10-Q 1 stratus_10q-093011.htm FORM 10-Q Unassociated Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 0000-24477
  
STRATUS MEDIA GROUP, INC.
(Exact name of Registrant as specified in its charter)

Nevada
(State of Incorporation)
#86-0776876
(I.R.S. Employer Identification No.)

3 E. De La Guerra St., Santa Barbara, CA 93101
(Address of principal executive offices)

(805) 884-9977
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock par value $0.001

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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No 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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller Reporting Company x

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

The number of shares of common stock outstanding at November 21, 2011 was 80,686,134 shares.


 
 
 
  
STRATUS MEDIA GROUP, INC.
FORM 10-Q
SEPTEMBER 30, 2011 (unaudited) and DECEMBER 31, 2010

INDEX

   
Page
     
Part I – Financial Information
3
     
Item 1.
Financial Statements
3-19
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
26
Item 4T.
Controls and Procedures
  26
     
Part II – Other Information
  26
     
Item 1.
Legal Proceedings
  26
Item 1A.
Risk Factors
  26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  26
Item 3.
Defaults Upon Senior Securities
  27
Item 4.
Reserved
  27
Item 5.
Other Information
  27
Item 6.
Exhibits
  27
     
Signatures
  28
     
Certifications
 
    
 
2

 
 
PART I – FINANCIAL INFORMATION
    
ITEM 1.  FINANCIAL STATEMENTS
  
STRATUS MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and equivalents
 
$
2,129,127
   
$
-
 
Accounts receivable
   
58,500
     
-
 
Deposits and prepaid expenses
   
1,337,280
     
653,644
 
Total current assets
   
3,524,907
     
653,644
 
                 
Property and equipment, net
   
126,114
     
10,051
 
Intangible assets, net
   
2,221,630
     
2,255,688
 
Goodwill for ProElite, Inc. and Stratus Rewards Card
   
3,108,212
     
1,073,345
 
Acquisition deposit
   
100,000
     
1,582,809
 
Total assets
 
$
9,080,863
   
$
5,575,537
 
LIABILITIES AND EQUITY
             
Current liabilities
               
Bank overdraft
 
$
-
   
$
62,796
 
Accounts payable
   
594,164
     
903,258
 
Deferred salary
   
345,529
     
330,625
 
Accrued interest
   
589,185
     
310,634
 
Accrued expenses - legal judgments
   
90,732
     
90,732
 
Other accrued expenses and other liabilities
   
1,060,460
     
1,320,595
 
Loans payable to officers and a director
   
129,475
     
795,939
 
Current portion of notes payable - related parties
   
455,000
     
465,000
 
Notes payable
   
73,017
     
167,017
 
Event acquisition liabilities
   
-
     
483,718
 
Total current liabilities
   
3,337,562
     
4,930,314
 
                 
Non-current liabilities
               
Non-current portion of notes payable - related parties
   
625,000
     
625,000
 
                 
Total liabilities
   
3,962,562
     
5,555,314
 
                 
Commitments and contingencies
               
                 
Equity
               
Series C 10% Preferred stock, $0.001 par value:  1,000,000 shares authorized;
3,333 shares and 18,365 issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
   
3
     
18
 
Series D 10% Preferred Stock, $0.001 par value: 500,000 shares authorized;
44,666 and 5,999 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
   
45
     
6
 
Series E 5% Preferred Stock, $0.001 par value: 10,000 shares authorized;
8,700 and 0 shares issued and outstanding as of September 30, 2011 and December 31, 2010
   
9
     
-
 
Common stock, $0.001 par value:  200,000,000 shares authorized
77,865,077 and 64,122,301 shares issued and outstanding, at September 30, 2011 and December 31, 2010, respectively
   
77,865
     
64,122
 
 Additional paid-in capital
   
39,636,545
     
27,189,432
 
 Stock subscription receivable
   
-
     
(749,968
)
 Accumulated deficit
   
(34,662,520
   
(26,483,387
)
Total Stratus Stockholders' equity
   
5,051,947
     
20,223
 
Non-Controlling interest
   
66,354
     
-
 
Total equity
   
5,118,301
     
20,223
 
Total liabilities and equity
 
$
9,080,863
   
$
5,575,537
 
  
See accompanying notes to consolidated financial statements. 
  
 
3

 
   
STRATUS MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
  
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
2011
   
2010
   
2011
   
2010
 
                       
Net revenues
$
250,201
   
$
-
   
$
250,201
   
$
-
 
Cost of revenues
 
253,810
     
-
     
253,810
     
-
 
Gross profit (loss)
 
(3,609
   
-
     
(3,609
   
-
 
                               
Operating expenses
                             
General and administrative
 
2,551,878
     
510,832
     
4,697,621
     
1,457,840
 
Warrant expense and fair value charge for stock sales
 
331,519
     
635,201
     
1,214,624
     
2,090,638
 
Legal and professional services
 
1,231,463
     
484,402
     
1,906,958
     
1,074,215
 
Depreciation and amortization
 
21,814
     
12,850
     
48,572
     
36,736
 
Total operating expenses
 
4,136,674
     
1,643,285
     
7,867,775
     
4,659,429
 
                               
Loss from operations
 
(4,140,283
)
   
(1,643,285
)
   
(7,871,384
)
   
(4,659,429
)
                               
Other (income)/expenses
                             
Other (income)/expense
  -
 
   
168,084
     
-
     
693,462
 
Interest expense
 
195,705
     
21,352
     
324,544
     
53,974
 
Total other(income)/ expenses
 
195,705
     
189,436
     
324,544
     
747,436
 
                               
Net loss
$
(4,335,988
)
 
$
(1,832,721
)
 
$
(8,195,928
)
 
$
(5,406,865
)
                               
Basic and diluted loss per share
$
(0.06
)
 
$
(0.03
)
 
$
(0.11
)
 
$
(0.09
)
                               
Basic and diluted weighted-average common shares
 
77,535,263
     
62,522,001
     
71,652,187
     
60,804,035
 
   
See accompanying notes to consolidated financial statements.
  
 
4

 
  
STRATUS MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)
   
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net loss
 
$
(8,195,928
)
 
$
(5,406,865
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
48,572
     
36,736
 
Non cash expense for stock options
   
1,214,624
     
2,090,638
 
Stock issued for services
   
-
     
225,832
 
Stock issued to settle legal dispute
   
-
     
704,481
 
(Increase) / decrease in current asets:
               
Accounts receivable
   
(58,500
)
   
-
 
Deposits and prepaid expenses
   
(683,636
)
   
(58,000
)
Increase / (decrease) in current liabilities:
               
Accounts payable
   
(309,093
)
   
248,548
 
Deferred salary
   
14,904
     
233,125
 
Accrued interest
   
278,551
     
45,948
 
Legal judgment
   
-
     
(5,000
)
Other accrued expenses and liabilities
   
(1,111,331
   
294,424
 
Net cash used in operating activities
   
(8,801,837
)
   
(1,590,133
)
                 
Cash flows from investing activities:
               
Capital expenditures
   
(130,578
)
   
(2,868)
 
Payments for acquisitions, net
   
(860,895
)
   
(712,794)
 
Net cash used in investing activities
   
(991,473
)
   
(715,662)
 
                 
Cash flows from financing activities:
               
Bank overdraft
   
(62,796
   
(8,260
)
Payments on loans payable to officers and a director
   
(603,668
)
   
(221,937
)
Payments on notes payable
   
(426,509
)
   
(25,000
)
Proceeds from issuance of preferred stock
   
9,406,051
     
314,015
 
Proceeds from issuance of common stock
   
3,609,359
     
2,260,000
 
Net cash provided by financing activities
   
11,922,437
     
2,318,818
 
                 
Increase in cash and equivalents
   
2,129,127
     
13,023
 
                 
Cash and equivalents, beginning of period
   
-
     
-
 
                 
Cash and equivalents, end of period
 
$
2,129,127
   
$
13,023
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
 
$
-
   
$
-
 
Cash paid during the period for income taxes
 
$
-
   
$
-
 
  
See accompanying notes to consolidated financial statements.
  
 
5

 
  
STRATUS MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (UNAUDITED) and DECEMBER 31, 2010
 
1.
Business
 
On March 14, 2008, pursuant to an Agreement and Plan of Merger dated August 20, 2007 between Feris International, Inc. (“Feris”) and Pro Sports & Entertainment, Inc. (“PSEI”), Feris issued 49,500,000 shares of its common stock for all of the issued and outstanding shares of PSEI, resulting in PSEI becoming a wholly-owned subsidiary of Feris and the surviving entity for accounting purposes (“Reverse Merger”).  In July 2008, Feris’ corporate name was changed to Stratus Media Group, Inc. (“Company”).

