SCWorx Corp. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended: September 30, 2016

OR

For the transition period from                       to                      

Commission File Number: 000-53166

ALLIANCE MMA, INC.

(Exact name of registrant as specified in its charter)

590 Madison Avenue, 21^st Floor

New York, New York 10022

(Address of principal executive offices)

(212) 739-7825

(Registrant’s telephone number, including area code)

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.     Yes  ¨    No  x 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐     No ☒

Number of shares of the registrant’s common stock outstanding at November 4, 2016: 8,888,978.

Alliance MMA

Form 10-Q

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the sections entitled “Important Introductory Information,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements within the meaning of the federal securities laws. These statements relate to anticipated future events, future results of operations or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to:

These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. The “Risk Factors” section of this Form 10-Q sets forth detailed risks, uncertainties and cautionary statements regarding our business and these forward-looking statements. Moreover, we operate in a changing regulatory environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all of the risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus.

We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the U.S., we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events. Other than with respect to the acquisition of the MMA promotions and related companies we acquired in connection with the closing of our initial public offering on September 30, 2016, and which are discussed in the “Notes to Condensed Consolidated Financial Statements” section of this Form 10-Q, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or other investments or strategic transactions in which we may engage in.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Alliance MMA, Inc.

Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Alliance MMA, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Alliance MMA, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) From February 12, 2015 (Inception) through September 30,2016

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Alliance MMA, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Alliance MMA, Inc.

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”) was formed in Delaware on February 12, 2015 to acquire companies in the mixed martial arts (“MMA”) industry. On September 30, 2016, Alliance acquired the assets and assumed certain liabilities of six companies, consisting of five promoters and a ticketing platform for MMA events. Alliance formed GFL Acquisition, Co., Inc. (“Acquisition Co”), a New York corporation, as a wholly-owned subsidiary of Alliance, on June 14, 2016, primarily to facilitate the acquisition and merger of the seventh company, Go Fight Net, Inc. (“GFL”) which operates a video production and distribution business. The seven companies (the “Target Companies) are as follows:

Target Companies

Promoters

Ticket Solution

Video Production and Distribution

In addition to the acquisition of the business of the Target Companies, Alliance acquired all rights in the existing MMA and kickboxing video libraries of Louis Neglia’s Martial Arts Karate, Inc. (“Louis Neglia”) related to the Louis Neglia’s Ring of Combat (“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, and the MMA and video library of Hoss Promotions, LLC (“Hoss”) related to certain CFFC events (collectively, the “Target Assets”).

Initial Public Offering (“IPO”)

Alliance completed the first tranche of its initial public offering on September 30, 2016, with the sale of 1,813,225 shares of common stock with net proceeds of $7,732,280, and closed the acquisitions of all the Target Companies and Target Assets of Hoss Promotions and Louis Neglia’s Ring of Combat. The Company closed the offering in October and sold an additional 409,083 shares with net proceeds of $1,168,861 and funded the acquisition of the Target Assets of Louis Neglia’s Ring of Combat. With the completion of the IPO, the Company’s gross proceeds from the sale of 2,222,308 shares of common stock was $10,000,373.

The combination of the Target Companies and Target Assets formed the operations of Alliance. The Company intends to acquire additional promotions over time to create a developmental league for professional MMA fighters and the premier feeder organization to the Ultimate Fighting Championship, (“UFC”), and other premier MMA promotions such as Bellator. The UFC is the sports largest mixed martial arts promotion company in the world and features the most top-ranked fighters. The combination of the acquired promotions will allow the Company to discover and cultivate the next generation of UFC and other premier MMA promotion champions, while at the same time create live original media content, attract an international fan base, and generate sponsorship revenue for the Company’s live MMA events and professional fighters.

The Company incurred an aggregate $1,205,808 net loss from inception to September 30, 2016. To fund the Company’s startup expenses, a loan agreement was entered into with a related party, Ivy Equity Investors, LLC, in February 2015 for up to an initial $500,000 of borrowings for startup expenses. In May 2016, the loan agreement was amended to permit up to $600,000 of borrowings for startup expenses and in July 2016 the loan agreement was amended again to permit up to $1,000,000 of borrowings. In connection with the completion of the IPO, $877,000 was utilized to pay off the current balance of the note payable and accrued interest.

