UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number: 000-21134

 

 

 

 

International Fight League, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

(Registrant’s telephone number, including area code)

212.356.4000

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of class

Common Stock, par value $0.01 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of June 29, 2007, the aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant, was approximately $21,921,251 (based on the last sale price of such stock on such date as reported by the OTC Bulletin Board and assuming, for the purpose of this calculation only, that all of the registrant’s directors, executive officers and 5% or greater stockholders were affiliates).

 

The number of shares outstanding of the registrant’s Common Stock, par value $0.01 per share as of April 9, 2008, was 79,058,509.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

TABLE OF CONTENTS

 

 

 

 

Overview

 

We are a sports entertainment company that uses our professional mixed martial arts (“MMA”) sports league, known as the “International Fight League” or the “IFL,” as a platform to generate revenues from spectator attendance at live events, broadcast of television programming, sponsorships and licensing. 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. In 2006 and 2007 our league centered around our teams, which included some of the world’s most highly regarded MMA athletes and coaches. In 2006 and 2007, our sporting events typically showcased four teams, in two-team match-ups, with athletes competing in one-on-one matches across five weight divisions. Our 2007 season consisted of nine regular season events, followed by a two round playoff for the league champion and then a two round “Grand Prix” tournament, in which our top athletes competed for title belts in various weight classes. At the conclusion of this Grand Prix tournament, we had belt holders for six different weight divisions.

 

We have changed our format for 2008. Rather than retain the team format, we have migrated to a camp format, with championship fights. Our previous teams were identified with a city or geographic region, along with a team name and logo. However, many of the teams never fought in their geographic region and were not recognized by MMA fans. By switching to the camps, we believe we can capitalize on some of the legends of MMA who are our coaches, by having their own gyms or camps compete against each other. We believe that MMA fans are familiar with these camps and this format will result in more natural match-ups that will enhance the attraction of spectators and viewers. We are also keeping our camp format “open,” meaning camps which are not regular members of the league can compete at an event to challenge one of the league’s camps or another challenging camp. Furthermore, under our previous league structure, every team match required an athlete from each team to compete in each of the five weight divisions. Beginning in 2008, we will work with the camps to determine the best athletes and best match-ups, and we will not require a fight in every weight class if some of the weight classes do not present good match-ups or a camp does not have a talented athlete in a particular weight division. Overall, we believe this new league format will provide us with more flexibility to determine the best match-ups that will result in the best, most competitive fights. In addition, now that we have belt holders, we plan to have two or three title fights at each event. This open format may also provide opportunities for us to co-promote MMA events with other promoters or organizations. Overall, we believe these changes will provide for much more entertaining and exciting events, which we believe should ultimately increase attendance at the live events and increase our television viewership. This should, in turn, increase our potential for sponsorship and licensing revenue

 

MMA is a sport that is growing in popularity around the world. 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. 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 about 37 jurisdictions. To foster athlete safety and a broader acceptance of the sport, we have established our own rules of conduct, including bans on certain dangerous moves, such as elbow strikes to an opponent’s head, placing more emphasis on the sport and competition.

 

Our mission is to create wide spread interest in our league so that we can develop a strong following from not only MMA fans but also fans of sports and action programming and events, as well as the public in general. We are particularly targeting the male audience, ages 18 to 34. We believe as our popularity grows, including the viewership of our television programming, we can generate increased revenue from ticket sales at live events, television rights fees, sponsorship and promotion fees from companies and advertisers targeting our primary market, sales of DVDs or other video formats of our events, and licensing of our brand name and other intellectual property on apparel and merchandise. Our uniqueness is derived from our camp-based league

structure. The league format enables us to announce events several months in advance, enabling fans, sponsors and athletes to plan for events, which is a new concept for MMA.

 

We earn revenue from live event ticket sales, sponsorships and promotions and licensing of our intellectual property. In addition, our live events create a body of television programming content that we can distribute for television viewing in the U.S. and internationally and can be compiled and edited for sales of DVDs or other videos. We have held over 20 live events, the first of which took place during the second quarter of 2006, the first period in which we recognized revenues. During the year ended December 31, 2007, we recognized a net loss of approximately $21.3 million.

 

We believe that the camp-based approach to MMA gives us an advantage because we are not dependent on a single athlete’s success and have the ability to build the popularity of individual athletes as well as the camps and the league in general.

 

Our operations are centered on the following three business components:

 

 

Liquidity

 

Since the inception of our business in 2005, we have incurred significant losses and only began generating revenue during the second quarter of 2006. Through December 31, 2007, we have generated net losses of $31 million.

 

Our ability to become profitable depends on our ability to generate and sustain substantially higher revenue while maintaining reasonable expense levels. Although we are reducing our expenses, these efforts may not be sufficient and may adversely impact our brand or fan, sponsor and merchandising interest. We expect that our revenues from operations will be insufficient to meet our projected expenses beyond the third quarter of 2008, unless we are able to increase our revenues and our profitability. We are exploring various alternatives to increase our profitability, such as a strategic alliance or relationship with a significant sports, entertainment or media organization or another significant entity interested in promoting MMA and/or exploiting our digital rights. Unless we can successfully increase our revenues (in excess of the costs we incur to generate these revenues) or our profitability, we will need raise additional capital through equity or debt financings by the end of the second quarter or in the early part of the third quarter of 2008. Such capital may not be available, or, if it is available, may not be available on terms that are acceptable to us. If we are unable to raise sufficient additional capital on acceptable terms or achieve profitability in the near-term, we will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in us being unable to continue our operations.

 

Corporate History

 

From our incorporation in 1985 through 1999, we operated under the name Procept, Inc., as a biotechnology company engaged in the development and commercialization of novel drugs with a product portfolio focused on infectious diseases and oncology. During 1999, our principal efforts were devoted to drug development and human clinical trials focusing on two biotechnology compounds, PRO 2000 Gel and O6-Benzylguanine. During fiscal 2000, we closed our research facilities and out-licensed PRO 2000 Gel and O6-Benzylguanine, which had been under development by us for several years. In September 2004, we transferred all of our rights, title and interest in PRO 2000 Gel pursuant to an option duly exercised by our sublicensee, and in March 2005, we assigned all of our rights, interests and obligations in O6-BG Benzylguanine.

 

In January 2000, we acquired Heaven’s Door Corporation, a company that provided products and services over the Internet. Effective with the acquisition of Heaven’s Door, our name was changed from Procept, Inc.

to HeavenlyDoor.com, Inc. At the same time, Procept, Inc. became the new name of the Company’s subsidiary, Pacific Pharmaceuticals, Inc., a company engaged in the development of cancer therapies, which we acquired in March 1999. After a sustained period of deterioration in the Internet and technology sectors and related capital markets, we decided, in the fourth quarter of 2000, to discontinue the pursuit of our Internet strategy. Shortly thereafter, we entered into an agreement to sell all of our Web-based assets and Internet operations and ceased our Internet activities. In connection with this agreement, we changed our name, on December 31, 2000, from HeavenlyDoor.com, Inc. to Paligent Inc. (“Paligent”).

 

From 2001 until the Merger (as described below), we had been engaged in seeking business opportunities to maximize value for our stockholders.

 

On November 29, 2006, we acquired International Fight League, Inc., which at the time was a privately held Delaware corporation (“Old IFL”), by a merger (the “Merger”) among us, Old IFL and our wholly owned subsidiary we formed for purposes of the Merger (“Merger Sub”). Old IFL was organized as a New Jersey limited liability company in 2005 and reincorporated as a Delaware corporation in January 2006. Pursuant to the Merger, Old IFL merged with our Merger Sub, with Old IFL being the surviving corporation and becoming our wholly owned subsidiary. Immediately following the Merger, we changed our name to International Fight League, Inc., and Old IFL changed its name from International Fight League, Inc. to IFL Corp. and continued to operate the business of organizing and promoting a mixed martial arts sports league. We operate as a holding company for IFL Corp. and the MMA business.

 

Immediately prior to the Merger, we completed a 1-for-20 reverse stock split of our common stock (the “Reverse Stock Split”). Except as otherwise specified herein, all references herein to share amounts of our common stock reflect the reverse stock split. Upon the closing of the Merger, all of the pre-Merger Paligent and Old IFL directors became our directors. As part of the Merger, we also adopted the International Fight League, Inc. 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”) under which all of the options to purchase shares of common stock of Old IFL outstanding prior to the Merger were converted into options to purchase shares of common stock of IFL.

