EX-99.2 3 v095437_ex99-2.htm
Report of Independent Registered Public Accounting Firm

 
Board of Directors
King of the Cage, Inc.
Fontana, CA 92336
 
We have audited the accompanying balance sheets of King of the Cage, Inc. as of December 31, 2005 and 2006, and the related statements of income, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial statements referred to above present fairly, in all material respects, the financial position of King of the Cage, Inc. as of December 31, 2005 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
 

 
/S/ GUMBINER SAVETT INC.

Gumbiner Savett Inc.
Santa Monica, California

November 20, 2007

Page 2


King of the Cage, Inc.
Balance Sheets
December 31, 2005 and 2006
and September 30, 2006 and 2007 (unaudited)
                   
           
September 30,
 
September 30,
 
Assets
 
December 31,
 
December 31,
 
2006
 
2007
 
Current assets:
 
2005
 
2006
 
(unaudited)
 
(unaudited)
 
Cash
 
$
129,982
 
$
162,421
 
$
98,352
 
$
68,174
 
Accounts receivable, net
   
115,142
   
176,415
   
121,654
   
57,895
 
Prepaid expenses
   
28,500
   
1,834
   
11,784
   
4,600
 
Total current assets
   
273,624
   
340,670
   
231,790
   
130,669
 
                           
Property and equipment:
                         
Transportation equipment
   
140,777
   
246,403
   
246,403
   
-
 
Office equipment
   
-
   
1,009
   
-
   
-
 
Cage equipment
   
22,614
   
53,250
   
53,250
   
46,000
 
     
163,391
   
300,662
   
299,653
   
46,000
 
Less: Accumulated depreciation
   
(86,240
)
 
(118,880
)
 
(103,873
)
 
(15,333
)
     
77,151
   
181,782
   
195,780
   
30,667
 
                           
Total assets
 
$
350,775
 
$
522,452
 
$
427,570
 
$
161,336
 
                           
Liabilities and Stockholders' Equity (Deficit)
                         
                           
Current liabilities:
                         
Accounts payable
 
$
30,897
 
$
4,790
 
$
8,758
 
$
26,625
 
Income tax payable
   
1,366
   
637
   
100
   
-
 
Retirement plan contribution payable
   
18,000
   
18,000
   
18,000
   
-
 
Deferred revenue
   
20,000
   
63,500
   
57,750
   
44,250
 
Due to sellers
   
-
   
-
   
-
   
108,400
 
Current portion of notes payable
   
6,296
   
14,411
   
14,411
   
-
 
Total current liabilities
   
76,559
   
101,338
   
99,019
   
179,275
 
                           
Long-term debt:
                         
Notes payable
   
7,870
   
27,945
   
31,547
   
-
 
Total liabilities
   
84,429
   
129,283
   
130,566
   
179,275
 
                           
Stockholders' equity (deficit):
                         
Capital stock, no par value; authorized: 1,000,000
                         
shares; issued and outstanding: 100 shares
   
1,000
   
1,000
   
1,000
   
1,000
 
Additional paid-in capital
   
19,000
   
19,000
   
19,000
   
19,000
 
Retained earnings (accumulated deficit)
   
246,346
   
373,169
   
277,004
   
(37,939
)
Total stockholders' equity (deficit)
   
266,346
   
393,169
   
297,004
   
(17,939
)
                           
Total liabilities and stockholders' equity (deficit)
 
$
350,775
 
$
522,452
 
$
427,570
 
$
161,336
 

 
See accompanying notes to financial statements.
Page 3


King of the Cage, Inc.
Statements of Income
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
                   
           
September 30,
 
September 30,
 
   
December 31,
 
December 31,
 
2006
 
2007
 
   
2005
 
2006
 
(unaudited)
 
(unaudited)
 
Revenue:
                 
