SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K




(Mark One)


xAnnual report under Section 13 or 15(d) of the Securities Exchange Act of 1934




For the year ended December 31, 2008




oTransition report under Section 13 or 15(d) of the Exchange Act




For the transition period from  To ___________




Commission file number Commission File Number: 000-31573




ProElite, Inc.


(Exact Name of Small Business Issuer as Specified in its Charter)


New Jersey

22-3161866(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)




12121 Wilshire Blvd., Suite 1001


Los Angeles, CA 90025


(Address of Principal Executive Offices)




(310) 526-8700


(Issuer’s Telephone Number, Including Area Code)




________________________________________


(Former Name, Former Address and Former Fiscal Year,


if Changed Since Last Report)




Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act o




Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 oNo x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes oNo x




As of the close of trading on March 31, 2009 there were 55,854,726 shares of Common Stock outstanding, shares of which 18,655,709 were held by non-affiliates. The aggregate market value of common shares held by non-affiliates, based on the average closing bid and asked prices on March 30, 2009, was approximately $373,114.




State issuer’s revenue for its most recent fiscal year: $12,560,407




Transitional Small Business Disclosure Format (check one): Yes oNo x










Explanatory Note




Prior to the date of this filing, ProElite, Inc. (the "Company") has not filed any periodic reports since August 19, 2008 for the Quarterly Report on Form 10-Q for the period ended June 30, 2008.  This Report is one of several reports being concurrently filed by the Company in order to bring its filings current as of the date hereof.  The information in this Report relates solely to the period covered thereby, and is not updated for events subsequent to such period.








ProElite, Inc.


INDEX




Page

No.PART IItem 1

Description of Business

3Item 2

Description of Property

18Item 3

Legal Proceedings

19Item 4

Submission of Matters to a Vote of Security Holders

19PART IIItem 5

Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

19Item 6

Management Discussion and Analysis

22Item 7

Financial Statements

26Item 8

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

26Item 8A

Controls and Procedures

26Item 8B

Other InformationPART IIIItem 9

Directors, Executive Officers, Promoters, Control Persons and Corporate Governance, Compliance with Section 16(A) Of The Exchange Act

29Item 10

Executive Compensation

31Item 11

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

33Item 12

Certain Relationships and Related Transactions, and Director Independence

36Item 13

Exhibits

37Item 14

Principal Accountant Fees and Services

37




302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer






2




PART I.




Forward Looking and Cautionary Statements




This Form 10-Kcontains certain forward-looking statements. For example, statements regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. These statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),” “continue,” “forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,” “expect” or the negative of such terms or other comparable terminology. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. However, these forward-looking statements are inherently subject to known and unknown risks and uncertainties. Actual results or experience may differ materially from those expected or anticipated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies, competition from other similar businesses, and market and general policies, competition from other similar businesses, and market and general economic factors. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report.




If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project. Any forward-looking statement you read in this report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy, and liquidity. All subsequent forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this report, which would cause actual results to differ before making an investment decision. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results.




Overview




You should read the information in this Item 1 together with our financial statements and notes thereto that appear elsewhere in this report.




Item 1. Description of Business




Mixed Martial Arts, commonly referred to as MMA, is a sport growing in popularity around the world. In MMA matches, athletes use a combination of a variety of fighting styles, including boxing, judo, jiu jitsu, karate, kickboxing, muy thai, tae kwon do, and wrestling. Typically, MMA sporting events are promoted either as championship matches or as vehicles for well-known individual athletes. Professional MMA competition conduct is regulated primarily by rules implemented by state athletic commissions and is currently permitted in over thirty states. Athletes win individual matches by knockout, technical knockout (referee or doctor stoppage), submission, or judges’ decision.




ProElite, Inc., a New Jersey corporation (the “Company”) is a holding company for entities that (a) organize and promote mixed martial arts matches, and (b) create an internet community for martial arts enthusiasts and practitioners. On October 3, 2006, pursuant to a Share Exchange Agreement dated concurrently between us and the shareholders of Real Sport, Inc., a California corporation, we issued 25,000,000 shares of our common stock in exchange for all of the issued and outstanding shares of Real Sport. As a result of this reverse merger transaction, Real Sport is now our wholly owned subsidiary, though from an historical perspective it was deemed to have been the acquirer in the reverse merger and the survivor of the reorganization. Concurrently with the closing of the reverse merger, we completed a private placement of our securities with gross proceeds of $10,000,000. Real Sport is the holding company of ProElite.com (formerly EliteXC.com and I-Fight, Inc.) and EliteXC Live (formerly MMA Live, Inc. and Jungle Fight, Inc.), which were formed on August 10, 2006 and September 13, 2006, respectively.






3




On October 20, 2008,  management, with Board ratification, decided to close or sell all operations and began an extended period of restructuring its balance sheet, divesting itself of certain assets, settlement of contingent liabilities, and attempting to raise additional capital.   All entities and transactions discussed below are operations that are the subject of this Board action and will be reported as discontinued operations in the financial statements included in Item 7 of this report.




SHOWTIME




On November 8, 2006, the Company entered into a television distribution agreement with Showtime Networks (“Showtime”) to televise the Company’s live events. The agreement provides that the Company will provide a minimum number of events for the years 2007 through 2009. There was no license fee payable by Showtime on account of Showtime events in 2007 and the Company bore all costs and expenses for the events. License fees in 2008 and 2009 will be split between the Company and Showtime. For each event featured on pay-per-view, the Company will receive the proceeds received by Showtime, less the distribution fee and advances made by Showtime on the Company’s behalf for marketing, public relations and television production. Any revenues derived from the sale of the Company’s merchandise by Showtime, or through Showtime Networks’ website or telecasts will be split 70% to the Company and 30% to Showtime. In connection with this agreement, the Company issued a warrant to purchase 2.5 million shares of common stock at a per share exercise price of $2.00. These warrants were valued at $606,579, were recorded in prepaid distribution costs, and are being amortized into operations over a three-year period commencing November 2006.




On January 5, 2007, pursuant to a Securities Purchase Agreement the Company entered into with Showtime, the Company issued an aggregate of 1,666,667 units for $5 million in cash, each unit consisting of 3 shares of common stock and a three-year warrant to purchase 1 share of common stock at a per share exercise price of $2.00 to Showtime, at a per unit price of $3.00. These warrants have been valued at $345,000 and were recorded in additional paid-in capital. Additionally, the Company issued a seven-year warrant to purchase 2.5 million shares of common stock to Showtime at a per share exercise price of $2.00, in consideration of the funding and the exclusive distribution agreement provided to the Company. These warrants have been valued at $608,000 and will be amortized into operations over a three-year period commencing January 5, 2007. The Showtime warrants were exercisable as of the date of grant, January 5, 2007.




Pursuant to the investor rights agreement entered into with Showtime, the Company granted Showtime the right to appoint one member to the Board of Directors, and Santa Monica Capital Partners II, LLC, the Company’s largest shareholder, has agreed to vote all shares it owns or over which it has voting control in whatever manner necessary to ensure that the Showtime designee will be elected to the Board of Directors at each annual or special meeting of shareholders at which an election of directors is held or pursuant to any written consent of the shareholders.




In September 2008, Showtime and the Company engaged in discussions in connection with the potential purchase by CBS of certain assets owned by PEI in exchange for the forgiveness of the loans from Showtime as well as the placement of additional cash from Showtime and the return of Showtime’s equity investment.




These discussions ended on October 14, 2008, when Showtime advised PEI that it was ending all negotiations to purchase PEI’s assets.  The next day, October 15, 2008, Showtime sent to PEI a Notice of Default claiming that PEI failed to maintain the minimum cash balance under a Senior Secured Note Purchase Agreement and related Security Agreement.  Then on October 31, 2008, Showtime gave the Company a notice that it intended to sell all of the Company’s personal property, whether tangible or intangible, to the highest bidder at a public sale to be held on November 17, 2008.




On November 13, 2008, the Company received correspondence from CBS Corporation, on behalf of Showtime that the sale of assets of ProElite, Inc. and its subsidiaries originally scheduled for November 17, 2008 had been adjourned.




Finally, on February 5, 2009, CBS and Showtime entered into a General Mutual Release and Termination Agreement with the Company agreeing to a mutual release and termination of any and all claims, agreements, debts, liens, damages or liabilities of any nature.  This agreement was completed in conjunction with the Strikeforce Agreement outlined below.




STRIKEFORCE




On February 5, 2009 the Company entered into an Asset Purchase Agreement and other related agreements with Explosion Entertainment, LLC (“Strikeforce”). Under the terms of the Purchase Agreement, Strikeforce acquired from the Company certain EliteXC fighter contracts, a library of televised EliteXC events and specified related assets.  Consideration paid for the assets consisted of (i) $3 million in cash paid at closing into an escrow account for the benefit of the Elite XC’s vendors, (ii) the assumption of certain liabilities relating to the assets sold and (iii) contingent consideration in the form of rights to receive a portion of the license fee earned by Strikeforce under a distribution agreement between Strikeforce and Showtime Networks Inc. (“Showtime”).  After payment of vendors from escrow, the Company was able to retain approximately $300,000.  The license fee is payable to the Company until February 28, 2012, subject to limited extensions.




4




KOTC




Pursuant to a purchase agreement dated September 11, 2007 among King of the Cage, Inc. (“KOTC”), Terry Trebilcock and Juliemae Trebilcock, the selling shareholders of KOTC, and the Company, on September 11, 2007 the Sellers sold to the Company all of the shares of capital of KOTC. The consideration for such shares is the payment to the shareholders of KOTC of $3,250,000 cash at closing; a minimum of 178,571 restricted shares of the Company’s common stock expected to be delivered in April 2008 to the KOTC shareholders and/or their designees; and $500,000 in cash to be paid sixty days from closing subject to any offset for any indemnity claims by the Company. Additionally, the Company has agreed to make contingent payments over a five-year period of up to an additional $5,000,000 (payable in part in cash and in part in shares of the Company’s common stock, as provided in the purchase agreement) in accordance with a schedule based on the number of events produced under the supervision of Terry Trebilcock under the KOTC name and earnings before interest, taxes, depreciation and amortization for KOTC’s operations during such period. As security for these contingent payments, the Company agreed to grant to the shareholders of KOTC a first priority security interest in the KOTC shares. The Company also agreed to enter into a five-year employment agreement with Trebilcock pursuant to which Mr. Trebilcock will serve as President of KOTC and supervise the production of live mixed martial events under the KOTC brand and such other duties as may be assigned to him by the Company. In addition to a salary of $150,000, Trebilcock is to receive a share of KOTC’s EBITDA over specified levels.




On July 10, 2009 the Company in an effort to settle contingent liabilities consummated a strict foreclosure under the California Commercial Code in which an entity affiliated with Terry Trebilcock and Juliemae Trebilcock (the “Secured Parties”) acquired all of the outstanding stock of the Company’s wholly-owned subsidiary, King of the Cage, Inc. (“KOTC”) and certain other related assets.  The strict foreclosure was effected pursuant to an Acceptance Of Collateral In Full Satisfaction Of Obligations At Less Than Face Value And Purchase Agreement, dated July 9, 2009 (the “Agreement”) between the Company, on the one hand, and the Secured Parties and their affiliated entity, KOTC Acquisition, LLC (“Acquisition”), on the other hand.  Mr. Trebilcock was the President of KOTC at the time the strict foreclosure was consummated.  Management believes that any and all issues between the parties has been satisfactorily resolved.




In addition to settling all outstanding claims, allegations and prior contracts between them, the Company received at closing certain earn-out rights, as described below and the Acquiror and the Secured Parties accepted the KOTC stock, in a “strict foreclosure”, in full satisfaction of all prior obligations between the parties.




The Acquiror agreed to pay the Company an earn-out, subject to certain maximums, as follows




(i)   a specified percentage of the Secured Parties’ percentage interest in the net cash flow; plus




(ii)  a specified percentage of the Secured Parties’ percentage interest in any proceeds the Secured Parties actually receive from, generally, a sale of Acquiror or KOTC, or from distributions to the Secured Parties from issuances of debt or equity securities by Acquiror; plus




(iii) a specified percentage of the proceeds the Secured Parties actually receive in any sale of their equity interests in Acquiror or KOTC.




The earn-outs are subject to certain limitations, which vary depending on when the earn-out is paid.  The earn-out obligations were guaranteed by the Secured Parties.




5


Private Placement of Securities in July 2007




Effective July 12, 2007, the Company entered into a Securities Purchase Agreement (“SPA”), dated June 29, 2007, with four institutional investors, whereby the Company issued and sold in a private placement 3,214,285 units for an aggregate purchase price of approximately $22,500,000. Each unit consisted of one share of the Company’s common stock and one-half of a five-year warrant to purchase one share of the Company’s common stock for $7.00 per share. An additional 357,143 units were also purchased by the investors under the SPA, consisting of 357,143 shares sold by certain shareholders of the Company and warrants to purchase an additional 178,571 shares of common stock to be issued by the Company. The Company’s agreement to issue the additional warrants was in consideration of the selling shareholders’ entering into a lock-up agreement, which terms are described below. The selling shareholders included directors, executive officers, shareholders holding at least 5% of the outstanding shares of common stock of the Company, and their affiliates. The Company also entered into a Registration Rights Agreement with the investors.




Securities Purchase Agreement




The Securities Purchase Agreement contains a number of covenants by the Company that are outlined below in this paragraph. The Company will not file any registration statements on Form S-8, or other registration statements covering securities issued or that may be issued to its employees, directors, consultants or others for services, for a two-year period following July 31, 2007, subject to certain exceptions. The Company also provided the investors with anti-dilution coverage for a period ending on the second anniversary of the effective date of the Registration Statement, which was declared effective on September 5, 2007. Subject to certain exclusions, the anti-dilution coverage provides for the issuance of additional shares of common stock and adjustments to the exercise price of the warrants issued to the investors of the July 2007 private placement if the Company issues additional securities, including convertible securities, options or other rights to acquire securities, that exceed an aggregate of 200,000 shares of common stock at a price or exercise price per share of common stock less than $7.00 (subject to a floor of $2.00 per share and adjustment for splits, recapitalizations, reorganizations).




Investor Warrants




The warrants issued to the investors in the private placement are exercisable at any time and expire June 29, 2012. The exercise price of these investor warrants is $7.00 per share, subject to adjustments for stock splits, combinations, stock dividends or distributions, reclassification, conversion, capital reorganization, merger or consolidation. The investor warrants contain a provision providing for full anti-dilution coverage on the same terms as provided in the Securities Purchase Agreement for a period ending on September 5, 2009. A holder may also exercise its warrants at any time by means of a cashless exercise in which the holder shall be entitled to receive shares of common stock for the number of shares underlying the warrants equal to the appreciation in the warrants above the exercise price at the time of the exercise. The amount of the appreciation will be determined against a referenced per share price that in no event may exceed $15. The warrants do not confer upon holders any voting or other rights as stockholders of the Company.




Registration Rights Agreement




Pursuant to the Registration Rights Agreement, the Company filed a Registration Statement with the Securities and Exchange Commission. The Registration Statement, which was declared effective on September 5, 2007, covered the resale of: (i) all of the securities underlying the units sold in or in connection with the July 2007 private placement, and (ii) any securities not already registered that were issued in connection with the Company’s private placement on October 3, 2006. The Company may also be required, under certain circumstances, to pay the investors and Hunter World Markets, Inc., the placement agent in the private placement offering, specified liquidated damages if it is unable to maintain the effectiveness of the Registration Statement.




Placement Agent Agreement




Pursuant to a placement agent agreement dated June 25, 2007, Hunter World Markets, Inc., an NASD member firm, acted as the exclusive placement agent in the private placement on July 12, 2007, and received: (i) a fee of $2,500,000 (ii) warrants to purchase 3,571,428 shares of common stock, which expires on July 31, 2012, and (iii) subject to certain terms and conditions, the right to prominent signage at three of the Company’s scheduled events per year for a two year period commencing August 1, 2007, subject to certain exceptions. The placement agent warrants have the same exercise price, cashless exercise feature and full anti-dilution coverage as the warrants issued to investors. The placement agent warrants do not confer upon its holder or holders any voting or other rights as stockholder of the Company. The Company conferred upon Hunter the right to nominate up to two members of the Company’s Board of Directors, including Hunter’s existing designee, and for a period ending on September 5, 2009, the right of first refusal for any equity, convertible debt or debt financing entered into by the Company, other than certain financings with strategic investors.  The Company has undertaken to indemnify Hunter for certain claims and liabilities that may arise in connection with the offer and sale of the units. The Company has also agreed to pay for one or more tombstone ads not to exceed $50,000 and to reimburse Hunter for fees of its counsel subject to a minimum of $25,000. The Company has further covenanted with Hunter to use best efforts as soon as practicable following July 31, 2007, subject to certain exceptions to apply for listing of the Company’s shares for trading on, and diligently attempt to be listed on, the Nasdaq Stock Market or the American Stock Exchange.


6




Lock-Up Agreements




As a condition to closing under the placement agent agreement, the Company’s officers, directors and principal shareholders, including without limitation, Santa Monica Capital Partners II, LLC and its principals, Showtime Networks, Inc., Lifelogger, LLC, and other persons who may be identified by Hunter, entered into agreements whereby each agreed not to sell any shares owned directly or indirectly by any of them for a period of 18 months ending on March 5, 2009.




Waiver of Liquidation Fees and Amendment to the Registration Rights Agreement from the October 2006 private placement offering




Pursuant to a Waiver and Amendment to Registration Rights Agreement, dated as of June 27, 2007, Hunter World Markets and the subscribers to the Company’s private placement offering on October 3, 2006 waived the liquidated damage payments owed by the Company, in accordance with the Registration Rights Agreement, dated October 3, 2006, and the Company agreed to file a registration statement covering the resale of the remaining shares of its common stock underlying the warrants previously issued to Hunter and the subscribers in connection with its private placement in October 2006, which was declared effective on September 5, 2007.




Mark Burnett and JMBP, Inc.




The Company entered into an agreement with Mark Burnett and JMBP, Inc., a California corporation wholly-owned by Mark Burnett, in connection with a television series involving MMA for the initial exhibition during prime time on one of the specified networks or cable broadcasters. JMBP (or a separate production services entity owned or controlled by JMBP) will render production services in connection with the series and will be solely responsible for and have final approval regarding all production matters, including budget, schedule and production location. It is anticipated that, as a condition to involvement in the series, each of the series contestants will sign a separate agreement with us or one of our affiliates for services rendered outside of the series. JMBP will own all rights to the series. The Company and JMBP will jointly exploit the Internet rights in connection with the series on ProElite.com and other websites controlled by the ProElite.com website. The Company is entitled to a certain share of JMBP’s proceeds from the series. Subject to specified exceptions, JMBP and Mark Burnett have agreed to exclusivity with respect to mixed martial arts programming. The term of the agreement extends until the earlier of the end of the term of the license agreement with the broadcast of the series or the failure of JMBP to enter into such a license agreement by June 15, 2008.




In connection with the agreement, we issued to Burnett warrants to purchase up to 17,000,000 shares of the Company's common stock. The warrants are divided into nine tranches with varying vesting dates. The warrants have an exercise price of $3.00 per share (subject to adjustment) as set forth in the warrant. The expiration date for a particular tranche of warrants is the latest to occur of (i) June 15, 2013; (ii) the date which is one year after the vesting date of any such tranche, and (iii) one year after the expiration of the term of the license agreement entered into with a broadcaster. The Company, Burnett and Santa Monica Capital Partners II, LLC, one of the Company's shareholders, entered into an Investor Rights Agreement providing certain registration rights with respect to the shares underlying the warrants, co-sale rights with Santa Monica Capital Partners II, LLC, restrictions on resale and board observation rights. The Subscription Agreement and warrant was amended on July 16, 2007 to, among other things, provide that 1,000,000 of the shares of common stock of the Company included in the warrant will not be subject to forfeiture under any circumstances, irrespective of whether or not a license agreement with a broadcaster is entered into.


7


The Company subsequently entered into an Amendment to Warrant and Related Agreements, dated June 28, 2007, with JMBP, Inc. and Mark Burnett, pursuant to which:




(i)
The agreement between the parties related to a reality TV show and the warrant issued pursuant to such agreement, both dated June 15, 2007, now provides that 1,000,000 shares of Common Stock included in the warrant will not be subject to forfeiture under any circumstances (irrespective of whether or not a license agreement with a broadcaster is entered into);




(ii)
Mr. Burnett will not sell any shares of Common Stock or shares of Common Stock underlying the warrants for a period of 18 months from the effective date of the Registration Statement, under the Investor Rights Agreement, dated June 15, 2007; and




(iii)
The provision regarding the termination of the Investor Rights Agreement if a license agreement with a broadcaster is not entered into within one year after the effective date of the Investor Rights Agreement was removed.




On July 9, 2009, the Company, Mark Burnett and his affiliate JMPB, Inc. entered into a Settlement Agreement and Mutual Release. Under the release, the parties terminated the following agreements between them, except as to certain limited provisions: (1) an agreement related to a reality television series then-entitled "Mixed Martial Arts Reality Show" (a/k/a "Bully Beatdown"); (2) a Subscription Agreement and together with certain other parties, an Investor Rights Agreement; (3) a warrant issued to Burnett dated as of May 17, 2007 (as amended, the "Warrant"); (4) an Amendment to Warrant and Related Agreements ("First Underlying Amendment") as of June 28, 2007, and (5) a Second Amendment to Warrant and Related Agreements ("Second Underlying Amendment") as of June 1, 2008 (the Underlying Agreement, Subscription Agreement, Investor Rights Agreement, Warrant, First Underlying Amendment and Second Underlying Amendment are collectively referred to herein as the "Underlying Documents"). The terminated agreements principally related to the Company's prior rights with respect to the exploitation and development of the Series, and equity rights arising from the Warrant and related investor rights. In addition, the parties settled and resolved fully and finally any and all grievances, disputes, controversies, differences, and claims between the parties arising out of or relating to the Underlying Documents that exist or may exist between them, as of the date of the release.


Entlian Corporation




The Company entered into an investment agreement with Entlian Corporation, a Korean corporation, and CJ Media Inc., a Korean corporation, pursuant to which the Company purchased a 32% interest in Entlian on September 18, 2007 (assuming the mandatory conversion of certain debt owed by Entlian to CJ Media into shares of capital stock of Entlian), for an aggregate purchase price of US$1,000,000 and 100,000 restricted shares of the Company’s common stock. These shares are subject to a lock-up for a period ending 18 months after September 5, 2007.




CageRage




Pursuant to a purchase agreement dated September 12, 2007 among Belgravia Entertainment International Limited, John Faraday and the Company, on September 12, 2007 Belgravia sold to the Company all of the share capital of Mixed Martial Arts Promotions Limited, an English company, and the Mixed Martial Arts Productions Limited, an English company (together referred to as “CageRage”). The consideration for the shares of capital stock of the two companies is the payment to Belgravia of $1,219,000, the issuance of 500,000 restricted shares of the Company’s common stock and the payment of an additional $1,000,000 within three business days of the first anniversary of the closing of the transactions, as contemplated in the purchase agreement (subject to any offset for breach of warranty). Management believes that the cessation of all operations n 2008 satisfactorily resolves any and all issues between the parties. Additionally, the Company repaid at closing (a) a loan by Integrated Technologies and Systems Limited in the amount of $2,600,000 and (b) a loan by Andrew Gear of $181,000, each made to Mixed Martial Arts Promotions Limited.




