Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1. Description of Business and Basis of Presentation
Nature of Business
Alliance MMA, Inc. (“Alliance” or the
“Company”) is a sports media company formed in Delaware in February 2015. The Company completed its
Initial Public Offering (“IPO”) 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 a ticketing software business focused on the MMA industry, an athlete management
business, and video production and distribution company to compliment the MMA fight league.
Alliance MMA acquired the following businesses to execute
its initial business strategy:
Promotions
|
·
|
CFFC Promotions (“CFFC”);
|
|
·
|
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 (“Fight Time”);
|
|
·
|
National Fighting Championships (“NFC”);
|
|
·
|
Fight Club Orange County (“FCOC” or “Fight Club OC”); and
|
|
·
|
Victory Fighting Championship (“Victory”).
|
Ticketing
Sports Management
|
·
|
SuckerPunch Holdings, Inc. (“SuckerPunch”).
|
Video Production and Distribution
|
·
|
Go Fight Net, Inc. (“GFL”)
|
As an adjunct to the promotion business, Alliance provided video
distribution and media archiving through Alliance Sports Media (“ASM”) formerly GFL.
Change in Management and Cessation of MMA Promotion and
Athlete Management operations
On 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.
As of the date of this filing, the Company has disposed of the following businesses:
The Company is currently focused on its CageTix business and
completing the acquisition of 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, 2018 and December 31, 2017, and for the three and nine months ended
September 30, 2018 and 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, 2017 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 unaudited condensed consolidated 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, 2017, included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on April 16, 2018 (the “Form
10-K”). The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative
of the results that may be expected for the full year ended December 31, 2018 or any future period and the Company makes no
representations related thereto.
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. These estimates relate to revenue recognition, the valuation and recognition of stock-based compensation expense, loss contingencies, discontinued
operations and income taxes. Actual results could differ materially from those estimates.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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, 2018, as compared to the Significant Accounting Policies described in the Form 10-K with the exception
of the revenue recognition policy.
Revenue Recognition
Ticket Service Revenue (Current Operations)
The Company acts as a ticket agent for third-party ticket sales
and 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 from the promoter. The Company’s ticket service fee is recognized when it satisfies
the performance obligation by transferring control of the purchased ticket to a customer.
Promotion Revenue (Discontinued Operations)
The Company recognized revenue, net of sales tax, when it
satisfied a performance obligation by transferring control over a product or service to a customer. Revenue from admission,
sponsorship, pay per view (“PPV”), apparel, and concession were recognized at a point in time when an event was
exhibited to a customer live or PPV, and when a customer took possession of apparel or food and beverage offerings.
Promotion revenue is a component of discontinued operations.
Fighter Commission Revenue (Discontinued Operations)
The Company recognized 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 a contracted athlete’s performance.
Business Combinations
The Company includes the results of operations of the businesses
that it has acquired in its consolidated results as of the respective dates of acquisition.
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. The 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 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 recorded 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 of goodwill annually in the fourth quarter, or more frequently
if events or circumstances indicate that the goodwill 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 a reporting unit
is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. If, based on the qualitative
assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, then the Company proceeds to perform the quantitative goodwill impairment test. The Company first determines
the fair value of a 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. If the carrying value of a 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 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, 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 amortized on a straight-line basis over their estimated useful
lives, ranging from three to ten years. The Company makes judgments about the recoverability of finite-lived intangible assets
whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount
of assets 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 carrying 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 new shorter useful life. The Company evaluates the carrying value of indefinite-lived intangible assets
on an annual basis, and an impairment charge would be recognized to the extent that the carrying amount of such assets exceeds
their estimated fair value. For further discussion of goodwill and identified intangible assets, see “Note 5-Goodwill and
Purchased Identifiable Intangible Assets.”
During the second quarter of 2018, the Company recorded
an intangible impairment charge related to the SuckerPunch acquisition of $182,546 which is included as a component of net
loss from discontinued operations, net of tax for the nine months ended September 30, 2018.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 3. Discontinued Operations
On May 25, 2018, the Company commenced
cessation of all the professional MMA promotion operations and supporting functions including ASM and began a plan 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 plan of disposition. This action included the termination of all Athlete
Management employees. As of September 30, 2018, the Athlete Management business unit was disposed.
The Company has reported the results of operations and financial
position of the discontinued Professional MMA Promotion and Athlete Management businesses in discontinued operations within the
condensed consolidated statements of operations and condensed consolidated balance sheets for all periods presented.
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 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, refer to “Note 7 Commitments and contingencies”.
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 during the third quarter 2018 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.
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
|
|
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4. Business 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 no acquisitions during the nine
months ended September 30, 2018.
The following acquisitions were completed during 2017:
SuckerPunch
On January 4, 2017, Alliance 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, $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, Alliance 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
Orange 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.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Final
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, if the gross profit was less than $265,000 during fiscal
year 2017, all 108,289 shares held in escrow would 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 final allocation
of the purchase price for SuckerPunch to identifiable assets, intangible assets, goodwill and identifiable 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 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.
