SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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



Forthe quarterly period ended September 30, 2008




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



For the transition period from  To




Commission file number 000-31573





ProElite, Inc.


(Exact name of registrant as specified in its charter)





New Jersey

22-3161866(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)





12121 Wilshire Blvd., Suite 1001


Los Angeles, CA 90025


(Address of Principal Executive Offices)


(310) 526-8700


(Registrant’s telephone number, including area code)





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes oNo x





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” an “accelerated filer,” a “non-accelerated filer,” or a “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o

Accelerated filer oNon-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x





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


Yes oNo x





As of September 30, 2008 there were 55,854,726 shares of Common Stock outstanding.















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 I. FINANCIAL INFORMATIONItem 1
Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
3Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2008 and 2007
4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
5Notes to Condensed Consolidated Financial Statements
7Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19Item 3
Quantitative and Qualitative Disclosures about Market Risk
23Item 4
Controls and Procedures
23PART II. OTHER INFORMATIONItem 1
Legal Proceedings
25Item 1A
Risk Factors
25Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
25Item 3
Defaults Upon Senior Securities
25Item 4
Submission of Matters to a Vote of Security Holders
25Item 5
Other Information
25Item 6
Exhibits
25Signatures
26Exhibit Index
27





Exhibit 31.1    302 Certification of Chief Executive OfficerExhibit 31.2    302 Certification of Chief Financial OfficerExhibit 32.1    906 Certification of Chief Executive Officer and Chief Financial Officer





2


PART I. FINANCIAL INFORMATION


Item 1. Condensed Consolidated Financial Statements.


ProElite, Inc.


Condensed Consolidated Balance Sheets


September 30,

2008


December 31,

2007Assets

(unaudited)Current assetsCash and cash equivalents

$
634,001


$
4,427,303Restricted cash


410,907



277,500Accounts receivable, net of allowance of $264,571 and $255,901, respectively


642,458



338,596Prepaid expenses


456,181



133,673Other current assets


65,905



1,077,896Total current assets


2,209,452



6,254,968Fixed assets, net


1,211,592



1,428,548Other assetsAcquired intangible assets, net


1,254,000



9,022,181Goodwill


-



6,238,652Investment in Entlian/SpiritMC


1,000,000



1,848,003Prepaid distribution costs, net


451,530



764,109Prepaid license fees, net


65,620



111,052Prepaid services, net


248,887



408,889Deposits and other assets


174,414



143,915Total other assets


3,194,451



18,536,801Total assets

$
6,615,495


$
26,220,317Liabilities and Shareholders’ Equity (Deficit)Current liabilitiesNotes payable and accrued interest – Showtime

$
6,048,225


$
1,822,086Accounts payable


2,389,787



1,531,342Accrued expenses


447,355



733,638Accounts payable and accrued expense – Showtime, CBS


-



125,000Future payments due for acquired companies


1,480,530



1,162,500Accrued liabilities from predecessor company


346,572



346,572Deferred revenue


19,250



-West Coast settlement


150,000



150,000Total current liabilities


10,881,719



5,871,138Deferred rent and lease incentive


150,453



153,309Total liabilities


11,032,172



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 September 30, 2008 and December 31, 2007, respectively


5,586



5,166Common stock to be issued


1,062,473



2,249,997Additional paid-in-capital


61,350,307



49,404,897Accumulated other comprehensive income (expense)


(139,197
)


(86,793
)Accumulated deficit


(66,695,846
)


(31,377,397
)Total shareholders’ equity (deficit)


(4,416,677
)


20,195,870Total liabilities and shareholders’ equity (deficit)

$
6,615,495


$
26,220,317





See Notes to Condensed Consolidated Financial Statements


3


ProElite, Inc.


Condensed Consolidated Statements of Operations


(Unaudited)





Three

Months

Ended

September 30,

2008


Three

Months

Ended

September 30,

2007


Nine

Months

Ended

September 30,

2008


Nine

Months

Ended

September 30,

2007Revenue, non-related party

$
2,399,834


$
1,270,825


$
8,500,131


$
3,101,807Showtime, CBS


505,000



(170,723
)


2,630,000



240,133Total revenue


2,904,834



1,100,102



11,130,131



3,341,940Cost of Revenue, non-related party


2,954,789



2,685,613



13,470,193



6,761,560Showtime, CBS


591,571



705,195



1,091,571



2,594,705Total cost of revenue


3,546,360



3,390,808



14,561,764



9,356,265Gross loss


(641,526
)


(2,290,706
)


(3,431,633
)


(6,014,325
)Operating expensesMarketing


-



119,002



206,878



246,049Website operations


213,396



1,031,185



1,603,860



2,351,429General and administrative


4,808,981



3,905,073



14,354,214



10,879,726Impairment and other charges


4,971,445



-



15,386,979



-Total operating expenses


9,993,822



5,055,260



31,551,931



13,477,204Operating loss


(10,635,348
)


(7,345,966
)


(34,983,564
)


(19,491,529
)Interest income (expense), net


(292,865
)


192,705



(334,885
)


391,746Loss before income taxes


(10,928,213
)


(7,153,261
)


(35,318,449
)


(19,099,783
)Income taxes


-



-



-



-Net loss

$
(10,928,213
)

$
(7,153,261
)

$
(35,318,449
)

$
(19,099,783
)Net loss per share - basic and diluted

$
(0.20
)

$
(0.16
)

$
(0.65
)

$
(0.44
)Weighted average shares outstanding - basic and diluted


55,855,726



45,911,668



54,865,225



43,689,176





See Notes to Condensed Consolidated Financial Statements


4





ProElite, Inc.