Future Fight Productions




Pursuant to an Asset Purchase Agreement consummated on December 7, 2007, among Future Fight Productions, Inc. (“FFP”), the shareholders of FFP, and the Company, FFP agreed to sell to the Company all of the assets of FFP relating to the mixed martial arts business. The consideration for these assets was $350,000 cash at the closing; and 200,000 restricted shares of the Company’s common stock. 100,000 shares of the Company’s common stock were delivered on the closing, and the remaining 100,000 of such shares are to be delivered in equal installments on each of the first three anniversaries of the closing. A portion of the Company’s common stock is subject to forfeiture in the event of the occurrence of certain events. Additionally, the Company will pay an additional $100,000 in cash if FFP’s EBITDA for a certain 12 month period exceeds a given threshold. The purchase agreement also contemplates a five-year Consultation Agreement between the Company and FFP, including the payment to FFP of a portion of FFP’s EBITDA.




CBS Distribution Agreement, Warrant Issuance and Showtime Warrant Exercise




The Company and CBS Entertainment (“CBS”) entered into an agreement dated as of February 22, 2008 (the “Broadcast Agreement”) pursuant to which CBS has the right to place an order for four two-hour mixed martial arts fight programs (the “Events”) for live broadcast during a period of one year. CBS was also granted four subsequent, consecutive annual options to order four additional two-hour Events and to order Events other than two-hours in length. In addition to the Events, CBS may order derivative type programs based on the Events. CBS will pay to the Company a per Event license fee. During the term, subject to limited exceptions, the Company’s ProElite and EliteXC brands will be exclusive to CBS in broadcast television and premium cable in the United States (excluding Puerto Rico) and Bermuda.




In connection with the Broadcast Agreement, the Company and Showtime Networks Inc. (SNI”), an affiliate of CBS, entered into a Subscription Agreement dated as of February 22, 2008 pursuant to which the Company agreed to issue two Warrants to SNI (the “New Warrants”) each for the purchase of 2,000,000 shares of the Company’s Common Stock at an exercise price of $2.00 per share. The first Warrant vests immediately and is for a term of five years from February 22, 2008. The second Warrant vests in four equal tranches of 500,000 shares with each respective tranche to vest if an Event is broadcast pursuant to the Broadcast Agreement. The term of each tranche is five years from the date that such tranche vests. Pursuant to an Investor Rights Agreement between the Company and SNI dated as of February 22, 2008, the Company granted to SNI certain registration rights with respect to the shares issuable upon exercise of the New Warrants, and SNI agreed that such shares and the New Warrants are subject to certain transfers restrictions until March 5, 2009.




Pursuant to the Subscription Agreement, effective February 22, 2008, the Company issued the New Warrants to SNI. Additionally, SNI exercised part of the warrants previously issued to SNI in January 2007. The exercise was for an aggregate of 2,000,000 shares of the Company’s Common Stock (the “Warrant Shares”) resulting in proceeds to the Company of $4,000,000. The issuance of the New Warrants and the Warrant Shares are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. SNI has represented that it was acquiring the Warrants for investment purposes only. The Company will place appropriate restrictions on transfer of the securities issued, and the certificates evidencing the New Warrants and the Warrant Shares will bear a restricted legend.




On June 18, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related documents with Showtime. Under the agreements, Showtime funded a note payable by the Company and the Company issued warrants to Showtime. The note has a face value of $3,500,000, of which the Company received $3,000,000 after an original issue discount of $500,000, and a first priority security interest in the unpledged assets of the Company. The note accrues interest at 10% per annum payable at maturity. The note matures on June 17, 2009. The note agreement includes a covenant that the Company maintain a minimum unrestricted cash balance of $550,000. The face value of the note together with accrued, unpaid interest may be prepaid without penalty prior to maturity. The $0.5 million discount from the face value of the note payable will be accreted into the note liability balance over 12 months, the term of the note.




8


In connection with the financing, the Company issued a warrant to purchase 100,000 shares of common stock. The warrant has an exercise price of $0.01 per share, a term of 36 months and an estimated fair value of $149,040. The warrant value is being amortized to interest expense over 12 months, the term of the note.


The Senior Secured Note Purchase Agreement allows the Company to raise additional indebtedness up to $3,500,000 (“Additional Indebtedness”) with collateral pari pasu with the Showtime notes, provided that Showtime has approval rights over any new holder of Additional Indebtedness, the right to purchase any Additional Indebtedness from new holders of debt, and sole power to exercise remedies upon a default of any Additional Indebtedness.


Effective October 3, 2008, ProElite, Inc. (the “Company”) entered into an amendment (the “Amendment”) to a license agreement with CBS Entertainment (“CBS”) originally dated January 10, 2008, as revised and dated February 21, 2008 (the “Agreement”) in connection with the production and licensing of live world-class mixed martial arts fight programs. Previously, CBS ordered an additional event under the Agreement from the Company scheduled to be presented on October 4, 2008, at The BankAtlantic Center in Sunrise, Florida (the “Sunrise Event”). The Company advised CBS that it was unable to deliver the Sunrise Event ordered by CBS for October 2008 under the current terms of the Agreement. Accordingly, the Company and CBS agreed to amend the Agreement whereby CBS would assume all expenses for the event and receive all revenue from the event. CBS advanced the estimated event costs according to an agreed upon budget in order for the Company to pay expenses related to the event. Additionally, the Company and CBS waived mutual exclusivity under the Agreement for the Sunrise Event.
 
 On October 16, 2008, the Company received a Notice of Default and Reservation of Rights dated October 15, 2008 from Showtime Networks (“Showtime”). Showtime claimed in the notice that the Company has violated a debt covenant under a Senior Secured Note Purchase Agreement dated June 18, 2008, and related Security Agreement dated September 10, 2008, as amended by Amendment No. 1 thereto dated September 10, 2008, and related promissory notes, each as may be amended from time to time (the “Loan Agreements”), requiring the Company to maintain at least $550,000 of unrestricted funds with a nationally recognized financial institution. Approximately $6.3 million is outstanding under the Loan Agreements, which is secured by substantially all of the Company’s assets. The notice states that Showtime may, within three business days, exercise rights and remedies set forth in clauses (a) through (e) of Section 6.1 of the Security Agreement. These rights and remedies include: (a) exercising any and all rights as beneficial and legal owner of the Company’s assets; (b) selling or assigning the Company’s assets in whole or in part; (c) granting a license or franchise to use the Company’s assets in whole or in part; (d) suing, demanding, collecting or receiving in Showtime’s name and money property or receivable on account of or in exchange for the Company’s assets; or (e) exercising all voting, consensual or other powers of ownership pertaining to the Company’s assets as if Showtime were the sole and absolute owner thereof.
  On October 31, 2008, Showtime gave the Company a notice pursuant to the Security Agreement, as amended, that it intends to sell all of the Company’s personal property, whether tangible or intangible, to the highest bidder at a public sale to be held on November 17, 2008. Showtime reserves its rights under the Security Agreement, as amended, and applicable law to adjourn or cancel the sale and thereafter dispose of such property in a public or private sale or in any other manner provided by applicable law.




On November 13, 2008, the Company received correspondence from CBS Corporation, on behalf of Showtime Networks, Inc. (Showtime), that the sale of assets of ProElite, Inc. and its subsidiaries originally scheduled for November 17, 2008 has been adjourned for no less than two weeks from that date. The correspondence also confirmed that Showtime will provide the Company with notice of intention to schedule a sale of assets.




On February 5, 2009, CBS and Showtime entered into a General Mutual Release and Termination Agreement (the “Release and Termination Agreement”) with the Company and certain of its subsidiaries pursuant to which the parties agreed to a mutual release and termination of any and all claims, agreements, debts, liens, damages or liabilities of any nature, now existing or hereafter arising, including, without limitation, termination of the Distribution Agreement, the Note Purchase Agreement and the Security Agreement and cancellation of all indebtedness of the Company to Showtime under the promissory notes dated December 17, 2007 (as amended June 17, 2008), June 18, 2008 and September 10, 2008. Notwithstanding the foregoing, the Release and Termination Agreement excluded certain matters which shall continue in full force and effect, including the Securities Purchase Agreement, the First Investor Rights Agreement (other than Sections 7, 8, 9 and 10 thereto), the Second Investor Rights Agreement, the Subscription Agreement, Warrant #1, Warrant #2, Warrant #3, Warrant #4 (other than Section 4.5 thereto), Warrant #5 (other than Section 4.5 thereto), Warrant #6 and any shares of common stock of the Issuer held by Showtime.




In conjunction with the Release and Termination Agreement discussed above, on February 5, 2009, ProElite, Inc. (the "Company") and its wholly-owned subsidiary, EliteXC Live (together with the Company, the "Sellers"), entered into an Asset Purchase Agreement (the "Purchase Agreement") and other related agreements with Explosion Entertainment, LLC ("Strikeforce"). Under the terms of the Purchase Agreement, Strikeforce acquired from the Sellers certain EliteXC fighter contracts, a library of televised EliteXC events and specified related assets.Consideration paid for the assets consisted of (i) $3 million in cash paid at closing, (ii) the assumption of certain liabilities relating to the assets sold and (iii) contingent consideration in the form of rights to receive a portion of the license fee earned by Strikeforce under a distribution agreement between Strikeforce and Showtime Networks Inc. ("Showtime"). The license fee is payable to the Sellers until February 28, 2012, subject to limited extensions. The Purchase Agreement contains typical representations and warranties by the Sellers regarding the Sellers' business, operations and financial condition. Each party agreed to indemnify the other party for breaches of representations, warranties, and covenants, subject to certain limitations. In connection with the closing of the transactions under the Purchase Agreement, the Sellers also entered into certain non-exclusive license agreements with Strikeforce, pursuant to which Strikeforce will license from the Sellers certain trademarks and other specified intellectual property. As a result of the Purchase Agreement, the Company is entitled to receive license fee income on certain Strikeforce productions through the second quarter of 2012. Due to the sale, the Company will recognize a gain on sale of assets in the first quarter of 2009.


STRATUS
 
 Effective October 12, 2009, the Company entered into a Strategic Investment Agreement with Stratus Media Group, Inc. (“SMGI”) pursuant to which the Company agreed to sell to SMGI, shares of the Company’s Series A Preferred Stock (the “Preferred Shares”).  The Preferred Shares are convertible into the Common Stock of the Company.  The amount of shares of Common Stock issuable upon conversion on a cumulative basis is equal to 95% of the sum of (a) the issued and outstanding shares of the Company as of the closing plus (b) any shares of the Company’s Common Stock issued after the closing upon exercise or conversion of any derivative securities of the Company outstanding as of the closing, subject to any adjustment for stock splits, stock dividends, recapitalizations etc. and, in all cases, after giving effect to the shares issuable upon conversion of the Preferred Shares.  The purchase price of the Preferred Shares is $2,000,000 which will be used by the Company for payment of outstanding liabilities, general working capital and other corporate purposes and repayment of all amounts due under a note(s) of the Company with respect to advances made to the Company by SMGI of $100,000.   Certain present and former key executives of the Company will continue with the Company.  This transaction closed on June 14, 2011.
 RISK FACTORS




An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before deciding to invest in or maintain your investment in our Company. The risks described below are not intended to be an all-inclusive list of all of the potential risks relating to an investment in our securities. If any of the following or other risks actually occur, our business, financial condition or operating results and the trading price or value of our securities could be materially adversely affected.




Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this report.  In addition, in light of the management decision on October 20, 2008 to restructure the Company, there is a risk that the Company may not be able to reinvigorate its business.






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RISKS RELATED TO OUR BUSINESS
  We have a limited operating history, which makes it difficult to evaluate our business and our ability to achieve our business objectives.
  We have a limited operating history in the mixed martial arts business. Since we have a short operating history, you will have little basis upon which to evaluate our ability to achieve our business objectives. Our revenues do not cover our cost of sales to date, and we cannot guarantee that we will produce revenues that will exceed our cost of sales or total operating expense. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies entering a new and rapidly evolving business.


Our limited operating history makes forecasting our revenues and expenses difficult, and we may be unable to adjust our spending in a timely manner to compensate for unexpected revenue shortfalls.




As a result of our limited operating history, it is difficult to accurately forecast our future revenues. We have limited meaningful historical financial data upon which to base planned operating expenses. Current and future expense levels are based on our operating plans and estimates of future revenues. Revenues and operating results are difficult to forecast because they generally depend on our ability to promote events and the growth in popularity of our franchise. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would result in further substantial losses. We may also be unable to expand our operations in a timely manner to adequately meet demand to the extent it exceeds expectations.




We may be unable to compete successfully with our competitors.




We face competition from existing international organizations such as the Ultimate Fighting Championship and Pride Fighting. Both Ultimate Fighting Championship, or UFC, and Pride Fighting are owned by Zuffa, LLC, a widely known MMA promoter in the United States. UFC produces MMA events for cable television through its agreement with Spike TV and for pay-per-view audiences. Other U.S. based MMA competitors include Strikeforce and International Fight League. Most promoters operate on an event-by-event basis and rely on the presence of a few well-known athletes to promote their events. Pride Fighting is a Japan-based organization that draws significant live event and television audiences. Pride hosted its first event in Tokyo in 1997. Pride organized U.S.-based events in October 2006 and February 2007. Pride is only available via pay-per-view, and makes available its old library content on the FOX Sports channel. Pride draws upon a global talent pool for its events with many fighters coming from the United States, Brazil, Asia and Europe. In addition to these larger organizations that enjoy global followings, we will compete with local market based organizations.




For our live and television audiences, we face competition from other professional and college sports as well as from other forms of live, filmed and televised entertainment and other leisure activities. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise for the sale of our branded merchandise, including hats, t-shirts, sweatshirts, fight apparel, gloves, jackets and other similar items.




Many of our competitors have greater technical and financial resources than we do. Some of these competitors have also been in operation for a period of time and have accumulated an installed base of fans. If we are unable to distinguish our mixed martial arts events and products from competing events, or if competing products reach the market first, we may be unable to compete successfully with current or future competitors. This would cause our revenues to decline and affect our ability to achieve profitability.




We may be unable to compete with new competitors with greater resources that enter into the mixed martial arts industry.




As the mixed martial arts industry continues to grow and gain mainstream popularity, new competitors with superior resources will enter the MMA market. The Company may not have the resources necessary to compete with these new competitors, nor is there any guarantee that these new competitors will not prevent the Company from accomplishing its goals.




The Internet side of our business, ProElite.com, may have difficulty gathering market momentum.




A significant part of our business depends on our ability to attract a customer base to drive revenues on the Internet side, as described in Business, above. There is no guarantee that we will be able to create a compelling product that will attract a significant customer base. Accordingly, we have generated less revenue than our costs and we cannot predict this will change in the relevant future period.




The Internet side of our business could take significant capital and time to develop.




Developing the Internet side of our business will take significant capital outlays. If we are not initially successful in gathering an installed customer base we may either have to spend additional money or raise additional capital to fund the added expenditures. Additionally, it could take extra time to develop the Internet model that could affect the timing of our projected revenue stream.


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The establishment of relationships with advertisers is necessary for us to achieve significant revenues.




Our revenue model includes significant revenues from advertising. If we are unable to develop sufficient relationships with key advertisers, we might not be able to achieve the revenues that we are projecting.




Our success depends on fan interest, so our business could fail if there is not a continued interest in our sport.




Mixed martial arts is a relatively new sport, so its continued popularity cannot be assumed, like baseball, basketball, football, golf, or boxing. As public tastes change frequently, interest in MMA may decline in the future. Such decline would threaten our ability to generate revenue and earn profits.




The success of our live events depends upon our ability to recruit and develop relationships with key fighters.




The success of our live events depends upon the ability of our production and management team to find, attract, and schedule fighters that are appealing to the paying public. The fighter’s audience appeal is critical to maintaining interest in our events. There is no guarantee that: (1) we can sign, attract and retain popular fighters; (2) the various state athletic commissions will certify a fighter once we have retained the fighter; (3) the fighter will pass various drug screening tests that state commissions may require post event; and (4) due to the violent nature of this industry, we have no guarantee a fighter will be injury free at the time of an event which could cause the fighter to not fight. Any of the above-mentioned risks can negatively impact a given live event.




We may be subject to claims that fighters we sign up do not have the right to participate in our events.




Fighters we sign up may be subject to prior contractual commitments that prevent them from participating in all or certain of our events. This will negatively impact our live events if we are unable to resolve such conflicts prior to the live event or are unable to find an equally popular fighter of equal or substantially similar ability to replace the original fighter whose contractual commitment prevents him from participating in our event.




Our failure to develop creative and entertaining programs and events would likely have a significant negative impact on our bottom line.




The creation, marketing and distribution of our live entertainment, including our pay-per-view events, are at the core of our business and are critical to our ability to generate revenues across our media platforms and product outlets. Our failure to create popular and compelling live events could adversely affect our operating results.




There could be unexpected costs associated with our live events.




We may incur unexpected costs associated with promoting large-scale events. These costs could be related to, among other factors, production, distribution, or marketing overruns. These unexpected costs could significantly affect our profits.




We may enter into agreements with other mixed martial arts organizations or promotion companies to co-promote or co-produce a live event. We cannot guarantee that any revenues or fees we receive in connection with such events will exceed our costs, nor can we guarantee that such events will increase our popularity in the mixed martial arts community.




We may enter into agreements with other mixed martial arts organizations or promotion companies to co-promote or co-produce a live mixed martial arts event. We will have limited control over the promotion or production aspects of the event, which may impact the gate ticket sales at the event and affect gate revenues. We cannot guarantee that any revenues or fees we receive in connection with such events will exceed our costs. We cannot guarantee that promoting or producing a live event with another MMA organization or promotion company will not negatively impact our image in the mixed martial arts community.


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A decline in general economic conditions could adversely affect our business.




Our operations are affected by general economic conditions, which generally may affect consumers’ disposable income and the level of advertising spending. The demand for entertainment and leisure activities tends to be highly sensitive to the level of consumers’ disposable income. A decline in general economic conditions could reduce the level of discretionary income that our fans and potential fans have to spend on our live and televised entertainment and consumer products, which could adversely affect our revenues.




We face uncertainties associated with international markets.




We hope  to produce events outside of the United States. Our production of live events overseas will subject us to the risks involved in foreign travel, local regulations, including regulations requiring us to obtain visas for our fighters, and political instability inherent in varying degrees in those markets. In addition, the licensing of our television and consumer products in international markets exposes us to some degree of currency risk. These risks could adversely affect our operating results and impair our ability to pursue our business strategy as it relates to international markets.




We may be prohibited from promoting and conducting our live events if we do not comply with applicable regulations.




In various states in the United States and some foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or other permits or licenses for performers before we can promote and conduct our live events. In the event that we fail to comply with the regulations of a particular jurisdiction, we may be prohibited from promoting and conducting our live events in that jurisdiction. The inability to present our live events over an extended period of time or in a number of jurisdictions could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.




Fighters scheduled to participate in our events may not be able to get the required clearances, which could adversely affect the success of the event.




It is possible that fighters who are scheduled to participate in our events may not received clearances, such as medical evaluations, required by state athletic commissions and, therefore, would not be able to compete in our events. We attempt to mitigate this risk by arranging back up fighters to be available on a stand-by basis. However, cancellation of a fighter’s appearance could adversely affect ticket buyers’ or television viewers’ experience, and require us to cancel an event or refund sales amounts.




Liability claims in excess of our planned insurance coverage could adversely affect our business, financial condition and results of operations.




The nature of our live actions events could expose us to significant liability claims. These claims might be made directly by participants, attendees or our customers. A liability claim or other claim, as well as any claims for uninsured liabilities or in excess of insured liabilities, could result in substantial costs to us, divert management attention from our operations and generate adverse publicity. This could harm our reputation, result in a decline in revenues and increase expenses.




Our products could give rise to claims that our technology infringes on the rights of others.




We are potentially subject to claims and litigation from third parties claiming that our products or processes infringe their patent or other proprietary rights. If any such actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture, use or sell the affected product or process. Litigation, which could result in substantial costs to us, may also be necessary to enforce our patent and proprietary rights and/or to determine the scope and validity of the patents or proprietary rights of others. Any intellectual property litigation would be costly and could divert the efforts and attention of our management and technical personnel, which could have a material adverse effect on our business, financial condition and results of operations.




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We cannot assure you that infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not prevent us from selling our products or materially and adversely affect our business, financial condition and results of operations. If any such claims are asserted against us, we may seek to enter into a royalty or licensing arrangement. We cannot assure you that a license will be available on commercially reasonable terms, if at all.




We may be subject to claims of trademark infringement, which may harm our business.




We may be subject to legal proceedings alleging claims of trademark infringement in the future. If we must rebrand, it may result in significant marketing expenses and additional management time and resources, which may adversely affect our business.




Because we expect to depend upon our intellectual property rights, our inability to protect those rights or prevent their infringement by others could adversely affect our business.




We anticipate that intellectual property will be material to all aspects of our operations, and we may expend substantial cost and effort in an attempt to maintain and protect our intellectual property. We plan to have a portfolio of registered trademarks and service marks and maintain a catalog of copyrighted works, including copyrights to television programming and photographs. Our inability to protect this portfolio of trademarks, service marks, copyrighted material, trade names and other intellectual property rights from piracy, counterfeiting or other unauthorized use could negatively affect our business. If others infringe our trademarks, it may cause harm to our brand and ultimately, to us, and we could be forced to spend additional time and resources fighting such infringement.




We may be unable to scale our operations successfully.




Our growth will place significant demands on our management and technology development, as well as our financial, administrative and other resources. We cannot guarantee that any of the systems, procedures and controls we put in place will be adequate to support the commercialization of our operations. Our operating results will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and improve our financial, administrative and other resources. If we are unable to respond to and manage changing business conditions, or the scale of our products, services and operations, then the quality of our services, our ability to retain key personnel and our business could be harmed.




We depend on certain key executive personnel and other key managerial personnel for our success, the loss of whom could adversely affect our business, financial condition and results of operations.




Our success depends on the continued availability and contributions of members of our senior management teams and other key personnel. The loss of services of any of these persons could delay or reduce our product development commercialization efforts, event management, and promotions and advertising efforts. Furthermore, recruiting and retaining qualified personnel will be critical to our success. The loss of members of our management team, key advisors or personnel, or our inability to attract or retain other qualified personnel or advisors, could significantly weaken our management, harm our ability to compete effectively and harm our business.




Our limited operating history makes management’s future performance difficult to assess.




ProElite.com and EliteXC Live were organized in August 2006 and September 2006, respectively, and we began operations in the mixed martial arts business in October 2006, so there is only a very limited track record upon which investors can assess management’s effectiveness. Consequently, investors are likely to have greater difficulty in accurately predicting whether an investment in the Company will be profitable.




Our limited operating history makes us highly reliant on management.




We lack the goodwill of an established business and therefore rely on individual members of current management to create business strategies and relationships, attract sponsors, and develop tournament formats and operating procedures necessary for us to expand and develop our business. The departure of one or more of our executives could impair our operations. If we are unable to find suitable replacements for departed management, we might incur losses that impair investors’ investments in the Company.




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We may be unable to compete with larger or more established sports leagues for corporate advertising budgets.




We face a large and growing number of competitors in the sports and entertainment industry. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition, and more established relationships in the industry than does the Company. As a result, certain of these competitors may be in better positions to obtain corporate advertising. We cannot be sure that we will be able to compete successfully with existing or new competitors.




Only a few major broadcast and cable networks can distribute our programming to a sufficiently large audience, and thus we have limited alternatives available if one or more of our television distributors performs unsatisfactorily, insists on unfavorable contract terms, or elects not to carry our programming.




