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Proelite, Inc. – ‘10-Q’ for 3/31/08

On:  Tuesday, 5/20/08, at 4:20pm ET   ·   For:  3/31/08   ·   Accession #:  1144204-8-31080   ·   File #:  0-31573

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/20/08  Proelite, Inc.                    10-Q        3/31/08    4:630K                                   Vintage/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

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 1: 10-Q        Quarterly Report                                    HTML    351K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     11K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 4: EX-32       Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 


10-Q   —   Quarterly Report


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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
 
For the quarterly period ended March 31, 2008
 
o
Transition report under Section 13 or 15(d) of the Exchange Act
 
For the transition period from                      To                      
 
Commission file number 000-31573
 
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
Los Angeles, CA 90025
(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
 
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
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 
Item 1. Condensed Consolidated Financial Statements. 
 
ProElite, Inc.
Condensed Consolidated Balance Sheets
 
 
     
 
 
(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

3


ProElite, Inc.
Condensed Consolidated Statements of Operations
(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
 
Website operations
   
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

4


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
)
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Balance at March 31, 2008
   
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

5


ProElite, Inc.
Condensed Consolidated Statements of Cash Flows
(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
 
 
6

 
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
 
7


ProElite, Inc.
Notes to Condensed Consolidated Financial Statements
(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.

8


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.

9


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.

10


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.

11


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.
 
12


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.

13


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.

14


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
 
Website development costs
   
349,976
   
349,976
 
 
   
1,780,155
   
1,577,469
 
Accumulated depreciation and amortization
   
(411,127
)
 
(246,538
)
 
 
$
1,369,028
 
$
1,330,931
 

15


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.

16


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.

17


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.

18


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.

19


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
 
Outstanding at December 31, 2007
 
 
4,875,859
 
$
2.77
 
Granted
 
 
1,260,000
 
$
2.29
 
Forfeited
 
 
(192,396
)
$
2.91
 
Exercised
 
 
-
 
$
-
 
Outstanding at March 31, 2008
 
 
5,943,463
 
$
2.66
 
Exercisable at March 31, 2008
 
 
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.


20


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
 
Outstanding at December 31, 2007
   
30,500,137
 
$
2.85
 
Granted
   
4,289,500
   
2.32
 
Expired
   
(47,917
)
 
4.96
 
Exercised
   
(4,750,000
)
 
2.00
 
Outstanding at March 31, 2008
   
29,991,720
 
$
2.90
 
Exercisable at March 31, 2008
   
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.

21


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
 
500,000 shares to be vested on each of June 15, 2008, 2009, 2010 and 2011.
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.

22


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.

23


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.

24


·
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.

 
·
Launched our social-networking MMA community website, www.proelite.com.

Results of Operations 

For the three months ended March 31, 2008. 

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.

25


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

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.

26


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.

27


(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.
 

28


PART II. OTHER INFORMATION 

Item 1. Legal Proceedings. 

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
 
Item 3. Defaults Upon Senior Securities 

None

Item 4. Submission of Matters to a Vote of Security Holders 

None

Item 5. Other Information 

None. 

Item 6. Exhibits. 

See the attached exhibit index.  

29


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.
   
   
   
 
By:  
/s/ Charles Champion
 
 
Charles Champion, Chief Executive Officer
(Principal Executive Officer)
     
 
And:   
/s/ Dale Bolen
 
 
Dale Bolen, Interim Chief Financial Officer
and Chief Accounting Officer
(Principal Financial and Accounting Officer)
 
30


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.
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
31


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
6/15/13
7/31/12
6/15/11
6/15/10
12/31/09
6/15/09
3/5/09
12/31/08
12/15/08
11/30/08
9/30/0810-Q,  NT 10-Q
9/16/08
6/15/08
Filed on:5/20/08
5/19/08
For Period End:3/31/08NT 10-K,  NT 10-Q
3/15/08
2/22/088-K
2/21/084
1/1/08
12/31/0710KSB,  NT 10-K
12/7/078-K
11/15/07
11/5/07
9/30/0710QSB,  NT 10-Q
9/18/078-K
9/12/074,  8-K
9/11/074,  8-K/A
6/28/0710QSB
6/26/07
6/22/07
6/15/078-K
4/18/07
3/31/0710QSB
3/22/07
2/10/07
2/5/07
2/1/07
1/23/07
1/10/07
1/5/07
1/2/07
1/1/07
12/14/06
 List all Filings 
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