PSEI, a California corporation, was organized on November 23, 1998 and specializes in sports and entertainment events it owns, operates, manages, markets and sells in national markets.  PSEI acquired the business of Stratus Rewards, LLC (“Stratus Rewards”) in August 2005 and Stratus Rewards is a wholly-owned subsidiary of PSEI.  Stratus Rewards is a credit card rewards program using the Visa card platform that offers a luxury rewards redemption program, including private jet travel, premium travel opportunities, exclusive events and luxury merchandise.   In May 2010, the Company entered into an agreement with a private bank in Switzerland for it to be the processing bank for Stratus Rewards in Europe.
   
ProElite, Inc. (“PEI”) is a subsidiary of the Company.  PEI specializes in the operation and management of Mixed Martial Arts events.  See Note 20 for further discussion of the acquisition of PEI.

2. 
Going concern

The Company has suffered losses from operations and without additional capital, currently lacks liquidity to meet its current obligations.  The Company had a net loss for 2010 of $8,409,605 and a net loss of $8,195,928 for the nine months ended September 30, 2011.  As of September 30, 2011, the Company had working capital of $187,345 and cumulative losses of $34,662,520.  Unless additional financing is obtained, the Company may not be able to continue as a going concern.  During 2010, the Company raised $2,935,720 in capital through the issuance of $2,310,000 of common and $625,720 of preferred stock.  The Company raised $9,406,051 in capital through issuance of preferred stock and $3,609,359 through the issuance of common stock during the nine months ended September 30, 2011.  

The financial statements were prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business.  The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result if the Company be unable to continue as a going concern.

3. 
Significant Accounting Policies

Basis of Presentation

The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The unaudited balance sheet at September 30, 2011 consolidates the accounts of PEI reflecting the close of the acquisition (see Note 20).  All significant intercompany balances were eliminated in consolidation.  There are no consolidated operating results for the 16 days ended June 30, 2011 as they were immaterial.  PEI’s operating results for the three months ended September 30, 2011 are included in operating results.
 
Use of Estimates
 
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from such estimates and assumptions.

Event Revenues
 
Event revenue consists of ticket sales, participant entry fees, corporate sponsorships, advertising, television broadcast fees, athlete management, concession and merchandise sales, charity receipts, commissions and hospitality functions. The Company recognizes admissions and other event-related revenues when the events are held in accordance with SEC Statement Accounting Bulletin (“SAB”) 104. Revenues received in advance and related direct expenses pertaining to specific events are deferred until the events are actually held.
   
 
6

 
  
Stratus White Visa Card

Stratus White (formerly referred to as Stratus Rewards), the Company’s affiliate redemption credit card rewards program, generates revenues from transaction fees generated by member purchases using the card, and membership fees. Revenue is recognized when transaction fees are received and membership fees are amortized and recognized ratably over the twelve-month membership period from the time of receipt.
 
Cash Equivalents
 
We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable relate principally to royalties due from television networks for pay-per-view presentations.

Fair Value of Financial Instruments
 
Our financial instruments include cash and equivalents, accounts receivables, accounts payable, loans payable, notes payable and accrued liabilities. The carrying amounts of financial instruments approximate fair value due to their short maturities.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation. We record depreciation using the straight-line method over the following estimated useful lives:

Equipment
3 – 5 years
Furniture and fixtures
5 years
Software
3 years
Leasehold improvements
Lesser of lease term or life of improvements

Goodwill and Intangible Assets
 
Intangible assets consist of goodwill related to the acquisition of PEI, certain events and the Stratus White Visa Card that we acquired. Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. We apply Statement of Financial Accounting Standards (SFAS) No. 142  Goodwill and Other Intangible Assets , codified in FASB ASC Topic 350, which requires allocating goodwill to each reporting unit and testing for impairment using a two-step approach.
 
The Company purchased several events that are recorded on the Company’s balance sheet as intangible assets at the consideration paid for such assets, which generally include licensing rights, naming rights, merchandising rights and the right to hold such event in particular geographic locations.  There was no goodwill assigned to any of these events and the value of the consideration paid for each event is considered to be the value for each related intangible asset. Each event has separate accounts for tracking revenues and expenses per event and a separate account to track the asset valuation.

A portion of the consideration used to purchase the Stratus White Visa card program was allocated to specific assets, as disclosed in the footnotes to the financial statements, with the difference between the specific assets and the total consideration paid for the program being allocated to goodwill.

The Company reviews the value of intangible assets and related goodwill as part of its annual reporting process, which generally occurs in February or March of each calendar year.  In between valuations, the Company conducts additional tests if circumstances warrant such testing.  For example, if the Company was unable to secure the services of any sponsoring banks, the Company would then undergo a thorough valuation of the intangible assets related to its Stratus Rewards program.

To review the value of intangible assets and related goodwill, the Company compares discounted cash flow forecasts with the amounts of the assets on the balance sheet.

The events are forecasted based on historical results for those events, adjusted over time for the assumed synergies expected from discounts from purchases of goods and services from a number of events rather than from each event on its own, and for synergies resulting from the expected ability to provide sponsors with benefits from sponsoring multiple events with a single point of contact.
 
 These forecasts are discounted at a range of discount rates determined by taking the risk-free interest rate at the time of valuation, plus premiums for equity risk and small companies in general, and factors specific to the Company and its business.
  
 
7

 
  
If the Company determines the discount factor for cash flows should be substantially increased, or the event will not be able to begin operations when planned, it is possible that the amounts for the intangible assets currently on the balance sheet could be reduced or eliminated, which could result in a maximum charge to operations equal to the current carrying value of the intangible assets of $5,260,108.

The Company believes that Core Tour and Maui Music Festival are most at risk for additional impairment charges in the future because the fair value for each event is less than 200% of the book value for such events.

Research and Development
 
Research and development costs not related to contract performance are expensed as incurred. We did not incur any research and development expenses for the nine months ended September 30, 2011 and 2010.
 
Capitalized Software Costs
 
We did not capitalize any software development costs during 2010 or the nine months ended September 30, 2011. Costs related to the development of new software products and significant enhancements to existing software products are expensed as incurred until technological feasibility has been established and are amortized over three years.
 
Valuation of Long-Lived Assets
 
We account for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is codified in FASB ASC Topic 360, which requires long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.
 
Net Loss Per Share
 
We compute net loss per share in accordance with SFAS No. 128, Earnings Per Share, which is codified in FASB ASC Topic 260.  Basic per share data is computed by dividing loss available to common stockholders by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing loss available to common stockholders by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential common shares had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.
 
The effect of common stock equivalents (which include outstanding warrants and stock options) are not included for the three or nine months ended September 30, 2011 or 2010, as they are antidilutive to loss per share.
 
Stock-Based Compensation
 
 We follow SFAS No. 123R, Share Based Payment (SFAS No. 123R), which is codified in FASB ASC Topic 718, using the modified prospective transition method. New awards and awards modified, repurchased or cancelled after January 1, 2006 trigger compensation expense based on the fair value of the stock option as determined by the Black-Scholes option pricing model. We amortize stock-based compensation for such awards on a straight-line method over the related service period of the awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior.

We account for equity instruments issued to non-employees in accordance with the provisions of ASC 718 and EITF Issue No. 96-18.

The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options.   Future option grants will be calculated using expected volatility based upon the average volatility of our common stock.

Advertising
 
We expense advertising as incurred. Such amounts have not historically been significant to our operations.
  
 
8

 
  
Income Taxes

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which is codified in FASB ASC Topics 740-10 and 740-30, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the  financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
 
Recent Accounting Pronouncements
 
In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s financial statements.

On March 5, 2010, FASB issued ASU No. 2010-11, Derivatives and Hedging Topic 815: Scope Exception Related to Embedded Credit Derivatives. This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging – Embedded Derivatives – Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU was effective for the Company on July 1, 2010. Early adoption was permitted. The adoption of this ASU did not have a material impact on the Company’s financial statements.

In April 2010, FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application was permitted. The adoption of this ASU did not have a material impact on the Company’s financial statements.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption was not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The Company adopted this ASU on January 1, 2011.  The adoption of this ASU did not have a material impact on the Company’s financial statements.
  
 
9

 
  
In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this ASU on January 1, 2011.

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220):  Presentation of Comprehensive Income.  Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the application of this accounting standard.

4. 
Litigation

In February 2006, former employee filed an action against PSEI and Paul Feller in Los Angeles Superior Court (“LASC”), alleging breach of his employment contract.  A jury trial concluded on July 28, 2010 with the jury finding in favor of us, PSEI, and Mr. Feller on all counts, except two counts as against PSEI only, requiring payment by PSEI to plaintiff of $22.104.  The parties filed crossing motions for attorneys’ fees and costs, and the court ruled and entered a judgment as follows:  (a) the Company and Mr. Feller shall recover from the former employee a total amount of $170,378; and (b) the former employee shall recover from PSEI, and PSEI only, a total amount of $28,912.  The plaintiff filed a notice of appeal but failed to timely pay fees related to the transcript, then filed a motion to set aside the payment default, said motion was denied by the court of appeals.
   