We require widespread distribution of our programming to interest sponsors and other advertisers. Our choices are limited, and our future ability to continue to enter into distribution agreements with major broadcast and/or cable networks cannot be assured. If we are unable to continue to make such suitable distribution arrangements, we may incur losses that impair investors’ investments in the Company.




Difficulty in retaining current fighters or recruiting future fighters could impair our prospects.




The number of professional mixed martial arts fighters is small in relation to other professional sports, as is the number of first-rate, non-pro fighters who might fight professionally in the future. Our prospects could decline and investors’ investments in the Company be impaired if our fighters are recruited by competitors or decide to pursue other occupations.




The markets in which we operate are highly competitive and rapidly changing, and we may not be able to compete effectively, especially against competitors with greater financial resources or marketplace presence.




For our live and television audiences, we face competition from professional and college sports, as well as from other forms of live and televised entertainment and other leisure activities in a rapidly changing and increasingly fragmented marketplace. Many of the companies with which we compete have greater financial resources than are currently available to us. Our failure to compete effectively could result in a significant loss of viewers, venues, distribution channels or athletes and fewer advertising dollars spent on our form of sporting events, any of which could adversely affect our operating results.




If we are unable to hire additional needed personnel, our growth prospects will be limited, or our operations may be impaired.




Our business requires uniquely trained and experienced professionals, and our success depends in large part upon our ability to attract, develop, motivate, and retain highly skilled personnel. Qualified employees will be a limited resource for the foreseeable future. As a new company with little history, we may have particular difficulty hiring qualified personnel. If we are unable to retain necessary personnel, our business will probably suffer, and investors may incur losses on their investment in the Company. Furthermore, our limited operating history may require the Company to pay above market salaries in order to attract qualified personnel, which could impair our profitability.




Our insurance may not be adequate to cover liabilities resulting from accidents or injuries that occur during our physically demanding events.




We hope to hold numerous live events each year. This schedule exposes our athletes who are involved in the production of those events to the risk of travel and event-related accidents, the consequences of which may not be fully covered by insurance. The physical nature of our events exposes athletes and coaches to the risk of serious injury or death. Although we plan to provide the necessary and required health, disability and life insurance for our athletes on an event-by-event basis, this coverage may not be sufficient to cover all injuries they may sustain. Liability extending to us resulting from any death or serious injury sustained by one of the athletes during an event, to the extent not covered by our insurance, could adversely affect our operating results.


14




Changes in the regulatory atmosphere and related private-sector initiatives could adversely affect our business.




Although the production and distribution of television programming by independent producers is not directly regulated by the federal or state governments in the United States, the marketplace for television programming in the United States is affected significantly by government regulations applicable to, as well as social and political influences on, television stations, television networks and cable and satellite television systems and channels. We plan to voluntarily designate the suitability of each of our television programs for audiences using standard industry practices. A number of governmental and private sector initiatives relating to the content of media programming in recent years have been announced in response to recent events unrelated to us or mixed martial arts. Changes in governmental policy and private sector perceptions could further restrict our program content and adversely affect our viewership levels and operating results, as well as the willingness of broadcasters to distribute our programming.




We face a variety of risks as we expand into new and complementary businesses.




We are a new company and are rapidly entering into new and complementary businesses. Risks of expansion may include:





●
potential diversion of management’s attention and other resources, including available cash, from our existing business;●
unanticipated liabilities or contingencies;●
reduced earnings due to increased costs;●
failure to retain and recruit MMA athletes;●
failure to maintain agreements for distribution;●
inability to protect intellectual property rights;●
competition from other companies with experience in such businesses; and●
possible additional regulatory requirements and compliance costs.






RISKS RELATED TO CAPITAL STRUCTURE




Our auditors have expressed substantial doubt regarding our ability to continue as a going concern. If we are unable to continue as a going concern, we may be required to substantially revise our business plan or cease operations.




We have incurred losses and negative cash flows from operations since inception and have limited cash. As a result, our auditors have expressed substantial doubt about our ability to continue as a going concern. Although we have generated revenue, we are still operating at a net loss. We cannot assure you that we will be able to obtain sufficient funds from our operating or financing activities to support our continued operations. If we cannot continue as a going concern, we may need to substantially revise our business plan or cease operations, which may reduce or negate the value of your investment. On October 20, 2008,  management, with Board ratification, decided to close or sell all operations and began an extended period of restructuring its balance sheet, divesting itself of certain assets, settlement of contingent liabilities, and attempting to raise additional capital.




We need to raise additional funds, which may not be available to us on favorable terms, if at all, thereby potentially disrupting the growth of our business and ability to generate revenues.




The Company incurred losses of approximately $4.2 million in fiscal year 2006, $27.1 million during 2007 and $55.1 million during 2008. These losses are due largely to compensation expense, impairment charges related to prior year acquisitions, production, and production support in connection with the promotion of live mixed martial arts events, impairment charges as well as the amortization of prepaid distribution costs and warrant expense related to Showtime/CBS. In 2008, we generated approximately $13.1 million of revenue. As of December 31, 2008, the Company had negative working capital of $10.5 million.


15


Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other shareholders wanted it to occur.




As of December 31, 2008, our executive officers, directors, and principal shareholders who hold 5% or more of our outstanding common stock beneficially owned, in the aggregate, approximately 80% of our outstanding common stock. These shareholders are able to exercise significant control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other shareholders wanted it to occur.




In the event that we raise additional capital through the issuance of equity securities, or securities exercisable for or convertible into our equity securities, our shareholders could experience substantial dilution.




If we raise additional capital by issuing equity securities or convertible debt securities, our existing shareholders may incur substantial dilution. Further, any shares so issued may have rights, preferences and privileges superior to the rights, preferences and privileges of our outstanding common stock.




The market price of our common stock may be volatile.




The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the MMA and entertainment industries, announcements made by our competitors or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance.




In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.




There is no assurance of an established public trading market, and the failure to establish one would adversely affect the ability of our investors to sell their securities in the public market.




At present, there is no active trading market for the Company’s securities, and there can be no assurance that a trading market will develop. Our common stock is traded on the Pink Sheets.




Factors which may adversely affect market prices of the Company’s common stock.




Market prices for our common stock will be influenced by a number of factors, including:


●
the issuance of new equity securities pursuant to a future offering or acquisition;●
changes in interest rates;●
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;●
variations in quarterly operating results;●
changes in financial estimates by securities analysts;●
the depth and liquidity of the market for our common stock;●
investor perceptions of our company and the mixed martial arts industry generally; and●
general economic and other national conditions.




The Company may issue securities to strategic investors, which will be reported as a loss in our financial statements. This increase in reported loss in our financial statements may negatively impact the market price of the Company's common stock.


16


From time to time, we may enter into discussions with strategic investors, pursuant to which we will issue securities on


terms that may be more favorable than the securities registered or sold pursuant to this registration statement. The issuance of such securities will be reported as a loss on our financial statements. The additional reported loss from the issuance of such securities, if material, may negatively impact the market price of the Company's common stock.




Shares eligible for future sale may adversely affect the market price of our common stock.




The Company’s previous registration statements on Form SB-2 were declared effective on May 14, 2007 and September 5, 2007. The shares of common stock covered by those registration statement are freely tradable. Furthermore, commencing in October 2007, our founding shareholders who received shares of our common stock in our reverse merger in October 2006 will be eligible to sell all or some of their shares of common stock, subject to certain limitations, by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended. In general, pursuant to Rule 144, a shareholder (or shareholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell to the public within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale if the shares are listed on a national exchange or on NASDAQ. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate that has satisfied a two-year holding period. While our founding shareholders are subject to a lock-up of their shares, such lock-up may be waived by Hunter World Markets, Inc. or may not apply. Any substantial resale, and the possibility of substantial resales, of the common stock sold pursuant to this registration statement or under Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.




Investors in our prior financing have certain price protections, which may further dilute our existing shareholders.




In connection with our prior financings, the investors have been granted price protection provisions if the Company raises capital or issues derivative securities at less than the effective per share price paid by such investors. These provisions could require the Company to issue additional shares of its Common Stock, resulting in further dilution to our existing shareholders.




Our common stock is considered a “penny stock” and may be difficult to sell.




Our common stock is considered to be a “penny stock” since it meets the definition in Rule 3a-51-1 of the Securities Exchange Act of 1934. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) the stock is NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) it is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, net tangible assets less than $5.0 million, if in business for more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.




Additionally, Section 15(g) of the Securities Exchange Act of 1934 and Rule 15g-2 promulgated there under by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.




Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.” Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.


17




If we fail to implement and maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.




We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting identified weaknesses and conditions that need to be addressed in our internal controls over financial reporting that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.




As of December 31, 2008, the Company’s Chief Executive Officer and Chief Financial Officer had evaluated the effectiveness of the Company’s disclosure controls and procedures, and based on such evaluation, such officers have concluded that, the Company’s disclosure controls and procedures were not effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files and submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The deficiencies in disclosure controls and procedures were related to the deficiencies in our internal control over financial reporting. In 2006, our auditors noted several material weaknesses and a significant deficiency, which we are working to address. The material weaknesses noted were: (1) the Company inadequately maintained accounting records, (2) accounting policies and procedures were not formally documented, and (3) the accounting department did not have sufficient technical accounting knowledge. The significant deficiency noted was that an affiliate did not provide adequate accounting for funds advanced by the Company.




While the Company has begun taking remediation steps to enhance its internal control over financial reporting and reduce control deficiencies, our stock price could be adversely affected if we are unable to implement and maintain controls.




Provisions in our certificate of incorporation and bylaws and under New Jersey law may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.




Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the shareholders of our company may deem advantageous. These provisions:




●
authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;●
allow shareholders to request that we call a special meeting of our shareholders only if the requesting shareholders hold of record at least a majority of the outstanding shares of common stock;●
provide that the board of directors is expressly authorized to make, alter, amend or repeal our bylaws; and●
provide that business to be conducted at any special meeting of shareholders be limited to matters relating to the purposes stated in the applicable notice of meeting.




We do not foresee paying cash dividends in the foreseeable future.




We have not paid cash dividends on our stock and do not plan to pay cash dividends on our common stock in the foreseeable future.






Item 2. Description of Property




We maintain our corporate office at 12121 Wilshire Blvd., Suite 1001, Los Angeles, CA 90025.  The Company originally had a long-term lease running through July 2012. Monthly rent payments began at $25,176 and escalate to $36,472. As of April 20, 2009 the Company terminated its lease agreement for its corporate office space, surrendered the leasehold improvements with a net book value of approximately $319,000 and entered into a new agreement with the landlord for a three month lease term of Suite 1112 with monthly renewal options. The base rent is $8,000 per month.




In 2008, we also maintained a small office in the United Kingdom with monthly payments of approximately $2,000.


18


Item 3. Legal Proceedings




On December 14, 2006, the Company received a demand letter (the “Demand Letter”) from counsel for Wallid Ismail Promocoes E Eventos LTDA EPP and Wallid Ismail (collectively “Wallid”). The Demand Letter alleged that the Company entered into a “fully enforceable agreement” to compensate Wallid for allegedly assisting the Company in raising financing, and that the Company or its directors committed unspecified fraudulent acts, misappropriated Wallid’s “confidential and proprietary information,” and engaged in an “intentional and well-orchestrated scheme to wrongfully remove Wallid” as a principal of the Company. Wallid and the Company filed suits and countersuits in federal and state courts. On November 7, 2008, the Company settled the lawsuits. The settlement required the issuance of 5,000,000 shares of the Company’s common stock cash payments of $650,000 within 60 days of the settlement. In addition, a payment of $500,000 was due to Wallid on November 7, 2009. The $500,000 note could be settled in cash or 1,000,000 shares of the Company’s common stock. In 2009, the Company issued 4,000,000 shares of its common stock and the remaining 1,000,000 shares were transferred to Wallid by former officers and directors out of shares that they owned. The 4,000,000 shares of common stock were valued at $10,200,000. The Company recognized $11,350,000 as legal expense in general and administrative expenses in November 2008. The $500,000 note was paid with cash of $256,694 plus issuing 6,000,000 shares of the Company’s common stock in 2011.





The Company was a defendant to other lawsuits that have been settled and which did not have a material impact to the Company’s operations or financial condition.




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




There were no submissions of matters to a vote of shareholders during the year ended December 31, 2008.






Part II




Item 5. Market for Common Equity and Related Stockholder Matters




Market Information




The Company’s common stock is not trading on any stock exchange. Shares of our Common Stock are quoted on Pink Sheets LLC under the symbol “PELE.pk”. On March 26, 2009, the last sales price for our stock quoted on Pink Sheets LLC was $0.02 per share.




There is little or no trading in our common stock. The following closing price information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:




Period

High


LowAugust 10, 2006 - June 30, 2007 (1)

$
15.00


$
12.00July 1, 2007 - September 30, 2007

$
15.00


$
14.90October 1, 2007 - December 31, 2007

$
15.00


$
7.50January 1, 2008 - March 31, 2008

$
7.50


$
2.95April 1, 2008 - June 30, 2008

$
7.50


$
3.40July 1, 2008 - September 30, 2008

$
8.00


$
2.40October 1, 2008 - December 31, 2008

$
3.90


$
0.70January 1, 2009 - March 31, 2009

$
2.05


$
0.01




(1) To our knowledge, quoted trading activity first commenced during the calendar quarter ended June 30, 2007.


19


Holders




As of December 31, 2008 there were 120 holders of our common stock.




Dividends




We have not paid any dividends on our common stock to date and do not intend to pay dividends for the foreseeable future. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.




Equity Compensation Plan Information




The only equity compensation plan approved by our security holders is the 2006 Stock Option Plan (the “2006 Plan”). The Company has also issued equity compensation outside of the 2006 Plan in connection with the services provided by Hunter World Markets for the Company’s private placement of its common stock and various other consultants. A table of the equity compensation issued by the Company is included with “Item 11. Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters” of this Annual Report.




Recent Sales of Unregistered Securities




Showtime




On January 5, 2007, pursuant to a Securities Purchase Agreement the Company entered into with Showtime, the Company issued an aggregate of 1,666,667 units for $5 million in cash, each unit consisting of 3 shares of common stock and a three-year warrant to purchase 1 share of common stock at a per share exercise price of $2.00 to Showtime, at a per unit price of $3.00. These warrants have been valued at $345,000 and will be amortized into operations over a three-year period commencing January 5, 2007. Additionally, the Company issued a seven-year warrant to purchase 2.5 million shares of common stock to Showtime at a per share exercise price of $2.00, in consideration of the funding and the exclusive distribution agreement provided to the Company. These warrants have been valued at $608,000 and will be amortized into operations over a three-year period commencing January 5, 2007. The Showtime warrants were exercisable as of the date of grant, January 5, 2007. The agreement provides that the Company will provide a minimum number of events for the years 2007 through 2009. There will be no license fee payable by Showtime on account of Showtime events in 2007 and the Company will bear all costs and expenses for the events. License fees in 2008 and 2009 will be split between the Company and Showtime. For each event featured on pay-per-view, the Company will receive the proceeds received by Showtime, less the distribution fee and advances made by Showtime on the Company’s behalf for marketing, public relations and television production. Any revenues derived from the sale of the Company’s merchandise by Showtime, or through Showtime Networks’ website or telecasts will be split 70% to the Company and 30% to Showtime.




Pursuant to the investor rights agreement entered into with Showtime, the Company granted Showtime the right to appoint one member to the Board of Directors, and Santa Monica Capital Partners II, LLC, the Company’s largest shareholder, has agreed to vote all shares it owns or over which it has voting control in whatever manner necessary to ensure that the Showtime designee will be elected to the Board of Directors at each annual or special meeting of shareholders at which an election of directors is held or pursuant to any written consent of the shareholders.




CBS Distribution Agreement, Warrant Issuance and Showtime Warrant Exercise




The Company and CBS Entertainment (“CBS”) entered into an agreement dated as of February 22, 2008 (the “Broadcast Agreement”) pursuant to which CBS has the right to place an order for four two-hour mixed martial arts fight programs (the “Events”) for live broadcast during a period of one year. CBS was also granted four subsequent, consecutive annual options to order four additional two-hour Events and to order Events other than two-hours in length. In addition to the Events, CBS may order derivative type programs based on the Events. CBS will pay to the Company a per Event license fee. During the term, subject to limited exceptions, the Company’s ProElite and EliteXC brands will be exclusive to CBS in broadcast television and premium cable in the United States (excluding Puerto Rico) and Bermuda.


20


In connection with the Broadcast Agreement, the Company and Showtime Networks Inc. (SNI”), an affiliate of CBS, entered into a Subscription Agreement dated as of February 22, 2008 pursuant to which the Company agreed to issue two Warrants to SNI (the “New Warrants”) each for the purchase of 2,000,000 shares of the Company’s Common Stock at an exercise price of $2.00 per share. The first Warrant vests immediately and is for a term of five years from February 22, 2008. The second Warrant vests in four equal tranches of 500,000 shares with each respective tranche to vest if an Event is broadcast pursuant to the Broadcast Agreement. The term of each tranche is five years from the date that such tranche vests. Pursuant to an Investor Rights Agreement between the Company and SNI dated as of February 22, 2008, the Company granted to SNI certain registration rights with respect to the shares issuable upon exercise of the New Warrants, and SNI agreed that such shares and the New Warrants are subject to certain transfers restrictions until March 5, 2009.




Pursuant to the Subscription Agreement, effective February 22, 2008, the Company issued the New Warrants to SNI. Additionally, SNI exercised part of the warrants previously issued to SNI in January 2007. The exercise was for an aggregate of 2,000,000 shares of the Company’s Common Stock (the “Warrant Shares”) resulting in proceeds to the Company of $4,000,000. The issuance of the New Warrants and the Warrant Shares are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. SNI has represented that it was acquiring the Warrants for investment purposes only. The Company will place appropriate restrictions on transfer of the securities issued, and the certificates evidencing the New Warrants and the Warrant Shares will bear a restricted legend.




On June 18, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related documents with Showtime. Under the agreements, Showtime funded a note payable by the Company and the Company issued warrants to Showtime. The note has a face value of $3,500,000, of which the Company received $3,000,000 after an original issue discount of $500,000, and a first priority security interest in the unpledged assets of the Company. The note accrues interest at 10% per annum payable at maturity. The note matures on June 17, 2009. The note agreement includes a covenant that the Company maintain a minimum unrestricted cash balance of $550,000. The face value of the note together with accrued, unpaid interest may be prepaid without penalty prior to maturity. The $0.5 million discount from the face value of the note payable will be accreted into the note liability balance over 12 months, the term of the note.




In connection with the financing, the Company issued a warrant to purchase 100,000 shares of common stock. The warrant has an exercise price of $0.01 per share, a term of 36 months and an estimated fair value of $149,040. The warrant value is being amortized to interest expense over 12 months, the term of the note.




The Senior Secured Note Purchase Agreement allows the Company to raise additional indebtedness up to $3,500,000 (“Additional Indebtedness”) with collateral pari pasu with the Showtime notes, provided that Showtime has approval rights over any new holder of Additional Indebtedness, the right to purchase any Additional Indebtedness from new holders of debt, and sole power to exercise remedies upon a default of any Additional Indebtedness.




On February 5, 2009, CBS and Showtime entered into a General Mutual Release and Termination Agreement (the “Release and Termination Agreement”) with the Company and certain of its subsidiaries pursuant to which the parties agreed to a mutual release and termination of any and all claims, agreements, debts, liens, damages or liabilities of any nature, now existing or hereafter arising, including, without limitation, termination of the Distribution Agreement, the Note Purchase Agreement and the Security Agreement and cancellation of all indebtedness of the Company to Showtime under the promissory notes dated December 17, 2007 (as amended June 17, 2008), June 18, 2008 and September 10, 2008. Notwithstanding the foregoing, the Release and Termination Agreement excluded certain matters which shall continue in full force and effect, including the Securities Purchase Agreement, the First Investor Rights Agreement (other than Sections 7, 8, 9 and 10 thereto), the Second Investor Rights Agreement, the Subscription Agreement, Warrant #1, Warrant #2, Warrant #3, Warrant #4 (other than Section 4.5 thereto), Warrant #5 (other than Section 4.5 thereto), Warrant #6 and any shares of common stock of the Issuer held by Showtime.




In conjunction with the Release and Termination Agreement discussed above, on February 5, 2009, ProElite, Inc. (the "Company") and its wholly-owned subsidiary, EliteXC Live (together with the Company, the "Sellers"), entered into an Asset Purchase Agreement (the "Purchase Agreement") and other related agreements with Explosion Entertainment, LLC ("Strikeforce"). Under the terms of the Purchase Agreement, Strikeforce acquired from the Sellers certain EliteXC fighter contracts, a library of televised EliteXC events and specified related assets.Consideration paid for the assets consisted of (i) $3 million in cash paid at closing, (ii) the assumption of certain liabilities relating to the assets sold and (iii) contingent consideration in the form of rights to receive a portion of the license fee earned by Strikeforce under a distribution agreement between Strikeforce and Showtime Networks Inc. ("Showtime"). The license fee is payable to the Sellers until February 28, 2012, subject to limited extensions. The Purchase Agreement contains typical representations and warranties by the Sellers regarding the Sellers' business, operations and financial condition. Each party agreed to indemnify the other party for breaches of representations, warranties, and covenants, subject to certain limitations. In connection with the closing of the transactions under the Purchase Agreement, the Sellers also entered into certain non-exclusive license agreements with Strikeforce, pursuant to which Strikeforce will license from the Sellers certain trademarks and other specified intellectual property. As a result of the Purchase Agreement, the Company is entitled to receive license fee income on certain Strikeforce productions through the second quarter of 2012. Due to the sale, the Company will recognize a gain on sale of assets in the first quarter of 2009.




21




Item 6. Management’s Discussion and Analysis of Operations




Overview




On October 20, 2008,  management, with Board ratification, decided to close or sell all operations and began an extended period of restructuring its balance sheet, divesting itself of certain assets, settlement of contingent liabilities, and attempting to raise additional capital.




SHOWTIME




In September 2008, Showtime and the Company engaged in discussions in connection with the potential purchase by CBS of certain assets owned by PEI in exchange for the forgiveness of the loans from Showtime as well as the placement of additional cash from Showtime and the return of Showtime’s equity investment.


These discussions ended on October 14, 2008, when Showtime advised PEI that it was ending all negotiations to purchase PEI’s assets.  The next day, October 15, 2008, Showtime sent to PEI a Notice of Default claiming that PEI failed to maintain the minimum cash balance under a Senior Secured Note Purchase Agreement and related Security Agreement.  Then on October 31, 2008, Showtime gave the Company a notice that it intended to sell all of the Company’s personal property, whether tangible or intangible, to the highest bidder at a public sale to be held on November 17, 2008.




On November 13, 2008, the Company received correspondence from CBS Corporation, on behalf of Showtime that the sale of assets of ProElite, Inc. and its subsidiaries originally scheduled for November 17, 2008 had been adjourned.




Finally, on February 5, 2009, CBS and Showtime entered into a General Mutual Release and Termination Agreement with the Company agreeing to a mutual release and termination of any and all claims, agreements, debts, liens, damages or liabilities of any nature.