 

As a result of the Merger, the former stockholders of Old IFL became holders of our common stock, and holders of Old IFL options became holders of options to acquire shares of our common stock. We issued 30,872,101 shares of our common stock to the former stockholders of Old IFL in exchange for all of the issued and outstanding shares of Old IFL. We also exchanged, as part of the Merger, options to purchase 1,865,000 shares of Old IFL common stock for options to purchase 1,925,376 shares of our common stock under our 2006 Equity Incentive Plan having substantially the same terms and conditions as the Old IFL options.

 

Following the reverse stock split and the Merger, there were 32,496,948 shares of Old IFL common stock outstanding, of which the pre-Merger stockholders of Paligent owned approximately 5% and the pre-Merger stockholders of Old IFL owned approximately 95%. As a result, Old IFL has been treated as the acquiring company for accounting purposes. 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 issued after completion of the transaction will reflect Old IFL’s operations.

 

Immediately after the Merger, we issued an additional 1,627,500 shares of common stock to Richard J. Kurtz, Paligent’s principal stockholder before the Merger, in exchange for $651,000 of indebtedness we owed him.

 

Unless otherwise indicated or the context otherwise requires, the terms “Company,” “IFL,” “we,” “us,” and “our” refer to International Fight League, Inc. (formerly known as Paligent Inc.) and its subsidiaries, including IFL Corp., after giving effect to the Merger. Unless otherwise indicated or the context otherwise requires, the term “our business” refers to the mixed martial arts business of Old IFL as continued by IFL Corp. after the Merger.

Recent Management Changes

 

During 2007, we underwent significant changes in our management and Board of Directors. At the time of the Merger, Richard Kurtz and Michael Molnar were our outside directors. Mr. Kurtz resigned from the Board in April 2007 and Michael Molnar decided not to stand for re-election at our annual stockholders meeting in June 2007. In May 2007, Jeffrey M. Jagid joined our Board, followed by Kevin Waldman in June 2007.

 

At the time of the Merger, our Board also consisted of Gareb Shamus, who served as our Chairman and Chief Executive Officer, Salvatore A. Bucci, who also served as our Executive Vice President, Chief Financial Officer and Treasurer, and Kurt Otto, our Commissioner. Mr. Bucci did not stand for re-election as a director at the June 2007 annual stockholders meeting and resigned from the Company on September 30, 2007. Mr. Shamus resigned as Chairman and Chief Executive Officer in November 2007 and resigned from the Board in December 2007.

 

In January 2007, Joel Ehrlich joined us as the President of Sales and Chief Marketing Officer and in June 2007, resigned from the Company. In March 2007, Michael C. Keefe joined us as the President, Legal and Business Affairs, and subsequently became our Executive Vice President, General Counsel, Corporate Secretary and Acting Chief Financial Officer. In September 2007, Jay Larkin joined us as the President and Chief Operating Officer, and became our President and Interim Chief Executive Officer in November 2007 upon Mr. Shamus’ resignation. For more information about or changes in our Board of Directors and management, see Part III, “Item 10 — Directors, Executive Officers and Corporate Governance” of this Annual Report on Form 10-K.

 

Market Opportunity

 

Mixed Martial Arts

 

MMA is a sport that is growing in popularity around the world. MMA 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 match. Typically, MMA sporting events are promoted either as championship matches or as vehicles for well-known individual athletes. MMA is currently permitted in approximately 37 jurisdictions with competition conduct regulated primarily by rules implemented by state athletic commissions, similar to professional boxing. Athletes win individual matches by knockout, technical knockout (referee or doctor stoppage), submission, or judges’ decision. Scoring for a judges’ decision is conducted by a panel of three judges provided by the relevant state athletic commission, using a ten-point system similar to the scoring system used in boxing. Referees attending matches are also provided by the relevant state athletic commission and are qualified to referee at a MMA competition. During fights, which typically consist of three four-minute rounds (with title belt fights often being five four-minute rounds), referees strictly enforce the rules of conduct for the relevant state’s athletic commission and those required by the organization promoting the event.

 

The Ultimate Fighting Championship, or the UFC, is the largest MMA promoter in the U.S. UFC began hosting events in 1995 and currently promotes roughly 10 major events yearly that draw sizable live audiences. The remainder of the MMA industry is highly fragmented with a variety of promoters and organizations hosting events across the country and globally. Typically, events are promoted on a fight-by-fight basis with little to no guidance about the timing of future events, similar to boxing.

 

Historically, MMA events were broadcast in the United States only through pay-per-view arrangements. MMA events were broadcast for the first time on free cable television in 2004. Spike TV, a cable television broadcaster, is currently broadcasting the fourth season of a popular reality television program, “The Ultimate Fighter,” based on MMA training and competitions. Our events began airing on Fox Sports Net (“FSN”) in 2006 and on another Fox network, MyNetworkTV, in 2007. In addition, we understand that competing MMA promoters have continued to grow the pay-per-view audience for their MMA events as well as their presence on broadcast and basic cable television. In Japan, live MMA sporting events promoted by competitors routinely sell tens of thousands of seats, are broadcast on major Japanese television networks, and appear on

pay-per-view and home video throughout the rest of the world. MMA events in the United States now generate attendance and pay-per-view audiences similar to professional boxing and wrestling.

 

The talent pool for MMA athletes is growing rapidly as there are thousands of martial arts focused training schools in the United States. It is estimated that there are millions of martial arts practitioners, including high school and college wrestling participants, in the United States alone. In addition, MMA is truly a global sport with many foreign athletes competing in U.S.-based events, and many U.S. athletes competing in international organizations. Many U.S MMA athletes begin their careers after successfully competing in wrestling, martial arts, kickboxing, or other related sports. Training schools such as Miletich’s Fighting System, led by former UFC Champion and current IFL coach Pat Miletich, Team Quest, led by top ranked middleweight and current IFL coach Matt Lindland, and the Renzo Gracie Jiu Jitsu, New York City, led by the legendary Renzo Gracie, serve as a major pipeline for MMA talent and the IFL specifically, seeking to attract interest from professional MMA athletes.

 

International Fight League

 

Through our subsidiary, IFL Corp., we operate the International Fight League, a MMA league which we promote to generate revenue from live events, broadcasts of television programming, sponsorships and licensing. We were founded in 2005 to organize, host and promote live and televised mixed martial arts sporting events and to capitalize on the growing popularity of mixed martial arts in the United States and around the world. We believe that our camp approach to mixed martial arts gives us an advantage in that our success will not depend on a single athlete’s success. In addition, by working with recognized camps and holding scheduled events on a regular basis, our league-based model focuses on gaining substantial sponsorship, promotion and marketing opportunities as we develop our market presence and brand awareness.

 

We had our first event in 2006 and launched our first full season in 2007. Our live events and television programming are directed at 18- to 49-year-old males, with a core target audience of 18- to 34-year-old males. We believe that our operations are unique compared to those of other MMA event promoters in many ways, including:

 

 

Strategy

 

Our objective is to use our MMA league to produce and promote live and televised MMA sporting events and to market our content and brands around the world. We seek to build multiple revenue streams much like other professional sports leagues. Key elements of our strategy are to:

 

 

Operations, Sales and Marketing

 

Our operations are centered on the following three business components:

 

 

Live and Televised Entertainment

 

Live MMA events are the cornerstone of our business, and provide content for our television programming. We have broadcasted our events in the United States through FSN and MyNetworkTV, Inc. (“MNTV”) and HDNet, a high definition satellite broadcaster in the U.S. and Canada. Our 2008 events and related programming are being broadcast on both FSN and HDNet. In 2007 and continuing in 2008, our programming is distributed internationally by Alfred Haber Distribution, Inc. Each live event is a high-quality production, incorporating music scores, computer-generated graphics, specialized lighting and in-arena large video screens. Costs to promote, stage and produce our MMA sporting events, including equipment, insurance, temporary personnel and other live event-specific costs, constitute our largest expense item, contributing an expense of approximately $15.9 million for the year ended December 31, 2007. We held 13 live events in 2007, and expect to have 6 or 7 live events in 2008. We expect to significantly reduce our event costs in 2008 due both to fewer events and reductions in our per event costs.