In connection with a consulting contract related to the acquisition of an event, a former consultant obtained an arbitration award, by default, against PSEI in August 2005 for $65,316 in LASC.  In September 2005, the plaintiff filed a petition against the Company to confirm the Award against PSEI.  In January 2006, the court entered a judgment on the Award and in October 2007, PSEI filed a motion to set aside the Judgment on the basis of lack of service.  In November 2007, the court denied the motion to set aside the Judgment. PSEI recorded an expense of $65,316 in 2007 and has fully reserved this amount.  Plaintiff has taken two debtor’s examinations of Mr. Feller, the second was on October 19, 2011. The examination has been concluded without any further action required by PSEI or Mr. Feller.
  
In July 2010, we were served with a summons and complaint by a shareholder in the Superior Court of California, Santa Barbara County, alleging breach of fiduciary duty, breach of covenant of good faith and fair dealing and conversion.   The summons and complaint sought a jury trial for declaratory relief of not less than $600,000 and injunctive relief. The case was settled subsequent to September 30, 2011 and is subject to a confidentiality agreement.
   
In July 2010 a shareholder of the Company served a demand for arbitration alleging we refused to remove transfer restrictions on shares of our stock owned by him.  The demand alleges that such refusal constituted breach of contract, implied covenant of good faith and fair dealing and conversion and seeks unspecified compensatory damages, injunctive relief and attorney fees and costs.  The matter went to arbitration, but as a result of the Company’s attorney’s withdrawal from representation at the start of the arbitration, went into a default, and the petitioner obtained an award for $165,344. The Company filed a motion to vacate the arbitration award, and on October 3, 2011, the court vacated the award and held that there is no binding arbitration agreement between the parties.
  
In March 2011, four of our shareholders filed an action in Superior Court of California, in Santa Barbara County against the Company, Chief Executive Officer, and Chief Financial Officer and its outside directors. The complaint alleges violations of the California Corporations Code and federal securities laws relating to the issuance of securities to the plaintiffs and breach of fiduciary duty, contract and covenant of good faith and fair dealing and conversion relating to the alleged refusal to allow the plaintiffs to sell their shares.  The complaint seeks unspecified compensatory and punitive damages, recovery of attorney fees and costs and certain equitable relief.  We believe the claims are without merit and are in the process of defending the action.
  
 
10

 
  
5. 
Acquisition of Stratus Rewards
 
In accordance with the Asset Purchase Agreement dated August 15, 2005, by and between the PSEI and Stratus Rewards LLC (“Stratus Purchase Agreement”), PSEI acquired the business of Stratus Rewards LLC, a credit card rewards program.

The total consideration for this acquisition was $3,000,000, with Stratus issuing a note of $1,000,000 and 666,667 common shares valued at $2,000,000. The note is payable in eight quarterly equal payments over a 24 month period, with the first payment due upon completion of the first post-public merger funding of a minimum of $3,000,000.

The Stratus Purchase Agreement included the transfer to the PSEI of tangible personal property such as computers and all intellectual property, goodwill associated therewith, licenses and sublicenses.  Stratus Rewards had at least $1.4 million of computer hardware and at least $0.2 million of computer software, all of which should have been transferred to the PSEI pursuant to the Stratus Purchase Agreement.  These computer and software assets were not included in the accounting for the acquisition of Stratus Rewards by PSEI and the value of the computer hardware and software that was not received was allocated to goodwill.  The previous owner of Stratus Rewards received notice on May 15, 2006 that if he did not deliver this hardware and software within 30 days, that the amount of consideration he was entitled to would be reduced by at least the $1,000,000, if not an additional $1,000,000 in common stock issued as consideration.  The owner responded on June 2, 2006 that his former law firm owned the computer hardware and software and he did not have the authority to release these items to the Company. 

 As a result, the Company intends to contest the validity of the $1,000,000 note to the former owner and seek to have it canceled.

The results of operations of the business acquired were included in the Company’s Statements of Operations from the date of acquisition. Depreciation and amortization related to the acquisition were calculated based on the estimated fair market values and estimated useful lives for property and equipment and an independent valuation for certain identifiable intangible assets acquired.

Effective May 14, 2010, the Company entered into a Co-branded Card Agreement (the “Agreement”) with Cornиr Banca SA (the “Bank”), located in Lugano, Switzerland.  Under the Agreement, the parties agreed to jointly launch a co-branded consumer card payment solution targeted at high net worth individuals and a co-branded commercial payment solution targeted at small and mid-sized businesses.  The cards, to be issued by the Bank, will include a loyalty rewards program.  The cards are targeted to residents of Europe.  The initial term of the Agreement is five years.  The Company, among other things, will be responsible for marketing and administration of, and expenses relating to, the rewards program.  The Bank will be responsible for issuing the cards.  The Company receives a share of purchase transactions generated by a card holder and membership and initiation fees.

6. 
Property and equipment

Property and equipment were as follows:
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
         
Computers and peripherals
 
$
97,660
   
$
56,863
 
Office machines
   
49,370
     
20,705
 
Furniture, fixtures and automobile
   
117,584
     
56,468
 
     
264,614
     
134,036
 
Less accumulated depreciation
   
(138,500
)
   
(123,985
)
   
$
126,114
   
$
10,051
 

Depreciation for the nine months ended September 30, 2011 and 2010 was $14,515 and $2,677, respectively, and depreciation for the three months ended September 30, 2011 and 2010 was $10,461 and $1,497, respectively.
      
 
11

 
   
7. 
Goodwill and intangible assets

Goodwill and intangible assets were as follows:
  
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Intangible Assets
           
Events
           
Beverly Hills Concours
 
$
169,957
   
$
169,957
 
Santa Barbara Concours d'Elegance
   
243,000
     
243,000
 
Cour Tour/Action Sports Tour
   
1,067,069
     
1,067,069
 
Freedom Bowl
   
344,232
     
344,232
 
Maui Music Festival
   
300,000
     
300,000
 
Total - Events
   
2,124,258
     
2,124,258
 
Stratus Rewards
               
Purchased Licensed Technology, net of accumulated amortization of $213,428 and $187,471
   
32,162
     
58,630
 
Corporate Partner List, net of accuulated amortization of $66,600 and $58,500
   
41,400
     
49,500
 
Member List
   
23,300
     
23,300
 
Total - Stratus Rewards
   
97,371
     
131,430
 
Total Intangible Assets
 
$
2,221,630
   
$
2,255,688
 
  
In accordance with ASC 350, the Company’s goodwill and intangible assets, other than the purchased licensed technology and the membership list for Stratus, are considered to have indefinite lives and are therefore not amortized, but rather are subject to annual impairment tests. The Company’s annual impairment testing date is December 31, but the Company monitors the facts and circumstances for all intangible properties and will record impairment if warranted by adverse changes in facts and circumstances.
 
The purchased licensed technology and membership list are amortized over their estimated useful life of 10 years.  For the nine months ended September 30, 2011 and 2010, amortization was $34,057 and $34,057, respectively.  For the three months ended September 30, 2011 and 2010, amortization was $11,353 and $11,353, respectively.

8. 
Deferred salary

Our president has an employment contract that stipulates an annual salary of $240,000.  He did not received cash payments for salary since prior to 2006 and the $240,000 per year was accrued quarterly.  As of September 30, 2011 and December 31, 2010, deferred salary was $277,226 and $330,625, respectively.  He started receiving cash payments for salary in June 2011.

9. 
Legal judgments

As of September 30, 2011 and December 31, 2010, we had $90,732 as accrued expenses – legal judgments to accrue for a judgment of $60,316 for amounts due under a consulting contract related to the acquisition of an event, and $30,416 related to allegedly unpaid legal bills from a former attorney for the Company.  A payment of $5,000 was made during the three months ended March 31, 2010.  See Footnote 4 for addition information regarding these amounts.

10. 
Other accrued expenses and liabilities

Accrued expenses and liabilities consisted of the following: 
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Professional fees
 
$
223,808
   
$
254,244
 
Travel expenses
   
202,436
     
202,436
 
Consultant fees
   
259,864
     
281,387
 
Payroll tax liabilities
   
285,198
     
525,864
 
Other
   
89,154
     
56,664
 
   
$
1,060,460
   
$
1,320,595
 
    
 
12

 
  
11. 
Loans payable to officers and a director

The Loans Payable to Officers and a Director are loans from the Company’s President and a member of the board of directors are as follows:
   
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
President and director, interest at 9.5%
 
$
5,066
   
$
391,993
 
An officer, non-interest bearing
   
69,409
     
127,421
 
An officer, interest at 5.0% if not repaid on timely basis
   
55,000
     
231,525
 
A director, interest at 10.0%
   
-
     
45,000
 
   
$
129,475
   
$
795,939
 
  
These loans are unsecured, due on demand, have no priority or subordination features, do not bear any restrictive covenants and contain no acceleration provisions. Interest expense on loans to officers and a director for the three months ended September 30, 2011 and 2010 was $0 and $3,105, respectively.  Interest expense on loans to officers and a director for the nine months ended September 30, 2011 and 2010 was $12,421 and $15,093, respectively.  During the nine months ended September 30, 2011, $45,000 was paid to the director to pay down the principal balance of a loan made to the Company in 2005, $497,350 was paid to the Company’s President and Director to pay down a series of revolving loans made to the Company, and $77,176 was paid to an officer pursuant to an employment agreement.