STRIKEFORCE




On February 5, 2009 the Company entered into an Asset Purchase Agreement and other related agreements with Explosion Entertainment, LLC (“Strikeforce”). Under the terms of the Purchase Agreement, Strikeforce acquired from the Company certain EliteXC fighter contracts, a library of televised EliteXC events and specified related assets.  Consideration paid for the assets consisted of (i) $3 million in cash paid at closing into an escrow account for the benefit of the Elite XC’s vendors, (ii) the assumption of certain liabilities relating to the assets sold and (iii) contingent consideration in the form of rights to receive a portion of the license fee earned by Strikeforce under a distribution agreement between Strikeforce and Showtime Networks Inc. (“Showtime”).  After payment of vendors from escrow, the Company was able to retain approximately $300,000.  The license fee is payable to the Sellers until February 28, 2012, subject to limited extensions.




KOTC




On July 10, 2009 the Company in an effort to settle contingent liabilities consummated a strict foreclosure under the California Commercial Code in which an entity affiliated with Terry Trebilcock and Juliemae Trebilcock (the “Secured Parties”) acquired all of the outstanding stock of the Company’s wholly-owned subsidiary, King of the Cage, Inc. (“KOTC”) and certain other related assets.  The strict foreclosure was effected pursuant to an Acceptance Of Collateral In Full Satisfaction Of Obligations At Less Than Face Value And Purchase Agreement, dated July 9, 2009 (the “Agreement”) between the Company, on the one hand, and the Secured Parties and their affiliated entity, KOTC Acquisition, LLC (“Acquisition”), on the other hand.  Mr. Trebilcock was the President of KOTC at the time the strict foreclosure was consummated.




In addition to settling all outstanding claims, allegations and prior contracts between them, the Company received at closing certain earn-out rights, as described below and the Acquiror and the Secured Parties accepted the KOTC stock, in a “strict foreclosure”, in full satisfaction of all prior obligations between the parties.




The Acquiror agreed to pay the Company an earn-out, subject to certain maximums, as follows




(i)   a specified percentage of the Secured Parties’ percentage interest in the net cash flow; plus


22


(ii)  a specified percentage of the Secured Parties’ percentage interest in any proceeds the Secured Parties actually receive from, generally, a sale of Acquiror or KOTC, or from distributions to the Secured Parties from issuances of debt or equity securities by Acquiror; plus




(iii) a specified percentage of the proceeds the Secured Parties actually receive in any sale of their equity interests in Acquiror or KOTC.




The earn-outs are subject to certain limitations, which vary depending on when the earn-out is paid.  The earn-out obligations were guaranteed by the Secured Parties.




Discounted Operations
 
 As a result of management’s decision to close or sell the operations, Cage Rage, King of the Cage and the live event operations of ProElite are treated as discontinued operations, and the revenues and expenses associated with these operations have been excluded from the particular revenue and expense line items on our consolidated financial statements and are reported as a net amount in discontinued operations. For more information about our discontinued operations, see Note 12 to our consolidated financial statements.




STRATUS




Effective October 12, 2009, the Company entered into a Strategic Investment Agreement with Stratus Media Group, Inc. (“SMGI”) pursuant to which the Company agreed to sell to SMGI, shares of the Company’s Series A Preferred Stock (the “Preferred Shares”).  The Preferred Shares are convertible into the Common Stock of the Company.  The amount of shares of Common Stock issuable upon conversion on a cumulative basis is equal to 95% of the sum of (a) the issued and outstanding shares of the Company as of the closing plus (b) any shares of the Company’s Common Stock issued after the closing upon exercise or conversion of any derivative securities of the Company outstanding as of the closing, subject to any adjustment for stock splits, stock dividends, recapitalizations etc. and, in all cases, after giving effect to the shares issuable upon conversion of the Preferred Shares.  The purchase price of the Preferred Shares is $2,000,000 which will be used by the Company for payment of outstanding liabilities, general working capital and other corporate purposes and repayment of all amounts due under a note(s) of the Company with respect to advances made to the Company by SMGI of $100,000.   Certain present and former key executives of the Company will continue with the Company.  The SMGI transaction closed on June 14, 2011.




Results of Operations for the Year Ended December 31, 2008, Compared to the Period December 31, 2007




Continuing Operations




Revenue / Cost of revenue / Gross profit




As a result of the decision to discontinue operations, the Company did not have any revenues, cost of revenue, and gross profit for the fiscal years ended December 31, 2008 and 2007.




General and administrative expenses




General and administrative expenses were $29,659,670 for the year ended December 31, 2008 compared to $17,694,203 for the year ended December 31, 2007. The increase was primarily related to higher option and warrant non-cash, stock-based compensation expense of approximately $9.2 million in 2008 versus approximately $5.2 million in 2007. We also had higher non-cash depreciation and amortization expenses of approximately $5.3 million in 2008 versus $1.4 million in 2007 due to capital expenditures and to amortization of capitalized values of warrants and common stock issued for prepaid services. The Company also had higher legal expenses in 2008 reflecting a $10.2 million legal settlement (see Item 3 for a discussion of the “Wallid” settlement).  The Company also recognized salaries expense of $4.4 million in 2008 versus $2.3 million in 2007.




Impairment Charges




In 2008 the Company incurred impairment charges of $1.3 million related to its investment in Entlian Corporatione.  There were no impairment charges in 2007.  The Company also recognized impairment charges of $13.8 million that are reported in discontinued operations.


23




Loss from continuing operations




The loss from continuing operations for the year ended December 31, 2008 was $31.9 million compared with $17.2 million for the year ended December 31, 2007. The increased loss is primarily attributable to the increased general and administration expenses reflecting the $10.2 million legal settlement.




Loss from discontinued operations




The following table reflects the details of the loss from discontinued operation.  Also please See Note 14 to the consolidated financial statements for further details related to discontinued operations.




Year ended


Year endedDecember 31,


December 31,2008


2007King of the Cage

$
(4,574,954
)

$
(50,110
)Cage Rage


(10,254,322
)


(1,476,134
)ProElite (Live events and other)


(8,847,059
)


(8,365,581
)$
(23,676,335
)

$
(9,891,825
)


Liquidity and Capital Resources




Net cash used in continuing operations was $9,229,818 during the year ended December 31, 2008 compared to $11,573,808 for the year ended December 31, 2007. The use of cash was primarily the result of the Company being in the early phases of executing its business plan and incurring expenses in advance of establishing its brand and operations.




Net cash used in discontinued operations was $3,170,014 during the year ended December 31, 2008 compared to $7,442,131 for the year ended December 31, 2007.




Net cash provided by investing activities was $160,746 during the year ended December 31, 2008 compared to net cash used in investing activities of $10,883,890 for the year ended December 31, 2007 due primarily to the cash consideration of $3.25 million paid for the acquisition of King of the Cage, Inc., $4.1 million paid for the acquisition of Mixed Martial Arts Productions, Ltd., $0.4 million paid for the purchase of assets from Future Fight Promotions, Inc. (ICON), and $1 million paid to purchase a partial ownership interest in Entlian Corp. (SpiritMC) and to the purchase of equipment, furniture and leasehold improvements.




Net cash provided by financing activities was $8,000,000 during the year ended December 31, 2008 compared to $27,118,100 for the year ended December 31, 2007 due primarily to the issuance of common stock and warrants for $20.2 million in a private placement and to the issuance of common stock and warrants to Showtime for $5 million. The proceeds from the Showtime stock was used primarily for general operations, and the proceeds from the private placement were used to fund acquisitions, an investment and general operations.




The auditor's report states that substantial doubt exists about our ability to continue as a going concern. These financial statements do not contain any adjustments that may be required should we be unable to continue as an on-going concern.




Critical Accounting Estimates and Policies




Critical accounting policies are those that are important to the portrayal of our financial condition and results, and which require management to make difficult, subjective or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. We have made critical estimates in the following areas. We also believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.


24




Revenue




We earn revenue primarily from ticket sales, events broadcast on pay-per-view television and sponsorship at live events. We also earn incidental revenue from event merchandise and video sales. Ticket sales are managed by third-parties, ticket agencies and live event venues. Revenue from ticket sales is recognized at the time of the event when the venue provides estimated or final attendance reporting to the Company. Revenue from merchandise and video sales is recognized at the point of sale at live event concession stands. Revenue from sponsorship and distribution agreements is recognized in accordance with the contract terms, which are generally at the time events occur.




On our websites, we earn revenue from online advertising and subscription services. Revenue is recognized at the time advertising is run or subscription terms are met.




Significant estimates for events




The Company is required to estimate significant components of live event revenues and costs because actual amounts may not become available until one or more months after an event date. Pay-per-view revenue for live events is estimated based upon projected sales of pay-per-view presentations. These projections are based upon information provided from distribution partners. The amount of final pay-per-view sales is determined after intermediary pay-per-view distributors have completed their billing cycles. The television production costs of live events are based upon the television distribution agreement with Showtime, event-specific production and marketing budgets and historical experience. Should actual results differ from estimated amounts, a charge or benefit to the statement of operations would be recorded in a future period.




Valuation of long-lived and intangible assets




Long-lived assets consist primarily of property, plant and equipment, goodwill and intangibles.




Long-lived assets, including goodwill and indefinite-lived intangible assets, are reviewed for impairment annually or whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable, but no more than 12 months following the acquisition date. Recoverability of these assets is measured by comparing the carrying amount of an asset to its fair value in a current transaction between willing parties, other than in a forced liquidation sale. Recorded fair value was estimated by independent appraisals and other valuation techniques.




Factors we consider important which could trigger an impairment review include the following:




·
Significant underperformance relative to expected historical or projected future operating results;




·
Significant changes in the manner of our use of the acquired assets or the strategy of our overall business;




·
Significant negative industry or economic trends;




·
Significant decline in our stock price for a sustained period; and




·
Our market capitalization relative to net book value.




If we determine that the carrying value of long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure any impairment based on comparing the carrying amount of the asset to its fair value in a current transaction between willing parties or, in the absence of such measurement, on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Any amount of impairment so determined would be written off as a non-cash charge to the income statement, together with an equal reduction of the related asset.


25




As a result of the decision on October 20, 2008 by the Board of Directors to discontinue operations, we recorded impairment charges of $10.6 million for Cage Rage, $4.6 million for King of the Cage, and $2.4 million for ICON.




Stock-based compensation and warrant valuation




We record stock-based compensation expense for options and warrants issued to employees and consultants in accordance with Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" using a Black-Scholes option pricing model. Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility and fair value of our stock. Due to our short history, we do not have reliable information about employee exercise behavior. Therefore, we estimate the expected life of options and warrants granted based on an average of the vesting terms and the term of the grant in accordance with guidance in the SEC’s Staff Accounting Bulletins No. 107 and 110. We estimate the volatility of our common stock on the date of grant based on the historical volatility of the stock of other publicly traded companies in the general entertainment industry. We believe the industry historical volatility is currently a better indicator of expected volatility and future stock price trends than the historical volatility of our stock because our stock has had limited or no trading volume. Additionally, due to the lack of trading in our stock, we estimate fair value using consummated transactions such as private placements of common stock and significant warrant grants where terms were negotiated.




The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.




Recent Accounting Pronouncements




Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on the Company’s financial statements.




Item 7. Financial Statements




Please see the financial statements beginning on page F-1 located elsewhere in this annual report on Form 10-K and incorporated herein by reference.




Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure




None.




Item 8A. Controls and Procedures




Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed and summarized and is reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. No matter how well designed and operated, disclosure control procedures can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.




The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls, and any past instances of data errors, control problems or acts of fraud.




Our chief executive officer and chief financial officer have concluded, based on the evaluation of the effectiveness of the disclosure controls and procedures by our management, that as of December 31, 2008, our disclosure controls and procedures were not effective due to the material weaknesses described in Management’s Report on Internal Control over Financial Reporting below.


26




Management’s Annual Report on Internal Control Over Financial Reporting




As of  December 31, 2008, the Company's management, including the Chief Executive Officer and interim Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the evaluation, the Chief Executive Officer and interim Chief Financial Officer concluded that the Company's disclosure controls and procedures are not effective in timely and accurately alerting them to material information required to be included in the Company's periodic SEC filings.




Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting as of December 31, 2008, based on the control criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). That framework defines a material weakness as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based on such evaluation, we have concluded that our internal control over financial reporting was not effective and contained significant deficiencies which represent a material weakness in the Company’s internal control over financial reporting as of December 31, 2008.




Management’s Discussion of Material Weakness




Management has identified the following groups of control deficiencies, each of which represents a material weakness in the Company’s internal control over financial reporting as of December 31, 2008:




·
The Company’s accounting records, policies and procedures were not adequately maintained or documented, and the accounting department did not have sufficient technical accounting knowledge.·
Due to a lack of resources, the Company did not analyze financial and operating results in a timely manner, including spending by management and other officers. Additionally, the Company did not proactively review the legal contracts entered into for financial implications.·
Departments did not always work in a cohesive manner, particularly in regards to required disclosures, due diligence and acquisitions, and grants of options and warrants.·
A portion of the Company’s expenditures for live events are paid by and reimbursed to an executive/director in advance of review and approval of the charges.·
The Company’s executives, directors and shareholders have business relationships requiring them to advise, manage and/or provide services to other businesses. The Company has engaged in transactions with some of these businesses. Due to the wide-ranging network of contacts and business relationships of our executives, directors and shareholders, the Company was not always able to devote sufficient resources to identify, monitor and report all transactions with such businesses in a timely manner.




Management of the Company takes very seriously the strength and reliability of the internal control environment of the Company. However, in view of the limited financial resources available as of December 31, 2008, the Company was unable to adequately address the control deficiencies.


27






Management acknowledges its responsibility for internal controls over financial reporting and, subject to available cash, will seek to improve those controls. In order to achieve compliance with Section 404 of the Act subject to available cash, we will perform the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging.




This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.




Changes in Internal Controls




There were no changes in Company's internal controls since the date of the last report filed in 2008.




Item 8B. Other Information




None.






28








Part III




Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance, Compliance with Section 16(A) Of The Exchange Act




The following table and text set forth the names of all directors and executive officers of our Company as of December 31, 2008. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships between or among the directors, executive officers or persons nominated by our Company to become directors or executive officers. The brief descriptions of the business experience of each director and executive officer and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws are provided herein below.




Our directors and executive officers in 2008 were as follows:




Name

Age

PositionDouglas DeLuca

41

Chairman of the Board, Chief Strategy OfficerCharles Champion

54

Chief Executive Officer, DirectorDavid M. Marshall

45

DirectorGary Shaw

63

President of EliteXC Live, DirectorKen Hershman

44

DirectorClifford Hyatt

50

DirectorWilliam Kelly

44

Chief Operating OfficerKurt Brendlinger

46

Secretary, DirectorKelly Perdew

41

President of ProElite.comGary Margolis

44

DirectorDale Bolen

39

Chief Financial Officer




Biographies of Directors and Executive Officers




Douglas DeLuca joined us in October 2006. From May 2002 to the present, Mr. DeLuca is a co-executive producer for ABC’s high profile, late-night vehicle, “Jimmy Kimmel Live.” From January 1998 to May 2002, Mr. DeLuca co-executive produced the first four seasons of Comedy Central’s original sketch comedy series, “The Man Show,” which starred Jimmy Kimmel and Adam Corolla.




Charles Champion joined us in March 2008. In March 2002, Charles Champion, age 54, joined Youbet.com, Inc. (“Youbet”), a provider of technology and pari-mutual content and services for horse racing, as President and was promoted to Chief Executive Officer in September 2002. He was elected to the additional position of Chairman of the Board of Youbet in August 2003. In August 2005, Mr. Champion also assumed the responsibilities of Chief Operating Officer. On November 28, 2007 Mr. Champion stepped down as President, Chief Executive Officer and Chairman of the Board of Youbet. From December 12, 2007 to March 3, 2008, Mr. Champion worked as an independent consultant.




David Marshall joined us in October 2006, and is a co-founder of Youbet.com, Inc. (NASDAQ:UBET), the largest legal online gaming company in the U.S. based on total wagers. Mr. Marshall has served as Vice Chairman of the Youbet Board since September 2002. Youbet currently processes over $7 billion of wagering annually. Since December 1999, Mr. Marshall has also been a financial principal and/or consultant to various emerging growth companies providing finance, acquisition and operational expertise. In September 2005, Mr. Marshall founded NUI, LLC, a food and beverage, media and entertainment company focused solely on encouraging children to be smart, fit and happy. Mr. Marshall is also the Chief Executive Officer and Chairman of the Board of Directors of Santa Monica Media Corporation (AMEX:MEJ), a special purpose acquisition corporation.


29




Gary Shaw joined us in October 2006, and is currently President and Chief Executive Officer of Gary Shaw Productions, LLC, which he founded in 2002. Since 1999, Mr. Shaw has served as the Chief Operating Officer of Main Events, a boxing promotional company, in the position of Chief Operating Officer. Mr. Shaw began his professional affiliation with boxing in 1971, when he was appointed Inspector to the New Jersey State Athletic Control Commission.




Ken Hershman joined us in April 2008 as a Director. Mr. Hershman is Senior Vice President, General Manager, of Showtime Sports and Event Programming. He is responsible for the acquisition and licensing of network and pay-per-view sports and event programming on a worldwide basis. Previously, from 2001 to 2003, Mr. Hershman served as Senior Vice President, Corporate Strategy/Showtime Sports and Event Programming. From 1997 to 2000, he served as Senior Vice President, Associate General Counsel for Showtime Networks He joined Showtime Networks Inc. in July 1992 as Counsel.




Clifford Hyatt joined us in April 2008 as a Director. Mr. Hyatt is a Partner at the law firm of Pillsbury Winthrop Shaw Pittman LLP and specializes in securities regulation and litigation. Since 2002, Mr. Hyatt has represented public companies, broker-dealers, investment companies, investments advisors, and their officers and directors in matters before the SEC, NASD, NYSE, and state securities agencies and in federal and state court. His practice also involves providing compliance advice and services to regulated businesses within the securities industry. From 1990-2001, Mr. Hyatt was an enforcement attorney for the United States Securities and Exchange Commission.




William Kelly joined us in October 2006 as Chief Operating Officer. Mr. Kelly also served ProElite.com as its President until January 8, 2007. Prior to joining us, Mr. Kelly served as Chief Operating Officer of Television Korea 24 Inc., a company he co-founded in June 2003. From May 2001 to June 2003, Mr. Kelly served the Extreme Sports Channel in the capacity of International Chief Operating Officer, tasked with launching the network in international markets.




Kurt Brendlinger joined us in October 2006. Mr. Brendlinger has been a partner of Santa Monica Capital Partners, LLC, a consulting firm, since June 2005, where he is responsible for corporate and business development and strategy, capital raising, and seeking investment opportunities. Since July 2004, Mr. Brendlinger has been the Managing Director of Aaron Fleck & Associates, LLC, a registered investment advisor where he is responsible for deal sourcing, capital raising, venture capital and private equity investments and asset management. From January 2002 to June 2004, Mr. Brendlinger was Chief Executive Officer and President of Rainmakers, Inc., an Internet marketing services company for the entertainment industry and currently serves as its Chief Executive Officer. Mr. Brendlinger is the Chief Financial Officer and a Director of Santa Monica Media Corporation (AMEX:MEJ), a special purpose acquisition corporation, and is also the Chief Financial Officer and Chairman of the Board of Directors of NuRX (OTCBB:NURX), a biotechnology company.




Kelly Perdew joined our subsidiary, ProElite.com, in January 2007. Mr. Perdew has been the Managing Director of Angel Venture Partners, LP, a venture capital firm, since June 2006, which requires less than ten hours a week of Mr. Perdew’s time. Since January 2004, Mr. Perdew has provided executive advisory and consulting services for Perdew Properties, LLC. From February 2001 to December 2004, Mr. Perdew served as President and Chief Executive Officer of The Layoff Lounge, an event production company that he co-founded. Mr. Perdew served as the President of CoreObjects Software, Inc., an offshore software developer, from March 2001 to December 2004. Mr. Perdew served as the CEO of MotorPride, LLC, an online community for motor enthusiasts that he co-founded, from January 2004 to January 2006 when he sold it to ZAG.com. Mr. Perdew was also the winner of Season 2 of the reality show, The Apprentice, and served as an Executive Vice President in The Trump Organization from January 2005 to February 2006.




Gary Margolis joined us in April 2007. Mr. Margolis has been a Certified Public Accountant in the state of California for over 15 years and specializes in income tax. Mr. Margolis has been the Chief Executive Officer of Gary A. Margolis Accountancy Corporation since December 1994, which currently has over 4,500 clients. Mr. Margolis has been the Chief Executive Officer of Athlete’s Exclusive Inc., which provides industry talent books for clients such as ESPN. From August 1991 to December 1994, Mr. Margolis has worked as the controller for Beverly Hills Sports Council, Inc., a baseball sports agent based in Beverly Hills, California.




Dale Bolen joined us as Controller in July 2007. In March 2008, Mr. Bolen was appointed Interim Chief Financial Officer. Prior to joining us, Mr. Bolen served as Director of Finance for TagWorld, Inc., social networking Internet website, from February 2006 to June 2007. From May 2002 through February 2006, Mr. Bolen co-founded and served as Chief Financial Officer of BioRenew Labs, LLC, which designs, manufactures and markets consumer products. Mr. Bolen has been a Certified Public Accountant in the state of California since July 1995.


30




Audit Committee




Our directors, Gary Margolis, Ken Hershman, Clifford Hyatt and David Marshall, are members of our audit committee. Mr. Margolis is the audit committee financial expert serving on our audit committee. Mr. Margolis and Mr. Hyatt would be considered “independent directors” as defined for members of the Audit Committee by NASDAQ Marketplace Rules.




Compensation Committee




Our directors, Gary Margolis, Ken Hershman, Clifford Hyatt and David Marshall, are members of our compensation committee. Mr. Margolis and Mr. Hyatt would be considered “independent directors” as defined for members of the Compensation Committee by NASDAQ Marketplace Rules.




Executive Committee




Our directors, David Marshall (Chairman), Doug DeLuca, Gary Shaw, Kurt Brendlinger and Charles Champion, are members of our executive committee.




Committees




Our Board of Directors has no committees other than the Audit Committee, the Compensation Committee and the Executive Committee.




Director Independence




Gary Margolis and Clifford Hyatt would be considered “independent directors” as defined by NASDAQ Marketplace Rules.




Resignation




James Kimmel served on our Board of Directors from January 8, 2007 through January 22, 2007.




Item 10. Executive Compensation




Compensation of Executive Officers




The following table summarizes compensation paid or, or earned by our former Chief Executive Officer and current Chairman of the Board, President of the EliteXC Live division and President of the ProElite.com division.




Name and Principal Position
Year

Salary

($)

Bonus

($)

Option

Awards

($)(1)

Non-Equity

Incentive Plan Compensation

($)

Non-qualified Deferred

Compensation Earnings

($)

All

Other

Compensation

($)

Total

($)Doug DeLuca, former Chief Executive Officer
2008

$
200,000

-


-


-

-


-

$
200,0002007

$
51,026

-


-


-

-


-

$
51,026Charles Champion, Chief Executive Officer
2008

$
240,000














$
240,000Gary Shaw, President of EliteXC Live (2)
2008

$
270,833

-




$
-

-

$
164,891

$
435,7242007

$
61,857

-

$
84,556


-

-

$
34,733

$
181,146Kelly Perdew, President of ProElite.com
2008

$
221,875

-

$
253,349


-

-


-

$
475,2242007

$
25,000

-

$
6,819


-

-


-

$
31,819




31






(1) This value represents the dollar amount recognized for financial statement reporting purposes with respect to the year ended December 31, 2007 and the period from August 10, 2006 (inception) to December 31, 2006 for the fair value of stock options granted, in accordance with SFAS 123R. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to these grants, refer to Note 11 of our financial statements in this Annual Report. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that will be recognized from these awards by the named director.