Condensed Consolidated Statements of Cash Flows


(Unaudited)





Nine Months

Ended September 30,

2008


Nine Months

Ended September 30,

2007Cash flows from operating activitiesNet loss

$
(35,318,449
)

$
(19,099,783
)Adjustments to reconcile net loss to net cash used in operating activitiesStock and warrant based compensation


4,291,348



4,008,005Stock issued for services


17,830



-Impairment and other charges


15,386,979



-Depreciation and amortization


3,134,624



815,076Loss in equity interest in Entlian Corp.






44,951Provision for uncollectible accounts


186,329



183,000Abandonment of equipment


-



242,809Amortization of deferred financing costs andoriginal issue discount


199,804



-Change in operating assets and liabilities:Increase in accounts receivable


(490,191
)


(778,749
)(Increase) decrease in prepaid expense and other assets


648,483



(297,213
)Increase in accounts payable, accrued expenses and other liabilities


479,962



2,670,947Net cash used in operating activities


(11,463,281
)


(12,210,957
)Cash flows from investing activitiesAcquisition of King of the Cage, Inc.


-



(3,250,000
)Acquisition of Cage Rage, net of cash acquired


-



(3,938,386
)Investment in Entlian Corp.


-



(1,000,000
)Purchase of fixed assets


(144,210
)


(1,378,348
)Net cash used in investing activities


(144,210
)


(9,566,734
)Cash flows from financing activitiesShowtime Loan


4,000,000



-Issuance of common stock and warrants for cash – Showtime


4,000,000



25,137,466Proceeds from exercise of options and warrants – Showtime






158,548Cash pledged as collateral for credit card facility


(133,407
)


(277,500
)Net cash provided by financing activities


7,866,593



25,018,514Cumulative translation adjustment


(52,404
)


-Net increase (decrease) in cash and cash equivalents


(3,793,302
)


3,240,823Cash and cash equivalents at beginning of period


4,427,303



7,295,825Cash and cash equivalents at end of period

$
634,001


$
10,536,648





5











Supplemental disclosures of non-cash investing and financing activities:





In connection with the warrant issued to Showtime on January 5, 2007, the Company recorded the $608,000 value of the warrant as prepaid distribution costs.





At March 31, 2007, the Company reduced its registration rights liability related to the shares issued in an October 2006 private placement by $100,000, with a corresponding increase to paid-in capital.





In January 2008, the Company recorded 35,714 issuable shares of restricted common stock for an acquisition of website-related assets. These shares were valued at $44,643, and this amount was recorded in goodwill.





On February 21, 2008, the Company issued 4,000,000 warrants to purchase common stock at $2.00 per share to Showtime in connection with a television distribution agreement with CBS Entertainment. At the grant date, 2,000,000 of these warrants were vested, and the $2.3 million value of the vested warrants was recorded as prepaid distribution costs.





On March 15, 2008, the Company’s placement agent exercised 2,750,000 warrants with a strike price of $2.00 per share on a cashless basis and received 2,016,667 shares of common stock.





On June 18, 2008, the Company issued to Showtime for proceeds of $3.0 million a note payable with a face value of $3.5 million and a warrant to purchase 100,000 shares of common stock at $0.01 per share. The $0.5 million discount from the face value of the note payable and the $149,040 value of the warrants issued will be accreted into the note liability balance over the term of the note.





During the nine months ended September 30, 2008, the Company issued 178,571 shares of common stock, previously recorded as common stock issuable, related to the KOTC acquisition.





During the nine months ended September 30, 2008, the Company accrued a liability of $487,500 for contingent consideration related to the KOTC acquisition.





See Notes to Condensed Consolidated Financial Statements





6


ProElite, Inc.


Notes to Condensed Consolidated Financial Statements


(Unaudited)





Note 1    Basis of Presentation and Summary of Significant Accounting Policies





Financial Statement Presentation





The accompanying unaudited condensed consolidated financial statements of ProElite, Inc., a New Jersey company and its subsidiaries (“ProElite” or the “Company”), have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.





In the opinion of management, these financial statements reflect all adjustments, consisting of normal recurring accruals, which are considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited consolidated financial statements included in our annual report on Form 10-KSB for the year ended December 31, 2007. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.





See Note 9 for a description of events subsequent to September 30, 2008 that relate to operations.





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 Corp. in which ProElite has significant influence; this represents common stock ownership of at least 20% and not more than 50% (see Note 3).





Revenue Recognition





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





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





Cost of Revenue





Costs related to live events are recognized when the event occurs. Event costs incurred prior to an event are capitalized to prepaid costs and then charged to expense at the time of the event. Costs primarily include: fighter purses, travel, arena costs, television production and amortization of capitalized value of warrants issued to Showtime. Cost of other revenue streams are recognized at the time the related revenues are realized.





Significant Estimates for Events





The Company is required to estimate significant components of live event revenues and costs because actual amounts may not become available until one or more months after an event date. Pay-per-view revenue is estimated based upon projected sales of pay-per-view presentations. These projections are based upon information provided from distribution partners. The amount of final pay-per-view sales is determined after intermediary pay-per-view distributors have completed their billing cycles. The television production costs of live events are based upon the television distribution agreements with Showtime and CBS, 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.


7





Advertising Expenses





Advertising is expensed as incurred. Total advertising expense was approximately $1,205,000 and $697,000 during the nine months ended September 30, 2008 and 2007 respectively.




