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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______ to_______
Commission file number 33-13789 LA
YOU BET INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 87-042246
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
1950 Sawtelle, Suite 180
Los Angeles, CA 90025
(314)444-3300
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
---------------------------
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
---- ----
The number of shares outstanding of the Registrant's Common Stock on October 31,
1997: 9,674,761 shares.
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YOU BET INTERNATIONAL, INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- --------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
PART II OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
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PART I FINANCIAL INFORMATION
- ------
Item 1. Financial Statements
YOU BET INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
---------- ----------
ASSETS:
Current assets:
Cash and cash equivalents $ 451 $ 87,318
Prepaid expenses and other current assets 196,331 156,742
---------- ----------
Total current assets 196,782 244,060
Property and equipment, net 864,519 1,012,813
Other assets 53,964 53,963
---------- ----------
$1,115,265 $1,310,836
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 887,886 $ 827,599
Accrued salaries and related expenses 496,398 191,925
Other accrued expenses 88,230 264,311
Advances from related parties 125,000 -
Bridge loans payable 450,000 200,000
Interest payable 71,030 1,250
Income taxes payable 2,400 4,420
Current portion of capitalized lease
obligations 194,985 129,432
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Total current liabilities 2,315,929 1,618,937
Capitalized lease obligations, less current
portion 58,008 97,598
---------- ----------
Total liabilities 2,373,937 1,716,535
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Stockholders' deficit:
Preferred stock, $.001 par value; authorized
1,000,000 shares; none issued
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
9,674,761 (1997) and 8,283,333 (1996) 9,674 8,283
Capital in excess of par value 11,248,243 4,410,661
Accumulated deficit (12,316,200) (4,547,556)
Deferred compensation (200,389) (277,087)
---------- ----------
Total stockholders' deficit (1,258,672) (405,699)
---------- ----------
$1,115,265 $1,310,836
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
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YOU BET INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months September 30, Nine Months September 30,
Ended 1997 1996 Ended 1997 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Consulting income $ 2,025 $ 2,700 $ 6,075 $ 5,700
----------- ---------- ---------- ----------
Operating expenses:
Research and development/
operations 464,277 442,318 1,444,535 1,012,973
Sales and marketing 142,632 183,240 465,049 331,262
General and administrative 620,802 427,261 1,596,347 935,956
Imputed fair value of warrants and
Options 1,663,855 1,663,855
----------- ---------- ---------- ----------
Total operating expenses 2,891,566 1,052,819 5,169,786 2,280,191
----------- ---------- ---------- ----------
Loss from operations (2,889,541) (1,050,119) (5,163,711) (2,274,491)
Interest expense (198,419) (2,158) (323,638) (4,957)
Interest expense - warrants (2,279,995) (2,279,995)
Interest income 477 18,404 1,100 72,977
----------- ---------- ---------- ----------
Loss before provision for income
taxes (5,367,478) (1,033,873) (7,766,244) (2,206,471)
Provision for income taxes - (1,600) (2,400) (1,600)
----------- ---------- ---------- ----------
Net loss $(5,367,478) $(1,035,473) $(7,768,644) $(2,208,071)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Net loss per share $ (0.58) $ (0.13) $ (0.84) $ (0.27)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number of
common shares outstanding 9,283,574 8,283,333 8,621,759 8,283,333
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
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YOU BET INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,768,644) $(2,208,071)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization of property and
equipment 230,176 59,759
Amortization of deferred interest compensation 284,298 76,078
Imputed fair value of options and warrants 1,663,855
Interest expense on warrants 2,072,395
Disposition of equipment 3,195 4,075
Prepaid expenses and other assets 73,995 (185,710)
Accounts payable 250,548 112
Accrued salaries and related expenses 331,100 (12,927)
Other accrued expenses (176,081) 65,665
Interest payable 266,280
Income taxes payable (2,020) (800)
---------- ----------
Net cash used in operating activities (2,770,903) (2,201,819)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment (85,077) (400,227)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from stock offering 1,394,400 520,000
Offering costs (185,989) (196,296)
Advances from related parties 125,000
Payments on capitalized lease obligations (124,298) (21,170)
Proceeds from bridge loan financing and other
debt conversions 1,560,000
---------- ----------
Net cash provided by financing activities 2,769,113 302,534
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (86,867) (2,299,512)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 87,318 3,297,908
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $451 $998,396
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $23,212 $11,791
Cash paid for income taxes $4,398 $1,756
See accompanying notes to consolidated financial statements.
