As filed with the Securities and Exchange Commission on March 16, 2016

Registration No. 333-209774

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1 TO  

 

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

XFIT BRANDS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		2032		47-1858485
(State or other Jurisdiction of Incorporation)		(Primary Standard Classification Code)		(IRS Employer Identification No.)

 

25731 Commercentre Drive

Lake Forest, CA 92630

Tel: (949) 916-9680

(Address and Telephone Number of Registrant’s Principal

Executive Offices and Principal Place of Business)

 

David E. Vautrin

Chief Executive Officer

XFit Brands, Inc.

25731 Commercentre Drive

Lake Forest, CA 92630

Tel: (949) 916-9680

(Name, Address and Telephone Number of Agent for Service)

 

Copies of communications to:

 

Marc A. Indeglia, Esq.

Gregory R. Carney, Esq.

Indeglia & Carney LLP

11900 W. Olympic Blvd. Suite 770

Los Angeles, CA 90064

Tel No.: (310) 982-2720

Fax No.: (310) 982-2719

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration Statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [  ]

 

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]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Amount to be Registered (1)				Proposed Maximum Offering Price Per Share				Proposed Maximum Aggregate Offering Price				Amount of Registration Fee
Common Stock, par value $0.0001 ( 2 )			620,000			$	4.50	( 3 )		$	2,790,000	( 3 )		$	281	( 5 )
Common Stock, par value $0.0001 ( 4 )			526,500			$	4.50	( 3 )		$	2,369,250	( 3 )		$	239	( 5 )

 

	(1)	Pursuant to Rule 416 under the Securities Act, the shares being registered hereunder include such indeterminate number of shares of Common Stock as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar transactions affecting the shares to be offered by the selling shareholders.
	(2)	The shares of the registrant’s common stock being registered hereunder are being registered primarily for resale by Kodiak Capital Group, LLC in accordance with the terms of an Equity Purchase Agreement between Kodak Capital Group, LLC and the registrant. The number of shares of common stock registered hereunder represents a good faith estimate of the number of shares of the registrant’s. common stock issuable upon delivery of a “put” notice. Should the number of shares being registered be an insufficient number of shares to fully utilize the credit facility, the registrant will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.
	(3)	The proposed maximum offering price per share and the proposed maximum aggregate offering price have been estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(c) under the Securities Act of 1933 on the basis of the average of the high and low prices of the Common Stock on the OTC Markets on March 14 , 2016, a date within 5 trading days prior to the date of the filing of this registration statement.
	(4)	Represents shares of common stock to be offered by PIMCO Funds: Private Account Portfolio Series: PIMCO High Yield Portfolio which are to be issued upon exercise of a warrant held by them to purchase up to 10% of the registrant’s outstanding common stock (which gives effect to the 620,000 shares of common stock being offered by Kodiak Capital Group LLC hereunder).
	(5)	Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the securities act of 1933 or until the registration statement shall become effective on such date as the commission, acting pursuant to said section 8(a), may determine.

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION

DATED March 16 , 2016

 

1,146,500 Common Shares

XFIT BRANDS, INC.

 

 

This prospectus relates to the resale of up to 620,000 shares of the common stock of XFit Brands, Inc., a Nevada corporation, by Kodiak Capital Group, LLC, a Delaware limited liability company (“Kodiak”), a selling shareholder, pursuant to a Put Notice(s) under an Equity Purchase Agreement (the “Equity Purchase Agreement”) that we have entered into with Kodiak. The Equity Purchase Agreement permits us to sell shares of our common stock to Kodiak enabling us to put up to $5 million of common stock to Kodiak. The registration statement covers the offer and possible sale of approximately $2.79 million in common stock by Kodiak based on our March 14 , 2016 closing market price of $4.50 per share before the discount offered to Kodiak. This prospectus also relates to the resale of up to 526,500 shares of our common stock by PIMCO Funds: Private Account Portfolio Series: PIMCO High Yield Portfolio (“PIMCO”) to be issued upon exercise of a warrant issued to PIMCO to purchase an amount of shares of our common stock equal to ten percent (10%) of all shares of common stock then outstanding, at an exercise price of $1,500,000 for the full 10% of our common stock ($150,000 for each one-percent of common stock purchased), which expires on June 12, 2024. We will not receive any proceeds from the sale of these shares of common stock offered by Kodiak or PIMCO. However, we will receive proceeds from the sale of securities pursuant to each Put Notice we send to Kodiak and we will receive up to $1,500,000 upon full exercise of the warrant by PIMCO. We will bear all costs associated with this registration.

 

The total amount of shares of common stock which may be sold to Kodiak pursuant to this Prospectus would constitute approximately 15 % of our issued and outstanding common stock as of March 14 , 2016, if all of the shares had been sold by that date. As of March 14 , 2016, the closing market price of our common stock was $4.50 . Based on that price, and disregarding limitations on the number of shares Kodiak may hold at any given time and the maximum advance provisions of the Purchase Agreement, the maximum amount of shares of common stock which may be sold would be 620,000 shares, representing approximately 15 % of the outstanding common stock as of March 14 , 2016 if all shares were sold by that date.

 

Kodiak is an “underwriter” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”) in connection with the resale of our common stock under the Equity Purchase Agreement. Kodiak will pay us 75% of the lowest closing bid price of our common stock during the five consecutive trading days immediately following the date of our notice to Kodiak of our election to put shares pursuant to the Equity Purchase Agreement. There are no underwriting agreements in place.

 

Our shares of common stock are currently quoted on the OTC Markets Group (OTC.QB Tier) under the symbol “XFTB.” The closing price of our common stock on March 14 , 2016 was $4.50 .

 

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk Factors” beginning on page 6 of this prospectus.

 

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The Date of This Prospectus Is: _____________, 2016

 

 

TABLE OF CONTENTS

 

		PAGE
Forward-looking Statements		1
Prospectus Summary		1
Risk Factors		6
Use of Proceeds		18
Selling Shareholders		19
Plan of Distribution		20
Determination of Offering Price		21
Penny Stock Considerations		21
Description of Business		23
Description of Property		30
Legal Proceedings		30
Security Ownership of Certain Beneficial Owners and Management		31
Directors, and Executive Officers		32
Executive Compensation		35
Certain Relationships and Related Transactions		36
Market For Common Equity and Related Stockholder Matters		37
Description of Securities		39
Legal Matters		41
Experts		42
Available Information		42
Index to Financial Statements		43
Management’s Discussion and Analysis of Financial Condition and Results of Operations		44
Selected Financial Data		53
Supplementary Financial Information		53
Changes in and Disagreements with Accounts on Accounting and Financial Disclosure		53
Quantitative and Qualitative Disclosures about Market Risk		53

 

 

FORWARD-LOOKING STATEMENTS

 

Some of the statements contained in this Registration Statement are forward-looking statements within the meaning of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The safe harbor created by the Private Securities Litigation Reform Act of 1995 does not apply to an issuer of penny stock, such as the Company. We have based these forward-looking statements largely on our expectations and projections about future events and financial trends affecting the financial condition and/or operating results of our business. Forward-looking statements involve risks and uncertainties; particularly those risks and related to the development, manufacturing and sale of alternative fuel vehicles. There are important factors that could cause actual results to be substantially different from the results expressed or implied by these forward-looking statements.

 

In addition, in this Registration Statement, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” “expect,” “potential,” or “opportunity,” the negative of these words or similar expressions, as they relate to us, our business, future financial or operating performance or our management, are intended to identify forward-looking statements. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends.

 

The terms “XFIT” “our” and “we,” and the “Company” as used in this prospectus, refer to XFit Brands, Inc.

 

You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

 

We intend to furnish our shareholders with annual reports containing consolidated financial statements audited by an independent accounting firm.

 

PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in the common stock. You should carefully read the entire prospectus, including “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements, before making an investment decision.

 

General

 

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 and our telephone number is (949) 916-9680. As of February 16, 2016, we had 8 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 mission is to become a leading developer and marketer of functional fitness brands and products at retail and fitness outlets worldwide. Our products span the Impact Sports, Mixed Martial Arts (MMA), High and low impact fitness and Cross Training, and other Action Sports and are marketed and sold under the Throwdown®, XFit Brands®, and Transformations™ brand names, which along with certain trade secrets are protected worldwide. Our products are marketed and sold through a range of different channels including 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”) through a mix of independent distributors and licensees throughout the world. All of our products are manufactured by a network of independent manufacturers, which satisfy our strict quality requirements. Virtually all apparel products are produced outside the United States, while equipment 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.

 

Following this offering, we will continue to be an emerging growth company until the earliest to occur of (1) the last day of the fiscal year during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (2) the last day of the fiscal year following the fifth anniversary of the date of our initial public offering (February 11, 2015), (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt and (4) the date on which we are deemed to be a “large accelerated filer,” as defined under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”).

 

We also qualify as a “smaller reporting company” under Rule 12b-2 of the Securities Exchange Act of 1934, as amended, which is defined as a company with a public equity float of less than $75 million. To the extent that we remain a smaller reporting company at such time as we are no longer an emerging growth company, we will still have reduced disclosure requirements for our public filings, some of which are similar to those of an emerging growth company, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

 

Under U.S. federal securities legislation, our common stock could be “penny stock.” Penny stock is any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving penny stock, unless exempt, the rules require that a broker or dealer approve a potential investor’s account for transactions in penny stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve an investor’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, before any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination. Brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities, and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Background

 

Our company was founded in 2003 under the Throwdown name. Our initial focus was for development and sale of ramps for Action sports (Skate, Moto, other) and training and competition cages for the Mixed Martial Arts (“MMA”) industry and thereafter expanded into development and sales of training and protective gear for the MMA industry. In the past year, we have begun commercializing a significantly broader portfolio of cross training, fitness and other products capitalizing on the growth of the fitness, training, and exercise industry that has significantly expanded our business. In September 2014, we formed XFit Brands, Inc. as a wholly-owned subsidiary of TD Legacy, LLC to act as a holding company for our Throwdown operations. TD Legacy distributed the shares of XFit Brands held by it to its members on February 13, 2015 and then dissolved on September 22, 2015.

 

 

Corporate History

 

The business was founded in 2003 under the Throwdown name, and was originally incorporated in 2007 as Throwdown Industries, Inc., a California corporation.

 

As part of a restructuring plan, Throwdown Industries, LLC, a Delaware limited liability company, was formed on January 11, 2012 and TD Legacy, LLC, a Florida limited liability company, was formed on January 26, 2012.

 

On January 26, 2012, all shareholders of Throwdown Industries, Inc. contributed their shares, totaling 136,013 of Throwdown Industries, Inc., to TD Legacy, LLC in exchange for a corresponding 136,013 units of membership interests in TD Legacy, LLC, making TD Legacy, LLC the sole shareholder of Throwdown Industries, Inc. Throwdown Industries, Inc. then redeemed 69,367 of its shares from TD Legacy, LLC. TD Legacy, LLC sold the remaining 66,646 shares of Throwdown Industries, Inc. to Throwdown Industries, LLC in exchange for 49% ownership of Throwdown Industries, LLC. Affliction Holdings, LLC, a California limited liability company, contributed know-how, marketing, distribution, and resources to Throwdown Industries, LLC as consideration for 51% ownership of Throwdown Industries, LLC.

 

On August 23, 2012, Windsor Court Holdings, LLC, a Delaware limited liability company, purchased all of Affliction Holdings, LLC’s ownership interest in Throwdown Industries, LLC. On September 13, 2012, Throwdown Industries Holdings, LLC, a Delaware limited liability company was formed. As part of a new restructuring plan, Windsor Court Holdings, LLC contributed all of its ownership of Throwdown Industries, LLC in exchange for 25% ownership interest in Throwdown Industries Holdings, LLC, and TD Legacy, LLC contributed all of its ownership of Throwdown Industries, LLC in exchange for 75% ownership interest in Throwdown Industries Holdings, LLC.

 

On April 24, 2014, Windsor Court Holdings, LLC transferred all of its ownership interest of Throwdown Industries Holdings, LLC to TD Legacy, LLC. TD Legacy, LLC was the sole owner of 100% of the ownership interests in Throwdown Industries Holdings, LLC on such date.

 

On September 26, 2014, TD Legacy, LLC contributed 100% of the equity of Throwdown Industries Holdings, LLC to XFit Brands, Inc. in exchange for 4,000,000 shares of XFit Brands, Inc. common stock. TD Legacy, LLC owns 100% of XFit Brands, Inc., which in turn owns 100% of Throwdown Industries Holdings, LLC, which in turn owns 100% of Throwdown Industries, LLC, which in turn owns 100% of Throwdown Industries, Inc.

 

On November 26, 2014, we filed a registration statement for the distribution of 4,000,000 shares of our common stock then held by TD Legacy, LLC, our parent company on such date, to TD Legacy members as a liquidating distribution (the “Distribution”). The registration statement was declared effective by the Securities and Exchange Commission on February 9, 2015 and the Distribution occurred on February 13, 2015. TD Legacy, LLC was dissolved on September 22, 2015.

 

As of the date of this registration statement, we have three direct and indirect subsidiaries: our wholly-owned subsidiary, Throwdown Industries Holdings, LLC, its wholly-owned subsidiary, Throwdown Industries LLC and its wholly-owned subsidiary, Throwdown Industries, Inc.

 

 

Growth Strategy

Our growth strategy includes the following:

 

	●	Expand our presence in the exercise and fitness training community;
	●	Leverage our MMA core credibility and heritage;
	●	Develop strategic alliances; and
	●	Acquiring other fitness related products to leverage our asset base, manufacturing infrastructure, market presence, and experienced personnel.

 

Kodiak Equity Purchase Agreement

 

This prospectus relates to the resale of up to 620,000 shares of our common stock by Kodiak pursuant to a Put Notice(s) under the Equity Purchase Agreement. Kodiak will obtain our common stock pursuant to the Purchase Agreement entered into by Kodiak and us, dated December 17, 2014.

 

Although we are not mandated to sell shares under the Equity Purchase Agreement, the Equity Purchase Agreement gives us the option to sell to Kodiak, up to $5,000,000 worth of our common stock (“Shares”), par value $0.0001 per share over the period following effectiveness of the registration of which this prospectus forms a part and ending on December 31, 2016. 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.  At the date of filing, we may not obtain the full $5,000,000 in funding based on the 620,000 shares being registered under this Registration Statement if the price of our common stock does not increase (and stay above) to $10.76, an increase of approximately 139% from the $4.50 market price on March 14, 2016. The $5,000,000 was stated as the total amount of available funding in the Equity Purchase Agreement because this was the maximum amount that Kodiak agreed to offer us in funding. There is no assurance that the market price of our common stock will increase in the future. The number of common shares being registered under this registration statement may not be sufficient, dependent upon the share price, to allow us to access the full amount contemplated under the Equity Purchase Agreement under this Registration Statement . Therefore, we may not have access to the remaining commitment under the Equity Purchase Agreement under this Registration Statement does not increase (and stay above) to $10.76, an increase of approximately 139% from the $4.50 market price on March 14, 2016. Based on our stock price as of March 14 , 2016, the registration statement covers the offer and possible sale under put notices of approximately $2.1 million worth of our shares at a current discounted market price of $3.375 or approximately 75% of $4.50 (our market price at March 14 , 2016).

 

In addition, there is an ownership limit for Kodiak of 9.99%.

 

On any Closing Date, we shall deliver to Kodiak the number of shares of the Common Stock registered in the name of Kodiak as specified in the Put Notice. In addition, we must deliver the other required documents, instruments and writings required. Kodiak is not required to purchase the shares unless:

 

	●	Our Registration Statement with respect to the resale of the shares of Common Stock delivered in connection with the applicable Put shall have been declared effective.
	●	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.
	●	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;
	●	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
	●	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.

 

 

Kodiak will not engage in any “short-sale” (as defined in Rule 200 of Regulation SHO) of our common stock at any time during this Agreement. Pursuant to the Equity Purchase Agreement with Kodiak, we issued Kodiak 52,525 shares of common stock commitment shares. These shares were issued to Kodiak as part of the Distribution. On December 17, 2014, we entered into a Registration Rights Agreement with Kodiak requiring, among other things that we prepare and file with the SEC a Registration Statement on Form S-1 covering the resale of the shares issuable to Kodiak under the Purchase Agreement. As per the Equity Purchase Agreement, Kodiak’s obligations are not assignable.

 

PIMCO Warrant

 

On June 12, 2014, Throwdown Industries Holdings, LLC issued a warrant to purchase 10% of its equity at an exercise price of $1.5 million to PIMCO in consideration of the issuance of the delayed draw note payable to PIMCO in June 2014. The issuance was exempt under Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended. We assumed all obligations under this warrant on November 26, 2014 and on November 26, 2014, we issued PIMCO a new warrant to purchase 10% of our equity at an exercise price of $1.5 million in exchange for the warrant originally issued by Throwdown Industries Holdings, LLC, which warrant was cancelled. Standard piggyback registration rights were provided under the warrant.

 

This prospectus relates to the resale of up to 526,500 shares of our common stock by PIMCO upon exercise of the warrant held by them described above (which takes into account the 620,000 shares of common stock issuable to Kodiak under their Equity Purchase Agreement being registered hereunder).

 

Summary of Financial Information

 

The following summary of financial information for the periods stated summarizes certain information from our financial statements included elsewhere in this prospectus. You should read this information in conjunction with Management’s Discussion and Analysis and Results of Operations, the financial statements and the related notes thereto included elsewhere in this prospectus.

 

		Six Months Ended December 30,								Years Ended June 30,
		2015				2014				2015				2014
Revenues		$	1,147,931			$	903,761			$	2,039,,239			$	1,538,539
Cost of Revenues		$	645,331			$	605,759			$	1,418,495			$	804,940
Operating Expenses		$	1,021,701			$	979,075			$	1,847,320			$	678,837
Other Income (Expenses)		$	(258,556	)		$	(157,155	)		$	(367,219	)		$	54,446
Net Income (Loss)		$	(777,657	)		$	(838,228	)		$	(1,593,795	)		$	109,208
Total Assets		$	976,258			$	843,739			$	843,739			$	742,670
Total Liabilities		$	3,319,488			$	2,534,749			$	2,534,749			$	1,339,699
Accumulated deficit		$	(6,788,144	)		$	(6,010,491	)		$	(6,010,491	)		$	(4,416,696	)
Stockholders’/Members’ Deficit		$	(2,343,230	)		$	(1,691,010	)		$	(1,691,010	)		$	(597,029	)

 

 

RISK FACTORS

 

The following is a summary of the risk factors that we believe are most relevant to our business. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.

 

RISK FACTORS RELATED TO THE OFFERING

 

Existing stockholders may experience significant dilution from the sale of our common stock pursuant to the Kodiak Capital Group Equity Purchase Agreement.

 

The sale of our common stock to Kodiak Capital Group, LLC in accordance with the Equity Purchase Agreement may have a dilutive impact on our shareholders. As a result, our net income per share could decrease in future periods and the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our put options, the more shares of our common stock we will have to issue to Kodiak Capital Group, LLC in order to exercise a put under the Equity Purchase Agreement. If our stock price decreases, then our existing shareholders would experience greater dilution for any given dollar amount raised through the Offering.

 

The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

 

The issuance of shares pursuant to the Kodiak Equity Purchase Agreement may have a significant dilutive effect.

 

Depending on the number of shares we issue pursuant to the Kodiak Equity Purchase Agreement, it could have a significant dilutive effect upon our existing shareholders. Although the number of shares that we may issue pursuant to the Equity Purchase Agreement will vary based on our stock price (the higher our stock price, the less shares we have to issue) the information set out below indicates the potential dilutive effect to our shareholders, based on different potential future stock prices, if the full amount of the Purchase Agreement is realized.

