U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: JUNE 30, 2005
Commission File Number: 0-23100
IDEA SPORTS ENTERTAINMENT GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
P.O. BOX 26, SANTEE, SC 29142
(Address of principal executive office)
800 WEST MAIN, LAKE CITY, SC 29560
(Former address of principal executive office)
(803) 854-3530
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of July 31, 2005 was 127,798,982.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Balance Sheet as of June 30, 2005 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2005 and 2004 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2005 and 2004 and the period from
inception (September 9, 2004) through June 30, 2005 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004, and the period from
inception (September 9, 2004) through June 30, 2005 6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis or Plan of Operation 14-17
Item 3. Controls and Procedures 18
PART II OTHER INFORMATION 19-21
2
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 25,625
-------------
Total current assets 25,625
Property and equipment, net 1,677
Investment in joint venture 84,691
Investment in Vegas Roll'em(TM) 295,544
Television programs 65,458
-------------
Total assets $ 472,995
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 3,248,373
Accounts payable 379,261
Accrued expenses 5,500
Accrued interest payable 451,391
-------------
Total liabilities 4,084,525
-------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Preferred stock: $2.75 par value; authorized 2,000,000 shares;
no shares issued and outstanding --
Common stock: $.0001 par value; authorized 500,000,000 shares;
issued 127,917,782 shares and outstanding 127,798,982 shares 12,780
Additional paid-in capital 17,157,404
Common stock warrants 66,658
Accumulated deficit (20,848,372)
-------------
Total stockholders' deficit (3,611,530)
-------------
Total liabilities and stockholders' deficit $ 472,995
=============
See accompanying notes to condensed consolidated financial statements.
3
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
2005 2004
---------- ----------
CONTINUING OPERATIONS
Administrative expense $ 158,125 $ --
Equity in joint venture loss 50,000 --
Interest expense 95,399 --
---------- ----------
LOSS FROM CONTINUING OPERATIONS (303,524) --
---------- ----------
DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations -- (118,542)
Income tax benefit -- --
---------- ----------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS -- (118,542)
---------- ----------
NET LOSS $(303,524) $(118,542)
========== ==========
NET LOSS PER SHARE, BASIC AND DILUTED, FROM:
CONTINUING OPERATIONS $ (0.00) $ --
DISCONTINUED OPERATIONS -- (0.00)
---------- ----------
TOTAL $ (0.00) $ (0.00)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED (THOUSANDS) 123,519.9 63,782.4
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004, AND THE PERIOD
FROM INCEPTION (SEPTEMBER 9, 2004) THROUGH JUNE 30, 2005
(UNAUDITED)
FROM INCEPTION
(9/9/2004)
SIX MONTHS ENDED THROUGH
JUNE 30, JUNE 30,
2005 2004 2005
---------- ---------- ----------
CONTINUING OPERATIONS
Administrative expense $ 310,472 $ -- $ 557,833
Equity in joint venture loss 50,000 -- 50,000
Interest expense 192,889 -- 290,144
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (553,361) -- (897,977)
---------- ---------- ----------
DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations 70,242 (330,290) --
Income tax benefit -- -- --
---------- ---------- ----------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 70,242 (330,290) --
---------- ---------- ----------
NET LOSS $(483,119) $(330,290) $(897,977)
========== ========== ==========
NET LOSS PER SHARE, BASIC AND DILUTED, FROM:
CONTINUING OPERATIONS $ (0.00) $ -- $ (0.01)
DISCONTINUED OPERATIONS 0.00 (0.01) --
---------- ---------- ----------
TOTAL $ (0.00) $ (0.01) $ (0.01)
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED (THOUSANDS) 104,533.6 63,782.4 94,544.2
========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
5
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004, AND THE PERIOD
FROM INCEPTION (SEPTEMBER 9, 2004) THROUGH JUNE 30, 2005
(UNAUDITED)
FROM INCEPTION
(9/9/2004)
SIX MONTHS ENDED THROUGH
JUNE 30, JUNE 30,
2005 2004 2005
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(483,119) $(330,290) $(897,977)
Earnings (loss) from discontinued operations 70,242 (330,290) --
---------- ---------- ----------
Loss from continuing operations (553,361) -- (897,977)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation 186 -- 186
Equity in joint venture loss 50,000 -- 50,000
Accounts payable 104,613 -- 86,891
Accrued expenses 197,130 -- 295,646
---------- ---------- ----------
Net cash used in continuing operations (201,432) -- (465,254)
---------- ---------- ----------
Net cash used in discontinued operations (163,002) (87,346) (163,002)
---------- ---------- ----------
Net cash used in operations (364,434) (87,346) (628,256)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of computer equipment -- -- (1,863)
Investment in joint venture (115,500) -- (115,500)
---------- ---------- ----------
Net cash used in continuing operations (115,500) -- (117,363)
---------- ---------- ----------
Net cash used in discontinued operations -- -- --
---------- ---------- ----------
Net cash used in investing activities (115,500) -- (117,363)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 367,692 -- 604,117
Loans from related parties 175 -- 29,675
Sale of common stock 135,000 -- 135,000
Cash received in acquisition of IMGI -- -- 1,200
---------- ---------- ----------
Net cash provided by continuing operations 502,867 -- 769,992
---------- ---------- ----------
Net cash provided by discontinued operations -- -- --
---------- ---------- ----------
Net cash provided by financing activities 502,867 -- 769,992
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,933 (87,346) 24,373
CASH AND CASH EQUIVALENTS, beginning of period 2,692 88,668 1,252
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 25,625 $ 1,322 $ 25,625
========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
6
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", and "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to other factors noted with such forward-looking
statements, include those discussed in Exhibit 99.1 filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on Form
10-KSB for fiscal year 2002.
