UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172018
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37899
ALLIANCE MMA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 47-5412331 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
590 Madison Avenue, 21st Floor
New York, New York 10022
(Address of principal executive offices)
(212) 739-7825
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x¨ No ¨x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | |
Non-accelerated filer | x | Smaller reporting company | x |
Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of the registrant’s common stock outstanding at November 9, 2017 was 12,662,974.14, 2018: 17,494,852.
Alliance MMA Inc.
Form 10-Q - Quarterly Report
For the Quarter Ended September 30, 2017
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Statements
Certain statements that we make from time to time, including statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning Private Securities Litigation Reform Act of 1995, and of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Form 10-Q are forward-looking statements. These statements, among other things, relate to our business strategy, goals and expectations concerning our future operations, prospects, plans and objectives of management. The words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, and similar terms and phrases are used to identify forward-looking statements in this presentation.
Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. Forward-looking statements in this Form 10-Q include, without limitation, statements reflecting management’s expectations for future financial performance and operating expenditures (including our ability to continue as a going concern, to raise additional capital and to succeed in our future operations), expected growth, profitability and business outlook, increased operating expenses.
Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other things, the unknown risks and uncertainties that we believe could cause actual results to differ from these forward looking statements as set forth under the heading, “Risk Factors” and elsewhere in this Form 10-Q. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all of the risks and uncertainties that could have an impact on the forward-looking statements, including without limitation, risks and uncertainties relating to:
· | Our ability to obtain and maintain sufficient working capital financing on acceptable terms to continue as a going concern; | |
· | Our ability to sustain our innovative business model in the MMA ticket service industry; |
· | Our ability to secure new, and maintain existing relationships with MMA promoters utilizing our ticket platform; |
· | Our ability to keep pace with technology advancements impacting our ticketing platform and advancements adopted by our competitors. |
· | Our ability to meet continuing listing standards on the NASDAQ Capital Market, including its requirement that the minimum bid price for our common stock be at or above $1.00; and it’s requirement that we have minimum capital of $2.5 million; standards we are not currently meeting; |
· | Our ability to consummate the acquisition of SCWorx. |
Although we believe that the expectations reflected in the forward-looking statements contained in this Form 10-Q are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. In light of inherent risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Except as required by law, we are under no duty to update or revise any of such forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Form 10-Q.
You should read this Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
All references to “Alliance,” “Alliance MMA,” “we,” “us,” “our” or the “Company” mean Alliance MMA, Inc., a Delaware corporation, and where appropriate, its wholly owned subsidiaries.
3 |
PART I—FINANCIALI-FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 1,035,697 | $ | 4,678,473 | ||||
Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30, 2017 and December 31, 2016 | 421,095 | 8,450 | ||||||
Prepaid expenses | 57,201 | 134,852 | ||||||
Total current assets | 1,513,993 | 4,821,775 | ||||||
Property and equipment, net | 249,052 | 122,312 | ||||||
Intangible assets, net | 5,449,091 | 5,780,213 | ||||||
Goodwill | 6,470,225 | 3,271,815 | ||||||
Total assets | $ | 13,682,361 | $ | 13,996,115 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 856,163 | $ | 284,361 | ||||
Earn out liability | 310,000 | — | ||||||
Customer deposits | 117,761 | — | ||||||
Total current liabilities | 1,283,924 | 284,361 | ||||||
Long-term deferred tax liabilities | 64,867 | — | ||||||
Commitments and contingencies (Note 5) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $.001 par value; 5,000,000 shares authorized and no shares issued and outstanding | — | — | ||||||
Common stock, $.001 par value; 45,000,000 shares authorized at September 30, 2017 and December 31, 2016; 12,272,974 and 9,022,308 shares issued and outstanding, respectively | 12,273 | 9,022 | ||||||
Additional paid-in capital | 24,003,109 | 18,248,582 | ||||||
Accumulated deficit | (11,681,812 | ) | (4,545,850 | ) | ||||
Total stockholders’ equity | 12,333,570 | 13,711,754 | ||||||
Total liabilities and stockholders’ equity | $ | 13,682,361 | $ | 13,996,115 |
September 30, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,787 | $ | 42,848 | ||||
Accounts receivable, net | 34,353 | — | ||||||
Current assets - discontinued operations | — | 602,386 | ||||||
Total current assets | 39,140 | 645,234 | ||||||
Intangible assets, net | — | 271,870 | ||||||
Long-term assets - discontinued operations | — | 8,838,224 | ||||||
TOTAL ASSETS | $ | 39,140 | $ | 9,755,328 | ||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 579,216 | $ | 843,554 | ||||
Notes payable - related party | 300,000 | — | ||||||
Notes payable | 920,000 | 300,000 | ||||||
Current liabilities - discontinued operations | 425,604 | 453,352 | ||||||
Total current liabilities | 2,224,820 | 1,596,906 | ||||||
Long-term liabilities - discontinued operations | — | 23,943 | ||||||
TOTAL LIABILITIES | 2,224,820 | 1,620,849 | ||||||
Commitments and contingencies | ||||||||
Stockholders' (deficit) equity: | ||||||||
Preferred stock, $.001 par value; 5,000,000 shares authorized at September 30, 2018 and December 31, 2017; no shares issued and outstanding | — | — | ||||||
Common stock, $.001 par value; 45,000,000 shares authorized at September 30, 2018 and December 31, 2017; 16,200,369 and 12,662,974 shares issued and outstanding, respectively | 16,200 | 12,663 | ||||||
Additional paid-in capital | 28,188,474 | 24,646,229 | ||||||
Accumulated deficit | (30,390,354 | ) | (16,524,413 | ) | ||||
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY | (2,185,680 | ) | 8,134,479 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | 39,140 | $ | 9,755,328 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4 |
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue, net | $ | 27,868 | $ | 40,293 | $ | 144,008 | $ | 160,494 | ||||||||
Gross margin | 27,868 | 40,293 | 144,008 | 160,494 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 743,494 | 512,145 | 1,890,547 | 1,518,714 | ||||||||||||
Impairment - intangible assets | — | — | 231,037 | — | ||||||||||||
Professional and consulting fees | 193,784 | 218,320 | 1,014,947 | 912,296 | ||||||||||||
Total operating expenses | 937,278 | 730,465 | 3,136,531 | 2,431,010 | ||||||||||||
Loss from operations before income tax benefit | (909,410 | ) | (690,172 | ) | (2,992,523 | ) | (2,270,516 | ) | ||||||||
Income tax benefit | — | — | — | — | ||||||||||||
Net loss from continuing operations | (909,410 | ) | (690,172 | ) | (2,992,523 | ) | (2,270,516 | ) | ||||||||
Net loss from discontinued operations, net of tax | (324,010 | ) | (1,771,882 | ) | (10,673,418 | ) | (4,865,446 | ) | ||||||||
Net loss | $ | (1,233,420 | ) | $ | (2,462,054 | ) | $ | (13,665,941 | ) | $ | (7,135,962 | ) | ||||
Loss per share: | ||||||||||||||||
Loss from continuing operations: | ||||||||||||||||
Basic and diluted | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.24 | ) | ||||
Loss from discontinued operations: | ||||||||||||||||
Basic and diluted | $ | (0.02 | ) | $ | (0.17 | ) | $ | (0.72 | ) | $ | (0.50 | ) | ||||
Net Loss: | ||||||||||||||||
Basic and diluted | $ | (0.08 | ) | $ | (0.23 | ) | $ | (0.93 | ) | $ | (0.74 | ) | ||||
Weighted average number of shares used in per share calculation, basic and diluted | 15,263,247 | 10,714,200 | 14,909,586 | 9,608,042 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue, net | $ | 1,050,450 | $ | — | $ | 2,919,660 | $ | — | ||||||||
Cost of revenue | 774,671 | — | 1,881,153 | — | ||||||||||||
Gross profit | 275,779 | — | 1,038,507 | — | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 1,752,560 | 357,826 | 6,494,294 | 2,994,356 | ||||||||||||
Professional and consulting fees | 218,320 | 237,585 | 912,767 | 419,996 | ||||||||||||
Total operating expenses | 1,970,880 | 595,411 | 7,407,061 | 3,414,352 | ||||||||||||
Loss from operations | (1,695,101 | ) | (595,411 | ) | (6,368,554 | ) | (3,414,352 | ) | ||||||||
Other income | 672 | — | 217 | — | ||||||||||||
Loss before provision for income taxes | (1,694,429 | ) | (595,411 | ) | (6,368,337 | ) | (3,414,352 | ) | ||||||||
Provision for income taxes | 767,625 | — | 767,625 | — | ||||||||||||
Net loss | $ | (2,462,054 | ) | $ | (595,411 | ) | $ | (7,135,962 | ) | $ | (3,414,352 | ) | ||||
Net loss per share, basic and diluted | $ | (0.23 | ) | $ | (0.11 | ) | $ | (0.74 | ) | $ | (0.65 | ) | ||||
Weighted average shares used to compute net loss per share, basic and diluted | $ | 10,714,200 | $ | 5,289,882 | $ | 9,608,042 | $ | 5,289,221 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Alliance MMA, Inc.
Condensed Consolidated Statement of Changes In Stockholders’ (Deficit) Equity
(Unaudited)
Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance—December 31, 2015 | — | $ | — | 5,289,136 | $ | 5,289 | $ | — | $ | (386,456 | ) | $ | (381,167 | ) | ||||||||||||||
Issuance of common stock related to IPO, net | — | — | 2,222,308 | 2,222 | 8,898,966 | — | 8,901,188 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Initial Business Units and Acquired Assets | — | — | 1,377,531 | 1,378 | 6,197,511 | — | 6,198,889 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Iron Tiger Fight Series | — | — | 133,333 | 133 | 506,532 | — | 506,665 | |||||||||||||||||||||
Stock based compensation related to employee stock option grant | — | — | — | — | 50,573 | — | 50,573 | |||||||||||||||||||||
Stock based compensation related to common stock issued to non-employees by an affiliate | — | — | — | — | 2,595,000 | — | 2,595,000 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (4,159,394 | ) | (4,159,394 | ) | |||||||||||||||||||
Balance—December 31, 2016 | — | $ | — | 9,022,308 | $ | 9,022 | $ | 18,248,582 | $ | (4,545,850 | ) | $ | 13,711,754 | |||||||||||||||
Stock based compensation related to employee stock option grants | — | — | — | — | 470,087 | — | 470,087 | |||||||||||||||||||||
Issuance of common stock and warrant related to acquisition of SuckerPunch | — | — | 307,487 | 307 | 1,328,540 | — | 1,328,847 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Fight Time Promotions | — | — | 74,667 | 75 | 287,393 | — | 287,468 | |||||||||||||||||||||
Stock based compensation related to warrant issued for consulting services | — | — | — | — | 169,401 | — | 169,401 | |||||||||||||||||||||
Issuance of common stock related to acquisition of National Fighting Championships | — | — | 273,304 | 273 | 365,954 | — | 366,227 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Fight Club OC | — | — | 693,000 | 693 | 810,117 | — | 810,810 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Sheffield video library | — | — | 5,556 | 6 | 8,494 | — | 8,500 | |||||||||||||||||||||
Stock based compensation related to common stock issued for consulting services | — | — | 150,000 | 150 | 148,350 | — | 148,500 | |||||||||||||||||||||
Issuance of common stock units related to private placement | — | — | 1,478,761 | 1,479 | 1,523,521 | — | 1,525,000 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Victory Fighting Championship | — | — | 267,891 | 268 | 642,670 | — | 642,938 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (7,135,962 | ) | (7,135,962 | ) | |||||||||||||||||||
Balance—September 30, 2017 | — | $ | — | 12,272,974 | $ | 12,273 | $ | 24,003,109 | $ | (11,681,812 | ) | $ | 12,333,570 |
Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’(Deficit) | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance—December 31, 2016 | — | $ | — | 9,022,308 | $ | 9,022 | $ | 18,248,582 | $ | (4,545,850 | ) | $ | 13,711,754 | |||||||||||||||
Stock based compensation related to employee stock option grants | — | — | — | — | 121,442 | — | 121,442 | |||||||||||||||||||||
Stock based compensation related to employee stock option grant - discontinued operations | — | — | — | — | 427,155 | — | 427,155 | |||||||||||||||||||||
Issuance of common stock related to acquisition of discontinued operations | — | — | 1,621,905 | 1,622 | 3,443,168 | — | 3,444,790 | |||||||||||||||||||||
Stock based compensation related to warrant issued for consulting services | — | — | — | — | 169,401 | — | 169,401 | |||||||||||||||||||||
Stock based compensation related to common stock issued for consulting services | — | — | 150,000 | 150 | 148,350 | — | 148,500 | |||||||||||||||||||||
Issuance of common stock units and warrants related to private placement | — | — | 1,868,761 | 1,869 | 2,010,631 | — | 2,012,500 | |||||||||||||||||||||
Stock based compensation related to option award for consulting services | — | — | — | — | 77,500 | — | 77,500 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (11,978,563 | ) | (11,978,563 | ) | |||||||||||||||||||
Balance—December 31, 2017 | — | $ | — | 12,662,974 | $ | 12,663 | $ | 24,646,229 | $ | (16,524,413 | ) | $ | 8,134,479 | |||||||||||||||
Stock based compensation related to employee and board of directors stock option grants | — | — | — | — | 368,423 | — | 368,423 | |||||||||||||||||||||
Stock based compensation related to employee stock option grant - discontinued operations | — | — | — | — | 198,822 | — | 198,822 | |||||||||||||||||||||
Stock based compensation related to repricing of employee warrant grant – discontinued operations | — | — | — | — | 10,000 | — | 10,000 | |||||||||||||||||||||
Stock based compensation related to issuance of common shares to former employees - discontinued operations | — | — | — | — | 121,000 | — | 121,000 | |||||||||||||||||||||
Stock based compensation related to issuance of shares in relation to legal settlement with shareholder | — | — | — | — | 240,000 | — | 240,000 | |||||||||||||||||||||
Stock based compensation related to warrants issued for consulting services | — | — | — | — | 63,580 | — | 63,580 | |||||||||||||||||||||
Stock based compensation related to common shares and warrants issued to debt holder | — | — | 200,000 | 200 | 66,300 | — | 66,500 | |||||||||||||||||||||
Non-cash dividend | — | — | — | — | 200,000 | (200,000 | ) | — | ||||||||||||||||||||
Issuance of common stock related to public offering | — | — | 2,200,000 | 2,200 | 1,943,800 | — | 1,946,000 | |||||||||||||||||||||
Exercise of common stock warrants | — | — | 1,056,750 | 1,057 | 305,400 | — | 306,457 | |||||||||||||||||||||
Exercise of common stock options | — | — | 80,645 | 80 | 24,920 | — | 25,000 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (13,665,941 | ) | (13,665,941 | ) | |||||||||||||||||||
Balance—September 30, 2018 | — | $ | — | 16,200,369 | $ | 16,200 | $ | 28,188,474 | $ | (30,390,354 | ) | $ | (2,185,680 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (7,135,962 | ) | $ | (3,414,352 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 787,988 | 2,615,240 | ||||||
Amortization of acquired intangibles | 894,373 | — | ||||||
Depreciation of fixed assets | 96,810 | — | ||||||
Deferred income tax and other, net | 767,625 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (380,465 | ) | — | |||||
Prepaid expenses | 77,651 | — | ||||||
Deferred offering costs | — | 25,000 | ||||||
Accounts payable and accrued liabilities | 733,154 | (90,106 | ) | |||||
Net cash used in operating activities | (4,158,826 | ) | (864,218 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of Victory Fighting Championship | (180,000 | ) | — | |||||
Purchase of Fight Club OC, net | (48,900 | ) | — | |||||
Purchase of National Fighting Championships | (140,000 | ) | — | |||||
Purchase of Fight Time Promotions | (84,000 | ) | — | |||||
Purchase of SuckerPunch | (357,500 | ) | — | |||||
Purchase of Sheffield video library | (25,000 | ) | — | |||||
Purchase of fixed assets | (173,550 | ) | — | |||||
Purchase of Initial Business Units and Initial Acquired Assets | — | (1,391,736 | ) | |||||
Net cash used in investing activities | (1,008,950 | ) | (1,391,736 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from sale of common stock | 1,525,000 | — | ||||||
Proceeds from note payable – related party | — | 523,550 | ||||||
Repayment of note payable – related party | — | (877,000 | ) | |||||
Net proceeds from IPO | — | 7,732,280 | ||||||
Net cash provided by financing activities | 1,525,000 | 7,378,830 | ||||||
NET (DECREASE) INCREASE IN CASH | (3,642,776 | ) | 5,122,876 | |||||
CASH — BEGINNING OF PERIOD | 4,678,473 | — | ||||||
CASH — END OF PERIOD | $ | 1,035,697 | $ | 5,122,876 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | — | $ | 34,015 | ||||
Cash paid for taxes | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Stock issued in conjunction with acquisition of Victory Fighting Championship | $ | 642,938 | $ | — | ||||
Stock issued in conjunction with acquisition of Fight Club OC | $ | 810,810 | $ | — | ||||
Stock issued in conjunction with acquisition of National Fighting Championships | $ | 366,227 | $ | — | ||||
Stock issued in conjunction with acquisition of Fight Time Promotions | $ | 287,468 | $ | — | ||||
Stock issued in conjunction with acquisition of SuckerPunch | $ | 1,328,847 | $ | — | ||||
Stock issued in conjunction with acquisition of Sheffield Video Library | $ | 8,500 | $ | — | ||||
Stock issued in conjunction with acquisition of Target Companies and target assets | $ | — | $ | 6,198,889 |
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (13,665,941 | ) | $ | (7,135,962 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Impairment - Intangible assets | 231,037 | — | ||||||
Stock-based compensation | 738,503 | 408,983 | ||||||
Amortization of acquired intangibles | 40,833 | 57,137 | ||||||
Loss from discontinued operations | 10,673,418 | 4,865,446 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (34,353 | ) | — | |||||
Accounts payable and accrued liabilities | (239,338 | ) | 371,752 | |||||
Net cash used in operating activities of continuing operations | (2,255,841 | ) | (1,432,644 | ) | ||||
Net cash used in operating activities of discontinued operations | (932,828 | ) | (3,148,110 | ) | ||||
Net cash used in operating activities | (3,188,669 | ) | (4,580,754 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Net cash used in investing activities of discontinued operations | (21,849 | ) | (1,008,950 | ) | ||||
Net cash used in investing activities | (21,849 | ) | (1,008,950 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | 1,946,000 | 1,525,000 | ||||||
Proceeds from exercise of stock option and warrants | 306,457 | — | ||||||
Proceeds from notes payable | 1,010,000 | — | ||||||
Proceeds from notes payable - related party | 300,000 | — | ||||||
Payment on loan payable | (390,000 | ) | — | |||||
Net cash provided by financing activities of continuing operations | 3,172,457 | 1,525,000 | ||||||
Net cash provided by financing activities of discontinued operations | — | — | ||||||
Net cash provided by financing activities | 3,172,457 | 1,525,000 | ||||||
NET INCREASE DECREASE IN CASH | (38,061 | ) | (4,064,704 | ) | ||||
CASH - BEGINNING OF PERIOD | 42,848 | 4,567,575 | ||||||
CASH - END OF PERIOD | $ | 4,787 | $ | 502,871 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 45,625 | $ | — | ||||
Cash paid for taxes | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Stock issued in conjunction with acquisition of SuckerPunch | $ | — | $ | 1,328,847 | ||||
Stock issued in conjunction with acquisition of Fight Time Promotions | — | 287,468 | ||||||
Stock issued in conjunction with acquisition of National Fighting Championships | — | 366,227 | ||||||
Stock issued in conjunction with acquisition of Fight Club OC | — | 810,810 | ||||||
Stock issued in conjunction with acquisition of Sheffield video Library | — | 8,500 | ||||||
Non-cash dividend | 200,000 | — | ||||||
Exercise of stock option in settlement of payable balance | 25,000 | — |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
Note 1. The CompanyDescription of Business and Basis of Presentation
Nature of Business
Alliance MMA, Inc. (“Alliance” or the “Company”) wasis a sports media company formed in Delaware onin February 12, 2015 to acquire companies in the mixed martial arts2015. The Company completed its Initial Public Offering (“MMA”IPO”) industry. On September 30, 2016, Alliance completed the first tranche of its initial public offering and acquired the assets and assumed certain liabilities of six companies, consisting of five MMA promoters and a ticketing platform focused on MMA events. In October 2016, GFL Acquisition, Co., Inc., a wholly-owned subsidiary of Alliance, merged with a seventh company, Go Fight Net, Inc., which produces and distributes MMA video entertainment. GFL was subsequently rebranded as Alliance Sports Media. The respective acquired businesses of the seven companies are referred to in these Notes as the “Initial Business Units”. At the completion of the offering in October 2016 and began to execute its initial business strategy to acquire regional MMA promotions to form a professional MMA fight league. A total of ten regional MMA promotions were acquired. Additionally, the Company acquired certaina ticketing software business focused on the MMA industry, an athlete management business, and kickboxing video libraries (the “Initial Acquired Assets”). Subsequentproduction and distribution company to compliment the acquisition of the Initial Business Units and the Initial Acquired Assets, the CompanyMMA fight league.