In connection with the employment agreement for its Senior Vice President and Chief Operating Officer, the Company assumed a promissory note of $231,525 formerly owed to him by PEI and agreed to pay the promissory note with $121,525 payable to him upon the closing of the acquisition of PEI by the Company, $55,000 due 90 days after the closing of the acquisition, and $55,000 due 180 days after the closing of the acquisition.  Any unpaid amounts after 180 days following the closing of the acquisition will bear interest at 5%.  In June 2011, upon closing the acquisition of PEI, the Company paid the first installment of $121,525 and $55,000 was paid in September 2011.

12. 
Notes payable to related parties

Notes Payable to Related Parties consisted of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
To shareholder (unsecured), dated January 14, 2005, with maturity of May 14, 2005. 
The principal amount and accrued interest were payable on May 14, 2005, plus
interest at 10%. This note is currently in default.
 
$
70,000
   
$
70,000
 
                 
To shareholder (unsecured), dated February 1, 2005, with maturity of June 1, 2005. 
The principal amount and accrued interest were payable on June 1, 2005, plus
interest at 10%. This note is currently in default.
   
-
     
10,000
 
                 
To shareholder (unsecured), dated February 5, 2005, with maturity of June 5, 2005. 
The principal amount and accured interest were payable on June 5, 2005, plus
interest at 10%. This note is currently in default.
   
10,000
     
10,000
 
                 
To shareholder (unsecured) related to purchase of Stratus. The note is payable
in eight quarterly equal payments over a 24 month period, with the first payment
due upon completion of the first post-public merger funding, with such funding
to be at a minimum amount of $3,000,000.
   
1,000,000
     
1,000,000
 
     
1,080,000
     
1,090,000
 
Less: current portion
   
455,000
     
465,000
 
Long-term portion
 
$
625,000
   
$
625,000
 
   
 
13

 
  
These notes have no priority or subordination features, have no restrictive covenants and contain no acceleration provisions.  Per contract, the $1,000,000 note related to the purchase of Stratus Rewards bears interest at 10%.  However, as noted in Footnote 5, the Company intends to pursue the cancelation of this note and therefore, the Company is not accruing interest on this note.  For the nine months ended September 30, 2011 and 2010, the Company incurred interest expense on this notes payable to related parties of $6,750 and $6,750, respectively.  For the three months ended September 30, 2011 and 2010, the Company incurred interest expense on this notes payable to related parties of $2,250 and $2,250, respectively.

13.  Notes payable

Notes Payable consisted of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
To a shareholder (unsecured). Payable on demand and bears interest at 8.5%.
 
$
13,017
   
$
107,017
 
                 
To non-shareholders (unsecured). Payable on demand and does not bear interest
   
60,000
     
60,000
 
                 
Total (all current)
 
$
73,017
   
$
167,017
 
 
These notes have no priority or subordination features, have no restrictive covenants and contain no acceleration provisions. For the nine months ended September 30, 2011 and 2010, the Company incurred interest on these notes of $19,760 and $6,246, respectively.  For the three months ended September 30, 2011 and 2010, the Company incurred interest expense on these notes payable of $2,250 and $2,868, respectively.

14. 
Event acquisition liabilities

The Event acquisition liabilities refer to the amount the Company owes to the principals of the Core Tour pursuant to a legal judgment in their favor for this amount.  The balance due was paid during the third quarter of 2011.
 
15. 
Other (income)/expense

Other (income)/expense for the nine months ended September 30, 2010 of $525,378 consisted of expense related to the issuance of 477,616 shares of common stock to settle a dispute with a long-term shareholder regarding the number of shares issued pursuant to a subscription agreement executed during 2007.
 
16. 
Related party transactions

During 2010, the Company repaid $60,000 on a loan made on January 19, 2005 with an original balance of $125,000 from an individual who became a director of the Company on April 30, 2009. The balance owed to this director at December 31, 2010 was $45,000.  From April 1, 2011 to present, $45,000 was paid to the director to pay down the principal balance of a loan made to the Company in 2005, $497,350 was paid to the President to pay down a series of revolving loans made to the Company, $77,176 was paid to an officer pursuant to his employment agreement and $176,525 was paid to another officer pursuant to a promissory note from PEI that was assumed by the Company as part of his employment agreement (See Note 11).

17. 
Shareholders’ equity

Series C 10% Preferred Stock

During 2010, the Company issued 18,365 shares of Series C 10% Preferred Stock (“Series C”) for $454,799.  Each share of Series C sold for $30, can be converted at any time into 20 shares of common stock and has voting rights equal to 20 shares of common stock.  In connection with the issuance of Series C, the Company issued 124,990 warrants with a life of 5 years to purchase a share of common stock for $2.00 per share.  The Series C has liquidation preference over common stock at a liquidation value equal to its par value of $30 and pays a cumulative dividend of 10% per year, payable on July 31 and December 31 of each year that the Series C is outstanding.  Interest payments may be made in cash or in common stock at the discretion of the Company.  The Series C automatically convert into 20 shares of common stock when the closing price for a share of common stock is $5.00 or above and the average daily trading volume for the 10 previous trading days is above 200,000 shares.  Given the losses recorded by the Company, the stock equivalents related to the Series C are not included in the calculation of earnings per share since the effect of such inclusion would be antidilutive.
  
 
14

 
    
Since the Series C contains an embedded conversion feature, the Company performed an analysis of the Series C under ASC 815 “Derivatives and Hedging.”  This analysis determined that the embedded conversion feature was not required to be bifurcated and accounted separately from the Series C because the economic risks and characteristics of the embedded conversion feature were clearly and closely related to the economic risks and characteristics of the host contract Series C, namely the risks of the common stock.  The value of the beneficial conversion feature was $26,945, which was charged to equity at the time of issuance and was not included in the calculation of earnings per share.  The beneficial conversion feature was calculated as the difference of the fair value of the conversion price and the intrinsic value of the preferred shares.
 
The Series C contains a share adjustment provision that provides for additional shares to be issued if the thirty-day volume weighted average price of the Company’s common stock (“VWAP”) is between $1.00 and $2.00.  The share adjustment is determined 180 days after the purchase of Series C.  If the VWAP is above $2.00, no action is taken.  If the VWAP is between $1.00 and $2.00, additional shares may be issued to the holder based on a formula specified in the individual agreements.  As of June 30, 2011, there were 183,973 shares of common stock issuable for future conversions of Series C and 551,920 shares of common stock reserved for the maximum share adjustment for Series C.

The Company determined that derivative accounting for the embedded conversion and the share adjustment features were  not required pursuant to ASC 815-10-15-74 because the features and the shares are indexed to the company’s own stock under ASC 815-40-15 (EITF Issue 07-5); the features can be classified in shareholders’ equity under ASC 815-40 (EITF Issue 00-19, paragraphs 1-11)  and that Series C is classified as a conventional convertible so the embedded conversion feature can be classified in stockholders’ equity under ASC 815-40 (Issue 00-19, paragraphs 12-32).  The determination was made by the Company that the Series C is a conventional convertible because the freestanding warrant is indexed to the company’s own stock under ASC 815-40-15 (EITF Issue 07-5); the freestanding warrant is classified in shareholders’ equity under ASC 815-40 (Issue 00-19, paragraphs 1-32); and the financial instrument does not include embedded puts and/or calls or other features that require bifurcation from the host contract under ASC 815.
 
During the nine months ended September 30, 2011, two shareholders converted 15,032 shares of Series C 10% preferred stock into 340,640 shares of common stock and received 901,920 shares pursuant to the share adjustment provision.

Series D 10% Preferred Stock

During the nine months ended September 30, 2011, the Company issued 44,666 shares of Series D 10% Preferred Stock (“Series D”) for $1,339,965.  During 2010, the Company issued 5,999 shares of Series D for $170,921.  Each share of Series D sold for $30, can be converted at any time into 60 shares of common stock and has voting rights equal to 60 shares of common stock.  In connection with the issuance of Series D, the Company issued  warrants to purchase 179,970 shares of common stock.  The warrants have a life of 5 years to purchase a share of common stock for $1.00 per share.  The Series D has liquidation preference over common stock at a liquidation value equal to its par value of $30 and pays a cumulative dividend of 10% per year, payable on July 31 and December 31 of each year that the Series D is outstanding.  Interest payments may be made in cash or in common stock at the discretion of the Company.  The Series D automatically convert into 60 shares of common stock when the closing price for a share of common stock is $5.00 or above and the average daily trading volume for the 10 previous trading days is above 200,000 shares.  Given the losses recorded by the Company, the stock equivalents related to the Series D are not included in the calculation of earnings per share since the effect of such inclusion would be antidilutive.