NOTE 1--BASIS OF PRESENTATION
-----------------------------
The condensed consolidated financial statements include the accounts of Idea
Sports Entertainment Group, Inc. ("Idea Sports") (formerly Team Sports
Entertainment, Inc.) and its wholly owned subsidiaries, Idea Management Group,
Inc. ("IMGI"), World Championship Poker, Inc. ("Poker"), Strategic Gaming
Consultants, LLC ("Gaming") and Maxx Motorsports, Inc. ("Maxx"), and its wholly
owned subsidiary, Team Racing Auto Circuit, LLC ("TRAC") (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. IMGI, Poker and Gaming represent the continuing
operations of the Company and the current development stage operations.
Idea Sports acquired IMGI on September 9, 2004 and Gaming on October 27, 2004,
both of which are non-operating development stage enterprises within the meaning
of Statement of Financial Accounting Standards No. 7, ("SFAS No. 7") "Accounting
and Reporting by Development Stage Enterprises." The Company follows the AICPA
SOP 98-5, "Reporting on the Costs of Start-Up Activities" in accounting for its
start-up activities. Accordingly, the costs associated with the new development
stage activities have a new inception date of September 9, 2004, and all prior
development stage costs associated with the discontinued automotive racing
league have been transferred to accumulated deficit.
7
Idea Sports is a company devoted to the creation, development and acquisition of
innovative motion pictures and television programming in the sports and family
genre. These unique and commercial entertainment properties are designed to
appeal to the sports enthusiast and are to be distributed domestically and
internationally through both strategic partnerships with film and distribution
companies, as well as, growing Internet distribution channels.
As discussed in note 3, Poker was acquired at the end of June 2005 and its
principal asset is Vegas Roll'em(TM) Fantasy Football ("Vegas Roll'em"), an
internet based proprietary fantasy football format.
On November 8, 2004, the Company changed its name to Idea Sports Entertainment
Group, Inc.
Maxx, through TRAC, planned to own, operate and sanction an automotive racing
league designed to provide content for television and tracks while expanding the
existing base of racing fans. Accordingly, the operations of the Company were
presented as those of a development stage enterprise, from its inception (May
15, 2001), as prescribed by SFAS No. 7. On August 26, 2003, the Board of
Directors of the Company unanimously approved a plan to immediately discontinue
its racing operation. Accordingly, all prior operations from this business
activity are classified as discontinued operations in the accompanying condensed
consolidated financial statements.
The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These condensed
consolidated financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31, 2004,
which is included in the Company's Form 10-KSB for the year ended December 31,
2004. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
8
NOTE 2--GOING CONCERN
---------------------
The Company has not established sources of revenue sufficient to fund the
development of business, projected operating expenses and commitments for fiscal
year 2005. The Company, which was in the development stage for its planned
racing operation since its inception, May 15, 2001, has accumulated a net loss
of $15,054,021 through December 31, 2003. The Company has ceased its plans to
begin a racing league and all operations have been discontinued. This
discontinued operation had a loss of $671,289 during the year ended December 31,
2004.
