XFTB XFIT Brands Inc (CE)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION

The following information should be read in conjunction with XFit Brands, Inc. and its subsidiaries (“we”, “us”, “our”, or the “Company”) condensed consolidated unaudited financial statements and the notes thereto contained elsewhere in this report. Information in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q that does not consist of historical facts, are “forward-looking statements.” Statements accompanied or qualified by, or containing words such as “may,” “will,” “should,” “believes,” “expects,” “intends,” “plans,” “projects,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume,” and “assume” constitute forward-looking statements, and as such, are not a guarantee of future performance.

Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; and advances in technology that can reduce the demand for the Company’s products. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results.

Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described elsewhere in this report and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June, 30, 2015.

Except as required by law, The Company disclaims any obligation to update the forward-looking statements in this report.

Overview

XFit Brands, Inc. was incorporated in September 2014 under the laws of the State of Nevada. As used herein, the terms “we,” “us,” “XFIT,” and the “Company” refer to XFit Brands, Inc. and its predecessors, subsidiaries, and affiliates, collectively, unless the context indicates otherwise. Our fiscal year end is June 30. Our principal office address is 25731 Commercentre Drive, Lake Forest, CA 92630. Our telephone number is (949) 916-9680. As of February 14, 2017, we had 11 employees.

Our principal business activity is the design, development, and worldwide marketing and selling of functional equipment, training gear, apparel, and accessories for the impact sports market and fitness industry. Our products are marketed and sold under our Throwdown®, XFit Brands®, and Transformations™ brand names to gyms, fitness facilities, and directly to consumers via our internet website and through third party catalogues (which we refer to as our “Direct to Consumer” operations) through a mix of independent distributors and licensees throughout the world. All of our products are manufactured by independent contractors. Our equipment and apparel products are produced both in the United States and abroad.

We are an “emerging growth company” within the meaning of the federal securities laws. For as long as we are an emerging growth company, we will not be required to comply with the requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.

Results of Operations

For the next twelve months, our current operating plan is focused on the development and sale of sports surfaces, 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, 2017 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 $600,000 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.

Six months ended December 31, 2016 Compared to the Six Months Ended December 31, 2015

Our revenue, operating expenses, and net loss from operations for the six month period ended December 31, 2016 as compared to the six month period ended December 31, 2015, are set forth below.

Revenues . Revenues consist of product sales. Total revenues for the six months ended December 31, 2016 were $1,394,192, an increase of $246,261, or 21%, from $1,147,931 of total revenues for the six months ended December 31, 2015. The increase in product sales is attributable to increased selling efforts and momentum during the six months ended December 31, 2016.

Cost of Revenues. Total cost of revenues for the six months ended December 31, 2016 were $854,937, an increase of $209,606, or 32%, from $645,331 for the six months ended December 31, 2015. The increase was due to cost of turf materials and installation for a project at Enviroturf.

Gross Profit. Gross profit decreased $(5,218) to $497,382 for the six months ended December 31, 2016, from a gross profit of $502,600 for     the six months ended December 31, 2015. The decrease in gross profit reflects the increase in product cost of sales in connection with promotional activity, During the six months ended December 31, 2016, we realized a 36% gross profit on our product sales as compared to a 44% gross profit on product sales during the six months ended December 31, 2015. The lower gross profit achieved during the six months ended December 31, 2015 is promotional activity with the fitness accessories at Xfit.

General and Administrative Expenses. General and administrative expenses increased by $77,212 or 9%, to $924,717 for the six months ended December 31, 2016 from $847,505 for the six months ended December 31, 2015. General & administrative expenses for the six months ended December 31, 2016 are comprised of salaries and wages of $417,229, professional fees of $215,402, office expenses of $12,610, insurance of $56,388, rent of $141,721, travel of $32,996, and other of $48,371. General & administrative expenses for the six months ended December 31, 2015 are comprised of salaries and wages of $383,109, professional fees of $315,085, office expenses of $5,695, insurance of $47,451, rent of $67,937, travel of $23,704, and $4,524 of other general and administrative expenses. The decrease in general and administrative expenses during the six months ended December 31, 2016 is comprised of an increase in salaries and wages of $34,120, a decrease in professional fees of $99,683, an increase in office expenses of $6,915, an increase of $8,937 in insurance expense, an increase of $73,784 of rent expense, an increase of $9,292 of travel expenses, and a net $43,847 increase in other general and administrative expenses.