Alliance MMA acquired the assets of five additional promotion companies, Iron Tiger Fight Series, Fight Time, National Fighting Championships, Fight Club OC, and Victory Fighting Championship and a fighter management and marketing company, SuckerPunch, along with the intellectual property rightsfollowing businesses to the Sheffield video fight library of Shogun Fights (the “Subsequent Acquisitions”).execute its initial business strategy:
Initial Business Units
Promotions
· | CFFC Promotions |
· | Hoosier Fight Club (“HFC”); | |
· | COmbat GAmes MMA (“COGA”); | |
· | Shogun Fights (“Shogun”); | |
· | V3 Fights (“V3”); | |
· | Iron Tiger Fight Series (“IT Fight Series” or “ITFS”); | |
· | Fight Time Promotions | |
· | National Fighting Championships (“NFC”); | |
· | Fight Club Orange County (“FCOC” or “Fight Club OC”); and | |
· | Victory Fighting Championship (“Victory”). |
Ticketing
· |
Ticketing PlatformSports Management
· |
Video Production and Distribution
· | Go Fight Net, Inc. |
Initial Acquired Assets
FollowingAs an adjunct to the completion of its initial public offering,promotion business, Alliance also acquired the following assets:provided video distribution and media archiving through Alliance Sports Media (“ASM”) formerly GFL.
Louis Neglia’s RingChange in Management and Cessation of Combat
All rights in the existing MMA and kickboxing video libraries of Louis Neglia’s Martial Arts Karate, Inc. related to the Louis Neglia’s Ring of Combat and Louis Neglia’s Kickboxing events and shows, a right of first refusal to acquire the rights to all future Louis Neglia MMA and kickboxing events.
Hoss Promotions, LLC
The MMA and video library of Hoss Promotions, LLC related to certain CFFC events.
Subsequent Acquisitions
Following the acquisition of the Initial Business Units and Initial Acquired Assets, the Company acquired:
Iron Tiger Fight Series
The Ohio-based MMA promotion business of Ohio Fitness and Martial Arts, LLC doing business as Iron Tiger Fight Series (“ITFS”) on December 9, 2016.
In June 2017, ITFS hired the former owner of Explosive Fight Promotions, an Ohio based MMA promotion business, as General Manager, along with certain staff members.
Sucker Punch
Roundtable Creative Inc., a Virginia corporation d/b/a SuckerPunch Entertainment (“SuckerPunch”), a leading fighter management and marketing company on January 4, 2017.
Fight Time
The MMA Promotion business of Ft. Lauderdale, Florida based Fight Time Promotions, LLC (“Fight Time”) on January 18, 2017.
National Fighting Championshipsand Athlete Management operations
The Atlanta, Georgia based mixed martial arts promotion business of Undisputed Productions, LLC, doing business as National Fighting Championships or NFC (“NFC”) on May 12, 2017.
Fight Club OC
The Orange County, California based mixed martial arts business of The Englebrecht Company, Inc., doing business as Roy Englebrecht Promotions or Fight Club OC (“Fight Club OC”) on June 14, 2017.
Victory Fighting ChampionshipOn February 7, 2018, the Company’s Chief Executive Officer, Paul Danner, resigned his position but remained Chairman of the Board and Director through May 1, 2018. Also, on February 7, 2018, the Company terminated the employment of the Company’s President, Robert Haydak, and its Chief Marketing Officer, James Byrne and named Robert Mazzeo as the Company’s acting Chief Executive Officer. Effective May 23, 2018, board of directors’ member, Renzo Gracie, resigned. On May 24, 2018, Robert Mazzeo resigned as Chief Executive Officer. On May 25, 2018, management and the Board of Directors committed the Company to an exit/disposal plan of the MMA promotion business because it did not believe the MMA business unit could generate sufficient operating cash flows to fund the ongoing operations. On June 6, 2018, the Company’s board of directors appointed John Price, the Company’s CFO, Co-President of the Company. On September 13, 2018, management and the board of directors extended the exit/disposal plan to the Athlete Management business unit because it did not believe it could generate positive cash flows. On September 26, 2018 the Company entered an agreement to sell SuckerPunch to the former owners. The effective date of the transaction was July 1, 2018.
The Omaha, Nebraska based mixed martial arts promotion businessAs of Victory Fighting Championship, LLC, doing business as Victory Fighting Championship (“Victory”) on September 28, 2017.the date of this filing, the Company has disposed of the following businesses:
· | CFFC |
· | HFC |
· | COGA |
· | Shogun |
· | V3 |
· | ITFS |
· | Fight Time |
· | NFC |
· | FCOC | |
· | Victory |
Sheffield Recordings Limited, Inc. - Media Library Rights
· | ASM |
· | GFL |
· | SuckerPunch |
The intellectual property rights toCompany is currently focused on its CageTix business and completing the Sheffield video fight libraryacquisition of the Shogun promotions.SCWorx.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Liquidity and Going Concern
The Company’s primary need for liquidity is to fund the working capital needs of the business, and general corporate purposes. The Company has incurred losses and experienced negative operating cash flows since the inception of operations in October 2016.
In August 2017, the Company completed a capital raise of $1.5 million through the private placement of 1,500,000 units, which consisted of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $1.50. The funds were used for operating capital and a business acquisition.
In October and November 2017, the Company completed a capital raise of $487,500 through the private placement of 390,000 units, which consisted of one share of common stock and 0.50 of a warrant to purchase one share common stock at an exercise price of $1.75, (an aggregate of 195,000 warrants). The funds were used for operating capital.
In December 2017, the Company issued a promissory note to an individual for $300,000 of borrowings for operating capital leading up to our further public offering in January 2018.
In January 2018, the Company completed a capital raise of $2.15 million gross, through the public placement of 2,150,000 units, which consisted of one share of common stock and .90 of a warrant to purchase common stock at an exercise price of $1.10, (an aggregate of 1,935,000 warrants). The warrant exercise price ratcheted down to $0.31 in June 2018 and down to $0.29 in July 2018 which is the floor price of the ratchet. The funds were used for operating capital.
In February 2018, the underwriter exercised their overallotment option resulting in the sale of an additional 50,000 shares for $50,000 and issuance of an additional 272,500 warrants.
In January 2018, the Company paid $345,000 to the promissory note holder of December 2017 as full payment of principal and interest.
In April 2018, the Company issued a promissory note to each of Joseph Gamberale and Joel Tracy, board members, for $150,000, respectively, for total borrowings of $300,000. The funds were used for operating capital.
In May 2018, the Company issued a promissory note to an individual for $200,000 of borrowings for operating capital. In September 2018, the Company agreed to issue the note holder 200,000 common shares and 50,000 warrants with an exercise price of $0.29 and term of five years in exchange for the noteholder’s agreement to convert all interest under the loan into shares of the Company’s common stock, and extend the note to December 31, 2018.
In June 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with SCWorx Acquisition Corp. (“SCWorx”), under which it agreed to sell up to $1 million in principal amount of convertible notes and warrants to purchase up to 671,142 shares of common stock. The note is convertible into shares of common stock at a conversion price of $0.3725 and the warrants have an exercise price of $0.3725.
On June 29, 2018, the Company sold SCWorx convertible notes in the principal amount of $500,000 and warrants to purchase 335,570 shares of common stock, for an aggregate purchase price of $500,000. The Note bears interest at 10% annually and matures on June 27, 2019. The warrant has an exercise price of $0.3725, term of five years and was vested upon grant. SCWorx agreed in the SPA to fund (i) a second tranche of $250,000 upon the signing of a merger agreement with the Purchaser and (ii) a third tranche of $250,000 upon mutual agreement of the Purchaser and Company.
Pursuant to the SPA, on July 31, 2018, the Company sold SCWorx convertible notes in the principal amount of $60,000 and warrants to purchase 40,269 shares of common stock, for an aggregate purchase price of $60,000. The Note bears interest at 10% annually and matures on July 31, 2019. The warrant has an exercise price of $0.3725, term of five years and was vested upon grant.
On August 20, 2018, the Company entered into the Stock Exchange Agreement (“SEA”) with SCWorx. Under the Agreement, the Company agreed to purchase from the SCWorx shareholders all the issued and outstanding capital stock of SCWorx, in exchange for which the Company agreed to issue at the closing that number of shares of Company common stock equal to the quotient of $50,000,000 divided by the closing price of the Company’s common stock upon the completion of the acquisition subject to a cap of $0.67 per share.
Pursuant to the SPA, on August 21, 2018, SCWorx funded $160,000 of the remaining $190,000 of the first $250,000 tranche which was due upon execution of the Stock Exchange Agreement with SCWorx and the Company issued warrants to SCWorx to purchase 127,517 shares of common stock. The warrant has an exercise price of $0.3725, term of five years and was vested upon grant. As of September 30, 2018 SCWorx has funded $720,000. To date SCWorx has funded $800,000 of the aggregate $1 million contemplated by the SCWorx SPA.
Beginning in August 2018, warrant holders from the January 2018 public placement began to exercise their warrant holdings. For the three months ended September 30, 2018, the Company received $306,457 in relation to the exercise of 1,056,750 warrants, resulting in the issuance of the same number of common shares.
The Company currently has virtually no cash on hand, has an accumulated deficit of approximately $30.0 million, has consistently experienced quarterly net losses and negative cash flows, and is operating with negative working capital, all indicating there is substantial doubt with respect to our ability to continue as a going concern. As of the date of this report, the Company has insufficient cash to support the business for the one year period following the date of this report. Unless the Company can generate sufficient revenue to cover operating costs, which it has not been able to do, it will need to continue to raise capital by selling shares of common stock or by borrowing funds. Management cannot provide any assurances that the Company will generate sufficient revenue to continue as a going concern or that it will be successful in raising capital on commercially reasonable terms or at all.
Basis of Presentation and Principles of Consolidation
The accompanying interim unaudited condensed consolidated financial statements as of September 30, 20172018 and December 31, 2016,2017, and for the three and nine months ended September 30, 20172018 and 2016,2017, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 20162017 have been derived from the Company’s annual audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations, changes in stockholders’ equity and cash flows as of and for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016,2017, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, filed on April 17, 201716, 2018 (the “Form 10-K”). The results of operations for the three and nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for the full year ended December 31, 20172018 or any future period and the Company makes no representations related thereto.
9 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the unaudited condensed consolidated financial statements and accompanying notes. SuchThese estimates include, but are not limitedrelate to fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment,revenue recognition, the assessment of the recoverability of goodwill, likelihood and range of possible losses on contingencies, valuation and recognition of stock-based compensation expense, recognitionloss contingencies, discontinued operations and measurement of current and deferred income tax assets and liabilities, assessment of unrecognized tax benefits, among others.taxes. Actual results could differ materially from those estimates.
10 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
Liquidity and Going Concern(Unaudited)
Our primary need for liquidity is to fund the working capital needs of our business, our planned capital expenditures, the continued acquisition of regional promotions and related companies, and general corporate purposes. We have incurred losses and experienced negative operating cash flows since the inception of our operations in October 2016. We believe, however, that the successful implementation of our business plan, along with other actions we have taken and will continue to take, will improve our operating margins and address corporate overhead expenditures.
Since completing our IPO in October 2016, we have focused primarily on building out a domestic MMA platform, which is expected eventually to include a presence in the top 20 media markets. To date, we have created a persistent brand presence in twelve markets through the acquisition of ten promotional businesses along with the promotion of regional Alliance MMA events in two additional markets. We have also continued to develop our existing media library of live MMA events, and have built a professional corporate infrastructure that will support our long-term goals. These activities and investments in our business directly support our stated goal of promoting at least 125 regional MMA events annually.
To ensure the Company’s capital needs are met over the next twelve months, in August 2017, the Company completed a capital raise of approximately $1.5 million through the placement of approximately 1.5 million units at $1.00 per unit, which consist of one share of common stock and a warrant to purchase one share of common stock at $1.50.
In November 2017, the Company raised approximately $500,000 through the placement of 390,000 units at $1.25 per unit, which consist of one common share and a warrant to purchase one-half share of common stock at an exercise price equal to $1.75 per whole share.
Additionally in November, the Company filed a “shelf” registration statement on Form S-3 which, when declared effective by the SEC, will allow the Company to issue various types of securities up to an aggregate of $20 million.
Management is in negotiations with multiple national sponsors and, on the basis of those negotiations, expects to receive at least $500,000 in national sponsorship revenue during the next twelve months.
Additionally, management is in discussions with national casinos to promote our MMA events at venues that would produce better margins through entertainment fees paid to the Company and, in certain cases, a reduction in event overhead through complimentary food and lodging for fighters and staff.
While many challenges associated with successfully executing our aggressive expansion plan exist, and while our historical operating results raise doubts with respect to our ability to continue as a going concern, we expect that our recent and anticipated financings, the continued implementation of our business plan and the expected increase in sponsorship revenue will provide sufficient liquidity and financial flexibility over the next twelve months. We cannot, however, predict with certainty the outcome of our actions to generate liquidity, including our success in raising additional capital or the anticipated results of our operations.
Note 2. Summary of Significant Accounting Policies
There have been no significant changes in the Company’s significant accounting policies during the nine months ended September 30, 2017,2018, as compared to the significant accounting policiesSignificant Accounting Policies described in the Form 10-K with the exception of the fighter commission revenue recognition policy disclosed below.policy.
Revenue Recognition
Promotion Revenue
The Company records revenue from ticket sales and sponsorship income upon the successful completion of the related event, at which time services have been deemed rendered, the sales price is fixed and determinable and collectability is reasonably assured. Customer deposits consist of amounts received from the customer for fight promotion and entertainment services to be provided in the next fiscal year. The Company receives these funds and recognizes them as a liability until the services are provided and revenue can be recognized.
Ticket Service Revenue (Current Operations)
The Company acts as ana ticket agent for third-party ticket sales for promoters and records revenue upon receipt of cash from the credit card companies. The Company charges a fee per transaction for collecting the cash on ticket sales and remits the remaining net amount to the third-party promoter upon completion of the event or request for advance from the promoter. The Company’s ticket service fee is non-refundable and is recognized immediately aswhen it is not tied tosatisfies the completionperformance obligation by transferring control of the event. purchased ticket to a customer.
Promotion Revenue (Discontinued Operations)
The Company recognizesrecognized revenue, upon receiptnet of sales tax, when it satisfied a performance obligation by transferring control over a product or service to a customer. Revenue from the credit card companies dueadmission, sponsorship, pay per view (“PPV”), apparel, and concession were recognized at a point in time when an event was exhibited to the following: the feea customer live or PPV, and when a customer took possession of apparel or food and beverage offerings. Promotion revenue is fixed and determined and the servicea component of collecting the cash for the promoter has been rendered and collection has occurred.discontinued operations.