Events
 
$
554,057
 
$
762,557
 
$
484,126
 
$
1,066,236
 
Licensing
   
196,127
   
154,683
   
127,823
   
175,590
 
Pay-per-view
   
419,274
   
244,224
   
203,980
   
121,667
 
Video royalties
   
50,800
   
250,179
   
71,397
   
187,500
 
Other
   
6,015
   
59,113
   
51,111
   
109,818
 
Total revenue
   
1,226,273
   
1,470,756
   
938,437
   
1,660,811
 
                           
Cost of revenue:
                         
Events
   
636,501
   
643,226
   
429,659
   
860,999
 
Licensing
   
35,865
   
-
   
-
   
20,750
 
Pay-per-view
   
62,022
   
69,842
   
56,748
   
26,613
 
Total cost of revenue
   
734,388
   
713,068
   
486,407
   
908,362
 
Gross profit
   
491,885
   
757,688
   
452,030
   
752,449
 
                           
Operating expenses:
                         
General and administrative
   
399,222
   
481,950
   
337,849
   
405,962
 
Total operating expenses
   
399,222
   
481,950
   
337,849
   
405,962
 
                           
Income from operations
   
92,663
   
275,738
   
114,181
   
346,487
 
                           
Other income (expense):
                         
Gain on sale of property and equipment
   
8,000
   
-
   
-
   
4,606
 
Settlement income
   
69,300
   
-
   
-
   
-
 
Interest expense
   
(6,341
)
 
(7,016
)
 
(4,549
)
 
(2,476
)
Total other income (expense)
   
70,959
   
(7,016
)
 
(4,549
)
 
2,130
 
                           
Income before provision for income taxes
   
163,622
   
268,722
   
109,632
   
348,617
 
                           
Provision for income taxes, current
   
2,166
   
3,737
   
800
   
2,850
 
                           
Net income
 
$
161,456
 
$
264,985
 
$
108,832
 
$
345,767
 
 
See accompanying notes to financial statements.
Page 4


King of the Cage, Inc.
Statements of Stockholders' Equity
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2007 (unaudited)
                       
               
Retained
 
Total
 
           
Additional
 
Earnings
 
Stockholders'
 
   
Common Stock
 
Paid-In
 
(Accumulated
 
Equity
 
   
Shares
 
Amount
 
Capital
 
Deficit)
 
(Deficit)
 
Balance at January 1, 2005
   
100
 
$
1,000
 
$
19,000
 
$
97,870
 
$
117,870
 
Net income
   
-
   
-
   
-
   
161,456
   
161,456
 
Dividends
   
-
   
-
   
-
   
(12,980
)
 
(12,980
)
                                 
Balance at December 31, 2005
   
100
   
1,000
   
19,000
   
246,346
   
266,346
 
Net income
   
-
   
-
   
-
   
264,985
   
264,985
 
Dividends
   
-
   
-
   
-
   
(138,162
)
 
(138,162
)
                                 
Balance at December 31, 2006
   
100
   
1,000
   
19,000
   
373,169
   
393,169
 
Net income (unaudited)
   
-
   
-
   
-
   
345,767
   
345,767
 
Dividends (unaudited)
   
-
   
-
   
-
   
(756,875
)
 
(756,875
)
                                 
Balance at September 30, 2007 (unaudited)
   
100
 
$
1,000
 
$
19,000
   
($37,939
)
 
($17,939
)
 
See accompanying notes to financial statements
Page 5


King of the Cage, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
                   
           
September 30,
 
September 30,
 
   
December 31,
 
December 31,
 
2006
 
2007
 
Cash flows from operating activities:
 
2005
 
2006
 
(unaudited)
 
(unaudited)
 
Net income
 
$
161,456
 
$
264,985
 
$
108,832
 
$
345,767
 
                           
Adjustments to reconcile net income to net cash
                         
provided by operating activities:
                         
Depreciation expense
   
35,278
   
55,254
   
40,247
   
48,648
 
Gain on sale of property and equipment
   
(8,000
)
 
-
   
-
   
(4,606
)
Changes in operating assets and liabilities:
                         
(Increase) decrease in:
                         
Accounts receivable
   
(37,104
)
 
(61,273
)
 
(6,512
)
 
(64,515
)
Prepaid expenses
   
(2,300
)
 
