UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-K
 
 ý ANNUALREPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE
ANNUAL PERIOD ENDED DECEMBER 31, 2008
 
 or
 
 oTRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIESEXCHANGE
ACT OF 1934
 
 Commission
file number: 0000-24477
 
 STRATUS MEDIA GROUP,
INC.
 
 (Exact
name of Registrant as specified in its charter)
 
 Nevada
                #86-0776876(State
      of Incorporation)
                (I.R.S.
      Employer Identification No.)
 
 8439 West Sunset Boulevard,
West Hollywood, CA 90069
 (Address
of principal executive offices)
 
 (323)
656-2222
 (Registrant's
telephone number)
 
 Securities
registered pursuant to Section 12(b) of the Act:
 Title of each class
                Name of each exchange on which
      registeredCommon
      Stock par value $0.001
                Over
      the Counter Bulletin Board
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No ý
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes o    No ý
  Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the 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 ý    No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this Chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
  Large accelerated filer o
              
              Accelerated filer o
              
              Non-accelerated filer o
                (Do
      not check if a smaller
                reporting
      company)
              
              Smaller Reporting Company ý
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o    No ý
  The
aggregate market value of the voting and non-voting common stock held by
non-affiliates as of June 30, 2008 was $61,549,700 (excludes shares held by
directors and executive officers). Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the actions of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant. The number of shares of common stock outstanding at April 13,
2009 was 57,673,427 shares.
  
  STRATUS
MEDIA GROUP, INC.
 FORM
10-K
 DECEMBER
31, 2008
 
 INDEX
 
 PagePart
      IItem
      1.
                  Business
                  3Item
      1A.
                  Risk
      Factors
                  9Item
      2.
                  Properties
                  13Item
      3.
                  Legal
      Proceedings
                  14Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  14Part
      IIItem
      5.
                  Market
      for Common Equity, Related Stockholder Matters and Issuer Purchase of
      Equity Securities
                  14Item
      6.
                  Selected
      Financial Data
                  16Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                  18Item
      7A.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  24Item
      8.
                  Financial
      Statements and Supplementary Data
                  25Item
      9.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  44Item
      9A.
                  Controls
      and Procedures
                  44Item
      9A(T).
                  Controls
      and Procedures
                  44Item
      9B.
                  Other
      Information
                  45PART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  45Item
      11.
                  Executive
      Compensation
                  45Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  45Item
      13.
                  Certain
      Relationships, Related Transactions and Director
    Independence
                  45Item
      14.
                  Principal
      Accounting Fees and Services
                  45PART
      IVItem
      15.
                  Exhibits,
      Financial Statement Schedules
                  45Signatures
                  47
  2
 
 CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
  This
Annual Report on Form 10-K, including the “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” section in Item 7
of this report, and other materials accompanying this Annual Report on
Form 10-K contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended.  We
attempt, whenever possible, to identify these forward- looking statements by
words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,”
“estimates,” “believes,” “should,” “projects,” or “continue,” or the negative of
those words and other comparable words. Similarly, statements that describe our
business strategy, goals, prospects, opportunities, outlook, objectives, plans
or intentions are also forward-looking statements.  These statements
may relate to, but are not limited to, expectations of future operating results
or financial performance, acquisitions,, plans for growth and future operations,
as well as assumptions relating to the foregoing.
  These
statements are based on current expectations and assumptions regarding future
events and business performance and involve known and unknown risks,
uncertainties and other factors that may cause actual events or results to be
materially different from any future events or results expressed or implied by
these statements.  These factors include those set forth in the
following discussion and within Item 1A “Risk Factors” of this Annual
Report on Form 10-K and elsewhere within this report.
  You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Annual Report on Form 10-K.  You
should carefully review the risk factors described in other documents that we
file from time to time with the U.S. Securities and Exchange Commission, or
SEC.  Except as required by applicable law, including the rules and
regulations of the SEC, we do not plan to publicly update or revise any
forward-looking statements, whether as a result of any new information, future
events or otherwise, other than through the filing of periodic reports in
accordance with the Securities Exchange Act of 1934, as amended.
  PART
I
   Item 1.   BUSINESS
  Overview
 
 On March
14, 2008, pursuant to an Agreement and Plan of Merger dated as of August 20,
2007 by and among Feris International, Inc. (“Feris”), Feris Merger Sub, Inc.
and Patty Linson, on the one hand, and Pro Sports & Entertainment, Inc.
(“PSEI”), on the other hand, Feris issued 49,500,000 shares of its common stock
in exchange for all of the issued and outstanding shares of the PSEI, resulting
in PSEI becoming a wholly-owned subsidiary of Feris and is the surviving entity
for accounting purposes (“Reverse Merger”).  In July 2008, Feris’
corporate name was changed to Stratus Media Group, Inc. (“Stratus” or
“Company”).  The Company is based in Los Angeles, California and
remains a Nevada corporation.
  PSEI, a
California corporation, was organized in November 1998 and specializes in sports
and entertainment events that it owns, and intends to operate, manage, market
and sell in national markets. In addition, Stratus acquired the business of
Stratus Rewards, LLC (“Stratus Rewards”) in August 2005.  Stratus
Rewards is a credit card rewards marketing program that uses the Visa card
platform that offers a unique luxury rewards redemption program, including
private jet travel, premium travel opportunities, exclusive events and luxury
merchandise.
  The
business plan of Stratus is to operate the Stratus Rewards program and to own
and realize 100% of all available event revenue rights from tickets/admissions,
corporate sponsorship, television, print, radio, Internet, merchandising, and
hospitality. With additional funding, the objective of management is to build a
profitable business by implementing an aggressive acquisition growth plan to
acquire quality companies, build corporate infrastructure, and increase organic
growth. The plan is to leverage operational efficiencies across an expanded
portfolio of events to reduce costs and increase revenues. The Company intends
to promote the Stratus Rewards card and its events together, obtaining maximum
cross marketing benefit among card members, corporate sponsors and Stratus
events.
 
 Strategy
 
 Stratus
is based on a “roll up” strategy, targeting sports and live entertainment events
and companies that are independently owned and operated, or being divested by
larger companies, with the plan to aggregate them into one large leading live
entertainment company. The strategy is to purchase these events for at a target
vazlue of 4-6 times Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”) of the events with the expectation that the combined
EBITDA of the Company from these events will receive a higher valuation multiple
in the public markets.
  3
  Contingent
on the availability of capital, Stratus is targeting acquisitions of event
properties. The goal is to aggressively build-up a critical mass of events,
venues and companies that allow for numerous cross-event synergies.
Specifically:
 
 ·
              On the expense side, to share
      sales, financial and operations resources across multiple events, creating
      economies of scale, increasing the Company’s purchasing power, eliminating
      duplicative costs, and bringing standardized operating and financial
      procedures to all events, thus increasing the margins of all
      events.
 
 ·
              On the revenue side, to present
      to advertisers and corporate sponsors a diverse menu of demographics and
      programming that allows sponsors “one stop shopping” rather than having to
      deal with each event on its
own.
 
 With
these core operational synergies and subject to available capital, Stratus
intends to (1) expand its acquisition strategy of additional live sports and
entertainment events and companies, (2) combine existing and future events to
serve targeted demographic markets, and (3) cross-promote the Stratus Rewards
Visa card with these events to enhance the results of the card and event
businesses.
 
 The
business plan of Stratus is to provide integrated event management, television
programming, marketing, talent representation and consulting services in the
sports and other live entertainment industries which may involve:
  ·
              managing sporting events, such as
      college bowl games, golf tournaments and auto racing team and
      events;
 ·
              managing live entertainment
      events, such as music festivals, car shows and fashion
      shows;
 ·
              producing television programs,
      principally sports entertainment and live entertainment programs;
      and
 ·
              marketing athletes, models and
      entertainers and
organizations.
 
 The
objective of this approach is to consolidate event properties and then craft
individual large-scale deals to allow companies to bundle advertising across
diverse events.
 
 For
example, subject to available capital, Stratus is targeting the acquisition of
several music festivals by the end of 2010, with the goal of combining them with
its current music festival events. Through these acquisitions, the Company plans
to utilize core competencies in the areas of promotion, operations, marketing,
sales and distribution. The objective is to afford Stratus better negotiating
leverage with cost centers such as advertising, marketing, venue and talent
costs on a regional, national and international scale. Additionally, by offering
advertisers access to other Stratus’s properties, the Company hopes to create
greater value for the advertisers by offering other key demographic target
markets to the client and creating greater value, more impression and a higher
cost point for less risk.
 
 Event
Properties
 
 The
following is the Company’s current portfolio of event properties (pursuant to
which Stratus has rights to the names and/or contract rights to operate). Most
of the properties have never been activated by the Company (such as the college
football bowl games), require the payment of additional amounts to complete the
acquisitions (such as the Core Tour alternative sports events) or have not
generated revenues in the last two years and require reactivation (such as auto
shows and music festivals).
 
 College Sports
Events
 
 Freedom Bowl
College Bowl Game acquired in October 1998 by Stratus. Played for the
first time in 1984 at Anaheim Stadium, the Freedom Bowl was for years one of the
“big” bowl games, hosting top teams from UCLA, USC, Washington, Colorado,
Brigham Young and Arizona State. In 1996 this event became inactive and has not
operated since then.  Stratus is seeking certification from the NCAA
to conduct this event after 2010. Stratus intends to host this event at a major
venue for potentially 60,000 or more attendees with attendant television
rights.
 
 Seattle Bowl
College Bowl Game was assumed by Stratus in 2004 and was operated in 2001
and 2002, was discontinued in 2003 and has not been operated since
then.  Stratus is seeking certification from the NCAA to conduct this
event after 2010.
 
 Stratus
is reviewing the opportunity to acquire an additional college bowl game and
combine the three bowls into a series in which common cost centers will be
shared and believes that increased sponsorship interest and revenue will result
by expanding benefits to all three events. Stratus intends to seek major
sponsors for a long-term multi-million title naming sponsorship, providing
recurring revenues for multiple years. Implementation will depend on obtaining
necessary capital and NCAA certifications.
  4
  Action Sports
Events
 
 Core Tour Action Sports & Music
Festival - The Company entered into a contract to acquire its assets in
October 2003. In connection with a settlement agreement on May 27, 2005, a legal
judgment was entered in the Superior Court of the County of Los Angeles against
the Company in favor of the previous owners of the “Core Tour” event, in the
amount of $482,126, plus accrued interest.  The dispute arose out of
the Company’s asset purchase of the “Core Tour” event from the
plaintiffs.  To complete the acquisition, the Company is required to
make payment of the balance of $482,126 in cash.  In the three months
ended December 31, 2008, the Company issued 102,840 shares of common stock
valued at $163,516 to pay the owners of Core Tour accrued interest on this
amount of $172,993. As conducted prior to 2004, the event is a summer series of
“extreme sports” events and concerts which visit multiple cities including Los
Angeles, New York and Chicago. The festival has involves competitions in BMX
dirt motorcycle jumping, in-line skating, mountain boarding and skateboarding. A
concert series runs in conjunction with the events that features music targeted
at the intended market. Past events have resulted in an audience size of
approximately 30,000 per day over three days and included major television
coverage of the events.  Subject to sufficient capital, Stratus
intends to expand this series of events to 4 summer events and 4 winter events
for a total of 8 events. The winter events are planned to include snowboarding,
skiing and snowmobile racing events.  None of these events have been
operated since 2004.
 
 Auto Show
Events
 
 Santa Barbara Concours d’
Elegance - acquired all of the assets in October 1998 from Crane School,
after twenty years of operations. This event was last run in
2007.  This is one of the oldest vintage automobile shows in the USA
and in the past has drawn audiences of 40,000 or more per day over a four-day
period. Anticipated to be held in October of this year, the show is planned to
move from its old location at the Sandpiper golf course in Santa Barbara to the
Santa Barbara International Polo Club and Fields, to increase audience and
revenue opportunities. This event will compliment the ten city tour of Concours
d’ Elegance events. Stratus is adding additional elements to this event which
include a vintage and modern Italian auto show, American classics auto show,
fashion show, music festival, wine festival, charity gala and auction, auto
acution, and a road rally visiting top Central Coast wineries and points of
interest.
 
 The Beverly Hills Concours d’
Elegance - acquired in June 2004 and last operated in August 2007. The
Beverly Hills Concours historically has drawn over 65,000 spectators. In order
to allow for ticket revenue and restricted access, Stratus is moving from the
Rodeo Drive location used in the past to the Playboy Mansion and UCLA. Past
exhibitors at the show have included car enthusiasts such as Jay Leno, Tim Allen
and Nicolas Cage. Past corporate sponsors have included Daimler Chrysler, Rolex,
Lladro, Ferrari, Brooks Brothers, Meguires, Geary’s of Beverly Hills and
Grundy.
 
 Contingent
on available capital, Stratus has taken over at no cost or intends to establish
by 2010, an additional 22 auto shows and intends to combine the 29 auto
shows into a national series in which common cost centers will be shared.
Stratus believes that increased sponsorship interest and revenue will result
from this combination. Stratus is currently seeking series and individual event
sponsors for a sponsorship and, with sufficient capital, intends to run a number
of these events in 2009 and 2010.
 
 Concert and Music
Festivals
 
 Maui Music Festival - Acquired
in October 2003, this three-day event features jazz and alternative rock
performers from around the world.  Past events have attracted 3,000 to
5,000 tourists and locals each day. Stratus plans to expand the event to a 5-day
format with expos, merchandising opportunities and new music genres, including
rhythm and blues and soft rock.   This event has not been
operated since 2002.
 
 Core Tour Music Festival -
This will be part of the Core Tour Action Sports acquisition, if and when
acquired, and is intended to feature music that caters to the younger
demographic (the same group to which the events are targeted). Stratus
intends to expand the series to operate in part with the action sports series
and with additional tour stops that operate separately.  These events
have not been operated since 2004.
 
 Contingent
on available capital, Stratus intends to establish or is taking over at no
cost four additional music festivals that include the Santa Barbara Music
Festival, the Santa Barbara Jazz Festival, the Napa Jazz Festival and the Maui
Jazz Festival. Subject to available capital, Stratus is targeting other key
music festival acquisitions and believes that increased sponsorship interest and
revenue will result. Stratus intends to expand the ticket, merchandising,
concessions and sponsorship revenues by creating a series of events and key
geographic locations, and by providing a venue for emerging talent to showcase,
at little to no talent fee cost to Stratus, and by leveraging the booking of
talent among a larger number of performances to reduce the cost per
event.   To date, these events have not been
conducted.
  5
  Talent
Management
 
 Pro Sports Talent Management -
acquired in November 2000 from a Stratus executive, in the past this effort has
represented over 100 professional and retired athletes and has held
non-exclusive agreements to represent appearances, corporate endorsements and
player contracts to such highly recognized names as Muhammad Ali, Kareem
Abdul-Jabbar and Joe Namath.
 
 Stratus’s
talent representation activities are planned to consist of athletes,
entertainers and models principally with representation in contract and
endorsement negotiations. Stratus expects to receive a percentage of monies
earned by an athlete client, of approximately 4% of a player’s sports contract
and approximately from 15% to 25% of related endorsement contracts. We expect
that modeling clients will pay to Stratus 33% of a photo shoot or runway
contract, 10% of film, television and commercial revenues, and 33% of
endorsement contracts. Revenue from these sources is dependent upon a number of
variables, many of which are outside Stratus’s control, including a player’s
model’s skill, health, and public appeal. Principal operating expenses include
salaries, wages and travel and entertainment expenses Agent representation can
be a lucrative business.  Stratus has not actively represented
athletes since in the past five years.
 
 Affiliate Lifestyle
Marketing
 
 Stratus Rewards VISA -
acquired in August 2005, Stratus Rewards is a lifestyle management and
entertainment club, credit card and rewards system marketed as the “White Card
for Visa,” similar to the Black Card for American Express. The program was
created expressly to support and enhance the affluent lifestyle. The program was
designed to offer private jet travel, premium access to  exclusive
events and personal services to an affluent or near-affluent individual or
business owner who seeks card-card usage rewards not found
elsewhere.
 
 The sponsoring bank that operated the
back-end banking requirements for the Stratus program when the Company acquired
Stratus,  discontinued providing the Company with financial statements
in October 2007 and formally discontinued the program in March
2008.  The Stratus Rewards program is currently inactive and the
Company is seeking a new sponsoring bank to restart the
program.  Stratus is seeking to obtain a sponsoring bank and to expand
the program in 2009 and 2010 so that the Stratus Rewards VISA White Card may be
offered to clients in Europe, Canada, U.K. and Asia, in addition to the United
States.
 
 OPERATIONS
 
 GENERAL
 
 Subject
to raising sufficient capital, the Company’s operations will consist primarily
of (a) live sports events, (b) music concerts, (c) specialized live
entertainment events, (d) other proprietary and non-proprietary entertainment
events, and (e) media platform marketing through its Stratus Rewards Visa
program. Subject to obtaining sufficient capital, the Company and the acquired
businesses also intend to engage in other activities ancillary to its live
entertainment businesses.
 
 Seasonality
 
 The
Company’s event operations and revenues are expected to be largely seasonal in
nature, with generally higher revenue generated in the third and fourth quarters
of the year. The musical concerts that the Company intends to promotes largely
occur in the second and third quarters. To the extent that the Company’s
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters. Therefore, the
seasonality of the Company’s business causes (and, upon consummation of the
intended Acquisitions) will likely probably continue to cause a significant
variation in the Company’s quarterly operating results. These variations in
sales could have a material adverse effect on the timing of the Company’s cash
flows and, therefore, on its ability to service its obligations with respect to
its indebtedness. However, the Company believes that this variation can be
somewhat offset with the acquisition of events that are typically non-summer
seasonal businesses.
 
 Overview
of the Live Entertainment Industry
 
 With
annual attendance at sporting events in the U.S. exceeding 470 million people,
the sports business is estimated to generate $214 billion annually, which is
greater than the U.S. automobile business. Combined with the $140 billion
entertainment business, this represents a $354 billion market with tens of
thousands of event properties available for acquisition. The industry is subject
to recessionary pressures but has historically grown 5-10 percent annually with
greater numbers of fans, higher television ratings, and increased corporate
sponsorships.
  6
  The
sports marketing industry has been historically fragmented, with local and
regional entrepreneurs comprising the majority of the competitors. In the late
1990’s and early 2000’s, several companies launched consolidation efforts and
one of the companies, SFX, was extremely successful in building a multi-million
dollar company. Fourteen months after launching a $256M IPO, SFX was acquired by
Clear Channel Communications for $4.4 billion. By 2000 there were three major
companies — Clear Channel Communications (Owner of SFX), Interpublic Group
(Owner of Octagon and Magna Global Entertainment), and International Management
Group (IMG).
 
 In recent
years, these companies (known as “the Big 3”) have begun divesting significant
portions of their live sports and entertainment holdings for several reasons,
detailed below in the “Competition” section.
 
