SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
o
|
Transition
report under Section 13 or 15(d) of the Exchange
Act
|
For
the transition period from
To
ProElite,
Inc.
(Exact
name of registrant as specified in its charter)
New
Jersey
|
|
22-3161866
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
12121
Wilshire Blvd., Suite 1001
(Address
of Principal Executive Offices)
(310)
526-8700
(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 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
x
No
o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” an “accelerated filer,” a
“non-accelerated filer,” or a “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
|
Accelerated
filer o
|
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o
No
x
As
of May 19, 2008 there were 55,854,724 shares of Common Stock outstanding.
ProElite,
Inc.
INDEX
|
|
Page
No.
|
|
PART
I. FINANCIAL INFORMATION
|
|
Item 1
|
Condensed
Consolidated Financial Statements
|
3
|
|
|
3
|
|
Condensed
Consolidated Statements of Operations for the three month periods
ended
March 31, 2008 and 2007
|
4
|
|
Condensed
Consolidated Statement of Changes in Shareholders’ Equity for the three
month period ended March 31, 2008
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the three month periods
ended
March 31, 2008 and 2007
|
6
|
|
Notes
to Condensed Consolidated Financial Statements
|
8
|
Item 2
|
Management’s
Discussion and Analysis of Operations
|
24 |
Item 3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
27 |
Item 4
|
Controls
and Procedures
|
27 |
|
PART
II. OTHER INFORMATION
|
|
Item 1
|
Legal
Proceedings
|
29 |
Item 1A
|
Risk
Factors
|
29 |
Item 2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29 |
Item 3
|
Defaults
Upon Senior Securities
|
29 |
Item 4
|
Submission
of Matters to a Vote of Security Holders
|
29 |
Item 5
|
Other
Information
|
29 |
Item 6
|
Exhibits
|
29 |
|
Signatures
|
30 |
|
|
31 |
302
Certification of Chief Executive Officer
|
302
Certification of Chief Financial Officer
|
906
Certification of Chief Executive Officer
|
906
Certification of Chief Financial
Officer
|
PART
I. FINANCIAL INFORMATION
ProElite,
Inc.
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,686,654
|
|
$
|
4,427,303
|
|
Restricted
cash
|
|
|
400,803
|
|
|
277,500
|
|
Accounts
receivable, net of allowance of $207,500 and $255,901,
respectively
|
|
|
1,055,495
|
|
|
338,596
|
|
Accounts
receivable - Showtime
|
|
|
45,820
|
|
|
-
|
|
Prepaid
expenses
|
|
|
156,663
|
|
|
133,673
|
|
Other
current assets
|
|
|
1,014,681
|
|
|
1,077,896
|
|
Total
current assets
|
|
|
6,360,116
|
|
|
6,254,968
|
|
Fixed
assets, net
|
|
|
1,369,028
|
|
|
1,428,548
|
|
Other
assets
|
|
|
|
|
|
|
|
Acquired
intangible assets, net
|
|
|
8,681,446
|
|
|
9,022,181
|
|
Goodwill
|
|
|
6,445,795
|
|
|
6,238,652
|
|
Investment
in Entlian/SpiritMC
|
|
|
1,732,306
|
|
|
1,848,003
|
|
Prepaid
distribution costs, net
|
|
|
2,897,479
|
|
|
764,109
|
|
Prepaid
license fees, net
|
|
|
95,908
|
|
|
111,052
|
|
Prepaid
services, net
|
|
|
337,778
|
|
|
408,889
|
|
Deposits
and other assets
|
|
|
148,915
|
|
|
143,915
|
|
Total
other assets
|
|
|
20,339,627
|
|
|
18,536,801
|
|
Total
assets
|
|
$
|
28,068,771
|
|
$
|
26,220,317
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Note
payable and accrued interest - Showtime
|
|
$
|
1,855,757
|
|
$
|
1,822,086
|
|
Accounts
payable
|
|
|
1,259,974
|
|
|
1,531,342
|
|
Accrued
expenses
|
|
|
632,984
|
|
|
733,638
|
|
Accounts
payable and accrued expense - Showtime
|
|
|
-
|
|
|
125,000
|
|
Future
payments due for acquired companies
|
|
|
1,325,000
|
|
|
1,162,500
|
|
Other
accrued liabilities from predecessor company
|
|
|
346,572
|
|
|
346,572
|
|
Other
accrued liabilities
|
|
|
31,918
|
|
|
-
|
|
Deferred
revenue
|
|
|
162,300
|
|
|
-
|
|
West
Coast settlement
|
|
|
150,000
|
|
|
150,000
|
|
Total
current liabilities
|
|
|
5,764,505
|
|
|
5,871,138
|
|
Deferred
rent and lease incentive
|
|
|
154,019
|
|
|
153,309
|
|
Total
liabilities
|
|
|
5,918,524
|
|
|
6,024,447
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 20,000,000 shares authorized, 0 shares
issued
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.0001 par value, 250,000,000 shares authorized, 55,676,155
and
51,659,488 shares issued and outstanding at March 31, 2008 and
December 31, 2007, respectively
|
|
|
5,568
|
|
|
5,166
|
|
Common
stock to be issued
|
|
|
2,312,470
|
|
|
2,249,997
|
|
Additional
paid-in-capital
|
|
|
56,864,624
|
|
|
49,404,897
|
|
Accumulated
other comprehensive income (expense)
|
|
|
15,854
|
|
|
(86,793
|
)
|
Accumulated
deficit
|
|
|
(37,048,269
|
)
|
|
(31,377,397
|
)
|
Total
shareholders’ equity
|
|
|
22,150,247
|
|
|
20,195,870
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
28,068,771
|
|
$
|
26,220,317
|
|
See
Notes
to Condensed Consolidated Financial Statements
ProElite,
Inc.
(Unaudited)
|
|
Three
Months
Ended
|
|
Three
Months
Ended
|
|
Revenue
|
|
|
|
|
|
|
|
Live
events
|
|
$
|
2,974,564
|
|
$
|
311,104
|
|
Pay
per view and television licensing
|
|
|
135,275
|
|
|
-
|
|
Showtime
|
|
|
1,200,000
|
|
|
-
|
|
Internet
|
|
|
26,464
|
|
|
3,500
|
|
Other
|
|
|
119,471
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
4,455,774
|
|
|
314,604
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
Live
events
|
|
|
4,027,894
|
|
|
1,509,939
|
|
Pay
per view and television licensing
|
|
|
24,354
|
|
|
-
|
|
Showtime
(including non-cash warrant amortization expense of $122,075 and
$104,193)
|
|
|
122,075
|
|
|
935,933
|
|
Internet
|
|
|
28,902
|
|
|
58,555
|
|
Other
|
|
|
39,394
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
cost of revenue
|
|
|
4,242,619
|
|
|
2,504,427
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
213,155
|
|
|
(2,189,823
|
)
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Marketing
|
|
|
121,025
|
|
|
103,529
|
|
|
|
|
724,264
|
|
|
415,170
|
|
Live
events
|
|
|
1,326,123
|
|
|
339,390
|
|
General
and administrative expenses
|
|
|
3,698,629
|
|
|
1,621,259
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,870,041
|
|
|
2,479,348
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,656,886
|
)
|
|
(4,669,171
|
)
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(13,986
|
)
|
|
116,224
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(5,670,872
|
)
|
|
(4,552,947
|
)
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,670,872
|
)
|
$
|
(4,552,947
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
52,915,349
|
|
|
42,277,778
|
|
See
Notes
to Condensed Consolidated Financial Statements
ProElite,
Inc.
Condensed
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
Additional
|
|
Other
|
|
|
|
Total
|
|
|
|
Issuable
|
|
Common
Stock
|
|
Paid-
|
|
Comprehensive
|
|
Accumulated
|
|
Shareholders’
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
In
Capital
|
|
Income
(Expense)
|
|
Deficit
|
|
Equity
|
|
|
|
|
278,571
|
|
$
|
2,249,997
|
|
|
51,659,488
|
|
$
|
5,166
|
|
$
|
49,404,897
|
|
$
|
(86,793
|
) |
$
|
(31,377,397
|
) |
$
|
20,195,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuable in connection with acquisitions and for
services
|
|
|
39,280
|
|
|
62,473
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
62,473
|
|
Common
stock issued in connection with warrant exercise by
Showtime
|
|
|
-
|
|
|
-
|
|
|
2,000,000
|
|
|
200
|
|
|
3,999,800
|
|
|
-
|
|
|
-
|
|
|
4,000,000
|
|
Warrant
issued to Showtime
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,255,446
|
|
|
-
|
|
|
-
|
|
|
2,255,446
|
|
Warrants
exercised on a cashless basis by private placement investors and
placement
agent
|
|
|
-
|
|
|
-
|
|
|
2,016,667
|
|
|
202
|
|
|
(202
|
) |
|
-
|
|
|
-
|
|
|
-
|
|
Compensation
expense for stock options and warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,204,683
|
|
|
-
|
|
|
-
|
|
|
1,204,683
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
102,647
|
|
|
-
|
|
|
102,647
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,670,872
|
) |
|
(5,670,872
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317,851
|
|
$
|
2,312,470
|
|
|
55,676,155
|
|
$
|
5,568
|
|
$
|
56,864,624
|
|
$
|
15,854
|
|
$
|
(37,048,269
|
) |
$
|
22,150,247
|
|
See
Notes
to Condensed Consolidated Financial Statements
ProElite,
Inc.
