Notes to Condensed
Consolidated Financial Statements
Note 1. The Company and Basis of
Presentation
Nature of Business
Alliance MMA, Inc. (“Alliance”
or the “Company”) was formed in Delaware on February 12, 2015 to acquire companies in the mixed martial arts (“MMA”)
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, the Company acquired certain MMA and kickboxing video libraries (the “Initial Acquired
Assets”). Subsequent to the acquisition of the Initial Business Units and the Initial Acquired Assets, the Company acquired
the assets of four additional promotion companies, Iron Tiger Fight Series, Fight Time, National Fighting Championships and Fight
Club OC, and a fighter management and marketing company, SuckerPunch, along with the intellectual property rights to the Sheffield
video fight library of Shogun Fights (the “Subsequent Acquisitions”).
Initial Business Units
Promotions
|
·
|
Hoosier Fight Club Promotions, LLC
|
|
·
|
Punch Drunk Inc., also known as Combat Games MMA
|
|
·
|
Bang Time Entertainment, LLC DBA Shogun Fights
|
Ticketing Platform
Video Production and Distribution
|
·
|
Go Fight Net, Inc. - Currently Alliance Sports Media
|
Initial Acquired
Assets
Following the completion of its initial
public offering, Alliance also acquired the following assets:
Louis Neglia’s Ring 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
Championships
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.
Sheffield
The intellectual property
rights to the Sheffield video fight library of the Shogun promotions.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
Description of Businesses
The following is a description of each
of the Initial Business Units, the Initial Acquired Assets and the Subsequent Acquisitions:
Initial Business
Units
CFFC Promotions, LLC
Based in Atlantic City, New Jersey, CFFC was founded in 2011
and has promoted 65 professional MMA events, primarily in New Jersey and Pennsylvania. Ranked in the top 10 of all regional
MMA promotions, CFFC currently airs on the CBS Sports Network as well as www.gfl.tv and has sent 23 fighters to the UFC. Devon
Mathiesen serves as General Manager of CFFC.
Hoosier Fight Club Promotions, LLC
Based in the Chicago metropolitan area, HFC was founded in 2009
and has promoted 33 events, including the first sanctioned event in Indiana in January, 2010. HFC has sent or promoted eight
fighters to the UFC and several to Invicta Fighting Championships. HFC’s Danielle Vale serves as General Manager in the Chicago
area market.
Punch Drunk, Inc. d/b/a COmbat GAmes MMA
Based in Kirkland, Washington, COGA was founded in 2009 and
has promoted 55 shows primarily in Washington State. COGA frequently airs on ROOT Sports Pacific Northwest regional network
as well as www.gfl.tv. COGA’s founder Joe DeRobbio serves as General Manager for the Pacific Northwest region.
Bang Time Entertainment LLC d/b/a Shogun Fights
Based in Baltimore, Maryland, Shogun was founded in 2008 and
has promoted 16 fights at the Royal Farms Arena in Baltimore, the same venue that hosted UFC 174 in April of 2014. A premier mid-Atlantic
regional MMA promotion, Shogun Fights currently airs on Comcast Sportsnet as well as www.gfl.tv. Shogun’s founder John Rallo
serves as General Manager our for the mid-Atlantic region.
V3, LLC
Based in Memphis, Tennessee, V3 Fights was founded in 2009 and
has promoted 60 events primarily at event centers in Memphis, Tennessee and elsewhere in Tennessee, Mississippi and Alabama. V3
Fights is the mid-South’s premier MMA promotion and has been broadcast live on Comcast Sports South as well as www.ustream.com,
www.YouTube.com. V3 Fights founder Nick Harmeier serves as General Manager for the mid-South region.
Go Fight Net, Inc.
Founded in 2010, Go Fight Net operates “GoFightLive”
or “GFL” a sports media and technology platform focusing exclusively on the combat sports marketplace.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
CageTix LLC
Founded in 2009 by Jay Schneider, a seasoned MMA event promoter,
CageTix is the first group sales service to focus specifically on the MMA industry. CageTix is intended to be complementary to
any existing ticket service such as Ticketmaster or box office sales used by a promotion. CageTix presently services the industry’s
top mixed martial arts events.
