UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
OR
| [ ] | TRANSITION REPORT PURSUANT TO PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
XFit Brands, Inc.
(Exact Name of Registrant as Specified in Charter)
| Nevada | 000-55372 | 47-1858485 | ||
| (State
or Other Jurisdiction of Incorporation) |
(Commission
File No.) |
(I.R.S.
Employer Identification No.) | ||
25731 Commercentre Drive, Lake Forest, CA 92630 |
(949) 916-9680 | |||
| (Address of Principal Executive Offices) | (Registrant’s Telephone Number) |
18 Goodyear, Suite 125
Irvine, California 92618
(Former name and address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 16, 2015, there were 4,098,500 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
| 2 |
Condensed Consolidated Balance Sheets
| September 30, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 21,642 | $ | 51,016 | ||||
| Accounts receivable | 85,906 | 92,823 | ||||||
| Royalties receivable | 50,000 | 75,000 | ||||||
| Inventory | 220,164 | 169,292 | ||||||
| Prepaid expenses | 233,307 | 333,572 | ||||||
| Total Current Assets | 611,019 | 721,703 | ||||||
| Long Term Assets | ||||||||
| Property and equipment, net | 37,693 | 42,292 | ||||||
| Other assets | ||||||||
| Deposits | 27,480 | 27,480 | ||||||
| Intangible assets, net | 41,481 | 52,264 | ||||||
| TOTAL ASSETS | $ | 717,673 | $ | 843,739 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 687,342 | $ | 446,063 | ||||
| Related party payable | 95,620 | 95,620 | ||||||
| Accrued expenses and interest | 104,537 | 129,182 | ||||||
| Customer deposits | 90,951 | 158,467 | ||||||
| Line of credit | 19,224 | — | ||||||
| Total Current Liabilities | 997,674 | 829,332 | ||||||
| Note payable, net | 1,722,698 | 1,705,417 | ||||||
| Total Liabilities | 2,720,372 | 2,534,749 | ||||||
| Commitments and contingencies (Note 8) | — | — | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2015 and June 30, 2015 | — | — | ||||||
| Common stock, $0.0001 par value, 250,000,000 shares authorized, 4,098,500 and 4,073,500 shares issued and outstanding as of September 30, 2015 and June 30, 2015, respectively | 409 | 407 | ||||||
| Additional paid in capital | 4,444,072 | 4,319,074 | ||||||
| Accumulated deficit | (6,447,180 | ) | (6,010,491 | ) | ||||
| Total Stockholders’ Deficit | (2,002,699 | ) | (1,691,010 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 717,673 | $ | 843,739 | ||||
See accompanying notes to the condensed consolidated financial statements.
| 3 |
Condensed Consolidated Statements of Operations
For the three month periods ended September 30, 2015 and 2014 (Unaudited)
For the Three Months Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Revenues: | ||||||||
| Product sales | $ | 473,257 | $ | 231,203 | ||||
| Royalties | — | 62,948 | ||||||
| Total revenues | 473,257 | 294,151 | ||||||
| Cost of revenues | 258,845 | 208,051 | ||||||
| Gross profit | 214,412 | 86,100 | ||||||
| Operating expenses | ||||||||
| General and administrative | 444,930 | 314,084 | ||||||
| Sales and marketing | 89,894 | 46,292 | ||||||
| Total operating expenses | 534,824 | 360,376 | ||||||
| Loss from operations | (320,412 | ) | (274,276 | ) | ||||
| Interest expense | (116,277 | ) | (77,608 | ) | ||||
| Other income (expense) | — | 2,000 | ||||||
| Net Loss | $ | (436,689 | ) | $ | (349,884 | ) | ||
| (Loss) income per common share – basic and diluted | $ | (0.11 | ) | $ | (0.087 | ) | ||
| Weighted average shares outstanding - basic and diluted | 4,098,500 | 4,000,000 | ||||||
See accompanying notes to the condensed consolidated financial statements.
| 4 |
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three month periods ended September 30, 2015 and 2014
| Three
Month Periods Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (436,689 | ) | $ | (349,884 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 15,382 | 1,448 | ||||||
| Amortization of debt issuance costs and loan discount | 41,108 | 35,490 | ||||||
| Stock based compensation | 75,000 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 6,917 | (46,528 | ) | |||||
| Royalties receivable | 25,000 | (19,760 | ) | |||||
| Prepaid expenses | 100,265 | — | ||||||
| Inventory | (50,872 | ) | (143,472 | ) | ||||
| Accounts payable | 241,279 | 94,017 | ||||||
| Accrued expenses | 1,528 | 52,524 | ||||||
| Deferred royalty payments | — | 25,000 | ||||||
| Customer deposits | (67,516 | ) | 237,870 | |||||
| Net cash used in operating activities | (48,598 | ) | (113,295 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of intangible assets | — | (3,596 | ) | |||||
| Purchase of property and equipment | — | (29,433 | ) | |||||
| Net cash used in investing activities | — | (33,029 | ) | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from line of credit | 19,224 | — | ||||||
| Net cash provided by financing activities | 19,224 | — | ||||||
| Net increase (decrease) in cash | (29,374 | ) | (146,324 | ) | ||||
| Cash at beginning of period | 51,016 | 360,323 | ||||||
| Cash at end of period | $ | 21,642 | $ | 213,999 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 64,525 | $ | 71,954 | ||||
| Non-cash investing and financing activities: | ||||||||
| Value of common shares issued as a loan fee | $ | 50,000 | $ | — | ||||
| Interest expense added to loan principal balance | $ | 26,173 | $ | 25,157 | ||||
| Distribution | $ | — | $ | 100,000 | ||||
| Issuance of common stock in exchange for LLC interests | $ | — | $ | 4,000 | ||||
See accompanying notes to the condensed consolidated financial statements.