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YOU BET INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1997 and 1996, the Company
acquired computer and office equipment under capital leases in the amount of
$150,000 and $271,000, respectively.
During the nine months ended September 30, 1997, certain employees and
vendors elected to convert monies owed into 30,201 shares of the Company's
Common Stock (See Note 5).
During the three months ended September 30, 1997, certain bridge note lenders
converted their loan balances and accrued interest into 803,467 shares of the
Company's Common Stock (see Note 5).
See accompanying notes to consolidated financial statements.
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YOU BET INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of You Bet
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with instructions to Form 10-Q and, in the opinion of management,
contain all material adjustments (consisting only of normal recurring accruals)
which are necessary for the fair presentation of financial position of the
Company as of September 30, 1997 and the results of operations and cash flows
for the three and nine months ended September 30, 1997 and 1996. These
unaudited consolidated financial statements should be read in conjunction with
the more detailed consolidated financial statements and related footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed with the Securities and Exchange Commission. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results expected for the entire year ending December 31, 1997.
Certain amounts in the accompanying financial statements have been reclassified
to conform with the presentation at September 30, 1997 and for the three and
nine months then ended.
2. PROPERTY AND EQUIPMENT
September 30, DECEMBER 31,
1997 1996
------------- ------------
Computer equipment $565,394 $636,871
Assets under capitalized leases 417,441 267,180
Office furniture and equipment 163,567 161,575
Leasehold improvements 63,535 62,429
------------- ------------
1,209,937 1,128,055
Less accumulated depreciation and amortization (345,418) (115,242)
------------- ------------
$864,519 $1,012,813
------------- ------------
------------- ------------
3. ADVANCES FROM RELATED PARTIES
As of September 30, 1997, the Company owed $125,000 related to non-interest
bearing advances made by relatives of certain officers of the Company. Of this
amount, $25,000 was repaid by the Company during October 1997 from proceeds
received in October 1997 from the Company's private placement (See Note 5). In
connection with these and other similar advances made by relatives of certain
officers of the Company between May 1997 and September 1997 ($365,000 in the
aggregate), the Company issued Series C warrants to purchase 146,000 shares of
Common Stock at a price of $2.50 per share. The warrants expire in September,
2000. The fair value of the warrants was estimated using the Black-Scholes
pricing model assuming a volatility rate of 100%, zero dividend yield, and a
discount of rate of 6%. The resulting fair value of $207,600 has been recorded
as interest expense - warrants in the accompanying consolidated statement of
operations during the three months ended September 30, 1997.
4. BRIDGE LOANS PAYABLE
During December 1996, the Company commenced a private placement of bridge
notes. For each unit of bridge financing sold, the purchaser received a note
in the face amount of $50,000 and 20,000 Series C warrants. The notes bear
interest at the rate of 15% per annum, are convertible at no more than the
rate of $2.50 per share. The warrants issued in connection with this
financing are exercisable at $2.50 per share and expire five years from the
date of grant. The notes are secured by substantially all of the assets of
the Company and contain restrictive
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provisions related to the Company's ability to pay dividends, change its line
of business, enter into a merger or consolidation, or liquidate the business. As
of September 30, 1997, the Company had received a total of $1,760,000 in bridge
note financing (of which $200,000 was received as of December 31, 1996) and
issued Series C warrants to purchase 704,000 shares of Common Stock at an
exercise price of $2.50 per share. The Bridge Notes are due and payable on the
earlier to occur of (i) a public or private financing raising in excess of
$5,000,000 of net cash proceeds to the Company or (ii) the first anniversary of
the Initial Closing Date of December 12, 1996. During May 1997, the interest
rate on the bridge notes was amended from 15% per annum to a flat rate of 15%
(the "Interest Fee").