 

Television Programming.  We produce and own our television programming and video library. The primary television outlet for our programming in 2006 was FSN. During 2007, our events were televised by FSN and MNTV, a Fox free network station. These telecast were aired pursuant to a letter of intent we entered into on January 15, 2007 with Fox Cable Networks, Inc. (“Fox”) and MNTV (MNTV, together with Fox, the “Fox Entities”), which set forth the terms and conditions under which we and the Fox Entities created, promotes and distributes IFL MMA content through, what was proposed at the time, as a three-tier television and new media programming alliance. We never completed the agreements contemplated by the letter of intent with the Fox Entities, but our programming was aired by MyNetworkTV and FSN throughout 2007. We did not recognize any revenue for our 2006 U.S. television and recognized $1,607,500 in revenue in 2007 for our programming on MyNetworkTV.

 

We entered an agreement with HDNet, a high definition satellite broadcaster, to televise live our events held on December 29, 2007, February 29, 2008 and April 4, 2008, and the one scheduled for May 16, 2008 event. We also entered into an agreement with FSN to broadcast four one-hour shows produced from our two Grand Prix events held in November and December 2007 and nine one hour shows produced from our first three events for 2008, the third one being the May 16, 2008 event. We are currently considering options for televising our events for the remainder of 2008.

 

International Television Programming.  We have an exclusive arrangement with Alfred Haber Distribution, Inc. to distribute our 2007 FSN and MyNetworkTV programming and our 2008 event programming throughout the world. Through the end of March 2008, our programming was being distributed in over 50 countries throughout the world. We recognized $1 million of revenue for our international television distribution in 2007.

 

Pay-Per-View Television Programming.  We believe that pay-per-view television distribution may present future opportunities to generate significant additional revenue. In an effort to build our brand, we are currently distributing television programming for free through basic cable television broadcasting. If a proper opportunity becomes available for us, we intend to produce and distribute certain live events through pay-per-view television outlets in the future. However, we do not anticipate a pay-per-view event in 2008.

Sponsorships and Promotions

 

We sell sponsorships and promotion opportunities to companies seeking to reach our core target audience of 18- to 34-year-old males. In 2006, sponsorships and promotions were sold separately for the two-event Legend Championship and four-event World Team Championship. We sold sponsorship and promotional opportunities for our 2007 events as an overall sponsorship/promotion package, and will continue to do so for our 2008 events. For the year ended December 31, 2007, we recognized revenues of approximately $498,000 from sponsorships and promotions.

 

Sponsorships.  Sponsorships include, among other things, the opportunity to display corporate brand names at our live events and on televised broadcasts. The most highly sought after sponsorship opportunities include painted brands/logos on the fighting canvas in the ring, billboards in the arena and on the television broadcast, the time clock, “tale of the tape,” website banners and advertisements in the event program guide. For our past events, sponsors include or have included, among others, Cytosport Muscle Milk, Throwdown Energy Drink, Headblade, Premier Fighter, L.A. Boxing, Microsoft Corporation’s Xbox, the Coca Cola Corporation’s glaceau vitaminenergy drink, the Suzuki Motor Corporation, Sandals Resorts, Dale and Thomas Popcorn, and Fairtex Inc. Sponsors pay a fee based upon the position of their advertising media and the exposure it will receive during a live event and on television broadcasts. We have signed sponsors for the 2008 season and continue to pursue and negotiate with additional sponsors. This activity remains ongoing as part of our sales and revenues generating efforts.

 

Promotions.  Promotions are opportunities to tie an advertiser’s brand in with our league, teams or events. Promotion opportunities include product placement and brand associations. At past IFL events, the Suzuki Motor Corporation conducted an ATV give-away and Dale and Thomas Popcorn sampled its popcorn products. As our brand grows, we expect to earn revenues by creating promotions with companies and brands seeking to benefit from the popularity of IFL and the exposure received from appearing at our live events and on televised broadcasts.

 

Branded Merchandise

 

Licensing.  The licensing of IFL names, logos and copyrighted works on a variety of retail products presents a further opportunity to generate revenues, and this licensing may become material sources of revenue. As our brand grows, we expect to pursue greater opportunities to expand our licensing efforts through a more comprehensive licensing program. To date, revenues from branded merchandise have not been material. Given the profit margins and nature of our sports business, we expect video games, apparel and sportswear to be the biggest revenue generating categories of licensed products. We recognized $117,544 of revenue from our branded merchandise in 2007.

 

Home Video.  We expect to pursue opportunities in the home video market by licensing, on a distribution fee and/or royalty basis, our growing video library to third parties to develop, produce, manufacture, and sell DVDs for the home video market. Our video library includes proprietary material from our live events, television broadcasts, special events and behind the scenes of live events.

 

We have an arrangement with Warner Home Video, a division of Warner Bros. Home Entertainment, to distribute IFL mixed martial arts content on a worldwide basis directly to consumers via DVD, electronic sell through and similar media. Warner Home Video collects the proceeds from the sale of IFL home video products, and remits the proceeds to us less Warner Home Video’s distribution fee and certain allowable costs associated with the marketing, promotion and distribution of the home video products. We have released two DVDs under this arrangement — “Greatest Knockouts & Extreme Action” and “Road to the Championship.” We did not recognize any revenue for home video in 2007.

 

Digital Media.  We use our website, www.ifl.tv, to create an online community for our fans, to promote IFL brands, teams and fighters, to market and distribute our products and services and to create awareness for our live events and television broadcast schedule. Through www.ifl.tv, our fans are able to obtain the latest IFL news and information and experience archived video and audio clips of IFL athletes and media events. We also use our website for e-commerce. We promote www.ifl.tv on our televised programming, at live events,

and on all collateral marketing materials. We are investigating collaborating with various website to generate advertising revenue that can be shared with these other web services.

 

Competition

 

We are a growth stage company and are constantly seeking to increase our fan base. The MMA industry is also rapidly growing and evolving, and we face competition from other promoters of MMA sporting events, including the UFC, owned by Zuffa, LLC, a widely known MMA promoter in the United States. UFC produces MMA events for cable television through its agreement with SpikeTV and for pay-per-view audiences. Other U.S. based MMA competitors include Strikeforce, ProElite FC, BodogFight and M-1. Most promoters operate on an event-by-event basis and rely on the presence of a few well-known athletes to promote their events. UFC has been available on free television for several years, and other MMA organizations are now available on free television.

 

Our live events and television programming faces competition from other professional and college sports as well as from other forms of live, filmed and televised entertainment and other leisure activities. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise for the sale of our branded merchandise.

 

Trademarks and Copyrights

 

Intellectual property is material to all aspects of our operations, and we expend cost and effort in an attempt to maintain and protect our intellectual property and to avoid infringing on other parties’ intellectual property. We have a portfolio of trademarks and service marks and maintain a catalog of copyrighted works, including copyrights to our television programming and certain photographs. When necessary, we intend to enforce our intellectual property rights. Our failure to curtail piracy, infringement or other unauthorized use of our intellectual property rights effectively could adversely affect our operating results.

 

“International Fight League,” “IFL,” and “Battleground” are trademarks of IFL. Each trademark, trade name or service mark of any other company appearing in this document belongs to its holder.

 

Insurance

 

We currently have three general liability insurance policies: one for our New York office, one for our Nevada office and a special events policy for MMA events. For each event hosted to date, we have purchased event-specific insurance that met or exceeded the requirements of the relevant state athletic commissions and have special accident insurance for athletes that participate in our MMA events. We have errors and omissions insurance for our television broadcasts and our videos and also have directors’ and officers’ liability insurance.

 

Regulation

 

Live Events

 

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

 

Television Programming

 

The production and distribution of television programming by independent producers is not directly regulated by the federal or state governments, but the marketplace for television programming in the United States is substantially affected by government regulations applicable to, as well as social and political influences on, television stations, television networks and cable and satellite television systems and channels. We voluntarily designate the suitability of our television programming using standard industry practices. A

number of governmental and private sector initiatives relating to the content of media programming have been announced. Changes in governmental policy and private sector perceptions could further restrict our program content and adversely affect our viewership levels and operating results.