| 5 |
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
History of the Company
XFit Brands, Inc. (“XFit” or the “Company”) was incorporated on September 16, 2014 under the laws of the State of Nevada. The fiscal year of the Company is June 30. XFit’s principal business activity is the design, development, and worldwide marketing and selling of functional equipment, training gear, apparel and accessories for the impact sports market and fitness industry. Products are marketed and sold under the “Throwdown®” brand name to gyms, fitness facilities and directly to consumers via an internet website and through third party catalogues through a mix of independent distributors and licensees throughout the world.
These financial statements represent the condensed consolidated financial statements of XFit and its wholly owned operating subsidiaries Throwdown Industries Holdings, LLC (“Holdings”), Throwdown Holdings, LLC (“TDLLC”), and Throwdown Industries, Inc. (“TDINC”). On September 26, 2014, XFit entered into a Contribution and Exchange Agreement with TD Legacy, LLC (“TD Legacy”) and Holdings under which TD Legacy contributed all of its membership interest in Holdings to XFit in exchange for the issuance by XFit of 4,000,000 shares of common stock to TD Legacy. The result of this transaction was that Holdings became a wholly owned subsidiary of XFit.
Basis of presentation
The accompanying condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary to fairly state the Company’s financial position, results of operations, and cash flows as of and for the dates and periods presented. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes as of and for the years ended June 30, 2015 and 2014, which were filed with the Company’s annual report form 10K on September 28, 2015. The results of operations for the three months ended September 30, 2015 are not necessarily indicative of results that may be expected for the year ending June 30, 2016, or for any other interim period.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of XFit, Holdings and TDINC. All significant intercompany transactions and balances have been eliminated in consolidation.
The Company also consolidates any variable interest entities (“VIEs”), of which it is the primary beneficiary, as defined within Accounting Standards Codification (“ASC”) 810. The Company does not have any VIEs that are required to be consolidated as of September 30, 2015 or June 30, 2015.
Recent Accounting Pronouncements
The Company has implemented all new accounting standards and does not believe that there are any other new accounting pronouncements that have been issued that may have a material impact on the consolidated financial statements.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU-2015-03”). ASU 2015-03 requires companies to present debt issuance costs as a direct deduction from the carrying value of that debt liability. ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Income (Loss) per Share
The basic loss per share is calculated by dividing the Company’s net loss available to common shareholders by the weighted average number of common shares during the period. The diluted net loss per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted net loss per share is the same as basic net loss per share due to the lack of dilutive items. As of September 30, 2015 and June 30, 2015, the Company had 453,723 and 452,612, respectively, of potential shares exercisable that are attributable to the PIMCO warrant, which have been excluded as their effect is anti-dilutive.
| 6 |
Reclassifications
Certain reclassifications were made to the prior period condensed consolidated financial statements to conform to the current period presentation. As of June 30, 2015, we reclassified $85,128 of accrued interest on the PIMCO note payable from the line item “Accrued expenses” to the principal balance of the PIMCO note. There was no change to the previously reported net loss.
Use of Estimates
Condensed consolidated financial statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the collectability of its accounts receivable, the valuation of long-lived assets, and equity instruments issued for financing. Actual results could differ from those estimates.
Loan Discounts and Loan Fees
The Company amortizes loan discounts over the term of the loan using the effective interest method. Costs associated with obtaining financing are capitalized and amortized over the term of the related loans using the effective interest method. As of September 30, 2015 and June 30, 2015, the Company had $149,632 of total gross debt issuance costs. Amortization of the debt issuance costs was $12,902 and $11,091 for the three month periods ended September 30, 2015 and 2014, respectively, which was recorded as a component of interest expense on the consolidated statements of operations.
Subsequent Events
In accordance with ASC 855, the Company evaluated subsequent events through the date of this report, which was the date the consolidated financial statements were available for issue.
NOTE 2 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at:
| September 30, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| Office furniture and equipment | $ | 46,233 | $ | 46,233 | ||||
| Warehouse equipment | 13,254 | 13,254 | ||||||
| Molds and dies | 6,650 | 6,650 | ||||||
| Total, cost | 66,137 | 66,137 | ||||||
| Accumulated Depreciation | (28,444 | ) | (23,845 | ) | ||||
| Property and equipment, net | $ | 37,693 | $ | 42,292 | ||||
Depreciation expense for the three months ended September 30, 2015 and 2014 was $4,599 and $1,358, respectively.