Subsequent
Acquisitions
Iron Tiger Fight Series
Based
in Bellfountain, Ohio, IT was founded in 1995 and has promoted 69 professional and amateur MMA events in various locations
throughout Ohio. IT has sent or promoted 10 fighters to the UFC and several to Bellator. IT’s Scott Sheeley serves as
General Manager of IT.
SuckerPunch
Based in Northern Virginia, SuckerPunch manages professional
MMA fighters, including current UFC feather weight champion Max Holloway.
Fight Time Productions
Based in Ft. Lauderdale, Florida, Fight Time has promoted 36
professional MMA events in Miami, Florida. Fight Time is South Florida’s premier MMA promotion and was founded by the late
Howard Davis and Karla Guadamuz who serves as General Manager.
National Fighting
Championships
Based in
Atlanta, Georgia, NFC was founded in 2002 and has promoted 96 professional and amateur MMA events throughout Atlanta, Georgia,
South Carolina and North Carolina. NFC’s David Oblas serves as General Manager of NFC.
Fight Club OC
Based in Orange
County, California, Fight Club OC was founded in 1982 and has promoted more than 260 professional and amateur MMA
events throughout Southern California. Fight Club OC’s Roy Englebrecht serves as General Manager of Fight Club OC.
Sheffield Recordings Limited, Inc.
A service provider of Shogun,
Sheffield owned the intellectual property rights of events promoted by Shogun. The Company has acquired the exclusive rights
to the Sheffield video fight library for a contractual price of $50,000, of which $25,000 was paid in cash during the
first quarter of 2017 and $8,500 was paid with the issuance of 5,556 shares of Alliance common stock during the second
quarter of 2017. The agreement for the video fight library calls for $25,000 of Alliance MMA Stock to be issued based upon
the IPO price of $4.50 per share. The Company has valued the stock portion of the acquisition based upon the date the 5,556
shares were issued, May 12, 2017.
Initial
Acquired Assets
Hoss Promotions, LLC
An affiliate of CFFC, Hoss owned the intellectual property rights
to approximately 30 MMA events promoted by CFFC. The Company has acquired the exclusive rights to the Hoss fighter library, which
covers approximately 100 hours of video content.
Ring of Combat, LLC
Based in Brooklyn, New York, and founded by MMA icon and three-time
World Kickboxing Champion Louis Neglia (34-2), Ring of Combat is currently ranked as the No. 4 regional promotion in the world
by Sherdog.com, a website devoted to the sport of mixed martial arts that is owned indirectly by Evolve Media, LLC. The Company
acquired the exclusive rights to the Ring of Combat fighter library, which includes professional MMA, amateur, and kickboxing events
and covers approximately 200 hours of video content. Ring of Combat has sent approximately 90 fighters to the UFC. The Company
additionally secured the media rights to all future Ring of Combat promotions.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
Basis of Presentation and Principles of Consolidation
The accompanying interim
unaudited condensed consolidated financial statements as of June 30, 2017 and December 31, 2016, and for the three and
six months ended June 30, 2017 and 2016, 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, 2016 have been derived from the Company’s annual audited financial 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 financial statements should be read in
conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2016,
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017 (the
“Form 10-K”). The results of operations for the three and six months ended June 30, 2017 are not necessarily
indicative of the results that may be expected for the full year ended December 31, 2017 or any future period and the Company
makes no representations related thereto.
Use of Estimates
The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated
financial statements and accompanying notes. Such estimates include, but are not limited to, fair value of acquired intangible
assets and goodwill, useful lives of intangible assets and property and equipment, the assessment of the recoverability of goodwill,
likelihood and range of possible losses on contingencies, valuation and recognition of stock-based compensation expense,
recognition and measurement of current and deferred income tax assets and liabilities, assessment of unrecognized tax benefits,
among others. Actual results could differ from those estimates.
Liquidity and Going Concern
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 eleven markets through the acquisition of nine 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 that our capital needs are
met over the next twelve months, in August 2017, we completed a capital raise of $1.5 million through the placement of 1.5
million units which consist of one common share and warrant. We expect to raise additional capital in the amount of
$1.0 million during 2017.