Sales and Marketing Expense. Sales and marketing expense decreased $35,693 or 20%, to $138,503 for the six months ended December 31, 2016 from $174,196 for the six months ended December 31, 2015. This decrease in sales and marketing expense is attributable to a decrease in wages and sales commissions due to the termination of a sales employee.

Interest Expense. Interest expense increased by $94,592 to $353,148 for the six months ended December 31, 2016 from $258,556 for the six months ended December 31, 2015. 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, 2016.

Net Loss. Net loss increased by $275,031 or 35% to a net loss of $1,052,688 for the six months ended December 31, 2016 from a net loss of $777,657 for the six months ended December 31, 2015. This increase in net loss is attributable to a loss on the extinguishment of debt and a loss on operating the EnviroTurf division.

Three months ended December 31, 2016 Compared to the Three Months Ended December 31, 2015

Our revenue, operating expenses, and net loss from operations for the three month period ended December 31, 2016 as compared to the three month period ended December 31, 2015, are set forth below.

Revenues . Revenues consist of product sales. Total revenues for the three months ended December 31, 2016 were $902,185, an increase of $227,510, or 34%, from $674,675 of total revenues for the three months ended December 31, 2015. The increase in product sales is attributable to increased selling efforts and momentum during the three months ended December 31, 2016.

Cost of Revenues. Total cost of revenues for the three months ended December 31, 2016 were $577,829, an increase of $191,342, or 50%, from $386,487 for the three months ended December 31, 2015. Cost of product sales during the three months ended December 31, 2016 were 64% as compared to 57.3% during the three months ended December 31, 2015. The increase in cost of revenues is attributable to both promotional activity with a key account in conjunction with the 33.7% increase in product sales during the three months ended December 31, 2016.

Gross Profit. Gross profit increased $36,168 to $324,356 for the three months ended December 31, 2016, from a gross profit of $288,188 for    the three months ended December 31, 2015. The increase in gross profit reflects the increase in product cost of sales in connection with promotional activity. During the three months ended December 31, 2016, we realized a 36% gross profit on our product sales as compared to a 42.7% gross profit on product sales during the three months ended December 31, 2015. The lower gross profit achieved during the three months ended December 31, 2016 is promotional activity with the fitness accessories.

General and Administrative Expenses. General and administrative expenses increased by $123,897 or 31%, to $526,472 for the three months ended December 31, 2016 from $402,575 for the three months ended December 31, 2015. The increase in general and administrative expenses is attributable to expenses related to the EnviroTurf division.

Sales and Marketing Expense. Sales and marketing expense decreased $9,974 or -12%, to $74,328 for the three months ended December 31, 2016 from $84,302 for the three months ended December 31, 2015. This decrease in sales and marketing expense is attributable to a decrease is wages and sales commission due to the termination of a sales employee.

Interest Expense . Interest expense increased by $51,937 to $194,216 for the three months ended December 31, 2016 from $142,279 for the three months ended December 31, 2015. The increase is largely due to the increased interest expense on the delayed draw note with the PIMCO Fund during the three months ended December 31, 2016.

Net Loss. Net loss increased by $305,267 or 90% to a net loss of $646,235 for the three months ended December 31, 2016 from a net loss of $340,968 for the three months ended December 31, 2015. This increase in our net loss is attributable to a loss on the extinguishment of debt and a loss on the operation of the EnviroTurf division.

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 $1,052,688 during the six months ended December 31, 2016, and losses are expected to continue in the near term. The accumulated deficit since inception is $8,845,945 at December 31, 2016. 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, 2016, we had $78,745 of cash on hand. We anticipate that our existing cash and cash equivalents, together with our cash from operating activities will not be sufficient to fund operations and expected growth through at least the next twelve months. These funds are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with international licensees; and (c) controlling overhead and expenses. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to us on satisfactory terms and conditions, if at all.

In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.