26,666
   
16,716
   
(5,480
)
Increase (decrease) in:
                         
Accounts payable
   
19,582
   
(26,107
)
 
(22,139
)
 
26,983
 
Income taxes payable
   
1,366
   
(729
)
 
(1,266
)
 
(637
)
Retirement plan contribution payable
   
-
   
-
   
-
   
(18,000
)
Deferred revenue
   
(17,000
)
 
43,500
   
37,750
   
(19,250
)
Net cash provided by operating activities
   
153,278
   
302,296
   
173,628
   
308,910
 
                           
Cash flows from investing activities:
                         
Acquisition of property and equipment
   
(35,177
)
 
(119,313
)
 
(118,304
)
 
(131,200
)
Proceeds from sales of property and equipment
   
43,177
   
-
   
-
   
57,856
 
Net cash provided by (used in) investing activities
   
8,000
   
(119,313
)
 
(118,304
)
 
(73,344
)
                           
Cash flows from financing activities:
                         
Principal payments on notes payable
   
(18,648
)
 
(12,382
)
 
(8,780
)
 
(9,668
)
Dividends paid to shareholders
   
(12,980
)
 
(138,162
)
 
(78,174
)
 
(264,997
)
Due to sellers
   
-
   
-
   
-
   
(55,148
)
Net cash used in financing activities
   
(31,628
)
 
(150,544
)
 
(86,954
)
 
(329,813
)
                           
 Net increase (decrease) in cash
   
129,650
   
32,439
   
(31,630
)
 
(94,247
)
                           
Cash at beginning of period
   
332
   
129,982
   
129,982
   
162,421
 
Cash at end of period
 
$
129,982
 
$
162,421
 
$
98,352
 
$
68,174
 
 
See accompanying notes to financial statements.
Page 6


King of the Cage, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)

                   
           
September 30,
 
September 30,
 
   
December 31,
 
December 31,
 
2006
 
2007
 
Supplemental disclosures of cash flow information:
 
2005
 
2006
 
(unaudited)
 
(unaudited)
 
Cash paid during period for:
                 
Interest
 
$
6,341
 
$
7,016
 
$
4,549
 
$
2,476
 
Income taxes
 
$
0
 
$
4,400
 
$
2,850
 
$
4,337
 
                           
 
Supplemental disclosures of non-cash investing and financing activities:
     
In April 2006, the Company entered into a long-term note payable for $40,572 in connection with the purchase of transportation equipment.
 
During September 2007, the following balances were reclassified to shareholder dividends in connection with the sale of the Company (See Note 8):
 
Description
 
Amount
 
Due to sellers
 
$
162,978
 
Accounts receivable
   
183,035
 
Prepaid expenses
   
3,284
 
Property and equipment
   
180,417
 
Accounts payable
   
(5,148
)
Notes payable
   
(32,688
)
Total reclassified to shareholder dividends
 
$
491,878
 
 
 See accompanying notes to financial statements.
Page 7

 
King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)

1.
Summary of significant accounting policies
 
Business of the Company
 
King of the Cage, Inc. (the Company) organizes and promotes mixed martial arts matches across the United States, and worldwide. The Company was founded in June 2000 and is incorporated under the laws of the State of California. The Company's operations and administrative facility is located in Fontana, California.
 
Revenue recognition
 
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements modified by Emerging Issues Task Force ("EITF") No. 00-21 and SAB No. 104 which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.
 
The Company earns revenue primarily from events, licensing, event broadcasts on pay-per-view television, and video royalties. Event revenue is recognized at the time of the event when the venue provides estimated or final attendance reporting to the Company. Revenue from licensing and video royalties is recognized in accordance with respective contract terms, which generally relate to specific events and/or geographic regions.
 
Receivables for pay-per-view programming revenue are based primarily upon estimated sales of pay-per-view presentations and are adjusted to actual after intermediary pay-per-view distributors have completed their billing cycles. If actual sales differ from the estimated sales, the Company records an adjustment to sales.
 
The Company records deferred revenue for customers who prepay the full, or any portion of their respective contracts/agreements.
 