Cash and Cash Equivalents
  The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  The Company maintains cash and cash equivalents with various commercial banks.  These bank accounts are generally guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000.  At times, cash balances at any single bank may be in excess of the FDIC 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 license fees and pay-per-view presentations and from live event venues for ticket sales. Amounts due for pay-per-view programming are based primarily upon estimated sales of pay-per-view presentations and are adjusted to actual after intermediary pay-per-view distributors have completed their billing cycles. If actual sales differ significantly from the estimated sales, the Company records an adjustment to sales. Accounts receivable from foreign television distribution is generally based upon contracted fees per event or showing. Accounts receivable from venues for ticket sales to live events are generally received within 30 days of an event date.





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





Fixed Assets





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





Goodwill and Intangible Assets





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





SFAS No. 142 requires goodwill and other indefinite-lived intangible assets to be tested for impairment at least on an annual basis and more often under certain circumstances, and written down by a charge to operations when impaired. An interim impairment test is required if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value. During the nine months ended September 30, 2008, the Company modified its operating plan for its Cage Rage subsidiary, due to its recent operating performance, and as a result recorded a charge of approximately $7.2 million to reduce the carrying value of goodwill and acquired intangible assets to their estimated fair values. Additionally, as of September 30, 2008, management assessed the financial performance of and market conditions affecting its ICON and King of the Cage acquisitions. Management evaluated recent adverse economic trends in the Hawaii market and as a result recorded an impairment of approximately $2.3 million to reduce goodwill and acquired intangible assets from the ICON acquisition to estimated realizable value. Management also evaluated industry trends, including increasing fighter purses and higher than anticipated promotion expenses in the Company’s King of the Cage subsidiary. Based upon this analysis, the Company recorded an impairment charge of approximately $4.3 million to reduce goodwill and purchased intangibles related to the King of the Cage to estimated fair value.





See Note 9 for a description of events subsequent to September 30, 2008 that relate to operations.


8





Prepaid Distribution Costs





Prepaid distribution costs represent the value of warrants issued to Showtime Networks, Inc. (“Showtime”) in November 2006, January 2007 and February 2008 in connection with television and pay-per-view distribution agreements with Showtime and CBS Corp. (“CBS”). Showtime and CBS are related parties. The value of the warrants issued in 2006 and 2007 is being amortized to cost of revenue over the three-year term of the distribution agreement with Showtime.





During the nine months ended September 30, 2008, management determined the warrants issued in 2008 in connection with the CBS distribution agreement had no future value as the likelihood of realizing gross profit on the CBS events was remote. Therefore, the entire $2.3 million value of these warrants was charged to cost of revenue during the three months ended June 30, 2008.





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.  See Note 9.





Income Taxes





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 settlements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The adoption of FIN 48 did not have an effect on the Company’s consolidated financial statements.





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.





Fair Value of Financial Instruments





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





Foreign Currency





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





Loss per Share





The Company utilizes Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic earnings (loss) per share are computed by dividing earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings 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.


9





There were 4,956,797 and 1,016,165 shares under options at September 30, 2008 and 2007, respectively, that were not included in the calculation of loss per share as their inclusion would be antidilutive.  There were 30,172,970 and 19,692,384 shares under warrants at September 30, 2008 and 2007, respectively, that were not included in the calculation of loss per share as their inclusion would be antidilutive.





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.  Although the Company had approximately $634,000 of cash at September 30, 2008, the Company continues to expend more cash than it brings in through operations.  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.  See Note 9.





The auditor's opinion contained in our Annual Report on Form 10-KSB for the year ended December 31, 2007 states substantial doubt exists about the Company's ability to continue as a going concern. The financial statements in this Quarterly Report on Form 10-Q do not contain any adjustments that may be required should we be unable to continue as an on-going concern.





Note 3    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.





In the nine months ended September 30, 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 9 for events subsequent to September 30, 2008 related to discontinued operations.





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, $1,000,000 cash to be paid in September 2008 plus $100,398 of direct transaction costs. The Company valued the common stock to be issued at $3.5 million, or $7.00 per share.





The 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.


10





In the nine months ended September 30, 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.





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 gave the Company additional promotion talent and access to fighters and venues. The assets acquired consisted primarily of a brand name. Additionally the owner of ICON signed a consulting contract with the Company to continue promoting ICON and other Company-run events. The total purchase price was $2.35 million consisting of: $350,000 cash paid at closing and 200,000 shares of restricted common stock, 100,000 of which were issued at closing and the remaining 100,000 are issuable over 3 years. Additionally, the Company will issue, in three equal installments, 50,000 shares of restricted common stock in connection with the consulting agreement with the seller. The shares were valued at $10 per share. The purchase price was allocated approximately $0.4 million to amortizable intangible assets, $0.6 million to non-amortizable assets and $1.3 million to goodwill. The value of the shares to be issued for the consulting agreement, $500,000, will be recorded into expense ratably over the service period.





In the nine months ended September 30, 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.





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 $78,000 and $271,000, representing the Company’s share of SpiritMC’s loss for the three and nine months ended September 30, 2008.  See Note 9 for a further discussion related to events subsequent to September 30, 2008.





Note 4    Fixed Assets, Net





Fixed assets, net consisted of the following:


September 30,

2008


December 31,

2007Computer, office and video production equipment

$
573,535


$
535,581Transportation equipment


26,702



-Furniture and fixtures


340,717



325,481Live event set costs


234,865



236,780Leasehold improvements


232,835



231,335Computer software


98,787



66,193Internet domain names and other


60,419



28,280Website development costs


349,976



349,9761,917,836



1,773,626Accumulated depreciation and amortization


(706,244
)


(345,078
)$
1,211,592


$
1,428,548





11





Note 5    Liabilities





Notes Payable - Showtime





The Company owed the following principal on notes payable:


September 30, 2008


December 31, 2007Note payable – Showtime due March 31, 2009

$
1,822,086


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


3,500,000



-Note payable – Showtime due June 18, 2009


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


(459.735
)


-Accrued interest


185,874



-Total

$
6,048,225


$
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.