Since August 26, 2003, the Company attempted to locate and negotiate with a
business entity for the merger of that target business into the Company. As
discussed below, the Company has acquired new development stage businesses
commencing on September 9, 2004. Since September 9, 2004, the Company incurred
losses in the amount of $344,616 through December 31, 2004 and a total of
$897,977 through June 30, 2005. A group of the note holders have agreed to
advance funds on a limited basis to allow the Company to develop a business
capable of generating revenues sufficient to fund projected operating expenses
and commitments. However, there can be no assurance that the group of note
holders will be able to continue to provide sufficient funding to develop the
Company's current business plan.
In addition, current liabilities of the Company exceed its assets by
approximately $3,612,000, and its convertible promissory notes payable
obligations are in default. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that may result from the
outcome of these uncertainties.
NOTE 3--ACQUISITIONS AND JOINT VENTURE
--------------------------------------
On April 19, 2005, the Company entered into a joint development agreement with
InnoZen, Inc. ("InnoZen") to jointly develop a film strip product containing
electrolytes to replenish the body while under physical stress (the "P3 strip").
InnoZen has experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. The Company has the
ability to locate athletes for testing the efficacy of the P3 strips in athletes
and to assist in obtaining endorsements for the P3 strips by well-known athletes
and coaches. The Company contributed $115,500 in cash and 250,000 shares of its
common stock, valued at $19,191 using the Black-Scholes valuation model, for its
50% interest in the joint venture. The Company is required to issue an
additional 250,000 shares of its common stock upon completion of the development
of a saleable product.
As of June 30, 2005, the joint venture had completed a product formulation of an
acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product.
As of August 2, 2005, the joint venture has produced initial P3 strips capable
of holding a deliverable load of electrolytes equal to approximately one fluid
ounce of most recognized sports drinks. The P3 strips have been produced for
flavor testing with initial flavors to be lemon-lime, orange and sour orange.
9
Management of the Company currently anticipates that P3 strips will be available
during the fourth quarter of 2005.
On June 28, 2005, the Company issued 3,850,000 shares of its common stock, which
were valued at $295,544 using the Black-Scholes valuation model, to acquire
Poker, whose principal asset is the rights to a proprietary fantasy football
format, with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas
Roll'em"). In January 2005, the Rules of Competition for Vegas Roll'em received
a copyright from the United States Copyright Office. This format allows live
filming of the high stakes action as it unfolds. Each player will have a roll of
the dice to determine which of his players will make up his team. This will add
a unique twist to the game.
According to the Fantasy Sports Trade Association, fantasy football was played
by nearly fifteen million participants last year. This internet-based phenomenon
has created a four billion dollar industry.
On July 21, 2005, the Company retained the services of veteran poker and fantasy
sports executive, Tom Elias, to manage its Las Vegas-based Vegas Roll'em. Mr.
Elias has over seventeen years experience producing fantasy sports and poker
tournaments.
NOTE 4--DISCONTINUED OPERATIONS
-------------------------------
The Company, which was in the development stage for its planned racing
operations since its inception, May 15, 2001, did not establish sources of
revenue sufficient to fund the development of business and pay operating
expenses, resulting in a net loss of $15,054,021 from inception through December
31, 2003. Accordingly, on August 26, 2003, the Board of Directors of the Company
unanimously approved a plan to immediately discontinue its racing operation.
The Company realized a loss from its discontinued operations of $671,289 in
2004. The loss is primarily the interest expense and selling, general and
administrative costs associated with attempting to implement the business plan.
In March 2005, the Company and all other parties to the litigation, described in
note 9, agreed to dismiss with prejudice all claims and counterclaims. As a
result, the Company was relieved of previously recorded liabilities in the
amount of $281,181. The Company recorded $210,939 in additional legal fees,
which resulted in a net gain from discontinued operations of $70,242.
10
NOTE 5--STOCK OPTIONS AND WARRANTS
----------------------------------
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its stock
option plan. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.
SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), requires
the Company to disclose pro forma information regarding option grants made to
its employees. SFAS No. 123 specifies certain valuation techniques that produce
estimated compensation charges that would be included in pro forma results.
These amounts would not be reflected in the Company's consolidated statement of
operations, because APB No. 25 specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of previous options granted
to the Company employees, board of directors, advisory committee members, and
consultants.
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
(SFAS 123(R)). Among other things, SFAS 123(R) requires expensing the fair value
of stock options, previously optional accounting. For transition, upon adoption
on January 1, 2006, SFAS 123(R) would require expensing any unvested options and
will also require the Company to change the classification of certain tax
benefits from option deductions to financing rather than operating cash flows.