Fighter Commission Revenue (Discontinued Operations)
The Company records fighterrecognized revenue when it satisfied a performance obligation by transferring control over a product or service to a customer. The Company recognized commission revenue upon the completion of thea contracted athlete’s related event, at which time the fighter’s services have been deemed rendered, the contractual amount due to the fighter is known and the commission due to the Company related to these activities is fixed and determinable and collectability is reasonably assured.performance.
Distribution RevenueBusiness Combinations
The Company acts as a producer, distributor and licensorincludes the results of video content. The Company’s online video content is offered on a pay per view (“PPV”) basis. The Company records revenue on PPV transactions upon receipt of payment to credit processing partners. The Company charges viewers a fee per PPV purchase transaction for entitling a viewer to watch the desired video. The Company records revenue net of a fee for the credit card processing cost per transaction. The Company maintains all revenues from videos the Company films and distribute a profit share, typically 50% to promoters who use our streaming services. The Company generates revenues from video production services, and books this revenue upon completionoperations of the video production project. The Company generates revenues from licensingbusinesses that it has acquired in its consolidated results as of the rights to videos to networks overseas and domestically, and books revenue upon deliveryrespective dates of content. To the extent there are issues (i) watching a video (ii) with our production services or (iii) with the quality of a video we send out for distribution to a network we would issue a partial or full refund based on the circumstances. Given the nature of our business, these refund requests come within days of delivery, thus we would not anticipate any refund request in excess of 30 days from a PPV purchase, a license delivery or video production performance.
Business Combinationsacquisition.
The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities and intangible assets acquired, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expensesThe primary items that generate goodwill include the value of the synergies between the acquired businesses and Alliance as well as the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. The fair value of contingent consideration associated with acquisitions is remeasured each reporting period and adjusted accordingly. Acquisition and integration related restructuring costs are recognized separately from the business combination and are expensed as incurred.
We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.
For additional information regarding the Company's acquisitions, refer to "Note 4 Business Combinations."
Goodwill and Purchased Identified Intangible Assets
Goodwill
Goodwill is testedrecorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. Goodwill also includes acquired assembled workforce, which does not qualify as an identifiable intangible asset. The Company reviews impairment on an annual basisof goodwill annually in the fourth fiscal quarter, and, when specificor more frequently if events or circumstances dictate, between annual tests. When impaired,indicate that the carryinggoodwill might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of goodwilla reporting unit is written down to fair value. Theless than its carrying amount, then the quantitative goodwill impairment test involvesis unnecessary. If, based on the qualitative assessment, it is determined that it is more likely than not that the fair value of a two-step process.reporting unit is less than its carrying amount, then the Company proceeds to perform the quantitative goodwill impairment test. The Company first step, identifyingdetermines the fair value of a potential impairment,reporting unit using weighted results derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow method based on assumptions about future conditions such as future revenue growth rates, new product, services and technology introductions, gross margins, operating expenses, discount rates, future economic and market conditions, and other assumptions. The market approach estimates the fair value of the Company’s equity by utilizing the market comparable method which is based on revenue multiples from comparable companies in similar lines of business. The Company then compares the derived fair value of a reporting unit with its carrying amount, including goodwill.amount. If the carrying value of thea reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
During the second step would needquarter of 2018, the Company recorded a goodwill impairment charge related to be conducted; otherwise, no further stepsthe SuckerPunch acquisition of $1.5 million, which is included as a component of Net loss from discontinued operations, net of tax for the nine months ended September 30, 2018.
Purchased Identified Intangible Assets
Identified finite-lived intangible assets consist of venue relationships, ticketing software, tradename and brand, fighter contracts, promoter relationships and sponsor relationships, resulting from business combinations. The Company’s identified intangible assets are necessary as no potential impairment exists. If necessary,amortized on a straight-line basis over their estimated useful lives, ranging from three to ten years. The Company makes judgments about the second step to measurerecoverability of finite-lived intangible assets whenever facts and circumstances indicate that the impairment loss would be to compare the implied fair value of the reporting unit goodwill withuseful life is shorter than originally estimated or that the carrying amount of that goodwill. Anyassets may not be recoverable. If such facts and circumstances exist, the Company assesses recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the reporting unit goodwillcarrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the Company would accelerate the rate of amortization and amortize the remaining carrying value over the respective implied fairnew shorter useful life. The Company evaluates the carrying value is recognized asof indefinite-lived intangible assets on an annual basis, and an impairment loss. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed overcharge would be recognized to the estimated useful lives of the respective assets. See “Long-Lived Assets” for the Company’s policy regarding impairment testing of purchased intangible assets with finite lives. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired.
Long-Lived Assets
Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicateextent that the carrying amount of such assets may not be recoverable. Determinationexceeds their estimated fair value. For further discussion of recoverabilitygoodwill and identified intangible assets, see “Note 5-Goodwill and Purchased Identifiable Intangible Assets.”
During the second quarter of long-lived assets2018, the Company recorded an intangible impairment charge related to the SuckerPunch acquisition of $182,546 which is based on an estimateincluded as a component of net loss from discontinued operations, net of tax for the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value.nine months ended September 30, 2018.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
Recent Accounting Pronouncements(Unaudited)
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), and since May 2014 the FASB has issued amendments to this new guidance, which collectively provides guidance for revenue recognition. ASU 2014-09 is effective for the Company beginning January 1, 2018 and, at that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Under the new standard, the current practice of many licensing companies of reporting revenues from per-unit royalty based agreements one quarter in arrears would no longer be accepted and instead companies will be expected to estimate royalty-based revenues. The Company is currently evaluating the method of adoption and the resulting impact on the financial statements.
In August 2014,Note 3. Discontinued Operations
On May 25, 2018, the FASB issued “Accounting Standards Update No. 2014-15,” DisclosureCompany commenced cessation of Uncertainties about an Entity’s Ability to Continue asall the professional MMA promotion operations and supporting functions including ASM and began a Going Concern (Subtopic 205-40) (“Update 2014-15”), which requires management to assessplan of disposition. This action included the termination of all promotion and support employees. As of June 30, 2018, all the MMA promotions were either disposed or ceased operations. On September 13, 2018, the Company commenced cessation of the Athlete Management operations and began a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. For public entities, Update 2014-15plan of disposition. This action included the termination of all Athlete Management employees. As of September 30, 2018, the Athlete Management business unit was effective for annual reporting periods ending after December 15, 2016. disposed.
The Company adopted this update in 2016 resulting in no impact on its consolidatedhas reported the results of operations and financial position cash flowsof the discontinued Professional MMA Promotion and disclosures.Athlete Management businesses in discontinued operations within the condensed consolidated statements of operations and condensed consolidated balance sheets for all periods presented.
In February 2016,The results from discontinued operations were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September | September 30, | September 30, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue, net | $ | — | $ | 1,010,157 | $ | 1,663,382 | $ | 2,759,166 | ||||||||
Cost of revenue | — | 774,671 | 1,084,028 | 1,881,153 | ||||||||||||
Gross margin | — | 235,486 | 579,354 | 878,013 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 300,754 | 1,240,415 | 4,206,288 | 4,975,580 | ||||||||||||
Professional and consulting fees | — | — | — | 471 | ||||||||||||
Other (income) expense | — | (672 | ) | — | (217 | ) | ||||||||||
Total operating expenses | 300,754 | 1,239,743 | 4,206,288 | 4,975,834 | ||||||||||||
Loss from operations | (300,754 | ) | (1,004,257 | ) | (3,626,934 | ) | (4,097,821 | ) | ||||||||
Gain on disposal | 96,746 | — | 764,064 | — | ||||||||||||
Loss on disposal | (120,002 | ) | — | (7,834,491 | ) | — | ||||||||||
Loss before provision for income tax | (324,010 | ) | (1,004,257 | ) | (10,697,361 | ) | (4,097,821 | ) | ||||||||
Income tax (provision) benefit | — | (767,625 | ) | 23,943 | (767,625 | ) | ||||||||||
Loss from discontinued operations | $ | (324,010 | ) | $ | (1,771,882 | ) | $ | (10,673,418 | ) | $ | (4,865,446 | ) |
As part of the FASB issued ASU 2016-02 “Leases (Topic 842):” The core principlecessation of Topic 842 is that a lessee should recognizeits professional MMA promotion business in the second quarter 2018, the Company disposed of all long-lived fixed assets and realized a loss on disposal of approximately $223,000, the Company also impaired or wrote off intangible assets and goodwill and realized a loss on disposal of $6.9 million, wrote off receivables of $190,000 and other assets of $19,000, which is included as a component of net loss from discontinued operations, net of tax for the nine months ended September 30, 2018.
During the second quarter 2018, the Company sold all the professional MMA promotion businesses, except for Victory, FT and NFC, to the former business owners and terminated/settled existing employment agreements. In relation to the promotion business disposals, the Company settled the $310,000 earn-out liability related to the Shogun acquisition with the issuance of 366,072 common stock options with a Black-Scholes value of $94,000, issued 30,000 common stock options to a promoter as severance, and incurred approximately $246,000 of additional liabilities that arise from leases while the accounting by a lessor is largely unchanged from that applied under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.related to severance payments to former employees. The Company is currently evaluating the impactrealized a gain of the adoption of this new standard.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718):” (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an optionapproximately $160,000 related to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this update effective January 1, 2017.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):” Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claimsoutstanding accounts payable and distributions receiveda gain of approximately $276,000 related to settlement with a promoter of customer prepayments and recorded a $15,000 receivable from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt allthe promoter related to the sale of the amendmentsbusiness. On July 30, 2018, the Company entered a settlement agreement, effective as of May 31, 2018, with a former employee, in relation to the same period.termination of his employment. The Company is currently assessingagreed to pay the impactformer employee $129,800 and issue a fully vested stock option grant dated July 30, 2018 for 75,000 common shares with a life of this new guidance.5 years and exercise price of $0.20. In June 2018, the Company abandoned the Cherry Hill, New Jersey promotion office and recorded a $167,500 charge for the remaining contractual lease payments, refer to “Note 7 Commitments and contingencies”.
In January 2017,July 2018, the FASBCompany entered a separation agreement with a former employee and agreed to pay $50,000 in exchange for terminating the employment agreement. On September 26, 2018, the Company entered an agreement to sell the Athlete Management business, SuckerPunch, to the former business owners, the agreement had an effective date of July 1, 2018. The parties agreed to terminate / settle the existing employment agreements. One of the former employees was paid severance until August 31, 2018 and issued ASU No. 2017-04, “Compensation – Retirement Benefits (Topic 715):”the remaining 108,289 common shares held in escrow related to simplify the measurementSuckerPunch acquisition. The Company recognized a stock-based compensation charge of goodwill by eliminating$31,000 related to the Step 2 impairment test. Step 2 measuresissuance of the 108,289 common shares. The other former employee was paid severance through September 15,2018 and had his warrant to purchase 93,583 common shares repriced from $3.74 to $0.3725. The Company recognized a goodwill impairmentstock-based compensation charge of $10,000 related to the repricing of the common stock warrant. The Company recognized a $70,000 loss by comparingin relation to the implied fair valuedisposal of a reporting unit’s goodwillthe SuckerPunch business. In conjunction with the carrying amountsettlement with the former owner of that goodwill.Fight Club OC, Roy Englebrecht, the shares held in escrow were released as part of the separation agreement. The new guidance requires an entity to compareCompany recorded stock based compensation expense of $55,000, the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwillshares on the carrying amountdate the agreement was entered. In September 2018, the Company sold the Victory name and related business assets to a vendor in settlement of an outstanding payable balance of $33,064. In September 2018, the Company sold Fight Time to the former business owner and terminated the existing settlement arrangement resulting in a gain of $16,667. In October 2018, the Company resolved its outstanding litigation with Mazzeo Song LLP resulting in the Company agreeing to pay $35,000 in settlement of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted.outstanding payable balance. The Company is currently assessingrealized a $47,000 gain during the impact of this new guidance.
In January 2017,third quarter 2018 on the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805):” This ASU clarifiessettlement as all invoices had previously been accrued. On November 12, 2018 the definition ofCompany entered into a businessseparation agreement with the objectiveformer promoter of adding guidanceVictory and agreed to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted for transactions for whichissue the acquisition date occurs before121,699 shares held in escrow related to the Victory acquisition. The effective date of the ASU only when the transaction has not been reported in financial statements that have been issued. The Company chose to early adopt this standard effective for the year ended December 31, 2016.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwillagreement was September 30, 2018 and Other (Topic 350):” which removes Step 2 of the goodwill impairment test. Step 2 requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value. ASU 2017-4 will be effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019, on a prospective basis, and early adoption is permitted.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718):” scope of modification accounting (“ASU 2017-09”), which provides clarity regarding the applicability of modification accounting in relation to share-based payment awards. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date for the standard is for fiscal years beginning after December 15, 2017, which for the Company is January 1, 2018. Early adoption is permitted. The new standard is to be applied prospectively. The Company does not expect ASU 2017-09 to have a material impact on its consolidated financial statements.recognized $35,000 of stock-based compensation expense.
As of September 30, 2018, the Company has sold all the professional MMA promotion businesses, except for NFC.
The current assets, long-term assets, current liabilities and long-term liabilities of discontinued operations were as follows:
September 30, 2018 | December 31, 2017 | |||||||
Cash | $ | — | $ | 305,349 | ||||
Accounts receivable, net | — | 225,787 | ||||||
Other receivables | — | 71,250 | ||||||
Current assets - discontinued operations | $ | — | $ | 602,386 |
September 30, 2018 | December 31, 2017 | |||||||
Property and equipment, net | $ | — | $ | 259,463 | ||||
Intangible assets, net | — | 2,615,224 | ||||||
Goodwill | — | 5,963,537 | ||||||
Long-term assets - discontinued operations | $ | — | $ | 8,838,224 |
September 30, 2018 | December 31, 2017 | |||||||
Accounts payable | $ | 8,074 | $ | 67,761 | ||||
Accrued liabilities | 417,530 | 385,591 | ||||||
Current liabilities - discontinued operations | $ | 425,604 | $ | 453,352 |
September 30, 2018 | December 31, 2017 | |||||||
Long-term deferred tax liability | $ | — | $ | 23,943 | ||||
Long-term liabilities - discontinued operations | $ | — | $ | 23,943 |
Note 3. Property and EquipmentAlliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
Property and equipment, net, consisted of the following:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Promotion equipment | $ | 83,185 | $ | 31,393 | ||||
Production equipment | 110,245 | 61,209 | ||||||
Equipment, furniture and other | 165,382 | 42,660 | ||||||
Total property and equipment | 358,812 | 135,262 | ||||||
Less accumulated depreciation | (109,760 | ) | (12,950 | ) | ||||
Total property and equipment, net | $ | 249,052 | $ | 122,312 |
Depreciation expense for the three and nine months ended September 30, 2017 was $41,111 and $96,810, respectively.
Depreciation expense for the three and nine months ended September 30, 2016 was zero for both periods.(Unaudited)
Note 4. AcquisitionsBusiness Combinations
During 2017, we completed several business acquisitions. We have included the financial results of these business acquisitions in our unaudited condensed consolidated financial statements from their respective dates of acquisition. Goodwill generated from all business acquisitions was primarily attributable to expected synergies from future growth and potential monetization opportunities.
All acquisitions have been accounted for as business acquisitions, under the acquisition method of accounting.
In connection with respective asset purchase agreements, the Company entered into trademark license agreements to license the trademark used by the underlying MMA business.
The Company completed the followingno acquisitions during the nine months ended September 30, 2018.
The following acquisitions were completed during 2017:
SuckerPunch
On January 4, 2017, the CompanyAlliance MMA acquired the stock of Roundtable Creative, Inc., a Virginia corporation d/b/a SuckerPunch Entertainment, a leading fighter management and marketing company, for an aggregate purchase price of $1,686,347, of which $357,500 was paid in cash, and $1,146,927 was paid with the issuance of 307,487 shares of Alliance MMA common stock valued at $3.73 per share, the fair value of Alliance MMA common stock on January 4, 2017, and $181,920 was paid with the issuance of a warrant to acquire 93,583 shares of the Company’s common stock.
Fight Time
On January 18, 2017, the CompanyAlliance MMA acquired the mixed martial arts promotion business of Fight Time Promotions, LLC (“Fight Time”) for an aggregate consideration of $371,468, of which $84,000 was paid in cash and $287,468 was paid with the issuance of 74,667 shares of the Alliance MMA’s common stock valued at $3.85 per share, the fair value of Alliance MMA common stock on January 18, 2017.
National Fighting Championships
On May 12, 2017, Alliance MMA acquired the mixed martial arts promotion business of Undisputed Productions, LLC, doing business as National Fighting Championships or NFC for an aggregate consideration of $506,227, of which $140,000 was paid in cash and $366,227 was paid with the issuance of 273,304 shares of Alliance MMA common stock valued at $1.34 per share, the fair value of Alliance MMA common stock on May 12, 2017.
Fight Club OCOrange County
On June 14, 2017, Alliance MMA acquired the mixed martial arts promotion business of The Englebrecht Company, Inc., doing business as Roy Englebrecht Promotions and Fight Club Orange County, for an aggregate consideration of $1,018,710, of which $207,900 was paid in cash and $810,810 was paid with the issuance of 693,000 shares of the Company’s common stock valued at $1.17 per share, the fair value of Alliance MMA common stock on June 14, 2017.
Victory Fighting Championship
On September 28, 2017, Alliance MMA acquired the mixed martial arts promotion business of Victory Fighting Championship, LLC, doing business as Victory Fighting Championship, for an aggregate consideration of $822,938, of which $180,000 was paid in cash and $642,938 was paid with the issuance of 267,891 shares of the Company’s common stock valued at $2.40 per share, the fair value of Alliance MMA common stock on September 28, 2017.