For accounting and reporting purposes, Alliance has been identified as the accounting acquirer of each of the Target Companies. In addition, each of the Target Companies has been identified as an accounting co-predecessor to the Company.

Liquidity and Going Concern

The 2015 audited financial statements have been prepared on the assumption that we were a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Prior to the acquisition of the Target Companies, Alliance incurred losses since inception, generated no operating revenue, and as reflected in the accompanying financial statements, incurred a net loss of $386,456 for the partial year ended December 31, 2015.

We believe that the revenue generated by the Target Companies and the Target Assets, together with the net proceeds of the IPO, provide Alliance with sufficient capital to fund operations for the balance of 2016 and all of 2017 and there is no longer significant doubt about Alliance MMA’s ability to continue as a going concern. However, we cannot provide any assurances that our operating revenue and the proceeds of the IPO will be sufficient to fund our operations or that, if such revenues and proceeds are not sufficient, that we will be able to obtain additional capital on terms acceptable to us or at all.

The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Alliance MMA, Inc. and its wholly-owned subsidiary, Go Fight Net, Inc. Acquisitions are included in the consolidated financial statements from the date of the acquisition. All significant intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q and Article 8 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of September 30, 2016, results of operations for the three and nine months ended September 30, 2016 and 2015, and cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes included in our amended initial registration statement on Form S1/A, filed with the SEC on August 30, 2016.

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.

Goodwill and 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. The Company reviews impairment of goodwill annually in the fourth quarter. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the Company concludes it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying amount, it need not perform the two-step impairment test. If based on the qualitative assessment, the Company believes it is more-likely-than-not that the fair value of its reporting units is less than its carrying value, a two-step goodwill impairment test is required to be performed. The first step requires the Company to compare the fair value of each reporting unit to its carrying value including allocated goodwill. The Company determines the fair value of its reporting units using an equal weighting of the 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, 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. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit with the carrying value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of the reporting unit over its implied fair value. Determining the fair value of a reporting unit is subjective in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others.

Identified intangible assets

Identified intangible assets consist of video libraries, venue contracts, and ticketing software resulting from business acquisitions. The Company’s identified intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 3 to 5 years. The Company makes judgments about the recoverability of purchased 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. For further discussion of goodwill and identified intangible assets, see Note 6, Acquisitions below.

Stock-Based Compensation

The Company accounts for stock-based compensation expense in accordance with the authoritative guidance on share-based payment. Under the provisions of the guidance, stock-based compensation expense is measured at the grant date based on the fair value of the option using a Black-Scholes option pricing model and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be significantly different from what was recorded in the current period. See Note 9, Stockholders’ Equity for additional detail.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions for any of the reporting periods presented.

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 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 is currently assessing the impact of the adoption of this new accounting standard would have on its consolidated financial statements and footnote disclosures.

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 evaluating the effect this ASU will have on its consolidated statement of cash flows.

Note 3. Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting and filing fees relating to the IPO, were capitalized and netted against the gross proceeds from the IPO. As of December 31, 2015, the Company capitalized $25,000 of deferred offering costs which are include in other current assets on the consolidated balance sheet. As the Company completed its IPO on September 30, 2016 the balance of the deferred offering costs was offset against gross IPO proceeds.

Note 4. Deposit Media Library

On March 1, 2016, the Company entered into an agreement to purchase the 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 for cash and shares of common stock. The Company also acquired a right of first refusal to acquire the rights to all future Louis Neglia MMA and kickboxing events. The total consideration paid to acquire the rights to the MMA and kickboxing event libraries was $155,000. An initial payment of $15,500 was made to Louis Neglia in March 2016 and a second payment of $10,000 was made in July 2016. Upon completion of the IPO on September 30, 2016, the Company closed on the assets. The balance of the cash portion of the purchase price, $129,500, was paid in October 2016.