As of June 30, 2005, the Company did not have any unvested options which would
require adjustment upon adoption of SFAS 123(R). Adoption should have the same
impact as the pro forma disclosure required by SFAS No 123.
SFAS No. 123 pro forma numbers are the same for the three and six months ended
June 30, 2005 and 2004, and for the period from inception (September 9, 2004)
through June 30, 2005 as the historical net loss reported. Accordingly, no
proforma disclosure is required.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, it is management's
opinion that the existing models do not necessarily provide a reliable single
measure of the fair value of the Company options.
At June 30, 2005, there were options and warrants outstanding which would allow
the holders to acquire 2,250,000 shares of the Company's common stock at $1.00
per share. The options generally expire in 2006.
At June 30, 2005, there were warrants outstanding which would allow the holder
to acquire 17,500,000 shares of the Company's common stock at $.10 pr share,
which expire in 2007. In the event the revenues of certain associated operations
of the Company achieve certain revenue goals before the warrants expire, the
holders are entitled to double the number of their existing warrants.
11
NOTE 6--NOTES PAYABLE
---------------------
a) The Company has funded operations since September 2002, with
convertible notes. Since March 1, 2004, all of these notes have been in
default. All were convertible into the Company's common stock at the
rate of $.20 per share and all bear interest at the default rate of
12%, since the event of default. In March 2005, the Company reduced the
exchange rate from $.20 per share to $.10 per share. The following
summarizes the activity of the convertible notes during fiscal 2005:
Convertible Accrued
Notes (1) Interest
--------- --------
Balance, January 1, 2005 $ 3,271,675 $ 355,717
New loan proceeds/interest accrued 441,499 192,598
Issued 36,066,570 shares of common stock for payment of
convertible notes and accrued interest (472,301) (97,215)
------------ ------------
Convertible notes balance, June 30, 2005 3,240,873 451,100
Other note 7,500 291
------------ ------------
Total $ 3,248,373 $ 451,391
============ ============
(1) Includes one note in the principal amount of $37,500 which is
convertible into the Company's common stock at the rate of $.04 per
share.
b) In March 2005, the Company issued a note payable in the amount of
$7,500 which is due on demand and is accruing interest at 8%.
NOTE 7--COMMITMENTS AND CONTINGENCIES
-------------------------------------
On August 26, 2003, when the Company discontinued its racing operations, the
Company was a party to the following agreements:
o Racing Car Design and Construction Agreement
o Team Sales Brokerage Agreement
o Broadcasting Agreement
o Office Lease
Management of the Company does not believe the Company has any remaining
liability under these agreements. Additional detail regarding these agreements
can be found in the Company's Form 10-KSB for the years ended December 31, 2004
and 2003.
12
NOTE 8--RELATED PARTIES
-----------------------
The Company has had transaction with and received loans from certain individuals
considered to be related parties. The amount due to these parties is as follows:
Convertible Accrued
Notes Interest
----- --------
Charles W. Clark, Interim CEO $249,377 $ 24,904
William C. Morris, Former CEO and Director(1) 646,276 116,264
-------- --------
Total $895,653 $141,168
======== ========
(1) Includes company controlled by Mr. Morris.
Included in accounts payable is $1,500 for rent owed to Godley Morris Group LLC,
which is controlled by Mr. Morris and $8,868 owed to Mr. Morris for travel
expense reimbursements.
Godley Morris Group LLC, also received $9,000 for rent during the six months
ended June 30, 2005.
NOTE 9--LEGAL
-------------
On February 18, 2004, four Georgia shareholders filed suit in the Superior Court
of Fulton County against the Company's former CEO, William G. Miller of
Alpharetta, Georgia. Also named in the action was Jon Pritchett, who was
president of the Company while Miller was CEO. The suit alleges breach of
contract, wrongful conversion of company monies, mismanagement, breach of
fiduciary duty and fraud on the part of the defendants while serving the Company
in 2001 and 2002. The suit contends Idea Sport's shareholders suffered market
losses in excess of $50 million.
On May 3, 2004, Miller, Pritchett and three other individuals filed several
derivative and individual claims against the Company, its Directors and certain
of its shareholders in the Court of Chancery of the State of Delaware in and for
New Castle County, C.A. No. 413-N. The Company filed a counterclaim against
Miller and Pritchett on November 24, 2004.