 

Dilution based upon common stock put to Kodiak Capital Group and the stock price discounted to Kodiak Capital Group’s purchase price of 75% of the lowest closing bid price during the pricing period. The example below illustrates dilution based upon a $4.50 market price (on March 14, 2016)/$3.375 purchase price and other increased/decreased prices (without regard to Kodiak’s 9.99% ownership limit):

 

$5,000,000 Put

 

Stock Price(Kodiak Purchase Price)		Shares Issued				Percentage of Outstanding Shares (1)
$ 7.88 ($5.91) +75%			846,561				17.05	%
$ 6.75 ($5.06) +50%			987,654				19.34	%
$ 5.63 ($4.22) +25%			1,185,185				22.35	%
$ 4.50 ($3.38)			1,481,481				26.46	%
$ 3.38 ($2.53) -25%			1.975,309				32.42	%
$ 2.25 ($1.69) -50%			2,962,963				41.84	%
$ 1.13 ($0.84) -75%			5,925,926				59.00	%

 

(1)

Based on 4,118,500 shares outstanding as of March 14, 2016.

 

 

Kodiak Capital Group, LLC will pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.

 

Our common stock to be issued under the Kodiak Equity Purchase Agreement will be purchased at a twenty-five percent (25%) discount or 75% of the lowest closing bid price during the five trading days immediately following our notice to Kodiak Capital Group, LLC of our election to exercise our “put” right.

 

Kodiak Capital Group, LLC has a financial incentive to sell our shares immediately upon receiving the shares to realize the profit between the discounted price and the market price. If Kodiak Capital Group, LLC sells our shares, the price of our common stock may decrease. If our stock price decreases, Kodiak may have a further incentive to sell such shares. Accordingly, the discounted sales price in the Purchase Agreements may cause the price of our common stock to decline.

 

Kodiak Capital Group, LLC has entered into similar agreements with other public companies and may not have sufficient capital to meet our put notices.

 

Kodiak Capital Group, LLC has entered into similar Equity Purchase Agreements with other public companies, and some of those companies have filed registration statements with the intent of registering shares to be sold to Kodiak pursuant to the Equity Purchase Agreement. We do not know if management at any of the companies who have or will have effective registration statements intend to raise funds now or in the future, what the size or frequency of each put request would be, if floors will be used to restrict the amount of shares sold, or if the Equity Purchase Agreement will ultimately be cancelled or expire before the entire amount of shares are put to Kodiak. Since we do not have any control over the requests of these other companies, if Kodiak Capital Group, LLC receives significant requests, it may not have the financial ability to meet our requests. If so, the amount of available funds may be significantly less than we anticipate.

 

We are registering an aggregate of 620,000 shares of common stock to be issued under the Kodiak Purchase Agreement. The sale of such shares could depress the market price of our common stock.

 

We are registering an aggregate of 620,000 shares of common stock under the registration statement of which this Prospectus forms a part for issuance pursuant to the Kodiak Equity Purchase Agreement. The sale of these shares into the public market by Kodiak could depress the market price of our common stock.

 

We May Not Have Access to the Full Amount under the Equity Purchase Agreement.

 

The closing price of our common stock was $4.50 on March 14 , 2016. There is no assurance that the market price of our common stock will increase from its current level (and stay above) $10.76, which is the price required for us to obtain the full $5 million under our agreement with Kodiak based on the 620,000 shares being registered. The entire commitment under the Equity Purchase Agreement is for $5,000,000. Therefore, we may not have access to the remaining commitment under the Equity Purchase Agreement under this Registration Statement if the share price of our common stock does not increase by approximately 139 % from the market price on March 14, 2016.

 

Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.

 

Since our common stock is thinly traded its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily limited to):

 

 

	●	the trading volume of our shares;
	●	the number of securities analysts, market-makers and brokers following our common stock;
	●	changes in, or failure to achieve, financial estimates by securities analysts;
	●	new products or services introduced or announced by us or our competitors;
	●	actual or anticipated variations in quarterly operating results;
	●	conditions or trends in our business industries;
	●	announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
	●	additions or departures of key personnel;
	●	sales of our common stock and
	●	general stock market price and volume fluctuations of publicly-traded, and particularly microcap, companies.

 

Investors may have difficulty reselling shares of our common stock, either at or above the price they paid for our stock, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. In addition, there is a history of securities class action litigation following periods of volatility in the market price of a company’s securities. Although there is no such litigation currently pending or threatened against the Company, such a suit against us could result in the incursion of substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover, and as noted below, our shares are currently quoted on the OTC Link (OTC.QB tier) and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.

 

RISKS RELATED TO OUR BUSINESS

 

Expanding our brand into new categories or territories may be difficult and expensive, and if we are unable to successfully expand into these categories or territories as expected, our brand may be adversely affected, and we may not achieve our planned sales growth.

 

Our growth strategy includes the expansion of our brand into new categories or territories, including the fitness, training, and exercise industry. Products that we or our licensees introduce in these new markets may not be successful with the consumers we target. Our brand may also fall out of favor with our current customer base as we expand our products into new markets. In addition, if we, or our licensees, are unable to anticipate, identify or react appropriately to evolving consumer preferences, our sporting goods equipment sales and license revenues may not grow as fast as we plan or may decline and our brand image may suffer.

 

Achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in selling, general and administrative expenses, both in absolute dollars and as a percentage of revenue. There can be no assurance that we will have the resources necessary to undertake these efforts or that these efforts will sufficiently increase our sporting goods equipment sales and license revenues. Material increases in our selling, general and administrative expenses could adversely impact our results of operations.

 

Our products face intense competition.

 

XFIT is a fitness products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The fitness industry is highly competitive in the United States and on a worldwide basis. We compete with a significant number of other product, equipment, and apparel suppliers to the fitness industry, many of whom have:

 

 

	●	significantly greater financial resources than us;
	●	more comprehensive product lines;
	●	longer-standing relationships with suppliers, manufacturers and retailers;
	●	broader distribution capabilities;
	●	stronger brand recognition and loyalty than we have, and
	●	the ability to invest substantially more on product advertising and sales.

 

Our competitors’ greater capabilities in the above areas may enable them to better differentiate their products from ours, gain stronger brand loyalty, withstand periodic downturns in the apparel and fitness equipment and product industries, compete more effectively on the basis of price and production, and more quickly develop new products.

 

Failure to maintain our reputation and brand image could negatively impact our business.

 

Our brand has international recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. We could be adversely impacted if our brand is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence in us, and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

 

In addition, our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. Negative posts or comments about us on social networking websites could seriously damage our reputation and brand image. If we do not maintain, extend, and expand our brand image, then our product sales, financial condition, or results of operations could be materially and adversely affected.

 

Failure to obtain high quality endorsers of our products could harm our business.

 

We establish relationships with professional athletes and sports leagues and associations to develop, evaluate, and promote our products, as well as establish product authenticity with consumers. If certain endorsers were to stop using our products, our business could be adversely affected. In addition, actions taken by either the athletes or the sports leagues and associations associated with our products that harm the reputations of those athletes, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes or sports leagues and associations to use and endorse our products, or a failure to enter into cost-effective endorsement arrangements with prominent athletes could adversely affect our brand, sales, and profitability.

 

Failure of our licensing partners to preserve the value of our licenses could have a material adverse effect on our business.

 

The risks associated with our own products also apply to our licensed products in addition to any number of possible risks specific to a licensing partner’s business, including, for example, risks associated with a particular licensing partner’s ability to do the following:

 

 

	●	obtain capital;
	●	manage its labor relations;
	●	maintain relationships with its suppliers;
	●	maintain the quality and marketability of products bearing our trademarks;
	●	manage its credit risk effectively;
	●	meet its financial obligations to us; and
	●	maintain relationships with its customers.

 

The failure of our licensing partners to successfully operate their businesses or to perform in a manner consistent with our desired business practices could result in a decrease in our revenues generated from sales of our licensed products and the loss of goodwill which could impact our financial results and cause a material adverse effect on our business.

 

Third parties may claim that we are infringing their intellectual property rights, and these claims may be costly to defend, may require us to pay licensing fees, damages, or other amounts, and may prevent, or otherwise impose limitations on the manufacture, distribution or sale of our products.

 

From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to infringe those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of the intellectual property rights of others that may cover some of our current or planned new products. If we are forced to defend against third party claims, whether or not the claims are resolved in our favor, we could encounter expensive and time consuming litigation which could divert our management and key personnel from business operations. If we are found to be infringing on the intellectual property rights of others, we may be required to pay damages or ongoing royalty payments, or comply with other unfavorable terms. Additionally, if we are found to be infringing on the intellectual property rights of others, we may not be able to obtain license agreements on terms acceptable to us, and this may prevent us from manufacturing, marketing or selling our products. Thus, these third party claims may significantly reduce the sales of our products or increase our cost of goods sold. Any reductions in sales or cost increases could be significant, and could have a material and adverse effect on our business.

 

Our business is affected by seasonality, which could result in fluctuations in our operating results.

 

We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth calendar quarters have slightly exceeded those in the second and third calendar quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of apparel and equipment. In addition, our customers may cancel orders, change delivery schedules, or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix, and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period.

 

Failure to adequately protect or enforce our intellectual property rights could adversely affect our business.

 

We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying us, and in distinguishing our goods from the goods of others. We consider our XFit Brands^®, Throwdown^®, and Transformations™ trademarks to be among our most valuable intangible assets. Throwdown^®, for example is registered in thirty-nine (39) countries.

 

 

We believe that our trademarks, trade secrets, and other intellectual property rights are important to our brand, our success, and our competitive position. In the future, we may encounter counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging a party’s products on the basis of trade secret misappropriation or trademark, or other intellectual property infringement, continued sales of these products could adversely affect our sales and our brand and result in the shift of consumer preference away from our products.

 

The actions we take to establish and protect trademarks, and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights.

 

We take various actions to prevent confidential information from unauthorized use and/or disclosure. Such actions include contractual measures such as entering into non-disclosure agreements. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information might not always be effective.

 

In addition, the laws of certain foreign countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected.

 

Potential liability exposure in our equipment business may have a material adverse effect on the consumer demand for our products.

 

Our equipment is exposed to an inherent risk of potential product liability claims as MMA, boxing, and fitness training are high-risk activities that involves physical contact. A judgment against us due to an alleged failure or defects of our equipment could lead to substantial damage awards. We currently maintain product liability and excess liability umbrella insurance with maximum coverage of (i) one million dollars ($1,000,000) and one million dollars ($1,000,000), respectively, for each occurrence and (ii) two million dollars ($2,000,000) and one million dollars ($1,000,000), respectively, in the aggregate. If a successful claim is brought against us in excess of, or outside of, our insurance coverage, it could have a material adverse effect on our business, results of operations, or financial condition. Although we invest resources in research and development and every attempt is made to ensure the safety of our products, claims against us may arise and, regardless of their merit or eventual outcome, these claims may have a material adverse effect on the consumer demand for our products.

 

We are subject to data security and privacy risks that could negatively affect our results, operations or reputation.

 

Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers’ or employees’ personal information, or a disruption of our business, which could give rise to unwanted media attention, materially damage our customer relationships and reputation, and result in lost sales, fines, or lawsuits.

 

Failure of our contractors or our licensees’ contractors to comply with local laws, and other standards could harm our business.

 

We work with third party contractors to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. From time to time, the contractors that manufacture our products and our licensees that make products using our intellectual property may not comply with applicable environmental, health, or safety standards for the benefit of workers, or other applicable local laws, or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition.

 

 

We rely on third party contract manufacturers.

 

Our equipment and apparel are supplied by approximately six (6) factories located in four (4) countries. We do not own or operate any of our own manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the products we sell. Our ability to meet our customers’ needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our suppliers were to close or sever their relationship with us or significantly alter the terms of our relationship, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition, or results of operations. Additionally, if any of our contract manufacturers fail to make timely shipments, do not meet our quality standards, or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations.

 

We depend on key personnel, the loss of whom would harm our business.

 

Our future success will depend in part on the continued service of key executive officers and personnel. We do not currently have employment agreements with any of our executive officers. The loss of the services of any key individual could harm our business. Our future success also depends on our ability to recruit, retain, and motivate our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel.

 

We may incur significant costs to be a public company to ensure compliance with U.S. corporate governance and accounting requirements and we may not be able to absorb such costs.

 

We may incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect these costs to approximate at least $100,000 per year, consisting of at least $55,000 in legal, $40,000 in audit, and $5,000 for financial printing and transfer agent fees. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We may not be able to cover these costs from our operations and may need to raise or borrow additional funds. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. In addition, we may not be able to absorb these costs of being a public company which will negatively affect our business operations.

 

However, for as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, we intend to take advantage of certain exemptions from various reporting 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, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and 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.”

 

We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following June 30.

 

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and 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 cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We expect our quarterly results to fluctuate, which may adversely affect our stock price.

 

We expect that our quarterly results will fluctuate significantly. We believe that period-to-period comparisons of our operating results are not meaningful. Additionally, if our operating results in one or more quarters do not meet securities analysts’ or your expectations, the price of our common stock could decrease.

 

Failure to raise additional capital to fund future operations could harm our business and results of operations.

 

As of December 31, 2015 we had a cash balance of $139,666, a working capital deficit of $137,874 and an accumulated deficit of $6,788,144. In addition, for the six months ended December 31, 2015, we have incurred losses from operations of $519,101 and a net loss of $777,657. On October 20, 2015, we drew the remaining $500,000 available under our facility with Pacific Investment Management Company (the “PIMCO Fund”) to increase the amount payable under this note (including accrued interest) to $2,620,098. We believe that we are able to fund our immediate operations, working capital requirements, and debt service requirements with existing working capital and cash flows generated from operations. However, we will likely require additional financing in order to fully implement our business plans and strategy, including any product acquisition or expansion plans. In the event that our cash flows from operations are insufficient to fund our operations, working capital requirements, and debt service requirements, we would need to raise additional capital, either by borrowing more money, if possible, or by selling our securities or seeking out joint venture opportunities. Any additional borrowing or significant capital expenditures may require the written consent of the PIMCO Fund. We may not be successful in raising additional financing as and when we need it. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, our operating results and prospects could be adversely affected.

 

If we were unable to satisfy our obligations under our delayed draw note, our business would be adversely affected.

 

We have issued a senior secured promissory note to the PIMCO Fund in the amount of $2,620,098, which is secured by all of our assets. This promissory note is due on June 12, 2017. If we were unable to pay this debt at maturity or if we otherwise default on our obligations thereunder, the PIMCO Fund could exercise its rights and remedies under the promissory note and related note purchase agreement and security agreement, which could include foreclosing on all of our assets. Any such action would have a material adverse effect on our business and prospects.

 

If our costs and expenses are greater than anticipated and we are unable to raise additional working capital, we may be unable to fully fund our operations and to otherwise execute our business plan.

 

Should our costs and expenses prove to be greater than we currently anticipate, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, the depletion of our working capital would be accelerated. To the extent it becomes necessary for us to raise additional cash in the future as our current cash and working capital resources are depleted, we will seek to raise it through the public or private sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing. We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities. Other than our equity purchase agreement with Kodiak Capital, we currently do not have any binding commitments for, or readily available sources of, additional financing. We cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations.

 

 

If we require additional capital and even if we are able to raise additional financing, we might not be able to obtain it on terms that are not unduly expensive or burdensome to the company or disadvantageous to our existing shareholders.

 

If we require additional capital and even if we are able to raise additional cash or working capital through the public or private sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or short-term loans, or the satisfaction of indebtedness without any cash outlay through the private issuance of debt or equity securities, the terms of such transactions may be unduly expensive or burdensome to us or disadvantageous to our existing shareholders. For example, we may be forced to sell or issue our securities at significant discounts to market, or pursuant to onerous terms and conditions, including the issuance of preferred stock with disadvantageous dividend, voting or veto, board membership, conversion, redemption or liquidation provisions; the issuance of convertible debt with disadvantageous interest rates and conversion features; the issuance of warrants with cashless exercise features; the issuance of securities with anti-dilution provisions; and the grant of registration rights with significant penalties for the failure to quickly register. If we raise debt financing, we may be required to secure the financing with all of our business assets, which could be sold or retained by the creditor should we default in our payment obligations.

 

We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

 

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting.

 

Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. As a result of developing, improving and expanding our core information technology systems as well as implementing new systems to support our sales, engineering, supply chain and manufacturing activities, all of which require significant management time and support, we may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.

 

RISKS RELATED TO OUR SECURITIES

 

You may not be able to sell your shares if you need money.

 

Our common stock is traded on the OTC Markets (QB Marketplace Tier), an inter-dealer automated quotation system for equity securities. There has been limited trading activity in our stock. We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock.

 

 

We have not voluntarily implemented various corporate governance measures, in the absence of which stockholders may have more limited protections against interested director transactions, conflicts of interests and similar matters.

 

We have not yet adopted any corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit or other independent committees of our board of directors as we presently do not have a sufficient number of independent directors. In the future, we may seek to establish an audit and other committees of our board of directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

 

Outstanding shares that are eligible for future sale could adversely impact a public trading market for our common stock, if a public market develops.

 

Approximately 55% of the shares of our common stock (2,250,254 shares) are subject to Rule 144 as control securities. The amount of shares which are available for sale in the public market, should such a market be developed, could result in a depression of our stock price until such time, if ever, that an active and liquid market for our common stock is developed. The amount of restricted shares which are available for sale in the public market, should such a market be developed, with or without the liquidation of those shares, could result in a depression of our stock price until such time, if ever, that an active and liquid market for our common stock is developed and the restricted shares are liquidated by their owners.

 

You may face significant restrictions on the resale of your shares due to state “blue sky” laws.

 

Each state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that state.

 

We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock. We have not yet applied to have our securities registered in any state. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration or qualification.

 

If we fail to remain current on our reporting requirements, we could be removed from the OTC Markets which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

 

Companies quoted on the OTC Markets (QB Marketplace Tier), such as we are seeking to become, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC.QB. If we fail to remain current on our reporting requirements, we could be removed from the OTC.QB. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-quoted on the OTC.QB, which may have an adverse material effect on our Company.

 

 

The application of the “penny stock” rules could adversely affect the market price of our common shares and increase your transaction costs to sell those shares.

 

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require the following:

 

	●	that a broker or dealer approve a person’s account for transactions in penny stocks; and
	●	the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must do the following:

 

	●	obtain financial information and investment experience objectives of the person; and
	●	make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

 

	●	sets forth the basis on which the broker or dealer made the suitability determination; and
	●	that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our securities and cause a decline in the market value of our securities.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

We do not intend to pay dividends.

 

We have not paid any cash dividends to date and do not expect to pay dividends for the foreseeable future on our common stock.

 

Our common stock price is likely to be highly volatile, which may subject us to securities litigation thereby diverting our resources which may affect our profitability and results of operation.

 

The market price for our common stock is likely to be highly volatile as the stock market in general. The following factors will add to our common stock price’s volatility:

 

 

	●	actual or anticipated variations in our quarterly operating results;
	●	announcements by us of acquisitions;
	●	additions or departures of our key personnel; and
	●	sales of our common stock.

 

Many of these factors are beyond our control. These factors may decrease the market price of our common stock, regardless of our operating performance. In the past, plaintiffs have initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

Our officers and directors collectively own a substantial portion of our outstanding common stock, and as long as they do, they may be able to control the outcome of stockholder voting.

 

Our officers and directors are collectively the beneficial owners of approximately 55% of the outstanding shares of our common stock as of the date of this prospectus. Accordingly, these stockholders, individually and as a group, may be able to control us and direct our affairs and business, including any determination with respect to a change in control, future issuances of common stock or other securities, declaration of dividends on the common stock and the election of directors.

 

Our officers and directors control a majority of our outstanding stock, which could result in a conflict of interest.

