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| IFLI.OB > SEC Filings for IFLI.OB > Form 10-Q on 14-Aug-2007 | All Recent SEC Filings |
14-Aug-2007
Quarterly Report
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed on April 2, 2007. In addition to historical information, this discussion and analysis contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance and the industries in which we operate as well as on our management's assumptions. These forward-looking statements that involve risks and uncertainties. When used in this Quarterly Report on Form 10-Q the words "anticipate," "objective," "may," "might," "should," "could," "can," "intend," "expect," "believe," "estimate," "predict," "targets," "goals," "projects," "seeks," "potential," "plan," "is designed to" or the negative of these and similar expressions identify forward-looking statements. While we believe our plans, intentions and expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Other than as required by applicable securities laws, we are under no obligation to update any forward-looking statement, whether as result of new information, future events or otherwise. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under Item 1A, "Risk Factors," and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2006.
Our Company
We are the world's first professional mixed martial arts (or MMA) sports league. In MMA matches, athletes combine a variety of fighting styles, such as boxing, judo, jiu jitsu, karate, kickboxing, muy thai, tae kwon do and/or wrestling, in each fight. Our business was founded in 2005 to organize, host and promote live and televised MMA sporting events and to capitalize on the growing popularity of MMA in the United States and around the world. At the core of our business are our twelve MMA teams, which comprise some of the world's most highly regarded athletes and coaches. Our sporting events typically showcase four teams, in two-team match-ups, with athletes competing in one-on-one matches across five weight divisions. These events create a body of television programming content that we currently distribute through an arrangement with both Fox Sports Net ("FSN"), a national sports cable network available to over 80 million households across the U.S., MyNetworkTV, Inc. ("MNTV"), a broadcast network available to over 100 million homes across the U.S., and internationally through our arrangement with Alfred Haber Distribution, Inc., an international distributor of U.S. television programming. We earn revenue from live event ticket sales, sponsorships and promotions and licensing of our intellectual property. We have held sixteen live events, the first of which took place during the second quarter of 2006, the first period in which we recognized revenues.
Corporate History
Prior to November 29, 2006, we were known as Paligent Inc., a Delaware corporation ("Paligent"). On November 29, 2006, we acquired International Fight League, Inc., a privately held Delaware corporation ("Old IFL"), pursuant to an agreement and plan of merger, dated as of August 25, 2006, as amended (the "Merger Agreement"), by and among us, IFL Corp., a Delaware corporation and our wholly owned subsidiary ("Merger Sub"), and Old IFL, providing for the merger of Merger Sub and Old IFL, with Old IFL being the surviving corporation and becoming our wholly owned subsidiary (the "Merger"). Immediately following the Merger, we changed our name to International Fight League, Inc. ("IFL" or collectively, the "Company"), and Old IFL changed its name to IFL Corp. and continued to operate Old IFL's business of organizing and promoting a mixed martial arts sports league.
The Merger has been accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with generally accepted accounting principles in the United States of America. Reported results of operations of the combined group reflect the operations of Old IFL and IFL.
Old IFL's predecessor, International Fight League, LLC (the "LLC"), was organized on March 29, 2005 as a New Jersey limited liability company. On January 11, 2006, the LLC merged into Old IFL, whereupon the existence of the LLC ceased, and at which time the members of the LLC received an aggregate of 18,000,000 shares
of Old IFL common stock, par value $0.0001 per share, in exchange for their membership interests in the LLC. Old IFL operated as a development stage enterprise through March 31, 2006.
During the first quarter of 2007, we launched our first full season, which consisted of a nine event regular season, which concluded in the second quarter, plus a two event post-season, which will occur in the third quarter. In addition, during the fourth quarter of 2007, we will hold our "grand prix," a two event tournament in which the four top athletes in each weight class will compete for the title belt to be awarded to the champion of each weight class.
Company Filings
We make available through our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to such reports and other filings made by us with the SEC, as soon as practicable after we electronically file such reports and filings with the SEC. Our website address is www.ifl.tv. The information contained in this website is not incorporated by reference in this report.
Results of Operations
From inception through June 30, 2007, we have incurred costs and expenses significantly in excess of revenues. As we pursue our goals and continue to build out our organization and business, we expect to increase revenues and control costs and maximize value to existing stockholders, though we expect to incur additional losses.
Through March 31, 2006, we were a development stage company with insignificant operations. We held our first event on April 29, 2006 and first reported revenues and costs of revenues during the three months ended June 30, 2006. Accordingly, comparative information relating to revenues and costs of revenues for the three and six month periods ended June 30, 2006 are identical.