NOTE 3 – INTANGIBLE ASSETS, NET
Intangible assets consisted of the following at:
| September 30, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| Trademark | $ | 4,396 | $ | 4,396 | ||||
| Transformations exercise fitness program | 62,500 | 62,500 | ||||||
| Total, cost | 66,896 | 66,896 | ||||||
| Accumulated Amortization | (25,415 | ) | (14,632 | ) | ||||
| Intangible assets, net | $ | 41,481 | $ | 52,264 | ||||
Amortization expense for the three months ended September 30, 2015 and 2014 was $10,783 and none, respectively.
| 7 |
NOTE 4 – NOTE PAYABLE
The note payable is comprised of the following at:
| September 30, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| Note payable | $ | 2,111,301 | $ | 2,085,128 | ||||
| Less: unamortized loan discount | (248,864 | ) | (277,070 | ) | ||||
| Less: unamortized debt issuance costs | (139,739 | ) | (102,641 | ) | ||||
| Total note payable, net | $ | 1,722,698 | $ | 1,705,417 | ||||
On June 10, 2014, the Company entered into a Note Purchase Agreement with Pacific Investment Management Company (“PIMCO”) that authorized the issuance of up to $2,500,000. On June 12, 2014, the Company entered into a Senior Secured Note (“Note”) whereby the Company drew $1,500,000. The note bears interest at 14% and an effective interest rate of 21%. This Note is collateralized by all of the assets of the Company.
On February 6, 2015, the Company drew down an additional $500,000 of funds on the PIMCO Note Payable. Following the February 6, 2015 draw, the principal balance payable (incluidng accrued interest added to the principal amount)on the PIMCO note was $2,044,300, and the Company had an additional $500,000 available to draw on this loan facility. The full principal balance outstanding related to this note is due on June 2017.
The Note includes various covenants, including but not limited to, having annual audited financial statements within 90 days of the end of the fiscal year. At September 30, 2015, the Company is in compliance with all covenants.
In connection with the Note, the Company granted warrants to acquire up to 10% of the Company’s capital stock based on an aggregate enterprise fair market value of $15.0 million. The Company valued the warrants using the Black-Scholes option pricing model with the following variables: annual dividend yield of 0%; expected life of 10 years; risk free rate of return of 2.92%; and expected volatility of 0%. The Company estimated the value of the warrants to be $377,480, which is recorded as a loan discount and is being amortized under the effective interest method to interest expense over the term of the loan.
On September 30, 2015, in consideration the draw-down of the remaining $500,000 available on the PIMCO Note Payable, the Company issued 10,000 shares of its common stock at a fair value of $50,000 as determined by the Company’s board of directors. This amount was recorded as a loan fee to be amortized over the remaining term of the PIMCO Note Payable. The draw-down of this remaining $500,000 was funded on October 20, 2015. (See Note 9—Subsequent Events).
During the three month periods ended September 30, 2015 and 2014, the Company amortized $41,108 and $35,490, respectively, of the loan fees and discount which is recorded as a component of interest expense on the consolidated statements of operations.
NOTE 5 – BANK LINE OF CREDIT
On July 24, 2015, the Company entered into an unsecured line of credit with Wells Fargo Bank. The line of credit bears interest at prime plus 4% and is personally guaranteed by the Company’s chief executive officer. As of September 30, 2015, the balance payable on the line of credit was $19,224, which amount was repaid on October 23, 2015.
NOTE 6 – RELATED PARTY TRANSACTIONS
Related Party Payable
As of September 30, 2015 and June 30, 2015, the Company has $95,620 of salaries and bonuses payable to four of its officers and membership interest holders. These bonuses were to cover income taxes relating to bonuses issued during 2009.
NOTE 7 – STOCKHOLDERS’ DEFICIT
On July 1, 2015, the Company issued 15,000 shares of its common stock valued at $75,000 to an employee as a signing bonus.
On July 15, 2015, the board of directors approved the issuance of 63,500 stock options to employees that will be utilized on a performance and retention basis. None of these stock options have been awarded.
On September 30, 2015, the Company issued 10,000 shares of its common stock valued by the Company’s board of directors at $50,000 to PIMCO as a loan fee in consideration of the additional $500,000 draw-down on the PIMCO Note Payable that was funded on October 20, 2015. (See Note 4—Note Payable and Note 9—Subsequent Events).
| 8 |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its office and warehouse facilities under a two year operating lease that expires on November 30, 2015. The lease calls for monthly payments of $4,865, which includes operating expenses, insurance and taxes on the property.
In June 2015, the Company entered into a lease agreement for approximately 25,788 square feet of warehouse and office space under a 38 month operating lease that commences on October 1, 2015 and expires on October 31, 2018. The lease has monthly payments starting at $16,504 for the first month, and $8,252 thereafter with monthly payments ranging over the term of the lease.
In June 2015, the Company entered into a sublease of a portion of the premises for the period October 1, 2015 through August 31, 2016, at a monthly rental rate of $5,000.
Rent expense for the three month periods ended September 30, 2015 and 2014, was $15,182 and $14,594, respectively.
Litigation
From time-to-time, the Company is subject to various litigation and other claims in the normal course of business. The Company establishes liabilities in connection with legal actions that management deems to be probable and estimable. No amounts have been accrued in the consolidated financial statements with respect to any matters.
Stock Incentive Plan
On October 21, 2014, the Board of Directors and the Company’s sole stockholder adopted the 2014 Stock Incentive Plan. The purpose of the 2014 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for management and growth of the Company with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with the Company. Further, the availability and offering of stock options and common stock under the plan supports and increases the Company’s ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which the Company depends. The total number of shares available for the grant of either stock options or compensation stock under the plan is 600,000 shares of common stock, subject to adjustment. The Board of Directors administers the plan and has full power to grant stock options. As of September 30, 2015 and June 30, 2015, the Company has not issued any shares under the plan and has not granted any options to purchase shares under the plan.