Note 5. Acquisitions

Target Companies and Target Assets

The Company completed the first tranche of its IPO on September 30, 2016, and closed the acquisitions of the businesses of the Target Companies and the Target Assets by making cash payments totaling $1,391,736, Net, and issuing 1,377,531 shares of common stock. In October 2016, the Company issued the final payment of $129,500 to Louis Neglia. The acquisition of the Target Companies has been accounted for as a business acquisition, under the acquisition method of accounting.

The Target Companies are as follows:

CFFC Promotions, LLC

Based in Atlantic City, New Jersey, CFFC was founded in 2011 and has promoted over 58 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. CFFC’s Robert Haydak and Mike Constantino serve as the Company’s President and Director of Business Development, respectively, Devon Mathiesen will serve as General Manager of CFFC.

Hoosier Fight Club Promotions, LLC

Based in the Chicago metropolitan area, HFC was founded in 2009 and has promoted over 26 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 Regional Vice President 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 over 46 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 Regional Vice President 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 14 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 our Regional Vice President for the mid-Atlantic region.

V3, LLC

Based in Memphis, Tennessee, V3 Fights was founded in 2009 and has promoted 45 events primarily at event centers in Memphis, Tennessee and elsewhere in Tennessee, Mississippi and Alabama. V3Fights 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. V3Fights founder Nick Harmeier serves as Regional Vice President 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. With a media library containing 11,000 titles comprising approximately 10,000 hours of unique video content, and the addition of approximately 1,200 hours of new original content annually, GFL maintains the largest continuously growing database of MMA events, fighters, and fight videos in the world. The GFL fighter database contains information on over 25,000 professional and amateur combat sports fighters and over 18,000 fights. GFL combines proprietary technology with content production and acquisition to deliver diverse and compelling content to a global audience. GFL’s content is distributed globally in all broadcast media through its proprietary distribution platform via cable/satellite, Internet, IPTV and mobile protocols. The GFL platform utilizes GFL’s proprietary scalable online master control technology that enables viewers using a broad range of devices and formats to obtain large amounts of video and other content. GFL broadcasts an average of 450 live events annually (having broadcast 2,500 events since inception) to viewers in over 175 countries. GFL has produced 150 episodes of the GoFightLiveTM “real fights” series airing weekly on Comcast Sports Net, SNY and other networks globally.

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 international mixed martial arts events including Legacy, RFA, Bellator MMA, King of the Cage, and Glory. Since its inception, CageTix has sold tickets for over 1200 MMA events and currently services 64 MMA promotions operating in 106 cities. In 2014, CageTix sold 15,883 tickets to 6,391 customers. Formerly the founder of Victory Fighting Championships, Jay Schneider is a member of the Nebraska Athletic Commission and was a senior columnist for Ultimate MMA magazine under the pen name ‘Victory Jay’ for over a decade. Jay Schneider serves as Vice President.

Acquisition of the Target Assets

In addition to the acquisition of the businesses of the Target Companies, the Company also acquired the MMA video libraries of two prominent regional promotions. The fight libraries consist of the following:

Hoss Promotions, LLC (“Hoss”)

An affiliate of CFFC, Hoss owns 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 (“Ring of Combat”)

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.

On September 30, 2016, 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 has also secured the media rights to all future Ring of Combat promotions.

Preliminary Purchase Allocation

As consideration for the acquisitions of the businesses of the Target Companies and the Target Assets, the Company delivered the following amounts of cash and shares of common stock, and recorded a contingent liability related to the specified earn outs.

The number of shares of common stock paid as consideration was calculated based on the IPO public offering price of $4.50 per share. 

The following table reflects the preliminary allocation of the purchase price for the Target Assets and the businesses of the Target Companies to identifiable assets, liabilities assumed and pro forma intangible assets and goodwill:

Under acquisition accounting, assets and liabilities acquired are recorded at their fair value on the acquisition date, with any excess in purchase price over these values being allocated to identifiable intangible assets and goodwill at September 30, 2016.