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 with Showtime.  The note has a face value of $1,000,000 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 matured on June 18, 2009.
 
 See Note 9 for a further discussion related to events subsequent to September 30, 2008.





Note 6    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. The Company denies Wallid’s allegations, and denies that it has breached any obligations to Wallid.  Wallid and the Company filed suits and countersuits in federal and state courts.  In December 2008, the Company settled the lawsuits by agreeing to issue 4,000,000 shares of the Company's common stock valued at $10,200,000 and cash payments totalling $1,150,000.  The Company recognized this amount as legal expense in general and administrative expenses.





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.  See Note 9.








Note 7    Shareholders’ Equity





CBS and Showtime





In connection with a television distribution agreement, the Company and Showtime, an affiliate of CBS, entered into a Subscription Agreement dated as of February 22, 2008 pursuant to which the Company agreed to issue two warrants to Showtime (the "New Warrants") each for the purchase of 2,000,000 shares of the Company's Common Stock at an exercise price of $2.00 per share. The first New Warrant vests immediately and is for a term of five years from February 22, 2008. The second New Warrant vests in four equal tranches of 500,000 shares with each respective tranche to vest if an Event is broadcast pursuant to the Broadcast Agreement. The term of each tranche is five years from the date that such tranche vests. Pursuant to an Investor Rights Agreement between the Company and Showtime dated as of February 22, 2008, the Company granted to Showtime certain registration rights with respect to the shares issuable upon exercise of the New Warrants, and Showtime agreed that such shares and the New Warrants are subject to certain transfers restrictions until March 5, 2009. The value of the first New Warrant computed using a Black-Scholes model was approximately $2.3 million and is expected to be charged as an expense to operations on the dates of the first four broadcasts under the television distribution agreement. The value of the second New Warrant computed using a Black-Scholes model was approximately $2.5 million and will be charged to operations on the dates of the first four broadcasts under the television distribution agreement. During the nine months ended September 30, 2008, the Company expensed approximately $2.8 million relating to these warrants.


12





Additionally, Showtime exercised part of the warrants previously issued to Showtime in January 2007. The exercise was for an aggregate of 2,000,000 shares of the Company's Common Stock (the "Warrant Shares") resulting in proceeds to the Company of $4,000,000.





On June 18, 2008 in connection with the $3.5 million face value note payable, the Company issued to Showtime a three-year warrant to purchase 100,000 shares of common stock at $0.01 per share. The value of this warrant calculated using a Black-Scholes model was $149,040 and will be charged to interest expense over the term of the note using the effective interest method.  See Note 9 for a further discussion related to events subsequent to September 30, 2008.





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 September 30, 2008, options to purchase 4,956,757 shares of common stock had been granted under the plan.





The Company accounts for stock-based compensation arrangements with its employees, consultants and directors in accordance with SFAS No. 123 (revised), “Share-Based Payment” (SFAS No. 123R). Under the fair value recognition provisions of SFAS No. 123R, the Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes compensation expense over the requisite service period, which is generally the vesting period. For the quarters ended September 30, 2008 and 2007, the Company incurred approximately $0.5 million and $0.3 million, respectively, of expense related to stock based compensation under this plan and approximately $0.5 million and $.5 million, respectively, of expense related to warrants. For the nine months ended September 30, 2008 and 2007, the Company incurred approximately $1.6 million and $0.7 million, respectively, of expense related to stock based compensation under this plan and approximately $1.4 million and $3.4 million respectively, of expense related to warrants.








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




Nine Months

Ended

September 30,

2008

Nine Months

Ended

September 30,

2007Risk-free interest rate


1.84% - 3.41
%
4.07 -4.70
%Expected life, in years


5.8 - 6.0

6.0Expected volatility


96.0
%
60.0
%Dividend yield


0.0
%
0.0
%





Expected volatility is based on the historical volatility of the share price of companies operating in similar industries. The volatility of industry peers is considered more representative of expected volatility because there is currently minimal daily trading volume in the Company’s stock. 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.


13





The following table represents stock option activity for the nine months ended September 30, 2008:




Plan

Options


Weighted

Average

Exercise

PriceOutstanding at December 31, 2007


4,875,859


$
2.77Granted


1,450,000


$
2.04Forfeited


(1,617,500
)

$
2.68Expired


(1,562
)

$
2.00Exercised


-


$
-Outstanding at September 30, 2008


4,706,797


$
2.58Exercisable at September 30, 2008


3,021,173


$
2.35





At September 30, 2008 the aggregate intrinsic value of options outstanding and the aggregate intrinsic value of options exercisable was approximately $4.9 million and $3.4 million, respectively. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2008 and 2007 was $1.25 and $1.25, respectively. The weighted-average remaining life of outstanding and exercisable options at September 30, 2008 was 7.6 years and 2.1 years, respectively.





At September 30, 2008 there was approximately $5.8 million of unrecognized compensation cost related to non-vested options, which is being expensed through 2012.





During the nine months ended September 30, 2008, the Company granted 1,700,000 options to employees and a director in individual grants ranging from 20,000 to 100,000 options. The options have exercise prices of $2.00, vest over three to four years and have 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 respective vesting periods.





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.