Three and Six Months Ended June 30, 2007 as compared to the Three and Six Months Ended June 30, 2006
During the three month period ended June 30, 2007, we held five live events. In addition, during this period, we created television content for twelve original episodes for broadcast on FSN and nine for MNTV. During the six months ended June 30, 2007, we held nine live events and created eighteen original episodes for broadcast on FSN and twelve for MNTV.
For the three months ended June 30, 2007, we incurred a net loss of $6.9 million, or $0.13 per share, as compared to a net loss of $1.8 million, or $0.10 per share during the comparable period in 2006. For the six months ended June 30, 2007, we incurred a net loss of $13.8 million, or $0.26 per share, as compared to a net loss of $2.4 million, or $0.14 per share, during the comparable period in 2006.
Revenues for the three and six months ended June 30, 2007 were $2.7 million and $4.2 million, respectively. During 2006, revenues for the comparable periods were $738,000. The principal components of revenue for the referenced periods in 2007 and 2006, respectively, include:
† television rights of $1.7 million and $2.6 million, respectively, during the three and six months ended June 30, 2007, consisting of $1.0 million and $1.75 million, respectively, relating to IFL's agreements with FSN and $683,000 and $883,000, respectively, relating to our agreement with MNTV. During 2006, we recognized $375,000 of television rights relating to our agreement with FSN;
† box office receipts and related revenue of $892,000 and $1.4 million, respectively, during the three and six month periods ended June 30, 2007 as compared to $127,000 during 2006; and
† sponsorships of $74,000 and $141,000, respectively, during the three and six month periods ended June 30, 2007 as compared to $234,000 during 2006.
During 2006, IFL entered into agreements with National Sports Programming, owner and operator of Fox Sports Net ("FSN"). The agreements with FSN granted FSN exclusive rights to broadcast episodes of IFL's 2006 events through June 30, 2007. In January 2007, we entered into a Letter of Intent with Fox Cable Networks, Inc. ("Fox")
and MyNetworkTV, Inc. ("MNTV" and, together with Fox, the "Fox Entities") (the "Letter of Intent"), which set forth certain terms and conditions under which the Fox Entities and IFL proposed to create, promote and distribute IFL MMA content. Under the proposed terms, FSN would retain exclusive distribution rights to all IFL regular season, playoff and championship events. The provision of the Letter of Intent relating to FSN provides that there shall be no payment of any distribution fee by IFL to FSN. Accordingly, we have treated the transaction as a barter transaction in accordance with FAS 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. The provision of the Letter of Intent relating to the broadcasts on MNTV provide for MNTV to pay IFL $50,000 for each initial telecast, $20,000 for each second telecast and $12,500 for each third telecast. During the second quarter ended June 30, 2007, MNTV broadcast nine first run telecasts, seven second run telecasts and five third run telecasts. During the six months ended June 30, 2007, MNTV broadcast twelve first run telecasts, ten second run telecasts and five third run telecasts.
During the three and six months ended June 30, 2007, costs of revenues were $7.4 million and $13.8 million, respectively. During 2006, costs of revenues for the comparable periods were $2.0 million. The principal components of costs of revenues for the referenced periods consists of the following:
† distribution fees of $1.0 million and $1.75 million, respectively, during the three and six months ended June 30, 2007 relating to the FSN agreement. During 2006, we recorded $375,000 of distribution fees relating to our agreement with FSN;
† live events costs of $6.4 million and $12.0 million, respectively, during the three and six months ended June 30, 2007. During 2006, we recorded $1.5 million of live events costs; and
† sponsorship costs of $22,000 and $55,000, respectively, during the three and six month ended June 30, 2007 as compared to $102,000 recorded in 2006.
Components of live event costs for the quarterly and six month periods ended June 30, 2007, respectively, include $1.7 million and $3.4 million of talent costs as compared to $387,000 in 2006, $1.4 million and $2.5 million of event travel and other event costs as compared to $522,000 in 2006, $2.8 million and $5.0 million of television production costs as compared to $435,000 in 2006 and $500,000 and $1.1 million of advertising expenses as compared to $170,000 in 2006.
During the three and six month periods ended June 30, 2007, selling, general and administrative expenses were $2.2 million and $4.4 million, respectively, as compared to $505,000 and $1.1 million during the comparable periods in 2006. The primary components of selling, general and administrative expenses for the three and six month periods ended June 30, 2007 and 2006 were, respectively, professional fees of $300,000 and $1.0 million in 2007 as compared to $119,000 and $457,000 in 2006, payroll and benefits expenses of $1.3 million and $2.3 million in 2007 as compared to $174,000 and $282,000, advertising expenses of $140,000 and $340,000 in 2007 as compared to $0 and $58,000 in 2006 and travel and entertainment of $100,000 and $200,000 as compared to $36,000 and $68,000. In addition, office and facilities costs of $270,000 and $570,000 were recorded during the quarterly and six month periods in 2007.