 

Our officers and directors are collectively the beneficial owners of approximately 55% of the outstanding shares of our common stock as of the date of this prospectus. Accordingly, these stockholders, individually and as a group, may be able to control us and direct our affairs and business, including any determination with respect to a change in control, future issuances of common stock or other securities, declaration of dividends on the common stock and the election of directors.

 

This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. Our board members owe a fiduciary duty to our stockholders and must act in good faith in a manner they reasonably believe to be in the best interests of our stockholders. As stockholders, even controlling stockholders, our officers and directors are entitled to vote their shares, in their own interests, which may not always be in the interests of our stockholders generally, which is therefore a potential conflict of interest.

 

We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted.

 

Our Articles of Incorporation authorizes the Board of Directors to issue up to 250,000,000 shares of common stock and up to 10,000,000 shares of preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment.

 

 

By issuing preferred stock, we may be able to delay, defer, or prevent a change of control.

 

Our Articles of Incorporation permits us to issue, without approval from our stockholders, a total of 10,000,000 shares of preferred stock. Our Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.

 

Securities analysts may not cover our common stock and this may have a negative impact on our common stock’s market price.

 

The trading market for our common stock may depend on the research and reports that securities analysts publish about us or our business. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect our common stock’s market price, if any. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regularly reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

 

FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This prospectus contains forward-looking statements, which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” beginning on page 6 that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. The safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 does not apply to the offering made in this prospectus.

 

Use of Proceeds

 

We will not receive any proceeds from the sale of the shares of our common stock by the Kodiak or PIMCO. All proceeds from the sale of such shares will be for the account of Kodiak or PIMCO, as applicable. However, we will receive proceeds from the sale of securities pursuant to each Put Notice we send to Kodiak and we will receive up to $1,500,000 upon full exercise of the warrant by PIMCO. We will pay for expenses of this offering, except that the selling stockholders will pay any broker discounts or commissions or equivalent expenses applicable to the sale of their shares.

 

 

Selling Shareholders

 

We agreed to register for resale shares of common stock of Kodiak under the Equity Purchase Agreement and PIMCO related to the shares of common stock underlying their warrant (each, a “Selling Shareholder”). The Selling Shareholders may from time to time offer and sell any or all of their shares that are registered under this prospectus. Kodiak and any participating broker-dealers are (and PIMCO may be) “underwriters” within the meaning of the Securities Act of 1933, as amended. All expenses incurred with respect to the registration of the common stock will be borne by us, but we will not be obligated to pay any underwriting fees, discounts, commissions or other expenses incurred by the selling security holder in connection with the sale of such shares.

 

The following table provides information regarding the beneficial ownership of our common stock held by each of the Selling Shareholders as of the date of this prospectus, including:

 

1. the number of shares owned by each prior to this offering;

 

2. the total number of shares that are to be offered by each;

 

3. the total number of shares that will be owned by each upon completion of the offering;

 

4. the percentage owned by each upon completion of the offering and

 

5. the identity of the beneficial holder of any entity that owns the shares.

 

The named party beneficially owns and has sole voting and investment power over all shares or rights to the shares, unless otherwise shown in the table. The numbers in this table assume that none of the selling shareholders sells shares of common stock not being offered in this prospectus or purchases additional shares of common stock, and assumes that all shares offered are sold. The percentages are based on 4,118,500 shares of common stock outstanding on March 14 , 2016.

 

Name of Selling Shareholder		Shares Owned Prior to this Offering				Total Number of Shares to be Offered for Selling Shareholder Account				Total Shares to be Owned Upon Completion of this Offering				Percent Owned Upon Completion of this Offering
Kodiak Capital Group, LLC(1)			52,525				620,000	(2)			52,525				0	%*
PIMCO Funds: Private Account Portfolio Series: PIMCO High Yield Portfolio (3)			472,389	(4)			526,500	(5)			10,000				0	%*

 

*None of the selling shareholders: (i) has had a material relationship with us other than as a shareholder at any time within the past three years or (ii) has ever been one of our officers or directors.

 

	(1)	Ryan Hodson is the Managing Director of Kodiak Capital Group, LLC and, in that capacity, has the authority to direct voting and investment decisions regarding the securities.
	(2)	The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon drawn down under the Agreement with Kodiak.
	(3)	PIMCO Funds: Private Account Portfolio Series: PIMCO High Yield Portfolio is a commingled 1940 Act registered fund, and the investment adviser of the fund is Pacific Investment Management Company LLC (PIMCO). The lead portfolio manager of the Fund is Christian Stracke. Mr. Stracke is a Managing Director of PIMCO and, in his capacity as the portfolio manager of the fund, is the natural person with voting and investment control over these shares on behalf of the fund.
	(4)	Includes 462,389 shares under presently exercisable warrants, based on 4,118,500 shares outstanding as of the date of this prospectus. PIMCO has the right to purchase 10% of our outstanding common stock. Assuming Kodiak purchases, the full amount offered under this prospectus, our total outstanding shares will increase to 4,738,500 which will increase the amount of shares purchasable under PIMCO’s warrant to 526,500 shares.
	(5)	Represents (i) 10,000 shares of common stock currently held by PIMCO and (ii) the amount of shares underlying the warrant issued to PIMCO following the issuance of 620,000 shares to Kodiak Capital under Put Notices.

 

 

PLAN OF DISTRIBUTION

 

Equity Purchase Agreement / Registration Rights Agreement

 

On December 17, 2014, we entered into the Equity Purchase Agreement and a Registration Rights Agreement with Kodiak Capital Group, LLC in order to establish a possible source of funding for us.

 

Under the Equity Purchase Agreement, Kodiak has agreed to provide us with up to $5,000,000 of funding during the period beginning on the effective date of this prospectus and ending on December 31, 2016. 620,000 shares of our common stock are being registered pursuant to this prospectus pursuant to a Put Notice(s) under the Purchase Agreement. During this period, we can deliver a put under the Equity Purchase Agreement by selling shares of our common stock to Kodiak and Kodiak will be obligated to purchase the shares. A put transaction must close before we can deliver another put notice to Kodiak.

 

We may request a put by sending a put notice to Kodiak, stating the amount of the put. During the five trading days following a notice, we will calculate the amount of shares we will sell to Kodiak and the purchase price per share. The number of shares of Common Stock that Kodiak shall purchase pursuant to each put notice shall be determined by dividing the amount of the put by the purchase price.

 

The purchase price per share of common stock will be set at seventy-five percent (75%) of the lowest closing bid price of our common stock during the pricing period, which is five consecutive days following a put notice.

 

There is no minimum amount we can put to Kodiak at any one time. However, the maximum amount of any individual put is $500,000. Upon effectiveness of the Registration Statement, the Company shall deliver instructions to its transfer agent to issue shares of Common Stock to Kodiak free of restrictive legends on or before each closing date.

 

Pursuant to the Purchase Agreement, Kodiak and its affiliates shall not be issued shares of our common stock that would result in its beneficial ownership equaling more than 9.99% of our outstanding common stock.

 

Kodiak will not engage in any “short-sale” (as defined in Rule 200 of Regulation SHO) of our common stock at any time during this Agreement. On December 17, 2014, we entered into a Registration Rights Agreement with Kodiak requiring, among other things,that we prepare and file with the SEC a Registration Statement on Form S-1 covering the shares issuable to Kodiak under the Equity Purchase Agreement.

 

As per the Equity Purchase Agreement, none of Kodiak’s obligations thereunder are transferrable and may not be assigned to a third party.

 

PIMCO

 

We will not receive any proceeds from the sale of up to 526,500 shares by PIMCO, including the shares they which they will receive upon exercise of the warrant held by them. However, we may receive up to $1.5 million upon full exercise of the warrant by them. We have prepared the registration statement of which this prospectus is a part, and we are paying the costs of the registration statement. We are solely responsible for the content of the registration statement and of this prospectus. We have not engaged an underwriter for the offering made by either Kodiak Capital or PIMCO. Each of Kodiak Capital and PIMCO has advised us that none of them have engaged an underwriter for the offering. We expect each of Kodiak Capital and PIMCO to make their own decisions as to if and when to sell their shares and, in general, to place their respective shares in their individual accounts at their own securities broker-dealers and request the entry of sell orders against their stock positions.

 

 

Kodiak Capital and PIMCO, may sell their shares in open market or block transactions or otherwise in accordance with the rules of the OTC Markets, or in private transactions, at prices related to the prevailing market prices or at negotiated prices. Kodiak Capital and PIMCO may effect such transactions by selling shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from selling stockholders for whom such broker-dealers may act as agent or to whom they sell as principal or both. Upon any sale of shares offered hereby, selling stockholders and participating broker-dealers or selling agents may be deemed to be “underwriters” as that term is defined in the Securities Act, in which event any discounts, concessions or commissions they receive, which are not expected to exceed those customary in the types of transactions involved, or any profit on re-sales of the shares by them, may be deemed to be underwriting commissions or discounts under the Securities Act.

 

DETERMINATION OF OFFERING PRICE

 

Each of Kodiak Capital and PIMCO may sell its shares in the over-the-counter market or otherwise, at market prices prevailing at the time of sale, at prices related to the prevailing market price, or at negotiated prices. We will not receive any proceeds from the sale of shares by either Kodiak Capital or PIMCO. However, we will receive proceeds from the sale of securities pursuant to each Put Notice we send to Kodiak and we will receive up to $1,500,000 upon full exercise of the warrant by PIMCO.

 

PENNY STOCK CONSIDERATIONS

 

Trading in our securities is subject to penny stock considerations. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission.

 

Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.

 

State Securities - Blue Sky Laws

 

There is no public market for our common stock, and there can be no assurance that any market will develop in the foreseeable future. Transfer of our common stock may also be restricted under the securities regulations or laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the Blue Sky laws of any state, the holders of such shares and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state Blue-Sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. Accordingly, investors may not be able to liquidate their investments and should be prepared to hold the shares of our common stock for an indefinite period of time.

 

 

Selling security holders may contact us directly to ascertain procedures necessary for compliance with Blue Sky Laws in the applicable states relating to sellers and/or purchasers of our shares of common stock.

 

We intend to apply for listing in Mergent, Inc. Securities Manual which, once published, will provide us with “manual” exemptions (as described below) in approximately 33 states as indicated in CCH Blue Sky Law Desk Reference at Section 6301 entitled “Standard Manuals Exemptions.”

 

Thirty-three states have what is commonly referred to as a “manual exemption” for secondary trading of securities such as those to be resold by selling security holders under this Prospectus. In these states, so long as we obtain and maintain a listing in Mergent, Inc. or Standard and Poor’s Corporate Manual, secondary trading of our common stock can occur without any filing, review or approval by state regulatory authorities in these states. These states are Alaska, Arizona, Arkansas, Colorado, Connecticut, District of Columbia, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Texas, Utah, Washington, West Virginia and Wyoming. We cannot secure this listing, and thus this qualification, until after the Registration Statement, of which this Prospectus forms a part, is declared effective. Once we secure this listing, secondary trading can occur in these states without further action.

 

We currently do not intend to and may not be able to qualify our common stock for resale in other states which require shares to be qualified before they can be resold by our security holders.

 

Limitations Imposed by Regulation M

 

Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of such distribution. In addition and without limiting the foregoing, each selling security holder will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the associated rules and regulations thereunder, including, without limitation, Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the selling security holders. We will make copies of this Prospectus available to the selling security holders and will inform them of the need for delivery of copies of this Prospectus to purchasers at or prior to the time of any sale of the shares offered hereby. We assume no obligation to so deliver copies of this Prospectus or any related Prospectus supplement.

 

 

DESCRIPTION OF BUSINESS

 

General

 

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. As of February 16, 2016, we had 8 full-time direct 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 mission is to become a leading developer and marketer of functional fitness brands and products at retail and fitness outlets worldwide. Our products span the Impact Sports, Mixed Martial Arts (MMA), High and low impact fitness and Cross Training, and other Action Sports and are marketed and sold under the Throwdown®, XFit Brands®, and Transformations™ brand names, which along with certain trade secrets are protected worldwide. Our products are marketed and sold through a range of different channels including 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”) through a mix of independent distributors and licensees throughout the world. All of our products are manufactured by a network of independent manufacturers, which satisfy our strict quality requirements. Virtually all apparel products are produced outside the United States, while equipment 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.

 

We will continue to be an emerging growth company until the earliest to occur of (1) the last day of the fiscal year during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (2) the last day of the fiscal year following the fifth anniversary of the date of our initial public offering under our prospectus dated February 11, 2015, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt and (4) the date on which we are deemed to be a “large accelerated filer,” as defined under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”).

 

We also qualify as a “smaller reporting company” under Rule 12b-2 of the Securities Exchange Act of 1934, as amended, which is defined as a company with a public equity float of less than $75 million. To the extent that we remain a smaller reporting company at such time as are no longer an emerging growth company, we will still have reduced disclosure requirements for our public filings some of which are similar to those of an emerging growth company including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

 

Background

 

Our company was founded in 2003 under the Throwdown name. Our initial focus was for development and sale of ramps for Action sports (Skate, Moto, other) and training and competition cages for the Mixed Martial Arts (“MMA”) industry and thereafter expanded into development and sales of training and protective gear for the MMA industry. In the past year, we have begun commercializing a significantly broader portfolio of cross training, fitness and other products capitalizing on the growth of the fitness, training, and exercise industry that has significantly expanded our business. In September 2014, we formed XFit Brands, Inc. as a wholly-owned subsidiary of TD Legacy, LLC to act as a holding company for our Throwdown operations. TD Legacy distributed the shares of XFit Brands held by it to its members on February 13, 2015 and then dissolved on September 22, 2015.

 

 

Corporate History

 

The business was founded in 2003 under the Throwdown name, and was originally incorporated in 2007 as Throwdown Industries, Inc., a California corporation.

 

As part of a restructuring plan, Throwdown Industries, LLC, a Delaware limited liability company, was formed on January 11, 2012 and TD Legacy, LLC, a Florida limited liability company, was formed on January 26, 2012.

 

On January 26, 2012, all shareholders of Throwdown Industries, Inc. contributed their shares, totaling 136,013 of Throwdown Industries, Inc., to TD Legacy, LLC in exchange for a corresponding 136,013 units of membership interests in TD Legacy, LLC, making TD Legacy, LLC the sole shareholder of Throwdown Industries, Inc. Throwdown Industries, Inc. then redeemed 69,367 of its shares from TD Legacy, LLC. TD Legacy, LLC sold the remaining 66,646 shares of Throwdown Industries, Inc. to Throwdown Industries, LLC in exchange for 49% ownership of Throwdown Industries, LLC. Affliction Holdings, LLC, a California limited liability company, contributed know-how, marketing, distribution, and resources to Throwdown Industries, LLC as consideration for 51% ownership of Throwdown Industries, LLC.

 

On August 23, 2012, Windsor Court Holdings, LLC, a Delaware limited liability company, purchased all of Affliction Holdings, LLC’s ownership interest in Throwdown Industries, LLC. On September 13, 2012, Throwdown Industries Holdings, LLC, a Delaware limited liability company was formed. As part of a new restructuring plan, Windsor Court Holdings, LLC contributed all of its ownership of Throwdown Industries, LLC in exchange for 25% ownership interest in Throwdown Industries Holdings, LLC, and TD Legacy, LLC contributed all of its ownership of Throwdown Industries, LLC in exchange for 75% ownership interest in Throwdown Industries Holdings, LLC.

 

On April 24, 2014, Windsor Court Holdings, LLC transferred all of its ownership interest of Throwdown Industries Holdings, LLC to TD Legacy, LLC. TD Legacy, LLC was the sole owner of 100% of the ownership interests in Throwdown Industries Holdings, LLC on such date.

 

On September 26, 2014, TD Legacy, LLC contributed 100% of the equity of Throwdown Industries Holdings, LLC to XFit Brands, Inc. in exchange for 4,000,000 shares of XFit Brands, Inc. common stock. TD Legacy, LLC owns 100% of XFit Brands, Inc., which in turn owns 100% of Throwdown Industries Holdings, LLC, which in turn owns 100% of Throwdown Industries, LLC, which in turn owns 100% of Throwdown Industries, Inc.

 

On November 26, 2014, we filed a registration statement for the distribution of 4,000,000 shares of our common stock then held by TD Legacy, LLC, our parent company on such date, to TD Legacy members as a liquidating distribution (the “Distribution”). The registration statement was declared effective by the Securities and Exchange Commission on February 9, 2015 and the Distribution occurred on February 13, 2015. TD Legacy, LLC was dissolved on September 22, 2015.

 

As of the date of this prospectus, we have three direct and indirect subsidiaries: our wholly-owned subsidiary, Throwdown Industries Holdings, LLC, its wholly-owned subsidiary, Throwdown Industries LLC and its wholly-owned subsidiary, Throwdown Industries, Inc.

 

 

Industry Overview

 

According to the most recent information released by the International Health, Racquet and Sportsclub Association (“IHRSA”) and Statista, total global fitness club industry revenues increased $78.2 billion in 2014 from $74.1 billion in 2013 and $72.6. billion in 2012. Total global fitness club memberships increased to $139 million in 2014 from $135 million in 2013 and 131 million in 2012. Total U.S. fitness club industry revenues increased to $24.2 billion in 2014 from $22.4 billion in 2013 and $21.8 billion in 2012. Total U.S. fitness club memberships increased to 58 million in 2014 from 54 million in 2013 and from 50 million in 2012. According to the IHRSA, the fitness industry is witnessing a shift in the exercise and preference of health club members. The club landscape now extends beyond the traditional, full-service fitness centers as studio concepts including boxing, yoga, Pilates, group cycling, barre, boot camps, cross training, Crossfit®, and personal training.

 

Sporting goods sales are also increasing at an accelerated rate. According to Statista, total global sporting goods revenues increased $146.5 billion in 2014 from $130.2 billion in 2013 and $129.9 billion in 2012. US sporting goods revenues increased $64.8 billion in 2014 from $63.7 billion in 2013 and $62.6 billion in 2012.

 

According to the IHRSA, 2 significant developments are continuing to drive the growth experienced by the fitness industry: obesity continues in endemic proportions and the healthcare industry continues its trend towards prevention versus treatment. As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, we believe the Company can benefit from these dynamics en route to accomplishing the Company’s mission of becoming the leading developer and marketer of functional fitness brands and products in retail and fitness outlets worldwide.

 

Products

 

We currently sell products in the following categories: (i) Functional Fitness Stations; (ii) Training and Protective Gear; (iii) Cages and Rings; (iv) Bag Rack Systems; (v) Apparel; (vi) Functional Training Equipment and Accessories and (vii) Fitness Training Programs.

 

Functional Fitness Stations. We offer an extensive array of fitness training stations including our XTC, CTC and UTC training equipment. Our fitness training stations have key features such as cantilever bag mounts, adjustable step-up platforms, dip bars, ladder system, adjustable Olympic bar rack, squat station, pull up rock station, medicine ball targets / storage, t-bar row, battle ropes, and weight horns. In addition, we recently started offering our mobile fitness training stations, which can be set up for mobile events such as mobile boot camps, community events, trade shows and outdoor competitions.

 

Training and Protective Gear. We offer a complete catalog of training and protective gear including MMA and boxing gloves, punching mitts, thai pads, body shields and heavy bags. We have designed and developed our products with input from athletes in the MMA industry. Further, our products have been approved for use by both MMA and boxing commissions.

 

Cages and Rings. Cages and Rings are our legacy product. We continue to offer an extensive portfolio of cages and rings in the MMA industry. We are a provider of the Octagon and other functional fitness equipment to all corporate Ultimate Fighting Championship (UFC) Gyms. All of our cages and rings encompass our proprietary design with the flex zone floor and framing system to protect against injuries. Our cages are designed with high safety standards and have been in use in the MMA industry for over ten years.