All acquisitions have been accounted for as business acquisitions, under the acquisition method of accounting.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
PreliminaryFinal Purchase Allocation – SuckerPunch
As consideration for the acquisition of SuckerPunch, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Warrant Grant | Consideration Paid | |||||||||||||
SuckerPunch | $ | 357,500 | 307,487 | 93,583 | $ | 1,686,347 |
In connection with the acquisition, 108,289 shares of the 307,487 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of SuckerPunch post-closing. Accordingly, in the eventif the gross profit iswas less than $265,000 during fiscal year 2017, all 108,289 shares held in escrow will bewould have been forfeited. During the third quarter 2018, Management entered a separation agreement with the former owner of SuckerPunch and released the shares held under escrow, and recorded stock based compensation expense of $31,000, the fair value of the shares on the date the agreement was entered.
The following table reflects the preliminaryfinal allocation of the purchase price for SuckerPunch to identifiable assets, intangible assets, goodwill and preliminary pro formaidentifiable liabilities:
Final Fair Value | ||||
Cash | $ | — | ||
Accounts receivable, net | — | |||
Intangible assets | 210,000 | |||
Goodwill | 1,522,605 | |||
Total identifiable assets | $ | 1,732,605 | ||
Total identifiable liabilities | (46,258 | ) | ||
Total purchase price | $ | 1,686,347 |
During the three months ended June 30, 2018, the Company recognized an impairment charge of the net intangible assets and goodwill:goodwill and fully wrote off these assets. The impairment charge is a component of net loss from discontinued operations, net of tax for the nine months ended September 30, 2018.
SuckerPunch | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable, net | — | |||||||||||
Intangible assets | 1,525,584 | |||||||||||
Goodwill | 160,763 | |||||||||||
Total identifiable assets | $ | 1,686,347 | ||||||||||
Total identifiable liabilities | — | |||||||||||
Total purchase price | $ | 1,686,347 |
PreliminaryFinal Purchase Allocation – Fight Time Promotions
As consideration for the acquisition of the MMA promotion business of Fight Time, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
Fight Time | $ | 84,000 | 74,667 | $ | 371,468 |
In connection with the business acquisition, 28,000 shares of the 74,667 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of Fight Time post-closing. Accordingly, in the eventIf the gross profit of Fight Time iswas less than $60,000 during fiscal year 2017, all 28,000 shares held in escrow willwere to be forfeited. During the first quarter 2018, Management entered a separation agreement with the former owner of Fight Time and released the shares held under escrow.
The following table reflects the preliminaryfinal allocation of the purchase price for the business of Fight Time to identifiable assets, intangible assets, goodwill and preliminary pro formaidentifiable liabilities:
Final Fair Value | ||||
Cash | $ | — | ||
Accounts receivable | — | |||
Intangible assets | 140,000 | |||
Goodwill | 231,468 | |||
Total identifiable assets | $ | 371,468 | ||
Total identifiable liabilities | — | |||
Total purchase price | $ | 371,468 |
During the year ended December 31, 2017 the Company recognized an impairment charge of the intangible assets and goodwill:goodwill and fully wrote off these assets.
Fight Time | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable | — | |||||||||||
Intangible assets | 48,867 | |||||||||||
Goodwill | 322,601 | |||||||||||
Total identifiable assets | $ | 371,468 | ||||||||||
Total identifiable liabilities | — | |||||||||||
Total purchase price | $ | 371,468 |
14 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
PreliminaryFinal Purchase Allocation – National Fighting Championships
As consideration for the acquisition of the MMA promotion business of NFC, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
NFC | $ | 140,000 | 273,304 | $ | 506,227 |
In connection with the business acquisition, 81,991 shares of the 273,304 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of NFC post-closing. Accordingly, in the eventif the gross profit of NFC iswas less than $100,000 during the 12 month12-month period following the acquisition, all 81,991 shares held in escrow will be forfeited. The Company is currently in negotiations with the former owner of NFC to dispose of this business.
The following table reflects the preliminaryfinal allocation of the purchase price for the business of NFC to identifiable assets, and preliminary pro forma intangible assets, goodwill and goodwill:identifiable liabilities:
NFC | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable | — | |||||||||||
Fixed assets | 20,000 | |||||||||||
Intangible assets | 120,000 | |||||||||||
Goodwill | 366,227 | |||||||||||
Total identifiable assets | $ | 506,227 | ||||||||||
Total identifiable liabilities | — | |||||||||||
Total purchase price | $ | 506,227 |
Final Fair Value | ||||
Cash | $ | — | ||
Accounts receivable | — | |||
Fixed assets | 20,000 | |||
Intangible assets | 180,000 | |||
Goodwill | 306,227 | |||
Total identifiable assets | $ | 506,227 | ||
Total identifiable liabilities | — | |||
Total purchase price | $ | 506,227 |
In conjunction with the cessation of the MMA operations, the Company wrote off the residual intangible and tangible assets which is included as a component of discontinued operations – loss on disposal, for the nine months ended September 30, 2018.
PreliminaryFinal Purchase Allocation – Fight Club OC
As consideration for the acquisition of the MMA promotion business of Fight Club OC, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
Fight Club OC | $ | 207,900 | 693,000 | $ | 1,018,710 |
Among the assets purchased is a cash balance of $159,000 related to customer deposits on ticket sales for future 2017 MMA promotion events. In connection with the business acquisition, 258,818 shares of the 693,000 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of Fight Club OC post-closing. Accordingly, in the event the gross profit of Fight Club OC iswas less than $148,500 during the 12 month12-month period following the acquisition, all 258,818 shares held in escrow will bewould have been forfeited. AmongIn conjunction with the assets purchased is a cash balancesettlement with the former owner of $159,000 related to customer depositsFight Club OC, Roy Englebrecht, the shares held in escrow were released as part of the separation agreement. The Company recorded stock based compensation expense of $55,000, the fair value of the shares on ticket sales for future 2017 MMA promotion events.the date the agreement was entered.
The following table reflects the preliminaryfinal allocation of the purchase price for the business of the Fight Club OC to identifiable assets, intangible assets, goodwill and identifiable liabilities, and preliminary pro forma intangible assets and goodwill:
Fight Club OC | Final Fair Value | |||||||||||||||
Cash | $ | 159,000 | $ | 159,000 | ||||||||||||
Accounts receivable | — | — | ||||||||||||||
Intangible assets | 500,000 | 270,000 | ||||||||||||||
Goodwill | 518,710 | 748,710 | ||||||||||||||
Total identifiable assets | $ | 1,177,710 | $ | 1,177,710 | ||||||||||||
Total identifiable liabilities | (159,000 | ) | (159,000 | ) | ||||||||||||
Total purchase price | $ | 1,018,710 | $ | 1,018,710 |
In conjunction with the cessation of the MMA operations, the Company wrote off the residual intangible and tangible assets which is included as a component of discontinued operations – loss on disposal, for the nine months ended September 30, 2018.
15 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
PreliminaryFinal Purchase Allocation – Victory Fighting Championship
As consideration for the acquisition of the MMA promotion business of Victory, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
Victory Fighting Championship | $ | 180,000 | 267,891 | $ | 822,938 |
In connection with the business acquisition, 121,699 shares of the 267,891 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of Victory post-closing. Accordingly, in the event the gross profit of Victory is less than $140,000 during the 12 month12-month period following the acquisition, all 121,699 shares held in escrow will bewould have been forfeited. Additionally, 146,192 shares were placed into a separate escrow to indemnify the Company for potential additional expenses incurred by Victory prior to the acquisition and to cover any uncollectible accounts receivable. During the third quarter 2018, Management entered a separation agreement with the former owner of Victory and released the shares held under escrow, and recorded stock based compensation expense of $35,000, the fair value of the shares on the date the agreement was entered.
The following table reflects the preliminaryfinal allocation of the purchase price for the business of Victory to identifiable assets, liabilities, and preliminary pro forma intangible assets, goodwill and goodwill:
Victory | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable | 32,180 | |||||||||||
Fixed assets | 30,000 | |||||||||||
Intangible assets | 600,000 | |||||||||||
Goodwill | 268,167 | |||||||||||
Total identifiable assets | $ | 930,347 | ||||||||||
Total identifiable liabilities | (107,409 | ) | ||||||||||
Total purchase price | $ | 822,938 |
Final Purchase Allocation - Initial Business Units
The Company completed the first tranche of its IPO on September 30, 2016, and closed the acquisitions of the Initial Business Units and the Acquired Assets. The transactions were accounted for as business combinations and the results of operations of the Initial Business Units have been included in the Alliance MMA results since the date of acquisition.
The following table is a reconciliation of the preliminary purchase price allocation at September 30, 2016 to the final purchase price allocation based on the final fair value of the acquired assets and assumed liabilities at the acquisition date:
Under acquisition accounting, assets and liabilities acquired are recorded at their fair value on the acquisition date, with any excess in purchase price over these values being allocated to identifiable intangible assets and goodwill at September 30, 2017.liabilities:
Preliminary | Adjustments | Final | ||||||||||
Cash and equivalents | $ | 118,764 | $ | — | $ | 118,764 | ||||||
Accounts receivable and other current assets, net | 34,599 | — | 34,599 | |||||||||
Property and equipment, net | 23,661 | — | 23,661 | |||||||||
Intangible assets | 5,839,700 | (2,264,700 | ) | 3,575,000 | ||||||||
Goodwill | �� | 2,878,071 | 1,561,942 | 4,440,013 | ||||||||
Total identifiable assets | $ | 8,894,795 | $ | 702,758 | $ | 8,192,037 | ||||||
Accounts payable and accrued expenses | 1,055,906 | (702,758 | ) | 353,148 | ||||||||
Total identifiable liabilities | $ | 1,055,906 | $ | (702,758 | ) | $ | 353,148 | |||||
Total purchase price | $ | 7,838,889 | $ | — | $ | 7,838,889 |
Final Fair Value | ||||
Cash | $ | — | ||
Accounts receivable | 32,180 | |||
Fixed assets | 30,000 | |||
Intangible assets | 290,000 | |||
Goodwill | 578,167 | |||
Total identifiable assets | $ | 930,347 | ||
Total identifiable liabilities | (107,409 | ) | ||
Total purchase price | $ | 822,938 |
The Company allocated $3,575,000 to intangible assets as follows:
Intangible assets | Useful Life | Allocated Amount | ||||||||||
Video library, intellectual property | 4 years | $ | 1,125,000 | |||||||||
Venue relationships | 7 years | 1,720,000 | ||||||||||
Ticketing software | 3 years | 90,000 | ||||||||||
Trademark and brand | 3 years | 330,000 | ||||||||||
Promoter relationships | 6 years | 310,000 | ||||||||||
Total intangible assets, gross | $ | 3,575,000 |
In conjunction with the final purchase price allocation,cessation of the MMA operations, the Company recognized a cumulative measurement period adjustment benefit of approximately $(551,687) related towrote off the adjustment toresidual intangible assets. This benefit is a reduction to amortization expenseand tangible assets which is included within General and Administrative expenseas a component of the Statement of Operationsdiscontinued operations – loss on disposal, for the three and nine months ended September 30, 2017.2018.
16 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5. Goodwill and Purchased Identifiable Intangible Assets
Goodwill
The change in
In May 2018, the carrying amountCompany ceased all professional MMA promotion operations and committed to an exit/disposal plan of the promotion businesses. In September 2018, the Company ceased all athlete management operations and extended its exit/disposal plan to SuckerPunch. In conjunction with the discontinued operations, $5,963,537 of Goodwill was classified as a component of long term assets - discontinued operations within the December 31, 2017, condensed consolidated balance sheet, which was subsequently impaired during the second quarter 2018. Refer to “Note 3 Discontinued Operations".
During the second quarter of 2018, the Company recorded a goodwill impairment charge related to the SuckerPunch acquisition of $1.5 million, which is included as a component of net loss from discontinued operations, net of tax for the nine months ended September 30, 2017 is:2018.
Intangible Assets
During the second quarter of 2018, the Company recorded an intangible impairment charge of $231,037 related to the write down of the ticketing software and promoter relationships acquired intangible assets from the CageTix business acquisitions, which is included as a component of operating expenses for the nine months ended September 30, 2018.
During the second quarter of 2018, the Company recorded an intangible impairment charge of $182,546 related to the write down of the trademark and brand, fighter contracts, and sponsor relationships acquired intangible assets from the SuckerPunch business acquisitions, which is included as a component of net loss from discontinued operations, net of tax for the nine months ended September 30, 2018.
The change in the carrying amounts of intangible assets for the nine months ended September 30, 2018 is as follows:
Balance as of December 31, 2016 | $ | 3,271,815 | ||||||||||
Goodwill – Sucker Punch | 160,763 | |||||||||||
Goodwill – Fight Time Promotions | 322,601 | |||||||||||
Goodwill – National Fighting Championships | 366,227 | |||||||||||
Goodwill – Fight Club OC | 518,710 | |||||||||||
Goodwill – Victory | 268,167 | |||||||||||
Final purchase price adjustment – Initial Business Units | 1,561,942 | |||||||||||
Balance as of September 30, 2017 | $ | 6,470,225 |
Balance as of December 31, 2017 | $ | 271,870 | ||
Amortization | 40,833 | |||
Impairment – intangibles (CageTix) | 231,037 | |||
Balance as of September 30, 2018 | $ | — |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
Intangible Assets(Unaudited)
Identified intangible assets consist of the following:
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||
Intangible assets | Useful Life | Gross Assets | Accumulated Amortization | Net | Gross Assets | Accumulated Amortization | Net | |||||||||||||||||||
Video library, intellectual property | 4 years | $ | 1,158,500 | $ | 286,136 | $ | 872,364 | $ | 3,512,741 | $ | 181,824 | $ | 3,330,917 | |||||||||||||
Venue relationships | 7 years | 1,720,000 | 245,174 | 1,474,286 | 1,966,400 | 163,867 | 1,802,533 | |||||||||||||||||||
Ticketing software | 3 years | 90,000 | 30,000 | 60,000 | 360,559 | 30,047 | 330,512 | |||||||||||||||||||
Trademark and brand | 3 years | 1,723,867 | 283,946 | 1,439,921 | 325,000 | 8,749 | 316,251 | |||||||||||||||||||
Fighter contracts | 3 years | 1,525,584 | 381,396 | 1,144,188 | — | — | — | |||||||||||||||||||
TV contract | 2 years | 200,000 | — | 200,000 | — | — | — | |||||||||||||||||||
Promoter relationships | 6 years | 310,000 | 51,668 | 258,332 | — | — | — | |||||||||||||||||||
Total intangible assets, gross | $ | 6,727,951 | $ | 1,278,860 | $ | 5,449,091 | $ | 6,164,700 | $ | 384,487 | $ | 5,780,213 |
September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
Intangible assets | Useful Life | Gross Assets | Accumulated Amortization | Impairment | Net | Gross Assets | Accumulated Amortization | Net | ||||||||||||||||||||||
Ticketing software | 3 years | $ | 90,000 | $ | (52,500 | ) | $ | (37,500 | ) | $ | — | $ | 90,000 | $ | (37,500 | ) | $ | 52,500 | ||||||||||||
Promoter relationships | 6 years | 277,099 | (83,562 | ) | (193,537 | ) | — | 277,099 | (57,729 | ) | 219,370 | |||||||||||||||||||
Total intangible assets, gross | $ | 367,099 | $ | (136,062 | ) | $ | (231,037 | ) | $ | — | $ | 367,099 | $ | (95,229 | ) | $ | 271,870 |
Amortization expense for the three months ended September 30, 2018 and 2017, was $0 and 2016, was $382,374 less the cumulative measurement period adjustment benefit of $(551,687) or $(169,313), net and $0,$19,046, respectively.
The amortization expense benefit of $(551,687) for the quarter ended September 30, 2017, is attributable to the final purchase price allocation of the Initial Business Units and reclass of $2,264,700 from intangible assets to goodwill.
Amortization expense for the nine months ended September 30, 2018 and 2017, was $40,833 and 2016, was $894,373$57,137, respectively.
In May 2018, the Company ceased all professional MMA promotion operations and $0, respectively.committed to an exit/disposal plan of the promotion business. In conjunction with the discontinued operations, $2,615,224 million of intangible assets, net, were classified as long term assets - discontinued operations within the December 31, 2017, condensed consolidated balance sheet, which were disposed of during the second quarter 2018.
As of September 30, 2018, the balance of intangible assets was $0.
Note 6. Debt
Notes Payable
In December 2017, estimated amortizationthe Company issued a promissory note to an individual for $300,000 of borrowings for operating capital leading up to our public offering in January 2018. The note had a maturity of 30 days, an annual interest rate of 40%, and was paid in full at maturity in January 2018 including interest of $45,000. The note was personally guaranteed by Joseph Gamberale, one of our board members.
In May 2018, the Company issued a promissory note to an individual for $90,000 of borrowings for operating capital. The note had a maturity of June 30, 2018, an annual interest rate of 6%, and was paid in full in June 2018, including interest of $625. The note was secured by our common shares in Round Table Creative, Inc.
On May 9, 2018, the Company borrowed $200,000 from an individual pursuant to a promissory note. The note bears interest at 40% annually and initially matured on June 25, 2018. In June 2018, the note holder agreed to extend the maturity to December 31, 2018. In September 2018, the Company agreed to issue the note holder 200,000 common shares with a fair value of $58,000 and 50,000 warrants with an exercise price of $0.29, term of 5 years, and Black-Scholes fair value of $8,500, in exchange for the note holder’s agreement to convert all interest under the loan into common stock and extend the note to December 31, 2018. Mr. Gamberale personally guaranteed the note and Mr. Gamberale and Mr. Tracy agreed to subordinate their existing notes to the repayment of this note. Interest expense for the unamortized acquired intangible assets over the next five yearsthree and thereafter is as follows:
2017 (Remaining three months) | $ | 437,672 | |||
2018 | 1,750,688 | ||||
2019 | 1,714,716 | ||||
2020 | 736,695 | ||||
2021 | 288,344 | ||||
Thereafter | 520,976 | ||||
$ | 5,449,091 |
Pro Forma Results
The combined pro forma net revenue and net loss of the Company as if Initial Business Units were acquired in January 1, 2016 are (in 000’s):
Three Months Ended | Nine Months Ended | ||||||||
September 30, 2016 | September 30, 2016 | ||||||||
Revenue | $ | 335 | $ | 1,559 | |||||
Net (loss) | $ | (848 | ) | $ | (4,052 | ) |
Significant adjustments to expenses for the three months ended September 30, 2016 include $420,000 of amortization of acquired intangible assets.
