The Fate or Future of the IFL

By Steven Curtis Sep 20, 2007
Speculation on the financial health of the International Fight League is rampant. Depending on the source, the first-of-its-kind mixed martial arts team-based league is either on the verge of collapse or thriving.

The problem with such speculation is that almost none of it is rooted in fact.

In the United States, however, there are tools and regulations that can lift the lids off certain companies. Unlike fans in forums, who can make baseless comments with impunity, officials at companies who falsify data are liable to be sued, or even worse, become the latest to take a white-collar perp walk.

The IFL is one of the companies open to scrutiny because it is publicly traded. That means you can buy stock in the company, and you can also research the real story behind the state of the company's performance and future.

Every publicly traded company is required by law to issue earnings reports on a quarterly basis that are certified by public accounting firms and company management. These reports may seem like boring legal documents, but they hold the truth of what's really happening.

According to the 10-Q filed by the IFL on Aug. 14, if current business conditions don't improve, there's no guarantee the league will operate much past the start of next baseball season.

The fight promotion, which Thursday in Hollywood, Fla., holds the finals to its 2007 season, lists a number of changes needed to survive, including higher sponsorship revenue, lower expenses for live events and higher DVD sales.

Sherdog.com spoke with some Wall Street experts for their take on the situation. These experts do not own IFL stock, and in at least one case, had never heard of the IFL. In other words, the IFL is just another stock on their screen.

"They're losing money hand over fist," one private equity investor told Sherdog.com.

Indeed, the IFL is not making money, and they're burning plenty of cash, too, meaning they're spending more than what they're taking in from the business. Such practice is akin to using a credit card to pay your bills every month because your salary can't cover your expenses.

The IFL is currently exceeding what they're taking in at the rate of about $2 million per month. This year they've lost nearly $14 million, and in the last quarter alone, which ended June 31, the company lost $6.8 million. As a result they're down to $2.6 million in cash, compared to more than $9 million at the end of March.

The revenue trends are not encouraging either. Despite TV contracts with Fox Sports Net and MyNetworkTV, advertising sponsorships have actually dropped nearly 40 percent over the past 12 months. Although the box-office receipts increased dramatically during the first half of the year -- from $127,000 to $1.4 million -- and television brought in another $2.6 million, the costs of staging live events continues to climb.

For instance, the IFL promoted nine live events in the first half of the year, costing $12 million. Add in distribution fees, which jumped from $375,000 to $1.75 million, and the loss per event is more than $1 million. As for merchandising, the company earned $30,000.

The advertising and merchandising trends shocked the private equity investor Sherdog.com interviewed: "I'm amazed. In a year you can't do better? You've got a network TV deal and all this exposure and events, and you only make [$30,000] from merchandise?"

The IFL did raise $12.6 million in August. Curiously, the company raised the money by issuing stock to a private investor at a discount to its trading price. The investor's identity is unknown, and the IFL won't disclose it, though that information will become public.

Given the financial state of the company, the experts Sherdog.com spoke with were puzzled as to the motive. "If I'm an investor," said one source, "I just bought into a company that by their own admission may not last more than six months."

The market generally views selling shares at less than their trading price as a desperate move. For example, if you have the only available copy of Halo 3, you'd get a lot of money for it because it's a hot item. Selling the game cheaply wouldn't make sense.

In the IFL's case, if the market had a favorable view of its future, why would the company sell shares at a discount?

"If you look at when people are going to raise capital, it usually happens all the time that way when a company is going to raise money at a discount to the market price," said IFL co-founder and CEO Gareb Shamus. "Basically, when you want to get investors in the company, they're not going to pay you a premium over what they can pay in the open market to buy shares. If they want to acquire blocks of shares, it's typical that they get discount to that market price."

Regardless, the IFL now has the money it raised. Jim Burns, CEO of Blue Sky Capital Management, said that in the near term, "the company should remain solvent," meaning the IFL will have the money to continue to operate.

Should this money run out, though, it could be very challenging to get more. "In this environment," said one money manager who declined to be named, "additional funding is going to be tough to secure."

When you apply for a car loan or a mortgage, if the bank thinks you might not be able to pay it back, you won't get the money. The situation is the same for the IFL. Sherdog.com's private equity source said the IFL is "facing this constant need to raise capital. That's OK if you're a biotech company, but I don't see the return on IFL's money that would justify continuing to fund them."