 For the
marketing segment of the industry that Stratus intends to participate in,, the
addressable market is estimated at $63 billion, divided as follows:
  ·
              Sponsorships
      - $14 billion~
      represents sponsorships of leagues, teams, broadcasts and events.
      Sponsorships are high margin, and have enjoyed robust growth until the
      economic disruptions in late 2008. Sports receive 67 percent of all
      sponsorship dollars, with entertainment receiving nine percent and
      festivals receiving nine
percent.
 
 ·
              Event
      Entrance & Spending - $30 billion~ includes ticket sales of $14
      billion; concessions, parking, on-site merchandise sales of $12 billion;
      and premium seating revenue of $4 billion. Spectator spending in these
      categories grew an average 18% between 2005 and
    2006.
 
 ·
              Endorsements
      - $2 billion
 
 ·
              Media
      Broadcast Rights - $12 billion~ includes the four major
      professional leagues (football, baseball, basketball, hockey), NASCAR, and
      College Sports.
 
 ·
              Professional
      Services — $15 billion~ includes facility and event
      management at $7 billion; financial, legal and insurance services at $6
      billion; marketing and consulting services at $2 billion; athlete
      representation at $385
million
 
 Initially
Targeted Events
 
 Subject
to the availability of sufficient capital, Stratus has targeted specific niches
in the live sports and entertainment markets for its initial growth. These
targets are expected to provide a combination of growth potential and reliable
revenue streams.
 
 Action Sports Industry ~ The
action sports industry has expanded, evolved and contracted in the past ten
years.  The sports superstars admired by youth come not only from
traditional sports, but from skateboarding, snowboarding, motorcycles and bikes.
Currently dominated by the X-Games and now the Action Sports Tour promoted by
NBC and Clear Channel, these events have elevated these non-traditional sports
to new levels.
 
 Running Events Industry ~
Marathons (26.2 miles) dominate road running sports, but there is a growing
market for shorter runs. Half-marathons (13.1 miles), 10 kilometer (6.2 miles)
and 5 kilometer (3.1 miles) races actually draw more participants and can
generate participation revenues equal to all but the major marathons. Until
recently, these shorter events have not been marketed to create larger
sponsorship and advertising interest. Only now are shorter races offering the
merchandising, as well as the hospitality events and amenities associated with
full marathons. Sponsors are beginning to recognize these opportunities.
Revenues for these events could dramatically improve with aggressive marketing
and event design.
 
 Concert and Music Festival
Industry ~ The concert and music festival industry consists primarily of
regional promoters focused generally in major metropolitan markets. According to
Amusement Business, industry gross box office receipts for North American
concert tours totaled over $6 billion in 2007, compared to $1.1 billion in 1997,
representing a compounded annual growth rate of approximately 21%. Stratus
believes that increases in ticket sales during the last several years are in
part due to the increasing popularity of outdoor venues and amphitheaters as
live entertainment venues, as well as an increasing number of tours that attract
older audiences who did not previously attend musical concerts.
  7
  The music
festival industry consists primarily of regional promoters focused in a single
geographic area. Many live event experiences are created with unique accents
that are targeted at specific audiences through activity or location on an
annual basis. Stratus believes there is significant opportunity in developing
these music events that are unique in nature and held in desirable locations.
For example, Stratus’s multiple music festivals, if and when activated, will
provide a destination event and location that can capture fans on a national
basis. Costs can be reduced through consolidating travel expenses including
hotels, ground and air transportation and government travel subsidies. These
travel packages and the desirable locations will allow for a premium ticket
price driven by top name acts that can combine performance with a vacation at a
reduced fee.
 
 Additionally,
Stratus intends to use television and broadcast media to extend the reach of
each event well beyond the festival itself Stratus believes that the music
industry has not realized the full benefits of tour sponsorships. Stratus
expects to change this opportunity by providing the methods by which sponsors
can receive greater advantage of musical acts.
 
 College Sports Industry ~ The
Company believes that the NCAA’s limitation of new bowl games makes the
established,bowl games that exist more valuable. This situation could improve if
a playoff system is instituted in the existing bowl structure.
 
 Motor Sports Industry ~
Specialized motor sports events make up a growing segment of the live
entertainment industry. This growth has resulted from additional demand in
existing markets and new demand in markets where new arenas and stadiums have
been built. The increasing popularity of specialized motor sports over the last
several years has coincided with, and, in part, been due to, the increased
popularity of other professional motor sports events, such as professional auto
racing, including NASCAR, Grand AM and Indy/IRL Car Racing. A number of
specialized motor sports events are televised on several of the major television
networks and are also shown on television in markets outside of the United
States.
 
 In
general, most markets host one to four motor sports events each year, with
larger markets hosting more performances. Stadiums and arenas typically work
with producers and promoters to manage the scheduling of events to maximize
their respective revenues. The cost of producing and promoting a typical single
stadium event ranges from $300,000 to $600,000, and the cost of producing and
presenting a typical single arena event ranges from $50,000 to $150,000.
Typically, third parties create and finance monster trucks, demolition derbies,
thrill acts, air shows and other motor sports concepts and events. They may
perform in an individual event or in an entire season of events. As in other
motor sports, corporate sponsorships and television exposure are important
financial components that contribute to the success of a single event or season
of events.
 
 Automobile
shows and races draw an affluent demographic, and while participant fees, ticket
and merchandise sales can be significant, the main revenue sources are from
sponsors, advertisers, and hospitality events. Shows tend to be regional in
nature, and within the region only a limited number of shows can be profitably
operated. Four shows dominate the western USA; they are independently operated
but could offer an opportunity if consolidated and marketed with synergies in
mind. Additionally, auto shows integrated well with lifestyle sports, such as
golf and tennis, and a coordinated program could enhance the combined event
revenues.
 
 Talent Representation Industry
~ Agenting involves the negotiation of employment contracts and the creation and
evaluation of endorsement, promotional and other business opportunities, for the
client. Agenting can be a lucrative business with high average margins. A
provider in this industry may also provide ancillary services, such as financial
advisory or management services to its clients in the course of the
representation. By acquiring agent firms, Stratus can be in the position to add
known names to its events, thereby increasing ticket sales, sponsorships and
advertising.
 
 Trade Shows/Expos Industry ~
U.S. trade shows generated $4.8 billion in revenue in 2007, with high margins
and low capital expenditures. Trade shows and expos, such as health or auto
shows, can be a natural complement to Stratus’s major events. By creating
“cookie cutter” trade shows and expos that run concurrent with major anchor
events, Stratus expects to gain maximum synergy from its event
properties.
 
 COMPETITION
 
 The live
sports and entertainment industry has been historically fragmented, with local
and regional entrepreneurs comprising the majority of the companies. In the late
1990s, several companies launched consolidation efforts and one of the
companies, most notably SFX.   By the early 2000’s three major
companies — Clear Channel Communications (Owner of SFX), Interpublic Group
(Owner of Octagon, Magna Global Entertainment), and International Management
Group (IMG) had established dominant positions which comprised an estimated
60-70 percent of industry revenues. These companies (known as “the Big 3”) have
begun divesting some of their live sports and entertainment holdings for several
reasons:
 
 1.
                The
      capital markets have demanded that the parent companies focus on core
      competencies.
 2.
                The
      companies face capital shortfalls and view the sports units as easy
      divestments.
 3.
                The
      parent companies have not successfully integrated the sports
      units.
  8
  4.
                A
      larger-than-life owner passed on and the family is reorganizing
      (IMG).
 5.
                There
      are potential conflicts between advertising division and event sales
      division.
 
 Stratus
believes that its acquisition strategy is fundamentally different from, and can
be more profitable, than the strategies used by the “Big 3” in the past. For
example, SFX sought total vertical integration, from ownership of the venue to
negotiating a player’s salary. This required the company to manage the venues,
which tend to run on low seven to eight percent margins. Stratus’s sole focus is
on owning the event content and talent rights that generate high margins and are
in increasing demand in the Experience Economy.
 
 In
addition to the “Big 3” there are a number of second-tier sports marketing
groups. One or more of these groups may be attempting acquisition strategies
that are similar to Stratus’s, though the Company is unaware of any such
efforts. The principal second-tier sports marketing groups are:
  ·
              Velocity Sports &
      Entertainment
 ·
              Vulcan
      Ventures
 ·
              Anschutz Entertainment
      Group
 
 Although
there are several live entertainment companies that are significantly larger
than Stratus, management believes that Stratus can implement its strategy in its
targeted verticals. Additionally, several of these companies are evaluating
their strategic direction and may decide to sell parts of their sports
portfolios, creating acquisition opportunities for Stratus.
 
 The
majority of the remaining live sports and entertainment events are owned and
operated by smaller organizations and individuals. This industry remains
fragmented and Stratus believes it is prime for consolidation.
  Item
1A.    RISK FACTORS
  You
should carefully consider the risks described below before deciding whether to
invest in our common stock. The risks described below are not the only ones we
face. Additional risks not presently known to us or that we currently believe
are immaterial may also impair our business operations and financial results. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be adversely affected. In such case, the trading
price of our common stock could decline and you could lose all or part of your
investment. Our filings with the Securities and Exchange Commission also contain
forward-looking statements that involve risks or uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks we face described
below.
  RISKS
RELATING TO OUR BUSINESS
 
 Our
Company is in early stages of development, which increases the risk of
investments in our common stock
 
 The
Company is currently in the early stages of development, and is planning on
bringing its staffing, infrastructure and marketing programs to an operational
level, subject to available capital.  Funding is needed to pay
liabilities, reestablish operations, establish the business concept within
current markets and to extend the business into new revenue generating markets
through acquisitions.
 
 We
have incurred substantial losses, have not established business operations, and
have received a “going concern” qualification from our auditors, which indicates
that there are substantial risks in the Company establishing profitable
operations and that the Company will need capital to continue as a going
concern.
 
 As noted
in the opinion of our independent financial auditors, “The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern.  As discussed in Note 2 to the financial statements,
the Company has suffered recurring losses and has negative cash flow from
operations.  This raises substantial doubt about the Company’s ability
to continue as a going concern.”  For the years 2008 and 2007, the
Company incurred net losses of $1,093,267 and $2,600,457. In addition, the
Company had accumulated deficits of $13,607,367 and $12,508,600 as of December
31, 2008 and December 31, 2007, and had negative working capital
of, $3,638,863 and $6,421,186 as of December 31, 2008 and
2007.  During 2009, the Company expects to raise capital and initiate
the operation of events and the Stratus Rewards program.  However,
until such time as operations are established with positive cash flows, the
Company will require capital to continue as a going concern.
  9
  The
implementation of the Company’s business plan will require additional financing.
Additional funds will be required to complete acquisitions and integrate them
into the Company. Based on market conditions at the time, the Company may be
unable to obtain sufficient additional financing on favorable terms, or at all.
If it raises additional funds by selling its equity securities, the relative
ownership of its existing investors will be diluted or the new investors could
obtain terms more favorable than those of its existing investors. If it raises
additional funds through debt financing, it could incur significant borrowing
costs as well as face the possibility of default of the Company if it is unable
to repay the financing. If it cannot obtain sufficient financing, it may have to
delay, reduce or eliminate its marketing and promotion campaign, which could
significantly limit its revenues.
 
 In
addition to needing capital for basic operations, our strategy calls for
expansion by acquisition, which will require additional capital.
 
 While the
Company has identified several promising acquisition targets and expects to be
able to secure financing and complete these acquisitions, there can be no
assurances that it will be able to do so. While the Company intends that the
value added by acquisitions will more than offset the dilution created by the
issuance of shares for acquisitions, there can be no assurance that this offset
will occur. Additional financing for future acquisitions may be unavailable and,
depending on the terms of the proposed acquisitions, financings may be
restricted by the terms of credit agreements and privately placed debt
securities contained in the financing. Any debt financing would require payments
of principal and interest and would adversely impact the Company’s cash flow.
Furthermore, future acquisitions may result in charges to operations relating to
losses related to the acquired events, interest expense, or the write down of
goodwill, thereby increasing the Company’s losses or reducing or eliminating its
earnings, if any.
 
 Our
strategy of expansion by acquisitions has inherent risks.
 
 Although
management believes that pursuing the Company’s acquisition strategy is in the
best interests of the Company, such strategy involves substantial expenditures
and risks on the part of the Company. There can be no assurance that
acquisitions will be completed successfully or, if completed, will yield the
expected benefits to the Company, or will not materially and adversely affect
the Company’s business, financial condition or results of operations. There can
be no assurance that the value attributed by the market to acquisitions will
offset the dilution created by the issuance of additional shares. Furthermore,
consummation of the intended acquisitions could result in charges to operations
relating to losses from the acquired events, interest expense, or the write down
of goodwill, which would increase the Company’s losses or reduce or eliminate
its earnings, if any. As a result of the foregoing, there can be no assurance as
to when the intended acquisitions will be consummated or that they will be
consummated. Furthermore, the results of the intended acquisitions may fail to
conform to the assumptions of management. Therefore, in analyzing the
information contained in this document, stockholders should consider that the
intended acquisitions may not be consummated at all.
 
 While
acquisition agreements generally provide for indemnification from the seller for
a limited period of time with respect to certain matters, some sellers may not
be willing to provide indemnification, or may limit the scope of indemnification
or that other material matters not identified in the due diligence process will
subsequently be identified or that matters heretofore identified will prove to
be more significant than currently expected and it is possible that the provider
of the indemnification may be unwilling or unable to provide such
indemnification. Future acquisitions by the Company could result in (a)
potentially dilutive issuances of equity securities, (b) the incurrence of
substantial additional indebtedness and/or (c) incurrence of expenses for
interest, operating losses and the write down of goodwill and other intangible
assets, any or all of which could materially and adversely affect the Company’s
business, financial condition and results of operations. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies and the diversion
of management’s attention from other business concerns. In the event that such
acquisitions were to occur, there can be no assurance that the Company’s
business, financial condition and results of operations would not be materially
and adversely affected.
 
 Our
events have not been run on an annual basis since 2004 and need to be
reestablished.
 
 In 2004,
the Company realized $2,554,600 of revenues from events.  There were
no revenues from events in 2006 and the total revenues from events in 2005, 2007
and 2008 was $252,741, which was derived from smaller-scale, standalone events
rather than recurring annual events of a larger scale anticipated in our
business plan.  The Company has intends to reestablish those events
with sufficient critical mass to afford economies of scale in operations. While
the Company believes that the nature of the event business allows for events to
be readily reestablished and that it has the experience and management expertise
to re-establish those events, there can be no assurance that such events will be
successfully reestablished. The Company believes that it has full ownership of
these events and related intellectual property, but there can be no assurance
that unknown or unforeseen claims will not arise after successful
reestablishment of such events.
  10
  Our
credit card operations have been dormant since October 2007 and we need to
obtain a sponsoring bank to reestablish our Stratus Rewards Visa card
program.
 
 A
contractual relationship with a sponsoring bank is necessary for the Company to
conduct its Stratus Rewards operations. In October 2007, the Company ended its
relationship with its sponsoring bank that was limited to U.S. operations and is
negotiating a new relationship with a larger bank that can support international
operations. While the Company believes that these negotiations will be
successful and this contractual relationship will be established, there can be
no assurance that this relationship will be established.
 
 Our
company depends on its only executive officer.
 
 The
Company depends on Paul Feller, Chairman and CEO of the Company, who is an
at-will employee, and we do not have key-person life insurance policies on him.
In order to achieve its business objectives, the Company must hire additional
personnel to fill key managerial positions and provide them with compensation
packages sufficient to retain their services. The Company’s future success will
depend upon the ability of its executive officers to establish clear lines of
responsibility and authority, to work effectively as a team and to gain the
trust and confidence of its employees. The loss of the services of a key
employee could seriously impair the Company’s ability to operate and improve its
events portfolio, which could reduce its revenues. The Company must also
identify, attract, train, motivate and retain other highly skilled, technical,
managerial, merchandising, engineering, accounting, marketing and customer
service personnel.
 
 Live
entertainment events are largely cash based and are conducted in remote
locations.
 
 Live
entertainment events are conducted in numerous locations and often involve
significant cash collections for tickets, concessions, merchandise, etc. The
Company has developed and will continue to develop controls and procedures
to control cash, to monitor cash proceeds, and to ensure that it is collected
and deposited properly, however there can be no assurance that all cash
proceeds at an event will be deposited properly into the Company
accounts.
 
 We
have not paid dividends on our stock, nor do we plan to do so for the
foreseeable future.
 
 At the
present time, the Company intends to reinvest any cash generated from operations
into expansion of operations and does not intend to pay dividends. The Company
will periodically evaluate the best means to bring value to shareholders and
such evaluations could result in a continuation of this policy. Investors should
look to the growth in value as the primary means of realizing a return on their
investment and should not look to dividends for a return. There can be no
assurance that the proposed operations of the Company will result in sufficient
revenues to enable the Company to operate at profitable levels or to generate a
positive cash flow. Any delay in the successful execution of the Company’s
operations of or the acquisition and marketing strategies could delay the
payment of dividends for an undetermined amount of time.
  RISKS
RELATING TO OUR MARKETS
 
 The
success of our events requires the availability of suitable athletes, artists
and locations.
 
 The
Company’s ability to sell tickets (including subscriptions) is highly dependent
on the availability of popular athletes, artists and events. There can be no
assurance that popular athletes, artists and events will be available to the
Company in the future, or will be available on terms acceptable to the Company.
The lack of availability of these artists and productions could have a material
adverse effect on the Company’s results of operations and financial condition.
Because the Company will operate its live entertainment events under leasing or
booking agreements with venues, its long-term success will depend upon its
ability to renew these agreements upon their expiration or termination. There
can be no assurance that the Company will be able to renew these agreements on
acceptable terms or at all, or that it will be able to obtain attractive
agreements with substitute venues.
 
 Our
industry is very competitive and most of our competitors are substantially
larger than us and have better access to capital needed to successfully run
events.
 
 Competition
in the live entertainment industry is intense, and competition is fragmented
among a wide variety of entities. In addition, television, movies, internet and
other non-live events compete for the time and attention for potential attendees
for live events. The Company intends to compete on a local, regional and
national basis with large venue owners and entertainment promoters for the
hosting, booking, promoting and producing of live entertainment events.
Moreover, the Company’s marketing and consulting operations will compete with
advertising agencies and other marketing organizations. The Company will compete
not only with other live entertainment events, including sporting events and
theatrical presentations, but also with non-live forms of entertainment, such as
television, radio and motion pictures. The Company’s competitors have
substantially greater resources than the Company. Certain of the Company’s
competitors may also operate on a less leveraged basis, and have greater
operating and financial flexibility than the Company. In addition, many of these
competitors have long standing relationships with performers, producers, and
promoters and may offer other services that are not provided by the Company.
There can be no assurance that the Company will be able to compete successfully
in this market or against these competitors.
  11
  Our
events business is dependent on obtaining local permits to conduct the events
and our Stratus Rewards business operates in a very regulated
environment.
 
