« Tuesday news and notes: Bringing the heat against Karo Parisyan | Home | More stupid human tricks with Dana White »
Latest quarterly report from Pro Elite Inc.
By Zach Arnold | August 14, 2007
Here are the links:
Form 10QSB for Pro Elite, Inc.
Cash and cash equivalents as of June 30, 2007 was $3,953,778. Additionally, on July 12, 2007, we received net proceeds of $20.2 million from a private placement of our common stock. Our cash and cash equivalents are expected to be sufficient to execute the next 18 months of our three year business plan. As such, we continue to seek additional financing. If we are unable to raise sufficient additional financing, our growth may be limited. There can be no assurances that we will be able to raise sufficient financing on favorable terms and conditions. Management believes that we currently have sufficient cash and cash equivalents to finance our current operations for the next twelve months.
I’ll let those smarter on the financial side of things analyze these reports in the comments section. One thing – read the part about bad accounting practices at hand. Unbelievable.
Topics: Media, MMA, Pro Elite, Zach Arnold | 17 Comments » | Permalink | Trackback |
The most scary part (for me) is reading Item 3 (Controls and Procedures) regarding the auditing of the books:
It’s possible that the numbers could be even worse than what it already is, given the (self-admittedly) poor bookkeeping procedures.
This sounds eerily similar to the report of the IFL…though not as dire.
From the beginning I never liked this promotion and the people behind it. It is the only organization I actively root against. They have beenn around about a year and have several lawsuits against them already. Now there’s the bad accounting. I won’t be sad when they fold.
It looks like the IFL report because this is standard operating procedure for a relatively new company still raising cash. Believe me, Pro Elite is in a much better place than the IFL right now. Pro Elite has Showtime’s backing and continues to provide them with a valuable product at lower cost than the IFL. They’re not going anywhere.
As for the accounting — that’s not as surprising as you might imagine. They’re still in the formative stages and it’s easy to remedy for future quarters. All in all, this is a positive report for a company in their stage. Having sufficient funds on hand for anything over 1 year is good at this point.
That’s not quite true. After all, it’s easier for a sole proprietorship to handle the books more effectively than, say, General Motors due to the volume of business. Given that Pro Elite is a developing corporation, it should be easier at this point to compile their books. If they’re having problems now, it can potentially occur at a much more significant level 2-3 years down the road.
Sadly, I have to agree with Euthyphro. Small businesses (and this is one) very typically have significant internal control problems, normally related to lack of experience of principals to deal with accounting issues, and small staff sizes preventing adequate segregation of duties.
I’ve personally dealt with a much larger company (who shall remain nameless) that recently had a significant deficiency identified related to the fact that they only had one person on staff who could close their books each month. The board ultimately ended up hiring a second person to be controller and retitled the other person as CFO to deal with the potential scenario where the original person might, for instance, die or become ill and unable to perform their duties.
From the information provided in that paragraph and the following one, I suspect that most likely there was an external bookkeeper doing their records and paying their bills directly for them (another common practice of small businesses). In any scenario where the management of the company is unable to manage and oversee all aspects of their accounting and evaluate the function of their internal controls, including those performed by outside contractors, you have an internal control problem.
However, it does look like they resolved the problem by hiring some people in house and moving that function inside the organization (possibly by just hiring the same bookkeeper who was doing the job independently into the company).
My opinion of external bookkeeping firms is … not good. The bookkeepers themselves are often competent enough for people who might have an associates degree or less, but typically these firms are not overseen by actual people who know what they are doing (for instance, who have any sort of accounting training). That’s not to be confused with CPA firms that do bookkeeping, which are generally fine (at least someone is theoretically looking over the bookkeeper’s shoulder), but those are becoming few and far between these days, since there’s no money in it.