(Unaudited)
|
|
Three
Months
|
|
Three
Months
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,670,872
|
)
|
$
|
(4,552,947
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
Stock
and warrant based compensation
|
|
|
1,204,683
|
|
|
462,715
|
|
Stock
issued for services
|
|
|
17,830
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
654,084
|
|
|
144,484
|
|
Loss
in equity interest in Entlian Co.
|
|
|
115,697
|
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(762,719
|
)
|
|
(12,250
|
)
|
(Increase)
decrease in prepaid expense and other assets
|
|
|
35,224
|
|
|
(86,595
|
)
|
Increase
(decrease) in accounts payable, accrued expenses and other
liabilities
|
|
|
(139,756
|
)
|
|
1,230,890
|
|
Increase
in deferred revenue
|
|
|
95,500
|
|
|
250,000
|
|
Net
cash used in operating activities
|
|
|
(4,450,329
|
)
|
|
(2,563,703
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(45,500
|
)
|
|
(584,832
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(45,500
|
)
|
|
(584,832
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants for cash
|
|
|
-
|
|
|
5,000,000
|
|
Proceeds
from exercise of options and warrants
|
|
|
4,000,000
|
|
|
|
|
Additional
cash pledged as collateral for credit card facility
|
|
|
(123,303
|
)
|
|
(75,000
|
)
|
Payments
related to acquisitions
|
|
|
(224,164
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
3,652,533
|
|
|
4,925,000
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates
|
|
|
102,647
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(740,649
|
)
|
|
1,776,465
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
4,427,303
|
|
|
7,295,825
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,686,654
|
|
$
|
9,072,290
|
|
Supplemental
disclosures of non-cash investing and financing activities:
In
connection with the warrant issued to Showtime on January 5, 2007, the Company
recorded the $608,000 value of the warrant as prepaid distribution
costs.
At
March
31, 2007, the Company reduced its registration rights liability related to
the
shares issued in a October 2006 private placement by $100,000, with a
corresponding increase to paid-in capital.
In
January 2008, the Company recorded 35,714 issuable shares of restricted common
stock for an acquisition in 2007 of website related assets. These shares
were
valued at $44,643, and this amount was recorded in goodwill.
On
February 21, 2008, the Company issued 4,000,000 warrants to purchase common
stock at $2.00 per share to Showtime Networks in connection with a television
distribution agreement with CBS Entertainment. At the grant date, 2,000,000
of
these warrants were vested, and the $2.3 million value of the vested warrants
was recorded as prepaid distribution costs.
On
March
15, 2008, the Company’s placement agent exercised 2,750,000 warrants with a
strike price of $2.00 per share on a cashless basis and received 2,016,667
shares of common stock.
See
Notes
to Condensed Consolidated Financial Statements
ProElite,
Inc.
(Unaudited)
Note
1 Basis of Presentation and Summary of Significant
Accounting Policies
Financial
Statement Presentation
The
accompanying unaudited condensed consolidated financial statements of ProElite,
Inc., a New Jersey company and its subsidiaries (“ProElite” or the “Company”),
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q. Accordingly, certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have
been
condensed or omitted pursuant to such rules and regulations.
In
the
opinion of management, these financial statements reflect all adjustments,
consisting of normal recurring accruals, which are considered necessary for
a
fair presentation. These financial statements should be read in conjunction
with
the audited consolidated financial statements included in our annual report
on
Form 10-KSB for the year ended December 31, 2007. Operating results for interim
periods are not necessarily indicative of operating results for an entire
fiscal
year or any other future periods.
The
Company began its current business in August 2006 and was considered a
development stage company until the first quarter of 2007 when revenues were
first recognized.
Principles
of Consolidation
The
Company’s consolidated financial statements include the assets, liabilities and
operating results of ProElite and its wholly-owned subsidiaries since formation
or acquisition of these entities. All significant intercompany accounts and
transactions have been eliminated in consolidation. The equity method of
accounting is used for its investment in Entlian in which ProElite has
significant influence; this represents common stock ownership of at least
20%
and not more than 50% (see Note 4).
Revenue
Recognition
In
general, the Company recognizes revenue in accordance with Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements modified by Emerging Issues Task Force
("EITF") No. 00-21 and SAB No. 104 which requires that four basic criteria
must
be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the
fee
is fixed and determinable; and (4) collectibility is reasonably assured.
The
Company earns revenue primarily from live event ticket sales, site fees,
sponsorship, television license fees and pay per view fees. The Company also
earns incidental revenue from merchandise and video sales and from online
advertising, subscriptions and online store sales. Ticket sales are managed
by
third-parties, ticket agencies and live event venues. Revenue from ticket
sales
is recognized at the time of the event when the venue provides estimated
or
final attendance reporting to the Company. Revenue from merchandise and video
sales is recognized at the point of sale at live event concession stands.
Revenue from sponsorship, and television distribution agreements is recognized
in accordance with the contract terms, which are generally at the time events
occur. Website revenue is recognized as advertisements are shown, as
subscription terms are fulfilled, and as products are shipped.
Cost
of Revenue
Costs
related to live events are recognized when the event occurs. Event costs
incurred prior to an event are capitalized to prepaid costs and then charged
to
expense at the time of the event. Costs primarily include: fighter purse,
travel, arena costs, television production and amortization of capitalized
value
of warrants issued to Showtime. Cost of other revenue streams are recognized
at
the time the related revenues are realized.
Significant
Estimates for Events
The
Company is required to estimate significant components of live event revenues
and costs because actual amounts may not become available until one or more
months after an event date. Pay-per-view revenue is estimated based upon
projected sales of pay-per-view presentations. These projections are based
upon
information provided from distribution partners. The amount of final
pay-per-view sales is determined after intermediary pay-per-view distributors
have completed their billing cycles. The television production costs of live
events are based upon the television distribution agreement with Showtime,
event-specific production and marketing budgets and historical experience.
Should actual results differ from estimated amounts, a charge or benefit
to the
statement of operations would be recorded in a future period.
Advertising
Expenses
Advertising
is expensed as incurred. Total advertising expense was $315,309 and $162,381
during the quarters ended March 31, 2008 and 2007, respectively.
Accounts
Receivable
Accounts
receivable relate principally to amounts due from television networks for
pay-per-view presentations and from live event venues for ticket sales. Amounts
due for pay-per-view programming are based primarily upon estimated sales
of
pay-per-view presentations and are adjusted to actual after intermediary
pay-per-view distributors have completed their billing cycles. If actual
sales
differ significantly from the estimated sales, the Company records an adjustment
to sales. Accounts receivable from foreign television distribution is generally
based upon contracted fees per event or showing. Accounts receivable from
venues
for ticket sales to live events are generally received within 30 days of
an
event date.
An
allowance for uncollectible receivables is estimated each period. This estimate
is based upon historical collection experience, the length of time receivables
are outstanding and the financial condition of individual
customers.
Fixed
Assets
Fixed
assets primarily consist of computer, office, and video production equipment;
furniture and fixtures; leasehold improvements; computer software; Internet
domain names purchased from others; and website development costs. Fixed
assets
are stated at historical cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on a straight-line basis over
the
estimated useful lives of the assets or, when applicable, the life of the
lease,
whichever is shorter. Equipment is depreciated over estimated useful lives
ranging from three to five years. Furniture, fixtures and leasehold improvements
are depreciated over estimated useful lives ranging from five to seven years.
Computer software is amortized over estimated useful lives ranging from one
to
five years. Internet domain names are amortized over ten years. Website
development costs are amortized over three years.
Goodwill
and Intangible Assets
Statement
of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite. During 2007, the Company acquired amortizable
intangible assets consisting of non-compete agreements, fighter contracts,
merchandising rights and distribution agreements and indefinite-lived intangible
assets consisting of brands and trademarks. The Company amortizes the cost
of
acquired intangible assets over their estimated useful lives, which range
from
one to five years.
SFAS
No.
142 requires goodwill and other indefinite-lived intangible assets to be
tested
for impairment at least on an annual basis and more often under certain
circumstances, and written down by a charge to operations when impaired.