 The
ability to conduct live entertainment events is subject to extensive local,
state and federal governmental licensing, approval and permit requirements,
including, among other things, approvals of state and local land-use and
environmental authorities, building permits, zoning permits and liquor licenses.
Significant acquisitions may also be subject to the requirements of the
Hart-Scott-Rodino Act or other antitrust laws or regulations. Other types of
licenses, approvals and permits from governmental or quasi-governmental agencies
may also be required for other opportunities that the Company may pursue in the
future, although the Company has no agreements or understandings with respect to
these opportunities at this time. In addition, the Stratus credit card operates
in a highly regulated and controlled market. The Company has used, and intends
to use a large, established commercial bank to run its credit card processing
and payments, but there can be no assurance that the Company may not be subject
to current or future rules or regulations that could adversely affect its
ability to operate the Stratus card in the manner intended or to achieve the
results expected. There can be no assurance that the Company will be able to
obtain the licenses, approvals and permits it may require from time to time in
order to operate its business.
  RISKS
RELATING TO OUR INTELLECTUAL PROPERTY
  Our
proprietary rights may not adequately protect our ability to operate events and
the credit card operations.
  The
Company has purchased a number of events and the Stratus Rewards business and
intends to acquire other events as well.  When an event is purchased,
the Company acquires certain naming, venue and other intellectual property
rights that are needed to conduct these events and card operations and prevent
other parties from infringing on these events.  While the Company does
an extensive check to verify these rights, there can be no assurance that such
intellectual property rights will be sufficient to allow the Company to conduct
such events.
  Third
parties may claim that we infringe their intellectual property, and we could
suffer significant litigation or licensing expense as a result.
 
 If intellectual property rights
relating to past or future acquisitions are challenged by third parties, we
could incur significant costs to defend such rights and/or we could be required
to pay license fees to such third parties if they were to prevail in a legal
challenge to such intellectual property rights.
 
 RISKS
RELATING TO OUR COMMON STOCK
  The
market for our common stock only recently developed and the price of our common
stock may fluctuate substantially in the future.
  From the Reverse Merger on March 14,
2008 until September 19, 2008, our stock was listed on The Pink Sheets LLC, a
privately-owned company whose Electronic Quotation Service provides an
Internet-based, real-time quotation service (“Pink Sheets”).  On
September 19, 2008, our stock was approved for listing on the OTC Bulletin
Board®
(“Bulletin Board”), a regulated quotation service that displays real-time
quotes, last-sale prices, and volume information in over-the-counter equity
securities that provides for improved liquidity and a larger potential
shareholder base that those provided by the Pink Sheets.  On November
3, 2008, we had obtained the CUSIP numbers and market makers needed for our
stock to actively begin trading on the Bulletin Board.  From March 14,
2008 to October 31, 2008, our common stock traded on 41 of the 182 trading days
during this period and traded a total of 49,590 shares, or an average of 1,210
shares per day in which it was traded.  From November 1, 2008 to
December 31, 2008, our stock traded on 40 out of 41 trading days during this
period and a total of 2,831,850 shares were traded, for an average of 70,796
shares per day.
  As a result of this increased trading
activity from November 1, 2008 on, the stock price experienced higher
fluctuations and such fluctuations may be expected in the
future.  While we are looking to add more market making firms which
will actively trade our stock and provide for more efficient pricing, there are
currently between three to five market makers providing quotes on any given
trading day.  This limited number of market makers could result in
wide fluctuations in the price of our common stock.
  If
there are substantial sales of our common stock, our stock price could decline
significantly.
  If our
existing stockholders sell a large number of shares of our common stock or the
public market perceives that these sales may occur, the market price of our
common stock could decline.  At the time of the Reverse Merger on
March 14, 2008, 49,500,000 shares our Stratus common stock were issued to
existing PSEI stockholders, in addition to the 5,500,000 shares held by existing
Feris International shareholders.  Of the shares issued to PSEI
stockholders, 24,077,086 were issued to our Chairman and CEO in exchange for his
PSEI shares, leaving 25,422,914 shares issued to other existing PSEI
stockholders and a total of 30,922,914 shares held by
non-affiliates.  These shares issued or held at the time of the
Reverse Merger have or will be eligible for resale under an exemption from
registration under the revised Rule 144 requirements.  In addition, we
issued 776,114 shares of common stock during 2008 that have, or will become,
eligible for resale under an exemption from registration under the revised Rule
144 requirements.
  12
  If
significant amounts of such shares of stock were sold, such sales could result
in significant declines in our stock price.
  If
we fail to continue to meet all applicable continued listing requirements of the
Over The Counter Bulletin Board Market and our common stock is delisted from
this market, the market liquidity and market price of our common stock could
decline significantly.
  Our
common stock is listed on the Bulletin Board.  Among other
requirements to maintain such listing, we need to file our Quarterly Reports on
Form 10Q and our Annual Report on Form 10K with the SEC in a timely
manner.  We did not file our Quarterly Reports on Form 10Q on time for
the periods ended March 31, 2008 and June 30, 2008, but did file our Quarterly
Report on Form 10Q on time for the period ending September 30,
2008.  If we are late in filing our Annual Report on Form 10K for the
period ending December 31, 2008 or if we are late with our Quarterly Reports on
Form 10Q for the periods ending in 2009 and through the quarter ending June 30,
2010, we will be delisted from the Bulletin Board and will return to the Pink
Sheets.  In the event that deslisting occurs because these SEC reports
are filed late, we will need to file all periodic SEC reports in a timely manner
for one year and meet other applicable listing criteria before becoming eligible
again for Bulletin Board listing.
  In the
event our common stock returns to the Pink Sheets, the market for our common
stock will be adversely affected and the market price for our common stock could
decline significantly.
  As
of December 31, 2008, our Chairman and CEO, along with his father,
collectively controlled approximately 45% of our outstanding common
stock.
  As of
December 31, 2008, our Chairman and CEO, along with his father, together
controlled approximately 45% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to influence our management and
affairs and all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. You and other
stockholders will have minimal influence over these actions. This concentration
of ownership may have the effect of delaying or preventing a change in control
of our company and might adversely affect the market price of our common
stock.
 
 THE
FOREGOING IS A SUMMARY OF SOME OF THE MORE SIGNIFICANT RISKS RELATING TO
INVESTMENT IN THE COMPANY. THE FOREGOING SHOULD NOT BE INTERPRETED AS A
REPRESENTATION THAT THE MATTERS REFERRED TO HEREIN ARE THE ONLY RISKS INVOLVED
IN THIS INVESTMENT, NEITHER THE REFERENCE TO THE RISKS INVOLVED IN THIS
INVESTMENT, NOR THE REFERENCE TO THE RISKS HEREIN SHOULD BE DEEMED A
REPRESENTATION THAT SUCH RISKS ARE OF EQUAL MAGNITUDE. PROSPECTIVE INVESTORS ARE
URGED TO CONSULT THEIR OWN ADVISORS AS TO THE INVESTMENT AND ANY TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
 
 Item
1B.  UNRESOLVED STAFF COMMENTS
 
 Not applicable.
  Item
2.    PROPERTIES
  Our
corporate headquarters are currently located in West Hollywood, California, and
we maintain an executive office in Santa Barbara, California.
  •
              we lease approximately 2,600
      square feet of space in West Hollywood, California, which is used for our
      corporate headquarters, general administrative functions, and sales and
      marketing efforts at $8,500 a month from April 1, 2008 to October 31,
      2008, and a monthly rent of $11,400 per month from November 1, 2008 until
      the end of the lease at June 30, 2010.  The Company is currently
      renegotiating this lease to reduce the amount of square footage and
      related rent payments.
  •
              we lease approximately 1,800
      square feet of space in Santa Barbara, California, for executive use at
      $4,000 per month under a lease expiring December 31,
      2010.
  We
believe that our existing facilities are adequate for our current needs and
suitable additional or substitute space will be available as needed to
accommodate expansion of our operations.
  13
  Item
3.   LEGAL PROCEEDINGS
  In
connection with a settlement agreement about May 27, 2005, a judgment was
entered in the Superior Court of the County of Los Angeles against the Company
in favor of the previous owners of the “Core Tour” event, in the amount of
$482,126 plus interest.  The dispute arose out of the Company’s asset
purchase of the “Core Tour” event from the plaintiffs.  As of December
31, 2008, the Company has recorded the $482,126 amount of the
judgment.  On July 31, 2008, Stratus Management and Core Tour have
agreed to a settlement whereby Stratus will retain all rights of the Core Tour
events in exchange for payment of $482,126 in cash by December 31, 2008 and
74,000 shares of Common Stock as payment of interest.  On December 31,
2008, the Company issued 102,840 shares of our common stock to the owners of the
Core Tour as payment for accrued interest on the judgment as of that
date.  These shares were valued at the $163,516 based on the closing
stock price of our common stock as of that date, and accrued interest on the
books of $172,993 was reversed, with the difference going to other
income.
  On August
18, 2008 two judgments totaling $70,805 were entered against Stratus related to
wage claims for two former employees.  This amount was taken as an
expense in the three months ended September 30, 2008.
 
 In or
around October 2008, the Company was made aware by a third party that HollyRod
Foundation (“HollyRod”), a California non-profit corporation, had filed a
lawsuit in the Superior Court of California, County of Los Angeles, seeking to
collect $100,000 of sponsorship fees related to the Company’s sponsorship of a
function held by HollyRod in Phoenix Arizona in January 2008 related to the
Super Bowl.  In February 2009, Hollyrod filed a motion for summary
judgment with the court.  The Company believes the case presented by
HollyRod is without merit and that HollyRod breached the agreement by failing to
perform on nearly all required actions required of HollyRod in the sponsorship
agreement.  The Company has notified HollyRod that the Company has not been
properly served and, upon being properly served, the Company intends to
vigorously defend this action and believes it will prevail, but there can be no
assurance that it will do so.  The Company has not taken a charge in the
twelve months ended December 31, 2008 for this action.
  Item
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  There
were no issues submitted to a vote of security holders during the three months
ended December 31, 2008.
  PART
II
  Item
      5.
                  MARKETFOR
      COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY
      SECURITIES
  PRICE
RANGE OF COMMON STOCK
 
 Prior to
the Reverse Merger on March 14, 2008, our stock was listed on The Pink Sheets
LLC, a privately owned company whose Electronic Quotation Service provides an
Internet-based, real-time quotation service (“Pink Sheets”).  From
March 14, 2008 until September 19, 2008, our stock continued to be listed on the
Pink Sheets   On September 19, 2008, our stock was approved for
listing on the OTC Bulletin Board®
(“Bulletin Board”), a regulated quotation service that displays real-time
quotes, last-sale prices, and volume information in over-the-counter equity
securities that provides for improved liquidity and a larger potential
shareholder base that those provided by the Pink Sheets.  On November
3, 2008, we had obtained the CUSIP numbers and market makers needed for our
stock to actively begin trading on the Bulletin Board.
 
 The
following table sets forth the high and low prices of our common stock since the
Reverse Merger on March 14, 2008 for each period indicated and are as reported
by the Pink Sheets or Bulletin Board for the dates indicated above.
 
 2008Fiscal
      Period
                      
                      High
                      
                      
                      LowFirst
      Quarter (From March 14, 2008 – Pink Sheets)
                      
                      $
                      1.90
                      
                      
                      $
                      1.10Second
      Quarter
                      
                      $
                      2.10
                      
                      
                      $
                      1.50Third
      Quarter (From September 19, 2008 – Bulletin Board)
                      
                      $
                      2.25
                      
                      
                      $
                      1.50Fourth
      Quarter
                      
                      $
                      2.00
                      
                      
                      $
                      1.20
  14
  As of
December 31, 2008, there were approximately 1,470 stockholders of record of
our common stock. We derived the number of stockholders of record by reviewing
the number of former PSEI stockholders as of December 31, 2008, and by
reviewing the listing of Non-Objecting Beneficial Owners of our common stock as
of December 31, 2008.
 
 STOCK
PERFORMANCE GRAPH
  The graph
set forth below compares the cumulative total stockholder return on our common
stock between March 17, 2008 (the first trading day following the filing of a
Report on Form 8-K on March 14, 2008 for the Reverse Merger) and
December 31, 2008, versus the cumulative total return of the NASDAQ
Composite Index and Russell 3000 Growth Index over the same period. This graph
assumes the investment of $100,000 at the closing price of the market on March
17, 2008 in our common stock, the NASDAQ Composite Index and the Russell 3000
Growth Index, and assumes the reinvestment of dividends, if any. We have never
paid dividends on our common stock and have no present plans to do
so.
  Since
there is no published industry or line-of-business index for our business
reflective of the performance the Company, nor do we believe we can reasonably
identify a publicly-trraded peer group, we measure our performance with issuers
of similar market capitalization. We selected the Russell 3000 Growth Index
because it measures the performance of a broad range of companies with lower
market capitalization than those companies included in the S&P 500 Index,
and we believe it is more appropriate comparison given our current market
capitalization.  We also compare our performance with the NASDAQ
Composite Index. The comparisons shown in the graph below are based upon
historical data. We caution that the stock price performance shown in the graph
below is not necessarily indicative of, nor is it intended to forecast, the
potential future performance
 
 
  15
  The
following are the numbers used in the above graph, presented in tabular
form:
 
 NASDAQ
                          
                          
                          Russell
      3000Date
                          
                          Composite
                          
                          
                          Growth
                          
                          
                          Stratus3/17/08
                          
                          $
                          100,000
                          
                          
                          $
                          100,000
                          
                          
                          $
                          100,0003/31/08
                          
                          
                          100,930
                          
                          
                          
                          100,564
                          
                          
                          
                          143,6364/30/08
                          
                          
                          106,864
                          
                          
                          
                          105,768
                          
                          
                          
                          181,8185/30/08
                          
                          
                          111,736
                          
                          
                          
                          109,667
                          
                          
                          
                          181,8186/30/08
                          
                          
                          101,550
                          
                          
                          
                          101,776
                          
                          
                          
                          181,8187/31/08
                          
                          
                          103,012
                          
                          
                          
                          100,097
                          
                          
                          
                          181,8188/29/08
                          
                          
                          104,872
                          
                          
                          
                          101,135
                          
                          
                          
                          180,9099/30/08
                          
                          
                          92,648
                          
                          
                          
                          89,148
                          
                          
                          
                          186,36410/31/08
                          
                          
                          76,218
                          
                          
                          
                          73,265
                          
                          
                          
                          181,81811/28/08
                          
                          
                          68,025
                          
                          
                          
                          67,062
                          
                          
                          
                          135,45512/31/08
                          
                          
                          69,841
                          
                          
                          
                          68,313
                          
                          
                          
                          144,545
 
 The
preceding Stock Performance Graph is not deemed filed with the Securities and
Exchange Commission and shall not be incorporated by reference in any of our
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, whether made before or after the date hereof and
irrespective of any general incorporation language in any such
filing.
  DIVIDEND
POLICY
  Since our
inception, we have never declared or paid any cash dividends. We currently
expect to retain earnings for use in the operation and expansion of our
business, and therefore do not anticipate paying any cash dividends in the
foreseeable future.
  EQUITY
COMPENSATION PLANS
  The
information required by this item regarding equity compensation plans is set
forth in Part III, Item 12 “Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters” of this Annual Report on
Form 10-K.
  UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Unregistered
Sales of Equity Securities during the Three Months Ended December 31,
2008
 
 During
the three months ended December 31, 2008 the Company raised $20,000 through the
issuance of 23,880 shares of common stock, and collected $50,000 from a stock
subscription receivable for 59,701 shares that were issued in the three months
ended September 30, 2008.
 
 All
securities were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)
and Regulation D.
 
 Use
of Proceeds from Sale of Registered Equity Securities
  None.
  PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  None
during the fourth quarter of 2008.
  Item
6.   SELECTED FINANCIAL DATA
  The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and the accompanying notes and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included at Part II, Item 7 in this Annual Report on Form 10-K.
The selected data in this section is not intended to replace the consolidated
financial statements.
  16
  Condensed,
Summary Income Statement and Balance Sheet
 
 Years Ended December
    31,2004
                                                              
                                                              
                                                              2005
                                                              
                                                              
                                                              2006
                                                              
                                                              
                                                              2007
                                                              
                                                              
                                                              2008Condensed,
      Summary Income StatementEvent
      revenues
                                                              
                                                              $
                                                              2,554,600
                                                              
                                                              
                                                              $
                                                              89,876
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              129,259
                                                              
                                                              
                                                              $
                                                              33,606Stratus
      White Card revenues
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              153,436
                                                              
                                                              
                                                              
                                                              380,989
                                                              
                                                              
                                                              
                                                              179,502
                                                              
                                                              
                                                              
                                                              6,583Total
      revenues
                                                              
                                                              
                                                              2,554,600
                                                              
                                                              
                                                              
                                                              243,312
                                                              
                                                              
                                                              
                                                              380,989
                                                              
                                                              
                                                              
                                                              308,761
                                                              
                                                              
                                                              
                                                              40,189Total
      cost of revenues
                                                              
                                                              
                                                              2,533,619
                                                              
                                                              
                                                              
                                                              537,929
                                                              
                                                              
                                                              
                                                              9,250
                                                              
                                                              
                                                              
                                                              76,120
                                                              
                                                              
                                                              
                                                              24,679Gross
      profit
                                                              
                                                              
                                                              20,981
                                                              
                                                              
                                                              
                                                              (294,617
                                                              )
                                                              
                                                              
                                                              371,739
                                                              
                                                              
                                                              
                                                              232,641
                                                              
                                                              
                                                              
                                                              15,510Total
      operating expenses
                                                              
                                                              
                                                              2,655,543
                                                              
                                                              
                                                              
                                                              1,073,273
                                                              
                                                              
                                                              
                                                              1,102,623
                                                              
                                                              
                                                              
                                                              3,051,596
                                                              
                                                              
                                                              
                                                              1,006,603Loss
      from operations
                                                              
                                                              
                                                              (2,634,562
                                                              )
                                                              
                                                              
                                                              (1,367,890
                                                              )
                                                              
                                                              
                                                              (730,884
                                                              )
                                                              
                                                              
                                                              (2,818,955
                                                              )
                                                              
                                                              
                                                              (991,093
                                                              )Other
      (income)/Expense
                                                              
                                                              
                                                              6,329
                                                              
                                                              
                                                              
                                                              356,250
                                                              
                                                              
                                                              
                                                              (128,054
                                                              )
                                                              
                                                              
                                                              (380,659
                                                              )
                                                              
                                                              
                                                              (84,315
                                                              )Interest
      expense
                                                              
                                                              
                                                              69,096
                                                              
                                                              
                                                              
                                                              112,890
                                                              
                                                              
                                                              