(2) “All Other Compensation” for Mr. Shaw includes housing allowances and reimbursement of office fees.




Employment Agreements and Severance Agreements




The Company entered into several new employment agreements with newly appointed executive officers and key employees of the Company.




Charles Champion. The Company agreed to employ Mr. Champion as the Company’s Chief Executive Officer effective March 3, 2008. The term of the Champion Agreement is for two years. Mr. Champion is to receive an annual salary of $240,000, with bonuses at the discretion of the Board. Mr. Champion was granted five-year options to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $2.00 per share.




Stock Option Grants




The following table sets forth information as of December 31, 2008 concerning unexercised options, unvested stock and equity incentive plan awards for the executive officers named in the Summary Compensation Table.











OUTSTANDING EQUITY AWARDS AT YEAR ENDED DECEMBER 31, 2008




Name

Number of Securities Underlying Unexercised Options

(#) Exercisable

Number of Securities Underlying Unexercised Options

(#) Unexercisable

Option Awards

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options

(#)

Option

Exercise

Price

($)

Option

Expiration DateDoug DeLuca, former Chief Executive Officer


25,000

-

-

$
0.60

10/03/09Gary Shaw, President of EliteXC Live


250,000

-

-

$
2.00

11/25/11Kelly Perdew, President of ProElite.com


658,146

1,020,000

-

$
2.00

01/07/17Kelly Perdew, President of ProElite.com


15,000

-

-

$
2.00

10/16/11Kelly Perdew, President of ProElite.com


5,000

-

-

$
2.00

12/15/11




32


Stock Option Plan




In 2006, the Company adopted its 2006 Stock Option Plan (the “2006 Plan”) and amended the plan in 2007, pursuant to which the Company is authorized to grant awards of up to 8,000,000 shares of common stock to employees, officers, directors, consultants and advisors. The 2006 Plan is to be administered by the Board of Directors or a committee to whom the Board of Directors has delegated some or all of the administration of the plan. As of the date of this Annual Report, the Board of Directors administers the 2006 Plan. The Board of Directors may also delegate nondiscretionary administrative duties to such employees of the Company as it deems proper.




The Board of Directors will determine the persons to whom awards shall be made, the number of shares to be covered by each award, and the terms thereof. In doing so, the Board of Directors shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Board of Directors shall deem relevant in connection with accomplishing the purposes of the 2006 Plan. Under the 2006 Plan, the Board of Directors can make awards of options. Unless otherwise determined by our Board of Directors, awards granted under the 2006 Plan are not transferable other than by will or by the laws of descent and distribution. No award shall have a term exceeding ten years, measured from the date of the grant.




In the event that the Company or the division, subsidiary or other affiliated entity for which a 2006 Plan participant performs services is sold, merged, consolidated, reorganized or liquidated, and the Plan is not continued, all unvested options immediately vest.




The Board of Directors may amend, suspend or terminate the 2006 Plan or any portion thereof at any time; provided, however, that no amendment shall be made without stockholder approval if such approval is necessary to comply with any applicable tax or regulatory requirement.




During 2008, we granted 1,450,000 options under the 2006 Plan to purchase shares at exercise prices from $2.00 to $7.01 per share.  As of December 31, 2008, there were outstanding options under the 2006 plan to purchase approximately 4,170,820 shares of our common stock at a weighted average exercise price of approximately $2.42 per share.





During 2007, we granted 3,745,000 options under the 2006 Plan to purchase shares at exercise prices from $2.00 to $7.00 per share. As of December 31, 2007, there were outstanding options under the 2006 Plan to purchase approximately 4,875,859 shares of our common stock at a weighted- average exercise price of approximately $2.18 per share.




Compensation of Directors




During the years ended December 31, 2008 and 2007, we did not pay any of our directors any cash compensation for serving on the Board of Directors of Directors.




Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters




The following table sets forth, as of December 31, 2008, certain information regarding beneficial ownership of our common stock by (i) each person or entity who is known by us to own beneficially more than 5% of the outstanding shares of common stock, (ii) each of our directors, and (iii) all directors and executive officers as a group. As of December 31, 2008, there were 55,854,726 shares of our common stock issued and outstanding. In computing the number and percentage of shares beneficially owned by a person, shares of common stock that a person has a right to acquire within sixty (60) days of December 31, 2008, pursuant to options, warrants or other rights are counted as outstanding, while these shares are not counted as outstanding for computing the percentage ownership of any other person. Unless otherwise indicated, the address for each shareholder listed in the following table is c/o ProElite, Inc., 12121 Wilshire Boulevard, Suite 1001, Los Angeles, California 90025. This table is based upon information supplied by directors, officers and principal shareholders.


33




Name of Beneficial Owner

Shares Beneficially Owned

Percent of TotalOfficers, Directors, and 5% ShareholdersDouglas DeLuca (1)


4,466,830

6.3
%Charles Champion


-

*David Marshall (2)(3)(5)


4,447,028

6.3
%Kurt Brendlinger (2)(4)(5)


4,414,946

6.3
%Gary Shaw (6)


2,708,220

3.8
%William Kelly (7)


183,061

*Kelly Perdew (8)


779,889

1.1
%Dale Bolen (9)


25,000

*Gary Margolis (15)

343 N. Lima Street

Sierra Madre, CA 91024


-

*Clifford Hyatt (15)

c/o Pillsbury Winthrop Shaw Pittman LLP

725 South Figueroa Street, Suite 2800

Los Angeles, CA 90017


-

*Ken Hershman (10)

c/o Showtime Networks

51 W. 52nd St

New York, NY 10019


-

*All Officers and Directors as a group (ten persons)


17,024,974

24.2
%Lifelogger LLC (5)

11845 W. Olympic Blvd., #1125W

Los Angeles, CA 90064


3,948,579

5.7
%Santa Monica Capital Partners II, LLC (3)(5)

11845 W. Olympic Blvd., #1125W

Los Angeles, CA 90064


11,780,410

16.7
%Eric Pulier (2)(5)(11)

11845 W. Olympic Blvd., #1125W

Los Angeles, CA 90064


4,445,054

6.3
%Hunter World Markets, Inc. (13)

9300 Wilshire Blvd., Penthouse

Beverly Hills, CA 90212


5,652,949

8.0
%Absolute Return Europe Fund (14)

c/o Hunter World Markets, Inc.

9300 Wilshire Blvd., Penthouse

Beverly Hills, CA 90212


4,291,579

6.1
%Showtime Networks Inc.(11)(12)

1633 Broadway

New York, NY 10019


9,166,668

13.0
%




* Less than 1%.




(1) Douglas DeLuca also holds a warrant to purchase 25,000 shares of common stock at an exercise price of $0.60 per share, which expires on October 3, 2009.




(2) 3,205,665 of the shares reported by each of David Marshall, Kurt Brendlinger, and Eric Pulier are owned through their beneficial ownership of Santa Monica Capital Partners II, LLC. Messrs. Marshall, Brendlinger and Pulier each beneficially own 33 1/3% of Santa Monica Capital Partners II, LLC. 721,155 of the shares reported by each of David Marshall, Kurt Brendlinger, and Eric Pulier are owned through their beneficial ownership of Lifelogger, LLC, which is beneficially owned through their ownership of Santa Monica Capital Partners II, LLC. Each of Messrs. Marshall, Brendlinger and Pulier disclaims beneficial ownership of shares of our common stock in excess of his percentage ownership of Santa Monica Capital Partners II, LLC.




(3) Mr. Marshall’s interest in Santa Monica Capital Partners II, LLC is held indirectly by Santa Monica Capital, LLC, of which he is the sole member. The remaining 395,225 shares are owned through Santa Monica Capital, LLC. Mr. Marshall is also the sole shareholder of David Marshall, Inc., which owns a warrant to purchase 125,000 shares of common stock at an exercise price of $0.60 per share, which expires on October 3, 2009.




(4) Mr. Brendlinger’s interest in Santa Monica Capital Partners II, LLC is held indirectly by E’s Holdings, Inc., of which he is the sole shareholder. The remaining 413,143 shares are owned through E’s Holdings, Inc. Mr. Brendlinger also owns a warrant to purchase 75,000 shares of common stock at an exercise price of $0.60 per share, which expires on October 3, 2009.


34




(5) Santa Monica Capital Partners II, LLC is the record owner of 9,616,994 shares of our common stock and beneficially owns 2,163,466 shares of our common stock by reason of its 54.8% ownership interest of Lifelogger, LLC. Santa Monica Capital Partners II disclaims beneficial ownership of shares of our common stock in excess of its percentage ownership of Lifelogger LLC. As described above in notes 2 thru 4, Messrs. Marshall, Brendlinger and Pulier beneficially own shares of our common stock by reason of their membership ownership of Santa Monica Capital Partners II, LLC.




(6) Gary Shaw holds a warrant to purchase 250,000 shares of common stock at $2.00 per share, which expires on November 25, 2011.




(7) William Kelly does not own any shares of common stock. The number of shares reported as beneficially owned by Mr. Kelly are shares of common stock underlying the options granted to Mr. Kelly pursuant to his employment agreement. Mr. Kelly holds an option to purchase 393,894 shares of common stock at $2.00 per share with vesting over three years ending October 2, 2009, and was granted an option in April 2007 to purchase 75,000 shares of common stock at $3.25 per share with vesting over three years ending April 30, 2010.




(8) Kelly Perdew does not own any shares of common stock. The number of shares reported as beneficially owned by Mr. Perdew are shares of common stock underlying the options granted to Mr. Perdew pursuant to his employment agreement. Mr. Perdew holds an option to purchase 1,678,146 shares of common stock at $2.00 per share, of which 760,146 have vested or will vest within the next 60 days. Mr. Perdew also holds warrants to purchase 15,000 and 5,000 shares of common stock at $2.00 per share, which expire on October 15, 2011 and December 15, 2011, respectively.




(9) Dale Bolen does not own any shares of common stock. The number of shares reported as beneficially owned by Mr. Bolen are shares of common stock underlying an option grant. Mr. Bolen holds an option to purchase 200,000 shares of common stock at $6.00 per share, of which 25,000 have vested or will vest within the next 60 days.




(10) Ken Hershman was appointed to the Board of Directors pursuant to the exclusive distribution agreement with Showtime Networks, Inc., dated November 8, 2006 and the investor rights agreement entered into with SNI, dated January 3, 2007.




(11) Mr. Pulier’s interest in Santa Monica Capital Partners II, LLC is held indirectly by New Vision Ventures, LLC, of which he is Manager. The remaining 493,251 shares are owned through New Vision Ventures, LLC. Mr. Pulier also owns a warrant to purchase 25,000 shares of common stock at an exercise price of $0.60 per share, which expires on October 3, 2009.




(12) Consists of 5,000,001 shares of our common stock and warrants to purchase up to 1,166,667 shares of our common stock at $2.00 per share, owned of record by Showtime Networks Inc., a wholly owned subsidiary of CBS Corporation. Showtime also has a warrant to purchase an additional 2,500,000 shares of our common stock at $2.00 per share upon the earlier of November 8, 2009 and the date when the Exclusive Distribution Agreement, described above under Description of Business, is terminated due to a breach on our part, if any. Showtime also has a warrant to purchase 2,500,000 shares of our common stock at $2.00 per share with vesting over three years ending November 8, 2009.




(13) Includes 2,522,949 shares of common stock owned by Hunter World Markets, Inc. and 30,000 shares of common stock controlled by a principal of Hunter World Markets, Inc. Includes a warrant to purchase 350,000 shares of common stock at an exercise price of $0.60 per share. The number of shares reported includes a warrant to purchase 2,750,000 shares of common stock at an exercise price of $2.00 per share, which is not exercisable until October 3, 2007.




(14) Includes 3,291,579 shares of common stock and warrants to purchase 1,000,000 shares of common stock at exercise prices of $7.00 per share.




(15) Mr. Margolis and Mr. Hyatt were appointed directors pursuant to the Placement Agent Agreement with Hunter World Markets, Inc.




35




Equity Compensation Plan Information




The following table summarizes as of December 31, 2008, the number of securities to be issued upon the exercise of outstanding derivative securities (options and rights); the weighted-average exercise price of the outstanding derivative securities; and the number of securities remaining available for future issuance under our equity compensation plans.






Plan Category

Number of securities

to be issued upon

exercise of o

utstanding options,

and rights

Weighted-average exercise

price of outstanding

options, and rights

Number of securities

remaining available for

future issuance under

equity compensation plansEquity compensation plans approved by security holders

4,875,859

$2.77

3,439,270Equity compensation plans not approved by security holders (a)

30,500,137

$2.85

-35,375,996

$2.83

3,439,270




(a) Amount represents warrants issued outside of the 2006 Stock Option Plan.




The Company adopted its 2006 Stock Option Plan and amended the plan in 2007, reserving a total of 8,000,000 shares. The plan provides for the issuance of statutory and non-statutory stock options to employees, directors and consultants, with an exercise price equal to the fair market value of the Company’s common stock on the date of grant.




Item 12. Certain Relationships and Related Transactions




This section describes the transactions we have engaged in with persons who were directors, officers or affiliates at the time of the transaction, and persons known by us to be the beneficial owners of 5% or more of our common stock as of December 31, 2008.




We have entered into a three-year term consulting agreement ending on September 30, 2009, with Santa Monica Partners II, LLC, a Delaware limited liability company whose members include Kurt Brendlinger, our Secretary and a director, David Marshall, our Chairman and a director, and Eric Pulier. Pursuant to this agreement, we pay a monthly consulting fee of $30,000 to Santa Monica Capital Partners II, LLC for services relating to strategic planning, investor relations, acquisitions, corporate governance and financing. Additionally, we incurred costs of approximately $200,000 for services paid on behalf of Santa Monica Capital Partners II, LLC.




We have entered into an exclusive distribution agreement with Showtime Networks, Inc.




We have acquired certain assets from Lifelogger LLC, a Delaware limited liability company, in exchange for 4,000,000 shares of our common stock. Santa Monica Capital Partners II, LLC, a limited liability company, indirectly owns approximately 61% in membership interest in Lifelogger LLC through SASHC, LLC, a California limited liability company. Santa Monica Capital Partners II owns a 68.75% membership interest in SASHC, LLC, which owns approximately 88.9% in membership interests in Lifelogger LLC.




In July 2007, four institutional investors purchased $22.5 million of our units, as described earlier under Private Placements. Each unit consisted of one share of our common stock and one half of a five-year warrant to purchase one share of our common stock. In addition, on or about August 23, 2007, the investors purchased an additional 357,143 shares of common stock from certain selling shareholders, including executive officers, directors, shareholders holding more than 5% of the outstanding shares of common stock of the Company, and their affiliates. In connection with the sale of shares by the selling shareholders, we issued warrants to purchase an additional 178,571 shares of our common stock. We agreed to issue the additional warrants in consideration of the selling shareholders' entering into a lock-up agreement, whereby each of the shareholders agreed to not sell any shares owned directly or indirectly by any of them for a period of 18 months from the date of this prospectus. Approximately 27 security holders participated in the August sale, and no one shareholder received more than $833,921.


36


Item 13. Exhibits




See the attached exhibit index.




Item 14. Principal Accountant Fees and Services




Gumbiner Savett, Inc. audited our financial statements for the years ended December 31, 2008, December 31, 2007 and the period from inception (August 10, 2006) to December 31, 2006. The following table shows amounts billed by Gumbiner Savett, Inc. during the periods ended December 31, 2008, December 31, 2007 and 2006:




2008

2007


2006Audit fees
$
254,000

$
464,870


$
25,000Audit-related fees




-



-Tax fees




-



-All other fees




-



-





Audit fees represent amounts billed for professional services rendered for the audit of our annual financial statements, the review of our interim financial statements, review of our filings on Form SB-2 for securities registrations, and the audit of financial statements of King of the Cage, an acquisition closed in September 2007.




37


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




PageReport of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets

F-3Consolidated Statements of Operations

F-4Consolidated Statements of Shareholders’ Equity

F-5Consolidated Statements of Cash Flows

F-6Notes to Consolidated Financial Statements

F-8








F-1








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors


ProElite, Inc.




We have audited the accompanying consolidated balance sheets of ProElite, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.




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 its internal control over financial reporting. Our audits included consideration of 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, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of ProElite, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended December 31, 2008 and 2007 in conformity with United States generally accepted accounting principles.




The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 2. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.






/s/ GUMBINER SAVETT INC.




GUMBINER SAVETT INC.




November 18, 2011


Santa Monica, California






F-2




ProElite, Inc.


Consolidated Balance Sheets




December 31,

2008


December 31,

2007AssetsCurrent assetsCash and cash equivalents

$
203,679


$
4,427,303Restricted cash


-



277,500Accounts receivable, net of allowance of $328,562 and $255,901, respectively


-



338,596Prepaid expenses


88,067



133,673Current assets of discontinued operations


-



1,077,896Total current assets


291,746



6,254,968Fixed assets, net


731,759



1,428,548Other assetsIntangible assets, net – discontinued operations


1,234,000



9,022,181Goodwill – discontinued operations


-



6,238,652Investment in Entlian/SpiritMC


-



1,848,003Prepaid distribution costs, net


-



764,109Prepaid license fees, net


-



111,052Prepaid services, net


-



408,889Deposits and other assets


92,235



143,915Total other assets


1,326,235



18,536,801Total assets

$
2,349,740


$
26,220,317Liabilities and Shareholders’ EquityCurrent liabilitiesNote payable – Showtime

$
6,342,556


$
1,822,086Accounts payable


2,606,931



1,531,342Accrued expenses


879,566



733,638Accounts payable and accrued expense - Showtime


-



125,000Future payments due for acquired companies – discontinued operations


805,529



1,162,500Accrued liabilities from predecessor company


346,572



346,572Other accrued liabilities


54,611



-West Coast Settlement - Discontinued Operations


150,000



150,000Total current liabilities


11,185,765



5,871,138Deferred rent and lease incentive


147,423



153,309Note Payable


500,000Total liabilities


11,833,188



6,024,447Commitments and contingenciesShareholders’ equityPreferred stock, $0.0001 par value, 20,000,000 shares authorized, 0 shares issued


-



-Common stock, $0.0001 par value, 250,000,000 shares authorized, 55,854,726 and 51,659,488 shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively


5,586



5,166Common stock to be issued


11,279,973



2,249,997Additional paid-in-capital


66,247,158



49,404,897Accumulated other comprehensive loss


(71,331
)


(86,793
)Accumulated deficit


(86,944,834
)


(31,377,397
)Total shareholders’ equity


(9,483,448
)


20,195,870Total liabilities and shareholders’ equity

$
2,349,740


$
26,220,317




See Notes to Consolidated Financial Statements






F-3






ProElite, Inc.


Consolidated Statements of Operations


Year Ended

December 31, 2008


Year Ended

December 31,

2007Revenue

$
-


$
-Pay per view and television licensing


-



-Total revenue


-



-Cost of revenuePay per view and television licensing


-



-Total cost of revenue


-



-Gross loss


-



-O Operating expensesGeneral and administrative


29,659,670



17,694,203Impairment and other charges


1,486,364



-Total operating expenses


31,146,034



17,694,203Operating loss from continuing operations


(31,146,034
)


(17,694,203
)Loss on Disposal of Assets


(106,193
)


-Interest income (expense), net


(638,875
)


458,486Loss from continuing operations before income taxes


(31,891,102
)


(17,235,717
)Income taxes


-



-Loss from continuing operations


(31,891,102
)


(17,235,717
)Discontinued operationsLoss from discontinued operations


(23,676,335
)


(9,891,825
)Net loss

$
(55,567,437
)

$
(27,127,542
)Loss per share from continuing operations - basic and diluted

$
(0.58
)

$
(0.38
)Loss per share from discontinued operations – basic and diluted

$
(0.43
)

$
(0.22
)N Net loss per share – basic and diluted

$
(1.01
)

$
(0.60
)WWeighted average shares outstanding - basic and diluted


55,108,187



45,660,279


See Notes to Consolidated Financial Statements






F-4








ProElite, Inc.


Consolidated Statement of Shareholders’ Equity


For the years ended December 31, 2008 and 2007






Common Stock








Additional





TotalIssuable


Common Stock


Paid-


Accumulated


Shareholders’Shares


Amount


Shares


Amount


In Capital


Deficit


EquityBalance at December 31, 2006


-


$
-



37,499,999


$
3,750


$
11,875,968


$
(4,249,855
)

$
7,629,863Common stock and warrant issued for cash - Showtime


-



-



5,000,001



500



4,999,500



-



5,000,000Warrant issued to Showtime


-



-



-



-



608,000



-



608,000Shares issued to MMA Live Entertainment, Inc.


-



-



320,000



32



639,968



-



640,000Warrants exercised on a cashless basis by private placement investors and placement agents


-



-



4,846,330



485



(485
)


-



-Common stock and warrants issued for cash in private placement


-



-



3,214,286



321



20,137,145



-



20,137,466Options and warrants exercised


-



-



78,872



8



158,540



-



158,548Common stock to be issued for purchase of King of the Cage, Inc.


178,571



1,249,997



-



-



-



-



1,249,997Common stock issued for purchase of “Cage Rage”


-



-



500,000



50



3,499,950



-



3,500,000Common stock issued for investment in Entlian Corp.


-



-



100,000



10



999,990



-



1,000,000Common stock issued and to be issued for ICON asset purchase


100,000



1,000,000



100,000



10



999,990



-



2,000,000Compensation expense for stock options and warrants


-



-



-



-



5,186,331



-



5,186,331Reduction of registration rights liability


-



-



-



-



300,000



-



300,000Cumulative translation adjustment


-



-



-



-



-



(86,793
)


(86,793
)Net loss


-



-



-



-



-



(27,127,542
)


(27,127,542
)Balance at December 31, 2007


278,571


$
2,249,997



51,659,488


$
5,166


$
49,404,897


$
(31,464,190
)

$
20,195,870Shares to be issued for services


64,280



79,973



















79,973Showtime warrant exercise


-



-



2,000,000



200



3,999,800







4,000,000Underwriter warrant exercise


-



-



2,016,667



202



(202
)


-



-Shares issued to King of the Cage


(178,571
)


(1,249,997
)


178,571



18



1,249,979







-Shares to be issued for legal settlement


4,000,000



10,200,000



















10,200,000Option and warrant expense


-



-











11,592,684







11,592,684Net loss including currency adjustment


-



-







-



-



(55,551,975
)


(55,551,975
)Totals at December 31, 2008


4,146,280


$
11,279,973



55,854,726


$
5,586


$
66,247,158


$
(87,016,165
)

$
(9,483,448
)




See Notes to Consolidated Financial Statements






F-5




ProElite, Inc.


Consolidated Statements of Cash Flows




2008


2007CASH FLOWS FROM OPERATING ACTIVITIES:Continuing operations:Net loss from continuing operations

$
(31,891,102
)

$
(17,085,717
)Adjustments to reconcile net loss from continuingoperations to net cash used in continuing operating activities:Stock and warrant based compensation


9,188,199



5,186,331Depreciation and amortization


30,119



173,312Loss in equity interest


513,636



151,997Impairment and other charges


1,334,367



-Stock issued for services


35,330



-Stock to be issued for a legal settlement


10,200,000Amortization of deferred financing costs and original issue discount


-Changes in operating assets and liabilities:Prepaid expense and other assets


128,578



(87,382
)Accounts payable and accrued expenses


1,231,055



87,651Net cash used in continuing operations


(9,229,818
)


(11,573,808
)Discontinued operations:Net loss on discontinued operations


(23,676,335
)


(10,041,825
)Adjustments to reconcile net loss from discontinuedoperations to net cash used in discontinued operating activities:Depreciation and amortization


5,245,767



1,215,926Loss on abandonment of fixed assets


106,193



241,798Provision for doubtful accounts


250,320



255,901Impairment and other charges


13,761,166



-Amortization of deferred financing costs and original issue discount


379,536



-Changes in discontinued operations operating assets and liabilities:Accounts receivable


88,276



(371,624
)Prepaid expense and other assets


(50,097
)


(258,639
)Accounts payable and accrued expenses


725,160



1,516,332Net cash used in discontinued operations


(3,170,014
)


(7,442,131
)CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of King of the Cage


-



(3,587,988
)Acquisition of Future Fight Productions Inc.