An
interim impairment test is required if an event occurs or conditions change
that
would more likely than not reduce the fair value of the reporting unit below
the
carrying value. The Company does not believe the goodwill and indefinite-lived
intangible assets were impaired at March 31, 2008.
However,
maintaining the goodwill and indefinite-lived intangible assets is predicated
upon the Company substantially improving the operations of CageRage and
maintaining profitable operations of the other acquisitions. The Company
has
developed plans to increase the revenue and profitability of CageRage.
Similarly, maintaining the goodwill related to the ICON purchase requires
the
Company to improve the profitability and/or increase the number of ICON events.
If the Company does not execute successfully against these plans, it will
be
required to record a non-cash charge to operations to reduce the amount of
goodwill and indefinite-lived intangible assets.
Valuation
of Long-Lived Assets
The
carrying amounts of long-lived assets are periodically evaluated for impairment
when events and circumstances warrant such a review.
Prepaid
Distribution Costs
Prepaid
distribution costs represent the value of warrants issued to Showtime Networks
in November 2006 and January 2007 and to CBS Entertainment in February 2008
in
connection with television and pay-per-view distribution agreements. The
value
of the warrants is being amortized to expense over the three-year term of
the
distribution agreement with Showtime and at the time of broadcast of the
first
four events under the CBS agreement.
Prepaid
Services
Prepaid
services included in other assets represent the value of shares issued to
MMA
Live Entertainment, Inc. for fighter services. The value of the shares is
being
amortized to expense over the three-year term of the related
agreement.
Fair
Value of Financial Instruments
The
Company measures its financial assets and liabilities in accordance with
the
requirements of Statement of Financial Accounting Standards (“SFAS”) No. 107,
“Disclosures about Fair Value of Financial Instruments.” The carrying values of
cash equivalents, accounts receivable, accounts payable, and payments due
for
acquired companies approximate fair value due to the short-term maturities
of
these instruments.
Foreign
Currency
The
functional currencies of the Company’s international subsidiary and investee are
the local currency. The financial statements of the foreign subsidiary are
translated into United States dollars using period-end rates of exchange
for
assets and liabilities and average rates of exchange for the period for revenues
and expenses. Foreign currency transaction gains and losses were insignificant
during the period. Foreign currency translation adjustments are shown as
other
comprehensive income (expense) in the accompanying consolidated balance
sheet.
Loss
per Share
The
Company utilizes Statement of Financial Accounting Standards No. 128, “Earnings
per Share.” Basic earnings (loss) per share are computed by dividing earnings
(loss) available to common shareholders by the weighted-average number of
common
shares outstanding. Diluted earnings (loss) per share is computed similar
to
basic earnings (loss) per share except that the denominator is increased
to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Potential common shares include stock that would be
issued
on exercise of outstanding options and warrants reduced by the number of
shares
which could be purchased from the related exercise proceeds.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. It applies
under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
This statement is effective for all financial instruments issued for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal
years. The Company adopted SFAS No. 157 as of January 1, 2008 and it had
no
effect on the Company’s financial position, operations or cash
flows.
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations”, replacing
SFAS 141, “Business Combinations”. This statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (which
SFAS
141 termed the purchase method) be used for all business combinations and
for an
acquirer to be identified for each business combination. This Statement also
establishes principles and requirements for how the acquirer: a) recognizes
and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; b)
recognizes and measures the goodwill acquired in the business combination
or a
gain from a bargain purchase; and c) determines what information to disclose
to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This Statement clarifies that acquirers
are
required to expense costs related to any acquisitions. SFAS 141R will apply
prospectively to business combinations for which the acquisition date is
on or
after fiscal years beginning December 15, 2008. Early adoption is prohibited.
Determination of the ultimate effect of this statement will depend on the
Company’s acquisitions, if any, subsequent to December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51”. SFAS 160
establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net income on
the
face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation
are
equity transactions if the parent retains its controlling financial interest.
In
addition, this statement requires that a parent recognize a gain or loss
in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interest. SFAS
160
is effective for fiscal years beginning on or after December 15, 2008, with
retrospective presentation and disclosure for all periods presented. Early
adoption is prohibited. The Company does not expect it will be affected
by the adoption of SFAS 160.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Note
2 Going Concern
The
Company has incurred losses from operations and negative cash flows from
operations since its inception. These factors raise substantial doubt about
the
Company’s ability to continue as a going concern. The Company’s business plan
calls for expanding the scale of live events and Internet operations. As
a
result, the need for cash has correspondingly increased. Although the Company
had approximately $3.7 million of cash at March 31, 2008, additional financing
is needed to maintain operations and to grow the operations to their desired
levels over the next 12 months.
The
Company is currently seeking additional financing. However, there can be
no
assurances that it will be able to raise sufficient financing on favorable
terms
and conditions.
If
the
Company is unable to raise sufficient financing, it will be required to reduce
its expansion programs and dramatically reduce costs by reducing administrative
expenses and some lines of business. Such actions would limit its potential
for
growth. If sufficient additional financing cannot be obtained, the Company
may
have to curtail or reduce operations. The auditor’s report for the year ended
December 31, 2007 states that substantial doubt exists about the Company’s
ability to continue as a going concern. These financial statements do not
contain any adjustments that may be required should the Company be unable
to
continue as an on-going concern.
Note
3 Net Loss Per Share
Net
loss
per share was calculated by dividing the net loss by the weighted average
number
of shares outstanding during the period. The following table summarizes the
shares of stock included in calculating earnings per share for the three
months
ended March 31, 2008 and 2007:
|
|
Three
Months
Ended
|
|
Three
Months
Ended
|
|
Weighted-average
common shares outstanding - basic
|
|
|
52,915,349
|
|
|
42,277,778
|
|
Dilutive
effect of stock options and warrants
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding - diluted
|
|
|
52,915,349
|
|
|
42,277,778
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.11
|
)
|
The
effect of options and warrants (together 35,935,184 and 19,070,000,
respectively) on the computation of diluted net loss per share is excluded
for
the three months ended March 31, 2008 and 2007 because their effect is
anti-dilutive.
Note
4 Acquisitions and Investments
King
of the Cage
On
September 11, 2007, the Company acquired the outstanding capital stock of
King
of the Cage, Inc. (“KOTC”), a promoter of MMA events primarily in the United
States. The acquisition was made in order to increase the Company’s event
activity. The total purchase price, not including contingent consideration,
was
$5.0 million consisting of: $3,250,000 cash paid at closing, $500,000 cash
paid
in November 2007, 178,571 restricted shares of common stock valued at
$1,249,997, or $7 per share that were to be issued in January 2008, plus
nominal
direct, capitalizable transaction costs. Under the stock purchase agreement,
the
calculation of the number of common shares to be issued is based upon the
quoted
market price of the Company’s common stock subject to a maximum per share price
of $7.00 and a minimum price of $2.00. In April 2008, the Company issued
178,571
shares at $7.00 per share. Additionally, the Company entered into a five
year
employment contract with one of the selling shareholders. (See Note
9.)
The
stock
purchase agreement also calls for contingent consideration to be paid annually
if certain operating results are achieved by KOTC over five years. Contingent
consideration performance thresholds and payment amounts are as follows:
|
|
Performance
Thresholds
|
|
Annual
Contingent
Consideration
Payable
|
|
Years
Ending September 11,
|
|
Number
of
Live
Events
Produced
per
Year
|
|
Annual
EBITDA
(as
defined in
Stock
Purchase
Agreement)
|
|
Cash
|
|
Common
Stock
|
|
2008
to 2012
|
|
|
15
|
|
|
n/a
|
|
$
|
500,000
|
|
|
-
|
|
2008
to 2012
|
|
|
22
|
|
|
n/a
|
|
|
75,000
|
|
$
|
75,000
|
|
2008
to 2012
|
|
|
22
|
|
|
Increasing
from $700,000 to $1,500,000
|
|
|
175,000
|
|
|
175,000
|
|
The
maximum additional contingent consideration is $3.75 million in cash and
$1.25
million in common stock. At March 31, 2008, the Company has accrued a liability
of $325,000 for estimated contingent consideration payable.
As
security for the contingent consideration, the Company granted the former
KOTC
shareholders a first priority security interest in the shares of
KOTC.
The
purchase price was allocated approximately $0.1 million to tangible assets,
$1.1
million to amortizable intangible assets, $1.7 million to non-amortizable
intangible assets, $0.1 million to liabilities and $2.4 million to
goodwill.
For
the
quarter ended March 31, 2008, KOTC recognized revenue of approximately $500,000
and after expenses, including amortization of approximately $105,000 related
to
acquired intangible assets, a net loss of approximately $105,000.