Significant adjustments to expenses for the nine months ended September 30, 2016 include $1,127,0002018 was $22,471 and $34,425, respectively.
On June 28, 2018, the Company entered into a Securities Purchase Agreement with SCWorx, under which the Company agreed to sell up to $1M in principal amount of amortizationconvertible notes and Warrants to purchase up to 671,142 shares of acquired intangible assets,common stock. The Note is convertible into shares of common stock at a conversion price of $0.3725 and $311,000 professional fees attributablebears interest at 10% annually. The Warrants are exercisable for shares of common stock at an exercise price of $0.3725.
On June 29, 2018, the Company sold the SCWorx convertible notes in the principal amount of $500,000 and warrants to consulting fees relatedpurchase 335,570 shares of common stock, for an aggregate purchase price of $500,000. The Note bears interest at 10% annually and matures on June 27, 2019. SCWorx agreed in the SPA to fund (i) a second tranche of $250,000 upon the signing of a merger agreement with the Purchaser and (ii) a third tranche of $250,000 upon mutual agreement of the Purchaser and Company.
Pursuant to the acquisitions.SCWorx SPA, on July 31, 2018, the Company sold SCWorx convertible notes in the principal amount of $60,000 and warrants to purchase 40,269 shares of common stock, for an aggregate purchase price of $60,000. The Note bears interest at 10% annually and matures on July 31, 2019. The warrant has an exercise price of $0.3725, term of five years and was vested upon grant.
On August 20, 2018, the Company entered into the Stock Exchange Agreement (SEA) with SCWorx Corp., Under the Agreement, the Company agreed to purchase from the SCWorx shareholders all the issued and outstanding capital stock of SCWorx, in exchange for which the Company agreed to issue at the closing that number of shares of Company common stock equal to the quotient of $50,000,000 divided by the closing price of the Company’s common stock upon the completion of the acquisition (subject to a cap of $0.67 per share).
Consummation of the transactions contemplated by the SEA is subject to satisfaction of a variety of conditions, including approval by the Company and SCWorx’ shareholders and the combined company meeting the listing qualifications for initial inclusion on the Nasdaq Stock Market.
Consequently, there is no assurance that the Company will be able to consummate the transactions contemplated by the SEA. If the Company completes the planned acquisition, management may dispose of the fighter management and ticketing businesses and focus on the SCWorx SAAS business, which is focused on streamlining the three core healthcare provider systems; Supply Chain, Financial and Clinical (EMR) enabling providers’ enterprise systems to work as one automated and seamless business management system.
Pursuant to the SCWorx SPA, on August 21, 2018 and October 16, 2018 , SCWorx funded $160,000 and $30,000, respectively, of the remaining $190,000 of the $250,000 tranche which was due upon execution of the Stock Exchange Agreement with SCWorx, for which SCWorx was issued warrants to purchase an aggregate of 127,517 shares of common stock. The warrant has an exercise price of $.3725, term of five years, and was vested upon grant. On November 6, 2018, SCWorx funded an additional $50,000 convertible note with a conversion price of $.30 per share, for which it received an additional 41,667 warrants, with an exercise price of $.30 per share. SCWorx has to date funded $800,000 of the aggregate $1 million contemplated by the SCWorx SPA.
The Company applied a portion of the proceeds of the $500,000 note to repay the aforementioned $90,000 promissory note. Accordingly, the lien on the capital stock of SuckerPunch Entertainment was released. During the third quarter 2018, the SuckerPunch business was disposed.
As of September 30, 2018, the Company received $720,000 under the agreement.
As of the date of this filing, the Company has received $800,000 under the agreement.
Interest expense, for borrowings under the various SCWorx notes, for the three and nine months ended September 30, 2018 was $15,131 and $15,405, respectively.
Related Party Promissory Notes
On April 10, 2018, the Company borrowed a total of $300,000 from two of its board members, Joseph Gamberale and Joel Tracy, pursuant to promissory notes of $150,000, respectively. The notes bear interest at 12% annually and mature May 21, 2018. Mr. Gamberale personally guaranteed Mr. Tracy’s Note.
Interest expense for the three and nine months ended September 30, 2018 was $4,731 and $8,830 for each note.
On May 21, 2018 Mr. Gamberale agreed to extend the maturity to August 31, 2018. The repayment of this note is subordinate to the $200,000 promissory note of May 9, 2018. In July 2018, Mr. Gamberale agreed to convert his note to common shares (at a rate of $.3725 per share) and warrants (25% warrant coverage with an exercise price of $.3725 per share) (same terms as the SCWorx investment). As of the date of this report, the note has not been converted.
On May 21, 2018 Mr. Tracy agreed to extend the maturity to December 31, 2018.
18 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5.7. Commitments and Contingencies
Operating Leases
The Company does not own any real property. The Company’s principal executive offices are located at an office complex in New York, New York, which includescomprised of approximately twenty thousand square feet of shared office space and services that we are leasing. The lease had an original one-year term that commenced on December 1, 2015, which was renewed until November 30, 2018. The lease allows for the limited use of private offices, conference rooms, mail handling, videoconferencing, and certain other business services.
In November 2016, the Company entered a sublease agreement for office and video production space in Cherry Hill, New Jersey. The lease expires on June 30, 2019. In June 2018, the Company abandoned the facility and on June 21, 2018 the sub-landlord filed suit against the Company for non-payment of rent. Currently the Company is in negotiations to settle the remaining payments due under the leases and has accrued the remaining amount due of $167,475, at June 30, 2018, within current liabilities - discontinued operations of the condensed consolidated balance sheet.
With the acquisition of Fight Club OC,FCOC, the Company assumed a lease for office space in Orange County, California. The lease expiresoriginally expired in September 2018. In conjunction with the discontinued operations the Company agreed to sell Fight Club OC to the former owner Roy Englebrecht which included the Orange County, California office lease.
Lease expense for the Cherry Hill, New Jersey and Orange County, CA facilities is included as a component of discontinued operation - general and administrative expense.
Each of the acquired business operatebusinesses operated from home offices or shared office space arrangements.
Rent expense was $30,000 and $0 for the three months ended September 30, 2017 and 2016, respectively.Warrants
Rent expenseIn conjunction with the stock offering completed in January 2018, the Company issued warrants with a provision requiring the Company to pay the warrant holder the Black - Scholes value of the warrant upon a fundamental transaction. On August 20, 2018, the Company entered into a Stock Exchange Agreement with SCWorx. which upon closing will qualify as a fundamental transaction within the warrant agreement. For illustration purposes only, if the stock price at closing was $87,000$0.67, the Black - Scholes value would approximate $0.53 per share based upon todays volatility and $0 for the nine months ended September 30, 2017 and 2016, respectively.risk-free interest rate. As of November 12, 2018, there were 1.4 million warrants outstanding which are subject to this Black – Scholes payout provision.
19 |
As of September 30, 2017, the aggregate minimum lease payments for the years ending December 31, 2017, 2018, and 2019 were:
Alliance MMA, Inc.
2017 (three months remaining) | $ | 34,292 | ||||||||||
2018 | 147,507 | |||||||||||
2019 | 76,201 | |||||||||||
Total minimum lease payments | $ | 258,000 |
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Contingencies
Legal Proceedings
In the normal course ofconducting our business, or otherwise, we may become involved in legal proceedings. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.
In April and May 2017, respectively, two purported securities class action complaints—Shapiro v. Alliance MMA, Inc., No. 1:17-cv-2583 (D.N.J.), andShulman v. Alliance MMA, Inc., No. 1:17-cv-3282 (S.D.N.Y.)—were filed against the Company and certain of its officers in the United States District Court for the District of New Jersey and the United States District Court for the Southern District of New York, respectively. The complaints allegealleged that the defendants violated certain provisions of the federal securities laws, and purportpurported to seek damages in an amount to be alleged on behalf of a class of shareholders who purchased the Company’s common stock pursuant or traceable to the Company’s initial public offering. In July 2017, the plaintiffs in the New York action voluntarily dismissed their claim. The court has not yet ruledclaim and, on March 8, 2018, the motion by the claimants inparties reached a settlement to the New Jersey case to be named lead plaintiffs.
We believe thataction in which the remaining claim is without merit and intend to defend against it vigorously. Based on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of the case. The Company maintainscarrier for our directors and officers liability insurance andpolicy has notified its insurance carrieragreed to cover Alliance’s financial obligations, including legal fees, under the settlement arrangement, subject to our payment of a deductible of $250,000, of which approximately $103,000 is included within accounts payable. The complaint was dismissed in October 2018.
In October 2017, a shareholder derivative claim based on the same facts that were alleged in the class action complaints was filed against the directors of the claims madeCompany in the District Court for the District New Jersey; however, a complaint was not served on the defendants and, on February 2, 2018 the claim was dismissed by the District Court.
In June 2018, the landlord of our Cherry Hill, New Jersey office filed suit against it.the Company for non-payment of rent. Currently the Company is in negotiations to settle the remaining payments due under the lease. The Company recorded $167,000 of expense related to the lease within discontinued operations - general and administrative for the cost of the remaining payments under the lease agreement. This amount is accrued for at June 30, 2018 within the current liabilities - discontinued operations balance.
In June 2018, the Company’s former President, Robert Haydak, filed suit against the Company. The Company and Mr. Haydak resolved the suit effective July 2018 with the Company agreeing on a cash settlement of $50,000, and delivery of certain MMA promotion fixed assets. The Company has accrued the settlement as of June 30, 2018 which is included within discontinued operations - general and administrative expense and current liabilities - discontinued operations balance.
On October 19, 2018, the company issued Red Diamond Partners 794,483 shares of common stock in consideration of a “most favored nation” clause contained in a common stock subscription agreement. In relation to the settlement agreement the parties terminated the original agreement.
Earn Out
Management evaluated the financial performance of the Initial Business UnitsCFFC, COGA, HFC, Shogun, V3, CageTix, and IT Fight Series in 2017 compared to the earn out thresholds as described in the respective Asset Purchase Agreements. Based upon Management’smanagement’s estimates, the Company recognizedrecorded an earn out liability during the third quarterin 2017 of approximately $310,000 related to Shogun’s financial results. This estimated amount is subjectIn conjunction with the cessation of the professional MMA promotions, the Company sold the Shogun promotion to provisions as defined in the related Asset Purchase Agreement. Additionally,former owner and settled the earn out liability will be settled with the issuance of approximately 141,000 shares366,072 options with an exercise price of Alliance MMA common stock$0.35 per option and will be remeasured each reporting period until the shares are issued.Black-Scholes value of $94,000.
Note 8. Stockholders’ Equity
Stock Offering
On January 9, 2018, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, acting as sole book-running manager (the “Underwriter”), for a secondary public offering (the “Offering”) of a combination of 2,150,000 shares of common stock, par value $0.001 per share (the “Common Stock”) of the Company, and 1,935,000 warrants to purchase 1,935,000 shares of Common Stock (the “Warrants”). Each share of Common Stock was sold in combination with a Warrant to purchase 0.90 shares of Common Stock. The Warrants have a five-year term and an original exercise price of $1.10 per share.
The warrants have a price adjustment provision (“ratchet”) in cases where the Company sells common stock or settles liabilities with equity, in each case at a lower price than is reflected in the Warrants. During June, July and August, the Company completed qualifying transactions under the SCWorx note resulting in the Warrant exercise price being adjusted to $0.31 in June and $0.29 in July, which is the lowest amount the warrant can be repriced to. Based upon ASU 2017-11, the decrease in the exercise price of the warrant has been fair valued at approximately $190,000 and accounted for as a non-cash dividend within the condensed consolidated balance sheet. The warrant also has a provision requiring the Company to pay the warrant holders the Black-Scholes value of the warrant upon consummation of a fundamental transaction. On August 20, 2018, the Company entered a stock exchange agreement with SCWorx which, upon closing, meets this definition. For illustration purposes only, if the stock price at closing was $0.67, the Black-Scholes value world approximate $0.53 per share based upon todays volatility and risk-free interest rate. As of the date this filing, there were 1,141,500, warrants outstanding which are subject to this Black-Scholes payout provision.
The Offering price was $1.00 per share of Common Stock and related Warrant and the Underwriter had agreed to purchase the shares of Common Stock and related Warrants from the Company at a 7.0% discount to the Offering price. In addition, the Company granted to the Underwriter a 45-day option to purchase up to an additional 322,500 shares of Common Stock and/or 290,250 Warrants to purchase 290,250 shares of Common Stock at the same price to cover over-allotments, if any. The underwriter exercised this option is February 2018 resulting in an additional $50,000 from the sale and issuance of 50,000 shares and 272,500 warrants. The Underwriting Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions.
Note 6. Stockholders’ EquityThe gross proceeds to the Company from the Offering and overallotment were approximately $2.2 million before underwriting discounts and commissions and other offering expenses.
The Offering was made pursuant to an effective shelf registration statement on Form S-3 that was declared effective by the Securities and Exchange Commission on December 1, 2017 and a prospectus supplement, dated January 9, 2018, together with the accompanying base prospectus.
One of our board members, Joseph Gamberale, participated in the offering and acquired 25,000 units which included 22,500 warrants.
Common Stock Private PlacementPlacements
In July 2017, the board of directors approved the issuance of up to $2.5 million of AMMAour common stock in one or more private placements.
In July 2017, Board members and an employee executed subscription agreements for 513,761 units at a purchase price of $1.09 per unit. In August 2017, the Company determined that the amount raised through such sales was insufficient to meet its current needs, and accordingly solicited subscription agreements from third parties for 965,000 units at $1.00 per unit. Each unit sold in these placements consists of one restricted share of AMMA common stock and a warrant to acquire one share of common stock at an exercise price of $1.50 per share. The Company issued all 1,478,761 shares of common stock sold in these placements on August 29, 2017.
In October and November 2017, the Company solicited subscription agreements from third parties for 390,000 units at $1.25 per unit. Each unit sold in the placement consists of one restricted share of AMMA common stock and a warrant to acquire one half a share of common stock, 195,000 shares in total, at an exercise price of $1.75 per share.
Stock Option Plan
The warrant issued with the October common stock placement included a price ratchet provision for cases where the Company sells common stock or settles liabilities with equity, in each case at a lower price than is reflected in the warrants. The Company completed a transaction which resulted in the warrant exercise price being adjusted to $1.10. Based upon ASU 2017-11, the decrease in the exercise price of the warrant has been fair valued at approximately $10,000 and accounted for as a non-cash dividend within the condensed consolidated balance sheet. There is no further reduction to the exercise price as this provision has expired.
Common Stock Grant
In February 2017, the Company entered a consulting arrangement with DC Consulting for management consulting services with a term of one year and included the grant of 150,000 shares subject to board of director approval. In July 2017, the Company issued the 150,000 restricted shares to DC Consulting under the arrangement and recognized stock basedstock-based compensation of approximately $148,000, the fair value of the shares on the date of issuance, in relation to the common stock grant.issuance.
Option Grants
In August 2016, the Company entered into an employment agreement with John Price as the Company’s President and Chief Financial Officer. In connection with Mr. Price’s employment he was awarded a stock option grant to acquire 200,000 shares of the Company’s common stock. The stock option had a term of ten years, an exercise price of $4.50, and a grant date fair value of $364,326, and vested one third of the shares on the one year anniversary of the grant date and one third annually thereafter. The Company recognized $61,000 of stock-based compensation expense during the six months ended June 30, 2018. On June 6, 2018, the Company cancelled the original stock option grant and issued a new stock option grant to acquire 200,000 shares of the Company’s common stock. The stock option has a term of five years, an exercise price of $0.36, was vested upon grant, and had a grant date fair value of $42,000. The Company determined the fair value of the stock option using the Black - Scholes model.
On February 1, 2017, the Company entered into an employment agreement with James Byrne as the Company’s Chief Marketing Officer. In connection with Mr. Byrne’s employment he was awarded a stock option grant to acquire 100,000 shares of the Company’s common stock. The stock option has a term of 5 years, an exercise price of $3.55, and a grant date fair value of $247,882, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model. In February 2018, Mr. Byrne was terminated, and in May 2018, the Company entered a separation agreement for $25,000 and agreed to cancel Mr. Byrne’s existing stock option grant and issue a new award. On June 27, 2018, the Company issued a stock option grant outside the 2016 Equity Incentive Plan to acquire 100,000 shares of the Company’s common stock. The stock option has a term of 5 years, an exercise price of $0.31 per share, was vested upon grant, and had a grant date fair value of $17,000. The Company determined the fair value of the stock option using the Black- Scholes model.
On May 25, 2018, the Company commenced the cessation of the professional MMA promotion business. In relation to the disposal of the Iron Tiger Fight Series promotion, the Company awarded the former owner, Scott Sheeley, a stock option grant to acquire 30,000 shares of the Company’s common stock. The stock option has a term of five years, and on exercise price of $0.35 and a Black - scholes value of $7,674, which is included as a component of discontinued operations - general and administrative expense.
20 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock Option Plan
On December 19, 2016, the Board of Directors of the Company awarded stock option grants under the 2016 Equity Incentive Plan to four employees to acquire an aggregate of 200,000 shares of the Company’s common stock. The stock options have a term of 10 years and an exercise price of $3.56 per share, vest annually over three years in three equal tranches and have a grant date fair value of $497,840. The Company determined the fair value of the stock options using the Black-Scholes model. Each award was accepted by the recipient during the first quarter 2017 at which point the Company began to recognize stock-based compensation expense.