                                                              137,870
                                                              
                                                              
                                                              
                                                              162,161
                                                              
                                                              
                                                              
                                                              186,489Total
      other (income)/expenses
                                                              
                                                              
                                                              75,425
                                                              
                                                              
                                                              
                                                              469,140
                                                              
                                                              
                                                              
                                                              9,816
                                                              
                                                              
                                                              
                                                              (218,498
                                                              )
                                                              
                                                              
                                                              102,174Net
      loss
                                                              
                                                              $
                                                              (2,709,987
                                                              )
                                                              
                                                              $
                                                              (1,837,030
                                                              )
                                                              
                                                              $
                                                              (740,700
                                                              )
                                                              
                                                              $
                                                              (2,600,457
                                                              )
                                                              
                                                              $
                                                              (1,093,267
                                                              )Basic
      and diluted loss per share
                                                              
                                                              $
                                                              (0.06
                                                              )
                                                              
                                                              $
                                                              (0.04
                                                              )
                                                              
                                                              $
                                                              (0.02
                                                              )
                                                              
                                                              $
                                                              (0.05
                                                              )
                                                              
                                                              $
                                                              (0.02
                                                              )Basic
      and diluted weighted-average common shares
                                                              
                                                              
                                                              44,007,814
                                                              
                                                              
                                                              
                                                              46,374,669
                                                              
                                                              
                                                              
                                                              48,364,526
                                                              
                                                              
                                                              
                                                              48,845,906
                                                              
                                                              
                                                              
                                                              53,959,831As of December 31,2004
                                                              
                                                              
                                                              2005
                                                              
                                                              
                                                              2006
                                                              
                                                              
                                                              2007
                                                              
                                                              
                                                              2008Condensed,
      Summary Balance SheetTotal
      current assets
                                                              
                                                              $
                                                              120,403
                                                              
                                                              
                                                              $
                                                              528,893
                                                              
                                                              
                                                              $
                                                              405,865
                                                              
                                                              
                                                              $
                                                              187,853
                                                              
                                                              
                                                              $
                                                              219,163Property
      and equipment, net
                                                              
                                                              
                                                              21,647
                                                              
                                                              
                                                              
                                                              38,149
                                                              
                                                              
                                                              
                                                              25,530
                                                              
                                                              
                                                              
                                                              12,913
                                                              
                                                              
                                                              
                                                              2,469Intangible
      assets, net
                                                              
                                                              
                                                              3,356,339
                                                              
                                                              
                                                              
                                                              4,519,818
                                                              
                                                              
                                                              
                                                              4,474,408
                                                              
                                                              
                                                              
                                                              4,428,998
                                                              
                                                              
                                                              
                                                              4,067,355Goodwill
                                                              
                                                              
                                                              0
                                                              
                                                              
                                                              
                                                              2,073,345
                                                              
                                                              
                                                              
                                                              2,073,345
                                                              
                                                              
                                                              
                                                              2,073,345
                                                              
                                                              
                                                              
                                                              2,073,345Total
      assets
                                                              
                                                              $
                                                              3,498,389
                                                              
                                                              
                                                              $
                                                              7,160,205
                                                              
                                                              
                                                              $
                                                              6,979,148
                                                              
                                                              
                                                              $
                                                              6,703,109
                                                              
                                                              
                                                              $
                                                              6,362,332Current
      liabilitiesBank
      overdraft
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              6,100
                                                              
                                                              
                                                              $
                                                              66,980
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              -Accounts
      payable
                                                              
                                                              
                                                              779,470
                                                              
                                                              
                                                              
                                                              831,414
                                                              
                                                              
                                                              
                                                              908,587
                                                              
                                                              
                                                              
                                                              622,411
                                                              
                                                              
                                                              
                                                              633,605Deferred
      salary, legal judgment, and line of credit
                                                              
                                                              
                                                              901,094
                                                              
                                                              
                                                              
                                                              1,506,867
                                                              
                                                              
                                                              
                                                              1,741,702
                                                              
                                                              
                                                              
                                                              1,545,512
                                                              
                                                              
                                                              
                                                              -Accrued
      interest
                                                              
                                                              
                                                              242,538
                                                              
                                                              
                                                              
                                                              395,092
                                                              
                                                              
                                                              
                                                              527,523
                                                              
                                                              
                                                              
                                                              1,061,136
                                                              
                                                              
                                                              
                                                              193,421Other
      accrued expenses and other liabilities
                                                              
                                                              
                                                              228,852
                                                              
                                                              
                                                              
                                                              514,619
                                                              
                                                              
                                                              
                                                              380,073
                                                              
                                                              
                                                              
                                                              608,219
                                                              
                                                              
                                                              
                                                              815,942Loans
      and notes payable
                                                              
                                                              
                                                              873,463
                                                              
                                                              
                                                              
                                                              1,101,450
                                                              
                                                              
                                                              
                                                              1,120,085
                                                              
                                                              
                                                              
                                                              1,486,791
                                                              
                                                              
                                                              
                                                              1,177,005Event
      acquisition liabilities
                                                              
                                                              
                                                              913,761
                                                              
                                                              
                                                              
                                                              1,153,761
                                                              
                                                              
                                                              
                                                              1,153,761
                                                              
                                                              
                                                              
                                                              1,153,760
                                                              
                                                              
                                                              
                                                              913,760Deferred
      revenue
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              165,309
                                                              
                                                              
                                                              
                                                              102,475
                                                              
                                                              
                                                              
                                                              6,917
                                                              
                                                              
                                                              
                                                              -Redemption
      fund reserve
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              482,647
                                                              
                                                              
                                                              
                                                              346,806
                                                              
                                                              
                                                              
                                                              124,293
                                                              
                                                              
                                                              
                                                              124,293Total
      current liabilities
                                                              
                                                              
                                                              3,939,178
                                                              
                                                              
                                                              
                                                              6,157,259
                                                              
                                                              
                                                              
                                                              6,347,992
                                                              
                                                              
                                                              
                                                              6,609,039
                                                              
                                                              
                                                              
                                                              3,858,026Non-current
      portion of notes payable
                                                              
                                                              
                                                              0
                                                              
                                                              
                                                              
                                                              1,000,000
                                                              
                                                              
                                                              
                                                              1,000,000
                                                              
                                                              
                                                              
                                                              1,000,000
                                                              
                                                              
                                                              
                                                              1,000,000Total
      liabilities
                                                              
                                                              
                                                              3,939,178
                                                              
                                                              
                                                              
                                                              7,157,259
                                                              
                                                              
                                                              
                                                              7,347,992
                                                              
                                                              
                                                              
                                                              7,609,039
                                                              
                                                              
                                                              
                                                              4,858,026Total
      shareholders' equity/(deficit)
                                                              
                                                              
                                                              (440,789
                                                              )
                                                              
                                                              
                                                              2,946
                                                              
                                                              
                                                              
                                                              (368,844
                                                              )
                                                              
                                                              
                                                              (905,930
                                                              )
                                                              
                                                              
                                                              1,504,306Total
      liabilities and shareholders' equity/(deficit)
                                                              
                                                              $
                                                              3,498,389
                                                              
                                                              
                                                              $
                                                              7,160,205
                                                              
                                                              
                                                              $
                                                              6,979,148
                                                              
                                                              
                                                              $
                                                              6,703,109
                                                              
                                                              
                                                              $
                                                              6,362,332
  17
  Please
see “Critical Accounting Policies and Estimates” included as part of Part II,
Item 7 of this Annual Report on Form 10-K for further discussion of key
accounting changes which occurred during the years covered in the above table.
Additional information regarding business combinations and dispositions for the
relevant periods above may be found in the notes accompanying our consolidated
financial statements at Part II, Item 8 of this Annual
Report on Form 10-K.
  Item
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  Forward-Looking
Statements
 
 This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
“Certain Factors That May Affect Future Results” below and elsewhere in, or
incorporated by reference into, this report.
 
 In
some cases, you can identify forward-looking statements by terms such as “may,”
“intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,”
“anticipate,” “estimate,” “predict,” “potential,” or the negative of these
terms, and similar expressions are intended to identify forward-looking
statements. When used in the following discussion, the words “believes,”
“anticipates” and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The forward-looking
statements in this report are based upon management’s current expectations and
belief, which management believes is reasonable. These statements represent our
estimates and assumptions only as of the date of this Quarterly Report on Form
10-Q, and we undertake no obligation to publicly release the result of any
revisions to these forward-looking statements, which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
 
 The
following discussion relates to the operations of Stratus and should be read in
conjunction with the Notes to Financial Statements.
 
 Description
of Business
 
 Overview
  Stratus
is located in Los Angeles, was originally formed as a California
corporation in November 1998, and became a Nevada corporation through a reverse
merger on March 14, 2008.  Stratus is in the early stages of its
development and owns or is targeting the acquisition of live entertainment
companies in the following areas (“strategic verticals”): Action Sports, Auto
Shows, College Sports, Concerts & Music Festivals, Food Entertainment,
Diversified Media Marketing, Motor Sports, Running Events, Trade Shows &
Expos, and Talent Management.  Assuming Stratus is able to raise
appropriate capital, Stratus intends to operate its current portfolio of live
entertainment events, activate certain existing properties, operate Stratus
Rewards and acquire and aggregate a global platform of live entertainment
events.
  The
business plan of Stratus is to operate the Stratus Rewards program and to own
and realize 100% of all available event  revenue  rights from
tickets/admissions, corporate sponsorship, television, print, radio, Internet,
merchandising, and hospitality. With additional funding, the objective of
management is to build a profitable business by implementing an aggressive
acquisition growth plan to acquire quality companies, build corporate
infrastructure, and increase organic growth.  The plan is to leverage
operational efficiencies across an expanded portfolio of events to reduce costs
and increase revenues.  The Company intends to promote the Stratus
Rewards card and its events together, obtaining maximum cross marketing benefit
among card members, corporate sponsors and Stratus events.
  Stratus
is based on a “roll up” strategy, targeting sports and live entertainment events
and companies that are independently owned and operated or being divested by
larger companies with the plan to aggregate them into one large leading live
entertainment company.  The strategy is to purchase these events for
approximately four to six times Earnings Before Interest, Taxes, Depreciation
and Amortization (“EBITDA”) of the events, with the expectation that the
combined EBITDA of the Company from these events will receive a higher valuation
multiple in the public markets.
  Assuming
the availability of capital, Stratus is targeting acquisitions of event
properties.  The goal is to aggressively build-up a critical mass of
events, venues and companies that allow for numerous cross-event
synergies.  Specifically:
  18
  ·
              On
      the expense side, to share sales, financial and operations resources
      across multiple events, creating economies of scale, increasing the
      Company’s purchasing power, eliminating duplicative costs, and bringing
      standardized operating and financial procedures to all events, thus
      increasing the margins of all
events.
  ·
              On
      the revenue side, to present advertisers and corporate sponsors an
      exciting and diverse menu of demographics and programming that allows
      sponsors “one stop shopping” rather than having to deal with each event on
      its own, and in so doing, convert these sponsors into “strategic
      partners.”
  With
these core operational synergies and subject to available capital, Stratus
intends to (1) expand its acquisition strategy of additional live sports and
entertainment events and companies, (2) create entirely new event properties on
the forefront of the “experience economy” and thus tap into people’s lifestyle
passions, and (3) cross-promote the Stratus Rewards Visa card with these events
to enhance the results of the card and event businesses.
  The
business plan of Stratus is to provide integrated event management, television
programming, marketing, talent representation and consulting services in the
sports and other live entertainment industries.  Stratus’s event
management, television programming and marketing services may
involve:
  ·
              managing
      sporting events, such as college bowl games, golf tournaments and auto
      racing team and events;
 ·
              managing
      live entertainment events, such as music festivals, car shows and fashion
      shows;
 ·
              producing
      television programs, principally sports entertainment and live
      entertainment programs; and
 ·
              marketing
      athletes, models and entertainers and
  organizations.
 
 The
following discussion relates to the operations of Stratus and should be read in
conjunction with the Notes to Financial Statements.
 
 Description
of our Revenues, Costs and Expenses
 
 Revenues
 
 Our
revenues represent event revenues from ticket sales, sponsorships,
concessions and merchandise, which are recorded when the event occurs, and
Stratus revenues from membership fees, fees on purchases and interest income
earned on the redemption trust.  Membership fees are amortized over
the twelve month period and fees from purchases and interest income are recorded
when they occur.
 
 Gross
Profit
  Our gross
profit represents revenues less the cost of goods sold. Our event cost of goods
sold consists of the costs renting the venue, structures at the venue,
concessions, and temporary personnel hired for the event.  Cost of
goods sold for the Stratus program are nominal.
 
 Operating
Expenses
 
 Our
selling, general and administrative expenses include personnel, rent, travel,
office and other costs for selling and promoting events and running the
administrative functions of the Company.  Legal and professional
services are paid to outside attorneys, auditors and consultants are broken out
separately given the size of these expenses relative to selling, general and
administrative expenses.
 
 Interest
Expense
 
 Our
interest expense results from accruing interest on a court judgment, loans
payable to shareholders, current portion of notes payable-related parties and
notes payable.
 
 Critical
Accounting Policies
  Goodwill
and Intangible Assets
  Intangible
assets consist of goodwill related to certain events and the Stratus Rewards
Visa White Card that we have acquired. Goodwill represents the excess of the
cost of an acquired entity over the net amounts assigned to tangible and
intangible assets acquired and liabilities assumed. We apply the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible
Assets, which requires allocating goodwill to each reporting unit and
testing for impairment using a two-step approach.
  19
  We
perform a goodwill impairment test annually or whenever a change has occurred
that would more likely than not reduce the fair value of an intangible asset
below its carrying amount. We engaged an outside service provider, who computed
the estimated fair value of our intangible assets at December 31, 2008,
using several valuation techniques, including discounted cash flow analysis. The
service provider computed future projected cash flows using information we
provided, including estimated future results of the events and card operations.
We then compared the estimated fair value of the reporting unit to the carrying
value of the reporting unit. As of December 31, 2008, the Company determined
that the $255,000 value of the Snow & Ski Tour and the $61,233 value of the
Millrose games were impaired and these amounts were written off as of that date
and a charge taken to other income and expense.
  Income
Taxes
 
 The Company utilizes SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the  financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
 
 As of
December 31, 2008, the Company had a deferred tax asset of $5,600,406 that was
fully reserved and a net operating loss carryforward of approximately
$10,200,000 for Federal purposes.  The Company will continue to
monitor all available evidence and reassess the potential realization of its
deferred tax assets. If the Company continues to meet its financial projections
and improve its results of operations, or if circumstances otherwise change, it
is possible that the Company may release all or a portion of its valuation
allowance in the future. Any such release would result in recording a tax
benefit that would increase net income in the period the valuation is
released.
  Stock-Based
Compensation
  Effective
January 1, 2006, we adopted SFAS No. 123R, Share Based Payment (SFAS
No. 123R) using the modified prospective transition method. New awards and
awards modified, repurchased or cancelled after January 1, 2006 trigger
compensation expense based on the fair value of the stock option as determined
by the Black-Scholes option pricing model. We amortize stock-based compensation
for such awards on a straight-line method over the related service period of the
awards taking into account the effects of the employees’ expected exercise and
post-vesting employment termination behavior.
  We account for equity instruments
issued to non-employees in accordance with the provisions of SFAS 123R and EITF
Issue No. 96-18.The
fair value of each option granted is estimated as of the grant date using the
Black-Scholes option pricing model.
 
 Results
of Operations
  The
following table shows information derived from our consolidated statements of
operations expressed as a percentage of revenues for the periods
presented:
  20
 
 Year Ended December 31,2008
                    
                    
                    2007Net
      revenuesEvent
      revenues
                    
                    
                    83.6
                    %
                    
                    
                    41.9
                    %Stratus
      revenues
                    
                    
                    16.4
                    %
                    
                    
                    58.1
                    %Total
      revenues
                    
                    
                    100.0
                    %
                    
                    
                    238.9
                    %Cost
      of goods soldEvent
      cost of goods sold
                    
                    
                    61.4
                    %
                    
                    
                    24.7
                    %Stratus
      cost of goods sold
                    
                    
                    -
                    %
                    
                    
                    -
                    %Total
      cost of goods sold
                    
                    
                    61.4
                    %
                    
                    
                    24.7
                    %Gross
      profit
                    
                    
                    38.6
                    %
                    
                    
                    75.3
                    %Total
      operating expenses
                    
                    
                    2,504.7
                    %
                    
                    
                    988.3
                    %Loss
      from operations
                    
                    
                    (2,466.1
                    )%
                    
                    
                    (913.0
                    )%Net
      other expenses
                    
                    
                    254.2
                    %
                    
                    
                    (70.8
                    )%Net
      loss
                    
                    
                    (2,720.3
                    )%
                    
                    
                    (842.2
                    )%
 
 Results
of Operations for the Years Ended December 31, 2008 and 2007
 
 Revenues
 
 Revenues for 2008 (“Current Period”)
were $40,189, a decrease of $268,572, or 87%, from the $308,761 in revenues
realized for 2007 (“Prior Period”).  There were $33,606 in event
revenues in the Current Period from a Super Bowl event held in February 2008, a
decrease of $95,653, or 74%, from $129,259 of event revenues in the Prior Period
from an automobile show held in August 2007.  Stratus card revenues
were $6,583 in the Current Period, a decrease of $172,919, or 96%, from the
Prior Period.  The sponsoring bank that ran the program when the
Company acquired Stratus stopped providing the Company with statements in
October 2007 and formally discontinued the program in March 2008.  The
Stratus Rewards program is currently inactive and the Company is actively
seeking a new sponsoring bank to restart the program.
 
 Gross
Profit
  The
overall gross margin for the Current Period was $24,679, or 39% of revenues,
compared to overall gross margin for the Prior Period of $232,641, or 75% of
total revenues.  The gross margin for events was 27% in the Current
Period and 41% in the Prior Period.
 
