<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
-------------
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number: 33-13789LA
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YOU BET INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 95-4627253
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1950 Sawtelle Boulevard, Suite 180, Los Angeles, California 90025
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (310) 444-3300
Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 [ ]
As of June 30, 1998, the issuer had 10,106,084 shares of common stock issued and
outstanding and issuable.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
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YOU BET INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 1997 and June 30, 1998
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months and Six Months Ended June 30,
1997 and 1998, and 1995 to Date
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended June 30, 1997 and 1998,
and 1995 to Date
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Six Months Ended June 30, 1997 and 1998
Item 2. Management's Discussion and Analysis or Plan of
Operation
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1997 and June 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,895 $ 4,819,633
Receivables 6,158 6,320
Prepaid expenses (Notes 2 and 3) 49,315 310,191
Other current assets 4,288 30,812
----------- -----------
Total current assets 112,656 5,166,956
----------- -----------
Property and equipment (Note 2) 1,260,411 1,479,319
Less: Accumulated depreciation
and amortization (423,177) (581,309)
----------- -----------
Property and equipment, net 837,234 898,010
----------- -----------
Other assets:
Deferred financing costs, net
of amortization (Notes 2 and 4) 103,484
Deposits (Note 2) 53,963
----------- -----------
Total other assets 53,963 103,484
----------- -----------
Total assets $ 1,003,853 $ 6,168,450
----------- -----------
----------- -----------
</TABLE>
(continued)
3
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Balance Sheets (Unaudited) (continued)
December 31, 1997 and June 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 910,278 $ 1,090,398
Accrued compensation and related items 503,467 196,012
Accrued interest payable 116,892 273,684
Other accrued expenses 341,108 672,526
Advances and bridge loans payable
(Note 4) -
Related parties 390,000 1,278,875
Unrelated parties 300,000 1,435,000
State income taxes payable 6,400
Current portion of capitalized
lease obligations (Note 2) 283,695 184,322
------------ -----------
Total current liabilities 2,851,840 5,130,817
Capitalized lease obligations,
less current portion (Note 2) 179,374
------------ -----------
Total liabilities 2,851,840 5,310,191
------------ -----------
Stockholders' equity (deficiency)
(Note 5):
Preferred stock, $.001 par value;
authorized - 1,000,000 shares;
issued and outstanding -
Series A Senior Convertible
Preferred Stock - 220,000
shares at June 30, 1998
(liquidation preference
$25.00 per share) 220
Common stock, $.001 par value;
authorized - 50,000,000 shares;
issued and outstanding and
issuable - 9,603,994 shares at
December 31, 1997 and 10,106,084
shares at June 30, 1998 9,604 10,106
Additional paid-in capital 23,413,989 35,095,384
Accumulated deficit during
development stage (23,964,394) (32,159,351)
------------ -----------
Total stockholders' equity
(deficiency) (540,801) 2,946,359
Less: Deferred compensation (Note 5) (1,307,186) (1,528,100)
Stock notes receivable (Note 5) (560,000)
------------ -----------
Net stockholders' equity (deficiency) (1,847,987) 858,259
------------ -----------
Total liabilities and stockholders'
equity (deficiency) $ 1,003,853 $ 6,168,450
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenues $ $ 20,170
----------- -----------
Costs and expenses:
Network operations 197,188 182,391
Research and development 330,271 348,231
Sales and marketing 150,919 534,609
General and administrative
(Note 3) 411,817 783,277
Depreciation and
amortization 76,350 82,338
Amortization of deferred
compensation (Note 5) 25,566 233,899
Fair value of common stock,
warrants and stock options
issued for services
rendered (Note 5) 1,288,158
----------- -----------
Total costs and expenses 1,192,111 3,452,903
----------- -----------
Other income (expense):
Interest expense (91,701) (174,425)
Amortization of deferred
financing costs (Note 4) (35,292)
Discount on conversion of
bridge loans, accounts
payable and employee
deferred salaries into
common stock and warrants
(Note 5) (841,713)
Fair value of warrants
issued for financing costs
(Note 5) (882,522)
Interest income 270 735
Consulting revenues 2,025
Other 896
----------- -----------
Total other expense (89,406) (1,932,321)
----------- -----------
Net loss $(1,281,517) $(5,365,054)
----------- -----------
----------- -----------
Net loss per common share $(0.22) $(0.54)
----------- -----------
----------- -----------
Weighted average number of
common shares 5,783,333 9,882,172
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Six Months Ended June 30, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
(Note 1)
<S> <C> <C> <C>
Revenues $ $ 22,025 $ 22,025
----------- ----------- ------------
Costs and expenses:
Network operations 314,817 331,603 997,002
Research and development 665,442 578,535 3,760,869
Sales and marketing 322,417 691,164 2,065,268
General and administrative
(Note 3) 775,436 1,225,876 4,664,836
Depreciation and
amortization 150,545 158,133 591,597
Amortization of deferred
compensation (Note 5) 51,132 452,632 761,335
Fair value of common stock,
warrants and stock options
issued for services
rendered (Note 5) 2,292,657 4,300,874
Release of forfeiture
restrictions on common
stock owned by officers/
major stockholders 7,875,000
----------- ----------- ------------
Total costs and expenses 2,279,789 5,730,600 25,016,781
----------- ----------- ------------
Other income (expense):
Interest expense (125,219) (243,601) (682,759)
Amortization of deferred
financing costs (Note 4) (47,456) (47,456)
Discount on conversion of
bridge loans, accounts
payable and employee
deferred salaries into
common stock and warrants
(Note 5) (841,713) (1,415,061)
Fair value of warrants
issued for financing costs
(Note 5) (1,243,722) (4,899,924)
Interest income 623 772 94,119
Consulting revenues 4,050 164,602
Other (831) (110,662) (81,618)
----------- ----------- ------------
Total other expense (121,377) (2,486,382) (6,868,097)
----------- ----------- ------------
Loss before provision for
state income and franchise
taxes (2,401,166) (8,194,957) (31,862,853)
Provision for state income
and franchise taxes 16,673
----------- ----------- ------------
Net loss $(2,401,166) $(8,194,957) $(31,879,526)
----------- ----------- ------------
----------- ----------- ------------
Net loss per common share $(0.42) $(0.84)
----------- -----------
----------- -----------
Weighted average number of
common shares 5,783,333 9,743,083
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
(Note 1)
<S> <C> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Cash flows from operating
activities:
Net loss $(2,401,166) $(8,194,957) $(31,879,526)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 150,545 158,133 591,597
Amortization of deferred
compensation 51,132 452,632 761,335
Amortization of deferred
financing costs 47,456 47,456
Other 64,750 64,750
Reduction of loan from