Management is in final 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, we are in final 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 six months ended June 30, 2017, as compared to the significant
accounting policies described in the Form 10-K, with the exception of the fighter commission revenue recognition policy disclosed
below.
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
The Company acts as an agent for 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 amount to the promoter upon completion of the event or request for advance from
the promoter. The Company’s fee is non-refundable and is recognized immediately as it is not tied to the completion of the
event. The Company recognizes revenue upon receipt from the credit card companies due to the following: the fee is fixed and determined
and the service of collecting the cash for the promoter has been rendered and collection has occurred.
Fighter Commission Revenue
The Company records fighter commission revenue upon the completion
of the 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.
Distribution Revenue
The Company acts as a producer, distributor and licensor 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 completion of the video production project. The Company generates revenues from licensing the rights to videos to
networks overseas and domestically, and books revenue upon delivery 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.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
Recent Accounting Pronouncements
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, the FASB issued “Accounting Standards Update
No. 2014-15,” Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) (“Update
2014-15”), which requires management to assess a company’s ability to continue as a going concern and to provide related
footnote disclosures in certain circumstances. For public entities, Update 2014-15 was effective for annual reporting periods
ending after December 15, 2016. The Company adopted this update in 2016 resulting in no impact on its consolidated results of
operations, financial position, cash flows and disclosures.
In February 2016, the FASB issued ASU 2016-02
“Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and 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. The Company is currently evaluating the impact 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 option 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 claims
and distributions received 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
all of the amendments in the same period. The Company is currently assessing the impact of this new guidance.
In January 2017, the FASB issued ASU
No. 2017-04, Compensation – Retirement Benefits (Topic 715): to simplify the measurement of goodwill by eliminating the
Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a
reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare 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 goodwill on the carrying amount 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. The Company is currently assessing the impact of this new guidance.
In January 2017, the FASB issued ASU No. 2017-01,
“Classifying the Definition of a Business.” This ASU clarifies the definition of a business with the objective of
adding guidance 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 which the acquisition date
occurs before 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 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.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
Note 3. Property and Equipment
Property and equipment, net, consisted of the following:
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Promotion equipment
|
|
$
|
53,185
|
|
|
$
|
31,393
|
|
Production equipment
|
|
|
81,312
|
|
|
|
61,209
|
|
Equipment, furniture and other
|
|
|
126,627
|
|
|
|
42,660
|
|
Total property and equipment
|
|
|
261,124
|
|
|
|
135,262
|
|
Less accumulated depreciation
|
|
|
(68,649
|
)
|
|
|
(12,950
|
)
|
Total property and equipment, net
|
|
$
|
192,475
|
|
|
$
|
122,312
|
|
Depreciation expense for the three
and six months ended June 30, 2017 was $32,779 and $55,699, respectively. Depreciation expense for the three and six months
ended June 30, 2016 was zero for both periods.
Note 4. Acquisitions
The Company completed the following acquisitions
during the six months ended June 30, 2017:
SuckerPunch
On January 4, 2017, the Company 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 Company 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 OC
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 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.
All acquisitions have been accounted
for as business acquisitions, under the acquisition method of accounting.
Preliminary 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 event the gross profit is less than $265,000 during
fiscal year 2017, all 108,289 shares held in escrow will be forfeited.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
The following table reflects the preliminary
allocation of the purchase price for SuckerPunch to identifiable assets and preliminary pro forma intangible assets and goodwill:
|
|
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
|
|
|
|
|
|
|
|
|
|
Preliminary 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 event the gross profit of Fight Time is less than $60,000
during fiscal year 2017, all 28,000 shares held in escrow will be forfeited.
The following table reflects the preliminary
allocation of the purchase price for the business of Fight Time to identifiable assets and preliminary pro forma intangible
assets and goodwill:
|
|
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
|
|
|
|
|
|
|
|
|
|
Preliminary
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 event the gross profit of NFC is less than $100,000
during the 12 month period following the acquisition, all 81,991 shares held in escrow will be forfeited.
The following table reflects the preliminary
allocation of the purchase price for the business of NFC to identifiable assets and preliminary pro forma intangible
assets and goodwill:
|
|
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
|
|
|
|
|
|
|
|
|
|
Preliminary
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
|
|
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 is less than $148,500 during the 12 month period following the acquisition, all 258,818 shares
held in escrow will be forfeited. Among the assets purchased is a cash balance of $159,000 related to customer deposits on
ticket sales for future 2017 MMA promotion events.