And I have no doubt that Pro Elite is in better shape than the IFL. Not much, but somewhat. They at least have had the sense to become affiliated with a media company that is actually in the business of producing fight programming, and who has the ability to organize PPV events. Their contract calls for a number of subscription channel events and a number of PPV events each year, and they seem to be pretty much on track to meet their target for this year. Additionally, they have been running coordinated events with other more established promotions, which cuts down on their day of event costs and marketing costs significantly. When your primary revenue source is your TV contract and your cut of the PPV buy, only getting half the house isn’t a bad trade for spending so much less on local operations.
My suspicion is that Pro Elite is going to merge with someone else soon though, which is going to make them a much more viable operation.
I have no evidence to support that claim though.
I’ve had the complete opposite experience, actually. I’ve been involved with a number of small firms and ventures that more-than-competent accountants (internal and external) who kept track of every invoice, receipt, etc. and I’ve had experience with ‘Professional’ corporations that had no idea where the hell their own financial statements could be located (I’m serious). While it’s anecdotal evidence, the same can be said of your evidence offering a potential positive spin to Pro Elite’s incompetence. While one hopes they are closing their gaps, there is nothing to suggest that they haven’t missed out to extra expenses that will require a correction of their losses, as far as I can tell.
Tomer Chen,
There’s less volume of activity, but there are inherent internal control issues raised by sole proprieterships and small businesses, as I identified in my previous post.
Detailed analysis of financial information follows:
Just looking at their balance sheet, you could be convinced that there’s no signficant problems here. They used some cash up, but traded it for prepaids and fixed assets.
Take a look over at the cash flow statement and you’ll see a different story:
They started the year with 7.3 million in cash. Based on operations, they burned 7.0 million to produce their events this year (five so far?). They paid another million dollars for fixed assets (which, based on their depreciation expense, are either quite short term or included a lot of disposals, and I’m seeing that they did dispose fo a bunch of set decorations). They received five million in cash from warrants issued to Showtime, and (flipping back over the balance sheet), they recorded additional “prepaid distribution costs” of about 400k which is also related to the warrants issued to Showtime).
They’re on a short fuse in terms of cash, but looking at subsequent events, it appears that they managed to obtain another 20 million in cash from their plans to sell additional shares and warrants.
Meanwhile, it looks like Pro Elite is ready for a buying spree. Word has been out for a while that they have been trying to buy ICON down in Hawaii. My suspicions are that it isn’t going to end there. They’re probably going to try to merge with other promotions that they have coordinated with in the past, and it’s entirely possible that Bodog could be on the table (no evidence, just based on the previous speculation that Ayre may be tired of losing money, and they have a nicely established brand and Bodog’s TV contract is coming up).
It’s impossible to see the future, but they do have enough cash to go another year at this moment, and I think that by growing the promotion through mergers, and continuing their partnership with Showtime, they have a better shot at surviving and contending than IFL does.
Re: correction of losses:
It’s possible. We’ll find out at the end of their fiscal year when they release actual audited financials, I guess. These are just interim unaudited statements. I’d imagine that by then, they will have sorted things out.
Or, they’ll be in such a cash crunch that their auditors will resign and we’ll all know they’re better left for dead.
Geez, I need to read the NEWS THREAD first:
http://mmamadness.com/insight.html?newsitem_id=47
Cage Rage had to be looking for a new beau after Pride fell over. Bodog next?
Once again, you are citing anecdotal evidence. I provided anecdotal evidence to the contrary. We will have to agree to disagree as while sole proprietorships and small corporations can be open to the issues you cited, so can large corporations and small corporations or small proprietorships can just as easily not have those problems. It has more to do with issues of the executive management than an actual inherent problem with any sized corporation.
Overall all, though, it’s somewhat encouraging that Pro Elite does have the immediate liquidity that IFL seems to be lacking, I do agree. Still, we’ll see the sustainability of the model in a year or so when the funds start running low and they’ll have to issue more equity and/or debt to get cash.
Why would someone be anti-Elite XC??
And what lawsuits have been filed against them? I am unaware of this. Please educate me.