Cage
Rage
On
September 12, 2007, the Company acquired the outstanding capital stock of
two
entities that promote MMA events: Mixed Martial Arts Promotions Limited,
a
British domiciled company (“MMAP”), and Mixed Martial Arts Productions Limited,
a British domiciled company (“MMAD”) (collectively “Cage Rage”). The acquisition
gives the Company an event promotion business in the UK. The transaction
was
treated as a business combination. The total purchase price was $8.6 million
consisting of: $4,000,000 cash paid at closing, 500,000 shares of restricted
common stock issued in October 2007, $1,000,000 cash to be paid in September
2008 plus $100,398 of direct transaction costs. The Company valued the common
stock to be issued at $3.5 million, or $7.00 per share.
The
Company acquired a balance due of approximately $940,000 from a business
owned
by a selling shareholder of CageRage. This amount was due primarily for event
sponsorship prior to the Company’s acquisition of CageRage. If the Company is
unable to collect this amount or offset it against the liability for future
acquisition purchase price payable, it will be reserved with the offset
increasing the goodwill from the purchase of CageRage.
The
purchase price was allocated approximately $0.9 million to accounts receivable,
$0.1 million to tangible assets, $1.7 million to amortizable intangible assets,
$3.8 million to non-amortizable intangible assets, $0.5 million to accounts
payable and $2.6 million to goodwill.
For
the
quarter ended March 31, 2008, Cage Rage recognized revenue of approximately
$465,000 and after expenses, including amortization of approximately $216,000
related to acquired intangible assets, a net loss of approximately
$787,000.
Future
Fight Productions, Inc.
On
December 7, 2007, the Company acquired substantially all the assets of Future
Fight Productions, Inc., (“ICON”) a promoter of MMA events primarily in Hawaii.
The acquisition gives the Company additional promotion talent and access
to
fighters and venues. The assets acquired consisted primarily of a brand name.
Additionally the owner of ICON. signed a consulting contract with the Company
to
continue promoting ICON and other Company-run events. The total purchase
price
was $2.35 million consisting of: $350,000 cash paid at closing and 200,000
shares of restricted common stock, 100,000 of which were issued at closing
and
the remaining 100,000 are issuable over 3 years. Additionally, the Company
will
issue, in three equal installments, 50,000 shares of restricted common stock
in
connection with the consulting agreement with the seller. The shares were
valued
at $10 per share. The purchase price was allocated approximately $0.4 million
to
amortizable intangible assets, $0.6 million to non-amortizable assets and
$1.3
million to goodwill. The value of the shares to be issued for the consulting
agreement, $500,000, will be recorded into expense ratably over the service
period.
The
Company’s first event using the ICON brand occurred in March 2008.
Detail
of Acquisitions
The
following table details the fair value of assets and liabilities acquired
at the
date of acquisition:
|
|
KOTC
|
|
Cage Rage
|
|
ICON
|
|
Total
|
|
Current
assets, exclusive of cash
|
|
$
|
-
|
|
$
|
904,000
|
|
$
|
-
|
|
$
|
904,000
|
|
Fixed
assets
|
|
|
30,000
|
|
|
61,000
|
|
|
-
|
|
|
91,000
|
|
Intangible
assets with indefinite lives
|
|
|
1,700,000
|
|
|
3,800,000
|
|
|
628,000
|
|
|
6,128,000
|
|
Other
intangible assets
|
|
|
1,110,000
|
|
|
1,723,000
|
|
|
410,000
|
|
|
3,243,000
|
|
Goodwill
|
|
|
2,356,000
|
|
|
2,571,000
|
|
|
1,312,000
|
|
|
6,239,000
|
|
Current
liabilities
|
|
|
(34,000
|
)
|
|
(459,000
|
)
|
|
-
|
|
|
(493,000
|
)
|
Consideration
|
|
$
|
5,162,000
|
|
$
|
8,600,000
|
|
$
|
2,350,000
|
|
$
|
16,112,000
|
|
The
Company allocated purchase prices to amortizable intangible assets of $1.9
million to noncompete agreements (with a weighted average amortization period
of
3.9 years), fighter contracts of $1.2 million (with a weighted average
amortization period of 2 years), and $0.1 million to distribution contracts
(with a weighted average amortization period of 2.4 years). The Company recorded
amortization expense of approximately $341,000 related to these intangible
assets during the quarter ended March 31, 2008.
Purchase
Price Allocations
The
purchase price allocations for the acquisitions were based upon discounted
expected cash flow models. Valuation methods including relief from royalty,
excess earnings/contributory asset charges, lost profits, and with and without
competition, were applied to the discounted expected cash flow models to
determine the value of the intangible assets acquired. The purchase prices
of
the acquisitions were then allocated based upon the values of intangible
assets
calculated and the carrying values of assets and liabilities acquired.
Additionally,
the maintenance of goodwill and indefinite-lived intangible assets on the
Company’s balance sheet requires management to achieve improvements in and
expansion of the acquired entities’ operations. Should operations not improve to
desired levels, the Company may be required to record a charge to operations
for
impairment of these assets.
SpiritMC
On
September 18, 2007, the Company made an investment in Entlian Corporation
(“SpiritMC”), a Korean company promoting MMA events in Korea. The investment
gives the Company access to event promotion in Korea and to fighters and
venues
under contract with SpiritMC. The cost of the investment was $2 million
consisting of $1 million cash and $1 million in restricted common shares
(100,000 common shares valued at $10.00 per share). The $10.00 per share
valuation resulted from the Company’s guarantee of a minimum per share value of
$10.00 to Entlian. If the Company’s quoted market price is below $10 per share
on the date the lock up period expires in March 2009, the Company is required
to
issue up to 100,000 additional common shares.
The
Company acquired approximately 54% of SpiritMC’s common stock. This ownership
percentage will dilute down to approximately 32% when SpiritMC’s existing debt
facility with a third party mandatorily converts to common stock at any time
but
no later than January 2010. The Company has one third of the seats on SpiritMC’s
Board of Directors, and therefore will not exercise control over SpiritMC.
The
Company has also determined that it is not the primary beneficiary. As such,
the
Company accounts for the investment in SpiritMC using the equity method.
The
Company recorded a charge of approximately $116,000, representing the Company’s
share of SpiritMC’s loss for the quarter ended March 31, 2008.
Note
5 Other Current Assets
Other
current assets includes a balance due of approximately $940,000 from a business
owned by a former shareholder of CageRage. This amount was due primarily
for
event sponsorship prior to the Company’s acquisition of CageRage. If the Company
is unable to collect this amount or offset it against the liability for future
acquisition purchase price payable, it will be reserved with the offset
increasing the goodwill from the purchase of CageRage.
Note
6 Fixed Assets, Net
Fixed
assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Computer,
office and video production equipment
|
|
$
|
563,823
|
|
$
|
514,114
|
|
Transportation
equipment
|
|
|
17,500
|
|
|
-
|
|
Furniture
and fixtures
|
|
|
340,717
|
|
|
337,629
|
|
Live
event set costs
|
|
|
172,737
|
|
|
56,000
|
|
Leasehold
improvements
|
|
|
232,835
|
|
|
231,335
|
|
Computer
software
|
|
|
73,247
|
|
|
63,482
|
|
Internet
domain names
|
|
|
29,320
|
|
|
24,933
|
|
|
|
|
349,976
|
|
|
349,976
|
|
|
|
|
1,780,155
|
|
|
1,577,469
|
|
Accumulated
depreciation and amortization
|
|
|
(411,127
|
)
|
|
(246,538
|
)
|
|
|
$
|
1,369,028
|
|
$
|
1,330,931
|
|
Note
7 Liabilities
Note
Payable - Showtime
The
Company earned revenue from and incurred expenses to Showtime in connection
with
the television distribution agreement. During the year ended December 31,
2007,
the Company recorded revenue of approximately $240,000 from the pay-per-view
broadcast of the Company’s June 22, 2007 event. During the year ended December
31, 2007, the Company incurred approximately $2.9 million of television
production expenses charged by Showtime to the Company. In February 2008,
the
Company and Showtime offset approximately $2 million of the amount due to
Showtime and $240,133 of accounts receivable due from Showtime into a note
payable of $1,822,086 due on December 15, 2008. The note bears interest at
the
daily prime rate as published by JPMorganChase bank.
Other
Accrued Liabilities
In
connection with the reverse merger of the Company and the predecessor
registrant, the Company assumed accounts payable of approximately $210,000
and
notes payable of approximately $137,000, which existed at the time the
predecessor registrant ceased operations. These liability balances remained
unchanged from the date of the reverse merger.
Note
8 Income Taxes
As
a
result of the Company’s losses, no income taxes were due for the three months
ended March 31, 2008 and 2007. The provision for income taxes was offset
by an
increase in the deferred tax asset valuation allowance.
As
of
January 1, 2007, the Company implemented FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (“FIN
48”),
which
clarifies the accounting for uncertainty in tax positions. This Interpretation
provides that the tax effects from an uncertain tax position can be recognized
in the financial statements, only if the position is more likely than not
of
being sustained on audit, based on the technical merits of the position.