In connection with the Company's June 1997 private placement, the Company
offered bridge lenders the right to convert the balance of their loans plus
Interest Fees to Common Stock at $1.875 per share, a discount of 25% to the
offering price, and waived the required minimum private placement of $5,000,000.
As of September 30, 1997, a total of $1,310,000 of bridge notes, plus $196,500
in Interest Fees, were converted into 803,467 shares of Common Stock (see Note
5).
The fair value of the bridge warrants ($2,186,160) was estimated using the
Black-Scholes pricing model assuming a volatility rate of 100%, zero dividend
yield, and a discount of rate of 6%. The Company has recorded the fair value of
the bridge warrants as a cost associated with the bridge financing. As a result
of the conversion during 1997 of $1.3 million or 74% of bridge loans to Common
Stock in connection with the private placement, $2,072,395 of the fair value of
bridge warrants was charged to interest expense - warrants during the three
months ended September 30, 1997. The remaining balance has been charged to
prepaid interest expense and is being amortized over the term of the bridge
loans (through December 12, 1997). The balance of prepaid interest at September
30, 1997 ($113,585) is included in prepaid expenses and other current assets in
the accompanying consolidated balance sheet. The entire fair value of the
bridge warrants was credited to capital in excess of par value.
In connection with the bridge notes, the Company issued Series E warrants to
purchase 20,000 shares of Common Stock at a price of $3.125 per share pursuant
to a finders' fee agreement. The warrants expire in April, 2000.
5. COMMON STOCK
On June 11, 1997, the Company commenced a private placement offering (the
"Offering") which replaced the previously reported March 17, 1997 offering. The
Offering proposed to raise up to $10,000,000 in gross proceeds before deduction
of placement fees and expenses (estimated to be approximately $1,125,000),
through a private placement of Units to persons who are not U.S. persons in
offshore transactions, as defined in Regulation S as well as to accredited
domestic investors, as defined in Rule 501 of Regulation D promulgated under the
Securities Act. Each Unit offered is priced at $25,000 per Unit and consists
of 10,000 shares of the Company's $.001 par value Common Stock and 5,000
callable Series D Warrants, each Warrant allowing its holder to purchase a share
of Common Stock for $5.25 per share for a period of up to two years from the
date of issue. The Offering was on a "best efforts" basis and provided for no
minimum subscription levels. Net proceeds from the private placement were used
for the final stage development of the You Bet! Racing Network software; Private
Network installation, expansion and usage; marketing activities such as sales
and service launches; web-site creation and maintenance; promotional programs
for frequent users; repayment of short-term loans and advances; certification
for product software and service; new accounting and management software; and
for general corporate purposes. The Offering, originally scheduled for 75 days,
was extended by the Company through November 15, 1997.
As of September 30, 1997, the Company had received Offering subscriptions
covering 1,391,428 shares of Common Stock which consisted of cash proceeds
received of $1,394,400 (557,760 shares), conversions of bridge loans (and
related Interest Fees) of $1,506,500 (803,467 shares), conversions of employee
deferred salaries of $26,627 (14,201 shares) and conversions of amounts due to
certain vendors of $40,000 (16,000 shares). Additionally, the Company issued to
investors Series D warrants to purchase 695,720 shares of Common Stock at an
exercise price of $5.25 per share as well as Series E warrants (to placement
agents) to purchase 114,642 shares of Common Stock (including 27,492 related to
the conversion of bridge loans - see Note 4) at an exercise price of $3.125 per
share. Offering costs, consisting of placement agent fees, legal fees,
accounting fees, finders fees and registration fees, are estimated to
approximate $200,000.
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In connection with the Offering, the Company issued Series C warrants to
purchase 40,000 shares of Common Stock at a price of $2.50 per share pursuant to
a finders' fee agreement. The warrants expire in September 2000.