settlement agreement (20,000)
Accounts payable and
accrued liabilities
settled through the
issuance of common
stock and warrants 275,712 556,150
Fair value of common
stock, warrants
and stock options
issued 3,545,092 9,209,511
Discount on conversion
of bridge loans,
accounts payable and
employee deferred
salaries into common
stock and warrants 841,713 1,415,061
Release of forfeiture
restrictions on common
stock owned by officers/
major stockholders 7,875,000
Changes in operating
assets and liabilities:
(Increase) decrease in -
Receivables (162) 23,680
Prepaid expenses 62,548 (271,663) (320,978)
Other current assets (21,610) (11,993) (16,281)
Deposits (53,963)
Increase (decrease) in -
Accounts payable 29,132 180,120 1,090,398
Accrued compensation
and related items 465,106 (307,455) 182,606
Accrued interest
payable 99,363 156,792 256,605
Other accrued expenses (78,485) 331,418 672,526
State income taxes
payable (2,020) (6,400) (800)
----------- ----------- -----------
Net cash used in operating
activities (1,645,455) (2,738,812) (9,544,873)
----------- ----------- -----------
</TABLE>
(continued)
7
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Six Months Ended June 30, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
(Note 1)
<S> <C> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Cash flows from investing
activities:
Purchases of property
and equipment (4,375) (138,908) (1,142,426)
----------- ----------- -----------
Net cash used in investing
activities (4,375) (138,908) (1,142,426)
----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from lease
financing 150,261 150,261
Proceeds from sale of
securities, net of
offering costs 4,661,583 10,016,078
Proceeds from advances
and bridge loans -
Related parties 350,000 888,875 2,218,862
Unrelated parties 1,210,000 1,190,000 2,505,000
Repayments of advances -
Related parties (104,000)
Unrelated parties (30,000) (135,000)
Payments on capitalized
lease obligations (85,205) (133,746)
Increase in deferred
financing costs (96,000) (96,000)
Proceeds from exercise
of stock options and
warrants 1,030,000 1,030,000
----------- ----------- -----------
Net cash provided by
financing activities 1,625,056 7,644,458 15,451,455
----------- ----------- -----------
Cash and cash equivalents:
Net increase (decrease) (24,774) 4,766,738 4,764,156
At beginning of period 87,318 52,895 55,477
----------- ----------- -----------
At end of period $ 62,544 $4,819,633 $ 4,819,633
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
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You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 1997 and 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
Principles of Consolidation -
The condensed consolidated financial statements include the accounts of You
Bet International, Inc., a Delaware corporation, its wholly-owned subsidiary,
You Bet!, Inc., a Delaware corporation, and Middleware Telecom Corporation, a
California corporation and a wholly-owned subsidiary of You Bet!, Inc.
(collectively, the "Company"). All intercompany accounts and transactions
have been eliminated in consolidation.
Business -
Since mid-1995, the Company has been engaged in developing PC-based
proprietary communications software technology to be utilized by consumers
for online entertainment purposes. The Company's first service to be offered
to consumers is The You Bet Racing Network, a horse racing network to be
broadcast over the Company's secure closed-loop network.
Development Stage -
As of June 30, 1998, the Company is considered to be a development stage
entity, as it had not realized significant revenues from planned principal
operations. During 1995, the Company shifted its business strategy by
de-emphasizing consulting services and software licensing, as a result of
which the Company became a development stage company. Accordingly, the
Company has provided cumulative condensed consolidated statements of
operations and condensed consolidated statements of cash flows for the period
from January 1, 1995 through June 30, 1998.
Going Concern -
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has had recurring losses, has
periodically experienced significant continuing liquidity problems from late
1996 through the middle of 1998, and has financed its operations during such
period from the sale of its securities and short-term debt. As a result of
these factors, the Company's independent certified public accountants have
expressed substantial doubt about the Company's ability to continue as a
going concern. On June 29, 1998, the Company completed a $5,500,000
preferred stock financing that provided net proceeds of approximately
$4,662,000, as more fully described at Note 5. On July 31, 1998, the Company
sold an additional $500,000 of preferred stock. However, the proceeds from
these financings are not expected to be sufficient to support the continuing
development and expansion of the Company's
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operations until operating revenues reach the level necessary to fund ongoing
operations. The Company is currently attempting to sell an additional
$4,000,000 of preferred stock, but there can be no assurances that the
Company will be successful in this regard. As a result of the preferred
stock financing on June 29, 1998, the Company had net working capital of
$36,139 at June 30, 1998, as compared to a working capital deficit of
$2,739,184 at December 31, 1997. In addition, subsequent to June 30, 1998,
the holders of advances and convertible bridge notes with a principal balance
of $2,640,000 at June 30, 1998 agreed to convert these obligations, plus
accrued interest, into 1,468,268 shares of common stock, as more fully
described at Note 4. The advances and convertible bridge notes outstanding
at June 30, 1998 were utilized to fund the Company's operations.
In order to conserve working capital, the Company has previously reduced the
number of its employees, deferred compensation to certain of its senior
officers and other employees, deferred or delayed the payment of accounts
payable, capital lease obligations and bridge loans payable, and reduced
operating expenses and capital expenditures. As a result, the Company is in
arrears with respect to its payment obligations to certain lessors and
creditors.
During the year ended December 31, 1997 and the six months ended June 30,
1998, the Company relied on the proceeds from short-term loans, primarily
from related parties, bridge loans from both related and unrelated parties,
the private placement of its common stock and warrants, and the exercise of
stock options and warrants, which aggregated approximately $3,903,000 and
$3,079,000 (excluding the June 1998 preferred stock financing), respectively,
to fund its operating requirements during such periods. During the six
months ended June 30, 1998, the Company received advances of $613,875 and
bridge financing of $1,465,000, as well as the net proceeds from the
preferred stock financing of $4,662,000 to fund its estimated 1998 cash
requirements of $7,000,000, which includes estimated discretionary costs
related to marketing and promotion activities of $2,000,000 and estimated
capital expenditures of $2,000,000. The Company is continuing to evaluate
various opportunities to raise additional capital during the remainder of
1998 and 1999, which includes the sale of the additional $4,000,000 of
preferred stock discussed above.