On March 15, 2005, all parties to both of the matters described above agreed to
dismiss with prejudice all claims and counterclaims. The final settlement is
subject to court approval, which management expects to be granted.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, which was in the development stage for its planned racing operation
since its inception, May 15, 2001, did not establish sources of revenue
sufficient to fund the development of business and pay operating expenses,
resulting in a net loss of $15,054,021 from inception through December 31, 2003.
On August 26, 2003, the Board of Directors of the Company unanimously approved a
plan to immediately discontinue its racing operation. Since August 26, 2003 and
until September 9, 2004, the Company has been attempting to find a suitable
acquisition candidate. On September 9, 2004, with the acquisition of IMGI, the
Company ceased one development stage and commenced a new development stage
operation.
IMGI, a development stage company with no prior operations, is a company
devoted to the creation, development and acquisition of innovative motion
pictures and television programming in the sports and family genre. These unique
and commercial entertainment properties are designed to appeal to the sports
enthusiast and are to be distributed domestically and internationally through
both strategic partnerships with film and distribution companies, as well as,
growing Internet distribution channels.
On April 19, 2005, the Company entered into a joint development agreement with
InnoZen, Inc. ("InnoZen") to jointly develop a film strip product containing
electrolytes to replenish the body while under physical stress (the "P3 strip").
InnoZen has experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. The Company has the
ability to locate athletes for testing the efficacy of the P3 strips in athletes
and to assist in obtaining endorsements for the P3 strips by well-known athletes
and coaches. The Company contributed $115,500 in cash and 250,000 shares of its
common stock, valued at $19,191 using the Black-Scholes valuation model, for its
50% interest in the joint venture. The Company is required to issue an
additional 250,000 shares of its common stock upon completion of the development
of a saleable product.
On June 28, 2005, the Company issued 3,850,000 shares of its common stock, which
were valued at $295,544 using the Black-Scholes valuation model, to acquire
Poker, whose principal asset is the rights to a proprietary fantasy football
format, with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas
Roll'em"). In January 2005, the Rules of Competition for Vegas Roll'em received
a copyright from the United States Copyright Office. This format allows live
filming of the high stakes action as it unfolds. Each player will have a roll of
the dice to determine which of his players will make up his team. This will add
a unique twist to the game.
GOING CONCERN FACTORS--LIQUIDITY
The Company has not established sources of revenue sufficient to fund the
development of business, projected operating expenses and commitments for fiscal
year 2005. The Company, which was in the development stage for its planned
racing operation since its inception, May 15, 2001, has accumulated a net loss
of $15,054,021 through December 31, 2003. The Company has ceased its plans to
begin a racing league and all operations have been discontinued. This
discontinued operation had a loss of $671,289 during the year ended December 31,
2004.
14
Since August 26, 2003, the Company attempted to locate and negotiate with a
business entity for the merger of that target business into the Company. As
discussed below, the Company has acquired new development stage businesses
commencing on September 9, 2004. Since September 9, 2004, the Company incurred
losses in the amount of $344,616 through December 31, 2004 and a total of
$897,977 through June 30, 2005. A group of the note holders have agreed to
advance funds on a limited basis to allow the Company to develop a business
capable of generating revenues sufficient to fund projected operating expenses
and commitments. However, there can be no assurance that the group of note
holders will be able to continue to provide sufficient funding to develop the
Company's current business plan.
In addition, current liabilities of the Company exceed its assets by
approximately $3,612,000, and its convertible promissory notes payable
obligations are in default. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that may result from the outcome of
these uncertainties.
DISCONTINUED OPERATIONS
The Company, which was in the development stage for its planned racing operation
since its inception, May 15, 2001, did not establish sources of revenue
sufficient to fund the development of business and pay operating expenses,
resulting in a net loss of $15,054,021 from inception through December 31, 2003.
As a result of the continuing losses, on August 26, 2003, the Board of Directors
of the Company unanimously approved a plan to immediately discontinue its racing
operation. This discontinued operation had a loss of $671,289 during the year
ended December 31, 2004. While the Company does not expect any additional
liability, the following agreements were in place when the Company discontinued
its racing operation:
o Racing Car Design and Construction Agreement
o Team Sales Brokerage Agreement
o Broadcasting Agreement
o Office Lease
Management of the Company does not believe the Company has any remaining
liability under these agreements. Additional detail regarding these agreements
can be found in the Company's Form 10-KSB for the year ended December 31, 2004
and 2003.