Stock-based compensation expenses relating to option grants of $14,000 and $30,000, respectively, were recorded to the statement of operations for the quarterly and six month periods ended June 30, 2007 as compared to charges of $16,000 and $25,000 for the similar periods in 2006.
During the quarterly and six month periods ended June 30, 2007, interest income of $72,000 and $234,000, respectively, was earned on available cash balances as compared to $11,000 and $23,000 during the comparable period in 2006.
During 2006, $45,000 and $72,000 of dividend expense relating to preferred stock of Old IFL was recorded. All preferred stock of Old IFL, including accrued dividends, was exchanged for common stock of Old IFL at the time of the Merger.
Liquidity and Capital Resources
At June 30, 2007, our cash and cash equivalents were $2.5 million, a decrease of $14.1 million from the end of the prior year. During the six months ended June 30, 2007, we received $1.2 million from the receipt of the remaining subscription receivable relating to the December 2006 private placement of common stock and used $13.6 million to fund operating activities and $1.6 million to pay accrued commissions on the private placement that was completed in December 2006.
Future Capital Requirements
Since inception, our MMA operations have incurred losses, and we have funded
these operating deficits through proceeds of $2.5 million from the 2006 issuance
of preferred stock and from net proceeds of approximately $22.2 million from our
December 2006 private placement. During August 2007, we completed a second
private placement, from which we received net proceeds of approximately $11.7
million. Based upon management's current forecast of future revenues and
expenses, the Company believes its cash resources will likely be sufficient to
fund operations into the second quarter of 2008. This assumes that the
Company's live event expenses continue to decrease as a result of the Company's
increased production efficiencies and that the Company realizes additional cash
from the following: (i) the distribution of IFL mixed martial arts content via
DVD, electronic sell through and similar media pursuant to our letter of intent
with Warner Home Video; (ii) the distribution of programming internationally
pursuant to our exclusive relationship with Alfred Haber Distribution, Inc.;
(iii) the continuation of television rights consistent with terms contemplated
by the Letter of Intent with the Fox Entities (see Note 8); and (iv) an increase
in sponsorship and licensing revenue. The Company is also evaluating the
profitability of other revenue sources, such as franchise or team sales, digital
rights and pay-per-view broadcasts. If the Company can successfully generate
revenue from additional sources, the Company's cash resources could last beyond
the second quarter of 2008. There can be no assurance, however, that the Company
will generate sufficient cash from any of such sources or continue to realize
decreases in its live event expenses. If the Company is not able to generate
sufficient cash from operations or if the Company is unable to secure sufficient
debt or equity financing for operations, the Company will experience a cash
shortage, the effect of which could result in the discontinuance of operations.
If additional funds are raised by issuing equity securities, further dilution to
existing stockholders will result and future investors may be granted rights
superior to those of existing stockholders.
Changes in Directors and Officers
On April 2, 2007, and as amended on June 19, 2007, we entered into agreements pursuant to which Salvatore A. Bucci, our Chief Financial Officer, Executive Vice President and Treasurer voluntarily resigned effective at the close of business on September 30, 2007 (the "Separation Date"). Mr. Bucci is to continue to serve as our Chief Financial Officer, Executive Vice President and Treasurer through the Separation Date (see Note 9 to the Condensed Consolidated Financial Statements included in this report). Mr. Bucci resigned as one of our directors upon the election of directors at the annual meeting of stockholders on June 28, 2007.
On April 25, 2007, Mr. Kurtz voluntarily resigned as one of our directors.
On May 1, 2007, our Board of Directors elected Jeffrey M. Jagid to fill the vacancy created by Mr. Kurtz's resignation.
On June 11, 2007, our Board of Directors elected Kevin Waldman as one of our directors.
On June 30, 2007, Joel Ehrlich, our Chief Marketing Officer and President of Sales, resigned from the Company.
Off-Balance Sheet Arrangements
As of June 30, 2007, we had no off-balance sheet arrangements.
Critical Accounting Policy
For the six months ended June 30, 2007, there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2006.
Seasonality
We organize, host and promote a significantly greater number of live and televised MMA sporting events during the first half of our fiscal year than during the second half of our fiscal year. Since we generally incur most of our costs in connection with such events, our expenses generally increase during the first half of our fiscal year and decline in the second half. This seasonality is likely to cause fluctuations in our financial results.
In 2007, we held all nine of our regular season events during the six months ended June 30, 2007, of which five events occurred during the second quarter. During the third and fourth quarters of 2007, we are scheduled to hold a total of four additional events, with two events occurring in each quarter. During 2006, we held a total of six events, of which two were held in the second quarter, which was the first quarter of our operations.
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