The
adoption on FIN 48 did not have an effect on the Company’s consolidated
financial statements. The total amount of unrecognized tax benefits that
if
recognized would affect the Company’s effective tax rate is zero based on the
fact that the Company currently has a full reserve against its unrecognized
tax
benefits.
Current
income taxes (benefits) are based upon the year’s income taxable for federal,
state and foreign tax reporting purposes. Deferred income taxes (benefits)
are
provided for certain income and expenses, which are recognized in different
periods for tax and financial reporting purposes. Deferred tax assets and
liabilities are computed for differences between the financial statements
and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
period in which the differences are expected to affect taxable income. The
Company had a full valuation allowance against deferred tax assets at March
31,
2008.
At
March
31, 2008, the Company had net operating loss carryforwards of approximately
$25.1 million for federal tax purposes, expiring through 2028. In addition,
the
Company had net operating loss carryforwards of approximately $25.1 million
for
state tax purposes, which expire through 2018. However, a change in ownership
could result in an “ownership change” under Internal Revenue Code Section 382
which restricts the ability of a corporation to utilize existing net operating
losses. The Company also had net operating loss carryforwards of approximately
$2.3 million for UK tax purposes that had been accumulated since acquisition
of
CageRage.
The
Company is subject to Federal and state tax in the United States and tax
in the
United Kingdom. The tax years 2006 and 2007 of the parent company remain
open to
examination by the major taxing jurisdictions to which the Company is subject.
The acquired subsidiaries may have earlier years subject to examination.
The
Company is not currently under examination by any tax authorities.
Note
9 Commitments
The
Company’s lease agreement for office space specifies monthly payments starting
at $25,176 and increasing to $36,472, and the lease expires on July 31, 2012.
The Company also leases additional office space requiring monthly payments
of
approximately $2,600 through 2017. Future minimum annual payments due under
these leases are as follows:
Year
ending December 31,
|
|
Amount
|
|
2008
|
|
$
|
414,000
|
|
2009
|
|
|
429,000
|
|
2010
|
|
|
445,000
|
|
2011
|
|
|
462,000
|
|
2012
|
|
|
286,000
|
|
Thereafter
|
|
|
142,000
|
|
|
|
$
|
2,178,000
|
|
The
Company incurred rent expense of $104,755 and $48,581, respectively for the
quarter ended March 31, 2008 and 2007, respectively.
The
Company has contracts with vendors, including a live events venue. The minimum
annual payments under these contracts are approximately $716,000, and $54,000
in
the years ending December 31, 2008 and 2009, respectively.
The
Company entered into contracts with executives, key employees and consultants.
These contracts call for following minimum annual payments:
Year
ending December 31,
|
|
Amount
|
|
2008
|
|
$
|
2,357,000
|
|
2009
|
|
|
2,135,000
|
|
2010
|
|
|
740,000
|
|
2011
|
|
|
438,000
|
|
2012
|
|
|
229,000
|
|
|
|
$
|
5,899,000
|
|
Additionally,
some employment contracts include performance bonuses related to the operations
of recently acquired businesses. In regards to the King of the Cage subsidiary,
the Company pays a bonus equal to 20% of the subsidiary’s earnings before
interest, taxes, depreciation and, amortization (“EBITDA”) in excess of
specified amounts, escalating from $850,000 to $1.6 million for each of the
twelve-month periods ending September 30, 2008 through 2012. In regards to
the
ICON asset purchase, the Company pays a bonus of $100,000 if the subsidiary’s
EBITDA exceeds $196,000 for the twelve-month period ending November 30,
2008.
Note
10 Litigation and Potential Claims
On
December 14, 2006, the Company received a demand letter (the “Demand Letter”)
from counsel for Wallid Ismail Promocoes E Eventos LTDA EPP and Wallid Ismail
(collectively “Wallid”). The Demand Letter alleges that the Company entered into
a “fully enforceable agreement” to compensate Wallid for allegedly assisting the
Company in raising financing, and that the Company or its directors committed
unspecified fraudulent acts, misappropriated Wallid’s “confidential and
proprietary information,” and engaged in an “intentional and well-orchestrated
scheme to wrongfully remove Wallid” as a principal of the Company. Wallid did
not specify the damages he claims to have sustained as a result of these
acts.
The
Company denies Wallid’s allegations, and denies that it has, or has breached,
any obligations to Wallid. On January 2, 2007, the Company filed a lawsuit
against Wallid in the Superior Court for the State of California, County
of Los
Angeles, LASC Case No. BC 364204 (the “California Lawsuit”). In the California
Lawsuit, the Company seeks a judicial declaration that the allegations in
the
Demand Letter are false. In addition, the California Lawsuit alleges that
Wallid
has misappropriated the Company’s business plan and other confidential and
proprietary information, that Wallid has been unjustly enriched at the Company’s
expense, that Wallid is engaging in unfair competition with the Company ,
and
that Wallid’s actions violate California Business and Professions Code sections
17200, et
seq.
Wallid
answered the complaint on March 22, 2007, and then transferred the case to
federal court. The case will be litigated in federal court, discovery is
underway and the case is set for trial on September 16, 2008.
On
January 10, 2007, Wallid filed suit against the Company, among others, in
federal court in New Jersey (the “New Jersey Lawsuit”). He amended his complaint
on February 1, 2007. On April 18, 2007, the Company filed a motion to dismiss
or
stay the New Jersey Lawsuit because the California Lawsuit was filed first,
or
in the alternative to transfer the case to the federal court in California
where
the California Lawsuit is pending. On June 26, 2007, the court granted the
Company’s motion and ordered the New Jersey Lawsuit transferred to the federal
court in California.
On
November 5, 2007, the federal court in the California lawsuit approved a
stipulation by Wallid and the Company granting Wallid leave to file a
Counterclaim and Third Party Complaint in the California Lawsuit, and providing
for dismissal of the New Jersey Lawsuit without prejudice upon completion
of the
transfer of that action to California. The Counterclaim and Third Party
Complaint asserts substantially the same claims Wallid asserted in the New
Jersey Lawsuit. Wallid seeks: a 23.25% to 26.67% equity interest in the Company;
damages for his losses in an amount to be determined at trial, but no less
than
$75,000; punitive damages of no less than $10,000,000; an imposition of a
receiver to oversee the assets of the Company; an accounting on all income
earned by the Company; and attorneys’ fees and costs of suit. The Company denies
Wallid’s allegations and intends to assert a vigorous defense.
West
Coast filed a civil action against Frank “Shamrock” Juarez (“Shamrock”) on
January 23, 2007, and sought and obtained a temporary restraining order which
prohibited Shamrock from fighting in the Company’s February 10, 2007 event. The
Company subsequently entered into a settlement agreement on February 5, 2007,
pursuant to which West Coast dismissed its civil action and agreed to permit
Shamrock to fight in the February 10, 2007 event. The Company agreed to pay
an
aggregate of $250,000 to West Coast, out of future compensation due to Shamrock
from the Company under the personal services agreement. The Company also
entered
into a co-promotion agreement with West Coast, pursuant to which it agreed
to
co-promote up to three live MMA events that feature Shamrock. To date the
Company has paid West Coast $100,000 of the $250,000 owed. The remaining
portion
totaling $150,000 will be paid to West Coast from future co-produced events.
A
liability of $150,000 has been accrued at March 31, 2007.
On
March
22, 2007, Zuffa, LLC filed a complaint against Showtime Networks, the Company
and Cage Rage in which it alleges that the defendants infringed Zuffa’s
copyrights by airing footage from certain Ultimate Fighting Championship
events
and alleges that the defendants utilized portions of Zuffa’s copyrights in the
televised broadcast of the February 10, 2007 MMA event that was held at the
Desoto Civic Center in Southaven, Mississippi. Zuffa has alleged causes of
action for copyright infringement and unfair competition, and seeks injunctive
relief, compensatory damages or statutory damages, and litigation expenses.
Zuffa has not specified the amount of monetary damages it seeks. The Company
and
Showtime have filed a motion to dismiss the case, and the parties to the
lawsuit
are currently waiting for a decision from the court.
Note
11 Shareholders’ Equity
CBS
Entertainment
In
connection with a television distribution agreement, the Company and Showtime,
an affiliate of CBS, entered into a Subscription Agreement dated as of February
22, 2008 pursuant to which the Company agreed to issue two Warrants to Showtime
(the "New Warrants") each for the purchase of 2,000,000 shares of the Company's
Common Stock at an exercise price of $2.00 per share. The first Warrant vests
immediately and is for a term of five years from February 22, 2008. The second
Warrant vests in four equal tranches of 500,000 shares with each respective
tranche to vest if an Event is broadcast pursuant to the Broadcast Agreement.