6. COMMITMENTS
a. INVESTOR RELATIONS CONSULTING CONTRACT
During May 1997, the Company signed a letter of intent to enter into an
investors relations consulting contract with McKinley Capital ("McKinley") and
Viscount Securities Ltd. (formerly Sachem Corporate Finance Ltd.), the Company's
principal placement agent in connection with the 1997 private placement. The
agreement, which is subject to the mutual acceptance and execution of a formal
contract, is for a period of 24 months and provides for the issuance of
1,000,000 non-callable Common Stock purchase warrants to McKinley, 500,000 of
which are exercisable at $3.125 per share and 500,000 of which are exercisable
at $5.25 per share. The warrants contain piggy-back registration rights and
expire four years from the date on which a registration statement registering
the warrants is declared effective. The fair value of the warrants was estimated
using the Black-Scholes pricing model assuming a volatility rate of 100%, zero
dividend yield, and a discount of rate of 6.44%. The resulting fair value of
$1,090,000 has been recorded as "imputed value of warrants and options" and
capital in excess of par value in the accompanying consolidated financial
statements during the three months ended September 30, 1997.
b. CONSULTING AGREEMENT
During May 1997, the Company entered into a consulting agreement with an
individual affiliated with Viscount Securities Ltd. The agreement, which
contains annual renewal provisions, is for a period of twelve months and may be
cancelled by the Company by providing 60 days notice after six months. The
agreement provided for the issuance of options to purchase 10,000 shares of
Common Stock at an exercise price of $2.50 per share, and provides for the
additional issuance of options to purchase 3,500 shares of Common Stock at an
exercise price of $2.50 per share for each month the agreement is in effect, in
lieu of fees, in return for consulting services related to defining corporate
objectives, strategies, and corporate restructuring. All options issued pursuant
to the agreement are fully vested at the date of grant and expire in May 2000.
As of September 30, 1997, the Corporation had issued options for 31,000 shares
of Common Stock. The fair value of the warrants was estimated using the
Black-Scholes pricing model assuming a volatility rate of 100%, zero dividend
yield, and a discount of rate of 6.37%. The resulting fair value of $53,630 has
been recorded as "imputed value of warrants and options" and capital in excess
of par value in the accompanying consolidated financial statements during the
three months ended September 30, 1997.
The Company is also required to cause such underlying shares of Common Stock to
be registered and freely tradable. As of September 30, 1997, the underlying
shares of Common Stock were not registered.
c. VENDOR Reward Warrants
As consideration for certain key vendors allowing the Company to delay payment
terms beyond those terms initially agreed upon between the parties, the Company,
during the third quarter of 1997, issued Series C warrants to purchase 102,500
shares of Common Stock at an exercise price of $2.50 per share The warrants
expire in September, 2000. The fair value of the warrants was estimated using
the Black-Scholes pricing model assuming a volatility rate of 100%, zero
dividend yield, and a discount of rate of 6%. The resulting fair value of
$520,225 has been recorded as "imputed value of warrants and options" and
capital in excess of par value in the accompanying consolidated financial
statements during the three months ended September 30, 1997.
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7. SUBSEQUENT EVENTS
As previously disclosed, in connection with the initial private placement of the
Company and the reverse acquisition, an aggregate of 2,500,000 shares owned by
David Marshall, Russell Fine, and the Marshall Gift Trust (collectively, the
"Divestment Shares") were subject to forfeiture and cancellation by the Company
if a minimum number of subscribers was not reached within specified timeframes.
The Board of Directors has determined that having the forfeiture schedule be
based upon the number of subscribers is not consistent with the current business
plan of the Company in view of the change in the Company's marketing strategy.
Accordingly, the Board of Directors has authorized the termination of the
possibility of forfeiture with respect to the Divestment Shares. As
consideration for such termination, Messrs. Marshall and Fine have agreed to
return to the Company an aggregate of 750,000 shares which will be made
available by the Company to employees and consultants as determined by the
Compensation Committee of the Board of Directors.