On February 1, 2017, In May 2018, in conjunction with the Company entered into an employment agreement with James Byrne as the Company’s Chief Marketing Officer. In connection with Mr. Byrne’s employment he was awarded a stock option grant to acquire 100,000 sharescessation of the Company’s common stock. The stock option has a term of 5 years, an exercise price of $3.55, and a grant date fair value of $247,882, and was fully-vested upon grant. The Company determined the fair valueprofessional MMA business, three of the stock option usingemployees were terminated, and 100,000 unvested options were returned to the Black-Scholes model.plan. During the third quarter an additional 50,000 options were returned to the plan as forfeited.
On May 15, 2017, the Company entered into an employment agreement with Ira Rainess as the Company’s EVP of Business Affairs. In connection with Mr. Rainess’ employment, in September 2017, he was awarded a stock option grant to acquire 100,000 shares of the Company’s common stock. The stock option has a term of 3 years, an exercise price of $1.30, and a grant date fair value of $53,306, and vests one half of the shares on the one year anniversary of the grant date ofand one half on the one year anniversary thereafter.second anniversary. The Company determined the fair value of the stock option using the Black-Scholes model.
On December 17, 2017, the Company awarded Robert Mazzeo, the Company’s external General Counsel at that time, a stock option grant to acquire 125,000 shares of the Company’s common stock. The option has a term of three years, an exercise price of $1.50, and a grant date fair value of $77,500, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
In March 2018, the Board of Directors authorized a stock option grant to Robert Mazzeo, CEO and Ira Rainess EVP of Business Affairs. Mr. Mazzeo’s award was for 250,000 shares with an exercise price of $0.53 and vests upon grant. Mr. Rainess’ award was for 250,000 shares with an exercise price of $0.53 and vests upon grant. As of the date of this report the option agreements had not been issued.
On May 25, 2018, the Company commenced cessation of the professional MMA promotion business. In relation to the disposal of the Shogun promotion, the Company awarded the former owner, John Rallo, a stock option grant to acquire 366,072 shares of the Company’s common stock. The stock option was vested upon grant, has a term of five years, an exercise price of $0.35 and a Black-Scholes value of $94,000. The option award was issued as settlement of the $310,000 earn-out, the Company realized a gain of $216,000, which is included as a component of discontinued operations - general and administrative expense.
On June 6, 2018, the Company awarded Burt Watson, the Company’s Vice President of Operations, a stock option grant to acquire 75,000 shares of the Company’s common stock. The option has a term of five years, an exercise price of $0.36, and a grant date fair value of $19,100, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
On June 6, 2018, the Company awarded each of its directors, Joe Gamberale, Joel Tracy and Burt Watson, a stock option grant to acquire 150,000 shares of the Company’s common stock. Each option has a term of five years, an exercise price of $0.36, and a grant date fair value of $38,000, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
On July 30, 2018, in relation to the disposal of the CFFC promotion, the Company awarded the former owner, Michael Constantino, a stock option grant to acquire 75,000 shares of the Company’s common stock. The stock option has a term of five years, an exercise price of $0.20 and a grant date fair value of $10,500 and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes Model. The grant date fair value is included as a component of discontinued operations - general and administrative expense. The effective date of the agreement was May 31, 2018.
On August 14, 2018, the Company awarded John Price, the Company’s President and Chief Financial Officer, a stock option grant to acquire 200,000 shares of the Company’s common stock. The option has a term of five years, an exercise price of $0.18, and a grant date fair value of $25,000, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
On September 13, 2018, the Company awarded John Price, the Company’s President and CFO, a stock option grant to acquire 250,000 shares of the Company’s common stock. The option has a term of five years, an exercise price of $0.31, and a grant date fair value of $55,000, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
On September 13, 2018, the Company awarded Joseph Gamberale, the Company’s board member, a stock option grant to acquire 250,000 shares of the Company’s common stock. The option has a term of five years, an exercise price of $0.31, and a grant date fair value of $55,000, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
On September 13, 2018, the Company awarded Jason Schneider, the Company’s Vice President of Operations, a stock option grant to acquire 75,000 shares of the Company’s common stock. The option has a term of five years, an exercise price of $0.31, and a grant date fair value of $16,500, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
Warrant Grants
On January 4, 2017, in connection with the acquisition of SuckerPunch, the Company entered an employment agreement with Bryan Hamper as Managing Director. Mr. Hamper was awarded a warrant to acquire 93,583 common shares of the Company’s common stock. The warrant has a term of 105 years, an exercise price of $3.74, and a grant date fair value of $181,920, and was fully-vested upon grant and is included as a component of the SuckerPunch purchase price. The Company determined the fair value of the warrant using the Black-Scholes model.
In September 2018, the Company disposed of SuckerPunch and agreed to reprice the warrant to acquire 93,583 common shares to $0.3725 per share. The Company recognized a stock based compensation expense of $10,000 related to the repricing.
On March 10, 2017, the Company entered into a service agreement with World Wide Holdings and issued a warrant to acquire 250,000 shares of the Company’s common stock. The warrant has an exercise price of $4.50, term of three years and vest in equal one third increments on April 1, July 1 and October 1, 2017. The Company determined the fair value of the warrant to be $169,000 which was expensed in the second quarter 2017. The Company determined the fair value of the warrant using the Black-Scholes model.
On January 12, 2018, the Company entered into a service agreement with National Services, LLC (“National”), and issued a warrant to acquire 100,000 shares of the Company’s common stock. The warrant has recognized stock-based compensation expensean exercise price of $169,401$1.10, term of five years and was vested upon grant. The service agreement allowed National to earn up to 300,000 additional warrants, each with an exercise price of $1.10 and five-year term, based upon achieving certain designated milestones. The Company terminated the agreement during the three months ended June 30, 2017 asthird quarter 2018 and issued no additional warrants. The Company determined the vendor is not required to perform future services to earnfair value of the warrant to be $38,000 which was expensed in the first quarter 2018. The Company determined the fair value of the warrant using the Black-Scholes model.
On April 11, 2018, the Company entered into a service agreement with a consultant, and issued a warrant to acquire 100,000 shares of the vesting provisions are only time based.Company’s common stock. The warrant has an exercise price of $1.10, term of five years and was vested upon grant. The Company determined the fair value of the warrant using the Black-Scholes model and determined the value to be $25,580, which was expensed during the second quarter 2018.
In May 2018, the Company issued a promissory note to an individual for $200,000 of borrowings for operating capital. In September 2018, the Company agreed to issue the note holder 200,000 common shares with a fair value of $58,000 and 50,000 warrants with an exercise price of $0.29 and term of five years and a fair value of $8,500, in exchange for the noteholder’s agreement to convert all interest under the loan into shares of the Company’s common stock, and extend the note to December 31, 2018. Additionally, the shareholder may participate in a planned preferred stock offering.
During the second and third quarters of 2018, the Company issued warrants to acquire 503,356 common shares in relation to the previously mentioned transactions with SCWorx.
The number of shares of the Company’s common stock that are issuable pursuant to warrant and stock option grants with time basedtime-based vesting as of September 30, 20172018 are:
Warrant Grants | Stock Option Grants | |||||||||||||||
Number of Shares Subject to Warrants | Weighted-Average Exercise Price Per Share | Number of Shares Subject to Options | Weighted-Average Exercise Price Per Share | |||||||||||||
Balance at December 31, 2016 | 222,230 | $ | 7.43 | 200,000 | $ | 4.50 | ||||||||||
Granted | 1,822,344 | 2.03 | 400,000 | 2.99 | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
Balance at September 30, 2017 | 2,044,574 | $ | 2.61 | 600,000 | $ | 3.50 | ||||||||||
Exercisable at September 30, 2017 | 482,480 | 5.70 | 166,666 | 3.93 |
Warrant Grants | Stock Option Grants | |||||||||||||||
Number of Subject to | Weighted-Average Exercise Price Per | Number of to Options | Weighted-Average Exercise Price Per Share | |||||||||||||
Balance at December 31, 2017 | 2,239,574 | $ | 2.50 | 725,000 | $ | 3.15 | ||||||||||
Granted | 2,960,606 | 0.37 | 2,071,072 | 0.32 | ||||||||||||
Exercised | (1,056,750 | ) | 0.29 | (80,645 | ) | 0.31 | ||||||||||
Cancelled/Forfeited | - | - | (450,000 | ) | 3.98 | |||||||||||
Balance at September 30, 2018 | 4,143,430 | $ | 1.55 | 2,265,427 | $ | 0.50 | ||||||||||
Exercisable at September 30, 2018 | 4,143,430 | $ | 1.55 | 2,211,260 | $ | 0.48 |
As of September 30, 20172018 and 2016,2017, the total unrecognized expense for unvested stock options, net of expected forfeitures, was approximately $71,848 and $642,694, and $0, respectively, whichrespectively. $71,848 of the unrecognized expense at September 30, 2018 is expectedrelated to be amortized on a weighted-average basis over a period of three years.our continuing operations.
Stock-based compensation expense for the three and nine months ended September 30, 20172018 and 20162017 is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
General and administrative expense | $ | 227,010 | $ | — | $ | 787,988 | $ | — |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
General and administrative expense | $ | 457,161 | $ | 178,861 | $ | 738,503 | $ | 408,983 |
Stock-based compensation expense included in discontinued operations for the three and nine months ended September 30, 2018 and 2017 is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
General and administrative expense | $ | 158,534 | $ | 48,149 | $ | 329,822 | $ | 379,005 |
Stock-based compensation expense categorized by the equity components for the three and nine months ended September 30, 20172018 and 20162017 is as follows:
Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Employee stock options | $ | 78,510 | $ | — | $ | 470,087 | $ | — | ||||||||||||||||||||||||
Stock option awards | $ | 178,395 | $ | 78,510 | $ | 567,445 | $ | 470,087 | ||||||||||||||||||||||||
Warrants | — | — | 169,401 | — | 18,500 | — | 82,080 | 169,401 | ||||||||||||||||||||||||
Common stock | 148,500 | — | 148,500 | — | 418,800 | 148,500 | 418,800 | 148,500 | ||||||||||||||||||||||||
$ | 227,010 | $ | — | $ | 787,988 | $ | — | $ | 615,695 | $ | 227,010 | $ | 1,068,325 | $ | 787,988 |
21 |
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7.9. Net Loss per Share
Basic net loss per share is computed by dividing net loss for the period by the weighted average shares of common stock outstanding during each period. Diluted net loss per share is computed by dividing net loss for the period by the weighted average shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the treasury stock method to determine whether there is a dilutive effect of outstanding option grants.
The following table sets forth the computation of the Company’s basic and diluted net loss from continuing operations per share and net loss per share for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Net loss | $ | (2,462,054 | ) | $ | (595,411 | ) | $ | (7,135,962 | ) | $ | (3,414,352 | ) | ||||||||||||||||||||
Net loss from continuing operations | $ | (909,410 | ) | $ | (690,172 | ) | $ | (2,992,523 | ) | $ | (2,270,516 | ) | ||||||||||||||||||||
Non-cash dividend | — | — | 200,000 | — | ||||||||||||||||||||||||||||
Adjusted net loss from continuing operations for common shareholders | $ | (909,410 | ) | $ | (690,172 | ) | $ | (3,192,523 | ) | $ | (2,270,516 | ) | ||||||||||||||||||||
Weighted-average common shares used in computing net loss per share, basic and diluted | 10,714,200 | 5,289,882 | 9,608,042 | 5,289,221 | 15,263,247 | 10,714,200 | 14,909,586 | 9,608,042 | ||||||||||||||||||||||||
Net loss per share, basic and diluted | $ | (0.23 | ) | $ | (0.11 | ) | $ | (0.74 | ) | $ | (0.65 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.24 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net loss | $ | (1,233,420 | ) | $ | (2,462,054 | ) | $ | (13,665,941 | ) | $ | (7,135,962 | ) | ||||
Non-cash dividend | — | — | 200,000 | — | ||||||||||||
Adjusted net loss for common shareholders | $ | (1,233,420 | ) | $ | (2,462,054 | ) | $ | (13,865,941 | ) | $ | (7,135,962 | ) | ||||
Weighted-average common shares used in computing net loss per share, basic and diluted | 15,263,247 | 10,714,200 | 14,909,586 | 9,608,042 | ||||||||||||
Net loss per share, basic and diluted | $ | (0.08 | ) | $ | (0.23 | ) | $ | (0.93 | ) | $ | (0.74 | ) |
The following securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Stock options (exercise price $3.55 - $4.50 per share) | 166,666 | — | 166,666 | — | ||||||||||||
Warrants (exercise price $4.50 - $7.43) | 482,480 | — | 482,480 | — | ||||||||||||
Total common stock equivalents | 649,146 | — | 649,146 | — |
Note 8. Income Taxes
The Company recorded no income tax provision for the nine months ended September 30, 2017 and 2016, as the Company has incurred losses for these periods.
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has established a full valuation allowance as it is more likely than not that the tax benefits will not be realized as of September 30, 2017.
Three Months Ended | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stock options (exercise price $0.18 - $4.50 per share) | 2,265,427 | 166,666 | 2,265,427 | 166,666 | ||||||||||||
Warrants (exercise price $0.29 - $7.43) | 4,143,430 | 482,480 | 4,143,430 | 482,480 | ||||||||||||
Total common stock equivalents | 6,408,857 | 649,146 | 6,408,857 | 649,146 |
Note 9.10. Subsequent Events
In November 2017,
On October 19, 2018, the Company completed a private placement of 390,000 units at $1.25 per unit for approximately $488,000 in aggregate. Each unit consists of one restricted share of AMMA common stock and a warrant to acquire one-half sharecompany issued Red Diamond Partners 794,483 shares of common stock atin consideration of (i) a “most favored nation” clause contained in a common stock subscription agreement and (ii) the termination of said agreement. The fair value of the stock issuance was $240,600, based upon the fair value of our common stock.
On November 6, 2018, the Company issued a $50,000 convertible note and warrants to purchase 41,667 shares to SCWorx for a purchase price of $50,000. The Note and warrants have an initial conversion/exercise price of $1.75$.30, subject to adjustment for the issuance of certain lower priced securities. In October, the Company received $30,000, the remaining payment related to the $750,000 convertible note.
As previously reported, the Company has not been in compliance with Nasdaq’s minimum bid price requirement of $1.00 per whole share.share, as set forth in Nasdaq Listing Rule 5550(a)(2), for continued listing on Nasdaq. On August 29, 2018, the Nasdaq officially notified the Company that it (i) did not meet the Nasdaq’s stockholder equity requirement of $2.5 million for continued listing, as set forth in Nasdaq Listing Rule 5550(b)(1), (ii) continues to not meet the Nasdaq’s minimum bid price requirement of $1.00 per share, for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2), and (iii) did not meet the Nasdaq periodic reporting requirement set forth in Nasdaq Listing Rule 5250(c)(1) because the Company had not as of August 29, 2018, filed this Quarterly Report on Form 10Q for the quarter ended June 30, 2018. The Company has since filed its Quarterly Report on Form 10Q for the quarter ended June 30, 2018, curing the periodic reporting deficiency.
Also, as previously reported, on August 30, 2018, the Company requested a hearing to appeal the Nasdaq’s delisting determination On October 25, 2018, as part of the appeal process, the Company presented to the Nasdaq the Company’s plan for meeting the Nasdaq’s original listing qualifications, in connection with the closing of the business combination of SCWorx. In order for the Company’s common stock to qualify for listing on the Nasdaq Stock Market following completion of the acquisition, the Company will be required to meet the Nasdaq’s listing standards for original listing (including among others its minimum bid price of $4 per share and minimum $5 million of stockholders’ equity).
On November 9, 2018, The Nasdaq Stock Market LLC (“Nasdaq”) notified the Company that the Nasdaq Hearings Panel (the “Panel”) granted the Company’s request for continued listing on The Nasdaq Capital Market, subject to the Company’s satisfaction of certain conditions, including interim funding milestones.
In October 2017 a purported stockholders’ derivative claim was filed againstaccordance with the Nasdaq’s decision, subject to compliance with the interim funding milestones, which the Company has not met, the Company has until February 25, 2019 to complete its acquisition of SCWorx and certaindemonstrate that the combined company satisfies the requirements for initial listing on The Nasdaq Capital Market.
Under the Panel’s decision, the Company was to have completed the interim funding milestone by November 15, 2018. Although the Company has made substantial progress towards meeting such milestone, the Company has not yet completed the required funding. Accordingly, the Company has requested that the Panel (i) reduce the amount of the required funding milestone and (ii) extend the time for completion of funding to November 30, 2018.
There is no assurance that the Nasdaq will agree to these Company requests. The Company believes that even at the reduced funding level, the combined company will still exceed the applicable Nasdaq stockholder equity requirement. If the Nasdaq does not agree to the Company’s requests, the Company will be delisted from the Nasdaq.
Even if the Panel grants the Company’s requests, there is no assurance that the Company will be able to satisfy the Panel’s revised conditions. If the Company is unable to fully comply with the terms of the Panel’s decision, including any revisions thereto, the company’s common stock could be delisted from The Nasdaq Capital Market which would have a material adverse effect on the company’s business and on the trading of its officers basedcommon stock. In addition, if the Company’s common stock is delisted from the Nasdaq Stock Market, there would be a failure of a closing condition to the SCWorx business combination, which, if not waived by SCWorx, would result in the termination of such transaction, which would have a material adverse effect on the same factsCompany.
On October 24, 2018, the Company issued 500,000 shares of common stock as describedcollateral to secure the Company’s payment to a vendor by the due date of November 23, 2018, as extended. The stock based compensation expense associated with the award was approximately $136,500.