 

Bag Rack Systems. Our bag rack systems are engineered for commercial grade usage with powder coated 4” square tubing, and oversized stainless steel eyebolts, carabineers and swivels. They feature an industry first bucket system and other options including hydraulically bent rolling monkey bars and the retractable bag and curtain system.

 

Apparel. We have a library of over 2,500 lifestyle tee apparel designs. In addition, we are currently beta testing a new line of athletic performance apparel with innovative technology such as heat displacement, and antibacterial.

 

Functional Training Equipment and Accessories. We have produced sample quantities of a full portfolio of commercial grade products for dynamic movement and exercise, endurance and strength building including kettle bells, resistance bands, weight bars and dumbbells, jump ropes, slam balls and plyo boxes to be used in cross training, cross fit, and other similar High and Impact fitness regimens. We are beginning expansion and sales of these retail products and Gym staples commercialized under the XFit Brand^®.

 

 

Fitness Training Programs. We recently began offering fitness training programs offered under the Transformations™ brand name. These programs are designed to be used both in conjunction with our fitness training centers, bag racks and out functional fitness equipment.

 

Our Strengths

 

We believe the following competitive strengths and sources of sustainable competitive advantage that will enable the implementation of our growth strategies:

 

Strong Brand Association. We have been providing cages, equipment and protective gear to the MMA community for the past 10 years and enjoy a brand associated with quality, durability, and innovation. We are a provider of equipment to all UFC Gym® corporate and Crunch® Franchise Gym locations and have sponsored events and athletes with our products internationally. We believe our strong brand recognition (as well as our recent portfolio expansion discussed below) will enable us to establish a presence in sporting goods retail stores, to penetrate new markets, such as the cross-fit training market and to expand geographically to new channels including the United States retail market.

 

Portfolio of Products. We have an extensive suite of products and apparel for the fitness, MMA and boxing industry. We believe this extensive line of products will enable us to establish a presence in sporting goods retail stores and fitness facilities. Further, we believe that our recent expansion of our portfolio to include functional strength and conditional equipment as well as fitness training programs enables us to provide a one-stop shop for major gym operators and fitness outlets to allow us to capitalize on the growth of the broader cross training and cross fit workout concepts.

 

Culture of Performance Based Innovation. We have provided significant innovation to products in the MMA and training products including improving safety of the MMA cages with our SlamTec flooring, to various use of unique surfaces like T-Flex. In addition, we have implemented multiple protective and training gear improvements in gloves, bags, and pads, which we believe has increased use of our products. Our UTC-K2 two-story fitness training stations are, to our knowledge, the first of their kind, and the Company expects to continue developing new innovations to expand our line of products, which will also strengthen our portfolio of brands, range of intellectual property and intangible assets, and market value. Our innovation has further strengthened the value of our brands, which we expect will enable us to establish a presence in sporting goods retail stores and our entry into new markets.

 

Key Relationships. We are currently a provider of equipment and cages for all UFC Gym® corporate locations, recently became the exclusive supplier of CTC Fitness Training Stations and related fitness accessories for all Crunch® Franchise Gyms, and we have a significant direct supply relationship with Centauro, a Brazilian sporting goods retailer. In addition, our brands are now sold in over 20 countries and we continue to sponsor international athletes and events, which maintains visibility and strengthens our reputation. We believe our current relationships will foster new partnerships and will bolster our efforts to secure new licensing relationships.

 

Global Sourcing Network. We have established a global network of manufacturers both directly and through licensing relationships. We currently have relationships with two US manufacturers, and four manufacturers internationally in Pakistan, China, and Taiwan. In addition, we have a licensing arrangement with a Brazilian company which supports distribution of Throwdown products to Brazil. Our international direct ship program benefits our international distribution points on several levels including, but not limited to, reduction in lead time to meet demand as well as savings related to duties, taxes, and transportation.

 

Social Media Footprint. Throwdown has a strong digital footprint among Facebook, Twitter, Pinterest, Instagram, and YouTube which foster presences and engagement around key Campaigns like “That’s How I Throwdown.” Our strong social media footprint is instrumental in promoting the Throwdown brand, which we believe could be helpful in establishing a presence in sporting goods retail stores and further penetrating our presence in fitness facilities. We are establishing a social media presence for the newly formed “XFit Brands” corporation as well.

 

 

Intellectual Property. We have an extensive collection of registered global trademarks. In addition, we have a large collection of proprietary functional fitness designs, equipment, and systems for which we intend to file provisional patents. These intellectual assets and specifically the global trademarks, serve to both protect the brand and we believe may attract strategic licensees.

 

Experienced Management Team. Our management team possesses substantial experience in the consumer goods and products industry. The strength and passion of our current dynamic and talented leaders coupled with the senior management expansion plans underway will enable both continued success and more rapid growth. Our senior management team has worked together for over five years and believe that the teams’ experience has enabled us to anticipate and respond effectively to industry trends and competitive dynamics, better understand our consumer base, and build strong customer relationships.

 

Our Growth Strategy

 

Key elements of our growth strategy include the following:

 

Expand our presence in the exercise and fitness training community. Our initial entry into the fitness products market with the introduction of our training stations (Cross Training Center, Ultimate Training Center and Combat Training Centers) has been well received. In addition, major gym operators have expressed a desire for us to provide a one-stop-shop for all their functional fitness equipment needs and programming. We believe that our recent portfolio expansion to include products for the exercise and fitness training industry, including jump ropes, medicine balls, resistance bands, ropes, kettle bells, agility ladders, push / pull sleds, dumbbells, rings, Olympic weights, and plyometric boxes as well as fitness and exercise programs will enable us to significantly expand our presence in the fitness training community and will also allow us to provide a complete fitness portfolio for gym operators and retail stores.

 

Leverage our MMA core credibility and heritage. Our products have been used in the MMA industry for over 10 years and we are a product supplier to the UFC Gyms®. We intend to leverage our reputation of product quality and innovation in the MMA industry to establish a meaningful position within both domestic and international sporting goods retailers as well as increasing our presence in the training industry. We have an extensive retail ready portfolio of products and have recently started targeting national sporting goods retailers. We believe our reputation for quality and durable products will facilitate our ability to establish a position with sporting goods retail stores. We believe our new line of products for the exercise and training segment of the fitness industry will be attractive to both retail stores and fitness facilities.

 

Develop Strategic Alliances. We intend to cultivate and execute key licensing partnerships with highly qualified licensees to build brand awareness and increase brand value by extending the Throwdown Brand into complementary product categories and international markets. We will continue to seek qualified partners to license our current Throwdown products in locations where we do not have a geographic presence, similar to our license arrangement with a Brazilian company. In addition, we will also seek to license the Throwdown brand for market segments in which we do not have a presence or expertise, such as headwear, eyewear, footwear, or nutritional products.

 

Acquiring other fitness related products to leverage our asset base, manufacturing infrastructure, market presence and experienced personnel. We currently have a manufacturing and distribution infrastructure in place and a reputation for providing quality products for the MMA and fitness industries. Accordingly, we will look to acquire additional fitness industry related products, brands and companies to take advantage of our infrastructure, capabilities and global customer base. Many of the competitors in this industry are smaller, private, entrepreneurial-based companies that are undercapitalized, underscaled, or looking for monetization which we believe would facilitate our strategy. The cost of acquiring new fitness related products will range from $100,000 for small products or companies to $600,000 for medium size companies to in excess of $1 million for large size operations. In February 2015, we acquired certain exercise and fitness programs under the Transformations brand name and we will continue to seek out additional opportunities. We expect to fund the purchase of any product via a combination of cash, equity and earn-out consideration. We expect to be able to fund the cash portion of any acquisition from our equity purchase agreement with Kodiak Capital, issuance of debt/equity securities or a combination of the foregoing.

 

 

Sales

 

We currently sell our products through a number of channels, including business-to-business, through distributors and licensees, and direct to consumer via the internet and third party catalogues. We are a supplier of MMA related products to all corporate UFC GYMs, and we are continuing to seek penetration of the fitness facility market with the development and launch of our fitness products targeting the exercise and training segment of the fitness industry. We actively ship to over 20 countries through relationships with international distributors. In addition, we have a licensing agreement with a Brazilian company that allows them to produce our products and gives them the exclusive right to sell our products in Brazil. We are also actively seeking to establish relationships with national sporting goods suppliers for the sale of our products.

 

Manufacturing

 

Our products are supplied by six manufacturing factories located in four countries – the United States, Pakistan, China, and Taiwan. In addition, we have entered into an exclusive license and distribution agreement with a Brazilian company to manufacture our products and which also gives them exclusive rights to sell our products in Brazil.

 

The primary raw materials used to manufacture our products are leather, synthetic fabrics, wood and steel tubing as well as other various materials. We buy our raw materials from several independent suppliers. Our third party manufacturers are required to maintain quality control procedures and supervisors inspect our goods and equipment for defects throughout the manufacturing process and finishing stage.

 

Marketing

 

Historically, we have marketed our products through a variety of methods, including athlete and event sponsorship, look books, third party catalogues, and magazine advertisements. Recently, we have also relied on establishing a social media presence to generate awareness for our products, such as Facebook, Twitter, Instagram, Pinterest, and YouTube.

 

We intend to focus our marketing strategies on the following areas:

 

Consumer: We will seek to deploy consistent brand messaging and campaigns i.e. “That’s How I Throwdown” and “Let’s Throwdown” to build engagement with our consumers using a combination of marketing mediums including but not limited to catalog and digital marketing, social networks, mobile app, rewards programs, print, point-of-sale marketing, public relations, and sponsorship and event participation. We expect to utilize these channels to also distribute content, education in our efforts to build the global awareness, purchase intent, conversion, and ultimately, demand through brand loyalty.

 

Influencers: We intend to expand our network of influencers, including coaches, trainers, top athletes, and brand ambassadors to generate brand awareness.

 

Concentration of Accounts

 

As of June 30, 2015, two customers accounted for 88% of our accounts and royalties receivable, being Crunch Franchise USA ($72,889/43%), and Partner Business ($75,000/45%). As of June 30, 2014, three of customers accounted for 65% of our accounts receivable, being Advantage Fitness Products ($6,188/30%), Gopher Sport ($3,722/18%) and The Compound MMA ($3,549/17%). We have written agreements with all of the 2015 customers. As of June 30, 2015, three vendors accounted for 68% of our accounts payable, being Indeglia & Carney ($51,465/12%), Lynam Industries ($203,394/46%), and Wells Fargo Bank ($46,683/10%). As of June 30, 2014, three vendors accounted for 73% of our accounts payable being Lynam Industries ($50,369/37%), Vista Industrial Products, Inc. ($28,825/22%) and West Engineering and Production ($18,824/14%). We have written agreements with a majority of the 2015 vendors. We expect our customer and vendor concentration to decrease as we expand our business.

 

 

Competition

 

The fitness equipment, product and apparel industry is highly competitive on a worldwide basis. The intense competition and the rapid changes in technology and consumer preferences in the markets for fitness equipment, products and apparel constitute significant risk factors in our operations.

 

We compete with a significant number of other equipment and apparel suppliers to the fitness industry, many of whom have the following:

 

	●	Significantly greater financial resources than us;
	●	More comprehensive product lines;
	●	Longer-standing relationships with suppliers, manufacturers, and retailers;
	●	Broader distribution capabilities;
	●	Stronger brand recognition and loyalty; and
	●	The ability to invest substantially more in product advertising and sales.

 

Our competitors’ greater capabilities in the above areas may enable them to better differentiate their products from ours, gain stronger brand loyalty, withstand periodic downturns in the apparel and fitness equipment and product industries, compete effectively on the basis of price and production, and more quickly develop new products.

 

Intellectual Property

 

We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our XFit Brands^®, Throwdown^®, and Transformations™ trademarks to be among our most valuable intangible assets. Throwdown^®, for example is registered in thirty-nine (39) countries. Trademarks registered in the U.S. and outside of the U.S. generally have a duration of ten years depending on the jurisdiction and are generally subject to an indefinite number of renewals for a like period on appropriate application.

 

We also rely on trade secret protection for our confidential and proprietary information, including more than 25 facets related to design and processes for our equipment. We seek to enter into confidentiality agreements with our employees, partners, and suppliers.

 

Employees

 

As of February 16, 2016, we had approximately 8 full-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union. We have never experienced a material interruption of operations due to labor disagreements.

 

Environmental Laws

 

We have not incurred and do not anticipate incurring any expenses associated with environmental laws.

 

Recent Updates

 

Exclusive Supply Chain Agreement with Crunch Franchising LLC. In June 2015, we entered into an Exclusive Supply Chain Agreement with Crunch Franchising LLC, a major fitness operator with more than 80 locations worldwide. We will be the exclusive supplier of CTC Fitness Training Centers and related fitness accessories as wells as Crunch® Branded Commercial Grade T-Flex Heavy Bags to Crunch® Gym and its franchisees during the term of this agreement.

 

 

Exclusive Manufacturing Agreements. In June 2015, we entered into exclusive manufacturing relationships with two international manufacturers, which exclusivity will remain so long as we meet certain purchasing targets. We believe these relationships will enable a reduction in direct costs while also potentially disrupting the supply chain of one of our major competitors.

 

New Facility. In July 2015, we entered into a Commercial Lease Agreement, which will serve as our executive office, showroom, warehouse and fulfillment center. This lease is approximately 26,000 square feet and expires in October 2018 and will accommodate our expected larger inventory base for new and contemplated gym relationships as well as our planned retail expansion.

 

PIMCO Drawdown. On October 20, 2015, we drew the remaining $500,000 available under our facility with the PIMCO Fund to increase the amount payable under this note (including accrued interest) to $2,620,098.

 

DESCRIPTION OF PROPERTY

 

Our showroom, warehouse and fulfillment center are located at this address. Our executive office is currently located at 25731 Commercentre Drive, Lake Forest, CA 92630 under a 38 month lease ending October 31, 2018 at a current base rent of approximately $16,504 per month and increases to $17,509 in the final year of the lease.

 

LEGAL PROCEEDINGS

 

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. We are party to claims and litigation that arise in the normal course of business. To our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or any of our companies or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information with respect to the beneficial ownership of our common stock, the sole outstanding class of our voting securities, by (i) any person or group owning more than 5% of each class of voting securities, (ii) each director, (iii) each executive officer named in the Summary Compensation Table in the section entitled “Executive Compensation” above and (iv) all executive officers and directors as a group. As of March 14 , 2016, we had 4,118,500 shares of common stock issued.

 

Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.

 

Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of the date of this Registration statement are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

Name And Address (1)		Number Of Shares Beneficially Owned				Percentage Owned
5% Stockholders:
PIMCO Funds: Private Account Portfolio Series:
PIMCO High Yield Portfolio (2)			472,389	(3)			10.31	%
Lisa Ann Willis (4)			274,995				6. 68	%
Executive Officers:
David E. Vautrin			1,121,013	(5)			27.22	%
Charles E. Joiner			605,122				14.69	%
Robert Miranda			5,012					*
Directors:
Kevin Hirsch, MD			244,083	(6)			5. 93	%
Brent D. Willis			275,024				6. 68	%
All directors and officers as a group (5 persons)			2,250,254				54. 64	%

 

*Less than 1%

 

	(1)	Unless otherwise indicated the address is c/o XFit Brands, Inc., 25731 Commercentre Drive, Lake Forest, CA 92630.
	(2)	The address is 840 Newport Center Drive, Newport Beach, CA 92660. PIMCO High Yield Portfolio is a commingled 1940 Act registered fund, and the investment adviser of the fund is Pacific Investment Management Company LLC (PIMCO). The lead portfolio manager of the Fund is Christian Stracke. Mr. Stracke is a Managing Director of PIMCO and, in his capacity as the portfolio manager of the fund, is the natural person with voting and investment control over these shares on behalf of the fund.
	(3)	Includes 462,389 shares under presently exercisable warrants.
	(4)	The address is 1010 Central Ave. Unit 433, St Petersburg, FL 33705.
	(5)	Includes 1,121,013 shares held under a trust of which Mr. Vautrin is the trustee.
	(6)	Includes 244,083 shares held under trust of which Mr. Hirsh’s wife is the trustee.

 

 

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 

The following table sets forth the name and age of officers and directors as of the date hereof. Our executive officers are elected annually by our board of directors. Our executive officers hold their offices until they resign, are removed by the Board, or his successor is elected and qualified.

 

Directors and Executive Officers

 

Name		Age		Position
David E. Vautrin		45		Chief Executive Officer, director
Charles E. Joiner		42		President, director
Robert J. Miranda		63		Chief Financial Officer
Brent D. Willis		55		Director (Executive Chairman)
Kevin Hirsch		55		Director

 

Set forth below is a brief description of the background and business experience of our executive officers and directors during the past five (5) years or more.

 

David E. Vautrin, Chief Executive Officer and director. Mr. Vautrin has been our Chief Executive Officer and a director since inception in September 2014. In addition, Mr. Vautrin has served and continues to serve as Chief Executive Officer and a director of our affiliated entities: Throwdown Industries, Inc. (2009-present), Throwdown Industries LLC (2012-present), TD Legacy, LLC (2012-present) and Throwdown Industries Holdings, LLC (2012-present). From 2007-2008, Mr. Vautrin was the Senior Vice President of Marketing at Cott Corporation, (NYSE: COT), a retail brand beverage company. Mr. Vautrin received his Bachelor of Science in Business Administration from the State University of New York.

 

Charles E. Joiner, President and director. Mr. Joiner has been our President and a director since inception in September 2014. In addition, Mr. Joiner has served and continues to serve as President and a director of our affiliated entities: Throwdown Industries, Inc. (2009-present), Throwdown Industries, LLC (2012-present), TD Legacy, LLC (2012-present) and Throwdown Industries Holdings, LLC (2012-present). Mr. Joiner received his Bachelors of Science in Business Marketing from Utah Valley University in Orem, Utah.

 

Robert J. Miranda, Chief Financial Officer. Mr. Miranda has been our Chief Financial Officer since inception in September 2014. Since August 2007, Mr. Miranda has been, and continues to serve as, the managing director of Miranda & Associates, a professional accountancy corporation. From March 2003 through October 2007, Mr. Miranda was a Global Operations Director at Jefferson Wells, where he specialized in providing Sarbanes-Oxley compliance reviews for public companies. Mr. Miranda is a licensed Certified Public Accountant and has over 35 years of experience in accounting, including experience in Sarbanes-Oxley compliance, auditing, business consulting, strategic planning and advisory services. He served as Chief Financial Officer of Balqon Corporation (BLQN) from October 2008 through October 2012. He served as Chief Executive Officer and Chief Financial Officer of Victory Energy Corporation (VYEY) from May 2009 through December 2011. He served as chairman of the board and audit committee of Victory Energy Corporation from December 2011 to October 2013. He served as chief financial officer and director of Saleen Automotive, Inc. (SLNN) from November 2011 through December 12, 2013. He currently serves as Chief Financial Officer of STW Resources Holdings, Inc. (STWS), an oil & gas services company based in Midland, Texas. Mr. Miranda has a bachelor’s degree in Business Administration from the University of Southern California, a certificate from the Owner/President Management Program from the Harvard Business School and membership in the American Institute of Certified Public Accountants. He is a certified public accountant licensed in California.