Since the quarter ended September 30, 1997, the Company raised through a private
placement an aggregate of $575,000 with accredited investors and paid 8% in
commissions and 2% in non-refundable expense fees to placement agents totaling
$57,500 on the raised funds and issued 230,000 shares of common stock at $2.50 a
share and 115,000 callable Series D Warrants, each Warrant allowing its holder
to purchase a share of Common Stock for $5.25 per share for a period of up to
two years from the date of issue. The private placement was affective pursuit
to Regulation D and Regulation S promulgate under the Securities Act of 1933, as
amended
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information set forth below should be read in conjunction with the unaudited
interim condensed financial statements and notes thereto included in Part I -
Item 1 of this Quarterly Report. The following discussion contains trend
analysis and other forward looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended and Section 21A of the
Securities Act of 1933, as amended. Actual results could differ from those
projected in the forward looking statements as a result of the cautionary
statements and risk factors set forth below and in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
OVERVIEW
The Company is continuing its development efforts towards the goal of the
initial commercial release of its first on-line service, the You Bet! Racing
Network, an interactive horseracing network which is designed to enable users,
via modem over the Company's private network, to view live horseracing events,
access handicapping information and facilitate wagering directly with licensed
gaming agencies (the "You Bet! Racing Network" or "YBRN"). The Company
anticipates the distribution of a beta release of the YBRN to occur in the
fourth quarter of 1997 whereby a limited number of selected users will conduct
live wagering with at least one licensed agency. The Company expects the
commercial release of the YBRN to occur during the second quarter of 1998.
During July 1997, the Company entered into an agreement with Mountain Laurel
Racing, Inc. and Washington Trotting Association, Inc. (collectively,
"Ladbroke") for the purpose of facilitating interactive telecommunications
between YBRN subscribers (utilizing personal computers) and host-track wagering
pools (the "Ladbroke Agreement"). Ladbroke operates one racetrack and six
off-track wagering facilities in Western Pennsylvania and provides simulcast
signals and pari-mutuel wagering from Ladbroke's own host racetrack and
provides simulcast signals and pari-mutuel wagering from 22 other host racing
venues throughout the United States (which includes all major racetracks). Since
1983, Ladbroke has also offered telephone wagering through Ladbroke's Call-A-Bet
system. The Ladbroke Agreement provides for a sharing between the Company and
Ladbroke of commissions, net of certain fees and expenses, from the portions of
host-track wagering pools generated by the YBRN. The Ladbroke Agreement is
terminable the earlier of five years from the date of first live wagering
transmission or November 19, 2002 and contains certain provisions, among
others, related to minimum commissions, deliverables by each party, and
maintenance of regulatory approvals.
During May 1996, the Company entered into a beta test agreement with the New
York Racing Association Inc. ("NYRA") (the"NYRA Agreement"). NYRA operates three
racetracks in the state of New York (Belmont Park, Saratoga and Aqueduct) and
provides simulcast signals and pari-mutual wagering pools from their own host
racetracks as well as from numerous other host racetracks throughout the U. S.
The NYRA Agreement, as amended,
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provided for the joint testing of the Company's YBRN and the operations of NYRA
for the purpose of facilitating telecommunications by and between NYRA and its
clientele regarding wagering products of NYRA. The NYRA Agreement expired on
September 1, 1997. The Company and NYRA are presently awaiting the Company's
implementation of live wagering with Ladbroke before continuing its discussions
regarding the entering into a definitive agreement related to product testing
and marketing of the anticipated commercial release of the YBRN to NYRA
clientele. There can be no assurance that a definitive agreement will be
reached between the parties at terms favorable to the Company.
The Ladbroke agreement is subject to regulatory approval as well as compliance
with existing federal, state and local laws. Additionally, potential future
agreements with other racing entities are expected to contain similar
provisions. There can be no assurance that the Company will be able to maintain
such relationships with Ladbroke or other potential licensed entities on terms
favorable to the Company, or on terms which indemnify the Company with respect
to certain of the Company's proposed activities.