The term of each tranche is five years from the date that such tranche vests.
Pursuant to an Investor Rights Agreement between the Company and Showtime
dated
as of February 22, 2008, the Company granted to Showtime certain registration
rights with respect to the shares issuable upon exercise of the New Warrants,
and Showtime agreed that such shares and the New Warrants are subject to
certain
transfers restrictions until March 5, 2009. The value of the first warrant
computed using a Black-Scholes model was approximately $2.3 million and is
expected to be charged as an expense to operations on the dates of the first
four broadcasts under the television distribution agreement. The value of
the
second warrant computed using a Black-Scholes model was approximately $2.5
million and will be charged to operations, if an event is broadcast pursuant
to
the Broadcast Agreement, on the dates of the first four broadcasts under
the
television distribution agreement.
Additionally,
Showtime exercised part of the warrants previously issued to Showtime in
January
2007. The exercise was for an aggregate of 2,000,000 shares of the Company's
Common Stock (the "Warrant Shares") resulting in proceeds to the Company
of
$4,000,000.
Stock-Based
Compensation
The
Company adopted its 2006 Stock Option Plan and amended the plan in 2007,
reserving a total of 8,000,000 shares. The plan provides for the issuance
of
statutory and non-statutory stock options to employees, directors and
consultants, with an exercise price equal to the fair market value of the
Company’s common stock on the date of grant. Options granted under the plan
generally vest quarterly over four years and have a life of 10 years. As
of
March 31, 2008, options to purchase 5,943,464 shares of common stock had
been
granted under the plan.
The
Company accounts for stock-based compensation arrangements with its employees,
consultants and directors in accordance with SFAS No. 123 (revised),
“Share-Based Payment” (SFAS No. 123R). Under the fair value recognition
provisions of SFAS No. 123R, the Company measures stock-based compensation
cost
at the grant date based on the fair value of the award and recognizes
compensation expense over the requisite service period, which is generally
the
vesting period. For the quarters ended March 31, 2008 and 2007, the Company
incurred approximately $0.5 million and $0.3 million, respectively, of expense
related to stock based compensation under this plan and approximately $0.5
million and $0.1 million respectively, of expense related to
warrants.
Stock
Options
The
Company uses a Black-Scholes option pricing model to estimate the fair value
of
stock-based awards with the weighted average assumptions noted in the following
table.
|
|
Three
Months
Ended
|
|
Three
Months
Ended
|
|
Black-Scholes
Model:
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.84%
- 3.41
|
%
|
|
4.50
- 4.84
|
%
|
Expected
life, in years
|
|
|
3.0
- 6.0
|
|
|
6.5
|
|
Expected
volatility
|
|
|
96.0
|
%
|
|
60.0
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility is based on the historical volatility of the share price of companies
operating in similar industries. The expected term is based on management’s
estimate of when the option will be exercised which is generally consistent
with
the vesting period. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve
in
effect at the time of grant.
The
following table represents stock option activity for the three months ended
March 31, 2008:
|
|
Plan
Options
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
4,875,859
|
|
$
|
2.77
|
|
Granted
|
|
|
1,260,000
|
|
$
|
2.29
|
|
Forfeited
|
|
|
(192,396
|
)
|
$
|
2.91
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
|
|
|
5,943,463
|
|
$
|
2.66
|
|
|
|
|
1,999,193
|
|
$
|
2.30
|
|
At
March
31, 2008 the aggregate intrinsic value of options outstanding and the aggregate
intrinsic value of options exercisable was approximately zero and zero,
respectively. The weighted-average grant-date fair value of options granted
during the quarter ended March 31, 2008 and 2007 was $1.50 and $0.60,
respectively. The weighted-average remaining life of outstanding and exercisable
options at March 31, 2008 was 8.12 years and 8.45 years,
respectively.
At
March
31, 2008 there was approximately $5.0 million of unrecognized compensation
cost
related to non-vested options, which is being expensed through 2011.
During
the quarter ended March 31, 2008, the Company granted 1,260,000 options to
employees in an individual grants ranging from 10,000 to 1,000,000 options.
The
options have exercise prices ranging from $2.00 to $7.01, vest over two or
four
years and have terms of 10 years. The aggregate fair value of these options
at
the dates of grant was approximately $1.8 million and is being amortized
on a
straight-line basis over the vesting period.
Warrants
The
Company uses a Black-Scholes option pricing model to estimate the fair value
of
warrants with the assumptions noted in the following table.
|
|
Three
Months
Ended
|
|
Three
Months
Ended
|
|
Risk-free
interest rate
|
|
|
2.11%
- 2.23
|
%
|
|
4.48
- 4.78
|
%
|
Expected
life, in years
|
|
|
2.5 –
3.1
|
|
|
5.0
|
|
Expected
volatility
|
|
|
96
|
%
|
|
60.0
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
The
following table represents warrant activity for the three months ended March
31,
2008:
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
30,500,137
|
|
$
|
2.85
|
|
Granted
|
|
|
4,289,500
|
|
|
2.32
|
|
Expired
|
|
|
(47,917
|
)
|
|
4.96
|
|
Exercised
|
|
|
(4,750,000
|
)
|
|
2.00
|
|
|
|
|
29,991,720
|
|
$
|
2.90
|
|
|
|
|
10,000,554
|
|
$
|
3.16
|
|
At
March
31, 2008 the aggregate intrinsic value of warrants outstanding and the aggregate
intrinsic value of warrants exercisable was approximately $0.8 million and
$0.8
million, respectively. The weighted-average remaining life of outstanding
and
exercisable warrants at March 31, 2008 was 4.9 years and 4.6 years,
respectively.
At
March
31, 2008 there was approximately $30.3 million of unrecognized cost related
to
non-vested warrants (including approximately $23.5 million of unrecognized
cost
related to Burnett warrant tranches three through nine, which is discussed
below), which is being expensed through 2012.
During
the quarter ended March 31, 2008, the Company issued 4,000,000 warrants with
exercise prices of $2.00 to Showtime, as discussed above. Also during the
quarter ended March 31, 2008, the Company’s placement agent for prior financings
exercised on a cashless basis 2.75 million warrants at $2.00 per share for
2,016,667 shares of common stock.
Burnett
Warrants
Effective
June 15, 2007 (and as amended on June 28, 2007), the Company entered into
an
agreement (the "Series Agreement") with JMBP, Inc. ("MBP"), wholly-owned
by Mark
Burnett ("Burnett") in connection with a possible television series involving
mixed martial arts ("Series") for initial exhibition during prime time on
one of
specified networks or cable broadcasters. MBP (or a separate production services
entity owned or controlled by MBP) will render production services in connection
with the Series and will be solely responsible for and have final approval
regarding all production matters, including budget, schedule and production
location. It is anticipated that, as a condition to involvement in the Series,
each of the Series contestants will sign a separate agreement with the Company
or an affiliate of the Company for services rendered outside of the Series.
MBP
will own all rights to the Series. The Company and MBP will jointly exploit
the
Internet rights in connection with the Series on ProElite.com and other websites
controlled by ProElite.com. The Company will be entitled to a share of MBP's
Modified Adjusted Gross Proceeds, as defined. Subject to specified exceptions,
MBP and Mark Burnett have agreed to exclusivity with respect to mixed martial
arts programming. The term of the Agreement extends until the earlier of
the end
of the term of the license agreement with the broadcaster of the Series (the
“License Agreement”) or the failure of MBP to enter into a License Agreement by
June 15, 2008.
Pursuant
to the Series Agreement, the Company and Burnett entered into a Subscription
Agreement (the “Subscription Agreement”) relating to the issuance to Burnett of
warrants to purchase up to 17,000,000 shares of the Company's common stock.
The
warrants are divided into nine tranches as follows:
Tranche
|
|
Number
of Shares
under
Warrants
|
|
Vesting
Date
|
One
|
|
2,000,000
|
|
|
Two
|
|
2,000,000
|
|
|
Three
|
|
2,000,000
|
|
Date
of execution of a License Agreement
|
Four
|
|
1,000,000
|
|
The
date that the first episode of the Series is broadcast on a network
or
cable broadcaster.
|
Five
|
|
1,000,000
|
|
The
last day of the first season.
|
Six
|
|
2,000,000
|
|
The
last day of the second season.
|
Seven
|
|
4,000,000
|
|
1,333,333
shares to be vested on the last day of each of third, fourth and
fifth
seasons, respectively.
|
Eight
|
|
2,000,000
|
|
1,000,000
shares to be vested on the date of broadcast of each of the first
two
derivative pay-per-view events.
|
Nine
|
|
1,000,000
|
|
500,000
shares to be vested on the date of broadcast of each of the next
two
derivative pay-per-view events.
|
The
vesting date of each tranche is subject to acceleration under certain
circumstances. However, the warrants are not exercisable if a License Agreement
is not entered into by June 15, 2008, except for 1,000,000 warrants from
tranche
one. Additionally, the warrants and any shares purchased through exercise
of the
warrants are subject to forfeiture, except for 1,000,000 warrants from tranche
one, if a License Agreement is not entered into within one year of the effective
date.