The success of our ability to continue as a going concern is dependent upon obtaining new customers for our products and new licensees to generate royalty revenues, and maintaining a break even or profitable level of operations. We have incurred operating losses since inception, and this is likely to continue in the near future. We believe that we are able to fund our immediate operations, working capital requirements, and debt service requirements with existing working capital, cash flows generated from operations, and additional borrowings under our delayed draw note or, if available, under our equity purchase agreement with GHS.

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 a verbal commitment but no formal written 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 December 31, 2016 and June 30, 2016 are as follows:

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.

On December 16, 2016 we entered into an Amended and Restated Note Purchase Agreement (the “PIMCO Amendment”) with PIMCO pursuant to which we issued a $3.5 million 9% Senior Secured Fixed Rate Note due July 12, 2020 (the “Note”). The Note refinanced our prior 14% Senior Secured Note in the principal amount of $2.5 million (the “Prior Note”), providing us with an additional $1 million in working capital. As with the Prior Note, the Note is secured by a lien on substantially all of our assets (other than those sold pursuant to our factoring agreement with Crown Financial).

In connection with the PIMCO Amendment, (i) PIMCO converted $278,689 in accrued and unpaid interest into 1,990,639 shares of our common stock. In addition we had previously issued PIMCO a warrant to purchase ten percent of our equity at an exercise price of $1.5 million. We amended the terms of the common stock purchase warrant previously issued to PIMCO to reduce the exercise price thereof to $350,000 to reflect the market capitalization of the Company as of the date of the Amendment

Crown Financial, LLC Factoring Agreement

On August 3, 2016 we entered into an Agreement with Crown Financial, LLC which advances 80% of invoices approved and assumed by Crown for collection. Depending on the length of time taken to collect the invoices we will receive additional payments from Crown ranging from 18.25% if collected within 20 days to 0% if collected in 120 days. Crown has the right to require us to repurchase unpaid invoices outstanding for more than 120 days. PIMCO has waived its security interest in invoices assigned to Crown.

GHS Investment Agreement

On August 13, 2016 we entered into an Investment Agreement (the “Investment Agreement”) with GHS Investments, LLC (“GHS”). Although we are not mandated to sell shares under the Investment Agreement, the Investment Agreement gives us the option to sell to GHS, up to $5,000,000 worth of our common stock (“Shares”), over the period following effectiveness of the registration of a registration statement covering the resale of the Shares (the “Effective Date”) and ending thirty-six (36) months after the Effective Date. Under the terms of the Investment Agreement, we have the right to deliver from time to time a Put Notice to GHS stating the dollar amount of Put Shares (up to $500,000 under any individual Put Notice)(the “Put Amount”) that we intend to sell to GHS with the price per share based on the following formula: the lesser of (a) the lowest sale price for the Common Stock on the date of the Put Notice (the “Put Notice Date”); or (b) the arithmetic average of the three (3) lowest trading prices for the Company’s Common Stock during the five trading days following the Put Notice Date. The maximum number of shares that can be put to GHS is two times the average daily trading volume during the ten trading days prior to the closing of a put (the “Closing Date”). If the amount of the tranche of our outstanding shares exceeds the volume limitation, additional tranches will be delivered until the entire Purchase Amount is delivered. Each tranche, including the initial tranche, will trigger a new purchase price, and will be priced according to the purchase price definition.

In addition, there is an ownership limit for GHS of 9.99% of our outstanding shares.

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

GHS 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 Investment Agreement with GHS, we agreed to pay a fee equaling $250,000 or 5%of the Commitment Amount (the “Commitment Fee”) which shall be paid in installments of Fifty Thousand ($50,000) beginning on the earlier of (i) the Effective Date of the Registration Statement and (ii) January 1, 2017 and, the first Trading Day of each January, April, July and October thereafter until fully paid. Each installment of the Commitment Fee shall be paid either in cash or, at the election of the Company, in shares of Common Stock, which shall be deemed a put under the Investment Agreement. On August 13, 2016, we entered into a Registration Rights Agreement with GHS 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 GHS under the Investment Agreement. As per the Investment Agreement, GHS’ obligations are not assignable.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.