 

Employees

 

As of December 31, 2007, we had 27 employees, with 20 employees located in New York City and an additional 7 located in Las Vegas. We believe that our relationships with our employees are generally good. None of our employees is represented by a union.

 

 

You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this report, including our financial statements and the related notes, before deciding to purchase or sell any shares of our common stock.

 

Risks Related To Our Business

 

We have experienced losses and expect to incur substantial net losses in the future and have received a “going concern” opinion from our auditors for 2007. If we do not achieve profitability and find additional sources of cash, our financial condition and stock price could suffer and we could be forced to discontinue operations.

 

Since the inception of our business in 2005, we have incurred significant losses and only began generating revenue during the second quarter of 2006. Through December 31, 2007, we have generated net losses of $31 million. We expect to incur additional losses and negative cash flow for the foreseeable future. Our ability to become profitable depends on our ability to generate and sustain substantially higher revenue while maintaining reasonable expense levels. Although we have and intend to continue reducing our expenses, these efforts may not be sufficient and may adversely impact our brand or fan, sponsor and merchandising interest. If we do not achieve profitability, we may have to discontinue our operations.

 

As a result of our continued losses, our independent auditors have included an explanatory paragraph in our financial statements for the fiscal year ended December 31, 2007, expressing doubt as to our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in the report of our independent auditors could make it more difficult for us to secure additional financing or enter into strategic relationships with distributors on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we may not achieve profitability and the value of your investment could decline significantly.

 

Our revenues from operations are likely to be insufficient to meet our projected expenses in the short term; therefore, we will need to raise additional funds, which may not be available to us on favorable terms, if at all, thereby potentially disrupting the growth of our business and our ability to generate revenues.

 

We expect that our revenues from operations will be insufficient to meet our projected expenses, unless we are able to increase our revenues through other sources, such as entering into a strategic alliance with a significant television broadcaster or sports or entertainment enterprise or exploiting our digital rights. Unless we can successfully increase our revenues through these other sources (in excess of the costs we incur to generate these revenues), we will likely be required to raise additional capital through equity or debt financings by the end of the second quarter or in the early part of the third quarter of 2008. Such capital may not be available, or, if it is available, may not be available on terms that are acceptable to us. A future financing may be substantially dilutive to our existing stockholders and could result in significant financial and operating

covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in insolvency.

 

Our business is difficult to evaluate because it represents a new business model for the MMA market and we have been operating for less than two years. The MMA market may not develop as we anticipate, and we may not successfully execute our business strategy.

 

Our original league-based MMA business model focusing on teams, rather than individual competition, was unique to the MMA industry. We have since modified our business model to be a camp-based league, with title belt holders for different weight classes. We made this change because we believed the camp-based model would eventually be more successful. However, our model may not prove to be successful. We have a limited operating history upon which you can evaluate our business. Although we were organized in 2005, we did not begin revenue generating operations until 2006. The MMA industry is also rapidly growing and evolving and may not develop in a way that is advantageous for our business model. You must consider the challenges, risks and difficulties frequently encountered by early stage companies using new and unproven business models in new and rapidly evolving markets. Some of these challenges relate to our ability to:

 

 

Our business strategy may not successfully address these and the other challenges, risks and uncertainties that we face, which could adversely affect our overall success and delay or prevent us from achieving profitability.

 

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

 

As a result of our limited operating history, it is difficult to accurately forecast our future revenues. Current and future expense levels are based on our operating plans and estimates of future revenues. Revenues and operating results are difficult to forecast because they generally depend on our ability to promote events and the growth in popularity of the IFL or MMA. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would result in further substantial losses.

 

Our MMA content is being televised in the United States under short-term agreements with FSN and HDNet, which may not be renewed. If we do not enter into new agreement after these expire, we will not have a broadcast outlet for our MMA content in the U.S.

 

We are currently televising our MMA content in the U.S. pursuant to short-term agreements with FSN and HDNet, which will only broadcast our programming through our May 16, 2008 event at Mohegan Sun. No assurance can be given that we will be able to negotiate new television rights agreements for our MMA content with any broadcaster or that any such agreements will be favorable to us. Our revenues are dependent, indirectly, on the distribution of our free televised programming. Accordingly, any failure to maintain or renew arrangements with the distributors could adversely affect our operating results.

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

 

Our success depends on the continued availability and contributions of members of our senior management and other key personnel. The loss of the services of any of our executive officers or any of a number of other key personnel could delay or reduce our efforts to increase the popularity of our MMA league. Furthermore, recruiting and retaining qualified personnel to assist with these efforts will be critical to our success. The loss of members of our management team or our inability to attract or retain other qualified personnel or advisors, could significantly weaken our management team, harm our ability to compete effectively, harm our long-term business prospects, disrupt our relationships with advertisers and have a corresponding negative effect on our financial results, marketing and other objectives and impair our ability to develop our MMA league. Our financial situation has increased the difficulty of retaining and attracting talented employees.

 

Our failure to continue to develop creative and entertaining programs and events would likely lead to a decline in the popularity of our brand of entertainment.

 

The creation, marketing and distribution of our live and televised entertainment are at the core of our business and are critical to our ability to generate revenues across our media platforms and product outlets. Our failure to continue to create popular live events and televised programming would likely lead to a decline in our television ratings and attendance at our live events, which would likely harm our operating results.

 

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

 

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

 

We face a variety of risks as we develop and refine our businesses.

 

We are a new company and are developing and refining our businesses. Risks related to this may include:

 

 

We currently have weaknesses in internal control over financial reporting. If we fail to rectify these weaknesses and then maintain effective controls, we may be subject to litigation and/or costly remediation and the price of our common stock may be adversely affected.

 

Failure to establish the required controls or procedures, or any failure of those controls or procedures once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Our management and our auditors have identified a material weakness in our disclosure controls and procedures and in our internal control over financial reporting due to insufficient resources in the accounting and finance department. Due to these weaknesses, there is more than a remote likelihood that a material misstatement of the consolidated financial statements would not have been prevented or detected.

 

Should we or our auditors identify any other material weaknesses and/or significant deficiencies, those will need to be addressed as well. Any actual or perceived weaknesses or conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal control over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal control over financial reporting could adversely impact the price of our common stock and may lead to claims against us. See Item 9A in this Annual Report on Form 10-K

 

Compliance with corporate governance and public disclosure regulation are costly compared to our revenues, and could increase liability exposure for us, our directors and our executive officers.

 

Rules adopted by the United States Securities and Exchange Commission (the “SEC”) pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of our assessment by our independent registered public accountants. The assessment requirement first applied to this annual report for fiscal 2007. The standards for management’s assessment of the internal control over financial reporting required significant documentation, testing and possible remediation to meet the detailed standards. We encountered problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, we may encounter problems or delays in completing the implementation of improvements and receiving an attestation of our assessment by our independent registered public accountants which will be required for fiscal 2008. If we do not improve our internal control over financial reporting so that it is effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence in us and the value of our common stock may be negatively impacted. Further, many companies have reported that compliance with these standards requires a disproportionate expenditure of funds.

 

In addition, as a public reporting company, we are subject to various laws, regulations and standards relating to corporate governance and public disclosure. Our management team needs to invest significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to significant general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In addition, because public company directors and officers face increased liabilities, the individuals serving in these positions may be less willing to remain as directors or executive officers for the long-term, and we may experience difficulty in attracting qualified replacement directors and officers. We also experienced increased cost and efforts obtaining director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, we may need to expend a significantly larger amount than we previously spent on recruiting, compensating and insuring new directors and officers.

 

Risks Related To Our Industry

 

The failure to retain or continue to recruit key athletes and coaches could negatively impact the growth of IFL’s popularity.

 

Our success depends, in large part, upon our ability to recruit and retain athletes and coaches who are well known in the MMA world and who can perform at a high level in our live events and televised programming. There is no assurance that we will be able to continue to identify and retain these athletes and

coaches in the future. Additionally, there is no assurance that we will be able to retain our current athletes and coaches after their contracts expire. Our failure to attract and retain key athletes, or a serious or untimely injury to, or the death of, or unexpected or premature loss or retirement for any reason of any of our key athletes, could lead to a decline in the popularity of our brand of mixed martial arts, which could adversely affect our operating results.

