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: MARCH 31, 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)
800 WEST MAIN, LAKE CITY, SC 29560
(Address of principal executive office)
(843) 374-4332
(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 April 30, 2005 was 119,098,982.
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 March 31, 2005 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004 and the period from
inception (September 9, 2004) through March 31, 2005 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004, and the period from
inception (September 9, 2004) through March 31, 2005 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis or Plan of Operation 13-15
Item 3. Controls and Procedures 16
PART II OTHER INFORMATION 17-19
2
IDEA SPORTS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,088
------------
Total current assets 9,088
Property and equipment, net 1,770
Television programs 65,458
------------
Total assets $ 76,316
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 3,144,209
Accounts payable 213,016
Accrued expenses 30,303
Amounts payable to related parties 92,837
Accrued interest payable 355,992
------------
Total liabilities 3,836,357
------------
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 119,217,782 shares and outstanding
119,098,982 shares 11,910
Additional paid-in capital 16,706,238
Common stock warrants 66,658
Accumulated deficit (20,544,847)
------------
Total stockholders' deficit (3,760,041)
------------
Total liabilities and stockholders' deficit $ 76,316
============
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 MARCH 31, 2005 AND 2004, AND THE PERIOD
FROM INCEPTION (SEPTEMBER 9, 2004) THROUGH MARCH 31, 2005
(UNAUDITED)
FROM INCEPTION
(9/9/2004)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
2005 2004 2005
--------------- --------------- ---------------
CONTINUING OPERATIONS
Administrative expense $ 152,347 $ -- $ 399,708
Interest expense 97,489 -- 194,744
--------------- --------------- ---------------
LOSS FROM CONTINUING OPERATIONS (249,836) -- (594,452)
--------------- --------------- ---------------
DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations 70,242 (211,748) --
Income tax benefit -- -- --
--------------- --------------- ---------------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 70,242 (211,748) --
--------------- --------------- ---------------
NET LOSS $ (179,594) $ (211,748) $ (594,452)
=============== =============== ===============
NET LOSS PER SHARE, BASIC AND DILUTED, FROM:
CONTINUING OPERATIONS $ (0.00) $ -- $ (0.01)
DISCONTINUED OPERATIONS 0.00 (0.00) --
--------------- --------------- ---------------
TOTAL $ (0.00) $ (0.00) $ (0.01)
=============== =============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 85,336,360 63,782,412 81,555,098
=============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
4
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004, AND THE PERIOD
FROM INCEPTION (SEPTEMBER 9, 2004) THROUGH MARCH 31, 2005
(UNAUDITED)
FROM INCEPTION
(9/9/2004)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
2005 2004 2005
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (179,594) $ (211,748) $ (594,452)
Earnings (loss) from discontinued operations 70,242 (211,748) --
--------------- --------------- ---------------
Loss from continuing operations (249,836) -- (594,452)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation 93 -- 93
Accounts payable 28,382 -- 10,659
Accrued expenses 126,533 -- 225,049
--------------- --------------- ---------------
Net cash used in continuing operations (94,828) -- (358,651)
--------------- --------------- ---------------
Net cash used in discontinued operations (163,002) (81,667) (163,002)
--------------- --------------- ---------------
Net cash used in operations (257,830) (81,667) (521,653)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of computer equipment -- -- (1,863)
--------------- --------------- ---------------
Net cash used in continuing operations -- -- (1,863)
--------------- --------------- ---------------
Net cash used in discontinued operations -- -- --
--------------- --------------- ---------------
Net cash used in investing activities -- -- (1,863)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 261,227 -- 497,652
Loans from related parties 3,000 -- 32,500
Cash received in acquisition of IMGI -- -- 1,200
--------------- --------------- ---------------
Net cash from continuing operations 264,227 -- 531,352
--------------- --------------- ---------------
Net cash from discontinued operations -- -- --
--------------- --------------- ---------------
Net cash provided by financing activities 264,227 -- 531,352
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,397 (81,667) 7,836
CASH AND CASH EQUIVALENTS, beginning of period 2,691 88,668 1,252
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 9,088 $ 7,001 $ 9,088
=============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
5
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. (formerly Team Sports
Entertainment, Inc.) and its wholly owned subsidiaries, Idea Management
Group, Inc. ("IMGI"), 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 and Gaming represent the continuing operations
of the Company and the current development stage operations.