The Company is dependent on the proceeds from the previously described
financing efforts for the continuation of its marketing efforts related to
The You Bet Racing Network, as well as for the continuation and expansion of
the Company's development activities. The Company expects that its cash on
hand at June 30, 1998, combined with the funds that it has raised subsequent
to June 30, 1998, will be sufficient to fund operating and capital
expenditures at least through early 1999. However, there can be no
assurances that the Company will be able to complete such additional debt or
equity financings as may be required to fund the Company's operations on a
timely basis and/or under acceptable terms and conditions.
The Company's need for financing during 1998 and beyond will vary based upon a
number of factors, some of which are outside the control of the Company. These
factors include the scope of the Company's development and marketing efforts,
consumer reaction/acceptance and the development of operating revenues, the time
and cost to develop and commercialize
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additional applications, competition from similar wagering systems and from
competing interactive gaming/leisure time systems and activities, and
potential political and legal issues.
The consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
Basis of Presentation -
The accompanying condensed consolidated financial statements are unaudited,
but in the opinion of management of the Company, contain all adjustments
necessary to present fairly the financial position at June 30, 1998, the
results of operations for the three months and six months ended June 30, 1997
and 1998, and the cash flows for the six months ended June 30, 1997 and 1998.
These adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1997 is derived from the Company's audited
financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
financial statements are adequate to make the information presented therein
not misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
The results of operations for the three months and six months ended June 30,
1998 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 1998.
Certain prior period amounts have been reclassified to conform to the current
year presentation.
Loss Per Share -
During 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"), which requires the presentation
of basic and diluted earnings per share. Basic earnings per share are
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
calculated by dividing net income (loss) by the basic shares and all dilutive
securities, including stock options, warrants, preferred stock and
convertible notes, but does not include the impact of potential common shares
which would be anti-dilutive. These dilutive securities were anti-dilutive
in 1997 and 1998. No prior period earnings per share amounts have been
restated as a result of SFAS 128.
As of June 30, 1998, potential dilutive securities were represented by 1,684,442
outstanding stock options, 7,633,431 outstanding common stock purchase warrants,
$2,690,000 principal amount of advances and convertible bridge notes, plus
accrued interest, convertible into
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1,497,284 shares of common stock, and 220,000 shares of preferred stock
issued in conjunction with the $5,500,000 preferred stock financing,
convertible into 2,200,000 shares of common stock, are not included in the
earnings per share calculation since their effect would be anti-dilutive.
During the three months and six months ended June 30, 1997, 2,500,000 shares of
common stock issued and outstanding to two officers/major stockholders and a
stockholder related to one of the officers were subject to forfeiture under
certain specified conditions, and were excluded from the calculation of net loss
per share in 1997. The forfeiture provisions were released effective December
31, 1997, in exchange for the return to the Company and cancellation of 750,000
of such shares.
2. Restructuring of Capital Lease
Effective March 31, 1998, the Company restructured a portion of its outstanding
capital lease obligations aggregating $170,516 into a new capital lease bearing
interest at approximately 14% per annum. In conjunction with this transaction,
the Company increased the outstanding lease obligation by $80,000 to reflect the
acquisition of office and computer equipment from the lessor.
The Company agreed to pay the lessor eighteen monthly payments of $15,500
commencing July 1, 1998 under the restructured lease agreement. The Company
also issued 20,000 shares of common stock to the lessor with an approximate fair
market value of $79,000. The effective interest rate on the restructured lease
agreement is approximately 41% per annum.
In conjunction with the restructuring of this lease, during the three months
ended March 31, 1998, the Company recorded a charge to operations of $64,750,
consisting of the write-off of lease deposits of $53,963 and prepayments of
$10,787. The Company also recorded deferred financing costs of $54,941 as a
result of the issuance of the 20,000 shares of common stock to the lessor, which
are being amortized through December 31, 1999.
3. Prepaid Expenses
During March 1998, the Company entered into a supplemental agreement with a
financial and marketing consulting firm to develop and manage an expanded
investor relations program to publicize the Company to stockholders, investors,
brokerages, and industry professionals. This program is designed to continue
during 1998 and 1999, and requires that the Company make advance payments to the
consulting firm to fund the program's costs and expenses. During April 1998,
the consulting firm was issued warrants to purchase an aggregate of 300,000
shares of the Company's common stock, as more fully described at Note 5.
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4. Advances and Bridge Loans Payable
Advances and bridge loans consisted of the following at December 31, 1997 and
June 30, 1998:
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties
------- -------
<S> <C> <C>
Advances
- --------
Balance, December 31, 1997 $390,000 $
Add: New loans 410,000
Less: Converted into 1998
bridge financing (185,000)
-------- ----------
Balance, March 31, 1998 615,000
Add: New loans 98,875 105,000
Less: Repayments (30,000)
-------- ----------
Balance, June 30, 1998 $713,875 $ 75,000
-------- ----------
-------- ----------
Bridge Loans Payable
- --------------------
Balance, December 31, 1997 $ $ 300,000
Add: New loans 865,000
Converted from advances 185,000
-------- ----------
Balance, March 31, 1998 185,000 1,165,000
Add: New loans 380,000 220,000
Less: Conversion of 1997
bridge loan into
common stock and
warrants (25,000)
-------- ----------
Balance, June 30, 1998 $565,000 $1,360,000
-------- ----------
-------- ----------
</TABLE>
The remaining $275,000 principal balance of 1997 bridge loans outstanding at
June 30, 1998 is secured by substantially all the assets of the Company. The
due date of the 1997 bridge loans outstanding was extended to December 1998.