 Operating
Expenses
 
 Overall
operating expenses for the Current Period were $1,006,603, a decrease of
$2,044,993, or 67%, from $3,051,596 in the Prior Period.  General and
administrative expenses of $536,545 decreased by $1,967,010, or 79%, from
$2,503,555 in the Prior Period, related to lower staffing levels in the Current
Period.  Legal and professional services of $414,206 decreased by
$75,807, or 16%, from $490,013 in the Prior Period, primarily related to reduced
use of outside consultants.  Depreciation and amortization remained
relatively constant with $55,852 in the Current Period, compared with $58,028 in
the Prior Period. Operating expenses in 2007 included a stock option
expense of $1,713,369 and there was no stock option expense in
2008.
  Other
(Income)/Expense
 
 Other
expenses decreased by a total of $296,344, or 78%, from a gain of $380,659 in
Prior Period to a net gain of $84,315 in the Current Period.  Other
expenses in the Prior Period included a gain of $560,549 on the writeoff for
accounts payable related to events that were canceled in 2004 and 2005 offset by
$242,929 of accounting expense adjustments related to the effective closure of
the Stratus program in that year.  Other income in the Current Period
included a $365,579 gain from reversing an accrual for legal judgment when the
related court case was dismissed, offset by $70,805 of accruals for a judgment
against Stratus related to two former employees and a charge of $216,284 for
recording the excess of the market value of common stock issued in the three
months ending December 31, 2008 over the amount of liabilities relieved by the
issuance of this common stock:
  21
 
 Years Ended December 31,2008
                    
                    
                    2007Other
      (Income)/ExpenseAccounting
      expense adjustments for closure of Stratus Visa program
                    
                    $
                    -
                    
                    
                    $
                    242,929Writeoff
      of accounts payable related to events canceled in 2004 and
      2005
                    
                    
                    (20,642
                    )
                    
                    
                    (560,549
                    )Gain
      from reversing legal accrual when case was dismissed
                    
                    
                    (365,579
                    )
                    
                    
                    -Judgment
      from two former employees
                    
                    
                    70,805
                    
                    
                    
                    -Fair
      value of common stock issued in excess of value received
                    
                    
                    216,284
                    
                    
                    
                    -Other
                    
                    
                    14,817
                    
                    
                    
                    (63,039
                    )Net
      other (income)/expense
                    
                    $
                    (84,315
                    )
                    
                    $
                    (380,659
                    )
 
 Interest
Expense
 
 Interest
expense was $186,489 in the Current Period, an increase of $24,328, or 15%, from
$162,161 in the Prior Period, primarily related to higher average debt levels in
the Current Period.
  Quarterly
Results (Unaudited)
  The following table sets forth in
thousands our unaudited historical revenues, operating income and net loss by
quarter during 2007 and 2008:
  Quarter Ended(Amounts in thousands,
                              except per share amounts)
                            
                            Mar. 31,
                              2007
                            
                            
                            Jun. 30,
                              2007
                            
                            
                            Sep. 30,
                              2007
                            
                            
                            Dec. 31,
                              2007
                            
                            
                            Mar. 31,
                              2008
                            
                            
                            Jun. 30,
                              2008
                            
                            
                            Sep. 30,
                              2008
                            
                            
                            Dec. 31,
                              2008Revenues:Events
                            
                            $
                            16
                            
                            
                            $
                            0
                            
                            
                            $
                            124
                            
                            
                            $
                            (10
                            )
                            
                            $
                            34
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Stratus
      Rewards Visa Card
                            
                            
                            36
                            
                            
                            
                            61
                            
                            
                            
                            50
                            
                            
                            
                            32
                            
                            
                            
                            6
                            
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      revenues
                            
                            
                            52
                            
                            
                            
                            61
                            
                            
                            
                            174
                            
                            
                            
                            22
                            
                            
                            
                            40
                            
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -Operating
      loss
                            
                            
                            (2,105
                            )
                            
                            
                            (328
                            )
                            
                            
                            (150
                            )
                            
                            
                            (236
                            )
                            
                            
                            (261
                            )
                            
                            
                            (233
                            )
                            
                            
                            (288
                            )
                            
                            
                            (208
                            )Net
      loss
                            
                            $
                            (2,111
                            )
                            
                            $
                            (366
                            )
                            
                            $
                            (449
                            )
                            
                            $
                            325
                            
                            
                            $
                            66
                            
                            
                            $
                            (286
                            )
                            
                            $
                            (269
                            )
                            
                            $
                            (604
                            )Net
      loss per share:Basic
      and diluted
                            
                            $
                            (0.04
                            )
                            
                            $
                            (0.01
                            )
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.01
                            
                            
                            $
                            0.00
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.00
                            
                            
                            $
                            (0.01
                            )Weighted
      average shares (000):Basic
      and diluted
                            
                            
                            48,747
                            
                            
                            
                            48,640
                            
                            
                            
                            48,788
                            
                            
                            
                            49,046
                            
                            
                            
                            49,440
                            
                            
                            
                            55,006
                            
                            
                            
                            55,082
                            
                            
                            
                            55,277
  Liquidity
and Capital Resources
 
 The
report of our independent registered public accounting firm on the financial
statements for the years ended December 31, 2007 and 2008 contains an
explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern as a result of recurring losses, a working capital
deficiency, and negative cash flows. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that would be necessary
if we are unable to continue as a going concern.
  22
 
 During
the three months ended December 31, 2008, we sold 59,701 shares to an investor
for $50,000.  The Company is actively pursuing equity capital and is
targeting an initial raise of $2 million to $5 million.  The proceeds
raised will be used for operational expenses, settling existing liabilities,
acquisitions and selling expenses.  Due to our history of operating
losses and the current credit constraints in the capital markets, we cannot
assure you that such financing will be available to us on favorable terms, or at
all.   If we cannot obtain such financing, we will be forced to
curtail our operations or may not be able to continue as a going concern, and we
may become unable to satisfy our obligations to our creditors. In such an event
we will need to enter into discussions with our creditors to settle, or
otherwise seek relief from, our obligations.
 
 As
of December 31, 2008, our principal sources of liquidity consisted of cash
and cash equivalents, increases in accounts payable and accrued expenses, and
the issuance of equity securities.  In addition to funding operations,
our principal short-term and long-term liquidity needs have been, and are
expected to be, the settling of obligations to our creditors, capital
expenditures, the funding of operating losses until we achieve profitability,
and general corporate purposes. In addition, commensurate with our level of
sales, we will require working capital for purchases of inventories and sales
and marketing costs to increase the promotion and distribution of our products.
At December 31, 2008, our cash was $800, and we had negative working capital of
$3,638,863.  At December 31, 2008, we had $2,177,005 in debt
obligations (comprised of $767,488 loan from shareholders, $1,090,000 notes
payable to related parties and $319,517 in notes payable), all of which is due
upon demand, and $215,000 is in default for non-payment.
 
 Cash
Flows
 
 The
following table sets forth our cash flows for 2008 and 2007:
 
 December 312008
                      
                      
                      2007Operating
      activities
                      
                      $
                      (505,949
                      )
                      
                      $
                      (578,919
                      )Investing
      activities
                      
                      
                      -
                      
                      
                      
                      -Financing
      activities
                      
                      
                      506,553
                      
                      
                      
                      579,115Total
      change
                      
                      $
                      604
                      
                      
                      $
                      196
 
 Operating
Activities
 
 Operating
cash flows for 2008 reflects our net loss of $1,113,909, offset by changes in
working capital of $335,825 and non-cash items (depreciation and amortization)
of $55,852 and expense for value of stock issued in excess of liabilities
received of $216,283. The change in working capital is primarily related to a
net of $76,233 from writing off intangible assets and related liabilities for
the Snow Tour, $240,000 of accrued salaries, $183,234 of accrued interest, and
$207,723 of accrued liabilities, off set by reversing a $365,579 reserve for a
legal action that was dismissed.
 
 Operating
cash flows for 2007 reflects our net loss of $3,161,006, offset by changes in
working capital of $802,140, non-cash stock option expense of $1,713,369 and
non-cash items (depreciation, amortization and accretion of warrants liability)
of $66,578. The change in working capital is primarily related to increases of
$246,145 in accounts payable, $240,000 in deferred salary, $168,034 in
accrued interest and $228,146 in other accrued expenses.
 
 Investing
Activities
 
 Capital
constraints resulted in no cash used in investing activities during either
period.
 
 Summary
of Contractual Obligations
  Set forth
below is information concerning our known contractual obligations as of
December 31, 2008 that are fixed and determinable.
 
 Total
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    After 2013Debt
      obligations*
                    
                    $
                    1,000,000
                    
                    
                    $
                    375,000
                    
                    
                    $
                    500,000
                    
                    
                    $
                    125,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Rent
      obligations
                    
                    
                    301,200
                    
                    
                    
                    184,800
                    
                    
                    
                    116,400
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    1,301,200
                    
                    
                    $
                    559,800
                    
                    
                    $
                    616,400
                    
                    
                    $
                    125,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 
 *
              Debt
      incurred in connection with acuiqisition of Stratus.  Repayment
      is triggered by first funding of at least $3,000,000.  For
      purposes of this schedule such funding is assumed to occur by June 30,
      2009
  23
 
 Financing
Activities
 
 During
2008 and 2007, we received cash proceeds of $625,000 and $350,000,
respectively, from the sale of stock.  In 2008, we used a net of
$118,447 to repay debt.  In 2007 we raised a net of $229,115 through
increasied debt.
 
 Off
Balance Sheet Arrangements
 
 We have
no off balance sheet arrangements.
 
 Item 7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Market risk represents the risk of loss
that may impact our financial position due to adverse changes in financial
market prices and rates. We do not hold or issue financial instruments for
trading purposes or have any derivative financial instruments.
 
 Interest
Rate Risk
  Our
exposure to market risk is limited to interest rate fluctuations due to changes
in the general level of United States interest rates, particularly because as of
December 31, 2008, our cash reserves were nominal and were maintained in
non-interest bearing accounts and were not exposed to material market
risks.
  Foreign
Currency Exchange Rate Risk
  As of
December 31, 2008, all our transactions have been denominated in United
States dollars. As such, we are not directly exposed to currency gains or losses
resulting from fluctuations in foreign exchange rates.
  24
  Item 8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
the Board of Directors and Stockholders
 Stratus
Media Group, Inc.
 Los
Angeles, California
  We have
audited the accompanying balance sheets of Stratus Media Group, Inc. as of
December 31, 2008 and 2007, and the related statements of operations,
stockholders’ equity/(deficit) and cash flows for each of the two years in the
period ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of internal control over
financial reporting.  Our audits considered internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Stratus Media Group, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses and has negative cash flow
from operations. These conditions raise substantial doubt as to the ability of
the Company to continue as a going concern. These financial statements do not
include any adjustments that might result from such uncertainty.
 
  Goldman
Parks Kurland Mohidin LLP
 Encino,
California
 April 13,
2009
  25
  STRATUS
MEDIA GROUP, INC.
 BALANCE
SHEETS
 
 December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007ASSETSCurrent
      assetsCash
                      
                      $
                      800
                      
                      
                      $
                      196Restricted
      cash
                      
                      
                      162,855
                      
                      
                      
                      162,855Receivables
                      
                      
                      10,165
                      
                      
                      
                      -Deposits
      and prepaid expenses
                      
                      
                      35,861
                      
                      
                      
                      15,320Inventory
                      
                      
                      9,482
                      
                      
                      
                      9,482Total
      current assets
                      
                      
                      219,163
                      
                      
                      
                      187,853Property and equipment,
      net
                      
                      
                      2,469
                      
                      
                      
                      12,913Intangible assets,
      net
                      
                      
                      4,067,355
                      
                      
                      
                      4,428,998Goodwill
                      
                      
                      2,073,345
                      
                      
                      
                      2,073,345Total
      assets
                      
                      $
                      6,362,332
                      
                      
                      $
                      6,703,109LIABILITIES
      AND SHAREHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      633,605
                      
                      
                      $
                      622,411Deferred
      salary
                      
                      
                      -
                      
                      
                      
                      1,545,512Accrued
      interest
                      
                      
                      193,421
                      
                      
                      
                      695,557Accrued
      expenses - legal judgment
                      
                      
                      -
                      
                      
                      
                      365,579Other
      accrued expenses and other liabilities
                      
                      
                      815,942
                      
                      
                      
                      608,219Line
      of credit
                      
                      
                      -
                      
                      
                      
                      68,041Loans
      payable to shareholders
                      
                      
                      767,488
                      
                      
                      
                      1,013,750Current
      portion of notes payable - related parties
                      
                      
                      90,000
                      
                      
                      
                      90,000Notes
      payable
                      
                      
                      319,517
                      
                      
                      
                      315,000Event
      acquisition liabilities
                      
                      
                      913,760
                      
                      
                      
                      1,153,760Deferred
      revenue
                      
                      
                      -
                      
                      
                      
                      6,917Redemption
      fund reserve
                      
                      
                      124,293
                      
                      
                      
                      124,293Total
      current liabilities
                      
                      
                      3,858,026
                      
                      
                      
                      6,609,039Non-current
      liabilitiesNon-current
      portion of notes payable - related parties
                      
                      
                      1,000,000
                      
                      
                      
                      1,000,000Total
      liabilities
                      
                      
                      4,858,026
                      
                      
                      
                      7,609,039Commitments
      and contingenciesShareholders'
      equity/(deficit)Preferred
      stock, $0.01 par value:  5,000,000 shares authorized 0 and 0
      shares issued and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.001 par value:  200,000,000 shares authorized
      57,130,879 and 49,046,280 shares issued and outstanding,
      respectively
                      
                      
                      57,132
                      
                      
                      
                      49,046Additional
      paid-in capital
                      
                      
                      15,154,541
                      
                      
                      
                      11,553,624Stock
      subscription receivable
                      
                      
                      (100,000
                      )
                      
                      
                      -Accumulated
      deficit
                      
                      
                      (13,607,367
                      )
                      
                      
                      (12,508,600
                      )Total
      shareholders' equity/(deficit)
                      
                      
                      1,504,306
                      
                      
                      
                      (905,930
                      )Total
      liabilities and shareholders' equity/(deficit)
                      
                      $
                      6,362,332
                      
                      
                      $
                      6,703,109
 
 See
accompanying Notes to Financial Statements.
  26
 
 STRATUS
MEDIA GROUP, INC.
 STATEMENTS
OF OPERATIONS
 
 Twelve Months Ended December
      31,2008
                            
                            
                            2007Net
      revenuesEvent
      revenues
                            
                            $
                            33,606
                            
                            
                            $
                            129,259Stratus
      revenues
                            
                            
                            6,583
                            
                            
                            
                            179,502Total
      revenues
                            
                            
                            40,189
                            
                            
                            
                            308,761Cost
      of revenuesEvent
      cost of goods sold
                            
                            
                            24,679
                            
                            
                            
                            76,120Stratus
      cost of goods sold
                            
                            
                            -
                            
                            
                            
                            -Total
      cost of goods sold
                            
                            
                            24,679
                            
                            
                            
                            76,120Gross
      profit
                            
                            
                            15,510
                            
                            
                            
                            232,641Operating
      expensesGeneral
      and administrative
                            
                            
                            536,545
                            
                            
                            
                            2,503,555Legal
      and professional services
                            
                            
                            414,206
                            
                            
                            
                            490,013Depreciation
      and amortization
                            
                            
                            55,852
                            
                            
                            
                            58,028Total
      operating expenses
                            
                            
                            1,006,603
                            
                            
                            
                            3,051,596Loss
      from operations
                            
                            
                            (991,093
                            )
                            
                            
                            (2,818,955
                            )Other
      (income)/expensesOther
      (income)/expense
                            
                            
                            (84,315
                            )
                            
                            
                            (380,659
                            )Interest
      expense
                            
                            
                            186,489
                            
                            
                            
                            162,161Total
      other expenses
                            
                            
                            102,174
                            
                            
                            
                            (218,498
                            )Net
      loss
                            
                            $
                            (1,093,267
                            )
                            
                            $
                            (2,600,457
                            )Basic
      and diluted earnings per share
                            
                            $
                            (0.02
                            )
                            
                            $
                            (0.05
                            )Basic
      and diluted weighted-average common shares
                            
                            
                            53,959,831
                            
                            
                            
                            48,845,906
 
 See
accompanying Notes to Financial Statements.
  27
 
 STRATUS
MEDIA GROUP, INC.
 STATEMENTS
OF STOCKHOLDER’S EQUITY
 
 StockCommon Stock
                    
                    
                    Additional
                    
                    
                    Accumulated
                    
                    
                    SubscriptionShares
                    
                    
                    Amount
                    
                    
                    Paid-In Capital
                    
                    
                    Deficit
                    
                    
                    Receivable
                    
                    
                    TotalBalance
      at December 31, 2005
                    
                    
                    48,437,198
                    
                    
                    $
                    48,437
                    
                    
                    $
                    9,121,953
                    
                    
                    $
                    (9,167,444
                    )
                    
                    $
                    -
                    
                    
                    $
                    2,946Issuance
      of common stock for cash
                    
                    
                    191,182
                    
                    
                    
                    191
                    
                    
                    
                    334,809
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    335,000Offering
      cost related to issuance of common stock settled in stock
      options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    0Value
      of stock options granted to consultants for services
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    33,910
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    33,910Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (740,699
                    )
                    
                    
                    
                    
                    
                    
                    (740,699
                    )Balance
      at December 31, 2006
                    
                    
                    48,628,380
                    
                    
                    
                    48,628
                    
                    
                    
                    9,490,672
                    
                    
                    
                    (9,908,143
                    )
                    
                    
                    0
                    
                    
                    
                    (368,843
                    )Issuance
      of common stock for cash
                    
                    
                    417,900
                    
                    
                    
                    418
                    
                    
                    
                    349,583
                    
                    
                    
                    0
                    
                    
                    
                    
                    
                    
                    
                    350,001Value
      of stock options granted to officer
                    
                    
                    
                    
                    
                    
                    
                    1,713,369
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,713,369Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,600,457
                    )
                    
                    
                    
                    
                    
                    
                    (2,600,457
                    )Balance
      at December 31, 2007
                    
                    
                    49,046,280
                    
                    
                    
                    49,046
                    
                    
                    
                    11,553,624
                    
                    
                    
                    (12,508,600
                    )
                    
                    
                    0
                    
                    
                    
                    (905,930
                    )Issuance
      of common stock for cash
                    
                    
                    746,254
                    
                    
                    
                    747
                    
                    
                    
                    624,253
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    625,000Issuance
      related to reverse merger
                    
                    
                    5,500,000
                    
                    
                    
                    5,500
                    
                    
                    
                    0
                    
                    
                    
                    (5,500
                    )
                    
                    
                    
                    
                    
                    
                    -Stock
      issued for accrued interest
                    
                    
                    102,840
                    
                    
                    
                    103
                    
                    
                    
                    163,414
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    163,517Stock
      issued to settle amounts owed to shareholder and officer of
      Company
                    
                    
                    1,735,505
                    
                    
                    
                    1,736
                    
                    
                    
                    2,596,967
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,598,703Expense
      for value of stock issued in excess of liabilities
relieved
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    216,283
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    216,283Stock
      subscription receivable
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (100,000
                    )
                    
                    
                    (100,000
                    )Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,093,267
                    )
                    
                    
                    
                    
                    
                    
                    (1,093,267
                    )Balance
      as of December 31, 2008
                    
                    
                    57,130,879
                    
                    
                    $
                    57,132
                    
                    
                    $
                    15,154,541
                    
                    
                    $
                    (13,607,367
                    )
                    
                    $
                    (100,000
                    )
                    
                    $
                    1,504,306
 
 See
accompanying Notes to Financial Statements.
  28
  STRATUS
MEDIA GROUP, INC.
 STATEMENTS
OF CASH FLOWS
 