The respective asset purchase agreements for the Target Companies other than GFL, and the agreement and plan of merger for GFL, contemplate the acquisition of certain assets and assume certain liabilities. Due to the short-term nature of many of the assets acquired, their carrying values, as shown in the historical financial statements of the companies, approximate their respective fair values. In addition, value has been assigned to those intangible assets related to intellectual property rights to video libraries, ticketing software and customer and venue relationships of each Target Company. The goodwill recognized for these acquisitions is related primarily to synergies with the combined businesses and assembled workforce.

Goodwill and Identifiable Intangible Assets

Goodwill

The change in the carrying amount of goodwill for the nine months ended September 30, 2016 is as follows:

Intangible Assets

Management’s preliminary estimates of each intangible asset type/category is based upon the nature of the businesses and the contracts entered into with each of the Target Companies and intellectual property rights of video libraries of the Target Assets. The acquisitions bring value to the business platform through their reputations as premier MMA promotional companies and their extensive video libraries, ticketing platforms, and customer and venue relationships. As such, the intellectual property rights of video libraries, ticketing software, and customer and venue relationships comprise the significant majority of management’s estimate of intangible assets. The preliminary estimated useful lives of intangible assets are based upon each asset’s contribution to the business platform and growth strategy. All estimates are preliminary.

Since the intangible assets were acquired on September 30, 2016, there is no amortization expense for the three or nine months ended September 30, 2016.

As of September 30, 2016, estimated amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows:

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

For the nine months ended September 30, 2016

(In thousands, except share information)

(i)       Professional fees. The Target Companies incurred approximately $311,000 of professional fees directly related to the acquisition of prospective targets. These costs will be non-recurring and have been adjusted from the pro forma results.

(ii)      Amortization of intangible assets. Intangible assets are amortized over their estimated useful lives. The estimated useful lives of acquired intangible assets are based upon the economic benefit expected to be received and the period during which we expect to receive that benefit. A useful life of five years has been assigned to the intellectual property rights of acquired video libraries and three years to the acquired ticketing software and customer and venue relationships based on a number of factors, including contractual agreements, estimated production hours available on video libraries and economic factors pertaining to the combined companies. 

The unaudited pro forma financial information includes various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and liabilities assumed of Target Companies based on management’s best estimates of fair value. The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities. Accordingly, the pro forma adjustments are preliminary and have been made solely for illustrative purposes.

The unaudited pro forma statement of operations for the nine months ended September 30, 2016 are based on the historical financial statements of Alliance MMA, Inc. after giving effect to the acquisition of the Target Assets and the businesses of the Target Companies and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma financial information. 

The unaudited pro forma financial information is not intended to represent or be indicative of the results of operations or financial position that would have been reported had the acquisitions been completed as of the date presented, and should not be taken as a representation of potential future results of operations or financial position.  

For purposes of these unaudited pro forma statements of operations, the acquisitions of the Target Assets and the businesses of the Target Companies are assumed to have occurred on January 1, 2016, and aggregate the results of Alliance and the Target Companies for the nine months ended September 30, 2016.

Note 6. Debt

Note Payable – Related Party

In February 2015, the Company entered into a loan agreement with Ivy Equity Investors, LLC for up to $500,000 of borrowings for startup expenses, including professional fees related to the Company’s initial public offering and expenses incident to the acquisition of the Target Assets and businesses of the Target Companies.  On March 1, 2015, 5,289,136 shares were issued to Ivy Equity Investors, LLC reducing the note payable and accrued interest balance by $5,289 which represents the par value of the shares issued. Ivy Equity Investors, LLC is an affiliate of the Company’s founder and current board member, Mr. Gamberale who at the time was the Company’s sole director.

In May 2016 the loan agreement was amended to permit up to $600,000 of aggregate borrowings for startup expenses.

In July 2016 the loan agreement was amended to permit up to $1,000,000 of aggregate borrowings for startup expenses.

