08/28/08

Financial Problems Plague MMA Promoter ProElite

By Joseph Bourelly (XLFights.com)

Having incurred losses and negative cash flows from operations since its inception in 2006, ProElite Inc., the parent company of EliteXC and other MMA promotional organizations, now finds itself in financial distress.  Indicating liquidity issues, as of June 30, 2008, the company possessed roughly $5.3 million in total current assets and $9.6 million in total current liabilities.  The company continues to spend more cash than it brings in and is seeking additional financing in the neighborhood of $3.0 million just to stay afloat. The auditor’s opinion in the company’s Annual Report for the year ended December 31, 2007, stated there was “substantial doubt” as to ProElite’s ability to continue operations.

Even if ProElite does manage to raise the $3.0 million it seeks to acquire, it has stated these “capital resources are sufficient only until the end of the year, and only if the company makes significant reductions in or cessation of operations and expenditures.”  Therefore, ProElite is also seeking additional funding beyond its short-term financing needs.

As a company that built itself to be a competitor with top MMA promoter Ultimate Fighting Championship (UFC), how did it get to this point of financial instability so quickly?  Seeking to become a global player in the promotion of MMA bouts, the answer is likely in the company’s aggressive acquisition and growth strategy as well as the current credit crunch impacting the U.S. economy.

Since 1997, ProElite Inc. has acquired multiple promotion companies around the world. On September 11, 2007, it acquired U.S.-based promotional company King of the Cage Inc., for cash and restricted stock valued at $5 million.  The very next day on September 12, 2007, ProElite continued its expansion by purchasing two British domiciled companies collectively known as Cage Rage for cash and restricted common stock worth $8.6 million.  During the quarter-ended June 30, 2008, the company recorded a $5.2 million impairment charge associated with the Cage Rage deal and has indicated unless it can execute a strategy of producing live events in smaller venues and securing a long-term television licensing agreement, it may incur future impairment charges.

On September 18, 2007, ProElite continued the busy month of acquisition by making a $2 million investment in South Korean promotional company SpiritMC, which gave it access to event promotion in the country.  On December 7, 2007, ProElite wrapped the year up with another purchase, a $2.35 million deal for Hawaii-based MMA promoter Future Fight Productions Inc.

Like so many technology companies during the late 1990s, ProElite sought to achieve rapid growth in revenues and a global footprint through the acquisition of other companies.  Indeed, young companies like those in information technology and ProElite are largely expected to lose money during the initial years after formation.  They depend almost exclusively on the good grace of their investors who must be convinced that one day their investments will payoff and yield a substantial profit.

Although MMA as a sport and ProElite as a company have grown rapidly in terms of exposure and revenues, respectively, over the past couple of years, make no mistake about it, sports promotion is a very risky business.  Consequently, investors tend to shy away from deals with such companies, especially in the current environment where a global credit crunch has been playing out for over the past year.  This puts ProElite’s ability to raise additional cash into question.

That being said, the prospect of ProElite continuing as a viable company likely comes down to the willingness of its existing investors to extend credit and purchase additional shares.  Should this happen, first to the plate should be premium cable channel Showtime which broadcasts ProElite’s EliteXC and ShoXC live MMA events.  Not only does ProElite owe the cable company approximately $5 million in notes payable due next year, but Showtime also has an ownership interest in ProElite.  Showtime has already extended the payment due date on a $1.8 million note and could grant additional extensions if it foresees promise in MMA events as telecasts on the network and ProElite as a company.

Showtime which is an affiliate of CBS has quickly made MMA a part of its brand, and it’s hard to imagine the company abandoning the sport altogether unless it concludes the events are not translating into enough additional subscribers or viewers to make it worth the risk it is taking.  Critical to convincing Showtime and CBS to continue its partnership will be the ratings of EliteXC’s next primetime network telecast which will feature Kimbo Slice and Ken Shamrock in the main event.  This will be the third of four contracted fight cards to be televised by CBS, and the ratings thus far have been mixed.  Should the third installment of the series equal or surpass the first which also featured Kimbo Slice and attracted over six million viewers, CBS may negotiate a licensing deal with the company for 2009.  This development would be an enormous boost to the viability of ProElite as a company and major player in the world of MMA.

On another positive note, ProElite has done a great deal in a short amount of time to build its various brands and acquire access to European and Asian markets for the promotion of its live events.  By contrast, the company is running out of money during a market cycle where credit has become increasingly more difficult to come by for both corporations and consumers.  It also doesn’t help that the United States may be entering a recession and growth prospects around the world are slowing.

Competition is good in any industry, so let’s hope for the overall health of MMA as a sport that ProElite manages to endure for the long term.  This will take a combination of ProElite reducing costs, negotiating additional television licensing deals and continuing to entice investors, so the company can continue to raise the necessary funding it will need to operate.  Putting the brakes on its aggressive acquisition strategy may be a wise choice in combination with focusing on its core brands, EliteXC and ShoXC.