 Twelve Months Ended December
      31,2008
                                
                                
                                2007Cash
      flows from operating activities:Net
      loss
                                
                                $
                                (1,093,267
                                )
                                
                                $
                                (2,600,457
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                
                                
                                55,852
                                
                                
                                
                                58,028Accretion
      of warrants liability
                                
                                
                                -
                                
                                
                                
                                8,550Expense
      for value of stock issued in excess of liabilities
relieved
                                
                                
                                216,283
                                
                                
                                
                                -Stock
      compensation expense
                                
                                
                                -
                                
                                
                                
                                1,713,369(Increase)
      / decrease in:Receivables
                                
                                
                                (10,165
                                )
                                
                                
                                12,778Deposits
      and prepaid expenses
                                
                                
                                (20,541
                                )
                                
                                
                                2,595Intangible
      assets
                                
                                
                                316,233
                                
                                
                                
                                -Increase
      / (decrease) in:Accounts
      payable
                                
                                
                                11,194
                                
                                
                                
                                (314,404
                                )Deferred
      salary
                                
                                
                                240,000
                                
                                
                                
                                240,000Accrued
      interest
                                
                                
                                183,234
                                
                                
                                
                                168,034Accrued
      expenses - legal judgment
                                
                                
                                (365,579
                                )
                                
                                
                                -Other
      accrued expenses and other liabilities
                                
                                
                                207,723
                                
                                
                                
                                228,146Event
      acquisition liabilities
                                
                                
                                (240,000
                                )
                                
                                
                                -Deferred
      revenue
                                
                                
                                (6,917
                                )
                                
                                
                                (95,558
                                )Net
      cash used in operating activities
                                
                                
                                (505,950
                                )
                                
                                
                                (578,919
                                )Cash
      flows from financing activities:Payments
      of bank overdraft
                                
                                
                                -
                                
                                
                                
                                (66,980
                                )Payments
      of line of credit
                                
                                
                                (68,041
                                )
                                
                                
                                (2,570
                                )Proceeds/(payments)
      - loans payable to shareholders
                                
                                
                                (54,922
                                )
                                
                                
                                108,665Proceeds
      from notes payable-related parties (current)
                                
                                
                                4,517
                                
                                
                                
                                190,000Proceeds
      from issuance of common stock for cash
                                
                                
                                625,000
                                
                                
                                
                                350,000Net
      cash provided by financing activities
                                
                                
                                506,554
                                
                                
                                
                                579,115Net
      change in cash and cash equivalents
                                
                                
                                604
                                
                                
                                
                                196Cash
      and cash equivalents, beginning of year
                                
                                
                                196
                                
                                
                                
                                -Cash
      and cash equivalents, end of year
                                
                                $
                                800
                                
                                
                                $
                                196Supplemental
      disclosure of cash flow information:Cash
      paid during the year for interest
                                
                                $
                                -
                                
                                
                                $
                                -Cash
      paid during the year for income taxes
                                
                                $
                                -
                                
                                
                                $
                                -Supplemental
      disclosure of non-cash investing and financing activities:Issuance
      of common stock for subscription receivable
                                
                                $
                                330,000
                                
                                
                                $
                                -Conversion
      of accrued interest into common stock
                                
                                $
                                163,516
                                
                                
                                $
                                -Conversion
      of loans, accrued salary, accrued interest and expenses due to an officer
      and shareholder of the company into common stock
                                
                                $
                                2,759,453
                                
                                
                                $
                                -
 
 See
accompanying Notes to Financial Statements
  29


STRATUS
MEDIA GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 December
31, 2008
 
 1.
              Business
 
 Business
 
 On March
14, 2008, pursuant to an Agreement and Plan of Merger dated as of August 20,
2007 by and among Feris International, Inc. (“Feris”), Feris Merger Sub, Inc.
and Patty Linson, on the one hand, and Pro Sports & Entertainment, Inc.
(“Stratus”), on the other hand, Feris issued 49,500,000 shares of its common
stock in exchange for all of the issued and outstanding shares of the Stratus,
resulting in Stratus becoming a wholly-owned subsidiary of Feris and is the
surviving entity for accounting purposes (“Reverse Merger”).
  In July 2008, Feris’ corporate name was
changed to Stratus Media Group, Inc. (“Company”).  Stratus, a
California corporation, was organized on November 23, 1998 and specializes in
sports and entertainment events that it owns, operates, manages, markets and
sells in national markets. In addition, Stratus acquired the business of Stratus
Rewards, LLC (“Stratus”) in August 2005.  Stratus is a credit card
rewards program that uses the Visa card platform that offers a unique luxury
rewards redemption program, including private jet travel, premium travel
opportunities, exclusive events and luxury merchandise.  The
sponsoring bank that ran the program when the Company acquired Stratus stopped
processing new members and sending the Company statements in October 2007 and
provided notice in March 2008 that it was discontinuing the
program.  While several cardmembers are continuing to use their cards
with the sponsor bank, the Stratus Rewards program is currently inactive and the
Company has not recorded new revenues since October 2007.  The Company
is actively seeking a new sponsoring bank to restart the program, but there can
be no assurances that it will be able to do so.
 
 2.    Going
Concern
 
 The
Company has suffered losses from operations and, without additional
capital, currently lacks liquidity to meet its current
obligations.  The Company had net losses for 2008 and 2007 of
$1,093,267 and $2,600,457, respectively.  As of December 31, 2008, the
Company had negative working capital of $3,638,863 and cumulative losses of
$13,607,367.  Unless additional financing is obtained, the Company may
not be able to continue as a going concern. In the three months ended December
31, 2008, the Company raised $20,000 in capital through the issuance of common
stock and collected $50,000 from a stock subscription receivable.  The
Company is actively seeking additional capital to establish operations, restart
the card and event business and complete and integrate targeted
acquisitions.  However, due to the current economic environment and
the Company’s current financial condition, we cannot assure current and future
stockholders there will be adequate capital available when needed and on
acceptable terms.
 
 The
financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business.  The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result if the Company be unable to continue as a going concern.
 
 3.     Basis
of Presentation and Significant Accounting Policies
 
 Basis
of Presentation
 
 The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”), pursuant to
the rules and regulations of the Securities and Exchange Commission
“SEC”).
 
 Stock
Split
 
 On March
14, 2008, the Board of Directors of the Company approved a 3.5821 for 1.000
forward stock split of the Stratus's common stock. The effective date of the
stock split was March 14, 2008 and was concurrent with the Reverse Merger. All
share and per share information have been adjusted to give effect to the stock
split for all periods presented, including all references throughout the
financial statements and accompanying notes.
  Use
of Estimates
  The
preparation of our consolidated financial statements in accordance with
U.S. GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities in our consolidated financial
statements and accompanying notes. Although these estimates are based on our
knowledge of current events and actions we may undertake in the future, actual
results may differ from such estimates and assumptions.
  30
  Event
Revenues
  Event revenue consists of ticket sales,
participant entry fees, corporate sponsorships, advertising, television
broadcast fees, athlete management, concession and merchandise sales, charity
receipts, commissions and hospitality functions. The Company recognizes
admissions and other event-related revenues when the events are held in
accordance with SEC Statement Accounting Bulletin (“SAB”) 104. Revenues received
in advance and related direct expenses pertaining to specific events are
deferred until the events are actually held.
  Stratus
Rewards White Visa Card
 
 Stratus Rewards, the Company’s
affiliate redemption credit card rewards program, generates revenues from
transaction fees generated by member purchases using the card, and membership
fees. Revenue is recognized when transaction fees are received and membership
fees are amortized and recognized ratably over the twelve-month membership
period from the time of receipt.
  Allowance
for Uncollectible Receivables
  Accounts
receivable are recorded at their face amount, less an allowance for doubtful
accounts. We review the status of our uncollected receivables on a regular
basis. In determining the need for an allowance for uncollectible receivables,
we consider our customers financial stability, past payment history and other
factors that bear on the ultimate collection of such amounts.
  Cash
Equivalents
  We
consider all highly liquid investments purchased with maturities of three months
or less to be cash equivalents.
 
 Restricted
Cash
 
 A portion of each credit card
transaction by a card member is deposited into a trust account.  This
account is used to fund the purchase of goods or services by the card member
through redemption of purchasing points.  If a card member cancels
their card and leaves unclaimed redemption points, the Company is entitled to
the cash equivalent of those unclaimed points.  With that exception,
the cash otherwise is earmarked for member benefits and is not available to the
Company for use in operations.
 
 The
Company maintains its cash in an account with a major financial
institution.  Deposits with this financial institution may exceed the
amounts of insurance provided on such deposits.  The Company has not
experienced any losses on its deposits of cash with this financial
institution.
  Fair
Value of Financial Instruments
  Our
financial instruments include cash and cash equivalents, accounts receivables,
accounts payable, a line-of-credit and accrued liabilities. The carrying amounts
of financial instruments approximate fair value due to their short
maturities.
  Property
and Equipment
  Property
and equipment are stated at cost less accumulated depreciation. We record
depreciation using the straight-line method over the following estimated useful
lives:
  Equipment
                  
                  3 –
      5 yearsFurniture
      and fixtures
                  
                  5
      yearsSoftware
                  
                  3
      yearsLeasehold
      improvements
                  
                  Lesser of lease term or life of improvements
  31
  Goodwill
and Intangible Assets
  Intangible
assets consist of goodwill related to certain events and the Stratus Rewards
Visa White Card that we have acquired. Goodwill represents the excess of the
cost of an acquired entity over the net amounts assigned to tangible and
intangible assets acquired and liabilities assumed. We apply the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible
Assets, which requires allocating goodwill to each reporting unit and
testing for impairment using a two-step approach.
 
 We
perform a goodwill impairment test annually or whenever an event has occurred
that would more likely than not reduce the fair value of a reporting unit below
its carrying amounts. We engaged an outside service provider, who computed the
estimated fair value of our events and card operations at December 31,
2008, using a discounted future cash flow method. The service provider computed
future projected cash flows using information that we provided, including
estimated future results of the events and card operations. We then compared the
estimated fair value of the reporting unit to the carrying value of the
reporting unit. As of December 31, 2008, the Company determined that the
$255,000 value of the Snow & Ski Tour and the $61,233 value of the Millrose
games were impaired and these amounts were written off as of that date and a
charge taken to other income and expense.
 
 Research
and Development
  Research
and development costs not related to contract performance are expensed as
incurred. We did not incur any research and development expenses for the years
2008 or 2007.
  Capitalized
Software Costs
  We did
not capitalize any software development costs during the years 2008 or 2007.
Costs related to the development of new software products and significant
enhancements to existing software products are expensed as incurred until
technological feasibility has been established and are amortized over three
years.
  Valuation
of Long-Lived Assets
  We
account for long-lived assets in accordance with the provisions of SFAS
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets is
measured by comparing the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds their fair value. Assets to be
disposed of by sale are reflected at the lower of their carrying amount or fair
value less cost to sell.
  Inventory
  Inventory
consists of event merchandise valued at the lower of cost (determined on the
first-in, first-out basis) or market. If deemed necessary, we will provide
reserves for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of the inventory and the estimated market value
based upon assumptions about future demand and market conditions. There were no
inventory reserves at December 31, 2008 or 2007.
  Net
Loss Per Share
  We
compute net loss per share in accordance with SFAS No. 128, Earnings Per Share. Basic per
share data is computed by dividing loss available to common stockholders by the
weighted average number of shares outstanding during the period. Diluted per
share data is computed by dividing loss available to common stockholders by the
weighted average shares outstanding during the period increased to include, if
dilutive, the number of additional common share equivalents that would have been
outstanding if potential common shares had been issued using the treasury stock
method. Diluted per share data would also include the potential common share
equivalents relating to convertible securities by application of the
if-converted method.
  The
effect of common stock equivalents (which include outstanding warrants and stock
options) are not included for the years 2008 or 2007, as they are antidilutive
to earnings per share.
  Stock-Based
Compensation
 
 Effective
January 1 2006, we adopted SFAS No. 123R, Share Based Payment (SFAS
No. 123R) using the modified prospective transition method. New awards and
awards modified, repurchased or cancelled after January 1, 2006 trigger
compensation expense based on the fair value of the stock option as determined
by the Black-Scholes option pricing model. We amortize stock-based compensation
for such awards on a straight-line method over the related service period of the
awards taking into account the effects of the employees’ expected exercise and
post-vesting employment termination behavior.
  32
   We
account for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123R and EITF Issue No. 96-18.
  The fair
value of the option granted on January 1, 2007 was estimated as of the grant
date using the Black-Scholes option pricing model with the following
assumptions:
 
 2007Risk-free
      interest rate
                        
                        
                        4.68
                        %Expected
      life of option-years
                        
                        
                        5.0Expected
      stock price volatility
                        
                        
                        70
                        %Expected
      dividend yield
                        
                        
                        —
  The
risk-free interest rate is based on U.S. Treasury interest rates, the terms of
which are consistent with the expected life of the stock options. For the option
granted  January 1, 2007, expected volatility is based upon an average
volatility of comparable public companies, since our common stock was not
publicly traded at that time.  There were no option grants in
2008.  Future option grants will be calculated using expected
volatility based upon the average volatility of our common stock.
 
 On
January 1, 2007 we granted 4,862,895 options to purchase shares of our common
stock that vested upon grant. We recognized $1,713,369 in expense related to
these options in 2007, which was the entire value of the options since they were
fully vested.  We did not recognize any share-based payment expense in
the year ended December 31, 2008.
 
 Advertising
  We
expense the cost of advertising as incurred. Such amounts have not historically
been significant to our operations.
  Income
Taxes
 
 The Company utilizes SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the  financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
 
 As of
December 31, 2008, the Company had a deferred tax asset of $5,298,075, that was
fully reserved and a net operating loss carryforward of approximately
$10,200,000 for Federal purposes.  The Company will continue to
monitor all available evidence and reassess the potential realization of its
deferred tax assets. If the Company continues to meet its financial projections
and improve its results of operations, or if circumstances otherwise change, it
is possible that the Company may release all or a portion of its valuation
allowance in the future. Any such release would result in recording a tax
benefit that would increase net income in the period the valuation is
released.
  Recent
Accounting Pronouncements
  In June
2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (EITF 07-5).
EITF 07-5 addresses the determination of whether a financial instrument (or an
embedded feature) is indexed to an entity’s own stock. EITF 07-5 is effective
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The adoption of EITF 07-5 is not expected to have a
material impact on our consolidated financial statements.
  In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS
162 identifies a hierarchy for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S. GAAP
for nongovernmental entities. SFAS 162 was effective on November 13, 2008
and we do not expect any material impacts from SFAS No. 162
  33
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) requires entities to recognize assets acquired, liabilities
assumed, and any non-controlling interest in an acquiree, measured at the fair
market value at the acquisition date. SFAS No. 141(R) is applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first fiscal year beginning after December 15,
2008. We expect that SFAS No. 141(R) will have an impact if we have make
targeted acquisitions in future periods.
  In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements. SFAS No. 160 establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and the deconsolidation of a subsidiary. It requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and a non-controlling interest. SFAS No. 160 is effective for
fiscal years ending on or after December 15, 2008. We expect SFAS
No. 160 will only have an impact if we make acquisitions in future
periods.
  Recently
Adopted Standards
  In June
2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities(EITF 07-3). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2007. The adoption of
EITF 07-3 did not have a material impact on our consolidated financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. The adoption of
SFAS No. 159 did not have a material impact on our consolidated financial
statements.
 
 4.     Litigation
 
 In
connection with a settlement agreement about May 27, 2005, a judgment was
entered in the Superior Court of the County of Los Angeles against the Company
in favor of the previous owners of the “Core Tour” event, in the amount of
$482,126 plus interest.  The dispute arose out of the Company’s asset
purchase of the “Core Tour” event from the plaintiffs.  As of December
31, 2008, the Company has recorded the $482,126 amount of the
judgment.  On July 31, 2008, Stratus Management and Core Tour have
agreed to a settlement whereby Stratus will retain all rights of the Core Tour
events in exchange for payment of $482,126 in cash by December 31, 2008 and
74,000 shares of Common Stock as payment of interest.  On December 31,
2008, the Company issued 102,840 shares of our common stock to the owners of the
Core Tour as payment for accrued interest on the judgment as of that
date.  These shares were valued at the $163,516 based on the closing
stock price of our common stock as of that date, and accrued interest on the
books of $172,993 was reversed, with the difference going to other
income.
  In March
2008, a court case was overturned and dismissed for which a $365,579 reserve had
been established on the balance sheet.  This reserve was reversed,
with the offset going to other income.
 
 On August
18, 2008 two judgments totaling approximately $70,805 were entered against
Stratus related to wage claims for two former employees.  This amount
was taken as an expense in the three months ended September 30,
2008.
 
 In or
around October 2008, the Company was made aware by a third party that HollyRod
Foundation (“HollyRod”), a California non-profit corporation, had filed a
lawsuit in the Superior Court of California, County of Los Angeles, seeking to
collect $100,000 of sponsorship fees related to the Company’s sponsorship of a
function held by HollyRod in Phoenix Arizona in January 2008 related to the
Super Bowl.  In February 2009, Hollyrod filed a motion for summary
judgment with the court.  The Company believes the case presented by
HollyRod is without merit and that HollyRod breached the agreement by failing to
perform on nearly all required actions required of HollyRod in the sponsorship
agreement.  The Company has notified HollyRod that the Company has not been
properly served and, upon being properly served, the Company intends to
vigorously defend this action and believes it will prevail, but there can be no
assurance that it will do so.  The Company has not taken a charge in the
twelve months ended December 31, 2008 for this action.
  34
  5.  Acquisition
of Stratus Rewards
  In
accordance with the Asset Purchase Agreement dated August 15, 2005, by and
between Stratus and Stratus, Stratus acquired the business of Stratus, a credit
card rewards program.
 
 The total
consideration for this acquisition was $3,000,000, with Stratus entering into a
note payable of $1,000,000 and issuing 666,667 common shares valued at
$2,000,000. The note is payable in eight quarterly equal payments over a 24
month period, with the first payment due upon completion of the first
post-public merger funding of a minimum amount of $3,000,000.
 
 The
results of operations of the business acquired have been included in the
Company’s Statements of Operations from the date of acquisition. Depreciation
and amortization related to the acquisition were calculated based on the
estimated fair market values and estimated useful lives for property and
equipment and an independent valuation for certain identifiable intangible
assets acquired.
 
 The sponsoring bank that ran the
program when the Company acquired Stratus stopped processing new members and
sending the Company statements in October 2007 and provided notice in March 2008
that it was discontinuing the program.  While several cardmembers are
continuing to use their cards with the sponsor bank, the Stratus Rewards program
is currently inactive and the Company has not recorded new revenues since
October 2007.  The Company is seeking a new sponsoring bank to restart
the program, but there can be no assurances that it will be able to do
so.  Despite this inactive status, the Company believes that the brand
and value of the business remains intact and will increase in value with the
addition of a new sponsoring bank.  Accordingly, the Company has not
recorded any impairment of the carrying value on its financial
statements.
 