Additionally, if the company does have to raise more money, the terms are likely to get even worse for the IFL. One Sherdog.com source said that unless something changes, there's nothing stopping the next investor from making a demand such as, "You guys have no choice. I want 50 percent of the company for $10 million."

As for the rumor that Fox Sports might invest, Page 11 of August's 10-Q shows it is true that an equity investment in the IFL is "contemplated" under a Letter of Intent signed by Fox and the IFL on Jan. 15. To date no investment has been made, though, and the IFL's report says that "no assurance can be given that a transaction will be consummated."

It's far from a slam-dunk for the IFL and a no-lose situation for Fox. If the IFL takes off, Fox has exclusive rights to invest. At the same time, Fox has no exposure if the IFL fails.

Another factor inviting Wall Street skepticism is the state of the IFL's management team. While turnover at small companies is somewhat expected, sudden high-level departures are never perceived well, especially when they happen in rapid succession. Two major, recent departures at the IFL immediately caught the attention of one financial analyst Sherdog.com interviewed.

"The Chief Financial Officer [Salvatore A. Bucci] leaving is not a good thing," the source said, "and neither is the resignation of the Chief Marketing Officer [Joel Ehrlich]."

Such departures, particularly given the company's current financial status, suggest that the management team is not on the same page. In addition, the exits leave a significant void at the top when the company can't afford one.

"You're going to bring in great people, you're going to bring in some people that don't work," Shamus said. "It's just normal for things like that to happen."

How about IFL stock? Burns, the Blue Sky Capital Management CEO, called it a "rollercoaster ride."

The stock peaked at $16.50 per share in January. In May, with the stock trading at $8.50, Barron's magazine called it "at best, a gamble." The stock price is now hovering near 50 cents.

"A business like this," said the private equity source, "which could lose business for years, is probably best left private."

At this point, for the IFL to survive, Burns said, "The challenge for senior management will be to continue revenue growth to offset the high cost of producing live events."

New revenue streams, including what Shamus called "tremendous" endorsement deals from Cytosport (makers of Muscle Milk) -- one of GNC's top 15 suppliers -- and Vitamin Energy, were signed prior to the IFL semifinals on Aug. 2.

"We've said all along that we've wanted to bring this sport to the mass market," Shamus said.

With these deals the company can move toward that goal, build awareness of the league and ultimately attract more revenues. Other new partners include the United Service Organizations and USA Wrestling.

In September, the IFL teamed with sports marketing company Premier Partnerships to "identify, create and activate new long-term sponsorship partners on the local, national and international level for the IFL."

"We think the IFL has the perfect multi-platform activation model for those forward looking sponsors," said Randy Bernstein, Premier president and CEO, in a press release that announced the partnership. "It is truly one stop shopping to reach the male demo: marketing rights including national TV, digital, grassroots, intellectual property, athlete rights, retail activation, entitlement opportunities and category exclusivity. All are very desirable and hard to find in one sports or entertainment entity."

As for one of the other major revenue sources -- television -- Shamus called it a "growing process."

"Everybody immediately wants to compare us to UFC, but it took five years and $44 million for those guys to turn the corner," Shamus said. "And when you look at where we are in just over a year -- we have over two million people a week watching us -- it doesn't take a long time for our guys to become superstars out there."

Shamus also cited the nine major events in the first half of this year, compared to only four in the second. "We've only recently been able to take advantage of the TV exposure we're getting," he said. "We now have a national platform."

The IFL is also "evaluating the profitability of other revenue sources, such as franchise or team sales, digital rights and pay-per-view broadcasts," according to its August 10-Q.

However, the Wall Street professionals Sherdog.com interviewed remain unconvinced.

"I love the fact that they had the guts to do this, but my sense is if you gave these guys $50 million, they still wouldn't be successful," one source said. "It's a flawed business model."

A viable competitor to the UFC poses many positives: more employment avenues for fighters, higher salaries and better working conditions. For the fans it means more choices.

But at the IFL semifinals in East Rutherford, N.J., on Aug. 2, nearly the entire upper tier of the Continental Airlines Arena was empty. No business can take hits like that for long.
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