The Company expects to derive a majority or its future revenues through
commissions from amounts wagered through the YBRN with licensed wagering
entities and, to a lesser extent, from monthly subscription fees, network useage
fees, information purchases (i.e. race data, past performance data) and
merchandise purchases. As a result, the Company is highly dependent on
maintaining its agreements with licensed wagering entities such as Ladbroke.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. For the year ended December 31, 1996, the
Company incurred a net loss of $3.9 million. For the nine months ended September
30, 1997, the Company recorded a net loss of $7.8 million and had a working
deficiency of $1.1 million as of September 30, 1997. The Company has for more
than the past year utilized its resources in the development of product
software, a computer network and establishing alliances within the horse racing
industry. Based on the Company's projected commercial introduction of the YBRN,
the Company anticipates that operating losses will continue through at least the
first half of 1998.
Since the commencement of development of the YBRN, the Company has primarily
financed its operations through private placements of its common stock,
convertible debt, loans or advances by certain individuals and the extension of
credit by equipment and other vendors. The Company continues to be dependent
upon obtaining additional financing in order to complete the development of the
YBRN and to timely execute certain marketing and distribution programs. Delays
in obtaining the required financing may adversely impact projected future
operating performance. Furthermore, no assurance can be given that the required
additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its shareholders. Any increase in
the outstanding number of shares or options and warrants may have an adverse
effect on the market price of the Common Stock and may hinder efforts to arrange
future financing. If adequate funds are not able to available to satisfy working
capital requirements, the Company may be required to cease operations, curtail
its operations significantly or to obtain funds through arrangements with others
that may require the Company to relinquish material rights to certain of its
technologies or potential markets.
MANAGEMENT CHANGES
On May 30, 1997, the Company elected Steven A. Molnar to the position of interim
Chief Executive Officer of You Bet! Inc. ("YBI") and Ronald W. Luniewski to the
position of President and Chief Operations Officer of YBI. YBI is a wholly-owned
subsidiary of the Company through which the Company conducts substantially all
of its business. Prior to his promotion, Mr. Molnar held the position of
Executive Vice President of Racing for YBI. Prior to his promotion, Mr.
Luniewski held the position of Chief Operations Officer of YBI.
On July 15, 1997, Barry Peters, the Chief Financial Officer of the Company,
resigned. Upon his resignation, the Company and Mr. Peters entered into a
consulting agreement for the period of August 1, 1997 through October 31, 1997
for which Mr. Peters was paid a sum of $3,000 per month.
RESULT OF OPERATIONS
THREE MONTHS ENDED SEPTMEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
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RESEARCH AND DEVELOPMENT / OPERATIONS
Research and development and network operations expenses during the three months
ended September 30, 1997 (the "third quarter of 1997") increased $21,959 or 5%
compared to the three months ended September 30, 1996 (the "third quarter of
1996). The increase in 1997 was due primarily to additional personnel associated
with operating, testing and simulating YBRN racing activity as well as increased
expenses related to establishing and maintaining dedicated data transmission
lines and third party network provider fees (which commenced during January
1997).
SALES AND MARKETING
Sales and marketing expenses during the third quarter of 1997 decreased $40,608
or 22% from the third quarter of 1996. The decrease was primarily the result of
lower expenditures related to promotional literature, public relations and
outside consultants which were a result of certain cost-cutting measures due to
cash flow constraints.
GENERAL AND ADMINISTRATIVE
General and administrative expenses during the third quarter of 1997 increased
$193,541 or 45% compared to the third quarter of 1996. The increase was
primarily the result of increased expenses associated with investor relations
activities; increased depreciation as a result of the acquisition of computer
equipment (primarily used in connection with developing and operating the YBRN);
and additional personnel and consultants .
IMPUTED COST OF WARRANTS AND OPTIONS
The imputed cost of warrants during the third quarter of 1997 represents the
fair value of warrants issued in connection with an investor relations
consulting contract entered into during May 1997 ($1,090,000) (see Note 6 a.);
the fair value of stock options issued in connection with a management
consulting agreement entered into during May 1997 ($53,630) (see Note 6 b.); and
the fair value of warrants issued during the third quarter of 1997 as
consideration for certain key vendors allowing the Company to delay payment
beyond those terms initially agreed upon between the parties ($520,225) (see
Note 6 c.).