As far as I’m concerned, finances aside, Elite XC is one of the only promotions that has a progressive attitude towards the ever-expanding MMA game. Gary Shaw is not obsessed with exclusive contracts and he has proven willing to collaborate with any and all promotions that wish to work with him.
They are brand new, but they have already had cards that had title fights and/or recognized titles for various promotions including their own (Elite XC), Strikeforce, KOTC, Gladiator Challenge. Unlike the UFC, where they ignore all past accomplishments (IE, Rodrigo Nogueira- former Pride HW Champ, former #1 HW, former #1 P4P, arguably all time best BJJ HW). I mean, come on, thats not treationg MMA like a sport, thats like WWF vs. WCW, pretending like the other doesnt even exist. Elite XC is looking to make the sport bigger, not just their promotion. And that is the type of attitude we need in the sport. Not the ‘love it or leave it’, ‘you suck if you’re boring’ attitude of the UFC.
I just dont see how someone can have a serious bias against Elite XC at this point. To me, someone who says that is not a true fan of the sport of MMA.
If Pro Elite cannot obtain 100,000+ PPV Buys and solid ticket sales within the next 2 years…. Then is poses the question: How much is Showtime willing to put into this company? Even with solid ratings, it would take substantial amount of money from Showtime in order for them keep this company functioning. Probably over $20 Million a year minimum. I can’t see a station that only has 15 Million subscribers, use over $1 of that subscription money for a show like EliteXC.
Revenues are a little misleading. Part of those revenues are the $600,000 paid by K-1 for the rights to run their event through the Pro Elite banner.
The company is still in much better financial shape then the IFL. The IFL has no backing, and are likely on their way out. Pro Elite at least has Showtime, but they are still losing a lot of money. The selling of stock can only work as a short term solution.
Plus, as others have already pointed out, the number of lawsuits tis company has. This company is crooked. I would love to see it go out of business. Gary Shaw is bad for the fight game… whether that be boxing or MMA.
I’ll be subscribing to Showtime again for that Sept card…then cancelling again. Same as the previous Shamrock/Gracie card.
Zach,
What cable provider do you have? Do they charge you for the entire month, or pro rate it? I was thinking of doing the same thing…..
Sam Scaff (and 45):
Elite has a few discloseable lawsuits (there are some loose criteria for whether you should be reporting a legal action in notes to financials, and additional ones about actually showing a liability related to legal actions brought against you).
They aren’t all terribly serious though:
1. The Frank Shamrock thing: Shamrock was signed to a contract with another organization and fought for Pro Elite at the same time in violation of his contract. That’s a no-no. They came to a settlement where Pro Elite paid a certain amount to West Coast, and they’re basically taking it out of Frank Shamrock’s checks, so it’s not that big a deal as long as they continue to have events and Shamrock continues to fight at them.
2. Zuffa: Apparently some footage of one or more UFCs was included in Pro Elite’s Showtime broadcast. Since Pro Elite doesn’t have a license do to that, its’ a no-no. Again, it’s pretty cut and dry, Zuffa’s asking for damages and legal fees, so it’s unlikely that this is a major problem financially. It’s more Zuffa protecting their IP than Zuffa trying to put Pro Elite out of business.
3. Wallid: Shaw talked about this on a podcast at one point. I can’t specific which out of hand, but it was Fight Opinion, MMA Smackdown, or the other one with the guy who loves the IFL that I’ve stopped listening to because he’s starting to get delusional at this point (which is sad, I liked the podcast).
This is a link that someone on the FO pocast may have access to with more details on the case:
http://dockets.justia.com/docket/court-cacdce/case_no-2:2007cv02015/case_id-385595/
I’m not a lawyer, I’m just a CPA, so I really can’t comment on this one too much, but it seems like it’s a fairly standard non-compete/wrongful-termination type thing. By standard, I mean messy and complicated.
None of these cases reflects, IMHO, on the character of Pro Elite as a business.