 

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

 

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

 

A decline in the popularity of mixed martial arts, including changes in the social and political climate, could adversely affect our business.

 

Our operations are affected by consumer tastes and entertainment trends, which are unpredictable and subject to change and may be affected by changes in the social and political climate. We believe that mixed martial arts is growing in popularity in the United States and around the world, but a change in our fans’ tastes or a material change in the perceptions of our advertisers, distributors and licensees, whether due to the social or political climate or otherwise, could adversely affect our operating results.

 

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

 

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

 

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

 

Intellectual property is material to all aspects of our operations, and we may expend substantial cost and effort in an attempt to maintain and protect our intellectual property. We have a portfolio of registered trademarks and service marks and maintain a catalog of copyrighted works, including copyrights to television programming and photographs. Our inability to protect our portfolio of trademarks, service marks, copyrighted material, trade names and other intellectual property rights from piracy, counterfeiting or other unauthorized use could negatively affect our business.

 

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

 

In various states in the United States and some foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or other permits or licenses for athletes and/or permits for events in order for us to promote and conduct our live events. If we fail to comply with the regulations of a particular jurisdiction, we may be prohibited from promoting and conducting live events in that jurisdiction. The inability to present live events over an extended

period of time or in a number of jurisdictions could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.

 

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

 

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

 

Risks Related To Our Common Stock

 

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

 

As of March 31, 2008, our executive officers, directors, and principal stockholders who hold 5% or more of our outstanding common stock beneficially owned, in the aggregate, approximately 72% of our outstanding common stock. These stockholders are able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

 

We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.

 

Prior to the merger and our acquisition of Old IFL’s business, there was a limited trading market for our common stock and there was no public trading market for Old IFL’s common stock. Upon the effectiveness on May 29, 2007 of a registration statement for 19,376,000 shares of our common stock sold in a December 2006 private placement, a more active trading market developed for our common stock. However, since that time, the price of our common stock has decreased significantly and has traded below $0.10 per share. No assurance can be given that an active market for our common stock will be sustained, or that you will be able to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. It is possible that, in future quarters, our operating results may be below the expectations of securities analysts or investors. As a result of these and other factors, the price of our common stock may decline, possibly materially.

 

If we raise additional capital through the issuance of equity securities, or securities exercisable for or convertible into our equity securities, our stockholders could experience substantial dilution.

 

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

 

The market price of our common stock may be volatile.

 

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

 

In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently

unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

 

Future sales of our common stock may depress our stock price.

 

Sales of a substantial number of shares of our common stock in the public market could cause a decrease in the market price of our common stock. As of March 31, 2008 we had 79,058,509 shares of common stock outstanding, and options and warrants outstanding to purchase 2,900,308 and 14,611,180, respectively, shares of our common stock. Substantially all of the 79 million shares of our common stock that are issued and outstanding may be traded under our two recent registrations statements or Rule 144 of the Securities Act of 1933. We may also issue additional shares of stock and securities convertible into or exercisable for stock in connection with our business. If a significant portion of these shares were sold in the public market, the market value of our common stock could be adversely affected.

 

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

 

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

 

 

In addition, Section 203 of the Delaware General Corporation Law provides that, subject to certain exceptions, an “interested stockholder” of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date that such stockholder becomes an interested stockholder unless:

 

 

With some exceptions, an interested stockholder includes any person and affiliates that own 15% or more of our outstanding voting stock.

 

Under certain circumstances, Section 203 makes it more difficult for a person who would be an interested stockholder to effect various business combinations with us for a three-year period. We have not elected to be exempt from the restrictions imposed under Section 203. The provisions of Section 203 may encourage persons interested in acquiring us to negotiate in advance with our board of directors, since the stockholder

approval requirement would be avoided if a majority of our directors then in office approves either the business combination or the transaction which results in any such person becoming an interested shareholder. These provisions also may have the effect of preventing changes in our management. These provisions could make it more difficult to accomplish transactions which our stockholders may otherwise deem to be in their best interests.

 

Cautionary Note Regarding Forward-Looking Statements.

 

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

 

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation, the factors listed under this Item 1A — “Risk Factors.”

 

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished

 

 

None.

 

 

Our principal office is located in New York City, New York, where we lease 4,300 square feet of office space pursuant to a lease that expires in August 2010. We have a one-year lease for an office in Las Vegas, Nevada, expiring in December 2008. If we require additional space, we believe that we will be able to obtain such space on commercially reasonable terms.

 

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not aware of any pending or threatened legal proceeding that, if determined in a manner adverse to us, could have a material adverse effect on our business and operations.

 

 

None.

 

 

Our shares of common stock, par value $0.01 per share, are quoted on the OTC Bulletin Board under the symbol “IFLI.” Prior to November 29, 2006, our common stock was quoted on the OTC Bulletin Board under the symbol “PGNT.” The following table sets forth the range of high and low closing sale prices for the common stock as reported by the OTC Bulletin Board for the periods indicated below.

 

 

The closing sale prices in the table above reflect inter-dealer prices, without retail mark-up or commissions and may not represent actual transactions.

 

Immediately prior to the Merger on November 29, 2006, we effected a 1-for-20 reverse stock split, whereby every 20 shares of common stock then outstanding were combined and reduced into one share of common stock. The closing sale prices in the table above reflect the reverse stock split. The reverse stock split did not affect the authorized number of shares of common stock or the number of our stockholders of record since each fractional share resulting from the reverse stock split was rounded up to the nearest whole share.

 

As of March 31, 2008 we had approximately 1,550 holders of record of our common stock. The last sale price of our common stock as reported by the OTC Bulletin Board on April 11, 2008 was $0.06 per share.

 

Dividend Policy

 

We have never declared or paid dividends on our common stock. We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

See Item 12 in this Annual Report on Form 10-K.

 

Issuer Purchases and Unregistered Sales of Equity Securities

 

We did not purchase any of our equity securities and did not sell any of unregistered equity securities during the quarter ended December 31, 2007.

Performance Graph

 

Five Year Cumulative Total Return

 

The following graph and chart compare the cumulative total return for International Fight League, Inc. over the past five fiscal years with those of the AMEX Market Index and a peer group index. We have included for comparison the AMEX Market Index because we believe this index provides a more meaningful comparison than other broad market indices, such as the S&P 500. We have also included a peer group index, consisting of public companies with the same Standard Industrial Classification (SIC) code as ours, which is the professional sports clubs and promoters industry.

 

The stockholder returns shown below should not be considered indicative of future returns.

 

 

 

Assumes $100 invested on December 31, 2002, in International Fight League, Inc. and each of the indices compared above, with all dividends and distributions reinvested. The companies included in the SIC code index are AVP Inc., Global Entertainment Corporation, Latin Television Inc., RTG Ventures, Inc. and United States Basketball League, Inc.

 

You should read the data set forth below in conjunction with our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information appearing elsewhere in this report.

 

We derived the statement of operations data for the period from March 29, 2005 (date of inception) to December 31, 2005 from the audited financial statements of International Fight League, LLC, the predecessor to Old IFL, which were prepared in accordance with generally accepted accounting principles, included elsewhere in this report. We derived the statement of operations data for the years ended December 31, 2007 and 2006 and the balance sheet data as of December 31, 2007 and 2006 from our audited consolidated financial statements included elsewhere in this report. Our historical results are not necessarily indicative of the results to be expected in any future period.

 

 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes that appear elsewhere in this report.

 

In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those set forth in “Risk Factors.”

 

Overview

 

We operate, through our subsidiary, IFL Corp., a sports entertainment business focused on our professional mixed martial arts sports league — International Fight League. Immediately prior to November 29, 2006, we were known as Paligent Inc. and were a shell company with no operating business. On November 29, 2006, pursuant to the Merger between our wholly owned subsidiary and Old IFL, we acquired the mixed martial arts sports league business of Old IFL. As a result of the Merger, Old IFL became our wholly owned subsidiary and changed its name to IFL Corp., and we changed our name from Paligent Inc. to “International Fight League, Inc.”