Upon the completion of the IPO on September 30, 2016, a portion of the proceeds were utilized to pay the balance of all amounts due under the loan. As of September 30, 2016 and December 31, 2015, the outstanding borrowings under the loan were $0 and $353,450, respectively, and the accrued interest amounts accrued under the loan were $0 and $8,127, respectively. The loan bore interest at 6% per annum and matured on the earlier of the closing of the IPO, or January 1, 2017.

Note 7. Commitments and Contingencies

Operating Leases

The Company does not own any real property. Alliance’s principal executive and administrative offices are temporarily located at an office complex in New York, New York, which includes approximately twenty thousand square feet of shared office space and services that are being leased.  The lease has a one-year term that commenced on December 1, 2015, and allows for the limited use of private offices, conference rooms, mail handling, videoconferencing, and certain other business services. There is a single Target Company lease that was assumed which is renewable monthly at market rates and will be terminable with 30 days notice.

Contingencies

In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company 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. As of September 30, 2016 and December 31, 2015, the Company was not involved in any legal proceedings.

Note 8. Stockholders’ Equity

Preferred Stock

The Company’s certificate of incorporation authorizes 5,000,000 shares of $0.001 par value preferred stock. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further vote or action by the Company’s stockholders. The Board of Directors can also increase or decrease the number of shares of any series of preferred stock, but not below the number of shares then outstanding of that series, without any further vote or action by stockholders. The Board of Directors may authorize the issuance of preferred stock with voting or conversion rights. There were no shares of preferred stock issued or outstanding as of September 30, 2016 or December 31, 2015.

Common Stock

Authorized Shares

The Company’s certificate of incorporation authorizes 45,000,000 shares of $0.001 par value common stock.

Voting Rights

Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. The Company has not provided for cumulative voting for the election of directors in our certificate of incorporation.

No Preemptive or Similar Rights

Common stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.

Common Stock Issuances

During the nine months ended September 30, 2016, the Company issued 1,813,225 common shares pursuant to the Company’s IPO and 1,377,531 shares in connection with the acquisition of the businesses of the Target Companies and the Hoss Target Assets.

Stock Based Compensation Plan

2016 Equity Incentive Plan

On July 30, 2016, the Board of Directors adopted the Alliance MMA 2016 Equity Incentive Plan (the “2016 Plan”). The Company may grant shares of the Company’s common stock to the Company’s directors, officers, employees or consultants. The 2016 Plan has been designed to provide the Board of Directors with an integral resource as it evaluates the Company’s compensation structure, performance incentive programs, and long-term equity targets for executives and key employees. The following is a summary of the 2016 Plan.

Administration

The Board intends to appoint and maintain as administrator of the 2016 Plan a Committee (the “Committee”) consisting of two or more directors who are (i) “Independent Directors” (as such term is defined under the rules of the Nasdaq Stock Market), (ii) “Non-Employee Directors” (as such term is defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended) and (iii) “Outside Directors” (as such term is defined in Section 162(m) of the United States Internal Revenue Code of 1986, as amended (the “Code”)). The Committee, subject to the terms of the 2016 Plan, will have full power and authority to designate recipients of options and restricted stock, to determine the terms and conditions of the respective option and restricted stock agreements (which need not be identical) and to interpret the provisions and supervise the administration of the 2016 Plan. The Committee will also have the authority, without limitation, to designate which options granted under the Plan will be Incentive Options and which will be Nonqualified Options. In the absence of a Committee, the Plan will be administered by the Board of Directors.

Eligibility

Generally, the persons who are eligible to receive grants are directors, officers and employees of, and consultants and advisors to, the Company or any subsidiary; provided that Incentive Options may be granted only to employees of the Company and any subsidiary.

Stock Subject to the 2016 Plan

Stock subject to grants may be authorized, but unissued, or reacquired common stock. Subject to adjustment as provided in the 2016 Plan, (i) the maximum aggregate number of shares of common stock that may be issued under the 2016 Plan is 825,000. The shares of common stock subject to the 2016 Plan will consist of unissued shares, treasury shares or previously issued shares held by a subsidiary of the Company, and such number of shares of common stock will be reserved for such purpose. Any of such shares of common stock that may remain unissued and that are not subject to outstanding options at the termination of the 2016 Plan will cease to be reserved for the purposes of the 2016 Plan.