The holders of the $275,000 of 1997 bridge loans have the option of
converting such loans, including accrued interest, into units, which include
10,000 shares of common stock and 5,000 Series D warrants, at the rate of
$18,750 per unit, or 75% of the next private placement
13
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offering price of an offering over $5,000,000, whichever is less. During
July 1998, as a result of the preferred stock financing completed on June 29,
1998, as described at Note 5, the holders of the $275,000 of bridge loans
agreed to convert such loans, plus accrued interest, at the rate of $1.875
per share, into 193,965 shares of common stock and 96,983 Series D common
stock purchase warrants.
In January 1998, the Company commenced a new bridge financing, consisting of a
secured note with interest at 12% due December 1998, secured by a junior lien on
substantially all the assets of the Company. Through June 30, 1998, the Company
had issued $1,650,000 of bridge notes, including $565,000 to related parties.
At the option of the holder, each note is convertible into the securities of a
subsequent private placement (or the equivalent amount of common stock, if such
financing is not a common stock financing) at the lower of $2.75 or 80% of the
private placement price. During July 1998, as a result of the preferred stock
financing completed on June 29, 1998, as described at Note 5, the holders of the
$1,650,000 of bridge notes payable agreed to convert such notes, plus accrued
interest, at the rate of $2.00 per share, into 875,226 shares of common stock,
including 299,702 shares allocable to related parties. As a result of the
conversion of the 1998 bridge financing into common stock, the Company will be
obligated to issue approximately 75,000 Series E common stock purchase warrants
to certain finders with respect to such bridge financing. These warrants will
be exercisable at $3.125 per share for a period of three years. Finders fees
paid in cash with respect to such bridge notes aggregating $96,000 have been
recorded as deferred financing costs and are being amortized through December
31, 1998. However, upon conversion of the bridge notes into common stock, the
unamortized portion of the related deferred financing costs will be charged to
operations for financing costs.
As of June 30, 1998, advances payable totaled $788,875, including $713,875 to
related parties. The holders of the $765,000 of advances also have the right to
convert such amounts into the 1998 bridge financing until such time as the
bridge notes are either called or repaid. During July 1998, as a result of the
preferred stock financing completed on June 29, 1998, as described at Note 5,
the holders of $715,000 of advances agreed to convert such advances, plus
accrued interest, at the rate of $2.00 per share, into 399,077 shares of common
stock, including 359,294 shares allocable to related parties.
As more fully described at Note 5, as a result of the previously described
conversion discounts, the Company recognized aggregate discounts of $841,713 as
a charge to operations for financing costs during the three months and six
months ended June 30, 1998.
5. Stockholders' Equity (Deficiency)
Issuance of Stock Options -
On February 6, 1998, the Company's Board of Directors adopted a program to
compensate employees of the Company pursuant to a stock option plan. The
Company issued options to purchase 500,000 shares of common stock at $2.50 per
share. Such options were fully vested upon issuance, but are not exercisable
until February 1999, and expire on February 6,
14
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2003. The Company has recorded the difference between the fair market value
of the Company's common stock on February 6, 1998 of $4.125 and the $2.50
exercise price as deferred compensation cost. The aggregate amount of
deferred compensation cost of $812,500 is being amortized through December
31, 1998.
On April 21, 1998, the Company issued a stock option to the non-employee
director of the Company at that time under the 1995 Stock Option Plan for
Non-Employee Directors to purchase 5,000 shares of common stock at an
exercise price of $5.50 per share, the fair market value on the date of
grant. The stock option was fully vested upon issuance, and is exercisable
for a period of ten years. The fair value of the stock option of $19,350 was
charged to operations during the three months and six months ended June 30,
1998.
On May 1, 1998, the Company granted a stock option to its newly-appointed
Executive Vice President and Chief Financial Officer under the 1995 Stock
Option Plan to purchase 75,000 shares of common stock at an exercise price of
$2.50 per share. The stock option vests in four equal annual installments
commencing one year after the grant date, and is exercisable for a period of
ten years. The Company has recorded a credit to deferred compensation of
$323,438 to reflect the difference between the fair market value of the
Company's common stock on the grant date of $6.81 per share and the exercise
price of $2.50 per share. The Company is amortizing this amount to operations
over the four year period beginning May 1, 1998.
Issuance of Common Stock -
During the three months and six months ended June 30, 1998, the Company
issued 20,000 shares of common stock in conjunction with the restructuring of
a capital lease as described at Note 2.
During the three months and six months ended June 30, 1998, the Company
issued 2,500 shares of common stock to a former employee for services
rendered which were valued at $15,469 and charged to operations.
During the three months and six months ended June 30, 1998, the Company
issued 16,267 shares of common stock (and 8,134 Series D common stock
purchase warrants) in conjunction with the conversion of a 1997 bridge note
with a principal balance of $25,000 and accrued interest of $5,500 into
common stock (see "Issuance of Warrants" below).
During the three months and six months ended June 30, 1998, the Company
issued 342,000 shares of common stock to three individuals, including one
officer, in conjunction with the exercise of warrants and stock options with
exercise prices ranging from $2.50 to $3.125 per share, generating gross
proceeds to the Company of $1,030,000.
During the three months and six months ended June 30, 1998, the Company
issued 11,200 shares of common stock (and 5,600 Series D common stock
purchase warrants) in conjunction with the conversion of vendor debt of
$28,000 into common stock (see "Issuance of Warrants" below).
During the three months and six months ended June 30, 1998, the Company issued
110,123 shares of common stock (and 55,063 Series C and 55,063 Series D common
stock purchase warrants), including 96,220 shares to
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two officers/major stockholders, in conjunction with the conversion of
employee deferred compensation of $206,483 into common stock (see "Issuance
of Warrants" below).
Issuance of Warrants -
During April 1998, the Company issued to a financial and marketing consulting
firm warrants to purchase 200,000 shares of common stock exercisable at $3.125
per share and 100,000 shares of common stock exercisable at $5.25 per share, for
additional services rendered during January through June 1998. The warrants are
exercisable through March 2003. The aggregate fair value of the 300,000
warrants of $1,444,000 was recorded as a charge to operations, of which $722,000
was charged to operations during each of the three months ended March 31, 1998
and June 30, 1998.
During April 1998, the Company issued a warrant to purchase 25,000 shares of
common stock exercisable at $3.00 per share to the Company's Chief Financial
Officer at that time for services rendered through June 1998. The warrant is
exercisable through April 1999. The fair value of the warrant was
approximately $75,000, which was charged to operations during the six months
ended June 30, 1998.