Since the Series D contains an embedded conversion feature, the Company performed an analysis of the Series C under ASC 815 “Derivatives and Hedging.”  This analysis determined that the embedded conversion feature was not required to be bifurcated and accounted separately from the Series D because the economic risks and characteristics of the embedded conversion feature were clearly and closely related to the economic risks and characteristics of the host contract Series D, namely the risks of the common stock.  The value of the beneficial conversion feature was $26,945 which was charged to equity at the time of issuance and was not included in the calculation of earnings per share.  The beneficial conversion feature was calculated as the difference of the fair value of the conversion price and the intrinsic value of the preferred shares.

The Series D contains a share adjustment provision that provides for additional shares to be issued if the thirty-day volume weighted average price of the Company’s common stock (“VWAP”) is between $1.00 and $2.00.  The share adjustment is determined 180 days after the purchase of Series C.  If the VWAP is above $2.00, no action is taken.  If the VWAP is between $1.00 and  $2.00, additional shares may be issued to the holder based on a formula specified in the individual agreements.  As of September 30, 2011, there were 3,039,870 shares of common stock issuable for future conversion of Series D and 4,143,710 shares of common stock issuable for the maximum share adjustment provision for Series D.

The Company determined that derivative accounting for the embedded conversion and the share adjustment features was not required pursuant to ASC 815-10-15-74 because these features are indexed to the company’s own stock under ASC 815-40-15 (EITF Issue 07-5); the features can be classified in shareholders’ equity under ASC 815-40 (EITF Issue 00-19, paragraphs 1-11)  and that Series D is classified as a conventional convertible so the features can be classified in stockholders’ equity under ASC 815-40 (Issue 00-19, paragraphs 12-32).  The determination was made by the Company that the Series D is a conventional convertible because the freestanding warrant is indexed to the company’s own stock under ASC 815-40-15 (EITF Issue 07-5); the freestanding warrant is classified in shareholders’ equity under ASC 815-40 (Issue 00-19, paragraphs 1-32); and the financial instrument does not include embedded puts and/or calls or other features that require bifurcation from the host contract under ASC 815.
 
During the nine months ended September 30, 2011, two shareholders converted 5,999 shares of Series D 10% preferred stock into 359,940 shares of common stock and received 359,940 shares pursuant to the share adjustment provision.  During the three months ended September 30, 2011, two shareholders converted 5,866 shares of Series D 10% preferred stock into 117,320 shares of common stock and received 351,960 shares pursuant to the share adjustment provision.
   
 
15

 
   
Series E 5% Preferred Stock

On May 24, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with eight investors (collectively, the “Investors”) pursuant to which the Company agreed to sell to each of the Investors, and the Investors severally agreed to purchase from the Company, 8,700 shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (the “Preferred Shares”), the terms of which are set forth in the Certificate of Designations of Series E Preferred Stock (the “Certificate”), for a purchase price of $1,000 per share, or $8,700,000 in the aggregate.
 
In connection with the sale of the Preferred Shares, the Company also agreed to issue to the Investors (a) warrants (“A Warrants”) to purchase up to one additional share of Common Stock for each share of Common Stock issuable upon conversion of the Preferred Shares, and (b) warrants (“B Warrants”) to purchase up to .50 additional shares of Common Stock for each share of Common Stock issuable upon conversion of the Preferred Shares.  The Warrants are exercisable for five years commencing on the date of first issuance and are exercisable only for cash if there is an effective registration statement covering the resale of the shares issuable upon exercise of the Warrants.  In the absence of such a registration statement, the Warrants are exercisable for cash or on a cashless basis at the option of the holder thereof.  The exercise price of the A Warrant is $0.65 per share and the B Warrant has an exercise price of $1.00 per share, subject in each case to full ratchet anti-dilution protection.
 
Pursuant to the Certificate, the Preferred Shares bear a dividend of 5%, payable quarterly in cash, or, if the dividend shares are registered for resale, in shares of the Company’s Common Stock.  The effective conversion rate for the Preferred Shares is $0.40 per share of Common Stock, subject to full ratchet anti-dilution protection. The Preferred Shares have voting rights on an as-converted to Common Stock basis, with the Investors (subject to certain exceptions) having the right to elect two members to the Company’s Board of Directors for so long as at least 50% of the total number of Preferred Shares purchased pursuant to the Purchase Agreement are outstanding, and the right to elect one member to the Company’s Board of Directors for so long as least 25% but less than 50% of the total number of Preferred Shares issued pursuant to the Purchase Agreement are outstanding. The Company is required to redeem any unconverted Preferred Shares on the fifth anniversary of the date of first issuance of the Preferred Shares, and has the right to require conversion at any time if the average daily trading value for any twenty consecutive trading days exceeds $250,000 and the weighted average price per share is at least $2.50 for each of those twenty consecutive trading days.
 
To secure the Company’s obligation to redeem the Preferred Shares, the Company entered into a Security Agreement dated May 24, 2011, pursuant to which the Company has agreed to grant the holders of the Preferred Shares a first priority security interest in all of its assets.
 
The Company has agreed to file a registration statement with the SEC covering the resale of the shares (a) issuable upon conversion of the Preferred Shares or exercise of the Warrants, (b) issued as dividends payable in shares of Common Stock pursuant to the Certificate, and (c) issuable upon exercise of the Placement Agent Warrants.  Upon the occurrence of certain events set forth in the Purchase Agreement, including the failure to timely file the registration statement or have the registration statement timely declared effective, the Company will pay to the Investors an amount of cash equal to 1% of the aggregate purchase price of the Series E Preferred Stock and Warrants for each 30-day period during such default; provided, however, that the payments will not exceed 10% of the aggregate purchase price.

Common Stock

During 2010, the Company raised $2,310,000 through the issuance of 3,474,230 shares of common stock and five-year warrants to purchase 1,675,000 shares of common stock, respectively, at $1.00 to $1.65.  During the nine months ended September 30, 2011, the Company raised $3,609,359 from the issuance of 7,957,141 shares of common stock.
   
 
16

 
  
Stock Options
 
During the nine months ended September 30, 2011, the Company did not issue options.

The following table sets forth the activity of our stock options to purchase common stock:

 
   
Options Outstanding
   
Options Exercisable
 
   
Options
Outstanding
   
Range of
Exercise Prices
   
Weighted
Average
Remaining
Life in
Years
   
Weighted
Average
Exercise
Price
   
Options
Exercisable
   
Weighted
Average
Exercise
Price
 
As of December 31, 2010
   
10,269,852
   
$
0.14 - $3.50
     
2.4
   
$
0.94
     
8,512,684
   
$
0.94
 
Forfeited
   
-
     
-
     
-
     
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
     
-
     
-
     
-
 
Granted
   
-
     
-
     
-
     
-
     
-
     
-
 
As of September 30, 2011
   
10,269,852
             
2.2
   
$
0.94
     
8,512,684
   
$
0.94
 

Warrants
 
A summary of the warrants:
 
   
Warrants Outstanding
   
Warrants Exercisable
 
   
Warrants
Outstanding
   
Range of
Exercise Prices
   
Weighted
Average
Remaining
Life in
Years
   
Weighted
Average
Exercise
Price
   
Warrants
Exercisable
   
Weighted
Average
Exercise
Price
 
As of December 31, 2010
   
2,472,676
   
$
1.00 - $2.00
     
4.4
   
$
1.35
     
2,472,676
   
$
1.35
 
Forfeited
   
-
     
-
     
-
     
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
     
-
     
-
     
-
 
Granted
   
49,960,677
   
$
0.65-  1.00
     
4.9
     
0.76
     
49,960,677
     
1.00
 
As of September 30, 2011
   
52,433,353
   
$
1.50 - $2.00
     
4.3
   
$
0.78
     
52,433,353
   
$
0.78
 

18. 
Commitments and contingencies

Office space rental

On May 1, 2009, the Company entered into a lease for approximately 1,800 square feet of office space in Santa Barbara, California for use as its executive offices.  This lease was amended on July 21, 2009 and expires on December 31, 2013 with a three-year renewal term available at an initial rent plus common area charges of $5,767 per month.

From prior to January 1, 2008 until May 2009, we leased approximately 1,800 square feet of space in Santa Barbara, California, for executive use at $4,000 per month under a lease which expired December 31, 2010.

Rent expense for the nine months ended September 30, 2011 and 2010 was $105,193 and $70,118, respectively.  Rent expense for the three months ended September 30, 2011 and 2010 was $58,735 and $17,301, respectively.
   
 
17

 
  
19. 
Segment Information

Each event and the Stratus Reward program is considered an operating segment pursuant to ASC 280 since each is budgeted separately and results of each event and the Stratus program are tracked separately to provide the chief operating decision maker information to assess and manage each event and the Stratus Program.