Stock Option Grant

In August 2016, the Company made its first equity grant under the 2016 Equity Incentive Plan, the Company’s Chief Financial Officer, to purchase 200,000 shares of common stock with an exercise price of $4.50. The stock options have a contractual term of 5 years and a grant date fair value of $364,326 which is amortized on a straight-line basis over the vesting period of three years. The Company determined the fair value of the stock options using the Black-Scholes model. For the three and nine months ended September 30, 2016, the Company recorded stock compensation expense of $20,240.

Stock-Based Compensation

The activity related to equity awards granted to employees, executives and board members was as follows:

As of September 30, 2016 and December 31, 2015, the total unrecognized expense for unvested stock options, net of expected forfeitures, was $344,086 and $0, respectively, which is expected to be amortized over a weighted-average period of 3 years.

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 per share for the periods presented:

The following securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

Note 10. Income Taxes

The Company recorded no income tax provision for the three and nine months ended September 30, 2016 and 2015, as the Company has incurred losses for these periods.

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has established a full valuation allowance as it is more likely than not that the tax benefits will not be realized as of September 30, 2016.

Note 11. Related Party

Notes Payable – Related Party

In February 2015, the Company entered into a loan agreement with Ivy Equity Investors, LLC which is an affiliate of the Company’s founder and current board member, Mr. Gamberale who at the time was the Company’s sole director. On September 30, 2016 the Company completed its initial public offering, and the outstanding balance on the note including accrued interest was repaid to Ivy Equity Investors, LLC. See Note 7 Debt, for additional information.

Note 12. Subsequent Events

IPO

Alliance completed the first tranche of its initial public offering on September 30, 2016, with the sale of 1,813,225 shares of common stock with net proceeds of $7,732,280, and closed the acquisitions of the Target Companies and Target Assets. The Company completed the IPO in October and sold an additional 409,083 shares with net proceeds of $1,168,861. Upon the completion of the IPO, the Company’s gross proceeds from the sale of 2,222,308 shares of common stock was $10,000,373.

CFFC PROMOTIONS LLC

CONDENSED FINANCIAL STATEMENTS

September 30, 2016

(UNAUDITED)

CFFC PROMOTIONS LLC

CONDENSED BALANCE SHEETS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

CFFC PROMOTIONS LLC

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

CFFC PROMOTIONS LLC

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

CFFC Promotions, LLC

Notes to Condensed Financial Statements

(Unaudited)

Note 1. Description of Business and Basis of Presentation

Nature of Business

CFFC Promotions, LLC (“CFFC”) promotes mixed martial arts cage fighting in the New York, New Jersey and Pennsylvania tristate area. The Company was formed on January 28, 2014.

Basis of Presentation

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

Note 2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited interim condensed financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, the unaudited interim condensed financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2016, our results of operations for the three and nine months ended September 30, 2016 and 2015, and our cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

These unaudited interim condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes included in our amended initial registration statement Form on S1/A. Filed with the SEC on August 30, 2016.

Use of Estimates

The preparation of unaudited condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the unaudited condensed financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, the assessment of useful lives and recoverability of long-lived assets, likelihood and range of possible losses on contingencies, valuations of equity securities and intangible assets, fair value of options, among others. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are stated at the amounts management expects to collect. An allowance for doubtful accounts is recorded based on a combination of historical experience, aging analysis and information on specific accounts. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Management has determined that an allowance of $22,625 is required at September 30, 2016 and December 31, 2015.

 Revenue Recognition

The Company records revenue from ticket sales and sponsorship income upon 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.

Advertising Costs

Advertising costs, which are expensed as incurred, were $281 and $261 for the three month ended September 30, 2016 and 2015, and $541 and $3,788 for the nine months ended September 30, 2016 and 2015, respectively.