Equity Purchase Agreement
On December 17, 2014, the Company entered into an Equity Purchase Agreement with Kodiak Capital LLC. The Equity Purchase Agreement provides the Company with financing whereby the Company can issue and sell to Kodiak, from time to time, shares of common stock (the “Put Shares”) up to an aggregate purchase price of $5.0 million (the “Maximum Commitment Amount”) during the commitment period. The commitment period is defined as the period beginning on the trading day immediately following the effectiveness of the registration statement and ending December 31, 2016. In addition, in no event shall Kodiak be entitled to purchase that number of Put Shares which when added to the sum of the number of shares of common stock already beneficially owned by Kodiak would exceed 9.99% of the number of shares of common stock outstanding on the applicable closing date.
The Equity Purchase Agreement will terminate when any of the following events occur: (i) Kodiak has purchased an aggregate of $5.0 million of the Company’s common stock, (ii) on December 31, 2016 or (iii) upon written notice from the Company to Kodiak.
Registration Rights Agreement
On December 17, 2014, the Company entered into a registration rights agreement with Kodiak Capital, LLC under which the Company is obligated to register the shares to be acquired by Kodiak pursuant to that certain Equity Purchase Agreement dated December 17, 2014, under which Kodiak agreed to purchase up to $5 million of XFit common stock, subject to certain conditions.
Asset Purchase Agreement
On February 26, 2015, the Company entered into an Asset Purchase Agreement to acquire the exclusive rights, title, and interest in the Transformations exercise and fitness program. The purchase price was $62,500 which comprised of a $7,500 cash payment and eleven thousand (11,000) shares of the Company’s common stock that was valued at $55,000. The agreement also has a performance based earn out for a period of eighteen (18) months that is based on fifty percent (50%) of all programming services gross revenues derived from the Transformations program, up to a maximum earn out of $187,500. The earn out is payable in tranches and none of the tranches were met as of September 30, 2015.
| 9 |
Vendor Credit Agreements
On June 18 2015, the Company entered into a Stock Purchase Agreement with Ever Blooming Industrial Limited, whereby the Company issued 20,000 shares of its common stock at $5.00 per share. The purchase price is in the form of a manufacturing credit totaling $100,000 to use for future inventory purchases (the “Vendor Credit”). The Company can use all or part of the Vendor Credit over the next 12 months until the Vendor Credit is exhausted. As of September 30, 2015 and June 30, 2015, the Company had $0 and $100,000, respectively, of Vendor Credit included in prepaid expenses on the condensed consolidated balance sheets.
On June 26 2015, the Company entered into a Stock Purchase Agreement with Yayu General Machinery Co., LTD, whereby the Company issued 40,000 shares of its common stock at $5.00 per share. The purchase price is in the form of a manufacturing credit of $200,000 to use for future inventory purchases (the “Vendor Credit”). The Company can use all or part of the Vendor Credit over the next 12 months until the Vendor Credit is exhausted. As of September 30, 2015 and June 30, 2015, the Company had $200,000 of Vendor Credit included in prepaid expenses in the condensed consolidated balance sheets.
NOTE 9 – SUBSEQUENT EVENTS
Additional Draw Down on PIMCO Note Payable
On October 20, 2015, the Company drew the remaining $500,000 available under its delayed draw note facility with PIMCO to increase the principal amount under this note (including the accrued interest added to the principal amount) to $2,620,098. A replacement note was issued on this date to reflect the note increase. (See Note 4—Note Payable)
| 10 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING INFORMATION
The following information should be read in conjunction with XFit Brands, Inc. and its subsidiaries (“we”, “us”, “our”, or the “Company”) condensed consolidated unaudited financial statements and the notes thereto contained elsewhere in this report. Information in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q that does not consist of historical facts, are “forward-looking statements.” Statements accompanied or qualified by, or containing words such as “may,” “will,” “should,” “believes,” “expects,” “intends,” “plans,” “projects,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume,” and “assume” constitute forward-looking statements, and as such, are not a guarantee of future performance.
Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; and advances in technology that can reduce the demand for the Company’s products. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results.
Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described elsewhere in this report and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June, 30, 2015.
The Company disclaims any obligation to update the forward-looking statements in this report.
Overview
XFit Brands, Inc. was incorporated in September 2014 under the laws of the State of Nevada. As used herein, the terms “we,” “us,” “XFIT,” and the “Company” refer to XFit Brands, Inc. and its predecessors, subsidiaries, and affiliates, collectively, unless the context indicates otherwise. Our fiscal year end is June 30. Our principal office address is 25731 Commercentre Drive, Lake Forest, CA 92630. Our telephone number is (949) 916-9680. As of November 16, 2015, we had 10 employees.
Our principal business activity is the design, development, and worldwide marketing and selling of functional equipment, training gear, apparel, and accessories for the impact sports market and fitness industry. Our products are marketed and sold under our Throwdown®, XFit Brands®, and Transformations™ brand names to gyms, fitness facilities, and directly to consumers via our internet website and through third party catalogues (which we refer to as our “Direct to Consumer” operations) through a mix of independent distributors and licensees throughout the world. All of our products are manufactured by independent contractors. Our equipment and apparel products are produced both in the United States and abroad.
We are an “emerging growth company” within the meaning of the federal securities laws. For as long as we are an emerging growth company, we will not be required to comply with the requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.
Results of Operations
For the next twelve months, our current operating plan is focused on the development and sale of training and competition cages training and protective gear for the Mixed Martial Arts (“MMA”), fitness, training, and exercise industry.