INTEREST INCOME AND EXPENSE
Interest income decreased to $477 during the third quarter of 1997 from $18,404
during the third quarter of 1996, primarily as a result of lower investment
balances due to cash used from operating activities.
Interest expense - warrants represents the fair value of warrants issued in
connection with the Company's bridge note financing which commenced during
December 1996 and concluded during June 1997 ($2,072,395) (see Note 4) and the
fair value of warrants issued to individuals as compensation for non-interest
bearing advances made to the Company ($207,600) (see Note 3).
Interest expense increased to $198,419 during the third quarter of 1997 from
$2,158 during the third quarter of 1996 primarily as a result of interest
fees in connection with the Company's bridge loan financing during 1997 (see
Note 4).
NINE MONTHS ENDED SEPTMEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
RESEARCH AND DEVELOPMENT / OPERATIONS
Research and development and network operations expenses during the nine months
ended September 30, 1997 increased $431,562 or 43% compared to the nine months
ended September 30, 1996. The increase in 1997 was due primarily to additional
personnel associated with product development (approximately $222,000);
increased expenses related to establishing and maintaining dedicated data
transmission lines and third party network provider fees (which commenced during
January 1997); and additional personnel and consultants required to operate,
test and simulate YBRN racing activity.
12
<PAGE>
SALES AND MARKETING
Sales and marketing expenses during the nine months ended September 30, 1997
increased $133,787 or 40% compared to the nine months ended September 30, 1996.
The increase was primarily the result of additional personnel, consultants and
temporary help required to design the Company's initial marketing campaign and
work towards its commercial introduction.
GENERAL AND ADMINISTRATIVE
General and administrative expenses during the nine months ended September 30,
1997 increased $660,391 or 71% compared to nine months ended September 30, 1996.
The increase was primarily the result of additional administrative and support
personnel; increased depreciation as a result of the acquisition of computer
equipment (used in connection with developing and operating the YBRN); and
increased expenses associated with investor relations activities.
IMPUTED COST OF WARRANTS AND OPTIONS
The imputed cost of warrants during the nine months ended September 30, 1997
represents the fair value of warrants issued in connection with an investor
relations consulting contract entered into during May 1997 ($1,090,000) (see
Note 6 a.); the fair value of stock options issued in connection with a
management consulting agreement entered into during May 1997 ($53,630) (see Note
6 b.); and the fair value of warrants issued during the third quarter of 1997 as
consideration for certain key vendors allowing the Company to delay payment
beyond those terms initially agreed upon between the parties ($520,225) (see
Note 6 c.).
INTEREST INCOME AND EXPENSE
Interest income decreased to $1,100 during the nine months ended September 30,
1997 from $72,977 during the nine months ended September 30, 1996, primarily
as a result of lower investment balances due to cash used for operating
activities.
Interest expense - warrants represents the fair value of warrants issued in
connection with the Company's bridge note financing which commenced during
December 1996 and concluded during June 1997 ($2,072,395) (see Note 4) and the
fair value of warrants issued to individuals as compensation for non-interest
bearing advanced made to the Company ($207,600) (see Note 3).
Interest expense increased to $323,638 during the nine months ended September
30, 1997 from $4,957 during the nine months ended September 30, 1996, primarily
as a result of interest fees in connection with the Company's bridge loan
financing during 1997 (see Note 4).
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1997, the Company had a negative cash
flow from operations of $2,770,903. The negative cash flow from operating
activities was primarily the result of the net loss of $7,768,644 which was
partially offset by the non cash fair value of warrants and options recognized
during the three months ending September 30, 1997 ($1,663,855), non cash
depreciation, amortization and interest ($2,279,995), an increase in accrued
salaries and related benefits ($331,100) which was primarily the result of
salary deferrals which occurred during the second quarter of 1997; an increase
in accounts payable ($250,548); and $196,500 of non cash interest fees related
to bridge financing which were converted to common shares in connection with the
Company's 1997 private placement (see Notes 4 and 5 of Notes to Consolidated
Financial Statements).