 

Immediately prior to the effective time of the Merger, all of the outstanding shares of preferred stock of Old IFL were converted into shares of Old IFL common stock on a one-for-one basis, and we effected a 1-for-20 reverse stock split of our common stock, such that the number of shares of our common stock outstanding following the Merger would be approximately equal to the number of shares of our common stock outstanding immediately prior to the reverse stock split. Pursuant to the Merger, we issued 30,872,101 shares of our common stock to the stockholders of Old IFL in exchange for all of the outstanding capital stock of Old IFL. In connection with the Merger, all of the options to purchase 1,865,000 shares of common stock of Old IFL outstanding prior to the Merger were converted into options to purchase 1,925,376 shares of our common stock on the same terms and conditions applicable to such options prior to the Merger. The new options were issued under the International Fight League, Inc. 2006 Equity Incentive Plan approved by our stockholders in conjunction with their approval of the Merger.

 

Following the reverse stock split and the Merger, there were 32,496,948 shares of IFL common stock outstanding, of which the pre-Merger stockholders of Paligent owned approximately 5% and the pre-Merger stockholders of Old IFL owned approximately 95%. As a result, Old IFL has been treated as the acquiring company for accounting purposes. 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 issued after completion of the transaction reflect Old IFL’s operations. In addition, immediately following the Merger, we issued 1,627,500 shares of common stock to Mr. Kurtz, Paligent’s principal stockholder before the Merger, in exchange for his contribution of $651,000 of indebtedness owing to him under a promissory note issued by Paligent.

 

The Old IFL business was founded in 2005 to organize, host and promote live and televised mixed martial arts sporting events and to capitalize on the growing popularity of mixed martial arts in the United States and around the world. Following the acquisition of Old IFL, we refocused our business efforts on developing and operating Old IFL’s mixed martial arts sports league business and continued operating this business through IFL Corp. At the core of our business in 2007 was our twelve mixed martial arts teams, which consist of some of the world’s most highly regarded mixed martial arts athletes and coaches. Our mixed martial arts sporting events typically included match-ups of two teams, with athletes competing in one-on-one matches according to weight division. These events create a body of television programming content that we currently distribute in the United States through an arrangement with Fox Sports Net (“FSN”) and MyNetworkTV, Inc. (“MNTV”). We earn revenue from live event ticket sales, sponsorships and promotions and licensing of our intellectual property. For 2008, we have changed our format by eliminating our team format, focusing on MMA camps and title fights involving our belt holders.

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. On April 29 and June 3, 2006, Old IFL held its debut MMA sports events featuring its initial four teams. The event was broadcast in a series of three original taped telecasts in May and June 2006. We have held four additional events as part of The World Team Championship, including the final event held in December 2006. We launched our first full season in 2007, which consisted of a six-month; nine event regular season that was followed by a two month, two events post-season. We finished 2008 with a two event “Grand Prix” all-star tournament during November and December 2007, in which the top athletes in each weight class competed for the title belts, which were awarded to the champion of each of six weight classes.

 

As Old IFL, we raised funds primarily through stockholder loans and the issuance of preferred stock. The Merger is also considered to be a capital transaction in substance rather than a business combination. The transaction is equivalent to the issuance of stock by Old IFL for the net monetary assets of Paligent, accompanied by a recapitalization. The transaction has been accounted for as a reverse acquisition of a “shell company” whereby Old IFL is the acquirer for accounting purposes and Paligent is the legal acquirer. In this transaction, no goodwill or other intangible assets have been recorded. As a result, the financial information included in this report for periods prior to the Merger relates to Old IFL.

 

At December 31, 2007, we had stockholders’ equity of $5.8 million and an accumulated deficit of $31 million. For the year ended December 31, 2007, we incurred losses and negative operating cash flows of $21.2 million and $21.4 million, respectively, as compared to 2006 of $9.6 million and $8.2 million, respectively. These trends have continued in the first quarter of 2008 as we continue to develop our business.

 

On December 28, 2006, we completed a private sale to a number of institutional and individual accredited investors an aggregate of 19,376,000 shares of common stock at a price of $1.25 per share, or $24,220,000 in the aggregate. In connection with the private placement, we incurred expenses which included, without limitation, commissions to the placement agent, legal and accounting fees, and other miscellaneous expenses, of approximately $2 million. We also issued to the placement agent, as partial compensation for its services, a five-year warrant to purchase up to 581,280 shares of common stock at an exercise price of $1.25 per share.

 

On August 6, 2007, we completed a private sale to a number of institutional and individual accredited investors for 25,330,000 shares of common stock at a price of $0.50 per share, or $12,665,000 in the aggregate, and issued five year warrants to the investors to purchase 12,665,000 shares of common stock with an exercise price of $1.05 per share. In connection with the private placement, we incurred expenses which included, without limitation, commissions to the placement agent, legal and accounting fees, and other miscellaneous expenses, of approximately $1.1 million. We also issued to the placement agent, as partial compensation for its services, a five-year warrant to purchase up to 729,900 shares of our common stock at an exercise price of $1.05 per share.

Unaudited Quarterly Consolidated Financial Data

 

The following tables set forth selected unaudited quarterly consolidated income statement data for each of the quarters ended March 31, June 30, September 30, and December 31, for 2007 and 2006. No information is presented for earlier quarters, as Old IFL did not commence operations until January 2006, and such earlier information is not deemed material or comparable. The consolidated financial statements for each of these quarters have been prepared on the same basis as the audited consolidated financial statements included in this report and, in the opinion of management, include all adjustments necessary for the fair presentation of the consolidated results of operations for these periods. You should read this information together with our audited consolidated financial statements and the related notes included elsewhere in this report.

 

These unaudited quarterly operating results are not necessarily indicative of the results for any future period.

 

 

 

Results of Operations

 

From inception to December 31, 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.

 

During 2005, we were a development stage company with insignificant operations. Accordingly, there are no meaningful comparative data upon which period comparisons can be made.

 

Year Ended December 31, 2007 Compared To Year Ended December 31, 2006

 

During the year ended December 31, 2007, IFL incurred a net loss of $21.3 million, or $0.33 per common share compared to a net loss of $9.6 million, or $0.49 per common share for the year ended December 31, 2006.

 

Revenues:

 

Revenues for 2007 were $5.7 million as compared to $1.0 million for 2006, an increase of $4.7 million or 470%. The increase is attributable to 2007 being the first full year of MMA sporting events, a total of thirteen events as compared to six events in 2006. For the first time, revenues were generated by television

rights and by sharing a portion of food, beverage and parking revenue at some of our events. In addition, sponsorship revenue increased in 2007 over 2006. The principal components of revenue include:

 

 

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 Letter of Intent, FSN had exclusive distribution rights to telecast all IFL regular season, playoff and championship events. We did not recognize any revenue from the FSN telecasts. The Letter of Intent also provided for the telecasting of IFL MMA content on MNTV, for which MNTV paid fees to us. MNTV paid us $1,607,500 during the year ended December 31, 2007 which we recognized as television revenue.

 

In February 2007, we entered into an agreement with Alfred Haber Distribution, Inc. to be the exclusive distributor internationally of IFL MMA content broadcasted on FSN and MNTV. We recognized $1,000,000 in revenue for the year ended December 31, 2007 from this arrangement.

 

On various dates during the year ended December 31, 2006, we entered into agreements with National Sports Programming, owner and operator of Fox Sports Net Sports Programming Service (“FSN”) regarding IFL’s series of team mixed martial arts matches held during the year ended December 31, 2006. The agreements granted FSN certain rights to the telecasts and, in return, FSN agreed to broadcast the series under specified conditions. We did not recognize any television rights revenue or corresponding costs of revenues related to those agreements.

 

Cost of Revenues:

 

For the year ended December 31, 2007, cost of revenues was $17.7 million as compared to $6.5 million for fiscal year 2006, an increase of $11.2 million, or 172%. The principal components and respective increases in costs of revenue are:

 

 

 

 

 

Selling, General and Administrative Expenses:

 

For the year ended December 31, 2007, selling, general and administrative expenses were $8.7 million as compared to $3.9 million for 2006, an increase of $4.9 million, or 126%. The primary components of these expenses and the reason for the increase are:

 

 

During 2007, we also recorded a reduction of $75,000 in bad debt expense as compared to $80,000 of expense in 2006, a charge of $189,000 for warrants to purchase common stock issued to a vendor for services rendered, and we recorded tax expense of $133,000 for 2007 representing the New York tax on capital infusions.