Our long term growth strategy includes expanding our presence in the fitness, training, and exercise community; leveraging our MMA core credibility and heritage; developing strategic alliances; and acquiring other companies in the fitness, training, and exercise industry to leverage our asset base, manufacturing infrastructure, market presence, and experienced personnel.
As is discussed further in the Liquidity and Capital Resources section below, we have limited funds to support our operations. Our continuation as a going concern subsequent to the year ended June 30, 2015 is dependent on our ability to obtain additional financing to fund the continued operation of our business model for a long enough period to achieve profitable operations. Based on our current business plan, we currently estimate we will need up to an additional $821,000 of financing to execute our business plan over the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern.
| 11 |
Three months ended September 30, 2015 Compared to the Three Months Ended September 30, 2014
Our revenue, operating expenses, and net loss from operations for the three month period ended September 30, 2015 as compared to the three month period ended September 30, 2014, are set forth below.
| Three
Months Ended September 30: | % Change Increase | |||||||||||||||
| 2015 | 2014 | Change | (Decrease) | |||||||||||||
| REVENUES | ||||||||||||||||
| Product sales | $ | 473,257 | $ | 231,203 | $ | 242,054 | 104.7 | % | ||||||||
| Royalties | — | 62,948 | (62,948 | ) | (100.0 | )% | ||||||||||
| Total revenues | 473,257 | 294,151 | 179,106 | 60.9 | % | |||||||||||
| COST OF REVENUES | 258,845 | 208,051 | 50,794 | 24.4 | % | |||||||||||
| Gross profit | 214,412 | 86,100 | 128,312 | 149.0 | % | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| General and administrative | 444,930 | 314,084 | 130,846 | 41.7 | % | |||||||||||
| Sales and marketing | 89,894 | 46,292 | 43,602 | 94.2 | % | |||||||||||
| Total operating expenses | 534,824 | 360,376 | 174,448 | 48.4 | % | |||||||||||
| Loss from operations | (320,412 | ) | (274,276 | ) | (46,136 | ) | 16.8 | % | ||||||||
| Interest expense | (116,277 | ) | (77,608 | ) | (38,669 | ) | 49.8 | % | ||||||||
| Other income | — | 2,000 | (2,000 | ) | (100.0 | )% | ||||||||||
| Net loss | $ | (436,689 | ) | $ | (349,884 | ) | $ | (86,805 | ) | 24.8 | % | |||||
Revenues. Revenues consist of product sales and royalties. Total revenues for the three months ended September 30, 2015 were $473,257, an increase of $179,106, or 60.9%, from $294,151 of total revenues for the three months ended September 30, 2014. Product sales increased $242,054, or 104.7%, to $473,257 for the three months ended September 30, 2015 from $231,203 for the three months ended September 30, 2014. Royalties decreased $62,948, or 100.0%, to none for the three months ended September 30, 2015 from $62,948 for the three months ended September 30, 2014. The increase in product sales is attributable to increased selling efforts and momentum during the three months ended September 30, 2015. The decrease in royalties is attributable to a lack of royalties from our international licensee in Brazil due to the current economic crisis in that country during the three month period ended September 30, 2015.
Cost of Revenues. Total cost of revenues for the three months ended September 30, 2015 were $258,845, an increase of $50,794, or 24.4%, from $208,051 for the three months ended September 30, 2014. Cost of product sales during the three months ended September 30, 2015 were 54.7% as compared to 90.0% during the three months ended September 30, 2014. The increase in cost of revenues is attributable to the 104.7% increase in product sales, offset by the decrease in product costs of sales during the three months ended September 30, 2015.
Gross Profit. Gross profit increased $128,312 to $214,412 for the three months ended September 30, 2015, from a gross profit of $86,100 for the three months ended September 30, 2014. The increase in gross profit reflects the decrease in product cost of sales, net of the decrease in royalties during the three months ended September 30, 2015. During the three months ended September 30, 2015, we realized a 45.3% gross profit on our product sales as compared to a 10.0% gross profit on product sales during the three months ended September 30, 2014. The lower gross profit achieved during the three months ended September 30, 2014 is attributable to liquidation of aged inventory items to prepare for inbound updated portfolio offerings with new technology and packaging. The improved gross profit achieved during the three months ended September 30, 2015, is attributable to improved materials sourcing.
General and Administrative Expenses. General and administrative expenses increased by $130,846 or 41.7%, to $444,930 for the three months ended September 30, 2015 from $314,084 for the three months ended September 30, 2014. General & administrative expenses for the three months ended September 30, 2015 are comprised of salaries and wages of $178,578, professional fees of $181,851, office expenses of $1,137, insurance of $19,675, rent of $15,182, travel of $10,413, and other of $38,093. General & administrative expenses for the three months ended September 30, 2014 are comprised of salaries and wages of $46,102, professional fees (including IPO expenses) of $214,260, office expenses of $1,743, insurance of $10,967, rent of $14,594, travel of $24,482, and $1,936 of other general and administrative expenses. The increase in general and administrative expenses during the three months ended September 30, 2015 is comprised of an increase in salaries and wages of $132,476, a decrease in professional fees of $32,409, a decrease in office expenses of $606, an increase of $8,708 in insurance expense, an increase of $588 of rent expense, a decrease of $14,069 of travel expenses, and a net $36,157 increase in other general and administrative expenses. The overall increase in general and administrative expenses is attributable to increased salaries and wages as we scale the Company for growth.
| 12 |
Sales and Marketing Expense. Sales and marketing expense increased $43,602 or 94.2%, to $89,894 for the three months ended September 30, 2015 from $46,292 for the three months ended September 30, 2014. This increase in sales and marketing expenses is commensurate with a net 70.4% increase in our revenues during the three months ended September 30, 2015.