 

 

Brent D. Willis, Executive Chairman (Director). Mr. Willis has served as the Executive Chairman since inception in September 2014. In addition, Mr. Willis has served and continues to serve as Chairman for our affiliated entities: Throwdown Industries, Inc. (2008-present), Throwdown Industries, LLC (2012-present), TD Legacy, LLC (2012-present) and Throwdown Industries Holdings, LLC (2012-present). Mr. Willis has served as the Chief Executive Officer, President, Secretary and a director of Electronic Cigarettes International Group, LTD (ECIG) from June 25, 2013 to April 8, 2015. From June 2012 until June 2013, Mr. Willis served as Chairman and Chief Executive Officer of Victory Electronic Cigarettes, Inc. From 2009 to 2013, Mr. Willis served as the Chairman and Chief Executive Officer of Liberty Ammunition Inc., a private lead-free ammunition company. From 2008 to 2009, Mr. Willis was the Chairman and Chief Executive Officer of Vascular Technologies, Inc., a private medical device company. Mr. Willis served as the Chief Executive Officer and on the board of directors of Cott Corporation (NYSE: COT), a retail brand beverage company, from 2006 to 2008 and on the board of directors for the American Beverage Association. From 2002 to 2006, Mr. Willis was the Global Chief Commercial Officer, President, and on the board of management for Anheuser-Busch InBev SA/NV (NYSE: BUD) and the board of directors of AmBev (NYSE: ABV). From 1996 through 2001, Mr. Willis served as a President in Latin America for the Coca-Cola Company. From 1987 through 1996, Mr. Willis worked for Kraft Foods, Inc. Mr. Willis obtained a Bachelors of Science in Engineering from the United States Military Academy at West Point in 1982 and obtained a Masters in Business Administration from the University of Chicago in 1991.

 

Kevin Hirsch, MD, Chief Business Development Officer and director. Dr. Hirsch has served as the Chief Business Development Officer and as a director since inception in September 2014. In addition, Dr. Hirsch has served and continues to serve as a director for our affiliated entities: Throwdown Industries, Inc. (2009-present), Throwdown Industries, LLC (2012-present), TD Legacy, LLC (2012-present) and Throwdown Industries Holdings, LLC (2012-present). Dr. Hirsch is a board certified trauma surgeon and has been at Healthcare America (HCA) since May 2011, and prior at Bayfront Medical Center, St. Petersburg, Florida from 1992 to 2010, including as a trauma surgeon. Dr. Hirsch also was a founder and a member of the board of directors of DecisionHR, a professional employee organization, from 1995 until it was acquired by First Advantage Corporation in 2006. Dr. Hirsch is also a founder of Medical 6 Sigma, LLC, a management advisory consulting firm for large risk-adjusted group practices. Dr. Hirsch is also a private developer of commercial and institutional real estate and has, along with his sons, developed a line of nanotechnology antimicrobials.

 

Board of Directors

 

The minimum number of directors we are authorized to have is three and the maximum is seven. Although we anticipate appointing additional directors in the future, as of the date hereof we have 4 directors consisting of David E. Vautrin, Charles Joiner, Kevin Hirsch, MD and Brent D. Willis. We considered Mr. Vautrin’s prior experience as an officer and director of our affiliated companies in concluding that he was qualified to serve as one of our directors. We considered Mr. Joiner’s prior experience as an officer and director of our affiliated companies as important factors in concluding that he was qualified to serve as one of our directors. We considered Mr. Willis’ prior experience as an officer and director of our affiliated entities as well as his experience as an officer and director of a public company as important factors in concluding that he was qualified to serve as one of our directors. We considered Dr. Hirsch’s prior experience as a director of our affiliated entities as important factors as well as his prior leadership and entrepreneurial experience as important factors in concluding that he was qualified to serve as one of our directors. Directors on our Board of Directors are elected for one-year terms and serve until the next annual security holders’ meeting or until their death, resignation, retirement, removal, disqualification, or until a successor has been elected and qualified. All officers are appointed annually by the Board of Directors and serve at the discretion of the Board. Currently, directors receive no compensation for their services on our Board.

 

All directors will be reimbursed by us for any appropriate expenses incurred in attending directors meetings provided that we have the resources to pay these expenses. We will consider applying for officers and directors liability insurance at such time when we have the resources to do so.

 

Committees of the Board of Directors

 

Concurrent with having sufficient members and resources, our Board of Directors intends to establish an Audit Committee and a Compensation Committee. The Audit Committee will review the results and scope of the audit and other services provided by the independent auditors and review and evaluate the system of internal controls. The Compensation Committee will review and recommend compensation arrangements for the officers and employees. No final determination has yet been made as to the memberships of these committees or when we will have sufficient members to establish committees. We believe that we will need a minimum of three independent directors to have effective committee systems.

 

 

As of the date hereof, we have not established any Board committees.

 

Family Relationships

 

No family relationship exists between any director, executive officer, or any person contemplated to become such.

 

Possible Potential Conflicts

 

We are unaware of any potential conflicts of interest.

 

Director Independence

 

We currently do not have any independent directors serving on our board of directors.

 

Involvement in Certain Legal Proceedings

 

None of our directors or executive officers has, during the past ten years:

 

	●	has had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years before that time;
	●	been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
	●	been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities;
	●	been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
	●	been subject or a party to or any other disclosable event required by Regulation S-K.

 

Code of Business Conduct and Ethics

 

We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officer. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at 25731 Commercentre Drive, Lake Forest, CA 92630.

 

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named executive officers for services rendered to us for the years ended June 30, 2015 and 2014. The compensation listed in the table below represents amounts paid to our executive officers from our wholly-owned operating subsidiary and predecessor company, Throwdown Industries Holdings, LLC for the periods presented.

 

Name and Principal Position		Fiscal Year		Salary ($)				Bonus ($)				Stock Awards ($)(2)				All Other Compensation ($)(1)				Total ($)
David E. Vautrin, Chief Executive Officer and director		2015		$	97,280				—				—			$	45,698			$	142,978
		2014		$	86,362				—				—			$	33,435			$	119,797
Charles E. Joiner, President and director		2015		$	86,636				—				—			$	45,698			$	132,334
		2014		$	83,193				—				—			$	33,435			$	116,628
Robert Miranda, Chief Financial Officer		2015		$	129,838				—			$	25,000				—			$	154,838
(Since September 2014)		2014			N/A				N/A				N/A				N/A				N/A

 

	(1)	Each of Mr. Vautrin and Mr. Joiner receive additional compensation equal to 2% of the company’s gross revenues, which are reflected in the table above under “All Other Compensation”.
	(2)	Mr. Miranda’s services as CFO are contracted through his solely owned corporation, Miranda CFO Services, Inc.

 

Other than as set forth in the table above, there has been no cash or non-cash compensation awarded to, earned by or paid to any of our officers and directors during the periods set forth above.

 

Director Compensation

 

Currently, directors receive no compensation for their services on our Board. All directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending board of director and committee meetings provided that we have the resources to pay these expenses.

 

Employment Agreements

 

We do not currently have any agreements with our executive officers.

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

 

On April 24, 2014, TD Legacy and Holdings entered into a Membership Interest Transfer Agreement with WCH under which WCH agreed to transfer its 250 LLC Units in Holdings to TD Legacy in exchange for repayment of all amounts due under its note with Holdings plus a transaction fee of $100,000.

 

As of April 24, 2014, Holdings loaned $100,000 to its sole member, TD Legacy. This loan was undocumented and is recorded as a related party loan on Holdings’ financial statement as of June 30, 2014.

 

As of June 30, 2014 and 2013, Holdings has $135,932 in salaries and bonuses payable to four of its officers and membership interest holders. These bonuses were to cover income taxes related to bonuses issued in 2009.

 

As of September 15, 2014, Holdings distributed $100,000 to its sole member, TD Legacy, which eliminated the April 2014 related party loan.

 

On September 26, 2014, XFit Brands, Inc. entered into a Contribution and Exchange Agreement with 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 four million (4,000,000) shares of common stock to TD Legacy.

 

On December 31, 2014, TD Legacy issued 173 limited liability company units to our chief financial officer in consideration his agreement to cancel indebtedness of $25,000 to him for consulting services previously rendered.

 

We believe that the foregoing transactions were in our best interests (or the best interests of our related party entities). Consistent with 78.140 of the Nevada Revised Statutes, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis, and, where appropriate, we will utilize our audit committee for the review of potential conflicts of interest.

 

Except as set forth above, none of the following persons has any direct or indirect material interest in any transaction to which we are a party since our incorporation or in any proposed transaction to which we are proposed to be a party:

 

	(A)	Any of our directors or officers;
	(B)	Any proposed nominee for election as our director;
	(C)	Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our common stock; or
	(D)	Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary of our company.

 

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 

On September 3, 2015 FINRA assigned our common stock the trading symbol “XFTB.” Our stock is quoted on the OTC Markets (OTC.QB). Our stock has been approved for quotation on the OTC Link (OTC.QB Tier). The table below sets forth the high and low bid prices for our common stock for each quarter since September 3, 2015, as reported on the OTC Link.

 

We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of our stock. Some of the bid quotations from the OTC Markets set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

2016 (OTC Link)		High Bid				Low Bid
January 1, 2016-March 31, 2016		$	5.00			$	3.25

 

2015 (OTC Link)		High Bid				Low Bid
September 3, 2015-September 30, 2015		$	10.00			$	10.00
October 1, 2015-December 31, 2015		$	10.00			$	4.75

 

Securities Authorized for Issuance Under Equity Compensation Plans. The following provides information concerning compensation plans under which our equity securities are authorized for issuance as of June 30, 2015:

 

		(a)		(b)		(c)
Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1)		—		N/A			600,000
Equity compensation plans not approved by security holders		—		N/A			—
Total		—		N/A			600,000

 

(1)

On October 21, 2014, our Board of Directors and our sole stockholder adopted our 2014 Stock Incentive Plan. The purpose of our 2014 Stock Incentive Plan is to advance the best interests of the company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 600,000 shares, subject to adjustment. Our Board of Directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable and proper. Any decision made, or action taken, by our Board of Directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive. The Board of Directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the Company, and such other persons as the Board of Directors or compensation committee may select, and permit holders of common stock options to exercise such options prior to full vesting therein and hold the common stock issued upon exercise of the option as common stock. Stock options may also be granted by our Board of Directors or compensation committee to non-employee directors of the Company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the Company. In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan. Our Board of Directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our Board of Directors may deem appropriate and in our best interest. As of June 30, 2015, we have not issued any shares under the plan or granted any options to purchase shares under the plan.

 

 

Stock Option Grants

 

As of June 30, 2015, we have not granted any stock options.

 

Transfer Agent and Registrar

 

The transfer agent for our common stock is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598, telephone: (212) 828-8436.

 

Dividend Policy

 

We have not paid cash dividends on our common stock since our inception and we do not contemplate paying dividends in the foreseeable future.

 

 

DESCRIPTION OF SECURITIES

 

Authorized Capital Stock

 

We are authorized to issue 250,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 per share.

 

Common Stock

 

As of March 14, 2016 , 4,118,500 shares of common stock are issued and outstanding.

 

The holders of our common stock have equal ratable rights to dividends from funds legally available if and when declared by our board of directors and are entitled to share ratably in all of our assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs. Our common stock does not provide the right to a preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights. Our common stock holders are entitled to one non-cumulative vote per share on all matters on which shareholders may vote.

 

We refer you to our Articles of Incorporation, Bylaws, which are publicly available on the SEC website, and the applicable statutes of the State of Nevada for a more complete description of the rights and liabilities of holders of our securities. All material terms of our common stock have been addressed in this section.

 

Holders of shares of our common stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in that event, the holders of the remaining shares will not be able to elect any of our directors.

 

Preferred Stock

 

We are also authorized to issue 10,000,000 shares of undesignated preferred stock. Pursuant to our Articles of Incorporation, our Board of Directors has the power, without further action by the holders of the common stock, to designate the relative rights and preferences of the preferred stock, and issue the preferred stock in one or more series as designated by the Board of Directors. The designation of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends, or other preferences, any of which may be dilutive of the interest of the holders of the common stock or the preferred stock of any other series. The Board of Directors effects a designation of each series of preferred stock by filing with the Nevada Secretary of State a Certificate of Designation defining the rights and preferences of each series. Documents so filed are matters of public record and may be examined according to procedures of the Nevada Secretary of State, or copies may be obtained from us. Our Board of Directors has not designated any series or issued any shares of preferred stock at this time.

 

The ability of directors, without security holder approval, to issue additional shares of preferred stock could be used as an anti-takeover measure. Anti-takeover measures may result in you receiving less compensation for your stock.

 

The issuance of preferred stock creates additional securities with dividend and liquidation preferences over common stock, and may have the effect of delaying or preventing a change in control without further security holder action and may adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, the issuance of preferred stock could depress the market price of the common stock.

 

Holders

 

As of the date of this prospectus, we have 27 record shareholders.

 

 

Warrants

 

PIMCO Warrant

 

We have issued a warrant that allows the PIMCO Fund to purchase an amount of shares of our common stock equal to ten percent (10%) of all shares of common stock then outstanding, at an exercise price of $1,500,000 for the full 10% of our common stock ($150,000 for each one-percent of common stock purchased). The warrant may be exercised in whole or in part and expires on June 12, 2024. Based on the current shares outstanding as of the date of this prospectus, PIMCO would be entitled to receive 462,389 shares upon full exercise of the warrant as of March 14, 2016 .

 

We issued piggyback registration rights to the PIMCO Fund relating to the shares of capital stock issuable upon exercise of the warrant, subject to customary underwriter and other cut-backs and exclusions.

 

PIMCO Delayed Draw Note

 

On November 26, 2014, XFit Brands, Inc., Throwdown Industries Holdings, LLC, Throwdown Industries, LLC and Throwdown Industries, Inc. (collectively, “Obligor”) issued a delayed draw note to the PIMCO Fund in the amount of $1,500,000, which is secured by all of our assets, and we have the right, subject to certain terms and conditions, to increase the amount by $1,000,000, to a total of $2,500,000. The note bears interest at 14% per annum 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, This note replaced the delayed draw note originally issued on June 12, 2014 by Throwdown Industries Holdings, LLC, Throwdown Industries, LLC and Throwdown Industries, Inc. 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 October 2015 draw down. A replacement note was issued on each draw down date to reflect the note increase.

 

Dividend Policy

 

It is unlikely that we will declare or pay cash dividends in the foreseeable future. We intend to retain earnings, if any, to expand our operations. To date, we have paid no dividends on our shares of common stock and have no present intention of paying any dividends on our shares of common stock in the foreseeable future. The payment by us of dividends on the shares of common stock in the future, if any, rests solely within the discretion of our board of directors and will depend upon, among other things, our earnings, capital requirements and financial condition, as well as other factors deemed relevant by our Board of Directors.

 

Equity Compensation Plan Information

 

On October 21, 2014, our Board of Directors and our sole stockholder adopted the 2014 Stock Incentive Plan. The purpose of our 2014 Stock Incentive Plan is to advance the best interests of the company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 600,000 shares, subject to adjustment. Our Board of Directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable and proper. Any decision made, or action taken, by our Board of Directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive. The Board of Directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the Company, and such other persons as the Board of Directors or compensation committee may select, and permit holders of common stock options to exercise such options prior to full vesting therein and hold the common stock issued upon exercise of the option as common stock. Stock options may also be granted by our Board of Directors or compensation committee to non-employee directors of the Company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the Company. In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan. Our Board of Directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our Board of Directors may deem appropriate and in our best interest. As of February 16, 2016, we have not issued any shares under the plan, and there are options to purchase 43,000 shares under this plan.

 

 

Registration Rights

 

Kodiak Capital Equity Purchase Agreement

 

On December 17, 2014, we entered into a registration rights agreement with Kodiak Capital, LLC under which we are 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 our common stock, subject to certain conditions.

 

Piggyback Registration Rights

 

We issued piggyback registration rights (with standard carve-outs) to the PIMCO Fund relating to the shares of capital stock issuable upon exercise of their respective warrants, subject to customary underwriter and other cut-backs and exclusions.

 

Anti-Takeover Provisions

 

Our Articles of Incorporation contain provisions that might have an anti-takeover effect. These provisions, which are summarized below, may have the effect of delaying, deterring or preventing a change in control of our company. They could also impede a transaction in which our stockholders might receive a premium over the then-current market price of our common stock and our stockholders’ ability to approve transactions that they consider to be in their best interests.

 

Our Articles of Incorporation permit our Board of Directors to issue preferred stock. We could authorize the issuance of a series of preferred stock which would grant to holders preferred rights to our assets upon liquidation, the right to receive dividend coupons before dividends would be declared to holders of shares of our existing preferred stock and our existing preferred stock and common stock. Our current stockholders have no redemption rights. In addition, as we have a large number of authorized but unissued shares, our board of directors could issue large blocks of voting stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval.

 

Transfer Agent

 

The transfer agent for our common stock is vStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598, telephone: (212) 828-8436.

 

LEGAL MATTERS

 

The validity of the common stock offered by this prospectus will be passed upon for us by Indeglia & Carney LLP, Los Angeles, California. An affiliated fund of Indeglia & Carney LLP currently owns 1,999 shares of our common stock.

 

 

EXPERTS

 

Our financial statements included in this prospectus and in the registration statement have been audited by Accell, Audit and Compliance, P.A., independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance on such report, given the authority of said firm as an expert in auditing and accounting.

 

AVAILABLE INFORMATION

 

We are filing with the SEC this registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedule thereto, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information regarding our common stock and our company, please review the registration statement, including exhibits, schedules and reports filed as a part thereof. Statements in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement, set forth the material terms of such contract or other document but are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.

 

We are also subject to the informational requirements of the Exchange Act which requires us to file reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information along with the registration statement, including the exhibits and schedules thereto, may be inspected at public reference facilities of the SEC at 100 F Street N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC’s Internet website at http://www.sec.gov.

 

 

INDEX TO FINANCIAL STATEMENTS

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of June 30, 2015 and 2014		F-2
Consolidated Statements of Operations for the years ended June 30, 2015 and 2014		F-3
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended June 30, 2015 and 2014		F-4
Consolidated Statements of Cash Flows the years ended June 30, 2015 and 2014		F-5
Notes to the Consolidated Financial Statements		F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2015		F-16
Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2015 and 2014		F-17
Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2015 and 2014		F-18
Notes to the Condensed Consolidated Financial Statements		F-19

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

XFit Brands, Inc. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of XFit Brands, Inc. and its subsidiaries (the “Company”), as of June 30, 2015 and 2014, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of XFit Brands, Inc. and its subsidiaries as of June 30, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Accell Audit and Compliance, P.A.
September 28, 2015

 

 

XFit Brands, Inc. and Subsidiaries

Consolidated Balance Sheets

 

		June 30,
		2015				2014
ASSETS
Current Assets
Cash		$	51,016			$	360,323
Accounts receivable			92,823				20,900
Royalties receivable			75,000				55,633
Related party receivable			—				100,000
Prepaid expenses			333,572				—
Inventory			169,292				200,471
Total Current Assets			721,703				737,327
Property and equipment, net			42,292				830
Other assets
Deposits			27,480				4,513
Intangible assets, net			52,264				—
TOTAL ASSETS		$	843,739			$	742,670
LIABILITIES AND STOCKHOLERS’ DEFICIT
Current Liabilities
Accounts payable		$	446,063			$	131,144
Related party payable			95,620				135,932
Accrued expenses			214,310				31,155
Customer deposits			158,467				41,249
Total Current Liabilities			914,460				339,480
Note payable, net			1,620,289				1,000,219
Total Liabilities			2,534,749				1,339,699
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 June 30, 2015 and 2014			—				—
Common stock, $0.0001 par value; 250,000,000 shares authorized, 4,073,500 and 4,000,000 shares issued and outstanding as of June 30, 2015 and 2014, respectively			407				400
Additional paid in capital			4,319,074				3,819,267
Accumulated deficit			(6,010,491	)			(4,416,696	)
Total Stockholders’ Deficit			(1,691,010	)			(597,029	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	843,739			$	742,670

 

See accompanying notes to the consolidated financial statements.