The
warrants have an exercise price of $3.00 per share. The exercise price is
reduced if the Company issues or sells shares of its common stock, excluding
shares issued as compensation for services or in connection with acquisitions,
for less than $3.00 per share. The expiration date for a particular tranche
of
Warrants is the latest to occur of (i) June 15, 2013; (ii) the date which
is one
year after the vesting date of any such tranche, and (iii) one year after
the
expiration of the term of the License Agreement.
The
value
of the warrants was calculated as approximately $2,637,000 for tranche one
and
$2,880,000 for tranche two using a Black-Scholes option pricing model with
the
following assumptions: expected term of 3 years (for tranche one) and from
3 to
4 years (for separate 500,000 vesting blocks of tranche two), expected
volatility of 60%, risk-free interest rate of 4.7% and dividend yield of
0%. The
value of the tranche one warrants was charged to expense in June 2007. The
value
of the tranche two warrants is being amortized to expense over the vesting
period of each 500,000 warrant vesting block (i.e., from 1 to 4
years).
The
current value of warrants in tranches three through nine was calculated as
approximately: $3.7 million (tranche three), $1.8 million (tranche four),
$1.8
million (tranche five), $3.6 million (tranche six), $7.2 million (tranche
seven), $3.6 million (tranche eight), and $1.8 million (tranche nine) or
approximately $23.5 million in aggregate. The values were calculated using
a
Black-Scholes option pricing model with an expected term of 6 years, expected
volatility of 60%, risk-free interest rate of 4.7% and dividend yield of
0%. The
Company will begin expensing the value of these tranches once there is a
reasonable likelihood of achieving the performance criteria of each tranche
(as
described above) and would be based on the current values at that time. At
September 30, 2007, the Company has recognized no expense related to tranches
three through nine.
The
Company, Burnett and Santa Monica Capital Partners II LLC, ("SMCP"), one
of the
Company's shareholders, entered into an Investor Rights Agreement providing
certain registration rights with respect to the shares purchasable under
the
warrants, co-sale rights with SMCP, restrictions on resale and board observation
rights.
Note
12 Related Party Transactions
The
Company earns revenue from and incurs expenses to Showtime in connection
with a
television production and distribution agreement. During the quarters ended
March 31, 2008 and 2007, the Company recorded revenue of $1.2 million and
$0,
respectively, for television license fees. During the quarters ended March
31,
2008 and 2007, the Company incurred approximately $0.1 million and $0.9 million
of television production expenses charged by Showtime to the Company. These
television production expenses included $0.1 million and $0.1 million of
non-cash amortization of prepaid distribution costs for the quarters ended
March
31, 2008 and 2007, respectively.
The
Company entered into a three-year term consulting agreement and pays a monthly
fee of $30,000 to Santa Monica Capital Partners II (“SMCP”) for services
relating to strategic planning, investor relations, acquisitions, corporate
governance and financing. The Company paid $90,000 to SMCP for this monthly
fee
during the three months ended March 31, 2008. Additionally, the Company incurred
costs of approximately $28,000 for free services to SMCP.
Item 2.
Management’s Discussion and Analysis of Operations.
Forward
Looking and Cautionary Statements
This
Form 10-Q contains certain forward-looking statements. For example, statements
regarding our financial position, business strategy and other plans and
objectives for future operations, and assumptions and predictions about future
product demand, supply, manufacturing, costs, marketing and pricing factors
are
all forward-looking statements. These statements are generally accompanied
by
words such as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),”
“continue,” “forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,”
“should,” “expect” or the negative of such terms or other comparable
terminology. We believe that the assumptions and expectations reflected in
such
forward-looking statements are reasonable, based on information available
to us
on the date hereof, but we cannot assure you that these assumptions and
expectations will prove to have been correct or that we will take any action
that we may presently be planning. However, these forward-looking statements
are
inherently subject to known and unknown risks and uncertainties. Actual results
or experience may differ materially from those expected or anticipated in
the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, regulatory policies, competition
from other similar businesses, and market and general policies, competition
from
other similar businesses, and market and general economic factors. This
discussion should be read in conjunction with the financial statements and
notes
thereto included in our annual report on Form 10-KSB.
If
one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we project. Any forward-looking statement you read in this report
reflects our current views with respect to future events and is subject to
these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy, and liquidity. All subsequent
forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
specifically consider the factors identified in this report, which would
cause
actual results to differ before making an investment decision. We are under
no
duty to update any of these forward-looking statements after the date of
this
report or to conform these statements to actual results.
Overview
Mixed
Martial Arts, commonly referred to as MMA, is a sport growing in popularity
around the world. In MMA matches, athletes use a combination of a variety
of
fighting styles, including boxing, judo, jiu jitsu, karate, kickboxing, muy
thai, tae kwon do, and wrestling. Typically, MMA sporting events are promoted
either as championship matches or as vehicles for well-known individual
athletes. Professional MMA competition conduct is regulated primarily by
rules
implemented by state athletic commissions and is currently permitted in
twenty-one states. Athletes win individual matches by knockout, technical
knockout (referee or doctor stoppage), submission, or judges’ decision.
Since
the
Company’s formation in August 2006, we have established ourselves as a leading,
global promoter of live MMA events and provider of a social-networking website
focused exclusively on MMA. We have agreements to distribute content by
television and DVD throughout the world. To date, we have focused our efforts
primarily on events in the United States and United Kingdom and on our website.
In
2007,
we accomplished the following strategic objectives:
|
·
|
Acquired
well-regarded MMA live event brands throughout the
world:
|
|
· |
King
of the Cage, Inc., a promoter of live MMA events, that has historically
produced in excess of 20 events per
year.
|
|
· |
Mixed
Martial Arts Promotions, Ltd. and Mixed Martial Arts Productions,
Ltd.
(together “CageRage”), a UK-based promoter of live MMA
events.
|
|
· |
The
assets of Future Fight Promotions, Inc., a Hawaii-based promoter
of live
MMA events.
|
|
·
|
Invested
in Entlian Co., a Korea-based promoter of live MMA
events.
|
Results
of Operations
Revenue
Revenue
from live events, consisting primarily of ticket sales, site fees and
sponsorship, was $2,974,564 for the three months ended March 31, 2008
compared to $311,104 for the three months ended March 31, 2007. The
increase was due to higher operating activity in the first quarter of 2008
compared to the first quarter of 2007 when the Company commenced operations.
The
Company’s EliteXC subsidiary earned revenue of $2,575,978 from promoting five
events in the first quarter of 2008 compared to one event in the first quarter
of 2007. Also, the Company’s King of the Cage and Cage Rage subsidiaries, which
were acquired in September 2007, earned live event revenues of $402,764 and
$247,895, respectively.
Revenue
from pay-per-view programming (PPV) and television licensing (excluding
Showtime) was $135,275 for the three months ended March 31, 2008 compared
to $0 for the three months ended March 31, 2007. Additionally, the Company
began earning television license fees in 2008 under the distribution agreement
with Showtime. In 2007, the Company earned no television license fees from
Showtime. In the first quarter of 2008, the Company received television license
fees of $1,200,000 from Showtime.
Revenue
from our website was $26,464 for the three months ended March 31, 2008
compared to $3,500 for the three months ended March 31, 2007. This revenue
consisted primarily of online advertising, online store sales and video
subscriptions.
Other
revenues, which includes DVD sales and fees for licensing fighters under
contract, was $119,471 for the three months ended March 31, 2008 compared
to $0 for the three months ended March 31, 2007. The increase was due to
the Company releasing its first DVD titles for sale during the quarter ended
March 31, 2008 and to the acquisition of King of the Cage, which had DVD
distribution agreements in place at acquisition.
Cost
of revenue
Cost
of
revenue for live event production was $4,027,894 for the three months ended
March 31, 2008 compared to $1,509,939 for the three months ended
March 31, 2007. Live event production costs increased primarily due to our
EliteXC subsidiary promoting five events in the first quarter of 2008 compared
to one in the first quarter of 2007. Live event production costs consist
principally of fighters purses, production of “Barker shows” (i.e.,
event-specific promotional videos), arena rental and related expenses,
event-specific marketing expenses (e.g., Internet, radio and television
advertising, posters and street teams), and travel. Additionally, we incurred
related-party production costs from Showtime of $122,075 in 2008, which
consisted entirely of non-cash amortization of prepaid distribution costs,
and
$935,933, which included $104,193 of non-cash amortization of prepaid
distribution costs, in 2007 for television production. The decrease in
television production costs payable to Showtime was a result of the terms
of the
distribution agreement with Showtime. This agreement called for the Company
to
pay production expenses in 2007 but not in 2008. We expect cost of revenue
for
live events will increase in 2008 as we promote more events. However, we
expect
television production costs payable Showtime to decrease in 2008 in accordance
with the terms of the distribution agreement.