Nine Months

Ended

September 30,

2008

Nine

Months

Ended

September 30,

2007Risk-free interest rate


1.87% - 2.71
%
4.07 - 4.7
%Expected life, in years


1.5 - 3.1

5.8 - 6.5Expected volatility


96.0
%
60.0
%Dividend yield


0.0
%
0.0
%





The following table represents warrant activity for the nine months ended September 30, 2008:




Warrants


Weighted

Average

Exercise

PriceOutstanding at December 31, 2007


30,500,137


$
2.85Granted


4,817,000


$
2.60Expired


(47,917
)

$
4.96Forfeited


(346,250
)

$
7.20Exercised


(4,750,000
)

$
2.00Outstanding at September 30, 2008


30,172,970


$
2.89Exercisable at September 30, 2008


11,777,304


$
3.05





14





At September 30, 2008 the aggregate intrinsic value of warrants outstanding and the aggregate intrinsic value of warrants exercisable was approximately $19.1 million and $10.7 million, respectively. The weighted-average remaining life of outstanding and exercisable warrants at September 30, 2008 was 4.3 years and 4.1 years, respectively.





At September 30, 2008 there was approximately $24.7 million 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 through 2012.





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





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.





Burnett Warrants





The Company entered into an agreement (the "Series Agreement") with JMBP, Inc. ("MBP"), wholly-owned by Mark Burnett ("Burnett") in connection with a possible television series involving mixed martial arts ("Series") for initial exhibition during prime time on one of specified networks or cable broadcasters. MBP (or a separate production services entity owned or controlled by MBP) will render production services in connection with the Series and will be solely responsible for and have final approval regarding all production matters, including budget, schedule and production location. It is anticipated that, as a condition to involvement in the Series, each of the Series contestants will sign a separate agreement with the Company or an affiliate of the Company for services rendered outside of the Series. MBP will own all rights to the Series. The Company and MBP will jointly exploit the Internet rights in connection with the Series on ProElite.com and other websites controlled by ProElite.com. The Company will be entitled to a share of MBP's Modified Adjusted Gross Proceeds, as defined. Subject to specified exceptions, MBP and Burnett have agreed to exclusivity with respect to mixed martial arts programming. The term of the Agreement, as amended effective June 1, 2008, 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 November 17, 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. As amended effective June 1, 2008, 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

1,000,000

The date that the pilot or first episode of a Series is broadcast on a Network or Cable Broadcaster.Four

1,000,000

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

2,000,000

The date that the pilot or first episode of an additional Series is broadcast on a specified network or cable broadcaster.Six

1,000,000

The last day of the first completed season of any Series.Seven

2,000,000

The last day of any additional completed season of any series (or the last day of the first completed season of any additional series).Eight

4,000,000

1,333,333 shares to be vested on the last day of each additional completed season of any series.Nine

2,000,000

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





15





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 by November 17, 2008.





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 less than the previously calculated value. Therefore, the previous warrant values will be used for any expense to be recognized. The value of the warrants was calculated as approximately $2.6 million for tranche one and $2.9 million 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 5.07% to 5.09% and dividend yield of 0%. The value of the tranche one warrants was charged to expense in June 2007. The value of the tranche two warrants is being amortized to expense over the vesting period of each 500,000 warrant vesting block (i.e., from 1 to 4 years).





The current value of warrants in tranches three through nine was calculated as approximately: $1.8 million (tranche three), $1.8 million (tranche four), $3.6 million (tranche five), $1.8 million (tranche six), $3.6 million (tranche seven), $7.3 million (tranche eight), and $3.6 million (tranche nine) or approximately $23.7 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 5.1% 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. During the quarter ended June 30, 2008, the Company recognized approximately $0.3 million expense related to tranche three based upon the status of production of a series pilot. No expense has been recognized related to tranches four through nine.





See Note 9 for a further discussion related to events subsequent to September 30, 2008.





Note 8    Related Party Transactions





The Company earns revenue from and incurs expenses to Showtime and CBS in connection with a television production and distribution agreement. The Company recorded revenue for television license fees of $0.9 million and $0.4 million during the three months ended September 30, 2008 and 2007, respectively and $2.1 million and $0.4 million during the nine months ended September 30, 2008 and 2007, respectively. The Company incurred television production expenses charged by Showtime of approximately $0.6 million during the three months ended September 30, 2008 and approximately $1.1 million during the nine months ended September 30, 2008. The Company also incurred non-cash expenses of $0.1 million and $0.1 million for warrant vesting and amortization of prepaid distribution costs for the three months ended September 30, 2008 and 2007, respectively, and $3.0 million and $0.2 million during the nine months ended September 30, 2008 and 2007, respectively.





In October 2006, the Company entered into a three-year term consulting agreement and is charged a monthly fee of $30,000, which is subject to 5% annual increases, by Santa Monica Capital Partners II (“SMCP”) for services relating to strategic planning, investor relations, acquisitions, corporate governance and financing. The Company paid $94,500 and $90,000 to SMCP for this monthly fee during the three months ended September 30, 2008 and 2007, respectively, and $274,500 and $270,000 during the nine months ended September 30, 2008 and 2007, respectively. Additionally, the Company incurred costs for other services provided to SMCP of approximately $39,000 and $106,000 during the three months ended September 30, 2008 and 2007, respectively, and $103,000 and $158,000 during the nine months ended September 30, 2008 and 2007, respectively.





On June 18, 2008, the Company issued to Showtime a note payable with $3.5 million principal and warrants to purchase 100,000 shares of common stock. This transaction is more fully described in Note 7.


16


Note 9                      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 discussed above are operations that are the subject of this Board action and, in the future, will be 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 Issuer 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 this 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 second quarter of 2012. Due to the sale, the Company will recognize a gain on sale of assets in the first quarter of 2009.





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.


17





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.





18


Item 2. Management’s Discussion and Analysis of Operations.