Effective October 24, 2018, the Company’s board of directors appointed Charles K. Miller a member of the Board and to serve on the Compensation and Audit Committees of the Board of Directors. The Board of Directors appointed Mr. Miller because of his strong corporate governance, business finance and technology expertise. The Board of Directors believes that Mr. Miller’s skills will be essential in connection with the anticipated completion of the Company’s acquisition of SCWorx. As compensation for serving in the class action complaints described in Note 1.foregoing capacities through December 31, 2018, the Board of Directors awarded Mr. Miller 62,500 shares of common stock which are fully vested. As of the date of this filing, the Company has not issued the shares. The stock based compensation expense associated with the award was approximately $17,500.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-QYou should read the following discussion of our financial condition and other written and oral statements made from time to time by us or on our behalf may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to anticipated future events, future results of operations or futurein conjunction with our unaudited condensed consolidated financial performance.statements and the related notes included in Item 1, “Financial Statements” of this Form 10-Q. In some cases, you can identifyaddition to our historical unaudited condensed consolidated financial information, the following discussion contains forward-looking statements by terminology such as, “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”that reflect our plans, estimates, and similar expressions or variations of such words that are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to:
Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on factsbeliefs which involves risk, uncertainty and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part I, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission, such as our annual reports on Form 10-K for the year ended December 31, 2016, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause ourassumptions. Our actual results tocould differ materially from those expressed hereindiscussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to review carefully and consider the various disclosures madeelsewhere in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.Form 10-Q.
Corporate Information
Our principal executive offices are located at 590 Madison Avenue, 21st Floor, New York, New York, 10022. Our telephone number is (212) 739-7825. We maintain a web site at www.alliancemma.com. The reference to the Company’s website address does not constitute incorporation by reference of the information contained on this website.
In the Quarterly Report, the “Company”, “we”, “us”, and “our” refers to Alliance MMA, Inc., which operates its business through its parent company and subsidiaries. Unless otherwise specified, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.
Our Business
Business Overview
Nature of Business
The Company was formed on February 12, 2015 to acquire companies in theAlliance MMA began its operations as a sports media company operating regional mixed martial arts (“MMA”) industry, and to develop and promote fighters to the sport's highest level of professional competition, including The Ultimate Fighting Championship (UFC), Bellator MMA, World Series of Fighting (now known as the “Professional Fighter League”) and other prestigious MMA promotions worldwide. The Company plans ultimately to promote over 125 domestic events per year, showcasing more than 1,000 fighters, through regional promotions operatingpromotion business under the Alliance MMA umbrella.name as well as under the trade names of the regional promoters we acquired. The fighters who participated in our MMA promotions were provided the opportunity to develop and showcase their talents for advancement to the next level of professional MMA competition. On May 25, 2018, the Board of Directors, along with management, committed the Company to an exit/disposal plan of the promotion business because it did not believe the business units were able generate sufficient operating cash flows to fund the ongoing operations. As of the date of this filing the Company has acquired 12 businesses and hired the general manager and staff of Explosive Fight Promotions in Ohio, to form the operations of Alliance MMA. See Note 1– “Description of Business and Basis of Presentation” and Note 4 – “Acquisitions”disposed of the Notes to Consolidated Financial Statements for additional information concerning the businesses acquired by the Company.following promotion and athlete management businesses:
· | CFFC |
· | HFC |
· | COGA |
· | Shogun |
· | V3 |
· | ITFS |
· | Fight Time | |
· | NFC | |
· | FCOC |
· | Victory |
· | ASM |
· | GFL |
· | SuckerPunch |
The Company is focused on operating its MMA ticketing platform, CageTix, along with completing the acquisition of SCWorx, pursuant to the SEA executed August 20, 2018.
Ticketing Platform
CageTix – founded in 2009, CageTix focusses its ticket sales service on the MMA industry. CageTix presently services many of the industry’s top U.S. mixed martial arts events.
Enhancing the CageTix Ticketing Platform
The CageTix platform provides significant benefits to third party MMA promotions, including the security of credit/debit card sales processing; immediate revenue recognition; real time sales reporting; and sales audit and compliance tracking for tax and regulatory authorities.
24 |
Proposed SCWorx Acquisition
As described elsewhere in this Report, on August 20, 2018, the Company entered into a Stock Exchange Agreement (SEA) with SCWorx Corp., a software as services (“SAAS”) company servicing the healthcare industry, under which the Company agreed to purchase from the SCWorx shareholders all the issued and outstanding capital stock of SCWorx, in exchange for which the Company agreed to issue at the closing that number of shares of Company common stock equal to the quotient of $50,000,000 divided by the closing price of the Company’s common stock upon the completion of the acquisition (subject to a cap of $.67 per share). Consummation of the transactions contemplated by the SEA is subject to satisfaction of a variety of conditions, including approval by the Company and SCWorx’ shareholders and the combined company meeting the listing qualifications for initial inclusion on the Nasdaq Stock Market.
Consequently, there is no assurance that the Company will be able to consummate the transactions contemplated by the SEA. If the Company completes the planned acquisition, management may dispose of the ticketing businesses and focus on the SCWorx SAAS business, which is focused on streamlining the three core healthcare provider systems; Supply Chain, Financial and Clinical (EMR) enabling providers’ enterprise systems to work as one automated and seamless business management system.
SCWorx offers an advanced software solution for the management of health care providers’ foundational business applications, empowering its customers to significantly reduce costs, drive better clinical outcomes and enhance their revenue. SCWorx supports the interrelationship between the three core healthcare provider systems: Supply Chain, Financial and Clinical. This solution moves data from one application to another to drive supply cost reductions, optimize contracts, increase supply chain management (SCM) cost visibility and control rebates and contract administration fees.
Results of Operations - Alliance MMA – 3 Months Endedmonths ended September 30, 20172018
Revenues
Our revenue is derived primarily from promotional activities including gate receipts, venue fees, food and beverage sales, merchandise sales, and sponsorships. Revenue from ticket sales is realized at the conclusion of the promotion. The majority of our ticket sales are made in cash which is collected prior to the start of the event. Sponsorship and venue fees are earned with the completion of the event and customers typically pay such fees within 60 days following the event. We generate additional revenue from ticket services from CageTix, fees earned through broadcast television advertising, internet streaming pay-per-view offerings, video production servicesCageTix.
Revenue for the three months ended September 30, 2018 was $28,000 from Alliance Sports Media, and from management commissions associated with fighter purses, third-party video pay-per-view sales, personal brand sponsorships and ancillary activities from SuckerPunch.ticket services.
Revenue for the three months ended September 30, 2017 was $1.05 million, compared$40,000 from ticket services.
The decrease in revenue is primarily related to $0 inour financial condition and limited working capital to support the same period 2016 as the Company had not yet commenced operations until the completion ofbusinesses. Given our IPO. During the third quarter 2017 the Company held 23 promotions resulting in $740,000 of revenue. Netlimited financial resources we expect revenue from ticket services, electronic content distribution and video production totaled $59,000, and revenue from fighter-related commission was $253,000. We expect revenuesthe business to increase as we continue to acquire MMA promotions and enhance the revenue opportunities for our existing promotions and related businesses. decline.
Expenses
General and administrative expenses increased approximately $1,395,000$231,000 to $1,753,000$743,000 for the three months ended September 30, 20172018 compared to $358,000 in$512,000 for the same period of 2016. The third quarter 2016 Generalin 2017. Salary and Administrative expenses were composed of expenseswages decreased $30,000 as we began to reduce executive head count in preparationFebruary 2018 with major head count reduction in May 2018. Travel decreased $150,000 related to the cessation of the Company’s IPO including $20,000MMA business and disposal of stockSuckerPunch. Amortization decreased $19,000 as we wrote off all acquired intangible related to the cessation of the MMA business and disposal of SuckerPunch. Insurance increased $67,000 as the Company adjusted for additional coverage for 2018. Stock based compensation $42,000increased $279,000 related to the annual board of traveldirectors’ option grants, employee option awards, legal settlement and issuance of shares and warrants to a note holder. Fees increased $51,000, and other expenses $77,000 of fees, $13,000 of business insurance, $31,000 of employee salary, $17,000 of sales and marketing and $158,000 of consulting services. Whereas the three months ended September 2017 reflect the integration and operation of the promotions we acquired during 2016 and 2017, and comprise primarily the following approximate expenditures:
1 These expenses, totaling $409,000 represent non-cash charges.increased $40,000.
Professional and consulting expenses decreased by $20,000 comparedapproximately $24,000 to $194,000 for the quarterthree months ended September 30, 2016, primarily as a result2018 compared to $218,000 in the same period of an2017. The decrease in these expenses was due primarily to a decreased of $59,000 in accounting fees, $10,000 decrease in consulting fees, and a $23,000 decrease in IR/PR fees, partially offset by a $69,000 increase in legal expense. We expect legal and accounting fees to increase as we pursue the completion of $100,000 mainlythe planned SCWorx acquisition transaction described elsewhere in this Report.
Effective July 2018, we disposed of our Athlete Management business, SuckerPunch. In connection with the disposal of SuckerPunch we lost approximately $70,000 and incurred additional stock-based compensation of $10,000 related to the acquisitionsrepricing of a warrant and evaluation$31,000 related to the issuance of potential acquisitionscommon shares. We incurred $50,000 in severance related to the cessation of our professional MMA business and preparation for our IPO in 2016 not incurred in 2017. 2017 legal fees mainly relate$55,000 of stock compensation expense related to feesthe release of escrow shares to defend against a purported class action lawsuit. The reduction in legal fees wasformer promoter. These costs were offset by an increase in consulting$97,000 of $55,000, investor relationsgain related to settlements of $23,000.various accounts payable balances.
We believe professional and consulting expenses will continue to be a significant cost as we continue to evaluate and acquire companies.
Results of Operations - Nine Months EndedAlliance MMA – 9 months ended September 30, 2017
2018
Revenues
Our revenue is derived from ticket services from CageTix.
Revenue for the nine months ended September 30, 2018 was $144,000 from ticket services.
Revenue for the nine months ended September 30, 2017 was $2.9 million compared to $0 in the same period 2016 as the Company had not yet commenced operations until completion of our IPO in October 2016. During the nine months ended September 30, 2017, the Company held 47 promotions resulting in $1,956,000 of revenue. Net revenue$160,000 from ticket services, electronic content distribution and video production totaled $249,000, and revenue from fighter-related commissions was $736,000. We expect revenues to increase as we continue to acquire MMA promotions and enhance the revenue opportunities for our existing promotions and related businesses. services.
ExpensesThe decrease in revenue is primarily related to our financial condition and limited working capital to support the businesses.
Expenses
General and administrative expenses increased approximately $3,500,000$372,000 to $6,500,000$1.9 million for the nine months ended September 30, 20172018 compared to $2,994,000$1.5 million in the same period of 2016. The nine months ended September 30, 2016 General2017. Salary and Administrativewages decreased $95,000 as we began to reduce executive head count in February 2018 with major head count reduction in May 2018. Insurance increased $135,000 as the Company adjusted for additional coverage for 2018. Stock based compensation increased $330,000 as the Company issued equity awards in 2018 to our board of directors and employees, settled a dispute and issued shares and warrants to a noteholder. Fees increased $31,000 and other expenses were comprised of $2,615,000 of stock-based compensation, $46,000 of travel, $78,000 of fees, $13,000 of business insurance, $31,000 of employee salary, $25,000 of salesincreased $91,000. Travel decreased $110,000 and marketing, and $186,000 of consulting services. Whereas the nine months ended September 30, 2017 reflect the integration and operation of the promotions we acquired during 2016 and 2017, and comprise primarily the following approximate expenditures:
1 These expenses, totaling $2,089,000 represent non-cash charges.amortization decreased $16,000.
Professional and consulting expenses increased by $493,000 comparedapproximate $103,000 to $1.0 million for the nine months ended September 30, 2016,2018 compared to $912,000 in the same period of 2017. The increase in these expenses was due primarily as a result ofto an increase in accounting and auditing related expenses of $190,000,$82,000 in legal fees, of $110,000 mainly related to the acquisitions and evaluation of potential acquisitions and legal fees to defend against purported class action lawsuits, public relations expense of $119,000 offset by a reduction$54,000 increase in SEC related fees offset by a decrease of $18,000.
We believe professional$14,000 in accounting and consulting expenses will continueand $19,000 decrease in IR/PR fees. We expect legal and accounting fees to be a significant costincrease as we continue to evaluate and acquire companies.pursue the completion of the planned SCWorx acquisition transaction.
As part of the cessation of its professional MMA promotion business in the second quarter 2018, the Company disposed of all long-lived fixed assets and realized a loss on disposal of approximately $223,000, the Company also impaired or wrote off intangible assets and goodwill and realized a loss on disposal of $6.9 million, wrote off receivables of $190,000 and other assets of $19,000, which is included as a component of net loss from discontinued operations, net of tax for the nine months ended September 30, 2018.
During the second quarter 2018, the Company sold all the professional MMA promotion businesses, except for Victory, FT and NFC, to the former business owners and terminated/settled existing employment agreements. In relation to the promotion business disposals, the Company settled the $310,000 earn-out liability related to the Shogun acquisition with the issuance of 366,072 common stock options with a Black-Scholes value of $94,000, issued 30,000 common stock options to a promoter as severance, and incurred approximately $246,000 of additional liabilities related to severance payments to former employees. The Company realized a gain of approximately $160,000 related to the settlement of outstanding accounts payable and a gain of approximately $276,000 related to settlement with a promoter of customer prepayments and recorded a $15,000 receivable from the promoter related to the sale of the business. On July 30, 2018, the Company entered a settlement agreement, effective as of May 31, 2018, with a former employee, in relation to the termination of his employment. The Company agreed to pay the former employee $129,800 and issue a fully vested stock option grant dated July 30, 2018 for 75,000 common shares with a life of 5 years and exercise price of $0.20. In June 2018, the Company abandoned the Cherry Hill, New Jersey promotion office and recorded a $167,500 charge for the remaining contractual lease payments.
In July 2018, the Company entered a separation agreement with a former employee and agreed to pay $50,000 in exchange for terminating the employment agreement. On September 26, 2018, the Company entered an agreement to sell the Athlete Management business, SuckerPunch, to the former business owners, the agreement had an effective date of July 1, 2018. The parties agreed to terminate / settle the existing employment agreements. One of the former employees was paid severance until August 31, 2018 and issued the remaining 108,289 common shares held in escrow related to the SuckerPunch acquisition. The Company recognized a stock-based compensation charge of $31,000 related to the issuance of the 108,289 common shares. The other former employee was paid severance through September 15,2018 and had his warrant to purchase 93,583 common shares repriced from $3.74 to $0.3725. The Company recognized a stock-based compensation charge of $10,000 related to the repricing of the common stock warrant. The Company recognized a $70,000 loss in relation to the disposal of the SuckerPunch business. In conjunction with the settlement with the former owner of Fight Club OC, Roy Englebrecht, the shares held in escrow were released as part of the separation agreement. The Company recorded stock based compensation expense of $55,000, the fair value of the shares on the date the agreement was entered. In September 2018, the Company sold the Victory name and related business assets to a vendor in settlement of an outstanding payable balance of $33,064. In September 2018, the Company sold Fight Time to the former business owner and terminated the existing settlement arrangement resulting in a gain of $16,667. In October 2018, the Company resolved its outstanding litigation with Mazzeo Song LLP resulting in the Company agreeing to pay $35,000 in settlement of the outstanding payable balance. The Company realized a $47,000 gain on the settlement as all invoices had previously been accrued. On November 12, 2018 the Company entered into a separation agreement with the former promoter of Victory and agreed to issue the 121,699 shares held in escrow related to the Victory acquisition. The effective date of the agreement was September 30, 2018 and as a result the Company recognized $35,000 of stock-based compensation expense.
Liquidity and Capital Resources
Our operations have generated negative cash flows since inception, Consequently, our primary sourcessource of cash used in the nine months ended September 30, 2017 havehas been from the issuance of common stock in conjunction with our initialIPO completed in October 2016, sales of our common stock and warrants to purchase common stock issued in private placements in July, August and October 2017 and public offering in January 2018 as well as advances in April and subsequent private placements,May 2018 under promissory notes with two of our board members and the operationa shareholder, and a convertible note financing provided by SCWorx. In spite of the combined Alliance MMA businesses.
As of September 30, 2017,having completed these financing transactions, due to our operations generating significant negative cash balance was $1.0 million, which consists primarily offlows, we currently have virtually no cash on deposit with banks. Our principal useshand. Consequently, in order for us to continue as a going concern, we need to raise additional capital almost immediately. In order to alleviate this capital deficiency, we are actively seeking additional financing in the form of cash include the acquisition of regional promotions, the payment of operating expenses, and the acquisition of capital assets.
NineMonths Ended September 30, | ||||||||
2017 | 2016 | |||||||
Consolidated Statements of Cash Flows Data: | ||||||||
Net cash used in operating activities | $ | (4,158,826 | ) | $ | (864,218 | ) | ||
Net cash used in investing activities | (1,008,950 | ) | (1,391,736 | ) | ||||
Net cash provided by financing activities | 1,525,000 | 7,378,830 | ||||||
Net (decrease) increase in cash | $ | (3,642,776 | ) | $ | 5,122,876 |
additional debt and/or equity. We cannot assure you that we will be able to raise sufficient additional funds in a timely fashion, or at all, to enable us to continue as a going concern. Nor can we assure you that any funds we are able to raise will be on commercially reasonable terms.
Our primary needIn order for liquidity isus to fundbe able to continue as a going concern so that we can complete the working capital needs ofSCWorx acquisition and execute our business plan successfully, in addition to short term capital needed to maintain our planned capital expenditures,status as a going concern, we will need substantial additional financing in the continued acquisitionnear term. The Company currently has virtually no cash on hand, an accumulated deficit of regional promotions and related companies, and general corporate purposes. We have incurred$30.0 million, historical operating losses and, experiencedsince inception, consistently negative operating cash flows, since the inception of our operations in October 2016. We believe, however, that the successful implementation of our business plan, along with other actions we have taken and will continue to take, will improve our operating margins and address corporate overhead expenditures.