 6.     Property
and Equipment
 
 Property
and equipment as of December 31, 2008 and December 31, 2007 consisted of the
following:
 
 2008
                              
                              
                              2007Computers
      and peripherals
                              
                              $
                              52,873
                              
                              
                              $
                              52,873Office
      machines
                              
                              
                              11,058
                              
                              
                              
                              11,058Furniture
      and fixtures
                              
                              
                              56,468
                              
                              
                              
                              56,468120,399
                              
                              
                              
                              120,399Less:  accumulated
      depreciation
                              
                              
                              (117,930
                              )
                              
                              
                              (107,486
                              )$
                              2,469
                              
                              
                              $
                              12,913
 
 For the
years ended December 31, 2008 and 2007, depreciation expense was $10,442 and
$12,618, respectively
 
 7.  Goodwill
and intangible assets
 
 The
following sets forth the intangible assets of the Company as of December 31,
2007 and September 30, 2008:
  35
  2008
              
              
              2007Intangible
      AssetsEvents●  Long
      Beach Marathon
              
              $
              300,000
              
              
              $
              300,000●  Millrose
      Games
              
              
              -
              
              
              
              61,233●  Concours
      on Rodeo
              
              
              600,000
              
              
              
              600,000●  Santa
      Barbara Concours d'Elegance
              
              
              243,000
              
              
              
              243,000●  Cour
      Tour/Action Sports Tour
              
              
              1,067,069
              
              
              
              1,067,069●  Freedom
      Bowl
              
              
              344,232
              
              
              
              344,232●  Maui
      Music Festival
              
              
              725,805
              
              
              
              725,805●  Athlete
      Management
              
              
              15,000
              
              
              
              15,000●  Snow
      & Ski Tour
              
              
              -
              
              
              
              255,000Total
      - Events
              
              
              3,295,106
              
              
              
              3,611,339Stratus
      Rewards●  Purchased
      Licensed Technology, net of Accum. Amort. of $118,251 and
      $83,641
              
              
              227,849
              
              
              
              262,459●  Membership
      List, net of accum.  amort. of $36,900 and $26,100
              
              
              71,100
              
              
              
              81,900●  Corporate
      Partner List
              
              
              23,300
              
              
              
              23,300●  Corporate
      Membership
              
              
              450,000
              
              
              
              450,000Total
      - Stratus Rewards
              
              
              772,249
              
              
              
              817,659Total
      Intangible Assets
              
              $
              4,067,355
              
              
              $
              4,428,998
 
 In
accordance with SFAS No. 142, the Company’s goodwill and intangible assets,
other than the purchased licensed technology and the membership list for
Stratus, are considered to have indefinite lives and are therefore no longer
amortized, but rather are subject to annual impairment tests. The Company’s
annual impairment testing date is December 31, but the Company monitors the
facts and circumstances for all intangible properties and will record an
impairment if warranted by adverse changes in facts and
circumstances.  As of December 31, 2008, the Company determined that
the $255,000 value of the Snow & Ski Tour and the $61,233 value of the
Millrose games were impaired and these amounts were written off as of that date
and a charge taken to other income and expense.  The purchased
licensed technology and membership list are being amortized over their estimated
useful life of 10 years.  For the years ended December 31, 2007
and  2008, amortization expense was $45,410 and $34,058,
respectively.
 
 The
Company owns the rights to a number of live entertainment events.  Based on
a valuation dated December 11, 2006 by The Mentor Group, Inc., an independent
valuation consultant, the value of these event properties was $45,700,000 at
December 31, 2005.
 
 8.  Accrued
liabilities
 
 Accrued liabilities at December 31,
2008 and 2007 consisted of the following:
 
 2008
              
              
              2007Professional
      fees
              
              $
              128,908
              
              
              $
              129,570Travel
      expenses
              
              
              147,509
              
              
              
              80,000Consultants
      fees
              
              
              217,199
              
              
              
              96,174Payroll
      tax liabilities
              
              
              270,047
              
              
              
              220,339Other
              
              
              52,279
              
              
              
              82,136Total
      accrued liab
              
              $
              815,942
              
              
              $
              608,219
 9.
Loans payable to shareholders
 
 The Loans Payable to Shareholders
represents a loan from the Company’s President and amounted to the following at
December 31, 2008 and 2007.
  36
 
 2008
                        
                        
                        2007Loans
      payable to shareholders, due on demand, with an interest rate
      of  9.5%
                        
                        $
                        767,488
                        
                        
                        $
                        1,013,750
 
 Interest
expense on loans to shareholders for the years ended December 31, 2008 and 2007
was $94,414 and $92,702, respectively.  On December 31, 2008, the
Company issued 1,735,505 shares of common stock to the President of the Company
as payment of a total of $2,597,705 for a portion of the money due to him along
with accrued salary, accrued interest and other expenses.  The number
of shares was determined by dividing the amounts owed by the Volume Weighted
Average Price (“VWAP”) for 30 days prior to December 31, 2008.  The
shares were valued at $2,759,453 based on the closing price of the common stock
on December 31, 2008, and $161,748 was taken as an expense in other income and
expense.
 
 10.  Notes
payable to related parties
 
 Notes Payable to Related Parties at
December 31, 2007 and September 30, 2008 consisted of the
following:
 
 2008
                                                          
                                                          
                                                          2007●
                                                          Note
      payable to shareholder (unsecured), dated
                                                          
                                                          $
                                                          70,000
                                                          
                                                          
                                                          $
                                                          70,000January
      14, 2005, with maturity date of May 14, 2005.The
      principal amount and accrued interest were payableon
      May 14, 2005, plus interest at 10% per
    annum.  Thisnote
      is currently in default.●
                                                          Note
      payable to shareholder (unsecured), dated
                                                          
                                                          
                                                          10,000
                                                          
                                                          
                                                          
                                                          10,000February
      1, 2005, with maturity date of June 1, 2005.The
      principal amount and accrued interest were payableon
      June 1, 2005, plus interest at 10% per
    annum.  Thisnote
      is currently in default.●
                                                          Note
      payable to shareholder (unsecured), dated
                                                          
                                                          
                                                          10,000
                                                          
                                                          
                                                          
                                                          10,000February
      5, 2005, with maturity date of June 5, 2005.The
      principal amount and accrued interest were payableon
      June 5, 2005, plus interest at 10% per
    annum.  Thisnote
      is currently in default.●
                                                          Note
      payable to shareholder related to purchase of
                                                          
                                                          
                                                          1,000,000
                                                          
                                                          
                                                          
                                                          1,000,000of
      Stratus.  The note is payable in eight quarterly
      equalpayments
      over a 24 month period, with the first paymentdue
      upon completion of the first post-public mergerfunding,
      with such funding to be at a minimum amountof
      $3,000,000.Total
                                                          
                                                          
                                                          1,090,000
                                                          
                                                          
                                                          
                                                          1,090,000Less:
      current portion
                                                          
                                                          
                                                          90,000
                                                          
                                                          
                                                          
                                                          90,000Long-term
      portion
                                                          
                                                          $
                                                          1,000,000
                                                          
                                                          
                                                          $
                                                          1,000,000
 
 For the
years ended December 31, 2008 and 2007, the Company incurred interest expense on
these Notes Payable to Related Parties of $9,000 and $9,000,
respectively.
 
 11.  Notes
payable
 
 The Notes Payable at December 31, 2008
and 2007 consisted of the following:
  37
 
 2008
                                          
                                          
                                          2007●
                                          Note
      payable to non-shareholder (unsecured),
                                          
                                          $
                                          125,000
                                          
                                          
                                          $
                                          125,000dated
      January 19, 2005 with maturity date ofMay
      19, 2005.  The principal amount and accruedinterest
      were payable June 1, 2005, plus interestat
      10% per annum.  This note is currently in
    default.●
                                          Note
      payable to a non-related shareholder
                                          
                                          
                                          184,517
                                          
                                          
                                          
                                          180,000$100,000
      made in August 2007 and $80,000made
      in November 2007.  Payable on demandand
      bears interest at 10% per annum. (unsecured)●
                                          Note
      payable to non-shareholder
                                          
                                          
                                          10,000
                                          
                                          
                                          
                                          10,000(unsecured).  Payable
      on demand anddoes
      not bear interestTotal
                                          
                                          $
                                          319,517
                                          
                                          
                                          $
                                          315,000
 
 For 2008
and 2007, the Company incurred interest expense on these Notes Payable of
$31,300 and $18,123, respectively.
 
 12.  Event
acquisition liabilities
 
 The
following sets forth the liabilities, in relation to the acquisition of events
(refer to Note 6), assumed by the Company as of December 31, 2008 and
2008:
  2008
              
              
              2007●
              Concours
      on Rodeo
              
              $
              430,043
              
              
              $
              430,043●
              Core
      Tour/Action Sports Tour
              
              
              483,717
              
              
              
              483,717●
              Snow
      & Ski Tour
              
              
              -
              
              
              
              240,000$
              913,760
              
              
              $
              1,153,760
 
 As of
December 31, 2008, the Company determined that the value of the Snow and Ski
Tour was impaired and wrote off the asset of $255,000 and the related
acquisition liability of $240,000, with the $15,000 difference recorded in
other income and expense.
 
 13.  Redemption
fund reserve
 
 The
redemption fund reserve records the liabilities related to the Company’s
obligations to pay for the redemption of rewards from the Stratus credit card
rewards program.
 
 14.  Related
party transaction
 
 From 2006
through the present, the Company rented office space owned by the Chairman,
President and Chief Executive Officer of the Company. The total rent expense
accrued by the Company in the years 2008 and 2007 was $48,000 and
$48,000.  The Company believes such rents are at or below prevailing
market rates and is continuing to rent this space.
 
 15.  Shareholders’
Deficit
 
 Common
Stock
 
 On March
14, 2008, pursuant to an Agreement and Plan of Merger dated as of August 20,
2007 (the “Merger Agreement”) by and among Feris International, Inc. (“Feris”),
Feris Merger Sub, Inc. and Patty Linson, on the one hand, and Pro Sports &
Entertainment, Inc. (“Stratus”), on the other hand, Feris issued 49,500,000
shares of its common stock in exchange for all of the issued and outstanding
shares of the Stratus, resulting in a “reverse merger” in which
Stratus  became a wholly owned subsidiary of Feris and is the
surviving entity for accounting purposes.
  38
  During
the years 2008 and 2007 the Company raised $625,000 and $350,000, respectively,
through the issuance of 746,254 and 417,900 shares of common stock,
respectively.  On December 31, 2008, the Company issued 1,735,505
shares of common stock to the President of the Company as payment of a total of
$2,597,705 for a portion of the money due to him along with accrued salary,
accrued interest and other expenses.  The number of shares was
determined by dividing the amounts owed by the Volume Weighted Average Price
(“VWAP”) for 30 days prior to December 31, 2008.  The shares were
valued at $2,759,453 based on the closing price of the common stock on December
31, 2008, and $161,748 was taken as an expense in other income and
expense.  In the three months ended December 31, 2008, the Company
issued 102,840 shares of common stock valued at $163,516 to pay the owners of
Core Tour accrued interest on this amount of $172,993.
 
 Stock
Options
  Total non-cash stock option expense for
2007 was $1,713,369 and there was no non-cash stock option expense in
2008.
  The
following table sets forth the activity of our stock options to purchase common
stock:
  Options
      Outstanding
                      
                      
                      Options
      ExercisableNumber
      of
                        Shares
                      
                      
                      Price
      per
                        Share
                        Range
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Aggregate
                        Intrinsic
                        Value
      (1)
                      
                      
                      Number
      of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Aggregate
                        Intrinsic
                        Value
      (1)Balance
      at December 31, 2006
                      
                      
                      4,444,818
                      
                      
                      $
                      1.79–$10.75
                      
                      
                      $
                      2.97
                      
                      
                      $
                      0
                      
                      
                      
                      4,444,818
                      
                      
                      $
                      2.97
                      
                      
                      $
                      0Forfeited
                      
                      
                      (3,146,628
                      )
                      
                      
                      1.79
                      
                      
                      
                      1.79Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      4,862,894
                      
                      
                      
                      1.79
                      
                      
                      
                      1.79Balance
      at December 31, 2007
                      
                      
                      6,161,084
                      
                      
                      
                      0.35–8.20
                      
                      
                      
                      2.63
                      
                      
                      $
                      0
                      
                      
                      
                      6,161,084
                      
                      
                      $
                      2.63
                      
                      
                      $
                      0Forfeited
                      
                      
                      (422,575
                      )
                      
                      
                      5.55–10.75
                      
                      
                      
                      5.66Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      at December 31, 2008
                      
                      
                      5,738,509
                      
                      
                      
                      1.79–10.75
                      
                      
                      
                      2.63
                      
                      
                      $
                      0
                      
                      
                      
                      5,738,509
                      
                      
                      $
                      2.63
                      
                      
                      $
                      0
 
 (1)
              The
      intrinsic value of an option represents the amount by which the market
      value of the stock exceeds the exercise price of the option of in-money
      options only.
  Options Outstanding
                            
                            
                            Options ExercisableRange of
                              Exercise Prices
                            
                            
                            Options
                              Outstanding
                            
                            
                            Weighted
                              Average
                              Remaining
                              Life in
                              Years
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Options
                              Exercisable
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price of
                              Options
                              ExercisableYear ended December
      31, 2006
                            
                            $
                            1.79-$10.75
                            
                            
                            
                            4,444,818
                            
                            
                            
                            2.0
                            
                            
                            
                            2.97
                            
                            
                            
                            4,444,818
                            
                            
                            
                            2.97Year
      ended December 31, 2007
                            
                            $
                            1.79-$10.75
                            
                            
                            
                            6,161,084
                            
                            
                            
                            4.0
                            
                            
                            
                            2.63
                            
                            
                            
                            6,161,084
                            
                            
                            
                            2.63Year
      ended December 31, 2008
                            
                            $
                            1.79-$10.75
                            
                            
                            
                            5,738,509
                            
                            
                            
                            3.3
                            
                            
                            
                            2.42
                            
                            
                            
                            5,738,509
                            
                            
                            
                            2.42
  Warrants
 
 During
2005, the Company granted warrants with rights to purchase 43,283 shares of its
common stock with a strike price of $0.84 cents per share. These warrants have
terms of five years and the exercise prices for these warrants are to be the
share prices applicable in the next Company Financing after February 2005 as a
result of the Reverse Merger. The warrants will expire in 2010. The Company
valued these warrants, using the Black-Scholes option pricing model, at December
31, 2006 and 2005, at $15,562 and $15,562, respectively, and included this
liability in other accrued expenses and other liabilities.  There were
no warrants granted in 2006, 2007 and 2008.
  39
 
 These
warrants were granted as financing costs related to notes payable agreements
with two shareholders and one non-shareholder. The warrants are accounted for as
financing costs which were capitalized and amortized over the five-year life of
the debt. Total amortization expense for the three months ended September 30,
2008 and 2007 were $0 and $1,813, respectively.  Total amortization
expense for the years ended December, 2008 and 2007 were $0 and $8,550,
respectively.
 
 The
Company analyzed these warrants in accordance with EITF pronouncement No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”. The Company determined that the warrants
should be classified as a liability based on the fact that the number of shares
attributable to these warrants is indeterminate.
 
 16.  Commitments
and contingencies
 
 Office
space rental
 
 Effective
September 1, 2006, the Company entered into a lease agreement for office
facilities on a month-to-month basis and this agreement requires monthly
payments of $4,318.  The Company vacated this space in August
2007.
 
 Effective
April 1, 2008, the Company entered into a lease for office space in West
Hollywood, California with a security deposit of $34,200 at a monthly rate of
$8,500 from April 1, 2008 to October 31, 2008, and a monthly rent of $11,400 per
month from November 1, 2008 until the end of the lease at June 30,
2010.
 
 Rent
expense for 2008 and 2007 amounted to $37,500 and $22,192,
respectively.
 
 Contractural
obligations
  Set forth
below is information concerning our known contractual obligations as of
December 31, 2008 that are fixed and determinable.
 
 Total
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      After
      2013Debt
      obligations*
                      
                      $
                      1,000,000
                      
                      
                      $
                      375,000
                      
                      
                      $
                      500,000
                      
                      
                      $
                      125,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Rent
      obligations
                      
                      
                      301,200
                      
                      
                      
                      184,800
                      
                      
                      
                      116,400
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      1,301,200
                      
                      
                      $
                      559,800
                      
                      
                      $
                      616,400
                      
                      
                      $
                      125,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
 
 
 *
              Debt
      incurred in connection with acuiqisition of Stratus.  Repayment
      is triggered by first funding of at least $3,000,000.  For
      purposes of this schedule such funding is assumed to occur by June 30,
      2009
 
 Employment
Agreement
 
 The
Company has an Employment Agreement (“Agreement”), dated January 1, 2007, with
its President and Chief Executive Officer, which requires the Company to offer a
non-qualified stock option to purchase 10% of the fully diluted shares of the
Company’s capital stock issued and outstanding on January 1, 2007, the effective
date of the Agreement.  The stock option has a term of five years at
an exercise price of $1.79 per share for 4,862,894 shares (which was equal to
the fair value) and vested immediately on the date of the agreement. This stock
option is subject to a customary anti-dilution provision with respect to any
stock splits, mergers, reorganizations and other such events. The length of this
Agreement is five years from the effective date unless the employment is
terminated for another cause. During the duration of this Agreement, the Chief
Executive Officer is entitled to an annual salary of $240,000 and a bonus of
$250,000 in the event a Valuing Event causes the Company to be valued in excess
of $100,000,000 and an additional bonus of $500,000 in the event a Valuing Event
causes the Company to be valued in excess of $500,000,000. For the years ended
December 31, 2008 and December 31, 2007, no bonuses have been paid by the
Company in relation to this Agreement.
  40
 Acquisitions
 
 On April
21, 2008, the Company agreed to purchase the tangible and intangible assets of
Nouveau Model Talent Management, Inc. (“Nouveau”), a modeling and talent
management agency, for 500,000 shares of Company common stock, of which 166,667
shares will be issued at the time of closing, 166,667 shares will be issued one
year from closing and the remaining 166,666 shares will be issued two years from
closing.  The closing of this transaction requires that Nouveau comply
with the conditions for closing in the agreement which include, but are not
limited to, obtaining an audit of its 2006 and 2007 financial statements and a
review of its financial statements for the three months ended March 31,
2008.  To date, Nouveau has not obtained this audit and review and the
transaction has not closed.
 