-



(350,000
)Acquisition of Cage Rage


-



(4,019,052
)Investment in Entlian


-



(1,000,000
)Cash received from the disposal of assets


28,611



-Cash collateral received upon closing credit card facility


277,500



(277,500
)Property and equipment purchased


(49,330
)


(414,595
)Property and equipment purchased — discontinued operations


(96,035
)


(1,234,755
)Net cash provided by (used in) investing activities


160,746



(10,883,890
)CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of common stock and warrants for cash - Showtime, net of offering costs


4,000,000



-Proceeds from exercise of options and warrants


-



158,548Issuance of common stock and warrants for cash, net of offering costs


-



25,137,466Loan proceeds - Showtime, discontinued operations


4,000,000



1,822,086Net cash provided by (used in) financing activities


8,000,000



27,118,100CUMULATIVE TRANSLATION ADJUSTMENT


15,462



(86,793
)NET CHANGE IN CASH AND CASH EQUIVALENTS


(4,223,624
)


(2,868,522
)CASH AND CASH EQUIVALENTS — BEGINNING OF YEAR


4,427,303



7,295,825CASH AND CASH EQUIVALENTS — END OF YEAR

$
203,679


$
4,427,303




F-6




Supplemental disclosures of non-cash investing and financing activities:
  In connection with the warrant issued to Showtime on January 5, 2007, the Company recorded $608,000, the value of the warrant, as prepaid distribution costs.
  During 2007, the Company reduced its registration rights liability related to the shares issued in the October 2006 private placement by $300,000, with a corresponding increase to paid-in capital.
 On April 3, 2007, the Company issued 320,000 shares to MMA Live Entertainment, Inc. for future services. The Company recorded the $640,000 value of these shares as prepaid services in the other assets section of the balance sheet.




In May 2007 in connection with a new office lease, the Company recorded leasehold improvements of $115,650 for design and modifications to the new office space. This amount was paid by the Company’s landlord directly to a third-party architect and has been recorded as deferred rent liability.




On June 20, 2007, an unrelated party in the Company’s October 2006 private placement exercised, on a cashless basis, 250,000 warrants and received 208,333 shares of common stock.




In August 2007, investors in the Company’s October 2006 and July 2007 private placements exercised, on a cashless basis, 3,246,333 warrants and received 2,790,707 shares of common stock. Also in August 2007, the placement agent for the Company’s October 2006 and July 2007 private placements exercised, on a cashless basis, 3,571,428 warrants and received 1,847,290 shares of common stock.




In September 2007, the Company recorded its obligation for the acquisition of King of the Cage of 178,571 shares of common stock valued at $1.25 million in common stock issuable in equity.




In September 2007, the Company recorded the issuance of 500,000 shares of common stock valued at $3.5 million for the acquisition of Cage Rage in equity.




In September 2007, the Company issued to Entlian Corp. 100,000 shares of restricted common stock valued at $1 million and recorded this amount in equity.




During September 2007 in accordance with the stock purchase agreement, the Company recorded a distribution of approximately $240,000 of accounts receivable in an acquired subsidiary to the subsidiary’s selling shareholders. At December 31, 2007, the balance payable was approximately $225,000.




In December 2007, the Company recorded the issuance of 100,000 shares of common stock valued at $1 million in equity and an obligation to issue 100,000 shares valued at $1.0 million for the purchase of assets from Future Fight Productions (ICON acquisition) in common stock issuable.




See Note 4 for non-cash disclosure of assets and liabilities acquired in business combinations in 2007.




In January 2008, the Company agreed to issue 35,714 shares to ONDA for services.  The shares were valued at $44,643.




In January 2008, the Company agreed to issue 3,566 shares to Cimmaron Group for services.





In March 2008, the Company's former underwriter exercised 2.75 million warrants on a cashless basis.  Approximately 2 million shares were issued.


In June 2008, the Company issued a note to Showtime with a face value of $3.5 million.
 
 The Company received $3 million in cash.  The associated note discount of $500,000 was recorded in equity and was amortized into interest expense over the term of the note.
 
 In June 2008, the Company issued a warrant to Showtime to purchase 100,000 shares of common stock in conjunction with the aforementioned note.  The warrant was valued at $149,040 and was amortized into expense over the term of the note.
 
 In June 2008, the Company issued a warrant to Showtime to purchase 2 million shares of common stock in exchange for future services.  The warrant was valued at $2,255,445 and was fully expensed as of December 31, 2008.




In October 2008, the Company issued 25,000 shares for services.




On November 7, 2008, the Company agreed to issue 4,000,000 shares for legal settlement expense.




During 2008, shares of common stock were issued to the prior owners of King of the Cage as part of the agreed upon purchase price.  The shares were valued at $1,249,997 and were previously accounted for at the time of purchase in September 2007.
  During 2008, the Company accrued an earn-out bonus of $650,000 associated with the purchase of King of the Cage.  The amount was capitalized into goodwill.







See Notes to Consolidated Financial Statements






F-7




ProElite, Inc.


Notes to Consolidated Financial Statements




Note 1    Basis of Presentation and Summary of Significant Accounting Policies




The Company




ProElite, Inc., a New Jersey corporation (the “Company”) is a holding company for entities that (a) organize and promote mixed martial arts matches, and (b) create an internet community for martial arts enthusiasts and practitioners. On October 3, 2006, pursuant to a Share Exchange Agreement dated concurrently between us and the shareholders of Real Sport, Inc., a California corporation, we issued 25,000,000 shares of our common stock in exchange for all of the issued and outstanding shares of Real Sport. As a result of this reverse merger transaction, Real Sport is now our wholly owned subsidiary, though from an historical perspective it was deemed to have been the acquirer in the reverse merger and the survivor of the reorganization. Concurrently with the closing of the reverse merger, the Company completed a private placement of its securities with gross proceeds of $10,000,000. Real Sport is the holding company of ProElite.com (formerly EliteXC.com and I-Fight, Inc.) and EliteXC Live (formerly MMA Live, Inc. and Jungle Fight, Inc.), which were formed on August 10, 2006 and September 13, 2006, respectively.




On October 20, 2008,  management, with Board ratification, decided to close or sell all operations and began an extended period of restructuring its balance sheet, divesting itself of certain assets, settlement of contingent liabilities, and attempting to raise additional capital.   These operations are disclosed as discontinued operations (See Note 12).




Principles of Consolidation




The Company’s consolidated financial statements include the assets, liabilities and operating results of ProElite and its wholly-owned subsidiaries since formation or acquisition of these entities. All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for its investment in Entlian in which ProElite has significant influence; this represents common stock ownership of at least 20% and not more than 50%.




Revenue Recognition




The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements modified by Emerging Issues Task Force ("EITF") No. 00-21 and SAB No. 104 which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.




The Company earns revenue primarily from live event ticket sales, site fees and sponsorship and pay per view fees for events broadcast on television. The Company also earns incidental revenue from merchandise and video sales and from online advertising, subscriptions and online store sales. Ticket sales are managed by third-parties, ticket agencies and live event venues. Revenue from ticket sales is recognized at the time of the event when the venue provides estimated or final attendance reporting to the Company. Revenue from merchandise and video sales is recognized at the point of sale at live event concession stands. Revenue from sponsorship, and television distribution agreements is recognized in accordance with the contract terms, which are generally at the time events occur. Website revenue is recognized as advertisements are shown, as subscription terms are fulfilled, and as products are shipped.




Cost of Revenue




Costs related to live events are recognized when the event occurs. Event costs incurred prior to an event are capitalized to prepaid costs and then charged to expense at the time of the event. Costs primarily include: TV and Internet production, fighter purse, arena, officiating, and the set design. Cost of other revenue streams are recognized at the time the related revenues are realized.




F-8




Significant Estimates for Events




The Company is required to estimate significant components of live event revenues and costs because actual amounts may not become available until one or more months after an event date. Pay-per-view revenue is estimated based upon projected sales of pay-per-view presentations. These projections are based upon information provided from distribution partners. The amount of final pay-per-view sales is determined after intermediary pay-per-view distributors have completed their billing cycles. The television production costs of live events are based upon the television distribution agreement with Showtime, event-specific production and marketing budgets and historical experience. Should actual results differ from estimated amounts, a charge or benefit to the statement of operations would be recorded in a future period.




Advertising Expenses




Advertising is expensed as incurred.  Total direct advertising expense was $1,575,163 during the year ended December 31, 2008 and $1,728,166 for the year ended December 31, 2007.




Cash and Cash Equivalents




Cash and cash equivalents include deposit accounts and debt instruments of the United States government and its agencies and high-quality corporate issuers. All highly liquid investments with an original maturity of three months or less are considered cash equivalents. The Company maintains cash and cash equivalents with a commercial bank. These accounts are generally guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 or by the Securities Investor Protection Corporation (“SIPC”) up to $500,000. At times, balances at any single bank may be in excess of the FDIC or SIPC insurance limit. The deposits are made with reputable financial institutions, and the Company does not anticipate realizing any losses from these deposits.




Accounts Receivable




Accounts receivable relate principally to amounts due from television networks for pay-per-view presentations and from live event venues for ticket sales. Amounts due for pay-per-view programming are based primarily upon estimated sales of pay-per-view presentations and are adjusted to actual after intermediary pay-per-view distributors have completed their billing cycles. If actual sales differ significantly from the estimated sales, the Company records an adjustment to sales. Accounts receivable from foreign television distribution is generally based upon contracted fees per event or showing. Accounts receivable from venues for ticket sales to live events are generally received within 30 days of an event date.




An allowance for uncollectible receivables is estimated each period. This estimate is based upon historical collection experience, the length of time receivables are outstanding and the financial condition of individual customers.




Fixed Assets




Fixed assets primarily consist of computer, office, and video production equipment; furniture and fixtures; leasehold improvements; computer software; Internet domain names purchased from others; and website development costs. Fixed assets are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Equipment is depreciated over estimated useful lives ranging from three to five years. Furniture, fixtures and leasehold improvements are depreciated over estimated useful lives ranging from five to seven years. Computer software is amortized over estimated useful lives ranging from one to five years. Internet domain names are amortized over ten years. Website development costs are amortized over three years.




Goodwill and Intangible Assets




Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. During 2007, the Company acquired amortizable intangible assets consisting of non-compete agreements, fighter contracts, merchandising rights and distribution agreements and indefinite-lived intangible assets consisting of brands and trademarks. The Company amortizes the cost of acquired intangible assets over their estimated useful lives, which range from one to five years.




F-9




SFAS No. 142 requires goodwill and other indefinite-lived intangible assets to be tested for impairment at least on an annual basis and more often under certain circumstances, and written down by a charge to operations when impaired. An interim impairment test is required if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value. During the year ended December 31, 2008, the Company modified its operating plans for its Cage Rage King of the Cage and Future Fight Productions, Inc. subsidiaries, due to their recent operating performances, and as a result recorded charges of approximately $7.2 million, $4.3 million and $2.3 million, respectively, to reduce the carrying value of goodwill and acquired intangible assets to their estimated fair values.




See Note 12 and 13 for impairment of goodwill and intangible assets during 2008.




Valuation of Long-Lived Assets




The carrying amounts of long-lived assets are periodically evaluated for impairment when events and circumstances warrant such a review. During 2007, live event set design costs and other equipment were determined to be impaired and the Company recorded a charge to operations of approximately $242,000 during the year ended December 31, 2007.




Prepaid Distribution Costs




Prepaid distribution costs represent the value of warrants issued to Showtime in November 2006 and January 2007 in connection with a television and pay-per-view distribution agreement. The value of the warrants is being amortized to expense over the three-year term of the distribution agreement.




Prepaid Services




Prepaid services included in other assets represent the value of shares issued to MMA Live Entertainment, Inc. for fighter services. The value of the shares is being amortized to expense over the three-year term of the related agreement.




Fair Value of Financial Instruments




The Company measures its financial assets and liabilities in accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments.” The carrying values of cash equivalents, accounts receivable, accounts payable, and payments due for acquired companies approximate fair value due to the short-term maturities of these instruments.




Discontinued Operations
  A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations; and (b) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to resale.
  Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the consolidated financial statements and related notes for all years presented.  See Note 12 for separate disclosure of discontinued operations.


Foreign Currency




The functional currencies of the Company’s international subsidiary and investee are the local currency. The financial statements of the foreign subsidiary are translated into United States dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the period for revenues and expenses. Foreign currency transaction gains and losses were insignificant during the period. Foreign currency translation adjustments are shown as other comprehensive income in the accompanying consolidated balance sheet.




Income Taxes




The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” As such, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial report amounts at each period 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, if any, and the change during the period in deferred tax assets and liabilities.




F-10




Loss per Share




The Company utilizes Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic earnings (loss) per share are computed by dividing earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Potential common shares include stock that would be issued on exercise of outstanding options and warrants reduced by the number of shares which could be purchased from the related exercise proceeds. For the years ended December 31, 2008 and 2007, 34,322,957 and 35,375,997, respectively, potentially dilutive securities, which represent all the outstanding options and warrants, are excluded from the computation because they are anti-dilutive.




Recent Accounting Pronouncements




Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on the Company’s financial statements.




Reclassifications




Certain prior year amounts have been reclassified to conform to the current year presentation.




Note 2    Going Concern




The Company has incurred losses from operations and negative cash flows from operations since its inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  On October 20, 2008,  management, with Board ratification, decided to close or sell all operations and began an extended period of restructuring its balance sheet, divesting itself of certain assets, settlement of contingent liabilities, and attempting to raise additional capital.These financial statements do not contain any adjustments that may be required should the Company be unable to continue as an on-going concern.




Note 3   Lifelogger LLC




Effective November 30, 2006, Real Sport acquired tangible and intellectual property assets from Lifelogger LLC (an entity 61% owned by an affiliate of the Company) for 4,000,000 common shares of the Company. The shares exchanged for the assets purchased had a fair value of $3.7 million. Lifelogger LLC acquired these assets from Orientations Network SDN BHD (“Orientations”), an unrelated Malaysian entity, pursuant to a Contribution Agreement dated October 3, 2006 in exchange for member’s interest in Lifelogger LLC.




The intellectual property assets acquired consisted of a set of advanced networking tools, an online depository, domain names and a personalized content tool that is to be used, among other things, as the backbone of the Company’s website (ProElite.com) and online Internet community. These software assets were in development on the date of acquisition. In accordance with the guidance of Staff Accounting Bulletin Topic 5:G, Transfers of Nonmonetary Assets By Promoters or Shareholders, the Company recorded the acquisition of these assets at the historical cost basis of the seller, Lifelogger LLC. The cost basis of the acquired intellectual property assets was determined to be zero pursuant to the provisions of Emerging Issues Task Force Abstracts Issue No. 00-02, Accounting for Web Site Development Costs, which requires web site development costs that have not reached technological feasibility to be recorded at zero. The seller’s historical cost basis of the tangible assets acquired, which consisted primarily of computer equipment, was $52,000. The cost of producing the software acquired was expensed as incurred.




In a letter agreement, effective November 30, 2006, between the Company and Orientations, the Company contracted Orientations to develop and market the acquired intellectual property assets. The Company pays Orientations a monthly amount equal to the aggregate of consulting fees, reimbursement of budgeted expenses, and the purchase of computer hardware as deemed necessary and approved by the Company’s management. The Company owns the computer hardware purchased. The cost of these purchased assets is included in fixed assets on the consolidated balance sheet. The parties may terminate the contract at any time without notice. For the years ended December 31, 2008 and December 31, 2007, the Company paid Orientations approximately $52,000 and $523,000, respectively, for consulting services. For the period from August 10, 2006 (inception) through December 31, 2006, the Company paid Orientations $228,986, consisting of consulting and related costs of $143,445, capital expenditures of $19,660, and an advance of $65,881. The Company expensed the consulting and related costs as the software was still under development as of December 31, 2006 and had not reached technological feasibility. Technological feasibility was reached on February 1, 2007.




F-11




Note 4    Acquisitions and Investments




King of the Cage




On September 11, 2007, the Company acquired the outstanding capital stock of King of the Cage, Inc. (“KOTC”), a promoter of MMA events primarily in the United States. The acquisition was made in order to increase the Company’s event activity. The total purchase price, not including contingent consideration, was $5.0 million consisting of: $3,250,000 cash paid at closing, $500,000 cash paid in November 2007, 178,571 restricted shares of common stock valued at $1,249,997, or $7 per share that were issued in April 2008, plus nominal direct, capitalizable transaction costs. Under the stock purchase agreement, the calculation of the number of common shares to be issued is based upon the quoted market price of the Company’s common stock subject to a maximum per share price of $7.00 and a minimum price of $2.00. Additionally, the Company entered into a five year employment contract with one of the selling shareholders.  The stock purchase agreement also calls for contingent consideration to be paid annually if certain operating results are achieved by KOTC over five years.




For the year ended December 31, 2008, the Company recorded an impairment charge of approximately $4.3 million to reduce the carrying value of goodwill and acquired intangible assets from the KOTC acquisition to their estimated fair value. See Note 12 and 13 for impairment of goodwill and intangible assets during 2008.




Cage Rage




On September 12, 2007, the Company acquired the outstanding capital stock of two entities that promote MMA events: Mixed Martial Arts Promotions Limited, a British domiciled company (“MMAP”), and Mixed Martial Arts Productions Limited, a British domiciled company (“MMAD”) (collectively “Cage Rage”). The acquisition gave the Company an event promotion business in the United Kingdom.  The total purchase price was $8.6 million consisting of: $4,000,000 cash paid at closing, 500,000 shares of restricted common stock issued in October 2007, plus $100,398 of direct transaction costs and an additional $1,000,000 within three business days of the first anniversary of the closing of the transactions, as contemplated in the purchase agreement (subject to any offset for breach of warranty).   Management believes that the cessation of all operations in 2008, coupled with Cage Rage no longer a registered company in the United Kingdom and no further contact with the predecessor owners, satisfactorily resolves any and all issues between the parties.  The Company valued the common stock to be issued at $3.5 million, or $7.00 per share. The purchase price was allocated approximately $0.9 million to accounts receivable, $0.1 million to tangible assets, $1.7 million to amortizable intangible  assets, $3.8 million to non-amortizable intangible assets, $0.5 million to accounts payable and $2.6 million to goodwill





For the year ended December 31, 2008, the Company recorded an impairment charge of approximately $7.2 million to reduce the carrying value of goodwill and acquired intangible assets from the Cage Rage acquisition to their estimated fair value.  See Note 12 and 13 for impairment of goodwill and intangible assets during 2008.




Future Fight Productions, Inc.




On December 7, 2007, the Company acquired substantially all the assets of Future Fight Productions, Inc., (“ICON”) a promoter of MMA events primarily in Hawaii. The acquisition gives the Company additional promotion talent and access to fighters and venues. The assets acquired consisted primarily of a brand name. Additionally the owner of ICON signed a consulting contract with the Company to continue promoting ICON and other Company-run events. The total purchase price was $2.35 million consisting of: $350,000 cash paid at closing and 200,000 shares of restricted common stock, 100,000 of which were issued at closing and the remaining 100,000 are issuable over 3 years. The additional shares have not been issued.  Additionally, the Company was to issue, but has not issued, in three equal installments, 50,000 shares of restricted common stock in connection with the consulting agreement with the seller. The shares were valued at $10 per share. The purchase price was allocated approximately $0.4 million to amortizable intangible assets, $0.6 million to non-amortizable assets and $1.3 million to goodwill. The value of the shares to be issued for the consulting agreement, $500,000, will be recorded into expense ratably over the service period.




For the year ended December 31, 2008, the Company recorded an impairment charge of approximately $2.3 million to reduce the carrying value of goodwill and acquired intangible assets from the ICON acquisition to their estimated fair value. See Note 12 and 13 for impairment of goodwill and intangible assets during 2008.




F-12




Detail of Acquisitions




The following table details the fair value of assets and liabilities acquired at the date of acquisition:




KOTC


Cage Rage


ICON


TotalCurrent assets, exclusive of cash

$
-


$
904,000


$
-


$
904,000Fixed assets


30,000



61,000



-



91,000Intangible assets with indefinite lives


1,700,000



3,800,000



628,000



6,128,000Other intangible assets


1,110,000



1,723,000



410,000



3,243,000Goodwill


2,356,000



2,571,000



1,312,000



6,239,000Current liabilities


(34,000
)


(459,000
)


-



(493,000
)Consideration

$
5,162,000


$
8,600,000


$
2,350,000


$
16,112,000




The Company allocated purchase prices to amortizable intangible assets of $1.9 million to non-compete agreements (with a weighted average amortization period of 3.9 years), fighter contracts of $1.2 million (with a weighted average amortization period of 2 years), and $0.1 million to distribution contracts (with a weighted average amortization period of 2.4 years). The Company recorded amortization expense of approximately $1,029,000 and $356,000 these intangible assets during the years ended December 31, 2008 and December 31, 2007, respectively. As a result of the impairment of intangibles as of September 30, 2008 (Note 13), there will be no amortization expense after December 31, 2008.




Purchase Price Allocations are Estimates




The purchase price allocations for the acquisitions were based upon discounted expected cash flow models. Valuation methods including relief from royalty, excess earnings/contributory asset charges, lost profits, and with and without competition, were applied to the discounted expected cash flow models to determine the value of the intangible assets acquired. The purchase prices of the acquisitions were then allocated based upon the values of intangible assets calculated and the carrying values of assets and liabilities acquires.




SpiritMC




On September 18, 2007, the Company made an investment in Entlian Corporation (“SpiritMC”), a South Korean company promoting MMA events in South Korea. The investment gave the Company access to event promotion in South Korea and to fighters and venues under contract with SpiritMC. The cost of the investment was $2 million consisting of $1 million cash and $1 million in restricted common shares (100,000 common shares valued at $10.00 per share). The $10.00 per share valuation resulted from the Company’s guarantee of a minimum per share value of $10.00 to Entlian. If the Company’s quoted market price is below $10 per share on the date the lock up period expires in March 2009, the Company is required to issue up to 100,000 additional common shares.  The Company has not issued the additional common shares.




The Company acquired approximately 54% of SpiritMC’s common stock. This ownership percentage will dilute down to approximately 32% when SpiritMC’s existing debt facility with a third party mandatorily converts to common stock at any time but no later than January 2010. The Company has one third of the seats on SpiritMC’s Board of Directors, and therefore will not exercise control over SpiritMC. The Company has also determined that it is not the primary beneficiary. As such, the Company accounts for the investment in SpiritMC using the equity method. The Company recorded a charge of approximately $514,000 and $152,000, representing the Company’s share of SpiritMC’s loss for the years ended December 31, 2008 and 2007, respectively. In 2008, The Company incurred an impairment change of $1.3 million related to this investment. See Note 12 and 13 for impairment of goodwill and intangible assets during 2008.