During the six months ended June 30, 1998, the Company issued Series C common
stock purchase warrants representing the right to purchase 254,593 shares of
common stock to various parties. The Series C common stock purchase warrants
are exercisable at $2.50 per share through June 2003. The Company issued 5,000
warrants to a vendor which deferred an amount due it, 55,063 warrants (including
48,110 warrants to two officers/major stockholders) in conjunction with the
conversion into common stock of employee deferred compensation of $206,483, and
177,000 warrants (including 134,000 warrants to related parties) as additional
consideration for short-term advances of $440,000, all of which were considered
financing costs. The Company also issued 17,530 warrants for legal fees. Of
the total of 254,593 warrants issued, 109,000 warrants were issued during the
three months ended March 31, 1998 and 145,593 warrants were issued during the
three months ended June 30, 1998. Aggregate fair value of the warrants was
$1,119,891, of which $658,244 and $1,019,444 were charged to operations as
financing costs during the three months and six months ended June 30, 1998,
respectively. The warrant issued for legal fees had an aggregate fair value of
$100,447, of which $25,112 was charged to operations during the three months and
six months ended June 30, 1998, and the remaining $75,335 will be charged to
operations through December 31, 1998.
During the three months and six months ended June 30, 1998, the Company
issued Series D common stock purchase warrants representing the right to
purchase 68,797 shares of common stock to various parties. The Series D
common stock purchase warrants are exercisable at $5.25 per share through
June 2000. The Company issued 8,134 warrants in conjunction with the
conversion into common stock of a 1997 bridge note with a principal balance
of $25,000, 5,600 warrants in conjunction with the conversion into common
stock of vendor debt of $28,000, and 55,063 warrants (including 48,110
warrants to two officers/major stockholders) in conjunction with the
conversion into common stock of employee deferred compensation of $206,483,
all of which were considered financing costs. Aggregate fair value of the
warrants was $224,278,
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which was charged to operations as financing costs during the three months
and six months ended June 30, 1998.
During the three months and six months ended June 30, 1998, the Company
issued a Series E common stock purchase warrant representing the right to
purchase 50,000 shares of common stock to a consulting firm. The Series E
common stock purchase warrant is exercisable at $3.125 per share through
April 2001. The fair value of the warrant was $251,000, which was charged to
operations during the three months and six months ended June 30, 1998.
During the three months and six months ended June 30, 1998, in conjunction
with the 1997 private placement, the Company also issued 8,532 Series E
common stock purchase warrants exercisable through June 2001, which had an
aggregate fair value of $32,336.
Conversion Discount -
As part of the consideration for making the advances and bridge loans described
at Note 3, the Company granted the investors the option to convert their bridge
loans, including accrued interest, into the securities offered in any subsequent
private placement (or the equivalent amount of common stock, if such financing
is not a common stock financing), at 75% to 80% of the private placement
offering price, representing discounts of 20% to 25%. As a result of the
completion of the private placement of preferred stock on June 29, 1998 (see
"Preferred Stock" below), the difference between the fair value of the Company's
common stock of $2.50 per share on June 29, 1998 (as determined by an investment
and merchant banking firm) and the effective conversion rate of $1.875 to $2.00
per share was recognized as a charge to operations. Accordingly, the Company
recorded the aggregate discount of $841,713 as a charge to operations for
financing costs during the three months and six months ended June 30, 1998.
Preferred Stock Financing -
On June 29, 1998, the Company entered into a Stock Purchase Agreement with
certain private and institutional investors. Pursuant to the Stock Purchase
Agreement, the Company sold 200,000 shares of Series A Senior Convertible
Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00 per
share, resulting in gross proceeds to the Company of $5,000,000. Robert M.
Fell, David M. Marshall and Jess Rifkind purchased 445 shares, 445 shares and
400 shares, respectively, of Preferred Stock.
On July 31, 1998, the Company sold an additional 20,000 shares of Preferred
Stock under the same terms for gross proceeds of $500,000. The Company is
seeking to sell an additional 160,000 shares of Preferred Stock to private and
institutional investors on the same terms, but there can be no assurances that
the Company will be successful in this regard.
The Preferred Stock has a liquidation preference of $25.00 per share and will
rank senior to all other series of preferred stock that may be issued in the
future. Each share of Preferred Stock is convertible into ten shares of common
stock of the Company, and will be automatically converted into common stock at
the then prevailing conversion rate at such time as the Company has completed a
secondary
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public offering which raises not less than $15,000,000 in gross proceeds and
has its common stock listed on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market System. The holders of the
Preferred Stock are not entitled to dividends, except that if dividends are
paid on the Company's common stock, holders of Preferred Stock will be
entitled to dividends on the basis of the number of shares of common stock
into which the Preferred Stock is then convertible. The Preferred Stock will
vote together with the holders of common stock on all matters presented to
stockholders for a vote on the basis of the number of shares of common stock
into which the Preferred Stock is then convertible. The holders of the
Preferred Stock have unlimited piggyback registration rights and certain
demand registration rights.
Based on a valuation report prepared by an investment and merchant banking
firm dated July 31, 1998, the Company has determined that the Preferred Stock
was sold at fair market value.
In addition, on June 29, 1998, the Company entered into a Securities Purchase
Agreement with the Robert M. Fell Living Trust (the "Fell Trust"). Pursuant to
the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares of
Preferred Stock and a warrant to purchase 1,200,000 shares of the Company's
common stock (the "Fell Warrant"). The purchase price of the Preferred Stock
acquired by the Fell Trust was $25.00 per share, or an aggregate of $500,000, of
which $10,000 was paid in cash and $490,000 was paid in the form of a promissory
note (the "$490,000 Note"). The purchase price of the Fell Warrant was $75,000,
of which $5,000 was paid in cash and $70,000 was paid in the form of a
promissory note (the "$70,000 Note"). The Fell Warrant expires on June 29,
2008, and entitles the Fell Trust to purchase 1,200,000 shares of common stock
at $2.50 per share. The Fell Warrant is exercisable one-sixth on June 29, 1998,
and one-sixth thereafter on each six month anniversary date. The $490,000 Note
bears interest at the rate of 8% per annum, which may, at the option of the Fell
Trust, be paid currently or added to the principal amount of the note. The
$490,000 Note is due June 29, 2002, provided that the Fell Trust is required to
prepay the note, without penalty, as soon as possible consistent with its other
cash requirements. The $70,000 Note bears interest at the rate of 6% per annum,
which may, at the option of the Fell Trust, be paid currently or added to the
principal amount of the note. The $70,000 Note is due on June 29, 2008. The
Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired
pursuant to the Securities Purchase Agreement to secure its obligations under
the $490,000 Note and the $70,000 Note.