Net cash used for investing activities during the nine months ended September
30, 1997 totaled $85,077and was primarily of the result of expenditures related
to computer equipment used for developing and operating the YBRN.
Financing activities during the nine months ended September 30, 1997 provided a
positive cash flow of $2,769,113, primarily due to the private placement of
bridge notes ($1,560,000), the private placement of Common Stock ($1,394,400),
and advances received from related parties ($125,000).
13
<PAGE>
The Company has continued to experience liquidity problems as a result of the
continued losses and negative cash flow from operations. As of September 30,
1997, the Company had a negative working capital of approximately $2.1 million,
as compared to negative working capital of approximately $1.4 million at
December 31, 1996. The Company must provide additional liquidity in order to
support its immediate needs as well as its anticipated requirements for the
balance of the current fiscal year. The Company is currently in the process of a
private placement of its Common Stock and is negotiating with certain
individuals and organizations for additional forms of financing. At present, the
Company has not received a firm commitment from any individual or firm to
complete its goal of raising $10,000,000 in the current private placement, or to
provide any significant financing beyond those amounts already received by the
Company through September 30, 1997 and there can be no assurance that it will be
able to obtain commitments for any amount of significant financing. If the
Company does not raise sufficient financing to meet its short-term needs, the
Company may have to suspend all or a portion of its business activities.
The Company has no material commitments for capital expenditures as of the date
hereof.
14
<PAGE>
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 1997, the Company raised through a
private placement a aggregate of $1,394,400 with accredited investors and paid
8% in commissions and 2% in non-refundable expense fees to placement agents
totaling $139,440 on the raised funds and issued 557,760 shares of common stock
at $2.50 a share and 278,880 callable Series D Warrants, each Warrant allowing
its holder to purchase a share of Common Stock for $5.25 per share for a period
of up to two years from the date of issue. The private placement was affective
pursuit to Regulation D and Regulation S, promulgate under the Securities Act of
1933, as amended. The Company also converted into the private placement
$1,506,500 in bridge notes, for the issuance of 803,467 shares of common stock
at $1,875 a share and 401,733 callable Series D Warrants, each Warrant allowing
its holder to purchase a share of Common Stock for $5.25 per share for a period
of up to two years from the date of issue. To date, no commissions have been
paid on the conversion of the notes. The Company also converted $26,627 in
employee deferred salaries for the issuance of 14,201 shares of common stock at
$2.50 and 7,101 callable Series D Warrants, and $40,000 in vendor payables for
the issuance of 16,000 shares of common stock at $2.50 a share and 8,000
callable Series D Warrants.
ITEM 5: OTHER INFORMATION
As previously disclosed, in connection with the initial private placement of the
Company and the reverse acquisition, an aggregate of 2,500,000 shares owned by
David Marshall, Russell Fine, and the Marshall Gift Trust (collectively, the
"Divestment Shares") were subject to forfeiture and cancellation by the Company
if minimum number of subscribers was not reached within specified timeframes.
The Board of Directors has determined that having the forfeiture schedule be
based upon the number of subscribers is not consistent with the current business
plan of the Company in view of the change in the Company's marketing strategy.
Accordingly, the Board of Directors has authorized the termination of the
possibility of forfeiture with respect to the Divestment Shares. As
consideration for such termination, Messrs. Marshall and Fine have agreed to
return to the Company an aggregate of 750,000 shares which will be made
available by the Company to employees and consultants as determined by the
Compensation Committee of the Board of Directors.
Effective November 3, 1997, Deloitte & Touche resigned as the Company's
independent accountants. As of the date of this Report, the Company has not
engaged new independent accountants.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
NONE
15
<PAGE>
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.
YOU BET INTERNATIONAL, INC.
Date: November 18, 1997 By: /s/ David Marshall
--------------------------
DAVID M. MARSHALL
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
16
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