Forward Looking and Cautionary Statements





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





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





Overview





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





Since the Company’s formation in August 2006, we have established ourselves as a leading, global promoter of live MMA events and provider of a social-networking website focused exclusively on MMA. We have agreements to distribute content by television and DVD throughout the world. To date, we have focused our efforts primarily on events in the United States and United Kingdom and on our website.





During 2008, the Company increased the number of live events that it promoted. In February 2008, the Company signed a television distribution agreement with CBS, which led to the first MMA event broadcast on network television on May 31, 2008.





In 2008, the Company encountered liquidity issues. The Company’s auditors have issued a going concern opinion in their report for the year ended December 31, 2007 that states substantial doubt exists 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.   All entities and transactions discussed above are operations that are the subject of this Board action and, in the future, will be reported as discontinued operations in the financial statements.  For this financial statement presentation only, the operations are reported as continuing operations.


19








Results of Operations





For the three months ended September 30, 2008.





Revenue





Revenue from live events, consisting primarily of ticket sales, site fees and sponsorship, was $1,538,858 for the three months ended September 30, 2008 compared to $1,100,102 for the three months ended September 30, 2007. The increase was due to higher operating activity in the second quarter of 2008 compared to the second quarter of 2007 when the Company commenced operations and to newly acquired subsidiaries. The Company’s EliteXC subsidiary earned revenue of approximately $1.5 million from promoting six events in the third quarter of 2008.  Also, the Company’s KOTC and Cage Rage subsidiaries, which were acquired in September 2007, earned live event revenues of $0.4 million and $0.6 million, respectively, during the third quarter of 2008.





Revenue from pay-per-view programming (PPV) and television licensing was $544,085 for the three months ended September 30, 2008.





The Company began earning television license fees in 2008 under the distribution agreement with Showtime and under the distribution agreement with CBS signed in 2008. In 2007, the Company earned no television license fees from Showtime or CBS. In the third quarter of 2008, the Company received television license fees of $505,000 from Showtime and CBS.





Revenue from our website was $89,638 for the three months ended September 30, 2008.





Other revenues, which includes DVD sales and fees for licensing fighters under contract, was $184,031 for the three months ended September 30, 2008.





Cost of revenue





Cost of revenue for live event production (excluding expenses payable to Showtime and CBS) was $2,954,789 for the three months ended September 30, 2008 compared to $3,390,808 for the three months ended September 30, 2007. Live event production costs consist principally of fighters purses, arena rental and related expenses (e.g., staffing, staging, and video equipment rental), event-specific marketing expenses (e.g., Internet, radio and television advertising, posters and street teams), and travel. Live event production costs increased primarily due to inclusion of the KOTC and Cage Rage subsidiaries (acquired in September 2007). Cost of revenue for KOTC and Cage Rage were approximately $0.3 million and $0.6 million, respectively, for the quarter ended September 30, 2008. Our EliteXC subsidiary incurred costs of approximately $1.9 million to promote six events in the third quarter of 2008.








Additionally, we incurred related-party production costs for television production by Showtime of $591,571 for the three months ended September 30, 2008 compared to $705,195 for the three months ended September 30, 2007. The decrease was as a result of the terms of the distribution agreement with Showtime. This agreement called for the Company to pay production expenses in 2007 but not in 2008 for events distributed on Showtime.





Cost of revenue for our website was $41,824 for three months ended September 30, 2008.





Marketing expenses





Marketing expenses primarily consist of marketing, advertising and promotion expenses not directly related to MMA events. Marketing, advertising and promotion expenses related directly to MMA events are charged to cost of revenue. Marketing expenses were $0 for the quarter ended September 30, 2008 compared to $119,022 for the quarter ended September 30, 2007 and primarily consisted of Internet and print advertising, public relations and marketing consultants.





Website operations





Website operations expenses were $213,396 for the three months ended September 30, 2008 compared to $1,031,185 for the three months ended September 30, 2007. The decrease was due primarily to staffing reductions initiated in January 2008.


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Live events operations





Live events operations expenses were $2,142,381 for the three months ended September 30, 2008.  Live events operations expenses consist primarily of wages and consultants’ fees related to day-to-day administration of the Company’s live events. The increase was primarily the result of acquiring KOTC and Cage Rage in September 2007. KOTC and Cage Rage incurred operating expenses of approximately $0.3 million and $1.4 million, respectively, during the quarter ended September 30, 2008.





General and administrative expenses





General and administrative expenses were $4,808,981 for the three months ended September 30, 2008 compared to $3,905,073 for the three months ended September 30, 2007. A significant component of general and administrative expenses was non-cash expense related to option and warrant grants of approximately $0.9 million in the third quarter of 2008 versus approximately $3.1 million in the third quarter of 2007. The decrease in option and warrant expense was primarily due to exercisable warrants issued to JMBP, Inc. in June 2007. The increase in general and administrative expenses was also due to higher employee head count resulting in wages of approximately $0.9 million in the third quarter of 2008 versus $0.4 million in the third quarter of 2007 and consulting fees of $0.4 million in the third quarter of 2008 versus $0.3 million in the third quarter of 2007. Also, legal expenses increased to $0.3 million in the third quarter of 2008 from $0.1 million in the third quarter of 2007.





In the first and second quarters of 2008, the Company reduced staffing and did not rehire for open positions resulting from employee turnover in an effort to cut costs.





During the three months ended September 30, 2008, the Company recognized impairment charges totaling approximately $4,971,445 related to goodwill and non-amortizable intangible assets and other assets resulting from the acquisitions of CageRage, KOTC and ICON.





For the nine months ended September 30, 2008.