Cost of revenue
 
Costs related to live events are recognized when the events occur. Event costs incurred prior to an event are capitalized to prepaid expenses and then charged to expense at the time of the event. Costs primarily include: filming and production costs, fighter purse, arena and staffing, and set design. The costs of licensing, pay-per-view, and other revenue streams are recognized at the time the related revenues are realized.
 
Cash and cash equivalents
 
For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. At December 31, 2005 and 2006, and at September 30, 2006 and 2007, there were no cash equivalents.
 
Accounts receivable
 
Accounts receivable are stated at the amount management expects to collect from outstanding balances. When appropriate, management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At December 31, 2005 and 2006, and at September 30, 2006 and 2007, there were no allowances for uncollectible accounts.
Page 8

 
King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)

1. Summary of significant accounting policies (continued)
 
Credit risk
 
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and trade receivables.
 
The Company places its cash with high credit quality institutions. At times, balances in the Company’s cash account may exceed the Federal Deposit Insurance Corporation (FDIC) limit of $100,000.
 
Concentrations of credit risk with respect to trade receivables are limited due to the fact that the Company's customer list consists primarily of large and/or reputable companies in the entertainment industries. (See Note 6 for discussion of specific customer concentrations.)
 
Property and equipment
 
Expenditures for major renewal and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When property and equipment is sold or otherwise disposed of, the assets and related accumulated depreciation accounts are relieved, any gain or loss is included in operations.
 
Depreciation is computed using the straight-line method is based on the estimated useful lives of the assets which is generally five years, except for office furniture and fixtures which is seven years.
 
Use of estimates
 
The process of preparing financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions by management regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. The Company’s most significant accounting estimates include pay-per-view receivables, the provision for bad debt, and the useful lives of fixed assets for purposes of computing depreciation.
 
Fair value of financial instruments 
 
The Company measures its financial assets and liabilities in accordance with the requirements of Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments.” The carrying values of accounts receivable, accounts payable, accrued expenses and other liabilities approximate fair value due to the short-term maturities of these instruments. 
 
Income taxes
 
The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". This statement requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Page 9

 
King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)

1. Summary of significant accounting policies (continued)
 
Income taxes (continued)
 
On June 23, 2000, the Company elected by consent of its (then) sole shareholder to be taxed as an S-corporation under Section 1372 of the Internal Revenue Code of 1986. Under these provisions, the Company does not pay federal and pays only marginal state corporate income taxes on its taxable income. Instead, the shareholder is liable for individual federal and state income taxes on the Company’s distributable taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements. The Company distributes funds to its shareholders to be used for the purpose of payment of the personal tax liability created by Company’s taxable income.
 
Income tax expense includes state taxes currently payable. There were no significant deferred taxes arising from temporary differences between income for financial reporting and for income tax purposes at December 31, 2005 and 2006, and at September 30, 2006 and 2007.
 
Recently issued accounting standards
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. This statement is effective for all financial instruments issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet determined the effect of SFAS No. 157 on its financial position, operations or cash flows.
 
2.
Property and equipment
 
Depreciation expense charged to operations was $35,178 and $55,254 for the years ended December 31, 2005 and 2006, respectively. Depreciation expense charged to operations was $40,247 and $48,648 for the nine months ended September 30, 2006 and 2007, respectively (unaudited).
 
Certain transportation is pledged as collateral in connection with notes payable (see Note 4).
 
3.
Income taxes
 
Deferred income taxes arise from temporary differences resulting from income and expense items being reported in different periods for financial accounting and tax purposes. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
 
At December 31, 2005 and 2006, and at September 30, 2006 and 2007, there were no significant deferred taxes arising from temporary differences between income for financial reporting and income tax purposes.

Page 10


King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)

4.
Notes payable
 
Following is a summary of notes payable at December 31, 2005 and 2006, and at September 30, 2006 and 2007:

           
September 30,
 
September 30,
 
   
December 31,
 
December 31,
 
2006
 
2007
 
   
2005
 
2006
 
(unaudited)
 
(unaudited)
 
0% note payable to finance company in moonthly installments of $525, through March 2008, secured by transportation equipment.
 