Idea Sports acquired IMGI and Gaming, 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.
On November 8, 2004, the Company changed its name to Idea Sports
Entertainment Group, Inc.
6
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 are 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.
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 has been 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 $594,452 through March 31, 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
7
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 $3,760,000, 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.
NOTE 3--ACQUISITIONS
--------------------
On September 9, 2004, the Company acquired all of the issued and
outstanding common stock of IMGI, a South Carolina corporation, in
exchange for warrants to acquire 15,000,000 shares of the Company's
common stock at an exercise price of $.10 per share. In addition, in
the event IMGI generates $2,000,000 in gross revenue within 36 months
of closing, the sellers of IMGI would receive additional warrants to
acquire 15,000,000 shares of the Company's common stock at an exercise
price of $.10. IMGI had no prior operations. Accordingly, this
transaction was valued at $1,200, which was the amount the sellers of
IMGI paid for IMGI's common stock.
On October 15, 2004, the Company acquired two television programs
entitled "America's Top Drivers" and "Women's Racing League" in
exchange for warrants to acquire 1,750,000 shares of the Company's
common stock at an exercise price of $.10 per share. In addition, in
the event these programs generate $2,000,000 in gross revenue within 36
months of closing, the sellers of the programs would receive additional
warrants to acquire 1,750,000 shares of the Company's common stock at
an exercise price of $.10. The transaction was valued at $65,458 using
the Black-Scholes option pricing model.
On October 27, 2004, the Company acquired all of the issued and
outstanding memberships of Gaming, a Nevada limited liability company,
in exchange for warrants to acquire 750,000 shares of the Company's
common stock at an exercise price of $.10 per share. In addition, in
the event Gaming generates $2,000,000 in gross revenue within 36 months
of closing, the sellers of Gaming would receive additional warrants to
acquire 750,000 shares of the Company's common stock at an exercise
price of $.10. Gaming had no prior operations and has no assets.
Accordingly, the transaction was recorded with no value.
IMGI 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.
8
NOTE 4--DISCONTINUED OPERATIONS
-------------------------------
The Company, which has been in the development stage 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 losses from its discontinued operations of
$671,289 and $9,069,804 in 2004 and 2003, respectively. The loss in
2003 includes an asset impairment of $7,029,808 which includes goodwill
of $2,810,627 and $4,219,181 in payments associated with the race cars.
The remainder of the loss in both periods 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
agreed to dismiss with prejudice all claims and counterclaims (note 9).
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.
NOTE 5--STOCK OPTION PLANS
--------------------------
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 are
included in the pro forma results below. These amounts have not been
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 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
9
March 31, 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 included under stock
option plans below.
SFAS No. 123 pro forma numbers are as follows for the three months
ended March 31, 2005 and 2004, and for the period from inception
(September 9, 2004) through March 31, 2005:
From
inception
(9/9/2004)
through
March 31, March 31,
2005 2004 2005
----------- --------- -----------
Net loss, as reported $ (179,594) $(211,748) $ (594,452)
Add: Stock-based employee compensation
expense determined under fair value based
method for all awards -- (138,552) --
Deduct: Stock-based employee compensation
included in reported net loss -- -- --
----------- --------- -----------
Pro forma net loss $ (179,594) $(350,300) $ (594,452)
=========== ========= ===========
Basic and diluted net loss per share:
Pro forma $ (.00) $ (.01) $ (.01)
As reported $ (.00) $ (.00) $ (.01)
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model. In
2001, the year in which the first group of options were issued, the
following weighted average assumptions were used: risk-free interest
rate based on date of issuance and term between 3.83% and 4.93%, no
expected dividends, a volatility factor of 138.13% and an expected life
of the options of 3 to 10 years.
On April 2, 2003, the Board of Directors granted options to certain
employees and directors to acquire 8,800,000 shares of the Company's
common stock at prices ranging from $.42 to $1.00 per share. The
options were scheduled to vest as follows: 4,500,000 on April 2, 2003,
2,210,000 on the day the 2004 racing season commences and 2,090,000 on
the day the 2005 racing season commences. The following assumptions
were used: risk-free interest rate of 4.67%, no expected dividends, a
volatility factor of 127.59% and an expected life of the option of 1 to
2 years.
10
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.