Revenue





Revenue from live events, consisting primarily of ticket sales, site fees and sponsorship, was $6,723,648 for the nine months ended September 30, 2008 compared to $3,341,940 for the nine months ended September 30, 2007. The increase was due to higher operating activity in 2008 compared to 2007 when the Company commenced operations and to newly acquired subsidiaries. The Company’s EliteXC subsidiary earned revenue of approximately $4.0 million from promoting thirteen events in 2008. The Company’s KOTC and Cage Rage subsidiaries, which were acquired in September 2007, earned live event revenues of $1.2 million and $1.5 million, respectively, during 2008.





Revenue from pay-per-view programming (PPV) and television licensing was $858,226 for 2008.





The Company began earning television license fees in 2008 under the distribution agreement with Showtime and under the distribution agreement with CBS signed in 2008. In 2007, the Company earned no television license fees from Showtime or CBS. In 2008, the Company received television license fees of $2,530,000 from Showtime and CBS.





Revenue from our website was $325,092 for the nine months ended September 30, 2008.  The revenues for 2008 are primarily due to licensing the Company’s social networking technology.





Other revenues, which includes DVD sales and fees for licensing fighters under contract, was $584,867 for the nine months ended September 30, 2008. The revenues for 2008 are due to the Company releasing DVD titles of its live events for sale during the and to the acquisition of KOTC, which had DVD distribution agreements in place at acquisition.





Cost of revenue





Cost of revenue for live event production (excluding expenses payable to Showtime and CBS) was $9,148,703 for the nine months ended September 30, 2008 compared to $9,356,265 for the nine months ended September 30, 2007. Live event production costs consist principally of fighters purses, arena rental and related expenses (e.g., staffing, staging, and video equipment rental), event-specific marketing expenses (e.g., Internet, radio and television advertising, posters and street teams), and travel. Live event production costs increased primarily due to inclusion of the KOTC and Cage Rage subsidiaries (acquired in September 2007). Cost of revenue for KOTC and Cage Rage were approximately $1.0 million and $2.0 million, respectively, for the nine months ended September 30, 2008. Our EliteXC subsidiary incurred costs of approximately $7.2 million to promote thirteen events in 2008.  The increase in EliteXC’s expenses was primarily due to producing more events resulting in increases in fight purses to $2.4 million in 2008 from $1.2 million in 2007, arena and related expenses to $1.2 million in 2008 from $0.4 million in 2007, and event-specific marketing to $0.5 million from $0.3 million in 2007. These increases were partially offset by reduced production spending of $0.2 million in 2008 versus $1.0 million in 2007 primarily due to no Barker shows produced in 2008 (i.e., event-specific promotional videos produced in 2007 for approximately $0.6 million) and a charge of $0.3 million for set equipment abandoned in 2007.


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Additionally, we incurred related-party production costs for television production by Showtime of $1,091,571 for the nine months ended September 30, 2008.  The terms of the distribution agreement called for the Company to pay production expenses in 2007 but not in 2008 for events distributed on Showtime. In 2008, the Company used Showtime’s production staff to produce the event broadcast on CBS in May 2008 and incurred expenses of approximately $1.1 million.





Cost of revenue for our website was $104,962 for nine months ended September 30, 2008 and consisted primarily of merchandise sold through our online store and Internet streaming expenses.





Marketing expenses





Marketing expenses primarily consist of marketing, advertising and promotion expenses not directly related to MMA events. Marketing, advertising and promotion expenses related directly to MMA events are charged to cost of revenue. Marketing expenses were $206,878 for the nine months ended September 30, 2008 compared to $246,049 for the nine months ended September 30, 2007 and primarily consisted of Internet and print advertising, public relations and marketing consultants.





Website operations





Website operations expenses were $1,603,860 for the nine months ended September 30, 2008 compared to $2,351,429 for the nine months ended September 30, 2007. The decrease was due primarily to staffing reductions initiated in January 2008.





In the first and third quarters of 2008, the Company reduced staffing and did not rehire for open positions resulting from employee turnover in an effort to cut costs.





Live events operations





Live events operations expenses were $4,865,263 for the nine months ended September 30, 2008.  Live events operations expenses consist primarily of wages and consultants’ fees related to day-to-day administration of the Company’s live events. The increase was primarily the result of acquiring KOTC and Cage Rage in September 2007. KOTC and Cage Rage incurred operating expenses of approximately $0.9 million and $2.6 million, respectively, during 2008.





General and administrative expenses





General and administrative expenses were $14,354,214 for the nine months ended September 30, 2008 compared to $10,879,726 for the nine months ended September 30, 2007. A significant component of general and administrative expenses was non-cash expense related to option and warrant grants of approximately $2.8 million in 2008 versus approximately $4.0 million in 2007. The decrease in option and warrant expense was primarily due to exercisable warrants issued to Burnett in June 2007 offset by additional option and warrant grants in 2008. Contributing to the increase in general and administrative expenses were higher employee head count resulting in wages and consulting fees of approximately $2.9 million in 2008 and consulting fees of $1.1 million in 2008. Legal expenses were $1.0 million in 2008, related primarily to ongoing litigation. Insurance expense was $0.5 million in and rent expense increased to $0.3 million in 2008 due to moving to new office space.





In the first and second quarters of 2008, the Company reduced staffing and did not rehire for open positions resulting from employee turnover in an effort to cut costs.