Final 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. If the gross profit of Fight Time was less than $60,000
during fiscal year 2017, all 28,000 shares held in escrow were 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 final
allocation of the purchase price for the business of Fight Time to identifiable assets,
intangible assets, goodwill and identifiable 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 and fully wrote off these assets.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Final
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, if the gross profit of NFC was less than $100,000
during the 12-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 final
allocation of the purchase price for the business of NFC to identifiable assets, intangible assets,
goodwill and identifiable liabilities:
|
|
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.
Final
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 was less than $148,500 during the 12-month period following the acquisition, all 258,818 shares held in
escrow would have been forfeited. 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.
The following table reflects the final
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:
|
|
Final Fair Value
|
|
Cash
|
|
$
|
159,000
|
|
Accounts receivable
|
|
|
—
|
|
Intangible assets
|
|
|
270,000
|
|
Goodwill
|
|
|
748,710
|
|
Total identifiable assets
|
|
$
|
1,177,710
|
|
Total identifiable liabilities
|
|
|
(159,000
|
)
|
Total purchase price
|
|
$
|
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.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Final
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-month period following the acquisition, all 121,699 shares held in escrow would 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 final
allocation of the purchase price for the business of Victory to identifiable assets, intangible assets,
goodwill and identifiable liabilities:
|
|
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
|
|
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.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 5. Goodwill and Purchased Identifiable Intangible
Assets
Goodwill
In May 2018, the Company 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, 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, 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
(Unaudited)
Identified intangible assets consist of the following:
|
|
|
|
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 $19,046, respectively.
Amortization expense for the nine months
ended September 30, 2018 and 2017, was $40,833 and
$57,137, respectively.
In May 2018, the Company ceased all professional MMA
promotion operations and 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, the 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 three and nine months ended September 30, 2018 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 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 bears 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 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. 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 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.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 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, comprised 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 FCOC, the Company assumed a lease for
office space in Orange County, California. The lease originally 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 businesses operated from home offices or shared
office space arrangements.
Warrants
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 the warrant agreement. For
illustration purposes only, if the stock price at closing was $0.67, the Black - Scholes value would approximate $0.53 per
share based upon todays volatility and 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.
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Contingencies
Legal Proceedings
In conducting our business, 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.), 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 alleged that the defendants violated certain provisions of the federal securities laws, and purported 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 and, on March 8, 2018, the parties reached a settlement to the New Jersey action in which the carrier for our directors and
officers liability insurance policy has agreed 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 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.
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. 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 CFFC,
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’s estimates, the Company recorded an earn out liability in
2017 of approximately $310,000 related to Shogun’s financial results. In conjunction with the cessation of the
professional MMA promotions, the Company sold the Shogun promotion to the former owner and settled the earn out liability
with the issuance of 366,072 options with an exercise price of $0.35 per option and 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.
The 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 Placements
In July 2017, the board of directors approved the issuance of
up to $2.5 million of our 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.
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-based compensation of approximately $148,000, the fair value of the shares on the date of 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.
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. In
May 2018, in conjunction with the cessation of the professional MMA business, three of the employees were terminated, and
100,000 unvested options were returned to the 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 and one half on the 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 5 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 an exercise price of $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
third quarter 2018 and issued no additional warrants. The Company determined the fair 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 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-based vesting as of September 30, 2018 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, 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, 2018 and 2017, the total
unrecognized expense for unvested stock options, net of expected forfeitures, was approximately $71,848 and $642,694,
respectively. $71,848 of the unrecognized expense at September 30, 2018 is related to our continuing operations.
Stock-based compensation expense 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
|
|
$
|
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, 2018 and 2017 is as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock option awards
|
|
$
|
178,395
|
|
|
$
|
78,510
|
|
|
$
|
567,445
|
|
|
$
|
470,087
|
|
Warrants
|
|
|
18,500
|
|
|
|
—
|
|
|
|
82,080
|
|
|
|
169,401
|
|
Common stock
|
|
|
418,800
|
|
|
|
148,500
|
|
|
|
418,800
|
|
|
|
148,500
|
|
|
|
$
|
615,695
|
|
|
$
|
227,010
|
|
|
$
|
1,068,325
|
|
|
$
|
787,988
|
|
Alliance MMA, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
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
|
|
|
15,263,247
|
|
|
|
10,714,200
|
|
|
|
14,909,586
|
|
|
|
9,608,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(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,
|
|
|
|
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 10. Subsequent Events
On October 19, 2018, the
company issued Red Diamond Partners 794,483 shares of common stock in 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 $.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 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 accordance 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 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 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 common 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 Company.
On October 24, 2018, the Company issued 500,000 shares of
common stock as collateral 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 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.