The $490,000 Note and the $70,000 Note were recorded as reductions to
stockholders' equity at June 30, 1998. Based on a valuation report prepared
by an investment and merchant banking firm dated July 31, 1998, the Company
has determined that the exercise price of the Fell Warrant was at not less
than fair market value.
In connection with the Stock Purchase Agreement and the Securities Purchase
Agreement, the parties to such agreements and David M. Marshall and Russell M.
Fine entered into a Stockholders Agreement. Pursuant to the Stockholders
Agreement, the parties agreed to vote all shares of Preferred Stock and common
stock owned by them (including any stock acquired in the future) for election to
the Board of Directors of
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four persons designated by Robert M. Fell and three persons designated by
David M. Marshall and Russell M. Fine. The Stockholders Agreement terminates
on June 29, 2000.
In connection with the Stock Purchase Agreement and the Securities Purchase
Agreement, the Company entered into a Services Agreement with Fell & Company,
Inc. ("FCI"), pursuant to which Robert M. Fell will serve as Chairman of the
Board of Directors for a period of three years. Mr. Fell will also serve as
interim Chief Executive Officer until a new Chief Executive Officer is
appointed, provided that if an employment agreement is not entered into with a
new Chief Executive Officer within six months from June 29, 1998, or such person
does not commence employment within eight months of June 29, 1998, the position
of Chief Executive Officer will become the Office of the Chief Executive and
will consist of Mr. Fell, Mr. Marshall and Mr. Fine. For making Mr. Fell's
services available to the Company, FCI will receive $150,000 per annum, subject
to cost of living increases, plus the amount of payroll taxes the Company would
pay if Mr. Fell were an employee of the Company.
The Company also entered into new employment agreements with David M. Marshall
and Russell M. Fine pursuant to which they will serve as Vice Chairman and Chief
Technology Officer, respectively. In addition, until a permanent Chief
Executive Officer is appointed, Mr. Marshall will serve as President and Chief
Operating Officer of the Company. Both employment agreements provide for terms
of five years and compensation of $150,000 per annum, subject to cost of living
increases.
Effective June 29, 1998, the number of directors of the Company was increased to
seven and Robert M. Fell, Alan Landsburg, Bill Roedy and Caesar Kimmel were
elected to the Board of Directors of the Company. Such persons were designated
by Mr. Fell pursuant to the Stockholders Agreement. David M. Marshall, Russell
M. Fine and Jess Rifkind remain as directors of the Company, as the designees of
Mr. Marshall and Mr. Fine. At such time as the Company retains a permanent
Chief Executive Officer, the number of directors of the Company will be
increased to eight and the Chief Executive Officer will be elected to the Board
of Directors. As a result of the ability to designate four directors as
provided in the Stockholders Agreement, Mr. Fell may be deemed to have acquired
control of the Company.
In conjunction with the Preferred Stock financing, the Company incurred direct
costs related to such financing of $343,417, which were charged to additional
paid-in capital. Of such amount, $217,493 was paid to a firm for investment
advisory services. In addition, this firm has the right to acquire warrants to
purchase 72,498 shares of common stock for $.0625 per warrant, consisting of
24,166 warrants exercisable at $.01 per share and 48,332 warrants exercisable at
$2.50 per share. The warrants are exercisable through June 2003, and have
certain piggyback registration rights. The aggregate fair value of such
warrants is $401,639. In addition, the Company paid cash finder's fees to other
parties aggregating $13,500.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-QSB for the three months ended June 30, 1998
contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning the Company's expectations regarding its financing
requirements and efforts to raise additional financing, its development and
marketing efforts, consumer reaction/acceptance to the Company's services,
and the development of operating revenues, and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form
10-QSB for the three months ended June 30, 1998 are subject to risks and
uncertainties that could cause actual results to differ materially from those
results expressed in or implied by the statements contained herein.
Overview:
Since mid-1995, the Company has been engaged in developing PC-based proprietary
communications software technology to be utilized by consumers for online
entertainment purposes. The Company's first service to be offered to consumers
is The You Bet Racing Network, a horse racing network to be broadcast over the
Company's secure closed-loop network. The Company has incurred substantial
software development costs during 1995 through June 30, 1998, which have been
charged to operations as research and development costs. During the six months
ended June 30, 1998, management is of the opinion that technological feasibility
of the Company's proprietary software technology has been established.
Business Plan:
The Company's original short-term goal, established in 1995, was to maximize
customer subscription levels. However, in 1997, the Company decided to
de-emphasize its original short-term goal in order to focus on certain
long-term goals. The Company's revised marketing strategy, which management
is seeking to implement during 1998 and 1999, is focused on building a brand
name and becoming a market leader, acquiring and retaining a large and loyal
customer base, and maximizing long-term profitability. In order to do so,
the Company intends to concentrate on marketing to existing horse players
during the initial phase of operations. By being the first to deliver an
interactive product, the Company believes that it will fill a significant
market need and establish itself as the leading brand in the horse racing
industry. Marketing activities will then be expanded to focus on a variety
of additional potential users, including sports gamblers and casino and
lottery customers. The Company then intends to move its products into the
mainstream online community through a mass marketing campaign.
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Liquidity and Capital Resources - June 30, 1998:
The Company has had recurring losses, has periodically experienced
significant continuing liquidity problems from late 1996 through the middle
of 1998, and has financed its operations during such period from the sale of
its securities and short-term debt. As a result of these factors, the
Company's independent certified public accountants have expressed substantial
doubt about the Company's ability to continue as a going concern. On June
29, 1998, the Company completed a $5,500,000 preferred stock financing that
provided net proceeds of approximately $4,662,000, as described below. On
July 31, 1998, the Company sold an additional $500,000 of preferred stock.