The following table reflects the
preliminary allocation of the purchase price for the business of the Fight Club OC to identifiable assets, liabilities, and
preliminary pro forma intangible assets and goodwill:
|
|
Fight Club OC
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
159,000
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
518,710
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
1,177,710
|
|
|
|
|
|
|
|
|
|
Total identifiable liabilities
|
|
|
(159,000
|
)
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,018,710
|
|
|
|
|
|
|
|
|
|
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 June 30, 2017.
Goodwill
and Identifiable Intangible Assets
Goodwill
The change in the carrying amount of goodwill
for the six months ended June 30, 2017 is:
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
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
4,640,116
|
|
|
|
|
|
|
|
|
|
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
Intangible Assets
Identified intangible assets consist of
the following:
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Intangible assets
|
|
Useful
Life
|
|
Gross
Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Assets
|
|
Accumulated
Amortization
|
|
Net
|
Video library, intellectual property
|
|
5 years
|
|
$
|
3,546,241
|
|
|
$
|
528,578
|
|
|
$
|
3,017,663
|
|
|
$
|
3,512,741
|
|
|
$
|
181,824
|
|
|
$
|
3,330,917
|
|
Venue contracts
|
|
3 years
|
|
|
1,966,400
|
|
|
|
491,600
|
|
|
|
1,474,800
|
|
|
|
1,966,400
|
|
|
|
163,867
|
|
|
|
1,802,533
|
|
Ticketing software
|
|
3 years
|
|
|
360,559
|
|
|
|
90,140
|
|
|
|
270,419
|
|
|
|
360,559
|
|
|
|
30,047
|
|
|
|
330,512
|
|
Brand
|
|
3 years
|
|
|
993,867
|
|
|
|
83,591
|
|
|
|
910,276
|
|
|
|
325,000
|
|
|
|
8,749
|
|
|
|
316,251
|
|
Fighter contracts
|
|
|
|
|
1,525,584
|
|
|
|
254,264
|
|
|
|
1,271,320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total intangible assets, gross
|
|
|
|
$
|
8,392,651
|
|
|
$
|
1,448,173
|
|
|
$
|
6,944,478
|
|
|
$
|
6,164,700
|
|
|
$
|
384,487
|
|
|
$
|
5,780,213
|
|
Amortization expense for the three months
ended June 30, 2017 and 2016, was $546,310 and$ 0, respectively.
Amortization expense for the six months
ended June 30, 2017 and 2016, was $1,063,686 and $0, respectively.
As of June 30, 2017, estimated amortization
expense for the unamortized acquired intangible assets over the next five years and thereafter is as follows:
2017 (Remaining six months)
|
|
$
|
1,156,259
|
|
|
2018
|
|
|
2,311,385
|
|
|
2019
|
|
|
2,110,388
|
|
|
2020
|
|
|
803,383
|
|
|
2021
|
|
|
543,611
|
|
|
Thereafter
|
|
|
19,452
|
|
|
|
|
$
|
6,944,478
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2016
|
|
|
June 30, 2016
|
|
|
Revenue, Net
|
|
$
|
784
|
|
|
$
|
1,224
|
|
|
Net loss
|
|
$
|
(3,082
|
)
|
|
$
|
(3,204
|
)
|
|
Significant adjustments to expenses for the
three months ended June 30, 2016 include $546,000 of amortization of acquired intangible assets.
Significant adjustments to expenses for
the six months ended June 30, 2016 include $707,000 of amortization of acquired intangible assets, and $142,000 professional fees
attributable to consulting fees related to the acquisitions.
Note 5. Commitments and Contingencies
Operating Leases
The Company does not own any real
property. The principal executive offices are located at an office complex in New York, New York, which includes
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, 2017. 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.
With the acquisition of Fight Club
OC, the Company assumed a lease for office space in Orange County, California. The lease expires in September 2018.
Each of the acquired business operate from home offices or shared office space arrangements.
Rent expense was $27,720 and $0 for
the three months ended June 30, 2017 and 2016, respectively.
