Alliance MMA burst into the industry’s collective consciousness last summer as it prepared for the first ever U.S. initial public offering (IPO) of an MMA promotion. After starting its NASDAQ IPO on Sept. 30, 2016 and using part of the proceeds to acquire five regional promotions – Cage Fury Fighting Championship, Hoosier Fight Club, Combat Games MMA, Shogun Fights, and V3 Fights – Alliance’s press releases have been a consistent blitz of front office optimism and positivity. But its back office took a recent stumble and its stock price has steadily plummeted from an initial offer price of $4.50 to $1.29 as of this writing (71% decline).
Bloody Elbow previously reported on an Alliance financial reporting “error” which led to an Apr. 17 class-action shareholder lawsuit. They’re alleging violations of securities law and also appears to be related to an Alliance Form 12b-25 Notification of Late Filing with the Securities and Exchange Commission (SEC) on Mar. 31, which Investopedia describes as a red flag.
“The SEC Form 12b-25 is usually a red flag for investors, indicating that something is not right with a company. It either means that management is incapable of ensuring that basic tasks are performed or that the company is experiencing major financial trouble.”
Having recently taken in roughly $8.9 million in net IPO proceeds – which ended up closer to $6 million after acquisition costs, according to CEO Paul Danner – major financial trouble would appear unlikely so soon. A stronger candidate is the inability to perform basic tasks, especially considering how Alliance was formed and operated and its CEO’s track record.
Alliance MMA didn’t exist prior to February 12, 2015. According to its prospectus, Alliance was formed for the purpose of acquiring companies in the MMA industry. To accomplish this, it used a public offering for funding through a roll-up IPO. In the run up to going public, Alliance reported zero operating revenue and incurred over $1.2 million in net losses. The company’s lack of experience was made clear in Alliance’s third-quarter 10Q report last year, stating that it had “no material operating history.” Alliance admitted that it only recently implemented the controls and procedures associated with being a public company, specifically citing “limited financial and manpower resources.”
The hassles of going public and integrating new acquisitions are never easy for any company, but Alliance’s early misstep is far less surprising given the history of some of the parties involved and previous public MMA promotions.
ProElite (a.k.a. EliteXC) and the International Fight League (IFL) both went public through reverse mergers in 2006 with each promotion coming to an end less than two full years later. During their brief attempts at MMA glory, ProElite secured a financing war chest of roughly $41 million ($29 million from private placements and $12 million from Showtime) with the IFL collecting approximately $35 million. This is according to Bloody Elbow’s calculations based upon each company’s financial reports.
But if MMA has taught observers one thing over the years, it’s that bad decisions trump millions of dollars every time. From the IFL’s team format and edited fights to ProElite’s bloated fighter payments and $9.1 million cash spending spree on the likes of King of the Cage, Cage Rage, ICON Sport, and SpiritMC (Rumble on the Rock was a warrant deal). It wasn’t easy to compete with the UFC back then, and dethroning them would be orders of magnitude more difficult today.
The Alliance model avoids direct UFC competition, serving instead as a developmental league and feeder organization. Its monumental task will be to create meaningful growth within the regional MMA realm while avoiding the second risk factor stated in its most recent 10K, being “perceived as a competitive threat to the UFC and to other premier MMA promotions that may use their significantly greater resources to frustrate our business and growth strategy.”
The Alliance strategy is to acquire and expand regional MMA promotions, license original content, secure national sponsorships, and increase profitability using a ticketing platform. It also recently stepped into the fighter management realm with the acquisition of SuckerPunch Entertainment.
Leading the charge for Alliance is CEO Paul Danner. His management and leadership experience was touted in the company’s prospectus, “particularly in growth stage and rollup companies.” While closer examination of Danner’s public company record certainly shows experience, his results have yet to impress.
Danner’s first stint as a public company CEO was for a few short months in November 1999 with MyTurn.com, a company looking to sell a $299 personal computer using a customer’s television as the monitor. After the dotcom bubble burst in 2000, MyTurn closed its doors in January 2001, according to a summary judgment order from a subsequent legal dispute.
His most recent public company CEO position was with China Crescent Enterprises, worth three cents per share on July 1, 2008 when he took over and two cents on Jan. 31, 2010 when he resigned.
It’s his time in between that’s most interesting towards Alliance.
After MyTurn, by August 2001 Danner founded Paragon Homefunding, a company similar to Alliance today in that it reported no revenue and no operating history prior to turning public. Paragon executed a reverse merger in April 2002 with PlanetRx.com, a public shell company that also seems to have been a dotcom casualty after reportedly shutting down retail operations in March 2001.
Paragon’s business strategy was described in PlanetRx.com’s SEC filings as “to enter the financial services market through a series of planned acquisitions.” In January 2003, according to the newly-named Paragon Financial Corporation’s SEC filings, Paragon acquired Mortgage Express, a mortgage bank focused on the wholesale sub-prime credit market. It would be divested 16 months later.
In late 2005 – with Danner serving as a Paragon director since 2002 and at certain times the chairman and CEO – the SEC noted Paragon’s “significant losses” and expressed its “substantial doubt” about its ability to continue in a letter sent to Danner. He left the company in 2006 and Paragon’s registration was revoked two years later for, among other things, not filing periodic SEC reports for any period after 2005. During Danner’s time at Paragon, the company had at least 12 red flag Notifications of Late Filing with excuses running the gamut from delays in the internal preparation of financial statements to a power outage in the northeastern United States.
Danner certainly appears to have experience in taking a company with no reported revenues and making it public. But successfully operating and growing it? That evidence seems lacking. The U.S. mortgage market was hot from 2002-2006, while Paragon was decidedly not.
All of which leads back to Alliance MMA, facing a tough yet not impossible task, sitting on just under $2.9 million in cash (as of the Mar. 31, 2017) and shares with a value 71% less (as of this writing) than what some people were accepting just over seven and a half months ago. Unfortunately for Alliance’s investors, warning signs were there from the beginning.
Alliance’s underwriter, Network 1 Financial Securities, is a broker-dealer most readers have probably never heard of before. As of this writing, its NASDAQ search history showed 10 IPOs (including Alliance) in the smallest-tier Capital Market, formerly known as the SmallCap Market. Five of the companies were still actively traded with one currently breaking even and four showing shareholder losses, relative to the IPO offering price, ranging from 35-86% based on Bloody Elbow calculations. The other five appear to have been delisted in the past with one company showing a gain of 11% while the other four had apparent losses of 78% or more.
Forbes writer Tom Taulli warned about small underwriters in his IPO book, “Be wary of the very small, unknown firms. An IPO requires numerous resources for which small firms tend to be inadequately equipped. Unfortunately, the deals often do not get much traction and can result in big losses for investors.”
As for Alliance, an $877,000 note to fund startup expenses was paid off with IPO proceeds, and confirmed to Bloody Elbow by Danner. In poker terms, Alliance’s principals appear to be free rolling with the financial risk now shifted to the IPO investors and the regional MMA businesses who accepted shares as partial compensation for selling their companies.
Alliance’s regional presence has continued to expand over recent months with the acquisitions of Iron Tiger Fight Series, Fight Time Promotions, and National Fighting Championship.
To avoid ending up next to ProElite and the IFL in the annals of MMA public company history, Alliance management will not only need to create regional MMA growth in creative ways with controlled and measured spending, but also swiftly get their act together in performing the basic tasks that go hand-in-hand with being a public company.
On May 15, Alliance filed its first quarter 10Q on time and seemingly in good standing with the SEC.
Paul covers MMA analytics and business for Bloody Elbow. Follow him @MMAanalytics.
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