Cost
of
revenue for our website was $28,902 for three months ended March 31, 2008
compared to $58,555 for the three months ended March 31, 2007 and consisted
primarily of merchandise sold through our online store and Internet streaming
expenses.
Marketing
expenses
Marketing
expenses primarily consist of marketing, advertising and promotion expenses
not
directly related to MMA events. Marketing, advertising and promotion expenses
related directly to MMA events are charged to cost of revenue. Marketing
expenses were $121,025 for the quarter ended March 31, 2008 compared to
$103,529 for the quarter ended March 31, 2007 and primarily consisted of
Internet and print advertising, public relations and marketing consultants.
We
anticipate sales and marketing expenses to increase as we promote our Company
and brands.
Website
operations expenses were $724,264 for the three months ended March 31, 2008
compared to $415,170 for the three months ended March 31, 2007. The increase
was
due primarily to hiring employees and consultants to develop and maintain
our
website and conduct business development activities.
Fight
operations
Fight
operations expenses for promotion of our live events were $1,326,123 for
the
three months ended March 31, 2008 compared to $339,390 for the three months
ended March 31, 2007. Fight operations expenses consist primarily of wages
and
consultants’ fees related to day-to-day administration of the Company’s live
events, travel and fighter recruiting and signing bonuses. The increase was
primarily the result of higher staffing levels in 2008 due to operations
starting and to acquisitions in late 2007.
In
2008,
we expect expenses related to our fight operations to increase due to higher
average staffing levels than 2007, increased fighter signing bonuses and
recruiting, and inclusion of a full year of operations of companies acquired
in
late 2007.
General
and administrative expenses
General
and administrative expenses were $3,698,629 for the three months ended March
31,
2008 compared to $1,621,259 for the three months ended March 31, 2007. The
increase was primarily related to increased option and warrant grants resulting
in non-cash, stock-based compensation expense of approximately $1.2 million
in
2008 versus approximately $0.5 million in 2007. We also incurred higher non-cash
depreciation and amortization expenses of approximately $0.7 million in 2008
versus $0.1 million in 2007 due to capital expenditures and to amortization
of
capitalized values of warrants and common stock issued for prepaid services.
The
increase in general and administrative expenses was also due to higher employee
head count resulting in wages of approximately $0.8 million in 2008 versus
$0.3
million in 2007.
In
January 2008, management began cost reductions through a reduction of staff.
We
expect annualized savings from this reduction of approximately $1 million.
However, we expect 2008 general and administrative expenses will increase
over
2007 primarily due to higher average staffing levels.
Liquidity
and Capital Resources
Net
cash
used in operating activities was $4,450,329 during the three months ended
March 31, 2008 compared to $2,563,703 during the three months ended
March 31, 2007. The use of cash was primarily the result of a net loss in
the quarter ended March 31, 2008. The Company is currently working to improve
event profitability and decrease overhead. The loss incurred in the quarter
ended March 31, 2007 resulted from the Company devoting resources to building
its brands and pursuing longer-term strategic goals in advance of related
revenues.
Net
cash
used in investing activities was $45,500 during the three months ended
March 31, 2008 compared to $584,832 during the three months ended
March 31, 2007. The decrease was due to less need for capital expenditures
in the current quarter compared to the prior when the Company was developing
its
social networking website.
Net
cash
provided by financing activities was $3,652,533 during the three months ended
March 31, 2008 compared to $4,925,000 during the three months ended
March 31, 2007. In the quarter ended March 31, 2008, the Company received
$4.0 million from Showtime from the exercise of 2.0 million warrants at $2.00
per share. In the quarter ended March 31, 2007, the Company received $5.0
million from Showtime for the issuance of 5 million shares of common stock
and
6.7 million warrants exercisable at $2.00 per share.
In
September and December 2007, the Company acquired the stock of two fight
promotion companies, purchased the assets of a fight-promotion company, and
made
a significant investment in a fourth. Additionally, the Company’s business plan
calls for expanding the scale of live events and Internet operations. As
a
result, the need for cash has correspondingly increased. Although the Company
had approximately $4 million of cash at December 31, 2007 and received $4
million from warrant exercises in February 2008, additional financing is
needed
to continue to grow the operations to their desired levels over the next
12
months. We are currently seeking additional financing. However, there can
be no
assurances that we will be able to raise sufficient financings on favorable
terms and conditions.
If
we are
unable to raise sufficient financing, we will be required to reduce our
expansion programs, dramatically reduce costs and growth may be limited.
If
sufficient additional financing cannot be obtained, the Company may have
to
curtail or reduce operations. There is no guarantee that we will succeed
in
accomplishing our objectives. The auditor's opinion states there is substantial
doubt exists about our ability to continue as a going concern. These financial
statements do not contain any adjustments that may be required should we
be
unable to continue as an on-going concern.
Item 3.
Quantitative
and Qualitative Disclosures about Market Risk.
Not
applicable.
Item 4.
Controls and Procedures.
(a)
Evaluation
of disclosure controls and procedures.
The
Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures as of
March 31, 2008. Based on such evaluation, such officers have concluded
that, as of March 31, 2008, the Company’s disclosure controls and
procedures were not effective in ensuring that (i) information required to
be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time
periods specified in the SEC’s rules and forms and (ii) information required to
be disclosed by the Company in the reports that it files and submits under
the
Exchange Act is accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. The deficiencies in disclosure controls and procedures
were
related to the deficiencies in our internal control over financial reporting.
In
evaluating our internal controls as of December 31, 2007, our auditors noted
several material weaknesses and a significant deficiency which we are working
to
address. The material weaknesses noted were: (1) The Company’s accounting
records, policies and procedures were not adequately maintained or documented,
and the accounting department did not have sufficient technical accounting
knowledge. (2) Due to a lack of resources, the Company did not analyze financial
and operating results in a timely manner, including spending by management
and
other officers. Additionally, the Company did not proactively review the
legal
contracts entered into for financial implications. (3) Departments did not
always work in a cohesive manner, particularly in regards to required
disclosures, due diligence and acquisitions, and grants of options and warrants.
(4) A portion of the Company’s expenditures for live events are paid by and
reimbursed to an executive/director in advance of review and approval of
the
charges. (5) The Company’s executives, directors and shareholders have business
relationships requiring them to advise, manage and/or provide services to
other
businesses. The Company has engaged in transactions with some of these
businesses. Due to the wide-ranging network of contacts and business
relationships of our executives, directors and shareholders, the Company
was not
always able to devote sufficient resources to identify, monitor and report
all
transactions with such businesses in a timely manner. (6) The Company did
not
have an active audit committee.
(b)
Changes
in internal controls.
The
Company has continued taking remediation steps to enhance its internal control
over financial reporting and reduce control deficiencies. We have been and
are
actively working to eliminate the internal control weaknesses noted by taking
the following measures: We are working to bring all accounting and record
maintenance in-house and creating centralized, on-site document repositories;
We
hired personnel in the accounting department with technical accounting and
financial reporting experience suitable for a public company. Additionally,
we
also hired personnel in our legal department; We have implemented Microsoft
Dynamics/Great Plains accounting software;
We
are
formally documenting Company policies and procedures; We are implementing
a
purchase order and approval system and system of managerial approval prior
to
disbursement of funds; We have implemented reviews of budget and actual results
by department managers; In order to improve communication throughout the
Company
and to identify transactions that may require disclosure, we implemented
twice
weekly meetings of department heads to communicate financial results and
operational activities; We have added new Directors to our Board and Audit
Committee.
As
noted
above, there were changes in our internal controls over financial reporting
that
occurred during the period covered by this report that have materially affected
our internal controls over financial reporting. It is expected that
implementation of the above described remediation steps will have a significant
impact on enhancing our internal control over financial reporting during
2008.
PART
II. OTHER INFORMATION
None.
There have been no material developments since the date of our previously
filed
annual report.
Item
1A. Risk Factors.
Not
applicable.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
None
None
None.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
PROELITE,
INC.
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|
|
|
|
By:
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/s/ Charles
Champion
|
|
|
Charles
Champion, Chief Executive Officer
(Principal
Executive Officer)
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|
|
|
|
And:
|
/s/ Dale
Bolen
|
|
|
Dale
Bolen, Interim Chief Financial Officer
and
Chief Accounting Officer
(Principal
Financial and Accounting Officer)
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
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32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to Section
906 of the Sarbanes-Oxley Act of
2002.
|