The characteristics of the Stratus Reward program are different than the events, so that operating segment is considered a reporting segment.  The events share similar economic characteristics and are aggregated into a reporting segment pursuant to paragraph 17 of ASC 280.  All of the events provide entertainment and the logistics and production processes and methods for each event are similar:  sponsorship sales, ticket and concession sales, security, stages, public address systems and the like.  While the demographic characteristics of the audience can vary by event, all events cater to consumer entertainment.

 A summary of results by segment is as follows:
  
   
(Amounts in $000)
   
 
As of/for the Nine Months Ended September 30, 2011
   
As of /for the Nine Months Ended September 30, 2010
   
 
Stratus
Credit Card
   
Events
   
Other
   
Total
   
Stratus
Credit Card
   
Events
   
Other
   
Total
 
                                                                 
Revenues
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Cost of sales
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Gross margin
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Deprec. & Amort
   
49
     
-
     
-
     
49
     
35
     
-
     
2
     
37
 
Segment loss
   
(49
)
   
-
     
-
     
(49
)
   
(35
)
   
-
     
(2
   
(23
)
Operating expenses
   
-
     
-
     
7,823
     
7,823
     
355
     
-
     
4,267
     
4,622
 
Other expenses
   
-
     
-
     
324
     
324
     
-
     
-
     
747
     
747
 
Net (loss)
 
$
(49
)
 
$
-
   
$
(8,147
)
 
$
(8,196
)
 
$
(390
)
 
$
-
   
$
(5,016
)
 
$
(5,406
)
                                                                 
Assets
 
$
1,205
   
$
2,124
   
$
5,751
   
$
9,080
   
$
1,766
   
$
2,224
   
$
2,187
   
$
6,177
 
Liabilities
 
$
1,000
   
$
484
   
$
2,478
   
$
3,962
   
$
1,000
   
$
484
   
$
3,106
   
$
4,590
 
  
20. 
Acquisition of ProElite, Inc.

Effective October 21, 2009, the Company entered into a Strategic Investment Agreement with ProElite, Inc. (“PEI”) pursuant to which PEI agreed to sell to the Company, and the Company agreed to purchase from PEI, shares of PEI’s Series A Preferred Stock (the “Preferred Shares”).  The transaction closed on June 14, 2011.  The Preferred Shares are convertible into the Common Stock of PEI.  The amount of shares of Common Stock issuable upon conversion on a cumulative basis is equal to 95% of the sum of (a) the issued and outstanding shares of PEI as of the closing plus (b) any shares of PEI Common Stock issued after the closing upon exercise or conversion of any derivative securities of PEI outstanding as of the closing, subject to any adjustment for stock splits, stock dividends, recapitalizations etc. and, in all cases, after giving effect to the shares issuable upon conversion of the Preferred Shares.  The purchase price of the Preferred Shares was $2,000,000 which was used by PEI for payment of outstanding liabilities of PEI, general working capital and other corporate purposes and repayment of all amounts due under a note of PEI with respect to advances made to PEI by the Company of $100,000.  At the close, all of the previous directors of PEI resigned and the board of directors of PEI consists of two designees of the Company and one designee of PEI.  Paul Feller, the Company’s Chief Executive Officer, became PEI’s Chief Executive Officer.  Certain present and former key PEI executives continued with PEI.  Upon the close of the transaction, the Company recorded goodwill of $2,034,867.  The Company also recorded non-controlling interest of $105,263 due to negative equity of PEI at June 30, 2011.  The Company has consolidated the balance sheet of PEI as of September 30, 2011.  The results of operations of PEI for the three months ended September 30, 2011 have been consolidated into the Company’s results of operations.
   
 
18

 
  
The pro forma financial information presented below show the consolidated operations of the Company as if the PEI acquisition had occurred as of January 1, 2010:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Revenues
 
$
509,201
   
$
186,500
 
Gross profit
   
255,391
     
186,500
 
Loss from operations
   
(8,578,546
)
   
(5,836
)
Provision for income taxes
   
-
     
-
 
Net loss
   
(8,903,090
)
   
(6,583
)
Basic loss per share
 
$
(0.12
)
 
$
(0.09
)
  
21. 
Subsequent Events
 
On November 1, 2011, we entered into a lease agreement for approximately 3,000 square feet of office space in Santa Barbara, California for use by our operating units.  This lease expires on October 31, 2014 with two additional three-year renewal terms available.  The initial rent plus common area charges are $7,157 per month.
 
Subsequent to September 30, 2011, two investors converted a total of 11,667 shares of Series D 10% Preferred Stock into common stock and received a total of 961,926 shares of common stock, with 700,020 shares issued for the conversion, 31,311 shares issued for accrued dividends, and 230,595 issued for the share adjustment provision described in Note 17.
 
     
 
19

 
    
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under “Certain Factors That May Affect Future Results” below and elsewhere in, or incorporated by reference into, this report.

In some cases, you can identify forward-looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,” or the negative of these terms, and similar expressions are intended to identify forward-looking statements. When used in the following discussion, the words “believes,” “anticipates” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The forward-looking statements in this report are based upon management’s current expectations and belief, which management believes is reasonable. These statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly release the result of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion relates to the operations of Stratus and should be read in conjunction with the Notes to Financial Statements.

Description of Business

Overview
 
On March 14, 2008, pursuant to an Agreement and Plan of Merger dated August 20, 2007 by and among Feris International, Inc. (“Feris”), Feris Merger Sub, Inc. and Patty Linson, on the one hand, and Pro Sports & Entertainment, Inc. (“PSEI”), on the other hand, Feris issued 49,500,000 shares of its common stock for all of the issued and outstanding shares of PSEI, resulting in PSEI becoming a wholly-owned subsidiary of Feris and the surviving entity for accounting purposes (“Reverse Merger”).
 
In July 2008, Feris’ corporate name was changed to Stratus Media Group, Inc. (“Company”).  PSEI, a California corporation, was organized on November 23, 1998 and specializes in sports and entertainment events that it owns, operates, manages, markets and sells in national markets. In addition, PSEI acquired the business of Stratus Rewards, LLC (“Stratus Rewards”) in August 2005.  Stratus Rewards is a credit card rewards program that uses the Visa card platform that offers a unique luxury rewards redemption program, including private jet travel, premium travel opportunities, exclusive events and luxury merchandise.  In May 2010, the Company entered into an agreement with a private bank in Switzerland to be the processing bank for Stratus Rewards in Europe.  
 
PSEI, a California corporation, was organized in November 1998 and specializes in sports and entertainment events that it owns, and intends to operate, manage, market and sell in national markets. In addition, PSEI acquired the business of Stratus Rewards, LLC (“Stratus Rewards”) in August 2005.  Stratus Rewards is a credit card rewards marketing program that uses the Visa card platform that offers a unique luxury rewards redemption program, including private jet travel, premium travel opportunities, exclusive events and luxury merchandise.

ProElite, Inc. (“PEI”) is a subsidiary of the Company.  PEI specializes in the operation and management of Mixed Martial Arts events.  The Company completed the acquisition of PEI on June 14, 2011.  The Company has consolidated the balance sheet of PEI as of September 30, 2011.  The results of operations of PEI for the three months ended September 30, 2011, were consolidated into the Company’s results of operations.

The business plan of the Company is to own, operate and market live entertainment events and derive its revenue primarily from ticket/admission/membership sales, corporate sponsorship, television, print, radio, on-line and broadcast rights fees, merchandising, and hospitality activities.  With additional funding, the objective of management is to build a profitable business by implementing an aggressive acquisition growth plan to acquire quality companies, build corporate infrastructure, and increase organic growth.  The plan is to leverage operational efficiencies across an expanded portfolio of events to reduce costs and increase revenues.  The Company intends to promote the Stratus Rewards card and its events together, obtaining maximum cross marketing benefit among card members, corporate sponsors and Stratus events.
 
The Company is using a “roll up” strategy, targeting sports and live entertainment events and companies that are independently owned and operated or being divested by larger companies with the plan to aggregate them into one large leading live entertainment company.  A key component of this strategy is to purchase these events for approximately four to six times Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of the events, with the expectation that the combined EBITDA of the Company from these events will receive a higher valuation multiple in the public markets.  Another key component of this strategy is to complete acquisitions that may not meet these economic parameters but have other compelling attributes such as entry into a new type of event or as a strategic fit with the Company’s existing events
  
 
20

 
   
Assuming the availability of capital, the Company is targeting acquisitions of event properties.  The goal is to aggressively build-up a critical mass of events, venues and companies that allow for numerous cross-event synergies.  Specifically:
 
 
On the expense side, to share sales, financial and operations resources across multiple events, creating economies of scale, increasing the Company’s purchasing power, eliminating duplicative costs, and bringing standardized operating and financial procedures to all events, thus increasing the margins of all events.
 
 
On the revenue side, to present advertisers and corporate sponsors an exciting and diverse menu of demographics and programming that allows sponsors “one stop shopping” rather than having to deal with each event on its own, and in so doing, convert these sponsors into “strategic partners.”
 