$
14,166
 
$
7,870
 
$
9,444
   
-
 
                           
0% note payable to finance company in moonthly installments of $676, through March 2011, secured by transportation equipment.
   
-
   
34,486
   
36,514
   
-
 
                           
Subtotals
   
14,166
   
42,356
   
45,958
   
-
 
                           
Less: Current maturities
   
(6,296
)
 
(14,411
)
 
(14,411
)
        
   
$
7,870
 
$
27,945
 
$
31,547
   
-
 
 
These notes payable are non-interest bearing. However, the notes were not discounted by the Company in accordance with Accounting Principles Board Opinion No. 21, as management did not deem the net effect of any discount required to be material to the financial statements.
 
Effective September 11, 2007, the unpaid balances of all notes payable of the Company were assumed by the selling shareholders (see Note 8).
 
Following are maturities of the long-term notes payable at December 31, 2006:

Year Ending December 31,
 
Amount
 
2007
 
$
14,411
 
2008
   
9,689
 
2009
   
8,114
 
2010
   
8,114
 
2011
   
2,028
 
   
$
42,356
 
 
Page 11


King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)

5.
Employee benefit plan
 
Effective January 1, 2003, the Company began sponsoring a Simplified Employee Pension plan (the Plan) covering all employees of the Company meeting the eligibility requirements of age twenty-one and five years of service. Contributions to the Plan consist of an annual discretionary employer contribution. Total employer contributions to the Plan for the years ended December 31, 2005 and 2006 were $18,000 for each year. The employer contributions to the Plan are accrued at each Plan year-end (calendar year). As such, there were no employer contributions recorded for the nine months ended September 30, 2006 and 2007, respectively (unaudited).
 
Since the inception of the Plan, the only employees of the Company meeting the eligibility requirements for participation have been the two shareholders of the Company. As such, in connection with the agreement for the sale of the Company, effective September 11, 2007, ownership of the Plan, and all of its underlying investment assets, was transferred to the sellers (see Note 8).
 
6.
Concentrations
 
Customers
 
During 2005, 21% of the Company's revenues were from two customers. One customer accounted for 10% and the other customer accounted for 11%.  At December 31, 2005, the amounts due from such customers were $46,848 and $26,524, respectively, which were included in accounts receivable.
 
During 2006, 27% of the Company's revenues were from two customers. One customer accounted for 17% and the other customer accounted for 10%.  At December 31, 2006, the amounts due from such customers were $125,207 and $0, respectively, which were included in accounts receivable.
 
During the nine months ended September 30, 2006, 23% of the Company's revenues were from two customers (unaudited). One customer accounted for 12% and the other customer accounted for 11% (unaudited).  At September 30, 2006, the amounts due from such customers were $0 and $35,000, respectively, which were included in accounts receivable (unaudited).
 
During the nine months ended September 30, 2007, 28% of the Company's revenues were from two customers (unaudited). One customer accounted for 17% and the other customer accounted for 11% (unaudited).  The corresponding receivables were included in the $183,035 of receivables distributed to the sellers at September 30, 2007 in connection with the sale of the Company (see Note 8).
 
Suppliers
 
During 2005 and 2006, the Company utilized one supplier for the filming and video-taping of live events. Total payments to this supplier aggregated 32% and 28%, of the total cost of revenue, respectively. Although there are other suppliers of filming and video-taping services, a change in suppliers would cause delays, which could ultimately affect operations. For the year ended December 31, 2005, the Company had accounts payable to this supplier of $4,216.
 
During the nine months ended September 30, 2006, the Company utilized one supplier exclusively for the filming and video-taping of live events. Total payments to this supplier aggregated 33% of the total cost of revenue (unaudited). Although there are other suppliers of filming and video-taping services, a change in suppliers would cause delays, which could ultimately affect operations. For the nine months ended September 30, 2006, there were no accounts payable to this supplier (unaudited).
 