 

 

XFit Brands, Inc. and Subsidiaries

Consolidated Statements of Operations

 

		For the Years Ended June 30,
		2015				2014
Revenues
Product sales		$	1,833,800			$	1,397,645
Royalties			205,439				140,894
Total revenues			2,039,239				1,538,539
Cost of revenues			1,418,495				804,940
Gross profit			620,744				733,599
Operating expenses
General and administrative			1,524,270				496,025
Sales and marketing			323,050				182,812
Total operating expenses			1,847,320				678,837
(Loss) income from operations			(1,226,576	)			54,762
Other income (expense)
Interest expense			(381,981	)			(40,321	)
Gain on settlement of payroll tax debt			—				98,336
Loss on write-off of property and equipment			—				(3,569	)
Other income			14,762				—
Income from licensing fees			—				114,190
Loss on marketable securities			—				(114,190	)
Net (loss) income		$	(1,593,795	)		$	109,208
(Loss) income per common share – basic and diluted		$	(0.0379	)		$	0.0273
Weighted average shares outstanding – basic and diluted			4,005,477				4,000,000

 

See accompanying notes to the consolidated financial statements.

 

 

XFit Brands, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Deficit

For the Years Ended June 30, 2015 and 2014

 

		Common Stock								Additional Paid In				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Deficit				Deficit
Balance, June 30, 2013			4,000,000			$	400			$	3,441,787			$	(4,525,904	)		$	(1,083,717	)
Issuance of warrants			—				—				377,480				—				377,480
Net income			—				—				—				109,208				109,208
Balance, June 30, 2014			4,000,000				400				3,819,267				(4,416,696	)			(597,029	)
Distribution			—				—				(100,000	)			—				(100,000	)
Shares issued for services			2,500				—				244,814				—				244,814
Shares issued for Asset Purchase			11,000				1				54,999				—				55,000
Shares issued for vendor credits			60,000				6				299,994				—				300,000
Net loss			—				—				—				(1,593,795	)			(1,593,795	)
Balance, June 30, 2015			4,073,500			$	407			$	4,319,074			$	(6,010,491	)		$	(1,691,010	)

 

See accompanying notes to the consolidated financial statements.

 

 

XFit Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

 

		For the Years Ended June 30,
		2015				2014
Cash flows from operating activities:
Net (loss) income		$	(1,593,795	)		$	109,208
Adjustments to reconcile net (loss) income to net cash from operations:
Depreciation and amortization			27,009				1,380
Loss on write-off of property and equipment			—				3,569
Amortization of debt issuance costs and loan discount			146,038				1,362-
Shares issued for services			244,814				—
Changes in operating assets and liabilities:
Accounts receivable			(71,923	)			80,759
Royalties receivable			(19,367	)			(55,633	)
Prepaid expenses			(33,572	)			—
Inventory			31,179				(176,853	)
Deposits			(22,967	)			602
Accounts payable			314,919				(34,090	)
Accrued expenses			5,000				(37,501	)
Payroll taxes payable			178,155				(343,700	)
Customer deposits			117,218				(106,496	)
Net cash from operating activities			(677,292	)			(557,393	)
Cash flows from investing activities:
Purchases of property and equipment			(53,839	)			(357	)
Acquisition of intangible asset			(11,896	)			—
Net cash from investing activities			(65,735	)			(357	)
Cash flows from financing activities:
Related party payable			(40,311	)			—
Related party receivable			—				(100,000	)
Proceeds from note payable			500,000				1,500,000
Proceeds from note payable – related party			—				100,000
Payments on note payable – related party			—				(500,000	)
Debt issuance costs			(25,969	)			(123,663	)
Net cash from financing activities			433,720				876,337
Net change in cash			(309,307	)			318,587
Cash, beginning of year			360,323				41,736
Cash, end of year		$	51,016			$	360,323
Supplemental cash flow information:
Cash paid for interest		$	145,345			$	28,677
Non-cash investing and financing activities:
Distribution		$	100,000			$	—
Issuance of common shares for Asset Purchase			55,000				—
Issuance of common shares for vendor credits			300,000				—
Value of marketable securities received as license fees			—				114,190
Loss on value of marketable securities			—				(114,190	)
Issuance of warrants			—				377,480

 

See accompanying notes to the consolidated financial statements.

 

 

XFit Brands, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

June 30, 2015 and 2014

 

NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

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 consolidated financial statements of XFit and its wholly owned operating subsidiaries Throwdown Industries Holdings, LLC (“Holdings”), Throwdown Industries, 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. The financial statements have been restated to reflect this conversion.

 

Basis of presentation

 

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Basis of Consolidation

 

The consolidated financial 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 June 30, 2015 or 2014.

 

Use of Estimates

 

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.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to a significant concentration of credit risk include cash, accounts receivable, royalties receivable, revenue, and vendor concentrations. At times, the Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management monitors the credit rating and concentration of risk with these financial institutions on a continuing basis to mitigate risk.

 

The Company controls credit risk related to accounts receivable and royalties receivable through credit approvals, credit limits and monitoring procedures.

 

As of June 30, 2015, one customer accounted for 75% of accounts receivable. As of June 30, 2014, three customers accounted for 65% of accounts receivable. During the years ended June 30, 2015 and 2014, four and three customers accounted for 52% and 39% of total revenues, respectively.

 

As of June 30, 2015 and 2014, three vendors accounted for 68% and 73% of total accounts payable, respectively. During the years ended June 30, 2015 and 2014, three vendors accounted for 77% and 82% of total purchases, respectively.

 

 

Fair Value of Financial Instruments

 

ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

The Company determines the fair value of its financial instruments based on a three-level hierarchy for fair value measurements under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair-value hierarchy:

 

Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical securities.

 

Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.

 

Level 3 — Valuations based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement.

 

At June 30, 2014, the warrants issued in connection with the loan discussed in Note 3 were measured at fair value on a non-recurring basis using unobservable inputs (Level 3).

 

Financial Instruments

 

The carrying amounts of cash, accounts and royalties receivable, accounts payable and accrued expenses approximate fair value as of June 30, 2015 and 2014, due to the short-term nature of the instruments.

 

Long-Lived Assets and Intangible Assets

 

In accordance with ASC 350-30, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.

 

The Company had no such asset impairments at June 30, 2015 or 2014. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.

 

Marketable Securities

 

Marketable securities classified as available-for-sale are carried at fair value. Unrealized gains and losses from available for sale investments in equity securities are reported as other income or expense in the consolidated statements of operations. Investments in equity securities are recorded on a trade-date basis.

 

Revenue Recognition

 

Product sales are recognized upon shipment of inventory to customers. Royalty revenues are recognized upon the terms of the underlying royalty agreements, when amounts are reliably measurable and collectibility is assured.

 

Accounts receivable consist primarily of receivables from product sales. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables, and once these receivables are determined to be uncollectible, they are written off against an existing allowance account. As of June 30, 2015 and 2014, the Company has determined that an allowance for doubtful accounts is not necessary as all accounts are considered fully collectible.

 

 

Cash and Cash Equivalents

 

The Company considers cash on hand, cash in banks and other highly liquid instruments purchased with an original maturity date of three months or less to be cash equivalents.

 

Inventory

 

Inventory, which primarily represents finished goods, is valued at the lower of cost or market. Cost has been derived principally using standard costs utilizing the first-in, first-out method. Write-downs for finished goods are recorded when the net realizable value has fallen below cost and provide for slow moving or obsolete inventory.

 

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 June 30, 2015 and 2014, the Company had $149,632 and $123,663 of total gross debt issuance costs, respectively. Amortization of the debt issuance costs was $46,414 and $576 for the years ended June 30, 2015 and 2014, respectively, which was recorded as a component of interest expense on the consolidated statements of operations.

 

Income Taxes

 

In accordance with ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset in the future tax consequences. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.

 

The Company has adopted the provisions set forth in ASC Topic 740 to account for uncertainty in income taxes. In the preparation of income tax returns in federal and state jurisdictions, the Company asserts certain tax positions based on its understanding and interpretation of the income tax law. The taxing authorities may challenge such positions, and the resolution of such matters could result in recognition of income tax expense in the Company’s financial statements. Management believes it has used reasonable judgments and conclusions in the preparation of its income tax returns.

 

The Company uses the “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement criteria for income tax benefits. The Company has determined that it has no material unrecognized tax assets or liabilities related to uncertain tax positions as of June 30, 2015 and 2014. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months.

 

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on its consolidated balance sheets at June 30, 2015 and 2014, respectively.

 

Taxes Collected from Customers and Remitted to Governmental Authorities

 

The Company reports taxes collected, which are primarily sales tax, on a net basis.

 

Income (Loss) per Share

 

The basic (loss) income per share is calculated by dividing the Company’s net (loss) income available to common shareholders by the weighted average number of common shares during the year. The diluted net (loss) income 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 year. 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) income per share is the same as basic net (loss) income per share due to the lack of dilutive items. As of June 30, 2015 and 2014, the Company had 452,612 and 444,445 dilutive shares outstanding, respectively, that are attributable to the PIMCO warrant, which have been excluded as their effect is anti-dilutive.

 

 

Property and Equipment, net

 

Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized using the straight-line method over the following estimated useful lives:

 

	Computer equipment and software	3 years
	Furniture	3 years
	Machinery	3-5 years

 

Prepaid Expenses

 

During the year ended June 30, 2015, the Company issued 60,000 shares of its common stock valued at $300,000 to two key vendors in consideration of future inventory purchases. As of June 30, 2015, the Company has not utilized these vendor credits and the $300,000 is included in prepaid expenses on the consolidated balance sheets.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense was $77,175 and $13,204 for the years ended June 30, 2015 and 2014, respectively, and is included in sales and marketing expense on the consolidated statements of operations.

 

Shipping and Handling Fees

 

All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues and are reported as product sales in the consolidated statements of operations. Costs incurred by the Company for shipping and handling are reported within cost of revenues in the consolidated statements of operations.

 

Reclassifications

 

Certain reclassifications were made to the prior period consolidated financial statements to conform to the current period presentation. There was no change to the previously reported net loss. The reclassifications as of June 30, 2014, are comprised of a $123,087 decrease in debt issuance costs and a corresponding $123,087 increase in loan discounts and debt issuance costs.

 

Recently Issued Accounting Standards

 

Recent accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

In April 2015 the Financial Accounting Standards Board (FASB) issued ASU 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new standard requires debt issuance costs to be classified as reductions to the face value of the related debt. The Company has reclassified debt issuance costs previously reported as other assets to loan discounts and debt issuance costs as a deduction of the debt liability.

 

Subsequent Events

 

In accordance with ASC 855, Subsequent Events, 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:

 

		June 30,
		2015				2014
Office furniture and equipment		$	46,233			$	12,298
Warehouse equipment			13,254				—
Molds & dies			6,650				—
			66,137				12,298
Less: Accumulated depreciation and amortization			(23,845	)			(11,468	)
Total Property and Equipment, net		$	42,292			$	830

 

Depreciation expense for the years ended June 30, 2015 and 2014 was $12,377 and $1,380, respectively.

 

NOTE 3 – NOTE PAYABLE

 

The note payable is comprised of the following at:

 

		June 30,
		2015				2014
Note payable		$	2,000,000			$	1,500,000
Less: unamortized loan discount			(277,070	)			(376,694	)
Less: unamortized debt issuance costs			(102,641	)			(123,087	)
Total Note Payable, net		$	1,620,289			$	1,000,219

 

On June 10, 2014, the Company entered into a Note Purchase Agreement (“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 on the PIMCO note is $2,000,000, and the Company has 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 June 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.

 

During the years ended June 30, 2015 and 2014, the Company amortized $99,624 and $786, respectively, of the loan discount which is recorded as a component of interest expense on the consolidated statements of operations.

 

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Related Party Receivable

 

As of June 30, 2014, the Company had a related party receivable of $100,000 from TD Legacy, the sole member of Holdings at that time. In June 2014, Holdings paid the balance of the $500,000 note payable to Windsor Court Holdings, LLC (“WCH”) and an additional $100,000 transaction fee on behalf of TD Legacy, which redeemed the 25% interest in Holdings from WCH to TD Legacy. The Company issued a $100,000 distribution to its sole member, TD Legacy, which eliminated the related party receivable during the year ended June 30, 2015.

 

Related Party Payable

 

As of June 30, 2015 and 2014, the Company has $95,620 and $135,932, respectively, of salaries and bonuses payable to four of its officers and membership interest holders. These bonuses were to cover income taxes relating to equity issued during 2009.

 

NOTE 5 – LICENSING AGREEMENTS

 

On October 2, 2013, the Company entered into a license agreement with Dethrone Royalty Holdings, Inc. (“Dethrone”), pursuant to which the Company granted an exclusive, non-sub licensable and non-assignable right to Dethrone to use Company trademarks and other intellectual property. In consideration for the license agreement, the Company shall receive royalties of 10% of the net revenue generated by sales and other transfers of the licensed products during the term of the license agreement (subject to minimum requirement). In addition to the royalty payments, the Company received 5,437,603 shares of Dethrone’s common stock, at a trading value of $114,190, which was recorded as other income on the consolidated statements of operations. As of June 30, 2014, the Company wrote down the shares to fair market value, which has been recorded as a loss on value of marketable securities on the consolidated statements of operations. The change was due to a decline in the fair value of the marketable security which, in the opinion of management, was considered to be other than temporary. This agreement was terminated on February 14, 2015. Total royalties related to this agreement were $75,000 for each of the years ended June 30, 2015 and 2014, respectively.

 

On April 10, 2014, the Company entered into a distribution and license agreement with Partner Business Importacao e Exportacao, LTDA, a Brazilian corporation (“Partner”). Pursuant to the agreement, the Company granted a two-year, non-assignable, royalty-based license and right to use the trademarks and other intellectual property in the territory defined as Brazil. In consideration for the license agreement, the Company shall receive the greater of royalties of 10% of the net sales generated by sales and other transfers of the licensed products during the term of the license agreement or the minimum royalties outlined in the agreement. Total royalties related to this agreement were $75,000 and $125,000 for the years ended June 30, 2015 and 2014, respectively.

 

On March 26, 2015, the Company entered into a distribution agreement with Eye Fitness Pty Ltd (“Eye Fitness”), an Australian Company. Pursuant to the agreement, the Company granted a two-year, non-assignable, distribution agreement for Australia and key accounts in the United Kingdom, Thailand and Singapore. In consideration for the distribution agreement, the Company shall receive minimum royalties as outlined in the agreement. There was no royalty revenue for the year ended June 30, 2015.

 

NOTE 6 – INCOME TAXES

 

The Company’s net loss before income taxes totaled $1,593,795 for the year ended June 30, 2015. During the year ended June 30, 2014, the Company had income before taxes of $109,208, but the financial statements do not include a provision for federal income taxes for that period as the Company’s earnings and losses were included in the former members’ personal income tax returns.

 

The total provision for income taxes, which consists of U.S. federal income and California Franchise taxes, consists of the following:

 

		June 30,
		2015				2014
Current taxes		$	(437,352	)		$	—
Deferred taxes			437,352				—
Total		$	—			$	—

 

 

A reconciliation of the tax on the Company’s loss for the year before income taxes and total tax expense are shown below:

 

		June 30,
		2015				2014
Income tax liability (benefit) at the U.S statutory income tax and California Franchise tax rates			(39.8	)%			—
Loss on marketable securities			—				—
Amortization of loan discount			2.6	%			—
Other differences			0.1	%			—
Change in valuation allowance			37.1	%			—
Total			—				—

 

Based on the weight of available evidence, the Company’s management has determined that it is more likely than not that the net deferred tax assets will not be realized. Therefore, the company has recorded a full valuation allowance against the net deferred tax assets.

 

The components of net deferred tax assets recognized are as follows:

 

		June 30,
		2015				2014
Deferred noncurrent tax asset:
Net operating loss carry-forward		$	502,178			$	—
Basis differences on marketable securities			45,448				—
Total, deferred noncurrent tax asset		$	547,626			$	—
Deferred noncurrent tax liabilities:
Value of warrants recorded as loan discount		$	110,274			$	—
Total deferred noncurrent tax liabilities			110,274				—
Valuation allowance			(437,352	)			—
Total		$	—			$	—

 

Due to uncertainties surrounding the Company’s ability to generate future U.S. taxable income to realize these assets, a full valuation allowance has been established to offset the net U.S. deferred tax asset.

 

The future utilization of the Company’s federal net operating loss and tax credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future.

 

At June 30, 2015, the Company had federal income tax net operating losses of approximately $1.6 million. The federal net operating losses expire at various dates beginning in 2028. The Company files income tax returns in the U.S. federal jurisdiction and California. Tax years 2008 forward remain open to examination for the U.S. federal jurisdiction as a result of net operating loss carryforwards. Tax years 2009 forward remain open to examination by the state taxing authority.

 

NOTE 7– STOCKHOLDERS’ DEFICIT

 

During the year ended June 30, 2015, TD Legacy, a related party, issued 1,813 limited liability company units to Kodiak Capital (“Kodiak”), in consideration of a capital commitment fee previously rendered to XFit. The value of these shares was $3.75 per share based on the $15.0 million valuation established upon closing of the PIMCO Note Payable. This was recorded as a contribution to additional paid-in-capital and general and administrative expense in the accompanying consolidated financial statements.

 

 

During the year ended June 30, 2015, TD Legacy, a related party, issued 173 limited liability company units to its chief financial officer in consideration of an agreement to cancel indebtedness of $25,000 for consulting services previously rendered to XFit. This was recorded as a contribution to additional paid-in capital and general and administrative expense in the accompanying consolidated financial statements.

 

During the year ended June 30, 2015, TD Legacy, a related party, issued 69 limited liability company units to its legal counsel in settlement of $10,000 of legal services previously rendered to XFit. This was recorded as a contribution to additional paid-in capital and general and administrative expense in the accompanying consolidated financial statements.

 

During the year ended June 30, 2015, the Company agreed to issue 11,000 shares of its common stock valued at $55,000, in connection with the Asset Purchase Agreement for the Transformation exercise and fitness program (refer to Note 8).

 

During the year ended June 30, 2015, the Company issued 2,500 shares of its common stock valued at $12,500 to an employee as a performance bonus.

 

During the year ended June 30, 2015, the Company issued 60,000 shares of its common stock valued at $300,000 to two key vendors in consideration of future inventory purchases (refer to Note 8).

 

NOTE 8 – COMMITMENTS AND CONTINGINCIES

 

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.

 

On June 18, 2015, the Company entered into a lease agreement for approximately 25,788 square feet of warehouse and office space under a thirty eight (38) month operating lease that commences on September 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.

 

On June 5, 2015, the Company entered into a sublease of a portion of the premises for the period September 1, 2015 through August 31, 2016, at a monthly rental rate of $5,000.

 

Future minimum lease payments under the operating lease as of June 30, 2015 are as follows:

 

For the years ending June 30:
2016			$	141,044
2017				203,003
2018				209,093
2019				70,038
Total			$	623,178

 

Rent expense for the years ended June 30, 2015 and 2014 was $59,747 and $57,087, 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 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 during the year ended June 30, 2015.

 

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. The Company had the total $100,000 Vendor Credit at June 30, 2015, which is included in prepaid expenses on the 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, or $200,000. 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. The Company had the total $200,000 Vendor Credit at June 30, 2015, which is included in prepaid expenses in the consolidated balance sheets.

 

 

NOTE 9 – SUBSEQUENT EVENTS

 

Issuance of Common Shares to an Employee

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.

 

Stock Options Awards

 

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.

 

Bank Line of Credit

 

On July 24, 2015, the Company secured a $35,000 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.

 

 

XFit Brands, Inc.