The Company recognized income of none and $70,242 during the three and six
months ended June 30, 2005, respectively, and a loss of $118,542 and $330,290
during the three and six months ended June 30, 2004, respectively, from its
discontinued operations. The income in 2005 was a result of the Company being
relieved of certain previously recorded liabilities when all parties agreed to
dismiss with prejudice all claims and counterclaims in the litigation discussed
in note 9.
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CURRENT OPERATIONS
The Company is a concept development company that internally creates projects in
the fields of professional sports, motor sports, motion pictures, animated
films, publishing, television, radio, licensed merchandise, direct-to-retail
videos and international entertainment for distribution into the global
marketplace.
Through various exclusive partnerships and wholly-owned subsidiaries, the
Company develops unique content through its internal creative team and then
partners with individuals and corporations already established in the respective
field or industry for which the project was created which increases the
viability that the project will be successful and profitable. The Company's
business model involves negotiating a revenue share agreement with its
individual and corporate partners to minimize the up front development costs
associated with each project that has been created which minimizes the risk
associated with developing a profitable business unit for the Company.
IMGI commenced operations on September 9, 2004, and has not generated any
revenue to date.
On September 9, 2004, the Company acquired all of the issued and outstanding
common stock of IMGI; on October 15, 2004, the Company acquired two television
programs entitled "America's Top Drivers" and "Women's Racing League"; and on
October 27, 2004, the Company acquired all of the issued and outstanding
memberships of Gaming. IMGI has been involved in the subsequent acquisitions
discussed below, the development of the two television programs is in process
and Gaming is still inactive.
As of June 30, 2005, the joint venture with InnoZen had completed a product
formulation of an acceptable thin film prototype containing electrolytes and had
completed laboratory stability testing for the oral dosage product.
As of August 2, 2005, the joint venture has produced initial P3 strips capable
of holding a deliverable load of electrolytes equal to approximately one fluid
ounce of most recognized sports drinks. The P3 strips have been produced for
flavor testing with initial flavors to be lemon-lime, orange and sour orange.
Management of the Company currently anticipates that P3 strips will be available
during the fourth quarter of 2005.
On June 28, 2005, the Company issued 3,850,000 shares of its common stock, which
were valued at $295,544 using the Black-Scholes valuation model, to acquire
Poker, whose principal asset is the rights to a proprietary fantasy football
format, Vegas Roll'em. In January 2005, the Rules of Competition for Vegas
Roll'em received a copyright from the United States Copyright Office. This
format allows live filming of the high stakes action as it unfolds. Each player
will have a roll of the dice to determine which of his players will make up his
team. This will add a unique twist to the game.
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According to the Fantasy Sports Trade Association, fantasy football was played
by nearly fifteen million participants last year. This internet-based phenomenon
has created a four billion dollar industry.
On July 21, 2005, the Company retained the services of veteran poker and fantasy
sports executive, Tom Elias, to manage its Las Vegas-based Vegas Roll'em. Mr.
Elias has over seventeen years experience producing fantasy sports and poker
tournaments.
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ITEM 3. CONTROLS AND PROCEDURES
The Company discontinued its planned racing operations on August 26, 2003,
and subsequently terminated the majority of its employees. A third-party
consultant was retained to communicate to management the disclosures
required by reports that are filed under the Exchange Act.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports that are filed under the Exchange Act is accumulated and
communicated to management, including the principal executive officer, as
appropriate to allow timely decisions regarding required disclosure. Under
the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
June 30, 2005, and, based on its evaluation, our principal executive
officer has concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
Other than as discussed above, there have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation described above,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
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PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During March 2005, the Company issued 36,066,570 shares of its common stock in
payment of $472,301 in convertible note principal, $97,215 in accrued interest
and $47,937 of reimbursable legal fees.
During April 2005, the Company issued 3,000,000 shares of its common stock for
$135,000 in cash. In addition, during April 2005, the Company issued 250,000
shares of its common stock as partial consideration for its investment in a
joint development venture. The shares were valued at $19,191. On June 28, 2005,
the Company issued 3,850,000 shares of its common stock to acquire Poker in a
transaction valued at $295,544.
All of the shares issued were sold pursuant to an exemption from registration
under Section 4(2) promulgated under the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS
(a) Exhibits--
Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with 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.
IDEA SPORTS ENTERTAINMENT GROUP, INC.
August 29, 2005 By: /s/ Charles W. Clark
-------------------------------------
Charles W. Clark, Chief Executive Officer
and principal financial and accounting
officer
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