 

Stock-based Compensation:

 

Stock-based compensation expense for 2007 was $344,000 compared to $48,000 in 2006, an increase of $296,000 or 617%. The increase is the result of continued expensing of prior equity grants for a full year, new equity grants to directors, officers and employees, and warrants issued to league coaches.

 

Other Income (Expense):

 

Dividend expense for 2007 was $0 compared to $153,000 for 2006, which related to dividends that accrued on the Series A Preferred Stock. Immediately prior to the Merger, all accrued dividends and the Series A Preferred Stock were converted into common stock of Old IFL, which was then exchanged for shares of IFL in connection with the Merger.

Interest expense for 2007 was $5,000 versus $91,000 for 2006, all of which relates to the cost of funds loaned to IFL pursuant to the promissory note with Mr. Kurtz.

 

For the year ended December 31, 2007, we incurred liquidated damages of $583,000 pursuant to the registration rights agreements with the investors in the December 2006 and August 2007 private sales of our common stock. We incurred these costs because of (a) delays getting our registration statement effective to register the shares issued in the August 2007 private placement and (b) the investors in our December 2006 private placement being unable to sell their shares under the previously effective registration statement. These two events are the result of the restatement of our financial statements we disclosed on November 19, 2007 due to our previous accounting for our FSN television arrangement as a barter transaction.

 

During the year ended December 31, 2007, interest income of $415,000 was earned on available cash balances compared to $32,000 in 2006, an increase of $383,000 or 1,197%. Cash balances in 2007 were higher than in 2006 due to increase in our cash balance resulting from our private placements of common stock.

 

Liquidity and Capital Resources

 

At December 31, 2007, our cash and cash equivalents were $6.1 million, a decrease of $10.5 million from the end of the prior year. During 2007, we (i) received $12.7 million from the August 2007 private sale of our common stock; (ii) received $1.2 million subscription receivable from 2006; (iii) used $1.6 million to pay accrued commission on the December 2006 private placement of common stock, (iv) used $1.3 million for costs of the December 2006 and August 2007 private placements of common stock; and (v) used $21.5 million for operating activities and deposits and purchases of property and equipment in the ordinary course.

 

On August 6, 2007, we completed a private sale with a number of institutional and individual accredited investors for 25,330,000 shares of common stock at a price of $0.50 per share, or $12,665,000 in the aggregate, and warrants to purchase up to 12,665,000 shares of our common stock with an exercise price of $1.05 per share and an expiration of August 6, 2012. We received net proceeds of $11.6 after payment of $1.1 million of expenses related to the private sale, which included commissions to the placement agent, legal and accounting fees, and other miscellaneous costs. In connection with the August 2007 private placement, we issued to the placement agent, as partial compensation for its services, a five year warrant to purchase up to 729,900 shares of our common stock at an exercise price of $1.05 per share.

 

At December 31, 2006, our cash and cash equivalents were $16.6 million, an increase of $15.5 million from the prior year. During fiscal 2006, we issued (i) $24.2 million in common stock, of which $23.0 million was received in cash and $1.2 million was held as a subscription receivable at December 31, 2006; (ii) issued $2.5 million of Series A Preferred Stock, of which $1.3 million was received in cash and $1.2 million was issued in exchange for the conversion of investor advances that were received in 2005; (iii) received $4.9 million in loans from Richard J. Kurtz, one of our directors, to fund operations during the third and fourth quarters of 2006; and (iv) used $8.2 million for operating activities, $5.1 million to repay principal indebtedness to Mr. Kurtz (including $189,000 of debt assumed from Paligent at the time of the Merger) and $455,000 for deposits and purchases of equipment.

 

On December 28, 2006, we completed a private placement to a number of institutional and individual accredited investors of an aggregate of 19,376,000 shares of common stock at a price of $1.25 per share, or $24,220,000 in the aggregate. In connection with the private placement, we incurred expenses which included commissions to the placement agent, legal and accounting fees, and other miscellaneous expenses, of $2 million. We also issued to the placement agent, as partial compensation for its services, a five-year warrant to purchase up to 581,280 shares of common stock at an exercise price of $1.25 per share.

 

We currently do not have any credit facilities or lines of credit or commitments from lenders or investors for any debt or equity financing.

 

Future Capital Requirements

 

Since inception, our MMA operations have incurred losses, and we have funded these operating deficits through proceeds of (a) $2.5 million from the 2006 issuance of preferred stock, (b) $22.2 million net proceeds

from our December 2006 private placement of common stock, and (c) $11.6 million of net proceeds from our August 2007 private placement of common stock. Based upon management’s current forecast of future revenues and expenses, we believe our cash resources will likely be sufficient to fund operations into the third quarter of 2008. This assumes that our expenses continue to decrease as a result of our cost reduction efforts and that we realize additional cash from the following: (i) live events revenues at the levels expects; (ii) the distribution of programming internationally pursuant to our exclusive relationship with Alfred Haber Distribution, Inc.; (iii) the continuation of televising our events and (iv) an increase in sponsorship and licensing revenue. We are also exploring various alternatives to increase profitability, such as a strategic alliance or relationship with a significant sports, entertainment or media organization or another significant entity interested in promoting MMA and/or exploiting our digital rights. If we can successfully generate revenue from additional sources or increase our profitability, our cash resources could last beyond the third quarter of 2008.

 

We have taken several steps in an effort to reduce our expenses and revised our entire live event and television production activities and structure to help us realize additional cost savings. In addition, we are implementing changes to our events and league structure with the goal of generating more fan interest. These measures have been taken into account in our forecast above.

 

If we are not able to generate sufficient cash from operations or if we are unable to secure sufficient debt or equity financing for operations, we 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.

 

Off-Balance Sheet Arrangements

 

For the years ended December 31, 2007 and 2006, we had no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

Principles of Consolidation — On November 29, 2006, as part of the Merger, Paligent issued 30,872,101 shares of its common stock to the former stockholders of Old IFL in exchange for all of the issued and outstanding shares of common stock of Old IFL (including shares of Old IFL preferred stock which were converted to Old IFL common stock immediately prior to the Merger) in a transaction accounted for as a reverse acquisition of a “shell company.” Old IFL was deemed to be the acquirer for accounting purposes, and Paligent was deemed to be the legal acquirer (see Note 4 of the accompanying financial statements).

 

The consolidated financial statements include the accounts of Old IFL from March 29, 2005 (date of inception) to December 31, 2005 and for the years ended December 31, 2007 and 2006. The consolidated financial statements also include the accounts of IFL from November 29, 2006 (the effective date of the merger) to December 31, 2006, plus the cash acquired and liabilities assumed for accounting purposes from Paligent at the time of the Merger, and for the year ended December 31, 2007. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents — For purposes of the consolidated statements of cash flows, we consider all short-term investments purchased with an original maturity of three months or less at the date of acquisition to be cash equivalents. We invest our excess cash in money market instruments. Cash and cash equivalents are, at times, maintained at financial institutions in amounts that exceed federally insured limits.

 

Accounts Receivable — Accounts receivable relates principally to international television distribution and sponsorship agreements. We evaluate the collectability of accounts receivable and establish allowances for the

amount of receivables that are estimated to be uncollectible. Allowances are based on the length of time receivables are outstanding and the financial condition of individual customers. For the years ended December 31, 2007, 2006 and 2005, we maintained an allowance for doubtful accounts of $5,000, $80,000 and $0, respectively, the provisions for which are included in selling, general and administrative expenses

 

Income Taxes — On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FAS 109” (“FIN 48”). As of January 1 and December 31, 2007, there were no unrecognized tax benefits. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at January 1, 2007. There was no change to this balance at December 31, 2007. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position. The adoption of the provisions of FIN 48 did not have a material impact on our financial position, results of operations and cash flows.

 

For the year ended December 31, 2007 and 2006, we complied with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

 

For the period of March 29, 2005 to December 31, 2005, the LLC was treated as a partnership for federal and state income tax purposes and, accordingly, did not record a provision for income taxes because the individual members reported their share of the LLC’s income or loss on their personal income tax returns.