 On July
30, 2008, the Company signed a definitive purchase agreement to acquire 100% of
the common stock of Exclusive Events S.A., a privately held corporation based in
Geneva, Switzerland that provides Formula One racecar experiences to its
customers, in a cash and stock transaction with an aggregate base value of
approximately $1,612,000, with $1,128,000 in cash and $484,000 in shares of the
Company’s common stock, with the number of such shares to be determined by
dividing this amount by the average closing price of the Company’s common stock
for thirty days prior to the closing of the transaction.  In addition,
if Exclusive Events meets certain financial performance criteria for 2008 and
2009, additional payments totaling $1,612,000, subject to certain conditions and
adjustments, will be due, with $484,000 in cash and $1,128,000 in shares of the
Company’s common stock, with the number of shares to be determined by dividing
the amount due by the average closing price of the Company’s common stock for
thirty days prior to the computation of the performance bonus.  The
transaction is subject to customary conditions and approvals and the Company’s
ability to fund the cash portion of the purchase price.  This
agreement expired on December 15, 2008, but the Company is in negotiations to
extend the expiration date and make changes to the agreement.
 
 Legal
 
 In
connection with a settlement agreement about May 27, 2005, a judgment was
entered in the Superior Court of the County of Los Angeles against the Company
in favor of the previous owners of the “Core Tour” event, in the amount of
$482,126 plus interest.  The dispute arose out of the Company’s asset
purchase of the “Core Tour” event from the plaintiffs.  As of December
31, 2008, the Company has recorded the $482,126 amount of the
judgment.  On July 31, 2008, Stratus Management and Core Tour have
agreed to a settlement whereby Stratus will retain all rights of the Core Tour
events in exchange for payment of $482,126 in cash by December 31, 2008 and
74,000 shares of Common Stock as payment of interest.  On December 31,
2008, the Company issued 102,840 shares of our common stock to the owners of the
Core Tour as payment for accrued interest on the judgment as of that
date.  These shares were valued at the $163,516 based on the closing
stock price of our common stock as of that date, and accrued interest on the
books of $172,993 was reversed, with the difference going to other
income.
  On August 18, 2008 two judgments
totaling approximately $70,805 were entered against Stratus related to wage
claims for two former employees.  This amount was taken as an expense
in the three months ended September 30, 2008.
 
 In or
around October 2008, the Company was made aware by a third party that HollyRod
Foundation (“HollyRod”), a California non-profit corporation, had filed a
lawsuit in the Superior Court of California, County of Los Angeles, seeking to
collect $100,000 of sponsorship fees related to the Company’s sponsorship of a
function held by HollyRod in Phoenix Arizona in January 2008 related to the
Super Bowl.  In February 2009, Hollyrod filed a motion for summary
judgment with the court.  The Company believes the case presented by
HollyRod is without merit and that HollyRod breached the agreement by failing to
perform on nearly all required actions required of HollyRod in the sponsorship
agreement.  The Company has notified HollyRod that the Company has not been
properly served and, upon being properly served, the Company intends to
vigorously defend this action and believes it will prevail, but there can be no
assurance that it will do so.  The Company has not taken a charge in the
twelve months ended December 31, 2008 for this action.
 
 17.  Segment
Information
 
 SFAS No.
131, “Disclosures about
Segments of an Enterprise and Related Information”, requires the
determination of reportable business segments (i.e., the management approach).
This approach requires that business segment information used by the chief
operating decision maker to assess performance and manage company resources be
the source for segment information disclosure. Revenues
are derived from customers located within the United States. Long-lived
assets consist of property and equipment and intangible assets located within
the United States.
  41
 
 18.     Quarterly
Results (Unaudited)
 
 Quarter
      Ended(Amounts
      in thousands,
                            except
      per share amounts)
                          
                          Mar.
      31,
                            2007
                          
                          
                          Jun.
      30,
                            2007
                          
                          
                          Sep.
      30,
                            2007
                          
                          
                          Dec.
      31,
                            2007
                          
                          
                          Mar.
      31,
                            2008
                          
                          
                          Jun.
      30,
                            2008
                          
                          
                          Sep.
      30,
                            2008
                          
                          
                          Dec.
      31,
                            2008Revenues:Events
                          
                          $
                          16
                          
                          
                          $
                          0
                          
                          
                          $
                          124
                          
                          
                          $
                          (10
                          )
                          
                          $
                          34
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Stratus
      Rewards Visa Card
                          
                          
                          36
                          
                          
                          
                          61
                          
                          
                          
                          50
                          
                          
                          
                          32
                          
                          
                          
                          6
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      revenues
                          
                          
                          52
                          
                          
                          
                          61
                          
                          
                          
                          174
                          
                          
                          
                          22
                          
                          
                          
                          40
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          -Operating
      loss
                          
                          
                          (2,105
                          )
                          
                          
                          (328
                          )
                          
                          
                          (150
                          )
                          
                          
                          (236
                          )
                          
                          
                          (261
                          )
                          
                          
                          (233
                          )
                          
                          
                          (288
                          )
                          
                          
                          (208
                          )Net
      loss
                          
                          $
                          (2,111
                          )
                          
                          $
                          (366
                          )
                          
                          $
                          (449
                          )
                          
                          $
                          325
                          
                          
                          $
                          66
                          
                          
                          $
                          (286
                          )
                          
                          $
                          (269
                          )
                          
                          $
                          (604
                          )Net
      loss per share:Basic
      and diluted
                          
                          $
                          (0.04
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          0.01
                          
                          
                          $
                          0.00
                          
                          
                          $
                          (0.01
                          )
                          
                          $
                          0.00
                          
                          
                          $
                          (0.01
                          )Weighted
      average shares (000):Basic
      and diluted
                          
                          
                          48,747
                          
                          
                          
                          48,640
                          
                          
                          
                          48,788
                          
                          
                          
                          49,046
                          
                          
                          
                          49,440
                          
                          
                          
                          55,006
                          
                          
                          
                          55,082
                          
                          
                          
                          55,277
 
 19.     Income
taxes
 
 Significant
components of the Company's deferred tax assets for federal income taxes for as
of December 31, 200 and 2007 consisted of the following:
  December
      31,2008
                                
                                
                                2007Net
      operating loss carryforward
                                
                                $
                                4,464,278
                                
                                
                                $
                                4,161,687Amortization
                                
                                
                                (560,692
                                )
                                
                                
                                (541,238
                                )Stock
      option compensation
                                
                                
                                904,334
                                
                                
                                
                                904,334Deferred
      compensation
                                
                                
                                764,913
                                
                                
                                
                                662,097Deferred
      state tax
                                
                                
                                (358,898
                                )
                                
                                
                                (326,215
                                )Other
                                
                                
                                386,471
                                
                                
                                
                                301,870Valuation
      allowance
                                
                                
                                (5,600,406
                                )
                                
                                
                                (5,162,535
                                )Net
      deferred tax asset
                                
                                $
                                -
                                
                                
                                $
                                -
  As of
December 31, 2008 and 2007, the Company had net operating loss carry-forwards
(“NOL”) for federal and state income tax purposes of approximately:
 
 December
      31,2008
                      
                      
                      2007Combined
      NOL:Federal
                      
                      $
                      10,200,000
                      
                      
                      $
                      9,700,000California
                      
                      
                      8,460,000
                      
                      
                      
                      7,230,000
 
 The net
operating loss carry-forwards begin expiring in 2019 and 2009, respectively. The
utilization of net operating loss carry-forwards may be limited due to the
ownership change under the provisions of Internal Revenue Code Section 382 and
similar state provisions. The Company recorded a 100% valuation allowance on the
deferred tax assets at December 31, 2008 and 2007 because of the uncertainty of
their realization.
  42
 
 A
reconciliation of the income tax credit computed at the federal statutory rate
to that recorded in the financial statements for 2008 and 2007 is as
follows:
 
 December
      31, 2008
                          
                          
                          December
      31, 2007Rate
      reconciliation:Federal
      credit at statutory rate
                          
                          
                          (371,711
                          )
                          
                          
                          34.00
                          %
                          
                          
                          (884,155
                          )
                          
                          
                          34.00
                          %State
      tax, net of Federal benefit
                          
                          
                          (64,351
                          )
                          
                          
                          5.88
                          %
                          
                          
                          (153,170
                          )
                          
                          
                          5.70
                          %Change
      in valuation allowance
                          
                          
                          438,143
                          
                          
                          
                          (40.07
                          %
                          )
                          
                          1,039,851
                          
                          
                          
                          (39.96
                          %)Other
                          
                          
                          (1,281
                          )
                          
                          
                          (0.12
                          %
                          )
                          
                          (1,726
                          )
                          
                          
                          (0.60
                          %)Total
      provision
                          
                          
                          800
                          
                          
                          
                          (0.31
                          %
                          )
                          
                          800
                          
                          
                          
                          (0.86
                          %)
 
 Given the
immaterial amount of the tax provision, it was included in other income and
expenses.
 
 20.     Subsequent
events
 
 Subsequent
to December 31, 2008, the Company sold 145,580 shares of its common stock for
$132,000 and issued warrants to purchase 9,900 shares of its common stock for
$2.00.  These warrants have a five-year life.
 
 Subsequent to March 31,
2009,  the Company entered into a subscription agreement to sell
413,223 shares of its commont stock  for $500,000 and issued warrants
to purchase 37,500 shares of its common stock for $2.00.  These
warrants have a five-year life. The shares of common stock are subject to
"piggyback" registration rights.
  43
  Item
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL
      DISCLOSURE
  On July
30, 2008, Stratus Media Group, Inc. (the “Company”) dismissed Gruber & Company, LLC
(“Gruber”), as its principal independent
accountant, and engaged Goldman Parks Kurland Mohidin LLP (“Goldman”) as its principal independent
accountant. Goldman will review the Company’s financial statements for the
quarters ended March 31, 2008 and 2007, and June 30, 2008 and 2007. The decision
to dismiss Gruber and to appoint Goldman was approved by the Company’s Board of
Directors.
  Gruber’s
report on the Company’s financial statements dated February 20, 2008, for the
two most recent fiscal years ended December 31, 2007 and 2006, did not contain
an adverse opinion or disclaimer of opinion, or qualification or modification as
to uncertainty, audit scope, or accounting principles. In connection with the
audit of the Company’s financial statements for the two most recent fiscal years
ended December 31, 2007 and 2006, and for the period between January 1, 2008 and
July 30, 2008, which was the date of Gruber’s dismissal as the principal
independent accountant for the Company, there were no disagreements, resolved or
not, with Gruber on any matters of accounting principles or practices, financial
statement disclosure, or audit scope and procedures, which disagreements, if not
resolved to the satisfaction of Gruber, would have caused Gruber to make
reference to the subject matter of the disagreements in connection with their
report.
  Item
9A(T).   CONTROLS AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  Our Chief
Executive Officer, after evaluating the effectiveness of our disclosure controls
and procedures (as defined in Securities Exchange Act of 1934 (the “Exchange
Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this report (the “Evaluation Date”), has concluded that as of the Evaluation
Date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that we file and submit
under the Exchange Act (i) is recorded, processed, summarized and reported
as and when required and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer, as appropriate to allow
timely decisions regarding required disclosure.
  Changes
in Internal Control Over Financial Reporting
  There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
  Management’s
Report on Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed, under
the supervision of our chief executive offices and effected by our board of
directors, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that our receipts and
expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements.
  Based on
our evaluation, our Chief Executive Officer concluded that internal control over
financial reporting was effective as of December 31, 2008.  All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance regarding the reliability of financial
reporting and the preparation  of financial statements for external
purposes in accordance with GAAP.
  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
  44
  Item
9B.   OTHER INFORMATION
  None.
  PART
III
  Item
10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 Information
concerning this item will be presented in an amendment to this Report on Form
10-K that we shall file with the Commission not later than 120 days after the
end of the fiscal year covered by this report.
 
 Item
11.   EXECUTIVE COMPENSATION
 Information
concerning this item will be presented in an amendment to this Report on Form
10-K that we shall file with the Commission not later than 120 days after the
end of the fiscal year covered by this report.
 
 Item
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED   STOCKHOLDER
MATTERS
 Information
concerning this item will be presented in an amendment to this Report on Form
10-K that we shall file with the Commission not later than 120 days after the
end of the fiscal year covered by this report.
 
 Item
13.   CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
 Information
concerning this item will be presented in an amendment to this Report on Form
10-K that we shall file with the Commission not later than 120 days after the
end of the fiscal year covered by this report.
 
 Item
14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 Information
concerning this item will be presented in an amendment to this Report on Form
10-K that we shall file with the Commission not later than 120 days after the
end of the fiscal year covered by this report.
  PART
IV
  Item
15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  See Index
to Consolidated Financial Statements this Report on Form 10-K.
  The following documents are furnished
as exhibits to this Report on Form 10-K.  Exhibits marked with an
asterisk are filed herewith.  The remainder of the exhibits previously
have been filed with the Commission and are incorporated herein by
reference.
 
 Exhibit No.
                              
                              Exhibit
      Description3.1
                              
                              Restated
      Articles of Incorporation of Titan (incorporated by reference from Form
      10-SB (Film No. 98648988) filed by Titan with the Commission on June 16,
      1998).3.2
                              
                              By-Laws
      of Titan as amended and restated on September 10, 1999 (incorporated by
      reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed
      October 1, 1999).4.1
                              
                              Specimen
      of Common Stock Certificate (incorporated by reference from Form 10-SB
      (Film No. 98648988) filed by Titan with the Commission on June 16,
      1998).4.2
                              
                              Certificate
      of Designations of the Series A Convertible Preferred Stock (incorporated
      by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
      filed October 1, 1999).4.3
                              
                              Warrant
      issued to Advantage Fund II Ltd., dated September 17, 1999 (incorporated
      by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K
      filed October 1, 1999).4.4
                              
                              Warrant
      issued to Koch Investment Group Limited, dated September 17, 1999
      (incorporated by reference to Exhibit 4.3 to the Company’s Current Report
      on Form 8-K filed October 1, 1999).4.5
                              
                              Warrant
      issued to Reedland Capital Partners, dated September 17, 1999
      (incorporated by reference to Exhibit 4.4 to the Company’s Form S-3
      Registration Statement filed on October 15, 1999).4.6
                              
                              Warrant
      issued to Mr. Richard Cohn, dated September 17, 1999 (incorporated by
      reference to Exhibit 4.5 to the Company’s Form S-3 Registration Statement
      filed on October 15, 1999).4.7
                              
                              Warrant
      issued to Intellect Capital Corp., dated September 17, 1999 (incorporated
      by reference to Exhibit 4.6 to the Company’s Form S-3 Registration
      Statement filed on October 15, 1999).4.8
                              
                              Registration
      Rights Agreement with Advantage Fund II Ltd., dated September 15, 1999
      (incorporated by reference to Exhibit 4.5 to the Company’s Current Report
      on Form 8-K filed October 1, 1999).4.9
                              
                              Registration
      Rights Agreement with Koch Investment Group Limited, dated September 15,
      1999 (incorporated by reference to Exhibit 4.6 to the Company’s Current
      Report on Form 8-K filed October 1, 1999).4.10
                              
                              Certificate
      of Designations of the Series B Convertible Preferred Stock (incorporated
      by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
      filed March 24,
2000).
  45
  4.11
                    
                    Warrant
      issued to Advantage Fund II Ltd., dated March 9, 2000 (incorporated by
      reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed
      March 24, 2000).4.12
                    
                    Warrant
      issued to Koch Investment Group Limited, dated March 9, 2000 (incorporated
      by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K
      filed March 24, 2000).4.13
                    
                    Warrant
      issued to Reedland Capital Partners, dated March 9, 2000 (incorporated by
      reference to Exhibit 4.4 to the Company’s Form S-3 Registration Statement
      filed on March 24, 2000).4.14
                    
                    Registration
      Rights Agreement with Advantage Fund II Ltd., dated March 7, 2000
      (incorporated by reference to Exhibit 4.5 to the Company’s Current Report
      on Form 8-K filed March 24, 2000).4.15
                    
                    Registration
      Rights Agreement with Koch Investment Group Limited, dated March 7, 2000
      (incorporated by reference to Exhibit 4.6 to the Company’s Current Report
      on Form 8-K filed March 24, 2000).10.1
                    
                    Subscription
      Agreement with Advantage Fund II Ltd., dated as of September 15, 1999
      (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed October 1, 1999).10.2
                    
                    Subscription
      Agreement with Koch Investment Group Limited, dated as of September 15,
      1999 (incorporated by reference to Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed October 1, 1999).10.3
                    
                    Modification
      and Partial Payment Agreement with Oxford International Management dated
      April 13, 200010.4
                    
                    Subscription
      Agreement with Advantage Fund II Ltd., dated as of March 7, 2000
      (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed March 24, 2000).10.5
                    
                    Subscription
      Agreement with Koch Investment Group Limited, dated as of March 7, 2000
      (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed March 24, 2000).10.6
                    
                    1997
      Stock Option and Incentive Plan of Titan (Incorporated by reference from
      Form 10-SB (Film No. 98648988) filed by Titan with the Commission on June
      16, 1998).10.61
                    
                    Agreement
      and Plan of Merger between Pro Sports & Entertainment and Feris
      International, Inc. dated August 20, 2007 (Incorporated by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 14,
      2008).10.62
                    
                    Amendment
      to Agreement and Plan of Merger between Pro Sports & Entertainment,
      Inc. and Feris International, Inc. dated March 10, 2008 (Incorporated by
      reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed March 14, 2008).10.63
                    
                    Employment
      Agreement between Pro Sports & Entertainment, Inc. and Paul Feller
      dated January 1, 2007 (Incorporated by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K filed March 14,
  2008).10.64
                    
                    Share
      Purchase Agreement with Exclusive Events, S.A. with the “Vendors” (as
      defined in the Agreement) (Incorporated by reference to Exhibit 2.1 to the
      Company’s Current Report on Form 8-K filed August 11,
    2008).31.1*
                    
                    Certifications
      of the Chief Executive Officer under Section 302 of the
      Sarbanes-Oxley Act.31.2*
                    
                    Certifications
      of the Principal Accounting Officer under Section 302 of the
      Sarbanes-Oxley Act.32.1*
                    
                    Certifications
      of the Chief Executive Officer under Section 906 of the
      Sarbanes-Oxley Act.32.2*
                    
                    Certifications
      of the Principal Accounting Officer under Section 906 of the
      Sarbanes-Oxley
Act.
  46
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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.
 STRATUS MEDIA GROUP,
      INC.By:
                                                        /s/ Paul FellerPaul
      Feller, Chief Executive Officerand
      Chief Financial OfficerDate:
                                                        April
      15,
2009
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated
 
 By:
                                              /s/ Paul FellerName:
                                              Paul FellerTitle:
                                              Principal
      Executive OfficerPrincipal
      Financial OfficerChairman
      of the Board of Directorssole
      directorDate:
                                              April
      15,
2009
  47