However, the proceeds from these financings are not expected to be sufficient
to support the continuing development and expansion of the Company's
operations until operating revenues reach the level necessary to fund ongoing
operations. The Company is currently attempting to sell an additional
$4,000,000 of preferred stock, but there can be no assurances that the
Company will be successful in this regard. As a result of the preferred
stock financing on June 29, 1998, the Company had net working capital of
$36,139 at June 30, 1998, as compared to a working capital deficit of
$2,739,184 at December 31, 1997. In addition, subsequent to June 30, 1998,
the holders of advances and convertible bridge notes with a principal balance
of $2,640,000 at June 30, 1998 agreed to convert these obligations, plus
accrued interest, into 1,468,268 shares of common stock. The advances and
convertible bridge notes outstanding at June 30, 1998 were utilized to fund
the Company's operations.
In order to conserve working capital, the Company has previously reduced the
number of its employees, deferred compensation to certain of its senior
officers and other employees, deferred or delayed the payment of accounts
payable, capital lease obligations and bridge loans payable, and reduced
operating expenses and capital expenditures. As a result, the Company is in
arrears with respect to its payment obligations to certain lessors and
creditors.
During the year ended December 31, 1997 and the six months ended June 30,
1998, the Company relied on the proceeds from short-term loans, primarily
from related parties, bridge loans from both related and unrelated parties,
the private placement of its common stock and warrants, and the exercise of
stock options and warrants, which aggregated approximately $3,903,000 and
$3,079,000 (excluding the June 1998 preferred stock financing), respectively,
to fund its operating requirements during such periods. During the six
months ended June 30, 1998, the Company received advances of $613,875 and
bridge financing of $1,465,000, as well as the net proceeds from the
preferred stock financing of $4,662,000, to fund its estimated 1998 cash
requirements of $7,000,000, which includes estimated discretionary costs
related to marketing and promotion activities of $2,000,000 and estimated
capital expenditures of $2,000,000. The Company is continuing to evaluate
various opportunities to raise additional capital during the remainder of
1998 and 1999, which includes the sale of the additional $4,000,000 of
preferred stock discussed above.
The Company is dependent on the proceeds from the previously described
financing efforts for the continuation of its marketing efforts related to
The You Bet Racing Network, as well as for the continuation and expansion of
the Company's development activities. The Company expects
21
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that its cash on hand at June 30, 1998, combined with the funds that the
Company has raised subsequent to June 30, 1998, will be sufficient to fund
operating and capital expenditures at least through early 1999. However,
there can be no assurances that the Company will be able to complete such
additional debt or equity financings as may be required to fund the Company's
operations on a timely basis and/or under acceptable terms and conditions.
The Company's need for financing during 1998 and beyond will vary based upon
a number of factors, some of which are outside the control of the Company.
These factors include the scope of the Company's development and marketing
efforts, consumer reaction/acceptance and the development of operating
revenues, the time and cost to develop and commercialize additional
applications, competition from similar wagering systems and from competing
interactive gaming/leisure time systems and activities, and potential
political and legal issues.
During the six months ended June, 1998, the Company's operations used
$2,738,812 of cash, as compared to using $1,645,455 of cash during the six
months ended June 30, 1997, reflecting a general increase in the levels of
activity as the Company completed the development of The You Bet Racing
Network and commenced commercial marketing activities.
During the six months ended June 30, 1998, cash flows used in investing
activities aggregated $138,908 for purchases of property and equipment. In
addition, effective March 31, 1998, the Company restructured a portion of its
outstanding capital lease obligations aggregating $170,516 into a new capital
lease bearing interest at approximately 14% per annum. In conjunction with
this transaction, the Company increased the outstanding lease obligation by
$80,000 to reflect the acquisition of office and computer equipment from the
lessor.
The Company agreed to pay the lessor eighteen monthly payments of $15,500
commencing July 1, 1998 under the restructured lease agreement. The Company
also issued 20,000 shares of common stock to the lessor with an approximate
fair market value of $79,000. The effective interest rate on the
restructured lease agreement is approximately 41% per annum. In conjunction
with the restructuring of this lease, during the three months ended March 31,
1998, the Company recorded a charge to operations of $64,750, consisting of
the write-off of lease deposits of $53,963 and prepayments of $10,787. The
Company also recorded deferred financing costs of $54,941 as a result of the
issuance of the 20,000 shares of common stock to the lessor, which are being
amortized through December 31, 1999.
On June 29, 1998, the Company entered into a Stock Purchase Agreement with
certain private and institutional investors. Pursuant to the Stock Purchase
Agreement, the Company sold 200,000 shares of Series A Senior Convertible
Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00
per share, resulting in gross proceeds to the Company of $5,000,000. Robert
M. Fell, David M. Marshall and Jess Rifkind purchased 445 shares, 445 shares
and 400 shares, respectively, of Preferred Stock.
On July 31, 1998, the Company sold an additional 20,000 shares of Preferred
Stock under the same terms for gross proceeds of $500,000. The Company is
seeking to sell an additional 160,000 shares of
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Preferred Stock to private and institutional investors on the same terms, but
there can be no assurances that the Company will be successful in this regard.
The Preferred Stock has a liquidation preference of $25.00 per share and will
rank senior to all other series of preferred stock that may be issued in the
future. Each share of Preferred Stock is convertible into ten shares of
common stock of the Company, and will be automatically converted into common
stock at the then prevailing conversion rate at such time as the Company has
completed a secondary public offering which raises not less than $15,000,000
in gross proceeds and has its common stock listed on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market System.
The holders of the Preferred Stock are not entitled to dividends, except that
if dividends are paid on the Company's common stock, holders of Preferred
Stock will be entitled to dividends on the basis of the number of shares of
common stock into which the Preferred Stock is then convertible. The
Preferred Stock will vote together with the holders of common stock on all
matters presented to stockholders for a vote on the basis of the number of
shares of common stock into which the Preferred Stock is then convertible.
The holders of the Preferred Stock have unlimited piggyback registration
rights and certain demand registration rights.
Based on a valuation report prepared by an investment and merchant banking firm
dated July 31, 1998, the Company has determined that the Preferred Stock was
sold at fair market value.