 

Revenue Recognition — In accordance with the provisions of Staff Accounting Bulletin. (“SAB”) No. 101, “Revenue Recognition,” as amended by SAB No. 104, revenues are generally recognized when products are shipped or as services are performed. However, due to the nature of our business, there are additional steps in the revenue recognition process, as described below:

 

 

Stock-Based Compensation — Accounting for equity awards issued to employees follows the provisions of SFAS 123(R), “Share-Based Payment.” This statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward.

 

We use the Black-Scholes option pricing model to measure the fair value of options granted to employees.

 

Earnings Per Share — We comply with the accounting and reporting requirements of SFAS No. 128, “Earnings Per Share.” Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for

the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares during the period. At December 31, 2007 and 2006, our common stock equivalents include stock options and warrants exercisable for 2,900,306 and 14,611,180, respectively, and 2,189,311 and 653,987, respectively, shares of our common stock. Common stock equivalents are excluded from the calculation in any period in which their inclusion would be anti-dilutive or would decrease the loss per common share.

 

Control Weakness

 

Our management has identified a material weakness in our disclosure controls and procedures and our internal control over financial reporting. See Item 9A in this Annual Report on Form 10-K.

 

Recently Issued Accounting Standards

 

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. SFAS No. 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. SFAS No. 157 is effective on January 1, 2008, although early adoption is permitted. We are currently assessing the potential effect of SFAS No. 157 on the consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In June 2007, the FASB ratified EITF Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those years. Management anticipates that the adoption of EITF 06-11 will not have a material impact on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS No. 141R”), which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors, and other users, all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141R will be effective for acquisitions with a date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will apply SFAS No. 141R for any of the Company’s applicable acquisitions beginning January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”, which requires the recognition of a noncontrolling interest

(minority interest) as equity in the consolidated financial statements and separate from the parent’s equity; the inclusion of the amount of net income attributable to the noncontrolling interest in consolidated income on the face of the income statement; and a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS No. 160 will be effective for the fiscal years beginning on or after December 15, 2008. The Company will apply SFAS No. 160 to any applicable transactions beginning January 1, 2009.

 

In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 was effective January 1, 2008 and expresses the views of the Staff of the SEC regarding the use of the simplified method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123(R). We are currently evaluating the impact of applying the provisions of SAB 110 on our financial position and results of operations.

 

 

Not applicable.

 

Index To Financial Information

 

 

To the Board of Directors and Stockholders of
International Fight League, Inc.

 

We have audited the accompanying consolidated balance sheets of International Fight League, Inc. and Subsidiary (collectively, the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ and members’ equity (deficit), and cash flows for the years ended December 31, 2007 and 2006, and for the period March 29, 2005 (date of inception) to December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Fight League, Inc. and Subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006, and for the period March 29, 2005 (date of inception) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered consecutive recurring losses, accumulated deficit and negative cash flows from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Roseland, New Jersey

April 14, 2008

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMEBERS’ EQUITY (DEFICIT)

For the Period March 29, 2005 (date of inception) to December 31, 2007

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

The accompanying notes are an integral part of the consolidated financial statements.

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Nature of Operations

 

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 (see Note 4).

 

The accompanying consolidated financial statements represent the accounts of IFL, a professional mixed martial arts (“MMA”) sports league. IFL is an integrated media and entertainment company, engaged in the development, production and marketing of live mixed martial arts events with the intent to package television and pay-per-view programming and eventually the license and sale of branded consumer products featuring the IFL and its personalities.

 

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 members of the LLC contributed 100% of their membership interests to Old IFL in exchange for 18 million shares of Old IFL’s $0.0001 par value common stock. The transaction has been accounted for as a merger of entities under common control, similar to a pooling of interests, in which Old IFL was the surviving entity.

 

 

Principles of Consolidation

 

On November 29, 2006, as part of the Merger, Paligent issued 30,872,101 shares of its common stock to the former stockholders of Old IFL in exchange for all of the issued and outstanding shares of common stock of Old IFL (including shares of Old IFL preferred stock which were converted to Old IFL common stock immediately prior to the Merger) in a transaction accounted for as a reverse acquisition of a “shell company.”. Old IFL was deemed to be the acquirer for accounting purposes, and Paligent was deemed to be the legal acquirer (see Note 4).

 

The consolidated financial statements include the accounts of Old IFL from March 29, 2005 (date of inception) to December 31, 2005 and for the years ended December 31, 2007 and 2006. The consolidated financial statements also include the accounts of IFL from November 29, 2006 (the effective date of the Merger) to December 31, 2006, plus the cash acquired and liabilities assumed for accounting purposes from Paligent at the time of the Merger and for the year ended December 31, 2007. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Property and Equipment

 

Property and equipment is stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the assets, ranging from 3 to 5 years or, when applicable, over the life of the lease, whichever is shorter.

 

Long-Lived Assets

 

The Company complies with the accounting and reporting requirements of Statement of Financial Accounting Standards No. (“SFAS”) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. Long-lived assets will be written-down if the evaluation determines that the fair value is less than the book amount.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all short-term investments purchased with an original maturity of three months or less at the date of acquisition to be cash equivalents.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company evaluates the collectibility of accounts receivable and establishes allowances for the amount of receivables that are estimated to be uncollectible. Allowances are based on the length of time receivables are outstanding and the financial condition of individual customers. As of December 31, 2007 and 2006, the Company maintained an allowance for doubtful accounts of $5,000 and $80,000 respectively, the provisions for which are included in selling, general and administrative expenses.

 

Merchandise Inventory

 

Merchandise inventory consists of merchandise sold on a direct sales basis, which are not sold through wholesale distributors and retailers. Substantially all merchandise inventory consists of finished goods. Inventory is stated at the lower of cost (first-in, first-out basis) or market. The valuation of merchandise inventory requires management to make estimates assessing the quantities and the prices at which the inventory can be sold. As of December 31, 2007, the Company had written off all of its merchandise inventory.

 

Income Taxes

 

For the years ended December 31, 2007 and 2006, the Company complied with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

 

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 creates a single accounting and disclosure model for uncertain tax positions, provides guidance on the minimum threshold that a tax uncertainty is required to meet before it can be recognized in the consolidated financial statements and applies to all tax positions taken by a company, both those deemed to be routine as well as those for which there may be a high degree of uncertainty.

 

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

FIN 48 establishes a two-step approach for evaluating tax positions. The first step, recognition, occurs when a company concludes (based solely on the technical aspects of the tax matter) that a tax position is more likely than not to be sustained on examination by a taxing authority. The second step, measurement, is only considered after step one has been satisfied and measures any tax benefit at the largest amount that is deemed more likely than not to be realized upon ultimate settlement of the uncertainty. Tax positions that fail to qualify for initial recognition are recognized in the first subsequent interim period that they meet the more likely than not standard, when they are resolved through negotiation or litigation with the taxing authority or upon the expiration of the statute of limitations. Derecognition of a tax position previously recognized would occur when a company subsequently concludes that a tax position no longer meets the more likely than not threshold of being sustained. FIN 48 also significantly expands the financial statement disclosure requirements relating to uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of the provisions of FIN 48 did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows. During the year ended December 31, 2007, the Company recognized no adjustments for uncertain tax provisions.

 

For the period March 29, 2005 (date of inception) to December 31, 2005, the LLC was treated as a partnership for federal and state income tax purposes and, accordingly, did not record a provision for income taxes because the individual members reported their share of the LLC’s income or loss on their personal income tax returns.

 

Revenue Recognition

 

In accordance with the provisions of the SEC’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition”, as amended by SAB 104, revenues are generally recognized when products are shipped or as services are performed. However, due to the nature of the Company’s business, there are additional steps in the revenue recognition process, as described below:

 

 

Stock-Based Compensation

 

Accounting for equity awards granted to employees follows the provisions of SFAS No. 123(R), “Share-Based Payment” and the SEC’s SAB 107, “Valuation of Share-Based Payment Arrangements for Public Companies.” This statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward.

 

The Company uses the Black-Scholes option pricing model to measure the fair value of options granted to employees.

 

INTERNATIONAL FIGHT LEAGUE, INC.
and Subsidiary (formerly International Fight League, LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Advertising Expense