Condensed Consolidated Balance Sheets

 

		December 31, 2015				June 30, 2015
		(Unaudited)
ASSETS
Current Assets
Cash		$	139,666			$	51,016
Accounts receivable			208,888				92,823
Royalties receivable			65,413				75,000
Inventory			253,452				169,292
Prepaid expenses			206,235				333,572
Total Current Assets			873,654				721,703
Long Term Assets
Property and equipment, net			37,652				42,292
Other assets
Deposits			27,480				27,480
Intangible assets, net			37,472				52,264
TOTAL ASSETS		$	976,258			$	843,739
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable		$	604,104			$	446,063
Related party payable			95,620				95,620
Accrued expenses and interest			67,507				129,182
Customer deposits			210,100				158,467
Line of credit			34,197				—
Total Current Liabilities			1,011,528				829,332
Note payable, net			2,307,960				1,705,417
Total Liabilities			3,319,488				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 December 31, 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 December 31, 2015 and June 30, 2015, respectively			409				407
Additional paid in capital			4,444,505				4,319,074
Accumulated deficit			(6,788,144	)			(6,010,491	)
Total Stockholders’ Deficit			(2,343,230	)			(1,691,010	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	976,258			$	843,739

 

See accompanying notes to the condensed consolidated financial statements.

 

 

XFit Brands, Inc.

Condensed Consolidated Statements of Operations

For the three and six month periods ended December 31, 2015 and 2014 (Unaudited)

 

		For the Three Months Ended December 31,								For the Six Months Ended December 31,
		2015				2014				2015				2014
Revenues:
Product sales		$	659,262			$	542,118			$	1,132,518			$	773,321
Royalties			15,413				67,492				15,413				130,440
Net revenues			674,675				609,610				1,147,931				903,761
Cost of revenues			386,487				397,708				645,331				605,759
Gross Profit			288,188				211,902				502,600				298,002
Operating expenses
General and administrative			402,575				563,271				847,505				877,355
Sales and marketing			84,302				55,428				174,196				101,720
Total operating expenses			486,877				618,699				1,021,701				979,075
(Loss) Income from operations			(198,689	)			(406,797	)			(519,101	)			(681,073	)
Interest expense			(142,279	)			(94,304	)			(258,556	)			(171,912	)
Other income			—				12,758				—				14,757
Net (Loss) Income		$	(340,968	)		$	(488,343	)		$	(777,657	)		$	(838,228	)
Loss per common share - basic and diluted		$	(0.09	)		$	(0.12	)		$	(0.19	)		$	(0.21	)
Weighted average shares outstanding - basic and diluted			4,098,500				4,000,000				4,098,500				4,000,000

 

See accompanying notes to the condensed consolidated financial statements.

 

 

XFit Brands, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the six month periods ended December 31, 2015 and 2014

 

		Six Month Periods Ended December 31,
		2015				2014
Cash flows from operating activities
Net loss		$	(777,657	)		$	(838,228	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			29,942				4,200
Amortization of debt issuance costs and loan discount			91,905				69,020
Stock based compensation			75,000				232,314
Value of options issued to employees			433				—
Changes in operating assets and liabilities:
Accounts receivable			(116,065	)			(81,547	)
Royalties receivable			9,587				18,133
Prepaid expenses			127,337				—
Inventory			(84,160	)			(125,127	)
Accounts payable			158,044				239,545
Accrued expenses and interest			(1,036	)			71,151
Customer deposits			51,633				268,161
Net cash used in operating activities			(435,037	)			(142,378	)
Cash flows from investing activities
Acquisition of intangible assets			(8,999	)			(3,596	)
Purchase of property and equipment			(1,511	)			(33,634	)
Net cash used in investing activities			(10,510	)			(37,230	)
Cash flows from financing activities
Payoff of line of credit			(19,224	)			—
Proceeds from line of credit			53,421				—
Proceeds from increase in PIMCO note payable			500,000				—
Net cash provided by financing activities			534,197				—
Net increase (decrease) in cash			88,650				(179,608	)
Cash at beginning of period			51,016				360,323
Cash at end of period		$	139,666			$	180,715
Supplemental cash flow information:
Cash paid for interest		$	103,305			$	65,233
Non-cash investing and financing activities:
Value of common shares issued as a loan fee		$	50,000			$	—
Distribution		$	—			$	100,000
Issuance of common stock in exchange for LLC interests		$	—			$	400

 

See accompanying notes to the condensed consolidated financial statements.

 

 

XFit Brands, Inc.

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 six months ended December 31, 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 December 31, 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 December 31, 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.

 

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 December 31, 2015 and June 30, 2015, the Company had total gross debt issuance costs of $199,632 and $149,632, respectively. Amortization of the debt issuance costs was $32,947 and $19,611 for the six month periods ended December 31, 2015 and 2014, respectively, which was recorded as a component of interest expense on the condensed consolidated statements of operations.

 

Subsequent Events

 

In accordance with ASC 855, the Company evaluated subsequent events through February 16, 2016, 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:

 

		December 31, 2015				June 30, 2015
		(Unaudited)
Office furniture and equipment		$	48,193			$	46,233
Warehouse equipment			15,254				13,254
Molds and dies			4,200				6,650
Total, cost			67,647				66,137
Accumulated Depreciation			(29,995	)			(23,845	)
Property and equipment, net		$	37,652			$	42,292

 

Depreciation expense for the six month periods ended December 31, 2015 and 2014 was $6,151 and $4,200, respectively.

 

 

NOTE 3 – INTANGIBLE ASSETS, NET

 

Intangible assets consisted of the following at:

 

		December 31, 2015				June 30, 2015
		(Unaudited)
Transformations exercise fitness program		$	62,500			$	62,500
Trademark and patent			7,811				4,396
Computer software			5,584				—
Total, cost			75,895				66,896
Accumulated amortization			(38,423	)			(14,622	)
Intangible assets, net		$	37,472			$	52,264

 

Amortization expense for the six months ended December 31, 2015 and 2014 was $23,791 and $270, respectively.

 

NOTE 4 – NOTE PAYABLE

 

The note payable is comprised of the following at:

 

		December 31, 2015				June 30, 2015
		(Unaudited)
Note payable		$	2,620,098			$	2,085,128
Add: accrued interest added to note principal			25,670				—
Less: unamortized loan discount			(218,113	)			(277,070	)
Less: unamortized debt issuance costs			(119,695	)			(102,641	)
Total note payable, net		$	2,307,960			$	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 (including 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 in 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 December 31, 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 of 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.

 

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.

 

During the six month periods ended December 31, 2015 and 2014, the Company amortized $91,905 and $69,020, 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 for up to $35,000. 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. After October 23, 2015, the Company borrowed an additional $34,197 from this line of credit and has an unpaid balance on the line of credit of $34,197 as of December 31, 2015.

 

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

Related Party Payable

 

As of December 31, 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 to be utilized on a performance and retention basis.

 

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).

 

On November 17, 2015, the Company issued options to purchase 43,000 shares of stock to six employees for services rendered. (See Note 8—Commitments and Contingencies—Stock Incentive Plan)

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

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 commenced on October 1, 2015 and expires on October 31, 2018. The lease has monthly payments starting at $8,252 for the period October 1, 2015 through February 28, 2016. Thereafter with monthly payments ranging $16,504 to $17,509 over the term of the lease. The Company previously leased office and warehouse facilities under a lease which expired on November 30, 2015 pursuant to which it paid $4,865 per month which included operating expenses, insurance and property taxes

 

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 six month periods ended December 31, 2015 and 2014, were $67,937 and $29,383, 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 condensed 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.

 

  

At December 31, 2015, the Company had not issued any shares under the plan and had granted options to purchase 43,000 shares under the plan.

 

On November 17, 2015, the Company granted 43,000 aggregate stock options to six employees. The value of the shares granted was determined to be $17,742 utilizing the Black-Scholes valuation model based on stock value of $5.00 at the date of issuance, a 5 year life of the options, a discount rate of 1.73%, and a zero percent stock volatility rate. For the six months ended December 31, 2015, the value of the stock options was $433 and was recorded as stock based compensation expense on the statement of operations.

 

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 December 31, 2015.

 

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 December 31, 2015 and June 30, 2015, the Company had none 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 Deceember 31, 2015 and June 30, 2015, the Company had $191,549 and $200,000, respectively, of Vendor Credit included in prepaid expenses in the condensed consolidated balance sheets.

 

NOTE 9 – SUBSEQUENT EVENTS

 

None

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this prospectus. The results shown here in are not necessarily indicative of the results to be expected for any future periods.

 

This discussion contains forward-looking statements, based on current expectations. All statements regarding future events, our future financial performance and operating results, our business strategy and our financing plans are forward-looking statements and involve risks and uncertainties. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. These statements are only predictions. Known and unknown risks, uncertainties, and other factors could cause our actual results and the timing of events to differ materially from those projected in any forward-looking statements. In evaluating these statements, you should specifically consider various factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this prospectus.

 

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” or “DTC” 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 $643,000 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.

 

Three months ended December 31, 2015 Compared to the Three Months Ended December 31, 2014

 

Our revenue, operating expenses, and net income (loss) from operations for the three month period ended December 31, 2015 as compared to the three month period ended December 31, 2014 are set forth below.

 

		Three Months Ended December 31:												% Change Increase
		2015				2014				Change				(Decrease)
REVENUES
Product sales		$	659,262			$	542,118			$	117,144				21.6	%
Royalties			15,413				67,492				(52,079	)			(77.2	)%
Net revenues			674,675				609,610				65,065				10.7	%
COST OF REVENUES			386,487				397,708				(11,221	)			(2.8	)%
Gross profit			288,188				211,902				76,286				36.0	%
OPERATING EXPENSES:
General and administrative			402,575				563,271				(160,696	)			(28.5	)%
Sales and marketing			84,302				55,428				28,874				52.1	%
Total operating expenses			486,877				618,699				(131,822	)			(21.3	)%
(Loss) income from operations			(198,689	)			(406,797	)			208,108				51.2	%
Interest expense			(142,279	)			(94,304	)			(47,975	)			50.9	%
Other income			—				12,758				12,758				100.0	%
Net loss		$	(340,968	)		$	(488,343	)		$	147,375				30.2	%

 

Revenues. Revenues consist of product sales and royalties. Total revenues for the three months ended December 31, 2015 were $674,675, an increase of $65,065, or 10.7%, from $609,610 of total revenues for the three months ended December 31, 2014. Product sales increased $117,144, or 21.6%, to $659,262 for the three months ended December 31, 2015 from $542,118 for the three months ended December 31, 2014. The increase in product sales is attributable to increased selling efforts and momentum during the three months ended December 31, 2015. Royalties from international distributors were $15,413 and $67,492 for the three months ended December 31, 2015 and 2014, respectively. The decrease in royalties is attributable to a lack of royalties from our Brazilian partner due to the current economic climate in Brazil.

 

Cost of Revenues. Total cost of revenues for the three months ended December 31, 2015 were $386,487, a decrease of $11,221, or 2.8%, from $397,708 for the three months ended December 31, 2014. Cost of product sales during the three months ended December 31, 2015 were 58.6% as compared to 73.4% during the three months ended December 31, 2014. The decrease in cost of revenues is attributable to the decrease in product sales costs as a percentage of revenues form 73.4% during the three months ended December 31, 2014 as compared to 58.6% during the three months ended December 31, 2015.

 

 

Gross Profit. Gross profit increased $76,286 to $288,188 for the three months ended December 31, 2015, from a gross profit of $211,902 for the three months ended December 31, 2014. The increase in gross profit reflects the decrease in product cost of sales, and the $15,413 in royalties during the three months ended December 31, 2014. During the three months ended December 31, 2014, we realized a 26.6% gross profit on our product sales as compared to a 41.4% gross profit on product sales during the three months ended December 31, 2015.

 

General and Administrative Expenses. General and administrative expenses decreased by $160,696, or 28.5%, to $402,575 for the three months ended December 31, 2015 from $563,271 for the three months ended December 31, 2014. General and administrative expenses for the three months ended December 31, 2015 are comprised of salaries and wages of $40,436, office expenses of $614, insurance of $27,776, rent of $34,883, professional fees of $72,853, travel of $12,138, stock-based compensation of $75,433, SEC financial reporting expenses of $60,380, and other of $78,061. General and administrative expenses for the three months ended December 31, 2014 are comprised of salaries and wages of $93,336, professional fees of $50,244, office expenses of $5,055, insurance of $10,302, rent of $14,789, SEC registration expenses, (including accounting, legal, audit and filing fees) of $141,998, a decrease in capital commitment fee of $197,314, travel of $549, and other of $49,684. The decrease in general and administrative expenses during the three months ended December 31, 2015 is comprised of a decrease in salaries and wages of $52,900, increase in professional fees of $22,609, a decrease in office expenses of $4,441, an increases in insurance expense of $17,474 an increase of $20,094 of rent expense, an increase in travel of $11,589, an increase in stock based compensation of $75,433, a decrease in IPO expenses of $141,998 decrease in capital commitment fee of $197,314, and a net $28,377 increase in other general and administrative expenses. The overall decrease in general and administrative expenses is attributable to decreased expenses for SEC registration fees, increased expenses for stock based compensation, net of a decrease in capital commitment fees and decrease in other general and administrative expenses.

 

Sales and Marketing Expense. Sales and marketing expense increased $28,874, or 52.1%, to $84,302 for the three months ended December 31, 2015 from $55,428 for the three months ended December 31, 2014. This increase in sales and marketing expenses is commensurate with a net 10.7% increase in our product sales during the three months ended December 31, 2015 and the added salary cost of a sales manager.

 

Interest Expense. Interest expense increased by $47,975 to $142,279 for the three months ended December 31, 2015 from $94,304 for the three months ended December 31, 2014. The increase is largely due to the increased interest expense on the increased balance of the delayed draw note with the PIMCO Fund during the three months ended December 31, 2015 and the amortization of loan discounts and loan fees.

 

Other Income. During the three months ended December 31, 2014, we realized $12,758 of other income while during the three months ended December 31, 2015 we realized zero of other income.

 

Net Loss. Net loss decreased by $147,375 or 30.2% to a net loss of $340,968 for the three months ended December 31, 2015 from a net loss of $488,343 for the three months ended December 31, 2014. This increase in our net loss is attributable to the increased revenues and decreased expenses, as explained herein.

 

Six months ended December 31, 2015 Compared to the Six Months Ended December 31, 2014

 

Our revenue, operating expenses, and net (loss) income from operations for the six month period ended December 31, 2015 as compared to the six month period ended December 31, 2014 are set forth below.

 

		Six Months Ended December 31:												% Change Increase
		2015				2014				Change				(Decrease)
REVENUES
Product sales		$	1,132,518			$	773,321			$	359,197				46.4	%
Royalties			15,413				130,440				(115,027	)			(88.2	)%
NET REVENUES			1,147,931				903,761				244,170				27.0	%
COST OF REVENUES			645,331				605,759				39,572				6.5	%
Gross profit			502,600				298,002				204,598				68.7	%
OPERATING EXPENSES:
General and administrative			847,505				877,355				(29,850	)			(3.42	)%
Sales and marketing			174,196				101,720				72,476				71.3	%
Total operating expenses			1,021,701				979,075				42,626				4.4	%
(Loss) income from operations			(519,101	)			(681,073	)			161,972				23.8	%
Interest expense			(258,556	)			(171,912	)			(86,644	)			(50.4	)%
Other income			—			$	14,757				(14,757	)			(100.0	)%
Net (loss) income		$	(777,657	)		$	(838,228	)		$	60,571				7.2	%

 

 

Revenues. Total revenues for the six months ended December 31, 2015 were $1,147,931, an increase of $244,170, or 27.0%, from $903,761 of total revenues for the six months ended December 31, 2014. Product sales increased $359,197, or 46.4%, to $1,132,518 for the six months ended December 31, 2015 from $773,321 for the six months ended December 31, 2014. The increase in product sales is attributable to the active sales and marketing program launched during 2015. Royalties from international distributors were $15,413, a decrease by $115,027 for the six months ended December 31, 2015, as compared to $130,440 of royalties for the six months ended December 31, 2014. The decrease in royalties is attributable to the economic downturn in Brazil which severely impeded our Brazilian partner to sell product and pay royalties.

 

Cost of Revenues. Total cost of revenues for the six months ended December 31, 2015 were $645,331, an increase of $39,572, or 6.5%, from $605,759 for the six months ended December 31, 2014. Cost of product sales during the six months ended December 31, 2015 were 57.0% as compared to 78.3% during the six months ended December 31, 2014. The increase in costs of revenues is attributable to the increased product and the improved product cost of sales percentages during the six months ended December 31, 2015.

 

Gross Profit. Gross profit increased $204,598 to $502,600 for the six months ended December 31, 2015, from a gross profit of $298,002 for the six months ended December 31, 2014. The increase in gross profit reflects the increase in product sales and the improved gross profit margin on product sales during the six months ended December 31, 2015. During the six months ended December 31, 2015, we realized a 43.0% gross profit on our product sales as compared to a 21.7% gross profit realized on product sales during the six months ended December 31, 2014.

 

General and Administrative Expenses. General and administrative expenses decreased by $29,850, or 3.7%, to $847,505 for the six months ended December 31, 2015 from $877,355 for the six months ended December 31, 2014. General and administrative expenses for the six months ended December 31, 2015 are comprised of salaries and wages of $219,014, professional fees of $151,866, office expenses of $1,752, insurance of $47,451, rent of $67,937, SEC financial reporting expenses, (including accounting, legal, audit and edgar/XBRL filing service fees) of $163,218, travel of $23,704, stock based compensation of $75,433, and other of $97,130. General and administrative expenses for the six months ended December 31, 2014 are comprised of salaries and wages of $146,072, professional fees of $101,536, expenses associated with our initial public offering of $291,824, insurance of $21,268, rent of $29,383, office expenses of $8,718, capital commitment fee of $197,314, travel of $29,445, and other of $51,795. The decrease in general and administrative expenses during the six months ended December 31, 2015 is comprised of an increase in salaries and wages of $72,942, a decrease in SEC financial reporting expenses of $291,824, an increase in expenses associated with our initial public offering of $163,218, a decrease in office expenses of $6,966, an increase in professional fees of $50,330 a decrease in capital commitment fee of $197,314, an increase of $26,183 in insurance expense, an increase of $38,554 in rent expense, a decrease in travel of $5,741, an increase in stock based compensation of $75,433, and a net $45,335 increase in other general and administrative expenses. The overall decrease in general and administrative expenses is attributable to decreased expenses for professional fees relating to the audit, accounting, legal fees capital commitment fees associated with the initial public offering of our securities, offset by an increase in stock based compensation.

 

 

Sales and Marketing Expense. Sales and marketing expense increased $72,476, or 71.3%, to $174,196 for the six months ended December 31, 2015 from $101,720 for the six months ended December 31, 2014. This increase in sales and marketing expenses is attributable to increased sales and marketing personnel that were employed during the six months ended December 31, 2015 and increased sales commissions due to a 46.4% increase in sales.

 

Interest Expense. Interest expense increased by $86,644 to $258,556 for the six months ended December 31, 2015 from $171,912 for the six months ended December 31, 2014. The increase is largely due to the increased interest expense on the delayed draw note with the PIMCO Fund during the six months ended December 31, 2015 and the amortization of $92,905 of loan fees and discounts during the six months ended December 31, 2015.

 

Other Income. During the six months ended December 31, 2014, we realized $14,757 of other income while during the six months ended December 31, 2015 we did not realize comparable other income.

 

Net Loss. Net loss decreased by $60,571 or 7.2% to a net loss of $777,657 for the six months ended December 31, 2015 from net loss of $838,228 for the six months ended December 31, 2014. This increase in our net loss is attributable to the increased revenues and increased expenses, as explained herein.

 

Year Ended June 30, 2015 Compared to the Year Ended June 30, 2014

 

Our revenue, operating expenses, and net income (loss) from operations for the year ended June 30, 2015 as compared to the year ended June 30, 2014 are set forth below. The results of operations for the year ended June 30, 2014 represent the consolidated results of operations of Throwdown Industries Holdings, LLC, our predecessor Company and wholly-owned subsidiary.