Rent expense was $56,856 and $0 for the
six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, the aggregate
minimum lease payments for the years ending December 31, 2017, 2018, and 2019 were:
2017 (six months remaining)
|
|
|
65,911
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
143,888
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
76,201
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
286,000
|
|
|
|
|
|
|
|
|
|
Contingencies
In the normal course of 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, two purported securities
class action complaints—
Shapiro v. Alliance MMA, Inc.
, No. 1:17-cv-2583 (D.N.J.), and
Shulman 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 allege that the defendants violated certain provisions of the federal securities laws, and purport to seek damages
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 ruled on the motion by the claimants in the New Jersey case to be named lead plaintiffs.
We believe that 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
maintains directors and officers insurance and has notified its insurance carrier of the claims made against it.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
Note 6. Stockholders’ Equity
Stock Option Plan
Option Grants
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, 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.
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 shares of the Company’s common stock. The warrant has a
term of 10 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.
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 has recognized stock-based compensation expense of
$169,401 during the three months ended June 30, 2016 as the vendor is not required to perform future services to earn the
warrant and the vesting provisions are only time based.
The number of shares of the
Company’s common stock that are issuable pursuant to warrant and stock option grants with time based vesting as of June
30, 2017 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
|
|
|
343,583
|
|
|
|
4.29
|
|
|
|
300,000
|
|
|
|
3.56
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at June
30, 2017
|
|
|
565,813
|
|
|
$
|
5.53
|
|
|
|
500,000
|
|
|
$
|
3.93
|
|
Exercisable at
June 30, 2017
|
|
|
315,813
|
|
|
|
6.34
|
|
|
|
100,000
|
|
|
|
3.55
|
|
As of June 30, 2017 and 2016, the
total unrecognized expense for unvested stock options, net of expected forfeitures, was $667,899 and $0, respectively, which
is expected to be amortized on a weighted-average basis over a period of three years.
Stock-based compensation expense for the three and six
months ended June 30, 2017 and 2016 is as follows:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
General and administrative expense
|
|
$
|
241,249
|
|
|
$
|
—
|
|
|
$
|
560,978
|
|
|
$
|
—
|
|
Stock-based compensation expense
categorized by the equity components for the three and six months ended June 30, 2017 and 2016 is as follows:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
Employee stock options
|
|
$
|
71,848
|
|
|
$
|
—
|
|
|
$
|
391,577
|
|
|
$
|
—
|
|
Warrants
|
|
|
169,401
|
|
|
|
—
|
|
|
|
169,401
|
|
|
|
—
|
|
|
|
$
|
241,249
|
|
|
$
|
—
|
|
|
$
|
560,978
|
|
|
$
|
—
|
|
Note 7. 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.
Alliance MMA, Inc.
Notes to Condensed Financial
Statements
The following table sets forth the computation of
the Company’s basic and diluted net loss per share for the periods presented:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(2,304,075
|
)
|
|
$
|
(2,702,254
|
)
|
|
$
|
(4,673,908
|
)
|
|
$
|
(2,818,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in computing net loss per share, basic and diluted
|
|
|
9,510,460
|
|
|
|
5,289,136
|
|
|
|
9,400,339
|
|
|
|
5,289,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(0.53
|
)
|
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options (exercise price $3.55 - $4.50 per share)
|
|
|
500,000
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
—
|
|
Warrants (exercise price $4.50 - $7.43)
|
|
|
565,813
|
|
|
|
—
|
|
|
|
565,813
|
|
|
|
—
|
|
Total common stock equivalents
|
|
|
1,065,813
|
|
|
|
—
|
|
|
|
1,065,813
|
|
|
|
—
|
|
Note 8. Income Taxes
The Company recorded no income
tax provision for the six months ended June 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 June 30, 2017.
Note 9. Subsequent Events
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.
In August 2017, the board of
directors approved the private placement of up to $2.5 million of AMMA stock. During August 2017, the Company received
subscription agreements from third parties for approximately 0.9 million units at $1.00 per unit. Each unit consists of one
restricted share of AMMA stock and a warrant to acquire an additional 0.9 million shares at $1.50. Board members
and employees also participated in the capital raise and acquired an additional 0.6 million units at a market price of
$1.09.