NOTE 6--NOTES PAYABLE
---------------------
a) In April 2003, holders of $1,645,000 of the $2,270,000
convertible notes payable agreed to extend the maturity date
of their respective notes from August 31, 2003 to March 1,
2004. In addition, certain holders of the notes increased the
principal amount of their notes by an aggregate amount of
$765,250. A 10% loan origination fee was paid on the increased
principal balances through the issuance of 306,100 shares of
the Company's common stock to the holders of the notes at $.25
per share. The origination fee of $76,525 was amortized over
the terms of the convertible notes payable. Notes in the
aggregate principal amount of $625,000 bear interest at 8% per
annum, require quarterly interest payments, and matured August
31, 2003. The remaining notes, in the aggregate principal
amount of $2,410,250, bear interest at 8% per annum, require
quarterly interest payments, and matured March 1, 2004. Each
note is convertible into common stock of the Company at the
rate of $.20 per share. The common stock issuable upon
conversion of the convertible notes payable is restricted and
may only be sold in compliance with Rule 144 of the Securities
Act of 1933, as amended. Since the acquisition of IMGI, the
note holders have loaned the Company an additional $533,959
under the same terms as the original notes. During March 2005,
the Company issued 34,466,570 shares of common stock in
payment of $470,000 in note principal and $97,215 in related
accrued interest.
At March 31, 2005, the Company owed accrued interest on the
notes of $355,925 and has not made any scheduled quarterly
interest payments since May 2003. All remaining notes are
currently in default and are accruing interest at the default
rate of 12%, since the default occurred.
b) In September 2004, the Company issued its 8% convertible note
payable in the amount of $37,500, which is payable in cash
until May 1, 2005. After May 1, 2005, the note can be
converted into the Company's common stock at $.04 per share.
c) 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%.
11
NOTE 7--COMMITMENTS AND CONTINGENCIES
-------------------------------------
On August 26, 2003, when the Board of Directors of the Company
discontinued 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 year
ended December 31, 2004 and 2003.
NOTE 8--RELATED PARTIES
-----------------------
The Company has received loans and advances, principally for services,
from certain individuals considered to be related parties. The amount
due to these parties is as follows:
Legal fees owed G. David Gordon, attorney,
creditor and stockholder $ 89,837
Other 3,000
---------
Total $ 92,837
=========
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. 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. Also
named in the action was Jon Pritchett, who was president of the Company
while Miller was CEO.
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 the litigation agreed to dismiss with
prejudice all claims and counterclaims. The final settlement is subject
to court approval, which management expects to be granted.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, which has been 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.
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 has been 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 $594,452 through March 31, 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 $3,760,000, 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.
13
DISCONTINUED OPERATIONS
The Company, which has been 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 $70,242 during the three months ended
March 31, 2005, and a loss of $211,748 during the three months ended
March 31, 2004, 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.
CURRENT OPERATIONS
On September 9, 2004, the Company acquired all of the issued and
outstanding common stock of IMGI in exchange for warrants to acquire
15,000,000 shares of the Company's common stock at an exercise price of
$.10 per share. In addition, in the event IMGI generates $2,000,000 in
gross revenue within 36 months of closing, the sellers of IMGI would
receive additional warrants to acquire 15,000,000 shares of the
Company's common stock at an exercise price of $.10.
On October 15, 2004, the Company acquired two television programs
entitled "America's Top Drivers" and "Women's Racing League" in
exchange for warrants to acquire 1,750,000 shares of the Company's
common stock at an exercise price of $.10 per share. In addition, in
the event the programs generate $2,000,000 in gross revenue within 36
months of closing, the sellers of the programs would receive additional
warrants to acquire 1,750,000 shares of the Company's common stock at
an exercise price of $.10.
14
On October 27, 2004, the Company acquired all of the issued and
outstanding memberships of Gaming in exchange for warrants to acquire
750,000 shares of the Company's common stock at an exercise price of
$.10 per share. In addition, in the event Gaming generates $2,000,000
in gross revenue within 36 months of closing, the sellers of Gaming
would receive additional warrants to acquire 750,000 shares of the
Company's common stock at an exercise price of $.10.
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.
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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 March 31, 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 34,466,570 shares of its common stock in
payment of $470,000 in convertible note principal, $97,215 in accrued interest
and $47,937 of reimbursable legal fees. The shares 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.
May 11, 2005 By: /s/ William C. Morris
------------------------------------------
William C. Morris, Chief Executive Officer
and principal financial and accounting
officer
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