With these core operational synergies, and subject to available capital, the Company intends to (1) operate its existing portfolio of events, (2) implement its acquisition strategy of additional live sports and entertainment events and companies, (3) create entirely new event properties on the forefront of the “experience economy” and thus tap into people’s lifestyle passions, and (4) cross-promote the Stratus Rewards Visa card with these events to enhance the results of the card and event businesses.
 
The business plan of Stratus is to provide integrated event management, television programming, marketing, talent representation and consulting services in the sports and other live entertainment industries.  Stratus event management, television programming and marketing services may involve:
 
 
managing sporting events, such as college bowl games, mixed martial-arts events, golf tournaments and auto racing team and events;
 
managing live entertainment events, such as music festivals, car shows and fashion shows;
 
producing television programs, principally sports entertainment and live entertainment programs; and
 
marketing athletes, models and entertainers and organizations.
 
Description of our Revenues, Costs and Expenses

Revenues

When the Company commences staging events, revenues will represent event revenues from ticket sales, sponsorships, concessions and merchandise, which are recorded when the event occurs, and Stratus White revenues from membership fees, fees on purchases and interest income earned on the redemption trust.  Membership fees are amortized over the twelve month period and fees from purchases and interest income are recorded when they occur.  
 
Gross Profit (Loss)
 
Gross profit will represent revenues less the cost of revenues. Our event cost of revenues will consist of the costs of renting the venue, structures at the venue, concessions, and temporary personnel hired for the event.  Cost of revenues for the Stratus program are nominal.

Operating Expenses

Our selling, general and administrative expenses include personnel, rent, travel, office and other costs for selling and promoting events and running the administrative functions of the Company.  Legal and professional services are paid to outside attorneys, auditors and consultants are broken out separately given the size of these expenses relative to selling, general and administrative expenses.  Operating expenses also include the non-cash expenses for the value of common stock issued above the value of consideration received and the Black-Sholes costs of options and warrants.

Interest Expense
 
 Our interest expense results from preferred shares, loans payable to shareholders, current portion of notes payable-related parties and notes payable.

Critical Accounting Policies

The following discussion relates to the operations of the Company and should be read in conjunction with the Notes to Financial Statements.
   
 
21

 

Net Loss per Share

We compute net loss per share in accordance with ASC 260, Earnings Per Share. Basic per share data is computed by dividing loss available to common stockholders by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing loss available to common stockholders by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential common shares had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.
 
The effect of common stock equivalents (which include outstanding warrants and stock options) are not included for the three or nine months ended September 30, 2010, as they are antidilutive to loss per share.  Losses per share for the three or nine months ended September 30, 2010 do not include the potential impact of options to purchase 8,709,852 shares of the Company's common stock, warrants to purchase 914,040 shares, or of warrants to purchase $36,250 of the Company's common stock, with the number of shares issuable under this warrant to be determined by the Company's first financing round following its reverse merger on March 14, 2008.

Intangible Assets
 
Intangible assets consist of goodwill related to the acquisition of PEI, certain events and the Stratus Rewards Visa White Card that we have acquired. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 142  Goodwill and Other Intangible Assets , which is codified in FASB ASC Topic 350, which requires allocating goodwill to each reporting unit and testing for impairment using a two-step approach.
 
The Company purchased several events that are recorded on the Company’s balance sheet as intangible assets at the consideration paid for such assets, which generally include licensing rights, naming rights, merchandising rights and the right to hold such event in particular geographic locations.  There was no goodwill assigned to any of these events and the value of the consideration paid for each event is considered to be the value for each related intangible asset. Each event has separate accounts for tracking revenues and expenses per event and a separate account to track the asset valuation.

A portion of the consideration used to purchase the Stratus Rewards Visa card program was allocated to specific assets, as disclosed in the footnotes to the financial statements, with the difference between the specific assets and the total consideration paid for the program being allocated to goodwill.

The Company reviews the value of intangible assets and related goodwill as part of its annual reporting process, which generally occurs in February or March of each calendar year.  In between valuations, the Company conducts additional tests if circumstances warrant such testing.  For example, if the Company was unable to secure the services of any sponsoring banks, the Company would then undergo a thorough valuation of the intangible assets related to its Stratus Rewards program.

To review the value of intangible assets and related goodwill, the Company compares discounted cash flow forecasts with the stated value of the assets on the balance sheet.

The events are forecasted based on historical results for those events, adjusted over time for the assumed synergies expected from discounts from purchases of goods and services from a number of events rather than from each event on its own, and for synergies resulting from the expected ability to provide sponsors with benefits from sponsoring multiple events with a single point of contact.

These forecasts are discounted at a range of discount rates determined by taking the risk-free interest rate at the time of valuation, plus a premium for equity risk, plus a premium related to small companies in general, plus a risk premium for factors specific to the Company and the business.

If the Company determines that the discount factor for cash flows should be substantially increased, or the event will not be able to being operations when planned, it is possible that the values for the intangible assets currently on the balance sheet could be substantially reduced or eliminated, which could result in a maximum charge to operations equal to the current carrying value of the intangible assets of $5,329,842.

 The Company believes that Core Tour and Maui Music Festival are most at risk for additional impairment charges in the future because the fair value for each event is less than 200% of its book value for such events.
   
 
22

 

Results of Operations for the Three Months Ended September 30, 2011

Revenues

Revenues for the three months ended September 30, 2011 (“Current Period”) were $250,201, compared to $0 for the three months ended September 30, 2010 (“Prior Period”).  The revenues in the Current Period relates to the Company’s ProElite operations.  Stratus White revenues were $0 in the Current Period and $0 in the Prior Period.  
 
Cost of Revenues

Cost of revenues for the Current Period were $253,810, compared to $0 for the Prior Period.  The cost of revenues in the Current period relates to the Company’s ProElite operations.

Gross Profit (Loss)
 
Gross loss in the Current Period is $3,609, primarily related to the Company’s ProElite operations.  There were no revenues or cost of revenues in the Prior Period, so the gross profit in the Prior Period was $0.
   
Operating Expenses

Operating expenses for the Current Period were $4,136,674, an increase of $2,439,389 from $1,643,285 in the Prior Period.  This increase in operating expenses was primarily comprised of an increase of $2,041,046 in general and administrative expenses reflecting the build of Stratus operations in preparation of commencing operating revenues and the addition of ProElite operations, a reduction of $303,682 in stock compensation expense, and an increase of $747,061 in legal and professional services.

General and administrative expenses of $2,551,878 increased by $2,041,046 from $510,832 in the Prior Period.  This increase was primarily related to higher levels of staffing and business development activity in the Current Period, specifically an increase for salaries and related.

Stock option and warrant expense was $331,519 in the Current Period, a decrease of $303,682 from $635,201 in the prior period.  This decrease was primarily related to a lower Black Scholes expense of options issued to employees reflecting that no options were issued in the Current Period.

Legal and professional services were $1,231,463 in the Current Period, an increase of $747,061 versus $484,402 in the Prior Period, largely related to increased consulting services related to business development in Europe, and litigation expenses related to legal actions described in footnotes 4 and 21 above.  Depreciation and amortization expense increased to $21,814 in the Current Period reflecting the additional assets purchased in 2011, compared to $12,850 in the Prior Period.
 
Other Income

Other (income)/expenses decreased by $168,084 from the Prior Period to net other expense of $0 in the Current Period.   The expense in the Prior Period reflects expense for the issuance of 477,616 shares of common stock to settle a dispute with a long-term shareholder regarding the number of shares issued pursuant to a subscription agreement executed during 2007.
 
Interest Expense

Interest expense was $195,705 in the Current Period, an increase of $174,353 from $21,352 in the Prior Period, primarily related to the interest expense associated with the issuance of preferred stock in the latter half of 2010 and the first half of 2011.

Results of Operations for the Nine Months Ended September 30, 2011
 
 Revenues

Revenues for the nine months ended September 30, 2011 (“Current Period”) were $250,021, compared to $0 for the nine months ended September 30, 2010 (“Prior Period”).  The revenues in the Current Period relate to the operations of ProElite.  There were no event revenues in the Prior Period.  Stratus card revenues were $0 in the Current Period and $0 in the Prior Period.  

Cost of Revenues

Cost of revenues for the Current Period were $253,810, compared to $0 for the Prior Period.  The cost of revenues in the Current period relates to the Company’s ProElite operations

Gross Profit (Loss)
 
Gross loss in the Current Period is $3,609, primarily related to the Company’s ProElite operations.  There were no revenues or cost of revenues in the Prior Period, so the gross profit in the Prior Period was $0.
    
 
23

 
    
Operating Expenses

Operating expenses for the Current Period were $7,867,775, an increase of $3,208,346 from $4,659,429 in the Prior Period.  This increase in operating expenses was primarily comprised of an increase of $3,239,780 in general and administrative expenses reflecting the build up of Stratus operations in preparation of commencing operating revenues and the addition of ProElite operations, a decrease of $876,014 in stock compensation  expense and an increase of $832,743 in legal and professional services.
 