F-13




Note 5    Income Taxes




As a result of the Company’s losses, no income taxes were due for 2008 or 2007. The provision for income taxes was offset by an increase in the deferred tax asset valuation allowance.




As of January 1, 2007, the Company implemented FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in the financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption on FIN 48 did not have an effect on the net loss for the years ended December 31, 2008 and December 31, 2007.




Current income taxes (benefits) are based upon the year’s income taxable for federal, state and foreign tax reporting purposes. Deferred income taxes (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes.




Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income.




The significant components of the Company’s net deferred tax asset at December 31, 2008 and 2007 are as follows:


Year Ended

December 31, 2008


Year Ended

December 31, 2007Net operating loss

$
17,943,000


$
8,664,000Options and warrants


5,598,000



2,428,000Allowance for uncollectible accounts


176,000



107,000Impairment charges


6,078,000



-Accrued expenses


2,517,000



1,023,000Valuation allowance


(32,312,000
)


(12,222,000
)$
-


$
-




In assessing the realizability of deferred tax assets of $32,312,000and $12,222,000 at December 31, 2008 and 2007, respectively, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance has been recorded to offset the deferred tax assets as it is currently more likely than not that the assets will not be utilized. The valuation allowance increased approximately $20.1 and $10.5 million in the years ended December 31, 2008 and 2007, respectively.






F-14




A reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total benefit for income taxes at December 31, 2008 and 2007 is as follows:




Year Ended

December 31, 2008

Year Ended

December 31, 2007Expected benefit at 34%
$
18,893,000

$
9,223,000State benefit, net of federal tax

2,642,000


1,499,000Foreign tax benefit

(1,436,000
)

(206,000)Other

(9,000
)

15,000Change in valuation allowance

(20,090,000
)

(10,531,000
)Benefit for income taxes
$
-

$
-




At December 31, 2008, the Company had net operating loss carryforwards of approximately $41.7 million for federal tax purposes, expiring through 2028. In addition, the Company had net operating loss carryforwards of approximately $41.7 million for state tax purposes, which expire through 2018. However, a change in ownership could result in an “ownership change” under Internal Revenue Code Section 382 which restricts the ability of a corporation to utilize existing net operating losses. The Company also had net operating carryforwards of approximately $11.7 million for UK tax purposes that had been accumulated since acquisition of CageRage.




The Company is subject to Federal and state tax in the United States and tax in the United Kingdom. The tax years 2008, 2009 and 2010 of the parent company remain open to examination by the major taxing jurisdictions to which the Company is subject. The acquired subsidiaries may have earlier years subject to examination. The Company is not currently under examination by any tax authorities.




Note 6    Fixed Assets, Net




Fixed assets, net consisted of the following:




December 31,

2008


December 31,

2007Computer, office and video production equipment

$
342,384


$
535,581Transportation equipment


26,702Furniture and fixtures


340,717



325,481Live event set costs


234,865



236,780Leasehold improvements


232,835



231,335Computer software


87,255



66,193Internet domain names


30,527



28,280Music Licenses


30,000



0Website development costs


349,976



349,9761,675,261



1,773,626Accumulated depreciation and amortization


(943,502
)


(345,078
)$
731,759


$
1,428,548




Note 7    Liabilities




Registration Rights Liability




In connection with the October 2006 private placement, the Company entered into a Registration Rights Agreement with its investment banker. The agreement called for the Company to pay monthly “liquidated damages” to the investment banker if the Company’s registration statement was not declared effective by the Securities and Exchange Commission by March 15, 2007. The liquidated damages commenced on March 16, 2007 and were calculated at 1% per month of the gross private placement proceeds ($10 million) for up to 24 months for each month that the registration statement was not declared effective. The registration statement was ultimately declared effective on May 14, 2007, two months after the liquidated damages commenced. At March 31, 2007, the liability was reduced by $100,000 to $200,000 (two months of liquidated damages) with a corresponding increase to additional paid-in capital.




F-15




On June 27, 2007, an agreement was entered into whereby the investment banker agreed to waive the liquidated damages if the Company files a registration statement covering the resale of the shares underlying the warrants issued in the October 2006 private placement within 45 days of closing another private placement that was in-process at June 30, 2007. The registration statement was declared effective within the specified timeframe on September 5, 2007. Therefore, the Company reclassified the remaining $200,000 liability to paid-in capital.




Notes Payable - Showtime




The Company owed the following related to notes payable:

December 31,

2008


December 31,

2007Note payable - Showtime due March 31, 2009

$
1,822,086


$
1,822,086Note payable - Showtime due June 17, 2009


3,500,000Note payable – Showtime due June 18, 2009


1,000,000Original issue discount and warrant value, unaccreted portion


(297,474
)Accrued interest


317,954



-Total

$
6,342,566


$
1,822,086




The $1.8 million note payable dated December 17, 2007 to Showtime was issued to extend payment of the net amount due to Showtime for television production costs incurred in 2007. In June 2008, Showtime and the Company extended the note due date from December 17, 2008 to March 31, 2009, and the note was given a first priority security interest in the unpledged assets of the Company. The note bears interest at the daily prime rate as published by JPMorganChase bank with interest payable at maturity.




On June 18, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related documents with Showtime. Under the agreements, Showtime funded a note payable by the Company and the Company issued warrants to Showtime. The note has a face value of $3,500,000, of which the Company received $3,000,000 after an original issue discount of $500,000, and a first priority security interest in the unpledged assets of the Company. The note accrues interest at 10% per annum payable at maturity. The note matures on June 17, 2009. The note agreement includes a covenant that the Company maintain a minimum unrestricted cash balance of $550,000. The face value of the note together with accrued, unpaid interest may be prepaid without penalty prior to maturity. The $0.5 million discount from the face value of the note payable will be accreted into the note liability balance over 12 months, the term of the note.




In connection with the financing, the Company issued a warrant to purchase 100,000 shares of common stock. The warrant has an exercise price of $0.01 per share, a term of 36 months and an estimated fair value of $149,040. The warrant value is being amortized to interest expense over 12 months, the term of the note.




On September 10, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related Documents with Showtime. Under the agreement the Company received the note proceeds of $1,000,000. The note bears interest at ten percent (10.0%) per annum, payable at maturity, and matures on June 18, 2009. The Note is secured by a first priority interest in the assets of the Company. The note agreement includes a covenant that the Company maintain a minimum unrestricted cash balance of $550,000. The Note and accrued interest may be repaid, in whole or in part, without penalty at any time prior to maturity. Mandatory repayment of the Note will be made from any license fees due to the Company under the Exclusive Distribution Agreement dated November 16, 2006 between the Company and Showtime.




F-16




See Note 14 for events subsequent to December 31, 2008.




Note 8    Commitments




We maintain our corporate office at 12121 Wilshire Blvd., Suite 1001, Los Angeles, CA 90025 under a long-term lease running through July 2012. Monthly rent payments began at $25,176 and escalate to $36,472.  See Note 14.




Year ending December 31,

Amount2009

$
422,0002010


438,0002011


490,0002012


241,0002013


22,000Thereafter


80,000$
1,693,000




The Company incurred rent expense of approximately $1,302,000 and $349,000, respectively, for the years ended December 31, 2008 and 2007.




The Company entered into contracts with executives, key employees and consultants. These contracts call for following minimum annual payments:




Year ending December 31,

Amount2009

$
1,101,0002010


878,0002011


701,0002012


226,000$
2,906,000




Additionally, some employment contracts include performance bonuses related to the operations of recently acquired businesses. In regards to the King of the Cage subsidiary, the Company pays a bonus equal to 20% of the subsidiary’s earnings before interest, taxes, depreciation and, amortization (“EBITDA”) in excess of specified amounts, escalating from $850,000 to $1.6 million for each of the twelve-month periods ending September 30, 2008 through 2012. In regards to the ICON asset purchase, the Company pays a bonus of $100,000 if the subsidiary’s EBITDA exceeds $196,000 for the twelve-month period ending November 30, 2008.  However, see Note 12 and 13.




F-17




Note 9    Litigation and Potential Claims




On December 14, 2006, the Company received a demand letter (the “Demand Letter”) from counsel for Wallid Ismail Promocoes E Eventos LTDA EPP and Wallid Ismail (collectively “Wallid”). The Demand Letter alleged that the Company entered into a “fully enforceable agreement” to compensate Wallid for allegedly assisting the Company in raising financing, and that the Company or its directors committed unspecified fraudulent acts, misappropriated Wallid’s “confidential and proprietary information,” and engaged in an “intentional and well-orchestrated scheme to wrongfully remove Wallid” as a principal of the Company. Wallid and the Company filed suits and countersuits in federal and state courts. On November 7, 2008, the Company settled the lawsuits.  The settlement required the issuance of 5,000,000 shares of the Company’s common stock cash payments of $650,000 within 60 days of the settlement.  In addition, a payment of $500,000 was due to Wallid on November 7, 2009. The $500,000 note could be settled in cash or 1,000,000 shares of the Company’s common stock.  In 2009, the Company issued 4,000,000 shares of its common stock and the remaining 1,000,000 shares were transferred to Wallid by former officers and directors out of shares that they owned.   The 4,000,000 shares of common stock were valued at $10,200,000. The Company recognized $11,350,000 as legal expense in general and administrative expenses in November 2008.  The $500,000 note was paid with cash of $256,694 plus issuing 6,000,000 shares of the Company’s common stock in 2011.


The Company was a defendant to other lawsuits that have been settled and which did not have a material impact to the Company’s operations or financial condition.




Note 10    Shareholders’ Equity




Common Stock Issued to MMA Live Entertainment, Inc.




On April 3, 2007, the Company issued 320,000 shares of restricted common stock to MMA Live Entertainment, Inc., an affiliate of Frank Juarez “Shamrock” in connection with an agreement to provide MMA-related services. Under this agreement, Shamrock granted the Company the right to promote Shamrock as a fighter and provide other promotional services. The shares were valued at $640,000, based on a fair value of $2.00 per share, and recorded in prepaid services. The value of the shares is being amortized over the three year term of the agreement.




SHOWTIME Securities Purchase




On January 5, 2007, pursuant to a Securities Purchase Agreement the Company entered into with Showtime, the Company issued an aggregate of 1,666,667 units for $5 million in cash, each unit consisting of 3 shares of common stock and a three-year warrant to purchase 1 share of common stock at a per share exercise price of $2.00 to Showtime, at a per unit price of $3.00. The warrants were valued at $345,000. Additionally, the Company issued a seven-year warrant to purchase 2.5 million shares of common stock to Showtime at a per share exercise price of $2.00, as additional consideration of the exclusive distribution agreement entered into in November 2006. These warrants have been valued at $608,000 and are being amortized into operations over a three-year period commencing January 5, 2007. This warrant was written off in the fourth quarter of 2008 when the Company ceased operations.  The Showtime warrants were exercisable as of the date of grant.




The values of the Showtime warrants were estimated using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 60%, risk free interest rate of 4.7%, and expected lives of 3 years.




Private Placement of Common Stock and Warrants




In the third quarter of 2007, the Company and selling shareholders finalized a private placement of common stock and warrants. Investors in the private placement purchased 3,571,429 units for $25,000,000 of which the Company received $22.5 million. Each unit was priced at $7.00 and consisted of one share of common stock and one-half warrant to purchase one share of common stock at $7.00 per share. The warrants have a term of five years and a cashless exercise feature. The warrants were determined to have a value of $4.9 million, or $2.74 per warrant, using a Black-Scholes pricing model. The Company and selling security holders paid the placement agent a fee of 10% of gross proceeds, or $2,500,000. Additionally, the Company issued to the underwriter five-year, cashless-exercise warrants to purchase 3,571,428 shares of common stock at $7.00 per share. The value of the warrants given to the placement agent were $2.74 per warrant, or $9.8 million. The value of all warrants issued was charged to equity.




F-18




Under the agreement with the placement agent, the Company granted the placement agent the right to nominate two members to the Board of Directors (including the placement agent’s existing nominee) and signage rights at three of the Company’s events per year for two years. The Company indemnified the placement agent for certain claims that may arise in connection with the private placement, agreed to pay up to $50,000 in costs for tombstone ads, and agreed to pay the placement agents legal costs, subject to a minimum of $25,000.




Holders of the Company’s common stock, options and warrants were allowed to sell 10% of the shares in the placement for $2,500,000. The placement was comprised of 3,214,286 shares of common stock from the Company, 357,143 shares of common stock from selling security holders and 1,785,715 investor warrants from the Company. The Company received net proceeds from the investors of $20.2 million which was allocated $4.4 million to warrants and the residual of $15.8 million to common shares, or $5.48 per share. The Company also received $100,214 from the selling security holders who exercised warrants and stock options in order to participate in the offering.




The Company registered the resale of the shares of common stock sold in the above offering along with warrants issued to investors and underwriters of the Company’s private placement in October 2006 with the Securities and Exchange Commission in a registration statement declared effective on September 5, 2007.




Stock-Based Compensation




The Company adopted its 2006 Stock Option Plan and amended the plan in 2007, reserving a total of 8,000,000 shares. The plan provides for the issuance of statutory and non-statutory stock options to employees, directors and consultants, with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Options granted under the plan generally vest quarterly over four years and have a life of 10 years. As of December 31, 2008, options to purchase 4,420,680 shares of common stock had been granted under these plans.




The Company accounts for stock-based compensation arrangements with its employees, consultants and directors in accordance with SFAS No. 123 (revised), “Share-Based Payment” (SFAS No. 123R). Under the fair value recognition provisions of SFAS No. 123R, the Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes compensation expense over the requisite service period, which is generally the vesting period. For the years ended December 31, 2008 and 2007, the Company incurred approximately $5.0 million and $1.0 million, respectively, of expense related to stock based compensation under this plan and approximately $2.4 million and $3.7 million respectively, of expense related to warrants.




Stock Options




The Company uses a Black-Scholes option pricing model to estimate the fair value of stock-based awards with the assumptions noted in the following table.




Year Ended

December 31,

2008

Year Ended

December 31,

2007Risk-free interest rate
1.84- 3.41%


4.07- 5.09%Expected life, in years
.7 – 1.6


5.0 - 6.5Expected volatility
96%


60% - 96%Dividend yield
0.0%


0.0%




Expected volatility is based on the historical volatility of the share price of companies operating in similar industries. The expected term is based on management’s estimate of when the option will be exercised which is generally consistent with the vesting period. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.




F-19




The following table represents stock option activity for the years ended December 31, 2008 and 2007:




Plan

Options


Weighted

Average

Exercise

PriceOutstanding at December 31, 2006


1,570,000


$
2.00Granted


3,745,000


$
3.00Expired


-


$
-Cancelled


-


$
-Forfeited


(364,014
)

$
2.00Exercised


(75,127
)

$
2.01Outstanding at December 31, 2007


4,875,859


$
2.77Granted


1,450,000


$
2.03Cancelled


(5,809
)

$
2.00Forfeited


(2,149,230
)

$
2.68Exercised





$Outstanding at December 31, 2008


4,170,820


$
2.42Exercisable as of December 31, 2008


3,285,701


$
2.37




At December 31, 2008 there was approximately $1.6 million of unrecognized compensation cost related to non-vested options, which is being expensed over future years.




At December 31, 2008, the aggregate intrinsic value of options outstanding and exercisable was approximately $181,000 and $144,000, respectively.  The weighted average grant date fair value of options granted during 2008 was $1.23 per share.  The weighted average remaining life of outstanding and exercisable options was 2.8 and 1.9 years, respectively.
  A summary of the status of the Company’s nonvested shares as of December 31, 2008 and changes during the year then ended is presented below:
  SharesDecember 31, 2007


3,494,965Granted


1,450,000Vested


(1,760,938
)Forfeited / Expired


(2,298,908
)December 31, 2008


885,119


On January 8, 2007, the Company granted stock options to a new director to purchase 100,000 shares of common stock with an exercise price of $2.00 per share. The options have a fair value of approximately $55,000, which was charged to expense in January 2007 as the options vested immediately and the director subsequently resigned from the board of directors in the month of issuance. The options have a term of 10 years.




On January 8, 2007, the Company issued to an officer, an option to purchase 1,700,000 shares of common stock at $2.00 per share. The options vested 340,000 shares immediately with the remainder vesting over four years. The term of the option is 10 years. The option has a fair value of approximately $1,075,000, and approximately $229,000 was amortized in January 2007 with the balance being amortized on a straight-line basis over the vesting period. In September 2007, the service period of these options was shortened to four years. The remaining compensation expense is being recognized over the shortened term.




During the quarter ended March 31, 2007, the Company granted 840,000 options to employees in individual grants ranging from 10,000 to 300,000 options. The options have exercise prices from $2.00 to $2.50, vest over 1.75 to four years and have terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $500,000 and is being amortized on a straight-line basis over the vesting period.




During the quarter ended June 30, 2007, the Company granted 495,000 options to employees in individual grants ranging from 10,000 to 100,000 options, with exercise prices ranging from $2.00 to $6.00, vesting over three to four years and terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $408,000 and is being amortized on a straight-line basis over the vesting period.




During the quarter ended September 30, 2007, the Company granted 340,000 options to employees in individual grants ranging from 10,000 to 200,000 options, with exercise prices ranging from $6.00 to $7.00, vesting over four years and terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $1.1 million and is being amortized on a straight-line basis over the vesting period.




During the quarter ended September 30, 2007, option holders, including those who participated in the private placement described above, exercised 75,127 options and paid the Company exercise proceeds of approximately $151,000.




F-20




During the quarter ended December 31, 2007, the Company granted 270,000 options to employees in individual grants ranging from 20,000 to 50,000 options, with exercise prices of $7.00, vesting over four years and terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $1.4 million and is being amortized on a straight-line basis over the vesting period.




On March 3, 2008 the Company granted stock options to an officer to purchase 1,000,000 shares of common stock at $2.00 per share.  The options vest over 23 months and have an exercise price of $2.00.  The fair value of the options at the date of the grant was approximately $1.5 million and is being amortized on a straight-line basis over the vesting period.




During the quarter ended March 31, 2008, the Company granted 10,000 options to an employee. The option grant had an exercise price of $7.01, vests over four years and has a term of 10 years. The aggregate fair value of these options at the dates of grant was approximately $12,000 and is being amortized on a straight-line basis over the vesting period.




During the quarter ended June 30, 2008, the Company granted 295,000 options to employees in individual grants ranging from 20,000 to 100,000 options, with exercise prices of $2.00, vesting over three to four years and terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $0.4 million and is being amortized on a straight-line basis over the vesting period.




During the quarter ended September 30, 2008, the Company granted 120,000 options to employees in individual grants ranging from 20,000 to 100,000 options, with exercise prices of $2.00, vesting over four years and terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $0.1 million and is being amortized on a straight-line basis over the vesting period.




There were no options granted during the quarter ended December 31, 2008.




Warrants




The Company uses a Black-Scholes option pricing model to estimate the fair value of warrants with the assumptions noted in the following table.


Year Ended

December 31,

2008

Year Ended

December 31,

2007Risk-free interest rate
1.87- 2.71%

3.91% - 5.11%Expected life, in years
1.5 – 3.1

1.5 - 6.0Expected volatility
96%

60% - 96%Dividend yield
0.0%

0.0%




The following table represents warrant activity for the years ended December 31, 2008 and December 31, 2007:


Warrants


Weighted

Average

Exercise PriceOutstanding at December 31, 2006


10,453,333


$
1.92Granted


27,123,310


$
3.64Expired


(5,000
)

$
3.00Exercised


(7,071,506
)

$
4.53Outstanding at December 31, 2007


30,500,137


$
2.85Granted


4,817,000


$
2.60Expired


(47,917
)

$
4.96Exercised


(4,750,000
)

$
2.00Forfeited


(617,083
)

$
7.20Outstanding at December 31, 2008


29,902,137


$
2.90Exercisable at December 31, 2008


12,310,887


$
3.01





At December 31, 2008, the aggregate intrinsic value of warrants outstanding and exercisable was approximately $1.6 million and $1.4 million, respectively.  The weighted average remaining useful life of outstanding and exercisable warrants was 4.1 and 3.9 years, respectively.  The weighted average grant date fair value of warrants granted in 2008 was approximately $1.16 per share.  The total intrinsic value of warrants exercised in 2008 was approximately $12 million.




F-21




At December 31, 2008 there was approximately $24.1million of unrecognized cost related to non-vested warrants (including approximately $23.7 million of unrecognized cost related to Burnett warrant tranches three through nine, which is discussed below), which is being expensed over future years.




During the quarter ended March 31, 2007, the Company issued 390,000 warrants with exercise prices ranging from $2.00 to $3.25 to consultants for services and 4,166,667 warrants to Showtime, as discussed elsewhere in this footnote. The value of the warrants issued to consultants was calculated as approximately $107,000.




During the quarter ended June 30, 2007, the Company issued 157,000 warrants with exercise prices ranging from $2.00 to $6.00 to consultants for services. The value of the warrants issued to consultants was calculated as approximately $54,000.




On June 20, 2007, an unrelated party in the Company’s October 2006 private placement exercised, on a cashless basis, 250,000 warrants and received 208,333 shares of restricted common stock. These shares were registered for resale in September 2007.




During the quarter ended September 30, 2007, other warrant holders, who participated in the private placement described above, exercised 3,745 warrants and paid the Company exercise proceeds of approximately $7,000.




During the quarter ended September 30, 2007, the Company issued 52,000 warrants with exercise prices ranging from $6.00 to $7.00 to consultants for services. The value of the warrants issued to consultants was calculated as approximately $125,000. The value of these warrants was fully expensed during the quarter ended September 30, 2007 based on the expected service period.




During the quarter ended September 2007, the Company issued a total of 5,357,143 warrants to investors and its placement agent in connection with a private placement. See Private Placement of Common Stock and Warrants aforementioned in this footnote.




During the quarter ended September 30, 2007, investors in the Company’s private placements exercised 3,246,333 warrants on a cashless exercise basis for 2,790,707 shares of common stock.




During the quarter ended December 31, 2007, the Company issued 52,500 warrants with exercise prices of $7.01 to consultants for services. The value of the warrants issued to consultants was calculated as approximately $239,000. The value of these warrants is being expensed over service periods ranging from one to four years.




During the quarter ended December 31, 2007, the Company’s private placement agent exercised 3,571,428 warrants on a cashless exercise basis for 1,847,290 shares of common stock.




During the quarter ended March 31, 2008, the Company issued 4,000,000 warrants with exercise prices of $2.00 to Showtime, as discussed above. In addition, Showtime exercised on a cashless basis 2.0 million warrants at $2.00 per share for 2,000,000 shares of common stock.  Also during the quarter ended March 31, 2008, the Company’s placement agent for prior financings exercised on a cashless basis 2.75 million warrants at $2.00 per share for 2,016,667 shares of common stock. In addition, during the quarter ended March 31, 2008 the Company issued 289,500 warrants with exercise prices ranging from $5.00 to $7.01 to consultants for services.  The value of the warrants issued to the consultants was approximated $568,000. The value of these warrants is being expensed over the service periods ranging from one month to four years.




During the quarter ended June 30, 2008, the Company issued 100,000 warrants with exercise prices of $0.01 per share to Showtime.




During the quarter ended June 30, 2008 the Company issued 300,000 warrants with exercise prices ranging from $7.01 to $8.00 to consultants for services.  The value of the warrants issued to the consultants was approximated $294,000.  The value of these warrants is being expensed over the service periods ranging from sixteen to twenty five months.