Interest Expense. Interest expense increased by $38,669 to $116,277 for the three months ended September 30, 2015 from $77,608 for the three months ended September 30, 2014. The increase is largely due to the increased interest expense on the delayed draw note with the PIMCO Fund during the three months ended September 30, 2015. The principal balance of the PIMCO note was $,2,111,301 during the three months ended September 30, 2015, while the principal balance during the three months ended September 30, 2014, was $1,525,137. This increase in the principal balance resulted in an additional $23,333 of interest expense during the three months ended September 30, 2015, as compared to the three months ended September 30, 2015. During the three months ended September 30, 2015, we also incurred interest on the line of credit with Wells Fargo Bank. We did not have this loan facility in place during the three months ended September 30, 2014.
Other Income. During the three months ended September 30, 2014, we earned $2,000 of other income while during the three months ended September 30, 2015, we did not earn other income.
Net Loss. Net loss increased by $86,805 or 24.88% to a net loss of $436,689 for the three months ended September 30, 2015 from a net loss of $349,884 for the three months ended September 30, 2014. This decrease in our net loss is attributable to the increased expenses, as explained herein.
Liquidity and Capital Resources
Our consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the consolidated financial statements, we incurred a net loss of $436,689 during the three months ended September 30, 2015, and losses are expected to continue in the near term. The accumulated deficit since inception is $6,447,180 at September 30, 2015. We have been funding our operations through private loans and the sale of equity interests in private placement transactions. See our discussion of our Credit Facility with PIMCO and our Equity Purchase Agreement with Kodiak Capital below. Our cash resources are insufficient to meet our planned business objectives without additional financing. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of our company to continue as a going concern.
Management anticipates that significant additional expenditures will be necessary to further develop our product lines and licensing relationships to expand product sales and royalty revenues before significant positive operating cash flows can be achieved. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At September 30, 2015, we had $21,642 of cash on hand. We anticipate that our existing cash and cash equivalents, together with our cash from operating activities will not be sufficient to fund operations and expected growth through at least the next twelve months. These funds are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with international licensees; and (c) controlling overhead and expenses. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to us on satisfactory terms and conditions, if at all.
In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.
The success of our ability to continue as a going concern is dependent upon obtaining new customers for our products and new licensees to generate royalty revenues, and maintaining a break even or profitable level of operations. We have incurred operating losses since inception, and this is likely to continue in the near future. We believe that we are able to fund our immediate operations, working capital requirements, and debt service requirements with existing working capital, cash flows generated from operations, and additional borrowings under our delayed draw note or, if available, under our equity purchase agreement with Kodiak.
| 13 |
Our financial requirements will be dependent upon the financial support through credit facilities and additional sales of our equity securities. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital.
The downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock or the debt securities may cause us to be subject to restrictive covenants. If additional financing is not available or is not available on acceptable terms, we may have to curtail our operations.
Cash, total current assets, total assets, total current liabilities and total liabilities as of September 30, 2015 and June 30, 2015, were as follows:
| September 30, 2015 | June 30, 2015 | |||||||
| Cash | $ | 21,642 | $ | 51,016 | ||||
| Total current assets | $ | 611,019 | $ | 721,703 | ||||
| Total assets | $ | 717,673 | $ | 873,739 | ||||
| Total current liabilities | $ | 997,674 | $ | 829,332 | ||||
| Total liabilities | $ | 2,720,372 | $ | 2,534,749 | ||||
At September 30, 2015, we had a working capital deficit of $386,655 compared to a working capital deficit of $107,629 at June 30, 2015. Current liabilities increased to $997,674 at September 30, 2015 from $829,332 at June 30, 2015, primarily as a result of increases in accounts payable and the bank line of credit.
Our operating activities used net cash of $48,598 for the three months ended September 30, 2015 compared to net cash used in operations of $113,295 for the three months ended September 30, 2014. The net cash used in operations for the three months ended September 30, 2015, reflects a net loss of $436,689, decreased by $131,490 in non-cash charges and by $256,601 net increase in the working capital accounts. The net cash used in operations for the three months ended September 30, 2014 reflects a net loss of $349,884, decreased by $36,938 in non-cash charges and by $199,651 net increase in the working capital accounts.
We did not have any cash related to investing activities in the three months ended September 30, 2015. Our net cash used in investing activities was $33,029 for the three months ended September 30, 2014. Our cash used in investing activities for the three months ended September 30, 2014, included $29,433 in purchases of equipment and $3,596 of intangible asset acquisition costs.
Our net cash provided by financing activities for the three months ended September 30, 2015 was $19,224, which consisted of $19,224 proceeds from the Wells Fargo Bank line of credit facility, our net cash provided by financing activities for the three months ended September 30, 2014 was none.