General and administrative expenses of $4,697,621 increased by $3,239,780 from $1,457,841 in the Prior Period.  This increase was primarily related to higher levels of staffing and business development activity in the Current Period, specifically an increase for salaries and related expenses and consulting servicdes.

The total warrant and options expense of $1,214,624 in the Current Period, a decrease $876,014 from $2,090,638 in the Prior Period.  This decrease was primarily related to a lower Black Scholes expense of options issued to employees reflecting that no options were issued in the Current Period.

Legal and professional services were $1,906,958 in the Current Period, an increase of $832,743 versus $1,074,215 in the Prior Period, largely related to increased consulting related to business development in Europe, increased legal and litigation expenses related to legal actions described in footnotes 4 and 21 above.  Depreciation and amortization expense increased to $48,572 in the Current Period reflecting the additional assets purchased in 2011, compared to $36,736 in the Prior Period. 

Other( Income)/Expenses

Other (income)/expenses decreased by $693,462 from the Prior Period to net other expense of $0 in the Current Period.   The expense in the Prior Period reflects expense for the issuance of 477,616 shares of common stock to settle a dispute with a long-term shareholder regarding the number of shares issued pursuant to a subscription agreement executed during 2007.
 
Interest Expense

Interest expense was $324,544 in the Current Period, an increase of $270,571 from $53,974 in the Prior Period, primarily related to the interest expense associated with the issuance of preferred stock in the latter half of 2010 and the first half of 2011.
 
Liquidity and Capital Resources

The report of our independent registered public accounting firm on the financial statements as of and for the year ended December 31, 2010 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern as a result of recurring losses, a working capital deficiency, and negative cash flows. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that would be necessary if we are unable to continue as a going concern.

The Company has suffered losses from operations and without additional capital, currently lacks liquidity to meet its current obligations.  The Company has a net loss for 2010 of $8,409,605 and a net loss of $8,195,928 for the nine months ended September 30, 2011.  As of September 30, 2011, the Company had working capital of $187,345 and cumulative losses of $34,662,520.  Unless additional financing is obtained, the Company may not be able to continue as a going concern.  During 2010, the Company raised $2,935,720 in capital through the issuance of $2,310,000 of common stock and $625,720 of preferred stock.  The Company raised $9,095,989 in capital through issuance of preferred stock and $3,609,359 through the issuance of common stock during the nine months ended September 30, 2011.  The Company is still in the process of building its brand and generating revenues.  It is anticipated that the losses will continue through year-end and that additional financing is necessary before December 31, 2011.  The Company is in the process of raising capital for itself and its ProElite subsidiary although no assurance can be given that the Company will be able to raise such funds.  If the Company is unable to raise additional funds, the ability to continue as a going concern will be difficult.

At September 30, 2011, cash and equivalents were $2,129,127 and we had working capital of $187,345.  At September 30, 2011, we had $1,272,491 in debt obligations (comprised of $129,475 in loans to officers and directors and $1,070,000 of notes payable to related parties
   
 
24

 
     
Cash Flows

The following table sets forth our cash flows for the periods indicated:
   
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Operating activities
 
$
(8,801,838
)
 
$
(1,590,133
)
Investing activities
   
(991,473
)
   
(715,662
)
Financing activities
   
11,922,438
     
2,318,818
 
Total
 
$
2,129,127
   
$
13,023
 
  
Operating Activities

Operating cash flows for the nine months ended September 30, 2011 reflects the net loss of $8,195,928, offset by changes in working capital of $1,869,106 primarily reflecting the reductions in various current liabilities, depreciation and amortization of $48,572, non-cash options expenses of $1,124,624

Operating cash flows for the nine months ended September 30, 2010 reflects the net loss of $5,406,865, offset by changes in working capital of $759,045, depreciation and amortization of $36,736, non-cash expenses of $2,090,638 for the excess of fair value of common stock sales over the consideration received and Black-Scholes cost of warrant issuance, $225,832 of the value of stock issued for services and $704,481 value of stock issued to settle a dispute with a long-term shareholder regarding the number of shares issued pursuant to a subscription agreement executed during 2007.

Investing Activities

During the nine months ended September 30, 2011, the Company invested $130,578 in office machines, computer equipment and an automobile.  We also advanced funds to PEI and the Core Tour totaling $860,895 to complete those acquisitions.  We advanced $712,794 in cash to PEI during the nine months ended September 30, 2010 for operating expenses and used $2,868 for capital expenditures during this period.  
   
Financing Activities

 During the nine months ended September 30, 2011, we raised $9,406,051 from the issuance of preferred stock and $3,609,359 from the issuance of common stock.  These proceeds were partially offset by payments on loans and notes payable totaling $1,030,177.  During the nine months ended September 30, 2010, we received cash proceeds of $2,260,000 from sales of common stock and warrants and $314,015 from sales of Preferred stock, and used $8,260 to cover an overdraft from December 31, 2009, $221,937 to partially repay loans from officers and a director and $25,000 to partially repay notes payable.  

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.
   
 
25

 
    
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable
 
ITEM 4T.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file and submit under the Exchange Act (i) is recorded, processed, summarized and reported as and when required and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
Not applicable. 
 
ITEM 1A.  RISK FACTORS
 
Not applicable.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Series E Preferred Stock
 
Pursuant to the Purchase Agreement, effective May 25, 2011 the Company sold to eight accredited investors 8,700 Series E Preferred Shares, A Warrants to purchase 21,750,000 shares of the Company’s Common Stock and B Warrants to purchase 10,875,000 shares of the Company’s Common Stock.  The Company received gross proceeds of $8,700,000.  The Company paid $800,000 in commissions and agreed to issue warrants to the placement agent to purchase 3,600,000 shares of the Company’s Common Stock with respect to the private placement.  The Company also paid a broker-dealer a commission in connection with the private placement of $100,000 in cash and agreed to issue such broker-dealer five year warrants to purchase 1,000,000 shares of the Company’s Common Stock, at an exercise price of $0.70 per share.  The Company agreed to provide “piggyback” registration rights with respect to shares of the Company’s Common Stock acquired by such broker-dealer upon exercise of the warrants.
 
Common Stock
 
From April 15, 2011 to May 25, 2011, the Company sold to 70 accredited investors 7,142,857 Units, each Unit consisting of (a) one share of Common Stock of the Company, (b) one warrant to purchase a share of Common Stock, at $0.60 per share, and (c) one-half of a warrant to purchase a share of Common Stock with an exercise price of $1.00 per share.  The purchase price per Unit was $0.35 and the Company received $2,500,000 in proceeds.  No commissions were paid.
     
 
26

 
   
Series C and D Preferred Stock
 
From May 26, 2010 to May 9, 2011, the Company sold to nine accredited investors 18,365 shares of Series C Preferred Stock (convertible into 367,293 shares of Common Stock), 50,665 shares of Series D Preferred Stock (convertible into 3,039,870 shares of Common Stock) and 2,300,000 shares of the Company’s Common Stock, together with warrants to purchase 2,853,582 shares of the Company’s Common Stock at $2.00 per share for the Series C Preferred offering and $1.00 per share for the Series D Preferred offering and Common Stock offering. The Company received gross proceeds of $3,220,875 and paid approximately $480,000 in commissions to placement agents. A more detailed description of the terms of the Series C and Series D Preferred Stock, including the price protection provisions, is contained in the notes to the Company’s financial statements.
 
The securities described in this Item 2 were not registered under the Securities Act of 1933, as amended (the “Act”) in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder.  The shares of preferred stock, warrants and the shares of the Company’s Common Stock issuable upon the exercise of the warrants and conversion of the preferred shares may not be reoffered or sold in the United States by the holders in the absence of an effective registration statement or exemption from the registration requirements of the Act. 
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.
  
ITEM 4.  RESERVED
 
  
ITEM 5.  OTHER INFORMATION
 
None
   
ITEM 6.  EXHIBITS
  
Exhibit No.
 
Exhibit Description
     
31.1
 
Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification by the acting Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Schema Document
     
101.CAL
 
XBRL Calculation Linkbase Document
     
101.LAB
 
XBRL Label Linkbase Document
     
101.PRE
 
XBRL Presentation Linkbase Document
     
101.DEF
 
XBRL Definition Linkbase Document
   
 
27

 
  
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
STRATUS MEDIA GROUP, INC.
     
 
By:
/s/ Paul Feller                                                        
   
Paul Feller
   
Principal Executive Officer
     
 
By:
/s/ John Moynahan                                               
   
John Moynahan
   
Principal Financial Officer
     
 
By:
/s/ Charles R. Bearchell                                          
   
Charles R. Bearchell
   
Principal Accounting Officer
     
 
Date:
November 21, 2011 
 

 
 
 
 
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