F-22




Burnett Warrants




Effective June 15, 2007 (and as amended on June 28, 2007) and June 1, 2008, the Company entered into an agreement (the "Series Agreement") with JMBP, Inc. ("MBP"), wholly-owned by Mark Burnett ("Burnett") in connection with a possible television series involving mixed martial arts ("Series"). It is anticipated that, as a condition to involvement in the Series, each of the Series contestants will sign a separate agreement with the Company or an affiliate of the Company for services rendered outside of the Series. MBP will own all rights to the Series. The Company and MBP will jointly exploit the Internet rights in connection with the Series on ProElite.com and other websites controlled by ProElite.com. The Company will be entitled to a share of MBP's Modified Adjusted Gross Proceeds, as defined. Subject to specified exceptions, MBP and Mark Burnett have agreed to exclusivity with respect to mixed martial arts programming. The term of the Agreement extends until the earlier of the end of the term of the license agreement with the broadcaster of the Series (the “License Agreement”) or the failure of MBP to enter into a License Agreement by June 15, 2008.




Pursuant to the Series Agreement, the Company and Burnett entered into a Subscription Agreement (the “Subscription Agreement”) relating to the issuance to Burnett of warrants to purchase up to 17,000,000 shares of the Company's common stock. The warrants are divided into nine tranches as follows:




Tranche

Number of Shares

under Warrants

Vesting DateOne

2,000,000

June 15, 2007Two

2,000,000

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

2,000,000

Date of execution of a License Agreement During the quarter ended March 31, 2008, the Company issued 4,000,000 warrants with exercise prices of $2.00 During the quarter ended March 31, 2008, the Company issued 4,000,000 warrants with exercise prices of $2.00 to Showtime, as discussed above. Also during the quarter ended March 31, 2008, the Company’s placement agent for prior financings exercised on a cashless basis 2.75 million warrants at $2.00 per share for 2,016,667 shares of common stock.



During the quarter ended June 30, 2008, the Company issued 100,000 warrants with exercise prices of $0.01 per share to Showtime, as discussed above and also issued 100,000 warrants with an exercise price of $8.00 per share.

to Showtime, as discussed above. Also during the quarter ended March 31, 2008, the Company’s placement agent for prior financings exercised on a cashless basis 2.75 million warrants at $2.00 per share for 2,016,667 shares of common stock.



During the quarter ended June 30, 2008, the Company issued 100,000 warrants with exercise prices of $0.01 per share to Showtime, as discussed above and also issued 100,000 warrants with an exercise price of $8.00 per share.Four

1,000,000

The date that the first episode of the Series is broadcast on a network or cable broadcaster.Five

1,000,000

The last day of the first season.Six

2,000,000

The last day of the second season.Seven

4,000,000

1,333,333 shares to be vested on the last day of each of third, fourth and fifth seasons, respectively.Eight

2,000,000

1,000,000 shares to be vested on the date of broadcast of each of the first two derivative pay-per-view events.Nine

1,000,000

500,000 shares to be vested on the date of broadcast of each of the next two derivative pay-per-view events.




The vesting date of each tranche is subject to acceleration under certain circumstances. However, the warrants are not exercisable if a License Agreement is not entered into by June 15, 2008, except for 1,000,000 warrants from tranche one. Additionally, the warrants and any shares purchased through exercise of the warrants are subject to forfeiture, except for 1,000,000 warrants from tranche one, if a License Agreement is not entered into within one year of the effective date.




F-23




The warrants have an exercise price of $3.00 per share. The exercise price is reduced if the Company issues or sells shares of its common stock, excluding shares issued as compensation for services or in connection with acquisitions, for less than $3.00 per share. The expiration date for a particular tranche of Warrants is the latest to occur of (i) June 15, 2013; (ii) the date which is one year after the vesting date of any such tranche, and (iii) one year after the expiration of the term of the License Agreement.




The value of the warrants under the June 1, 2008 amendment was calculated as approximately $2,637,000 for tranche one and $2,880,000 for tranche two using a Black-Scholes option pricing model with the following assumptions: expected term of 3 years (for tranche one) and from 3 to 4 years (for separate 500,000 vesting blocks of tranche two), expected volatility of 60%, risk-free interest rate of 4.7% and dividend yield of 0%. The value of the tranche one warrants was charged to expense in June 2007. The value of the tranche two warrants is being amortized to expense over the vesting period of each 500,000 warrant vesting block (i.e., from 1 to 4 years).




The value of warrants in tranches three through nine was calculated as approximately: $3.7 million (tranche three), $1.8 million (tranche four), $1.8 million (tranche five), $3.6 million (tranche six), $7.2 million (tranche seven), $3.6 million (tranche eight), and $1.8 million (tranche nine) or approximately $23.5 million in aggregate. The values were calculated using a Black-Scholes option pricing model with an expected term of 6 years, expected volatility of 60%, risk-free interest rate of 4.7% and dividend yield of 0%. The Company will begin expensing the value of these tranches once there is a reasonable likelihood of achieving the performance criteria of each tranche (as described above) and would be based on the current values at that time. At December 31, 2008 and 2007, the Company recognized no expense related to tranches three through nine.




Note 11    Related Party Transactions




The Company entered into a television production and distribution agreement with Showtime, which is also an investor in the Company. In February 2008, subsequent to year end, the Company and Showtime offset approximately $2 million of the amount due to Showtime and $240,133 of accounts receivable due from Showtime into a note payable of $1,822,086 due on December 15, 2008. The note bears interest at the daily prime rate as published by JPMorganChase bank. Because the note was executed prior to issuance of the financial statements, the amounts due to and from Showtime are offset on the financial statements at December 31, 2007.




On June 18, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related documents with Showtime. Under the agreements, Showtime funded a note payable by the Company and the Company issued warrants to Showtime. The note has a face value of $3,500,000, of which the Company received $3,000,000 after an original issue discount of $500,000, and a first priority security interest in the unpledged assets of the Company. The note accrues interest at 10% per annum payable at maturity. The note matures on June 17, 2009. The $0.5 million discount from the face value of the note payable will be accreted into the note liability balance over 12 months, the term of the note.




In connection with the financing, the Company issued a warrant to purchase 100,000 shares of common stock. The warrant has an exercise price of $0.01 per share, a term of 36 months and an estimated fair value of $149,040. The warrant value is being amortized to interest expense over 12 months, the term of the note.




On September 10, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related Documents with Showtime. Under the agreement the Company received the note proceeds of $1,000,000. The note bears interest at ten percent (10.0%) per annum, payable at maturity, and matures on June 18, 2009.




During the quarter ended March 31, 2008, the Company issued 4,000,000 warrants with exercise prices of $2.00 to Showtime. In addition, Showtime exercised 2.0 million warrants at $2.00 per share for 2,000,000 shares of common stock.  Also during the quarter ended March 31, 2008, the Company’s placement agent for prior financings exercised on a cashless basis 2.75 million warrants at $2.00 per share for 2,016,667 shares of common stock


On February 21, 2008, the Company issued a warrant to purchase 2,000,000 shares of common stock at an exercise price of $2.00 per share was issued to Showtime.  The warrant was valued at 2.3 million and was charged to cost of revenue during 2008.


The Company earns revenue from and incurs expenses to Showtime/CBS in connection with this agreement. During the years ended December 31, 2008 and December 31, 2007, the Company recorded revenue of approximately $3.5 million and $0.2 million, respectively.  During the years ended December 31, 2008 and December 31, 2007, the Company incurred approximately $0.6 million and $2.9 million of television production expenses charged by Showtime to the Company or paid by the Company to Showtime/CBS, respectively.




F-24




The Company entered into a three-year term consulting agreement and pays a monthly fee of $30,000 to Santa Monica Capital Partners II (“SMCP”) for services relating to strategic planning, investor relations, acquisitions, corporate governance and financing. The monthly fee was subsequently increased to $31,500 as of October 1, 2007 and $33,075 as of October 1, 2008. SMCP is a shareholder in the Company and is partially-owned by Directors of the Company. Beginning as of August 1, 2008 SMCP agreed to defer payment on the monthly fees and $162,225 was owed as of December 31, 2008.  During the years ended December 31, 2008 and 2007, the Company was charged $382,725 and $390,000, respectively.  The Company also incurred costs of approximately $139,000 and $200,000, respectively, for services paid on behalf of SMCP.




The Company engaged Orientation Networks, a company partially owned by stockholders of the Company, to provide computer programming services.  During the years ended December 31, 2008 and 2007, the Company was charged approximately $52,000 and $523,000, respectively, for these services.
  In 2007, the Company engaged in a dual branded advertising and promotion campaign with a company partially owned by stockholders of the Company.  The Company incurred charges amounting to $40,000 for this campaign.


The Company used travel and event organizing services provided by a company that was partially-owned by stockholders of the Company. In 2007, the Company paid approximately $135,000 for these services.




In July 2007, the Company co-promoted a live event in the UK with CageRage prior to the Company’s acquisition of CageRage. From the event, the Company recorded revenue of approximately $350,000, expenses of approximately $706,000. Upon the acquisition of CageRage, the net liability payable to CageRage of approximately $356,000 was reclassified an intercompany liability which was eliminated in consolidation.




Note 12     Discontinued Operations




Effective October 20, 2009, Management with Board ratification, decided to close or sell all operations.  As of October 28, 2008 management had a disposal or sale plan for all of the operations.




The results of King of the Cage have been included as discontinued operations and are as follows:




Year Ended


Year Ended12/31/2008


12/31/2007Net revenues

$
1,738,706


$
799,893Cost of revenues


1,395,054



553,773Gross profit (loss)


343,652



246,120Operating expenses


650,262



296,200Impairment charge


4,268,344



-Other income (expense)


-



30Income (loss) from discontinued operations before income taxes


(4,574,954
)


(50,110
)Income taxes


-



-Income (loss) net of tax


(4,574,954
)


(50,110
)Gain on sale


-



-Results from discontinued operations net of income taxes

$
(4,574,954
)

$
(50,110
)Impact on company’s income (loss) per share:Basic

$
(0.08
)

$
0.00Diluted

$
(0.08
)

$
0.00




F-25




The results of Cage Rage included as discontinued operations are as follows:
  Year Ended


Year Ended12/31/2008


12/31/2007Net revenues

$
1,518,453


$
521,065Cost of revenues


2,157,676



1,412,236Gross profit (loss)


(639,223
)


(891,171
)Operating expenses


2,391,291



583,465Impairment charge


7,226,725



-Other income (expense)


2,917



(1,498
)Income (loss) from discontinued operations before income taxes


(10,254,322
)


(1,476,134
)Income taxes


-



-Income (loss) net of tax


(10,254,322
)


(1,476,134
)Gain on sale


-



-Results from discontinued operations net of income taxes

$
(10,254,322
)

$
(1,476,134
)Impact on company’s income (loss) per share:Basic

$
(0.19
)

$
(0.03
)Diluted

$
(0.19
)

$
(0.03
)




The results of ProElite operations included as discontinued operations are as follows:




Year Ended


Year Ended12/31/2008


12/31/2007Net revenues

$
9,303,248


$
3,970,612Cost of revenues


14,576,039



10,722,369Gross profit (loss)


(5,272,791
)


(6,751,757
)Operating expenses


1,299,434



1,613,824Impairment charge


2,274,834



-Other (income) expense


-



-Income (loss) from Continued operationsbefore income taxes


(8,847,059
)


(8,365,581
)Income taxes


-



-Results from discontinued operations net ofincome taxes

$
(8,847,059
)

$
(8,365,581
)Impact on company’s (loss) per share:Basic

$
(0.16
)

$
(0.18
)Diluted

$
(0.16
)

$
(0.18
)






F-26


Note 13       Impairment of Goodwill and Intangible Assets




In 2008 the Company incurred impairment charges of $1.5 million related to its investment in Entlian Corporatione.  There were no impairment charges in 2007.  The Company also recognized impairment charges of $12.7 million that are reported in discontinued operations.




Note 14    Subsequent Events




On October 20, 2008, management, with Board ratification, decided to close or sell all operations and began an extended period of restructuring its balance sheet, divesting itself of certain assets, settlement of contingent liabilities, and attempting to raise additional capital.  All entities and transactions related to these operations have been reported as discontinued operations in the financial statements.


On February 5, 2009, CBS and Showtime entered into a General Mutual Release and Termination Agreement (the “Release and Termination Agreement”) with the Company and certain of its subsidiaries pursuant to which the parties agreed to a mutual release and termination of any and all claims, agreements, debts, liens, damages or liabilities of any nature, now existing or hereafter arising, including, without limitation, termination of the Distribution Agreement, the Note Purchase Agreement and the Security Agreement and cancellation of all indebtedness of the Company to Showtime under the promissory notes dated December 17, 2007 (as amended June 17, 2008), June 18, 2008 and September 10, 2008. Notwithstanding the foregoing, the Release and Termination Agreement excluded certain matters which shall continue in full force and effect.  Under the agreement, the Company will record a gain resulting from debt forgiveness in the first quarter of 2009.




On February 5, 2009, ProElite, Inc. (the “Company”) and its wholly-owned subsidiary, EliteXC Live (together with the Company, the “Sellers”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) and other related agreements with Explosion Entertainment, LLC (“Strikeforce”). Under the terms of the Purchase Agreement, Strikeforce acquired from the Sellers certain EliteXC fighter contracts, a library of televised EliteXC events and specified related assets.Consideration paid for the assets consisted of (i) $3 million in cash paid at closing, (ii) the assumption of certain liabilities relating to the assets sold and (iii) contingent consideration in the form of rights to receive a portion of the license fee earned by Strikeforce under a distribution agreement between Strikeforce and Showtime Networks Inc. (“Showtime”).  The license fee is payable to the Sellers until February 28, 2012, subject to limited extensions. The Purchase Agreement contains typical representations and warranties by the Sellers regarding the Sellers’ business, operations and financial condition.  Each party agreed to indemnify the other party for breaches of representations, warranties, and covenants, subject to certain limitations. In connection with the closing of the transactions under the Purchase Agreement, the Sellers also entered into certain non-exclusive license agreements with Strikeforce, pursuant to which Strikeforce will license from the Sellers certain trademarks and other specified intellectual property.  As a result of the Purchase Agreement, the Company is entitled to receive license fee income on certain Strikeforce productions through the first quarter of 2012.  Due to the sale, the Company will recognize a gain on sale of assets in the first quarter of 2009.




As of April 20, 2009, the Company terminated its lease agreement for its corporate office space, surrendered the leasehold improvements with a net book value of approximately $319,000 and entered into a new agreement with the landlord for a three month lease term with monthly renewal options.  The base rent is $8,000 per month.  The Company had no obligation under the previous lease agreement.


On May 13, 2009, ProElite, Inc. and EliteXC, Inc. (together as “Company”) entered into an agreement with Kevin Ferguson (“Fighter”) pursuant to which the Company obligation to provide future bouts and payments to Fighter was retired and the unarmed combatant promotional agreement as amended (the “UCPA Agreement”) between the Company and Fighter was terminated (the “Termination Agreement”).  Under the terms of the Termination Agreement, Company and Fighter agreed that except for certain ancillary rights previously granted and defined under the UCPA Agreement (the “Ancillary Rights”), the UCPA Agreement and all rights and obligations arising thereunder were terminated and Company and Fighter  mutually released each other with respect to, among other things, any and all claims, agreements, debts, liens, damages or liabilities of any nature, including, without limitation, any liabilities arising under the UCPA Agreement. It was further agreed under the Termination Agreement that none of the parties shall be required to make any further payment to another Party in connection with the UCPA Agreement.




On July 9, 2009, the Company, Mark Burnett and his affiliate JMPB, Inc. entered into a Settlement Agreement and Mutual Release. Under the release, the parties terminated the following agreements between them, except as to certain limited provisions: (1) an agreement related to a reality television series then-entitled “Mixed Martial Arts Reality Show” (a/k/a “Bully Beatdown”); (2) a Subscription Agreement and together with certain other parties, an Investor Rights Agreement; (3) a warrant issued to Burnett dated as of May 17, 2007 (as amended, the “Warrant”); (4) an Amendment to Warrant and Related Agreements (“First Underlying Amendment”) as of June 28, 2007, and (5) a Second Amendment to Warrant and Related Agreements (“Second Underlying Amendment”) as of June 1, 2008 (the Underlying Agreement, Subscription Agreement, Investor Rights Agreement, Warrant, First Underlying Amendment and Second Underlying Amendment are collectively referred to herein as the “Underlying Documents”). The terminated agreements principally related to the Company’s prior rights with respect to the exploitation and development of the Series, and equity rights arising from the Warrant and related investor rights. In addition, the parties settled and resolved fully and finally any and all grievances, disputes, controversies, differences, and claims between the parties arising out of or relating to the Underlying Documents that exist or may exist between them, as of the date of the release.




F-27






On July 10, 2009 the Company in an effort to settle contingent liabilities consummated a strict foreclosure under the California Commercial Code in which an entity affiliated with Terry Trebilcock and Juliemae Trebilcock (the “Secured Parties”) acquired all of the outstanding stock of the Company’s wholly-owned subsidiary, King of the Cage, Inc. (“KOTC”) and certain other related assets.  The strict foreclosure was effected pursuant to an Acceptance Of Collateral In Full Satisfaction Of Obligations At Less Than Face Value And Purchase Agreement, dated July 9, 2009 (the “Agreement”) between the Company, on the one hand, and the Secured Parties and their affiliated entity, KOTC Acquisition, LLC (“Acquisition”), on the other hand.  Mr. Trebilcock was the President of KOTC at the time the strict foreclosure was consummated.  In addition to settling all outstanding claims, allegations and prior contracts between them, the Company received at closing certain earn-out rights, as described below and the Acquiror and the Secured Parties accepted the KOTC stock, in a “strict foreclosure”, in full satisfaction of all prior obligations between the parties.


Effective October 12, 2009, the Company entered into a Strategic Investment Agreement with Stratus Media Group, Inc. (“SMGI”) pursuant to which the Company agreed to sell to SMGI, and SMGI agreed to purchase from the Company, shares of the Company’s Series A Preferred Stock (the “Preferred Shares”).  The Preferred Shares are convertible into the Common Stock of the Company.  The amount of shares of Common Stock issuable upon conversion on a cumulative basis is equal to 95% of the sum of (a) the issued and outstanding shares of the Company as of the closing plus (b) any shares of the Company’s Common Stock issued after the closing upon exercise or conversion of any derivative securities of the Company outstanding as of the closing, subject to any adjustment for stock splits, stock dividends, recapitalizations etc. and, in all cases, after giving effect to the shares issuable upon conversion of the Preferred Shares.  The purchase price of the Preferred Shares is $2,000,000 which will be used by the Company for payment of outstanding liabilities, general working capital and other corporate purposes and repayment of all amounts due under a note of the Company with respect to advances made to the Company by SMGI of $100,000.  Upon closing, all of the current directors of the Company resigned and the board of directors of the Company will consist of two designees of SMGI and one designee of the Company.  Paul Feller, SMGI’s Chief Executive Officer, became the Company’s Chief Executive Officer.  Certain present and former key Company executives continued with the Company.  The acquisition was completed on June 14, 2011.

























F-28


SIGNATURES




In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




ProElite, Inc.Date:  November 18, 2011
By:
/s/ Paul FellerPaul FellerChief Executive Officer and Chairman of the BoardDate:  November 18, 2011
By:
/s/ Charles R. BearchellCharles R. BearchellChief Financial Officer




In accordance with the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.




Signature
Title
Date/s/ Doug DeLuca
Director
November 18, 2011Doug DeLuca/s/ Glen Golenberg
Director
November 18, 2011Glen Golenberg















EXHIBIT INDEX
  Exhibit No.

Exhibit Description2.1

Share Exchange Agreement dated as of October 3, 2006 among the Company, Santa Monica Capital Partners II, LLC, Douglas DeLuca, Gary Shaw, Lifelogger, LLC, Pro Camp Enterprises LLC, Jarred Shaw, Hunter World Markets, Inc., and David Ficksman. (1)4.1

Amendment to Warrant and Related Agreements by and between JMBP, Inc., Mark Burnett and ProElite, Inc. dated June 28, 2007. (3)4.2

Form of Warrant issued to Mark Burnett on June 15, 2007. (2)4.3

Form of Investor Warrant dated as of June 29, 2007. (3)4.4

Form of Registration Rights Agreement dated as of June 29, 2007 between ProElite, Inc. and the Purchasers named therein and Hunter World Markets, Inc. (3)4.5

Placement Agent Warrant issued to Hunter World Markets, Inc. dated as of June 29, 2007. (3)4.6

Form of Lock-Up Agreement. (5)4.7

Form of Vested Warrant issued to CBS Entertainment dated February 22, 2008.4.8

Form of Broadcast Warrant issued to CBS Entertainment dated February 22, 2008.10.1

Form of Securities Purchase Agreement dated as of June 29, 2007, by and among ProElite, Inc. and the Purchasers named therein. (3)10.2

Placement Agent Agreement dated as of June 25, 2007, between ProElite, Inc. and Hunter World Markets, Inc. (3)10.3

Form of Agreement between Company and Selling Shareholder. (5)10.4

Waiver and Amendment to Registration Rights Agreement, dated as of June 27, 2007. (4)10.5

Investment Agreement dated August 24, 2007, by and among ProElite, Inc., Entlian Corporation and CJ Media Inc. (7)10.6

Purchase Agreement dated September 11, 2007, by and among ProElite, Inc., Belgravia Entertainment International Limited and John Faraday. (6)10.7

Stock Purchase Agreement dated as of September 11, 2007, by and among ProElite, Inc., King of the Cage, Inc., and the shareholders of King of the Cage. (6)10.8

Employment Agreement dated as of September 11, 2007, by and between ProElite, Inc and Terry Trebilcock. (6)10.9

Stock Pledge Agreement dated as of September 11, 2007, between ProElite, Inc., as pledgor and Terry Trebilcock and Juliemae Trebilcock, as pledges. (6)









10.10

Asset Purchase Agreement dated as of September 21, 2007, by and among ProElite, Inc., Future Fight Productions, Inc., and the shareholders of Future Fight Productions, Inc. (8)10.11

Amendment to Asset Purchase Agreement, dated December 7, 2007, by and among ProElite, Inc., Future Fight Productions, Inc., Thomas Jay Thompson and Odd Haugen. (9)10.12

Consulting Agreement, dated December 7, 2007, by and among ProElite, Inc., FFP, Inc. and Thomas Jay Thompson. (9)10.13

Subscription Agreement dated as of February 22, 2008 between ProElite, Inc. and Showtime Networks Inc. (10)10.14

Investor Rights Amendment dated as of February 22, 2008 between ProElite, Inc. and Showtime Networks Inc. (10)10.15

CBS Broadcast Agreement. (11)



Portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

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







(1)
Previously filed in connection with the Company’s registration statement on Form SB-2, originally filed on January 7, 2007 and declared effective on May 14, 2007.




(2)
Previously filed on June 18, 2007 with the current report on Form 8-K.





(3)
Previously filed on July 18, 2007 with the current report on Form 8-K.





(4)
Previously filed on July 16, 2007 with the current report on Form 8-K.





(5)
Previously filed in connection with the Company’s registration statement on Form SB-2, originally filed on August 24, 2007 and declared effective on September 5, 2007.





(6)
Previously filed on September 17, 2007 with the current report on Form 8-K.





(7)
Previously filed on September 21, 2007 with the current report on Form 8-K.(8)
Previously filed on November 19, 2007 with the quarterly report on Form 10-Q.(9)
Previously filed on December 13, 2007 with the current report on Form 8-K.(10)
Previously filed on February 28, 2008 with the current report on Form 8-K.(11)
Previously filed on April 15, 2008 with the annual report on Form 10-K.