Credit Facility
On June 10, 2014, we entered into a Note Purchase Agreement (“Agreement”) with PIMCO Funds: Private Account Portfolio Series: PIMCO High Yield Portfolio, a separate investment portfolio of PIMCO Funds, a Massachusetts business trust (“PIMCO”) that authorized the issuance of up to $2,500,000. On June 12, 2014, we entered into a Senior Secured Note (“Note”) whereby we drew $1,500,000. The note bears interest at 14% and matures on June 12, 2017. Interest in payable monthly in arrears, provided that if no event of default has occurred, Obligor can elect to pay cash interest on each payment date at 9%, with the additional unpaid interest due on such dates added to the principal balance, The note bears an effective interest rate of 21%. This Note is collateralized by all of our assets. The Note includes various covenants, including but not limited to, having annual audited financial statements within 90 days of the end of the fiscal year.
On February 6, 2015, we drew an additional $500,000 under this facility to increase the principal amount payable (including the accrued interest added to the principal amount) under this note to $2,044,300 and on October 20, 2015, we drew the remaining $500,000 available under this facility to increase the amount payable under this note (with accrued interest) to $2,620,098. We issued 10,000 shares of our common stock to PIMCO as a loan fee in consideration of the October 2015 draw down. A replacement note was issued on each draw down date to reflect the note increase.
| 14 |
Equity Purchase Agreement with Kodiak Capital LLC
On December 17, 2014, we entered into an Equity Purchase Agreement (“Equity Purchase Agreement”) with Kodiak Capital LLC. The Equity Purchase Agreement provides us with a financing (the “Financing” ) whereby the registrant can issue and sell to Kodiak, from time to time, shares of our common stock (the “Put Shares” ) up to an aggregate purchase price of $5.0 million (the “Maximum Commitment Amount”) during the Commitment Period (as defined below). Under the terms of the Equity Purchase Agreement, we have the right to deliver from time to time a Put Notice to Kodiak stating the dollar amount of Put Shares (up to $500,000 under any individual Put Notice) that we intend to sell to Kodiak with the price per share based on the following formula: seventy-five percent (75%) of the lowest closing bid price of our common stock during the period beginning on the date of the Put Notice and ending five (5) days thereafter. Under the Equity Purchase Agreement, we may not deliver the Put Notice until after the resale of the Put Shares has been registered pursuant to a registration statement filed with the Securities and Exchange Commission. Additionally, provided that the Equity Purchase Agreement does not terminate earlier, during the period beginning on the trading day immediately following the effectiveness of the registration statement and ending December 31, 2016, we may deliver the Put Notice or Notices (up to the Maximum Commitment Amount) to Kodiak (the “Commitment Period”). In addition, in no event shall Kodiak be entitled to purchase that number of Put Shares which when added to the sum of the number of shares of common stock already beneficially owned by Kodiak would exceed 9.99% of the number of shares of common stock outstanding on the applicable closing date.
The Equity Purchase Agreement also provides that we are not entitled to deliver a Put Notice, and Kodiak shall not be obligated to purchase any Put Shares, unless each of the following conditions are satisfied: (i) a registration statement has been declared effective and remains effective for the resale of the Put Shares until the closing with respect to the subject Put Notice; (ii) at all times during the period beginning on the date of the Put Notice and ending on the date of the related closing, our common stock has been listed on the Principal Market as defined in the Equity Purchase Agreement (which includes, among others, the Over-the-Counter Bulletin Board and the OTC Market Group’s OTC Link quotation system) and shall not have been suspended from trading thereon; (iii) we have complied with its obligations and is otherwise not in breach of or in default under the Equity Purchase Agreement, the Registration Rights Agreement or any other agreement executed in connection therewith; (iv) no injunction has been issued and remains in force, and no action has been commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Put Shares; and (v) the issuance of the Put Shares will not violate any shareholder approval requirements of the market or exchange on which our common stock are principally listed.
The Equity Purchase Agreement will terminate when any of the following events occur: (i) Kodiak has purchased an aggregate of $5.0 million of our common stock, (ii) on December 31, 2016 or (iii) upon written notice from us to Kodiak.
The proceeds from the agreement with Kodiak would primarily be used for working capital and general corporate purposes. However, Kodiak is not required to provide funding until certain conditions are met, as described above. There can be no assurance that we will meet the conditions under which Kodiak will be required to provide the equity capital.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of our last fiscal quarter ended September 30, 2015, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon those evaluations, management concluded that our disclosure controls and procedures were effective as of September 30, 2015, to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
| 15 |
Going forward from this filing, the Company intends to improve its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
During the quarter covered by this Report, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| 16 |
From time to time, the Company may become a party to litigation or other legal proceedings that it considers to be a part of the ordinary course of its business. The Company is not involved currently in legal proceedings that could reasonably be expected to have a material adverse effect on its business, prospects, financial condition or results of operations. The Company may become involved in other material legal proceedings in the future.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item. Please refer to “Risk Factors” contained in our Annual Report on Form 10-K for the year ended June 30, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See our Current Report on Form 8-K dated October 20, 2015 and filed on October 21, 2015.
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
See our Current Report on Form 8-K dated October 20, 2015 and filed on October 21, 2015.
| 17 |
Item 6. Exhibits
EXHIBIT INDEX
| Exhibit No. | Description | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of the Chief Financial Officer pursuant to U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Schema Linkbase Document | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Labels Linkbase Document | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| 18 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized
| XFIT BRANDS, INC | |
| (Registrant) |
| Date: November 16, 2015 | By: | /s/ David E. Vautrin |
| David E. Vautrin | ||
| Chief
Executive Officer (Principal Executive Officer) | ||
| Date: November 16, 2015 | By: | /s/ Robert J. Miranda |
| Robert J. Miranda | ||
| Chief
Financial Officer (Principal Accounting Officer) |
| 19 |
Exhibit 31.1
Chief Executive Officer Certification (Section 302)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David E. Vautrin, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of XFit Brands, Inc., (Registrant).