Since completing our IPO in October 2016, we have focused primarily on building outindicating a domestic MMA platform, which is expected eventually to include a presence in the top 20 media markets. To date, we have created a persistent brand presence in twelve markets through the acquisition of ten promotional businesses along with the promotion of regional Alliance MMA events in two additional markets. We have also continued to develop our existing media library of live MMA events, and have built a professional corporate infrastructure that will support our long-term goals. These activities and investments in our business directly support our stated goal of promoting at least 125 regional MMA events annually.
To ensure the Company’s capital needs are met over the next twelve months, in August 2017, the Company completed a capital raise of approximately $1.5 million through the placement of 1.5 million units which consist of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $1.50 per share.
In October and November 2017, the Company raised approximately $488,000 through the placement of 390,000 units which consist of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.75 per whole share.
Additionally in November, the Company filed a Universal Shelf Registration Statement on Form S-3 which allows the Company to issue various types of securities up to an aggregate $20 million.
Management is in negotiations with multiple national sponsors and, on the basis of those negotiations, expects to receive at least $500,000 in national sponsorship revenue during the next twelve months.
Additionally, management is in discussions with national casinos to promote our MMA events at venues that would produce better margins through entertainment fees paid to the Company and, in certain cases, a reduction in event overhead through complimentary food and lodging for fighters and staff.
While many challenges associated with successfully executing our aggressive expansion plan exist, and while our historical operating results raise doubtssubstantial doubt with respect to our ability to continue as a going concern,concern. We intend to fund the operating deficits through debt and or equity financings until such time as we expect that our recentare able to complete the SCWorx acquisition and anticipated financings, the continued implementation of our business plan and the expected increase in sponsorship revenue will provide sufficient liquidity and financial flexibility over the next twelve months.generate positive cash flows from operating activities. We cannot however, predict with certaintyassure you we will be able to secure additional debt and or equity financing on commercially reasonable terms or at all or that we will be able to complete the outcome of our actions to generate liquidity, including our success in raising additional capital or the anticipated results of our operations.
SCWorx acquisition.
As of September 30, 2018, our cash balance was $4,787 which consists primarily of cash on deposit with banks. As of the filing of this report, we had virtually no cash on hand. During the third quarter of 2018, our principal uses of cash consisted of paying for operating expenses and outstanding payables. As noted above, we currently do not have sufficient capital resources to continue our operations, and thus we have an immediate and urgent need for additional capital.
The Company has entered into a number of negotiated settlements with vendors and former employees, which provide for payments upon the closing of the SCWorx Acquisition. The aggregate amount owed under these settlement agreements payable upon closing of the SCWorx transaction is approximately $418,000, which is a component of the $425,604 current liabilities - discontinued operations of the condensed consolidated balance sheet.
As disclosed above, in conjunction with the stock offering completed in January 2018, the Company issued warrants with a provision requiring the Company to pay the warrant holder the Black - Scholes value of the warrant upon a fundamental transaction. On August 20, 2018, the Company entered into a stock Exchange Agreement with SCWorx which upon closing will qualify as a fundamental transaction within meaning of the warrant agreement. For illustration purposes only, if the stock price at closing was $0.67, the Black - Scholes value world approximate $0.53 per share based upon todays volatility and risk-free interest rate. As of the date hereof, there were 1,141,500 warrants outstanding which are subject to this Black – Scholes payout provision.
9 Months Ended September 30, | |||||||||
2018 | 2017 | ||||||||
Consolidated Statements of Cash Flows Data: | |||||||||
Net cash used in operating activities | $ | (3,188,669 | ) | $ | (4,580,754 | ) | |||
Net cash used in investing activities | (21,849 | ) | (1,008,950 | ) | |||||
Net cash provided by financing activities | 3,172,457 | 1,525,000 | |||||||
Net decrease in cash | $ | (38,061 | ) | $ | (4,064,704 | ) |
The operations of Alliance to date have resulted in losses and negative operating cash flows. During the first quarter of 2018, the Company began a cost reduction plan resulting in the termination of employment of several executives and other personnel, renegotiating or terminating contracts and similar cost cutting activities. During the second quarter of 2018, the Company ceased the professional MMA operations and terminated all MMA promoters and support staff including ASM. During the third quarter the Company disposed of SuckerPunch and resolved additional employee employment agreements. As of the date of this filing, the Company has two employees focused on the MMA ticketing platform business.
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Operating Activities
Cash used in operating our businessesactivities was approximately $4.2$3.2 million for the nine months ended September 30, 2017. For2018, mainly related to the net loss of $13.7 million, an increase of $34,000 in accounts receivable, and a decrease in accounts payable of $239,000, non-cash stock based compensation expense of $738,000, non-cash amortization of $41,000 and loss from discontinued operations of $10.9 million.
Cash used in operating activities was $4.6 million for the nine months ended September 30, 2016, we used approximately $0.9 million of cash in preparing for our initial public offering and the acquisition of the Initial Business Units.
Except for increases in costs2017, mainly related to the evaluation and acquisitionnet loss of additional businesses (which will be$7.1 million, offset by the revenues provided by such acquisitions), we do not anticipate a materialnon-cash amortization of $57,000, non-cash stock-based compensation of $409,000 related to various equity awards to employees and non-employees, an increase in quarterly cash expenditures during the balanceaccounts payable of 2017 unless we begin to acquire businesses at a faster pace. We expect it to take approximately twelve months$372,000, and loss from the datediscontinued operations of acquisition to integrate the operations and cost structure of a promotion or other business, and produce the intended improvement in profitability.$5.2 million.
Investing Activities
Cash used in investing activities was approximately$22,000 for the nine months ended September 30, 2018, related to the acquisition of capital assets in discontinued operations of $22,000.
Cash used in investing activities was $1.0 million for the nine months ended September 30, 2017, relateddue to the acquisitions of SuckerPunch, Fight Time, NFC, Fight Club OC, and Victory totaling $0.8 million in the aggregate,businesses that make up the acquisition of a video library from Sheffield for $25,000, and fixed asset purchases totaling $174,000.
Cash used in investing activities was $1.4 million in 2016 related to acquisition of the Initial Business Units, and Initial Acquired assets.
discontinued operations.
Financing Activities
Cash provided by financing activities was $3.2 million for the nine months ended September 30, 2018, primarily related to a registered public offering of our securities, which provided $1.9 million of capital. In January 2018, the Company completed a public offering of 2,150,000 units for $1.00 per unit. Each unit included one share of Alliance MMA common stock and 0.9 warrants to purchase common stock, totaling 1,935,000 warrants. The gross proceeds to the Company was approximately $2,150,000 before underwriter discounts, commissions and offering expenses. The Company signed two related party note agreements during the period, each for $150,000 with two of our Board members. We entered into two additional note agreements, with third parties for $90,000 and $200,000. Additionally, the Company sold an aggregate of $720,000 of convertible notes to SCWorx. These proceeds from these notes were offset by the $390,000 repayment of notes payable. Additionally, the Company received $306,000 from the exercise of warrants and stock options.
Cash provided by financing activities was $1.5 million for the nine months ended September 30, 2017 related to the private placementplacements of common stock.Common Stock.
Cash provided by financing activities was $7.4 million for the nine months ended September 30, 2016, primarily related to the Company’s IPO.
Contractual Cash Obligations
Our operating lease obligation represents the future minimum lease payments under non-cancelable facility operating lease.
See Note 5— “Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.
Off-Balance Sheet Arrangements
As of September 30, 2017,2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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Critical Accounting Policies and Estimates
During the nine months ended September 30, 20172018 there were no significant changes inwas a change to our critical accounting policies with the exception of fighter commission revenue recognition policy. See Note 2 –-“Summary of Significant Accounting Policies” of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 –-Management’s Discussion and Analysis of Financial Condition and Results of Operationsin the Form 10-K.
Recent Accounting Pronouncements
See Refer to “Note 2—“2- Recent Accounting Pronouncements”of the Notesnotes to Condensed Consolidated Financial Statementsunaudited condensed consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this Form 10-Q are certifications
Management conducted an evaluation of the Company’s Chief Executive Officereffectiveness of our “disclosure controls and Chief Financial Officer, which are required in accordance with Rule 13a-14procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls, as of September 30, 2018, the end of the period covered by this Form 10-Q, as required by Rules 13a-15(b) and Procedures” section includes information concerning15d-15(b) of the controlsExchange Act. The Disclosure Controls evaluation was done under the supervision and controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understandingparticipation of the topics presented.
This Quarterly Report on Form 10-Q does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
As we are an emerging growth company and a newly-public company with a limited operating history following the completion of our initial public offering in October 2016, we have only recently commenced implementing “disclosure controls and procedures” (“Disclosure Controls”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, which are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
based on the 2013 framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. We conducted an evaluation of the effectiveness of our Disclosure Controls as of September 30, 2017, the end of the period covered by this Quarterly Report on Form 10-Q. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and President/Chief Financial Officer concluded that, due to our limited financialdeficiencies in the design of internal controls and manpower resources,lack of segregation of duties, our Disclosure Controls were not effective as of September 30, 2017,2018, such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officerprincipal executive and our Chief Financial Officer,principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure.
Management is in the process of determining how best to implement an effective system to ensure that information required to be disclosed in this Quarterly Report on Form 10-Q and subsequent filings to be submitted under the Exchange Act will be recorded, processed, summarized and reported accurately. Our management intends to develop procedures to address these issues to the extent possible given the limitations in our financial and manpower resources. No assurance can be made the implementation of these controls and procedures will be completed in a timely manner or that such controls or procedures will be adequate once implemented.
ChangeManagement Report on Internal Controls over Financial Reporting
Our management has identified material weaknesses in our internal controls related to deficiencies in the design of internal controls and segregation of duties. Management is planning to meet with the Audit Committee to discuss remediation efforts, which are expected to continue through 2018 until such time as management is able to conclude that its remediation efforts are operating and effective.
Notwithstanding the foregoing, our management, including our President/Chief Financial Officer, has concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
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We may in the future identify other material weaknesses or significant deficiencies in connection with our internal control over financial reporting. Material weaknesses and significant deficiencies that may be identified in the future will need to be addressed as part of our quarterly and annual evaluations of our internal controls over financial reporting under Sections 302 and 404 of the Sarbanes-Oxley Act. Any future disclosures of a material weakness, or errors as a result of a material weakness, could result in a negative reaction in the financial markets and a decrease in the price of our common stock.
Changes in Internal Control over Financial ReportingReporting.
There has beenDuring the quarter ended September 30, 2018, there was no change in the Company’sour internal control over financial reporting as(as such term is defined in Rule 13a-15(f) under the Exchange Act Rules 13a-15(f) and 15d-15(f), during the Company’s most recent quarterAct) that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
PART II—OTHERII-OTHER INFORMATION
In the normal course ofconducting our business, or otherwise, we may become involved in legal proceedings. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.
In April and May 2017, respectively, two purported securities class action complaints—Shapiro v. Alliance MMA, Inc., No. 1:17-cv-2583 (D.N.J.), andShulman v. Alliance MMA, Inc., No. 1:17-cv-3282 (S.D.N.Y.)—were filed against the Company and certain of its officers in the United States District Court for the District of New Jersey and the United States District Court for the Southern District of New York, respectively. The complaints allegealleged that the defendants violated certain provisions of the federal securities laws, and purportpurported to seek damages in an amount to be alleged on behalf of a class of shareholders who purchased the Company’s common stock pursuant or traceable to the Company’s initial public offering. In July 2017, the plaintiffs in the New York action voluntarily dismissed their claim. The court has not yet ruledclaim and, on March 8, 2018, the motion by the claimants inparties reached a settlement to the New Jersey caseaction in which the carrier for our directors and officers liability insurance policy has agreed to be named lead plaintiffs.cover Alliance’s financial obligations, including legal fees, under the settlement arrangement, less a deductible of $250,000. The complaint was dismissed in October 2018.
In October 2017, a purported stockholders’shareholder derivative action was filed against the Company and certain of its officersclaim based on the same facts as describedthat were alleged in the purported class action complaints.complaints was filed against the directors of the Company in the District Court for the District New Jersey; however, a complaint was not served on the defendants and, on February 2, 2018 the claim was dismissed by the District Court.
We believe that these claims are without merit
In June 2018, the landlord of our Cherry Hill, New Jersey office filed suit against the Company for non-payment of rent. Currently the Company is in negotiations to settle the remaining payments due under the lease of $167,475.
In June 2018, the Company’s former President, Robert Haydak, filed suit against the Company. The Company and intend to defend against them vigorously. BasedMr. Haydak resolved the suit effective July 2018 with the Company agreeing on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a cash settlement of these cases. The$50,000 and delivery of certain MMA promotion fixed assets and the Company maintain directors and officers insurance and has notified its insurance carrieraccrued the settlement as of the claims made against it.September 30, 2018.
There have been no material changesWe are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the Risk Factors disclosed in the Company’s Form 10-K that was filed with the Securities and Exchange Commission on April 17, 2017.information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In July 2017, the board of directors approved the issuance up to $2.5 million of AMMA stock in one or more private placements. In July 2017, certain board members and an employee executed subscription agreements for 513,761 units at a purchase price of $1.09 per unit. In August 2017,On September 13, 2018, the Company determined that the amount raised through such sales was insufficient to meet its current needs, and accordingly solicited subscription agreements from third parties for 965,000 units at a purchase price of $1.00 per unit. Each unit sold in these placements consists of one restricted share of AMMA common stock and a warrant to acquire one share of common stock at a price of $1.50 per share. The Company issued all 1,478,761200,000 shares of common stock soldand warrants to purchase 50,000 shares to a note holder in these placements on August 29, 2017.
In November, 2017,consideration of his agreement to extend the Company completed a private placementnote until December 31, 2018 and convert all interest related to the Note into shares of 390,000 units at a purchase price of $1.25 per unit for approximately $488,000 in the aggregate. Each unit consists of one restricted share of AMMAcompany common stock and a warrant to acquire one-half share of common stock atstock. The warrants have an exercise price of $1.75$.29 per whole share.
Item 3. Defaults Upon senior SecuritiesOn October 19, 2018, the company issued 794,483 shares of common stock in consideration of (i) a “most favored nation” clause contained in a subscription agreement and (ii) the termination of said agreement.
Not applicable.The Company believes that the foregoing transactions were exempt from the registration requirements under the Securities Act of 1933, as amended (“the Act”), based on the following facts: there was no general solicitation, there was a limited number of purchasers, each of whom the Registrant believes was an “accredited investor” (within the meaning of Regulation D under the Securities Act of 1933, as amended) and was sophisticated about business and financial matters, and all shares issued were subject to restriction on transfer, so as to take reasonable steps to assure that the purchaser was not an underwriter within the meaning of Section 2(11) under the Act.
Item 4. Mine Safety Disclosures
Not applicable.
On November 13, 2017,
Also, as previously reported, on August 30, 2018, the Company receivedrequested a letter fromhearing to appeal the Nasdaq’s delisting determination On October 25, 2018, as part of the appeal process, the Company presented to the Nasdaq noting the vacancies createdCompany’s plan for meeting the Nasdaq’s original listing qualifications, in connection with the closing of the business combination of SCWorx. In order for the Company’s common stock to qualify for listing on the Company’s Board of Directors, and on the Audit and Compensation Committees thereof, created by the departure of Mark Shefts from the Board on October 24, 2017. As a result of these vacancies, the Audit Committee currently has two independent members insteadNasdaq Stock Market following completion of the three independent membersacquisition, the Company will be required byto meet the Nasdaq’s listing standards for original listing (including among others its minimum bid price of $4 per share and minimum $5 million of stockholders’ equity).
On November 9, 2018, The Nasdaq Stock Market LLC (“Nasdaq”) notified the Compensation CommitteeCompany that the Nasdaq Hearings Panel (the “Panel”) granted the Company’s request for continued listing on The Nasdaq Capital Market, subject to the Company’s satisfaction of certain conditions, including interim funding milestones.
In accordance with the Nasdaq’s decision, subject to compliance with the interim funding milestones, which the Company has one independent member insteadnot met, the Company has until February 25, 2019 to complete its acquisition of SCWorx and demonstrate that the combined company satisfies the requirements for initial listing on The Nasdaq Capital Market.
Under the Panel’s decision, the Company was to have completed the interim funding milestone by November 15, 2018. Although the Company has made substantial progress towards meeting such milestone, the Company has not yet completed the required funding. Accordingly, the Company has requested that the Panel (i) reduce the amount of the required two. Infunding milestone and (ii) extend the letter,time for completion of funding to November 30, 2018.
There is no assurance that the Nasdaq informedwill agree to these Company requests. The Company believes that even at the reduced funding level, the combined company will still exceed the applicable Nasdaq stockholder equity requirement. If the Nasdaq does not agree to the Company’s requests, the Company will be delisted from the Nasdaq.
Even if the Panel grants the Company’s requests, there is no assurance that the Company will be able to satisfy the Panel’s revised conditions. If the Company is unable to fully comply with the terms of the applicable “cure period” duringPanel’s decision, including any revisions thereto, the company’s common stock could be delisted from The Nasdaq Capital Market which would have a material adverse effect on the Company must fillcompany’s business and on the outstanding vacancies on these committees, and thattrading of its common stock. In addition, if the vacancies wereCompany’s common stock is delisted from the Nasdaq Stock Market, there would be a failure of a closing condition to the SCWorx business combination, which, if not filledwaived by SCWorx, would result in the endtermination of such cure period,transaction, which would have a material adverse effect on the Company would be in violation of the Nasdaq’s listing requirements. The cure period for both vacancies is the earlier to occur of the Company’s next annual meeting of stockholders or October 24, 2018. Management has commenced a search for a new independent director to fill these vacancies.Company.
* | Filed Herewith |
(1) | The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLIANCE MMA, INC | ||||
Date: November | 16, 2018 | By: |
| |
/s/ John Price | ||||
Name: | John Price | |||
Title: | Chief Financial Officer | |||
(Principal Executive Officer) (Principal Financial Officer) | ||||
(Principal Accounting Officer) |