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King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)
 
6.
Concentrations (continued)
 
During the nine months ended September 30, 2007, the Company utilized one supplier aggregating 92% of the total cost of filming and video-taping live events (unaudited). Total payments to this supplier aggregated 17% of the total cost of revenue (unaudited). Although there are other suppliers of filming and video-taping services, a change in suppliers would cause delays, which could ultimately affect operations. For the nine months ended September 30, 2007, the Company had accounts payable to this supplier of $10,881 (unaudited).
 
7.
Settlement income
 
In February 2003, the Company entered into a licensing agreement with Majesco Sales, Inc. (Majesco). The agreement granted Majesco the exclusive right to design, develop, manufacture, distribute, and license entertainment software products, based on the "King of the Cage" name and concept for personal computers and gaming systems.
 
Under the terms of the agreement, Majesco was to pay the Company royalties of 8% of Majesco's net receipts for each copy of the products distributed, licensed, or sold. The agreement required a $75,000 nonrefundable advance against such royalty payments in the form of $37,000 due upon execution of the agreement, and $38,000 upon the commercial release of the first product; which, in accordance with the agreement, was to be no later than January 1, 2005.
 
The Company received the initial $37,000 royalty advance in April 2003 upon execution of the agreement, and recorded it as deferred revenue. Majesco, however, subsequently failed to release any products by January 1, 2005. The agreement provided for a one year extension at a cost of $50,000 to Majesco. However, Majesco decided to forgo the extension and enter into a settlement agreement with the Company in January 2005. Under the terms of the settlement and release agreement, Majesco paid the Company the remaining $38,000 royalty advance balance, in exchange for a general release from the licensing agreement.
 
The $75,000 in Majesco payments, less a $5,700 agent fee (netting to $69,300) was recorded as settlement income in January 2005.
 
8.
Subsequent events (unaudited)
 
Sale of the Company
 
On September 11, 2007, all of the issued and outstanding common stock of the Company was acquired by ProElite, Inc. The total consideration payable in the transaction was a cash purchase price of $3.75 million, 178,571 restricted shares of common stock of ProElite, Inc., and certain future contingent payments to the sellers based on variables related to the financial performance of the Company.
 
Under the terms of the agreement, all asset and liability balances, with the exception of one fixed asset (a cage) were transferred to the sellers on September 11, 2007. Additionally, the sellers are entitled to all pay-per-view receivables accrued through September 30, 2007.
 
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King of the Cage, Inc.
Notes to the Financial Statements
For the Years Ended December 31, 2005 and 2006
and for the Nine Months Ended September 30, 2006 and 2007 (unaudited)
(continued)
 
8.
Subsequent events (unaudited) (continued)
 
The Company's asset and liability balances due the sellers on September 11, 2007 were as follows:

Description
 
Amount
 
Cash
 
$
162,978
 
Accounts receivable
   
183,035
 
Prepaid expenses
   
3,284
 
Property and equipment
   
180,417
 
Accounts payable
   
(5,148
)
Notes payable
   
(32,688
)
Net assets and liabilities due sellers on September 11, 2007
 
$
491,878
 
 
 
As of September 11, 2007, the sellers took possession of the property and equipment and assumed personal responsibility for notes payable, leaving the remaining current assets and liabilities to be settled in cash. The cash balance reclassified to dividends was recorded into a Due to sellers account.
 
Following is a summary of balance due the sellers in connection with the sale of the Company at September 30, 2007:

Description
 
Amount
 
Total balance distributable to sellers
 
$
491,878
 
Property and equipment - sellers took possession
   
(180,417
)
Notes payable - sellers assumed personally
   
32,688
 
Payment made by Company on behalf of sellers after September 11, 2007
   
(50,000
)
Accounts receivable to be remitted to sellers as received by the Company
   
(183,035
)
Unamortized balance of prepaid expenses
   
(2,714
)
Balance due sellers at September 30, 2007
 
$
108,400
 
 
The $108,400 balance is currently under review by the Sellers and ProElite, Inc. However management of the Company believes that any changes to this balance will not be material to the financial statements.
 
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