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
(4) The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information ; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 16, 2015
| By: | /s/ David E. Vautrin | |
| David E. Vautrin | ||
| Chief Executive Officer |
Exhibit 31.2
Chief Financial Officer Certification (Section 302)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert J. Miranda, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of XFit Brands, Inc., (Registrant).
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
(4) The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information ; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 16, 2015
| By: | /s/ Robert J. Miranda | |
| Robert J. Miranda | ||
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of XFit Brands, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) I, David E. Vautrin, Chief Executive Officer of the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 16, 2015
| By: | /s/ David E. Vautrin | |
| David E. Vautrin, | ||
| Chief Executive Officer | ||
| Principal Executive Officer |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of XFit Brands, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) I, Robert J. Miranda, Chief Financial Officer of the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 16, 2015
| By: | /s/ Robert J. Miranda | |
| Robert J. Miranda, | ||
| Chief Financial Officer | ||
| Principal Financial Officer |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Note Payable - Schedule of Note Payable (Details) - USD ($) |
Sep. 30, 2015 |
Jun. 30, 2015 |
|---|---|---|
| Notes Payable [Abstract] | ||
| Note payable | $ 2,111,301 | $ 2,085,128 |
| Less: unamortized loan discount | (248,864) | (277,070) |
| Less: unamortized debt issuance costs | (139,739) | (102,641) |
| Total note payable, net | $ 1,722,698 | $ 1,705,417 |
Note Payable |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note Payable |
NOTE 4 – NOTE PAYABLE
The note payable is comprised of the following at:
On June 10, 2014, the Company entered into a Note Purchase Agreement with Pacific Investment Management Company (“PIMCO”) that authorized the issuance of up to $2,500,000. On June 12, 2014, the Company entered into a Senior Secured Note (“Note”) whereby the Company drew $1,500,000. The note bears interest at 14% and an effective interest rate of 21%. This Note is collateralized by all of the assets of the Company.
On February 6, 2015, the Company drew down an additional $500,000 of funds on the PIMCO Note Payable. Following the February 6, 2015 draw, the principal balance payable (incluidng accrued interest added to the principal amount)on the PIMCO note was $2,044,300, and the Company had an additional $500,000 available to draw on this loan facility. The full principal balance outstanding related to this note is due on June 2017.
The Note includes various covenants, including but not limited to, having annual audited financial statements within 90 days of the end of the fiscal year. At September 30, 2015, the Company is in compliance with all covenants.
In connection with the Note, the Company granted warrants to acquire up to 10% of the Company’s capital stock based on an aggregate enterprise fair market value of $15.0 million. The Company valued the warrants using the Black-Scholes option pricing model with the following variables: annual dividend yield of 0%; expected life of 10 years; risk free rate of return of 2.92%; and expected volatility of 0%. The Company estimated the value of the warrants to be $377,480, which is recorded as a loan discount and is being amortized under the effective interest method to interest expense over the term of the loan.
On September 30, 2015, in consideration the draw-down of the remaining $500,000 available on the PIMCO Note Payable, the Company issued 10,000 shares of its common stock at a fair value of $50,000 as determined by the Company’s board of directors. This amount was recorded as a loan fee to be amortized over the remaining term of the PIMCO Note Payable. The draw-down of this remaining $500,000 was funded on October 20, 2015. (See Note 9—Subsequent Events).
During the three month periods ended September 30, 2015 and 2014, the Company amortized $41,108 and $35,490, respectively, of the loan fees and discount which is recorded as a component of interest expense on the consolidated statements of operations. |
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Stockholders' Deficit (Details Narrative) - USD ($) |
Jul. 15, 2015 |
Jul. 02, 2015 |
Sep. 30, 2015 |
Aug. 20, 2015 |
Jun. 30, 2015 |
|---|---|---|---|---|---|
| Class of Stock [Line Items] | |||||
| Number of common stock shares issued for employee as performance bonus | 63,500 | ||||
| Fair value of common stock | $ 409 | $ 407 | |||
| Signing Bonus [Member] | |||||
| Class of Stock [Line Items] | |||||
| Number of common stock shares issued | 15,000 | ||||
| Number of common stock value issued | $ 75,000 | ||||
| PIMCO [Member] | |||||
| Class of Stock [Line Items] | |||||
| Common stock shares issued | 10,000 | ||||
| Fair value of common stock | $ 50,000 | ||||
| Company drew an additional funds | $ 500,000 | $ 500,000 |
Subsequent Events (Details Narrative) - Subsequent Event [Member] - PIMCO Note Payable [Member] |
Oct. 20, 2015
USD ($)
|
|---|---|
| Company drew an additional funds | $ 500,000 |
| Related party note principal and accrued interest | $ 2,620,098 |
Intangible Assets, Net |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Assets, Net (Excluding Goodwill) [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Assets, Net |
NOTE 3 – INTANGIBLE ASSETS, NET
Intangible assets consisted of the following at:
Amortization expense for the three months ended September 30, 2015 and 2014 was $10,783 and none, respectively. |
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