During the quarter ended September 30, 2008, the Company recognized impairment charges totaling approximately $14.0 million related to goodwill and non-amortizable intangible assets resulting from the acquisitions of Cage Rage, KOTC and ICON. The impairment charges were recorded to reduce the carrying value of goodwill and acquired intangible assets to estimated fair value. The Company recorded an impairment charge of approximately $5.2 million related to a change in the operating plan of Cage Rage and a charge of approximately $0.9 million related to future realization of assets acquired. The Company recorded an impairment charge of approximately $2.4 million related to unfavorable industry trends (i.e., increasing fighter purses) affecting KOTC. The Company recorded an impairment charge of approximately $1.8 million due to a recessionary economy affecting ICON’s market.


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Liquidity and Capital Resources





Net cash used in operating activities was $11.5 million during the nine months ended September 30, 2008 compared to $12.2 million during the nine months ended September 30, 2007. The use of cash was primarily the result of net losses for the periods.





Net cash used in investing activities was $0.1 million during the nine months ended September 30, 2008 compared to $9.6 million during the nine months ended September 30, 2007. The decrease was due to less need for capital expenditures in the current year compared to the prior year when the Company was acquiring other entities.





Net cash provided by financing activities was $7.9 million during the nine months ended September 30, 2008 compared to $25.0 million during the nine months ended September 30, 2007. In the nine months ended September 30, 2008, the Company received $4.0 million from Showtime from the exercise of 2.0 million warrants at $2.00 per share in February 2008 and $3.0 million from the proceeds of the note payable issued June 2008. In the nine months ended September 30, 2007, the Company received $20.2 million from a private placement of common stock and warrants and received $5.0 million from Showtime for the issuance of 5 million shares of common stock and 6.7 million warrants exercisable at $2.00 per share.





In September and December 2007, the Company acquired the stock of two fight promotion companies, purchased the assets of a fight-promotion company, and made a significant investment in a fourth. Additionally, the Company’s business plan calls for expanding the scale of live events, including pay-per-view, and Internet operations. As a result, the need for cash has correspondingly increased.





The auditor's opinion contained in our Annual Report on Form 10-KSB for the year ended December 31, 2007 states substantial doubt exists about our ability to continue as a going concern. The financial statements in this Quarterly Report on Form 10-Q do not contain any adjustments that may be required should we be unable to continue as an on-going concern.





Item 3. Quantitative and Qualitative Disclosures about Market Risk.





Not applicable.








Item 4. Controls and Procedures.





(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2008. Based on such evaluation, such officers have concluded that, as of September 30, 2008, the Company’s disclosure controls and procedures were not effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files and submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The deficiencies in disclosure controls and procedures were related to the deficiencies in our internal control over financial reporting. In evaluating our internal controls as of December 31, 2007, our auditors noted several material weaknesses and a significant deficiency which we are working to address. The material weaknesses noted were: (1) The Company’s accounting records, policies and procedures were not adequately maintained or documented, and the accounting department did not have sufficient technical accounting knowledge. (2) Due to a lack of resources, the Company did not analyze financial and operating results in a timely manner, including spending by management and other officers. Additionally, the Company did not proactively review the legal contracts entered into for financial implications. (3) Departments did not always work in a cohesive manner, particularly in regards to required disclosures, due diligence and acquisitions, and grants of options and warrants. (4) A portion of the Company’s expenditures for live events are paid by and reimbursed to an executive/director in advance of review and approval of the charges. (5) The Company’s executives, directors and shareholders have business relationships requiring them to advise, manage and/or provide services to other businesses. The Company has engaged in transactions with some of these businesses. Due to the wide-ranging network of contacts and business relationships of our executives, directors and shareholders, the Company was not always able to devote sufficient resources to identify, monitor and report all transactions with such businesses in a timely manner. (6) The Company did not have an active audit committee.


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(b) Changes in internal controls. The Company is in the early stages of taking remediation steps to enhance its internal control over financial reporting and reduce control deficiencies. As of September 30, 2008, we did not have the necessary resources to complete such steps.  If we obtain such resources, we will bring all accounting and record maintenance in-house and creating centralized, on-site document repositories.  We will hire additional personnel in the accounting department with technical accounting and financial reporting experience suitable for a public company. We will also hire additional personnel in our legal department; We will implement a new Microsoft Dynamics/accounting software system. We will formally document Company policies and procedures; We will also implementing a purchase order and approval system and system of managerial approval prior to disbursement of funds; We will implement periodic reviews of budget and actual results by department managers; In order to improve communication throughout the Company and to identify transactions that may require disclosure, we will implement twice weekly meetings of department heads to communicate financial results and operational activities.  We will add three new independent Directors to our Board and key committees.  All of the foregoing depends on the availability of sufficient funds.
 
 As noted above, there were changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected our internal controls over financial reporting.


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PART II. OTHER INFORMATION





Item 1. Legal Proceedings.





None. There have been no material developments since the date of our previously filed annual report.





Item 1A. Risk Factors.





Not applicable.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





On June 18, 2008, in connection with the issuance of a Senior Secured Note Purchase Agreement and related documents with Showtime Networks, Inc. (“Showtime”), the Company issued to Showtime a warrant (“Warrant”) to purchase 100,000 shares of common stock. The warrant has an exercise price of $0.01 per share and a term of 36 months.





Item 3. Defaults Upon Senior Securities





None





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





None





Item 5. Other Information





None.





Item 6. Exhibits.





See the attached exhibit index.





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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Date: November 18, 2011
PROELITE, INC.By:
/s/ Paul FellerPaul Feller, Chief Executive Officer

(Principal Executive Officer)And:
/s/ Charles R. BearchellCharles R. Bearchell, Chief Financial Officer

(Principal Financial and Accounting Officer)








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EXHIBIT INDEX





Exhibit No.

Exhibit Description31.1

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

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32

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