Income Taxes

The Company has elected to be treated as a pass-through entity for income tax purposes and is not subject to income taxes. Rather, all items of taxable income, deductions and tax credits are passed through to and are reported by its owners on their respective income tax returns. The Company’s federal tax status as a pass-through entity is based on its legal status as a limited liability company. Accordingly, the Company is not required to take any tax positions in order to qualify as a pass-through entity. The Company is required to file and does file tax returns with the Internal Revenue Service and other taxing authorities. Accordingly, these unaudited condensed financial statements do not reflect a provision for income taxes and the Company has no other tax positions, which must be considered for disclosure.

CFFC Promotions, LLC

Notes to Condensed Financial Statements

(Unaudited)

Note 3. Accounts Receivable

Accounts receivable consists of the following:

Note 4. Property and Equipment

Property and equipment consists of the following:

Note 5. Debt

Note Payable

In February 2014, the Company entered into a loan agreement with Mr. Colombino for $100,000 of borrowings with a due date of February 1, 2017. In 2015 the Company paid $15,000 to reduce the note payable to $67,000 and agreed to defer all remaining payments until February 1, 2017.  As of September 30, 2016 and December 31, 2015, the outstanding balance on the note was $67,000.

HOOSIER FIGHT CLUB PROMOTIONS, LLC

CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(UNAUDITED)

HOOSIER FIGHT PROMOTIONS LLC

CONDENSED BALANCE SHEETS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

HOOSIER FIGHT PROMOTIONS LLC

CONDENSED STATEMENTS OF INCOME

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

HOOSIER FIGHT PROMOTIONS LLC

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

Hoosier Fight Club Promotions, LLC

Notes to Condensed Financial Statements

(Unaudited)

Note 1. Description of Business and Basis of Presentation

Nature of Business

Hoosier Fight Club Promotions, LLC was started in the State of Indiana on March 1, 2009. HFC’s focus is on becoming the premier Mixed Martial Arts (MMA) promoter in Northwest Indiana and the Chicagoland markets. The Porter County Expo Center has become home to HFC.

Basis of Presentation

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

Note 2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited interim condensed financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q and Article 8 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, the unaudited interim condensed financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2016, our results of operations for the three and nine months ended September 30, 2016 and 2015, and our cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

These unaudited interim condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes included in our amended initial registration statement Form on S1/A. Filed with the SEC on August 30, 2016.

Use of Estimates

The preparation of unaudited condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the unaudited condensed financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, the assessment of useful lives and recoverability of long-lived assets, likelihood and range of possible losses on contingencies, valuations of equity securities and intangible assets, fair value of options, among others. Actual results could differ from those estimates.

Hoosier Fight Club Promotions, LLC

Notes to Condensed Financial Statements

(Unaudited)

Accounts Receivable

Accounts receivable are stated at the amounts management expects to collect. An allowance for doubtful accounts is recorded based on a combination of historical experience, aging analysis and information on specific accounts. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Management has determined that no allowance is required at September 30, 2016 and December 31, 2015.

Revenue Recognition 

The Company records revenue from ticket sales and sponsorship income upon 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.

Deferred Revenue

The Company received prepayment from a sponsor as the Company requires prepayment before the date of the event. As of September 30, 2016 and December 31, 2015, the Company had deferred revenue of $6,400 and $7,500, respectively. The Company recognizes revenue and decreases deferred revenue in accordance with its revenue recognition policy.

Income Taxes

The Company has elected to be treated as a pass-through entity for income tax purposes and, as such, is not subject to income taxes. Rather, all items of taxable income, deductions and tax credits are passed through to and are reported by its owners on their respective income tax returns. The Company’s federal tax status as a pass-through entity is based on its legal status as a limited liability company. Accordingly, the Company is not required to take any tax positions in order to qualify as a pass-through entity. The Company is required to file and does file tax returns with the Internal Revenue Service and other taxing authorities. Accordingly, these unaudited condensed financial statements do not reflect a provision for income taxes and the Company has no other tax positions, which must be considered for disclosure. 

Note 3. Property and Equipment

Property and equipment consists of the following:

PUNCH DRUNK INC.

CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(UNAUDITED)

PUNCH DRUNK INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)