 

		Year Ended June 30:												% Change Increase
		2015				2014				Change				(Decrease)
REVENUES
Product sales		$	1,833,800			$	1,397,645			$	436,155				31.2	%
Royalties			205,439				140,894				64,545				45.8	%
Net revenues			2,039,239				1,538,539				500,700				32.5	%
COST OF REVENUES			1,418,495				804,940				613,555				76.2	%
Gross profit			620,744				733,599				(112,855	)			(15.4	)%
OPERATING EXPENSES:
General and administrative			1,524,270				496,025				1,028,245				207.3	%
Sales and marketing			323,050				182,812				140,238				76.7	%
Total operating expenses			1,847,320				678,837				1,168,483				172.1	%
(Loss) income from operations			(1,226,576	)			54,762				(1,281,338	)			(2,339.8	)%
Interest expense			(381,981	)			(40,321	)			(341,660	)			847.3	%
Gain on settlement of payroll tax debt			—				98,336				(98,336	)			(100.0	)%
Other income			14,762				—				14,762				100.0	%
Licensing fees			—				114,190				(114,190	)			100.0	%
Loss on marketable securities			—				(114,190	)			114,190				100.0	%
Loss on write-off of leasehold improvements			—				(3,569	)			3,569				100.0	%
Net (loss) income		$	(1,593,795	)		$	109,208			$	(1,703,003	)			(1,559.4	)%

 

 

Revenues. Revenues consist of product sales and royalties. Total revenues for the year ended June 30, 2015 were $2,039,239, an increase of $500,700, or 32.5%, from $1,538,539 of total revenues for the year ended June 30, 2014. Product sales increased $436,155, or 31.2%, to $1,833,800 for the year ended June 30, 2015 from $1,397,355 for the year ended June 30, 2014. Royalties increased $64,545, or 45.8%, to $205,439 for the year ended June 30, 2015 from $140,894 for the year ended June 30, 2014. The increase in product sales is attributable to increased selling efforts and momentum during the year ended June 30, 2015. The increase in royalties is attributable to royalties realized from international licensees during the year period June 30, 2015.

 

Cost of Revenues. Total cost of revenues for the year ended June 30, 2015 were $1,418,495, an increase of $613,555, or 76.2%, from $804,940 for the year ended June 30, 2014. Cost of product sales during the year ended June 30, 2015 were 77.4% as compared to 57.6% during the year ended June 30, 2014. The increase in cost of revenues is attributable to the 31.2% increase in sales and the effect of higher product costs during the year ended June 30, 2015.

 

Gross Profit. Gross profit decreased $112,855 to $620,744 for the year ended June 30, 2015, from a gross profit of $733,599 for the year ended June 30, 2014. The decrease in gross profit reflects the increase in sales and increase in royalties during the year ended June 30, 2015. However the gross profit from increased sales was offset by the increase in cost of product sales that was 77.4% during the year ended June 30, 2015 as compared to 57.6% during the year ended June 30, 2014.

 

General and Administrative Expenses. General and administrative expenses increased by $1,028,245 or 207.3%, to $1,524,270 for the year ended June 30, 2015 from $496,025 for the year ended June 30, 2014. General & administrative expenses for the year ended June 30, 2015 are comprised of salaries and wages of $370,007, professional fees of $194,359, office expenses of $4,988, insurance of $53,512, rent of $59,747, SEC registration expenses, (including accounting, legal, audit and filing fees) of $435,855, travel of $59,076, capital commitment fee of $197,314, and other of $149,412. General & administrative expenses for the year ended June 30, 2014 are comprised of salaries and wages of $178,676, professional fees of $113,634, office expenses of $14,533, insurance of $44,300, rent of $57,087, travel of $42,435, and $45,360 of other general and administrative expenses. The increase in general and administrative expenses during the year ended June 30, 2015 is comprised of an increase in salaries and wages of $191,331, increase in professional fees of $80,725, a decrease in office expenses of $9,545, an increase in SEC registration expenses of $435,855, an increase of $9,212 in insurance expense, an increase of $2,660 of rent expense, an increase of $16,641 of travel expenses, an increase of $197,314 in capital commitment fee, and a net $104,512 increase in other general and administrative expenses. The overall increase in general and administrative expenses is attributable to increased expenses for professional fees relating to the audit, accounting, legal fees, and capital commitment fees associated with the initial public offering of our securities.

 

Sales and Marketing Expense. Sales and marketing expense increased $140,238 or 76.7%, to $323,050 for the year ended June 30, 2015 from $182,812 for the year ended June 30, 2014. This increase in sales and marketing expenses is attributable to hiring of additional sales personnel to grow our sales. The increased sales and marketing expenses enabled us to grow our sales by 31.2% during the year ended June 30, 2015.

 

Interest Expense. Interest expense increased by $341,660 to $381,981 for the year ended June 30, 2015 from $40,321 for the year ended June 30, 2014. The increase is largely due to the increased interest expense on the $2,000,000 balance on the delayed draw note with the PIMCO Fund during the year ended June 30, 2015. We did not fund this delayed draw note until June 12, 2014, which explains the lower interest expense during the year ended June 30, 2014.

 

Gain on settlement of tax debts. During the years ended June 30, 2014 and 2014, we realized none and $98,336, respectively of gain on settlement of past federal payroll tax liabilities and penalties.

 

Other income: During the year ended June 30, 2015 and 2014, we realized $14,762 and none, respectively, of other income.

 

Income from licensing fees. During the year ended June 30, 2014, we realized $114,190 of income from licensing fees. The fees were paid in the form of common stock of a small public company based on the value of the shares at the time of payment.

 

 

Loss on value of marketable securities. During the year ended June 30, 2014, we incurred a $114,190 unrealized loss on the value of marketable securities that we hold in a small public company. We did not have a comparable loss during the year ended June 30, 2015.

 

Loss on write off of leasehold improvements. During the year ended June 30, 2014, we realized a $3,569 loss on the write off of leasehold improvements while during the year ended June 30, 2015 we realized no comparable loss.

 

Net Loss. Net loss increased by $1,703,003 or 1,559.4% to a net loss of $1,593,795 for the year ended June 30, 2015 from a net income of $109,208 for the year ended June 30, 2014. This increase in our net loss is attributable to the increased revenues and offset by our 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 $777,657 during the six months ended December 31, 2015, and losses are expected to continue in the near term. The accumulated deficit since inception is $6,788,144 at December 31, 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 December 31, 2015, we had $139,666 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 if available, under our equity purchase agreement with Kodiak.

 

 

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:

 

		December 31, 2015				June 30, 2015
Cash		$	139,666			$	51,016
Total current assets		$	873,654			$	721,703
Total assets		$	976,258			$	843,739
Total current liabilities		$	1,011,528			$	829,332
Total liabilities		$	3,319,488			$	2,534,749

 

At December 31, 2015, we had a working capital deficit of $137,874 compared to a working capital deficit of $107,629 at June 30, 2015. Current liabilities increased to $1,011,528 at December 31, 2015 from $829,332 at June 30, 2015, primarily as a result of increases in accounts payable, customer deposits, and the bank line of credit.

 

Our operating activities used net cash of $435,037 for the six months ended December 31, 2015 compared to net cash used in operations of $142,378 for the six months ended December 31, 2014. The net cash used in operations for the six months ended December 31, 2015, reflects a net loss of $777,657, decreased by $197,280 in non-cash charges and by $145,340 net increase in the working capital accounts. The net cash used in operations for the six months ended December 31, 2014 reflects a net loss of $838,228, decreased by $305,534 in non-cash charges and by $390,316 net increase in the working capital accounts.

 

Our net cash used in investing activities was $10,510 for the six months ended December 31, 2015, comprised of $8,999 of intangible asset acquisitions and $1,511 of equipment acquisitions. Our cash used in investing activities for the six months ended December 31, 2014, was $37,230 that included $33,634 in purchases of equipment and $3,596 of intangible asset acquisition costs.

 

Our net cash provided by financing activities for the six months ended December 31, 2015 was $534,197, which consisted of $500,000 in cash proceeds from our October 2015 draw-down on the PIMCO Note Payable, $53,421 in proceeds from the Well Fargo Bank line of credit, offset by payment of $19,224 on the Wells Fargo Bank line of credit. We did not have any cash proceeds related to financing activities in the six months ended December 31, 2014.

 

 

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.

 

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.

 

 

SELECTED FINANCIAL DATA

 

Not applicable because we are a smaller reporting company.

 

SUPPLEMENTARY FINANCIAL INFORMATION

 

Not applicable because we are a smaller reporting company.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

We have not had changes in or disagreements with accountants on accounting and financial disclosure. Accell Audit and Compliance, P.A. has served as our registered independent public accounting firm since 2014. There have been no changes in or disagreements on accounting or financial disclosure matters.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable because we are a smaller reporting company.

 

 

1,146,500 Common Shares

 

XFIT BRANDS, INC.

 

PROSPECTUS

 

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

Until ___________, 2016, all dealers that effect transactions in these securities whether or not participating in this offering may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

The Date of This Prospectus Is: _____ __, 2016

 

 

PART II — INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item.13 Other Expenses Of Issuance And Distribution.

 

The estimated costs of this offering are as follows:

 

Securities and Exchange Commission registration fee		$	520
Transfer Agent Fees*		$	2,500
Accounting fees and expenses*		$	10,000
Legal fees and expenses*		$	25,000
Edgar filing, printing and engraving fees*		$	5,000
TOTAL		$	43,020

 

*Indicates expenses that have been estimated for filing purposes.

 

All amounts are estimates other than the Securities and Exchange Commission’s registration fee.

 

All amounts are estimates other than the Commission’s registration fee. We are paying all expenses of the offering listed above. No portion of these expenses will be borne by the selling shareholders. The selling shareholders, however, will pay any other expenses incurred in selling their common stock, including any brokerage commissions or costs of sale.

 

Item.14 Indemnification Of Directors And Officers.

 

Disclosure of Commission Position of Indemnification for Securities Act Liabilities

 

Insofar as indemnification for liabilities arising under the Act, may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

 

Item 15. Recent Sales of Unregistered Securities

 

Common Stock

 

On September 26, 2014, the registrant issued 4,000,000 shares of its common stock to TD Legacy, LLC in consideration of all of the issued and outstanding membership units of Throwdown Industries Holdings, LLC held by TD Legacy. The issuance was exempt under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

 

On February 26, 2015, we agreed to issue 11,000 shares of our common stock in partial consideration of assets being purchase under an asset purchase agreement with Dennis Dumas. The shares were issued in September 2015. We did not receive any proceeds upon issuance. These shares were issued in reliance of the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

On May 15, 2015, we issued 2,500 shares of our common stock to an employee in consideration of services rendered. The shares were valued at $5.00 per share. We did not receive any proceeds from this issuance The issuance of these shares was exempt from registration under the Securities Act, pursuant to the exemption afforded by Rule 4(a)(2) of the Securities Act.

 

 

On June 12, 2015, we issued 20,000 shares of our common stock to a manufacturer in consideration of a $100,000 manufacturing credit in order to manufacture certain martial arts and functional fitness for us in the future. We did not receive any proceeds from this issuance. The issuance of these shares was exempt from registration under the Securities Act pursuant to the exemption afforded by Regulation S of the Securities Act.

 

On June 26, 2015, we issued 40,000 shares of our common stock to a manufacturer in consideration of a $200,000 manufacturing credit in order to manufacture certain martial arts and functional fitness for us in the future. We did not receive any proceeds from this issuance. The issuance of these shares was exempt from registration under the Securities Act pursuant to the exemption afforded by Regulation S of the Securities Act.

 

On July 1, 2015, we issued 15,000 shares of our common stock to an employee in consideration of services rendered. The shares were valued at $5.00 per share. We did not receive any proceeds from this issuance The issuance of these shares was exempt from registration under the Securities Act pursuant to the exemption afforded by Rule 4(a)(2) of the Securities Act.

 

On October 15, 2015, we issued 10,000 shares of our common stock to the PIMCO Fund as a loan fee in consideration of our October 2015 draw-down under our credit facility with them. We did not receive any proceeds upon issuance. The We relied on the exemption from registration provided by Section 4(a)(2) of the Securities Act, and/or Rule 506 of Regulation D promulgated thereunder for the issuance of these shares

 

On February 23, 2016 we issued 10,000 shares to an employee in consideration of services rendered. We did not receive any proceeds from this issuance. The issuance of these shares was exempt from registration under the Securities Act pursuant to the exemption afforded by Rule 4(a)(2) of the Securities Act.

 

On February 23, 2016 we issued 10,000 shares to a consultant in consideration of services rendered. We did not receive any proceeds from this issuance. The issuance of these shares was exempt from registration under the Securities Act pursuant to the exemption afforded by Rule 4(a)(2) of the Securities Act.  

 

Limited Liability Company Units

 

On November 2, 2012, Throwdown Industries Holdings, LLC issued 1,000 limited liability company units to each of TD Legacy, LLC and Windsor Court Holdings LLC in consideration of their contribution of their limited liability company interests in Throwdown Industries, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Promissory Notes

 

On November 12, 2012, Throwdown Industries Holdings, LLC, issued a revolving note payable in the principle amount of $1,500,000 to Windsor Court Holdings, LLC, an accredited investor. The note bore interest at 6% per annum and had a maturity date of July 31, 2014. The note was paid in full on June 12, 2014 from the proceeds of the initial draw under a promissory note payable to the PIMCO Fund. The issuance was exempt under Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended.

 

On June 12, 2014, Throwdown Industries Holdings, LLC, Throwdown Industries LLC and Throwdown Industries Inc. issued a delayed draw note in the principle amount of $1,500,000 payable to the PIMCO Fund, an accredited investor. The note is secured by all of the borrowers’ assets, and the borrowers have the right, subject to certain terms and conditions, to increase the amount by $1,000,000, to a total of $2,500,000. The note bears interest at 14% per annum and matures on June 12, 2017. The proceeds were used to repay amounts due under the note issued to Windsor Court Holdings, LLC. The issuance was exempt under Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended. On November 26, 2014, XFit Brands, Inc. became an additional obligor under such note and pledged all of its assets to secure such obligation. 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 October 2015 draw down. A replacement note was issued on each draw down date to reflect the note increase. The issuances were exempt under Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended

 

 

Warrants

 

On June 12, 2014, Throwdown Industries Holdings, LLC issued a warrant to purchase 10% of its equity at an exercise price of $1.5 million to the PIMCO Fund in consideration of the issuance of the delayed draw note payable to the PIMCO Fund in June 2014. The issuance was exempt under Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended. The registrant assumed all obligations under this warrant on November 26, 2014 and on November 26, 2014, the registrant issued the PIMCO Fund a new warrant to purchase 10% of the registrant’s equity at an exercise price of $1.5 million in exchange for the warrant originally issued by Throwdown Industries Holdings, LLC, which warrant was cancelled. The issuance was exempt under Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended.

 

Options

 

On November 17, 2015, we granted options to purchase 43,000 shares of our common stock to six (6) employees in consideration of services rendered at an exercise price of $5.00 per share. The issuances were exempt under Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 16. Exhibits.

 

EXHIBIT NUMBER		DESCRIPTION
2.1		Contribution and Exchange Agreement dated September 26, 2014 by and among TD Legacy, LLC, a Florida limited liability company XFit Brands, Inc., a Nevada corporation, and Throwdown Industries Holdings, LLC, a Delaware limited liability company
3.1		Articles of Incorporation of XFit Brands, Inc. (1)
3.2		By-Laws of XFit Brands, Inc. (1)
4.1		Warrant issued to the PIMCO Fund (1)
4.2		Assignment, Assumption and Release for warrant issued to the PIMCO Fund (1)
4.3		Senior Secured Fixed Rate Note dated November 26, 2014 issued to the PIMCO Fund (1)
4.4		2014 Stock Incentive Plan (1)
4.5		Senior Secured Fixed Rate Note issued to the PIMCO Fund in the original principal amount of $2,620,098.37 (5)
5.1		Opinion of Indeglia & Carney LLP (6)
10.1		Pledge & Security Agreement dated June 12, 2014 by and among Throwdown Industries Holdings, LLC, Throwdown Industries, LLC, Throwdown Industries, Inc. and the PIMCO Fund (1)
10.2		Note Purchase Agreement dated June 12, 2014 by and among Throwdown Industries Holdings, LLC, Throwdown Industries, LLC, Throwdown Industries, Inc. and the PIMCO Fund (1)
10.3		Trademark Security Agreement dated June 12, 2014 by and among Throwdown Industries Holdings, LLC, Throwdown Industries, LLC, Throwdown Industries, Inc. and the PIMCO Fund (1).
10.4		Standard Industrial/Commercial Multi-Tenant Lease dated November 22, 2013 between Don Wilson Builders and Throwdown Industries, LLC (1)
10.5		Exclusive Distribution and License Agreement dated April 10, 2014 with Partner Business Omportacao e Exportacao LTDA, as Licensee and Throwdown Industries Holdings, LLC (1)

 

 

10.6		License Agreement dated October 2, 2013 between Throwdown Industries Holdings, LLC and Dethrone Royalty Holdings, Inc. (1)
10.7		Joinder Agreement between XFit Brands and the PIMCO Fund (1)
10.8		Assumption Agreement dated November 26, 2014 between XFit Brands and the PIMCO Fund (1)
10.9		Equity Purchase Agreement dated December 17, 2014 between Kodiak Capital Group, LLC and XFit Brands, Inc. (2)
10.10		Registration Rights Agreement dated December 17, 2014 between XFit Brands, Inc. and Kodiak Capital, LLC (2)
10.11		Asset Purchase Agreement dated February 26, 2015 between XFit Brands, Inc. and Dennis Dumas. (3)
10.12		Exclusive Supply Chain Agreement dated June 23, 2015 between XFit Brands, Inc. and Crunch Franchising, LLC (4)
10.13		Lease Agreement dated June 18, 2015 between Prologis California I, LLC and Throwdown Industries Holdings, LLC (4)
10.14		Stock Purchase Agreement dated June 18, 2015 between XFit Brands, Inc. and Ever Blooming Industrial Ltd. (4).
10.15		Stock Purchase Agreement dated June 26, 2015 between XFit Brands, Inc. and Yayu General Manufacturing Co., Ltd. (4)
21		Subsidiaries (1)
23.1		Consent of Accell Audit and Compliance, P.A. (6)
23.2		Consent of Indeglia & Carney LLP (filed as part of Exhibit 5.1) (6)

  

	(1)	Filed as an exhibit to our Registration on Form S-1 filed with the SEC on November 26, 2014 (File No. 333-200619) and incorporated herein by reference.
	(2)	Filed as an exhibit to our Amendment No. 1 to Registration on Form S-1 filed with the SEC on January 9, 2015 (File No. 333-200619) and incorporated herein by reference.
	(3)	Filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2015 and incorporated herein by reference.
	(4)	Filed as an Exhibit to our Annual Report on Form 10-K for the year ended June 30, 2015 and incorporated herein by reference.
	(5)	Filed as an Exhibit to our Current Report on Form 8-K dated October 20, 2015 and filed on October 21, 2015
	(6)	Filed herewith

 

Item 17.Undertakings.

 

The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

 

 

iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(5) Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(6) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

i. Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and authorized this Amendment No. 1 to registration statement to be signed on its behalf by the undersigned on March 16, 2016.

 

	XFIT BRANDS, INC.
	By:	/s/ David E. Vautrin
		David E. Vautrin
		Chief Executive Officer and Director
		(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed by the following person in the capacities and on the date indicated.

 

Signatures		Title		Date
/s/ David E. Vautrin		Chief Executive Officer, and Director		March 16,  2016
David E. Vautrin		(Principal Executive Officer)
*		President and Director		March 16,  2016
Charles E. Joiner
*		Chief Financial Officer		March 16,  2016
Robert Miranda		(Principal Financial and Accounting Officer)
*		Director		March 16,  2016
Brent D Willis

  

*By:	/s/ David E. Vautrin
	David E. Vautrin
	Attorney-in-Fact