In addition, on June 29, 1998, the Company entered into a Securities Purchase
Agreement with the Robert M. Fell Living Trust (the "Fell Trust"). Pursuant
to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares
of Preferred Stock and a warrant to purchase 1,200,000 shares of the
Company's common stock (the "Fell Warrant"). The purchase price of the
Preferred Stock acquired by the Fell Trust was $25.00 per share, or an
aggregate of $500,000, of which $10,000 was paid in cash and $490,000 was
paid in the form of a promissory note (the "$490,000 Note"). The purchase
price of the Fell Warrant was $75,000, of which $5,000 was paid in cash and
$70,000 was paid in the form of a promissory note (the "$70,000 Note"). The
Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to
purchase 1,200,000 shares of common stock at $2.50 per share. The Fell
Warrant is exercisable one-sixth on June 29, 1998, and one-sixth thereafter
on each six month anniversary date. The $490,000 Note bears interest at the
rate of 8% per annum, which may, at the option of the Fell Trust, be paid
currently or added to the principal amount of the note. The $490,000 Note is
due June 29, 2002, provided that the Fell Trust is required to prepay the
note, without penalty, as soon as possible consistent with its other cash
requirements. The $70,000 Note bears interest at the rate of 6% per annum,
which may, at the option of the Fell Trust, be paid currently or added to the
principal amount of the note. The $70,000 Note is due on June 29, 2008. The
Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired
pursuant to the Securities Purchase Agreement to secure its obligations under
the $490,000 Note and the $70,000 Note.
The $490,000 Note and the $70,000 Note were recorded as reductions to
stockholders' equity at June 30, 1998. Based on a valuation report
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prepared by an investment and merchant banking firm dated July 31, 1998, the
Company has determined that the exercise price of the Fell Warrant was at not
less than fair market value.
In connection with the Stock Purchase Agreement and the Securities Purchase
Agreement, the parties to such agreements and David M. Marshall and Russell
M. Fine entered into a Stockholders Agreement. Pursuant to the Stockholders
Agreement, the parties agreed to vote all shares of Preferred Stock and
common stock owned by them (including any stock acquired in the future) for
election to the Board of Directors of four persons designated by Robert M.
Fell and three persons designated by David M. Marshall and Russell M. Fine.
The Stockholders Agreement terminates on June 29, 2000.
In connection with the Stock Purchase Agreement and the Securities Purchase
Agreement, the Company entered into a Services Agreement with Fell & Company,
Inc. ("FCI"), pursuant to which Robert M. Fell will serve as Chairman of the
Board of Directors for a period of three years. Mr. Fell will also serve as
interim Chief Executive Officer until a new Chief Executive Officer is
appointed, provided that if an employment agreement is not entered into with a
new Chief Executive Officer within six months from June 29, 1998, or such person
does not commence employment within eight months of June 29, 1998, the position
of Chief Executive Officer will become the Office of the Chief Executive and
will consist of Mr. Fell, Mr. Marshall and Mr. Fine. For making Mr. Fell's
services available to the Company, FCI will receive $150,000 per annum, subject
to cost of living increases, plus the amount of payroll taxes the Company would
pay if Mr. Fell were an employee of the Company.
The Company also entered into new employment agreements with David M. Marshall
and Russell M. Fine pursuant to which they will serve as Vice Chairman and Chief
Technology Officer, respectively. In addition, until a permanent Chief
Executive Officer is appointed, Mr. Marshall will serve as President and Chief
Operating Officer of the Company. Both employment agreements provide for terms
of five years and compensation of $150,000 per annum, subject to cost of living
increases.
Effective June 29, 1998, the number of directors of the Company was increased to
seven and Robert M. Fell, Alan Landsburg, Bill Roedy and Caesar Kimmel were
elected to the Board of Directors of the Company. Such persons were designated
by Mr. Fell pursuant to the Stockholders Agreement. David M. Marshall, Russell
M. Fine and Jess Rifkind remain as directors of the Company, as the designees of
Mr. Marshall and Mr. Fine. At such time as the Company retains a permanent
Chief Executive Officer, the number of directors of the Company will be
increased to eight and the Chief Executive Officer will be elected to the Board
of Directors. As a result of the ability to designate four directors as
provided in the Stockholders Agreement, Mr. Fell may be deemed to have acquired
control of the Company.
In conjunction with the Preferred Stock financing, the Company incurred direct
costs related to such financing of $343,417, which were charged to additional
paid-in capital. Of such amount, $217,493 was paid to a firm for investment
advisory services. In addition, this firm has the right to acquire warrants to
purchase 72,498 shares of common stock for
24
<PAGE>
$.0625 per warrant, consisting of 24,166 warrants exercisable at $.01 per
share and 48,332 warrants exercisable at $2.50 per share. The warrants are
exercisable through June 2003, and have certain piggyback registration
rights. The aggregate fair value of such warrants is $401,639. In addition,
the Company paid cash finder's fees to other parties aggregating $13,500.
The Company does not currently have any existing capital expenditure
commitments. However, subject to the continuing development of The You Bet
Racing Network and the availability of sufficient capital resources, the
Company's business plan anticipates approximately $2,000,000 of capital
expenditures during the latter half of 1998, in order to support the
anticipated increase in activity on The You Bet Racing Network.
Consolidated Results of Operations:
Three Months Ended June 30, 1997 and 1998 -
Network operations decreased by $14,797 or 7.5%, to $182,391 in 1998, as
compared to $197,188 in 1997.
Research and development costs increased by $17,960 or 5.4%, to $348,231 in
1998, as compared to $330,271 in 1997.
Sales and marketing expense increased by $383,690 or 254.2%, to $534,609 in
1998, as compared to $150,919 in 1997, reflecting the expansion of the
Company's marketing activities for The You Bet Racing Network.
General and administrative expenses increased by $371,460 or 90.2%, to
$783,277 in 1998, as compared to $411,817 in 1997, reflecting an increase in
personnel related costs and general operating activities, and the
implementation of an expanded stockholder relations program, as described
below.
During March 1998, the Company entered into a supplemental agreement with a
financial and marketing consulting firm to develop and manage an expanded
investor relations program to publicize the Company to stockholders,
investors, brokerages, and industry professionals. This program is designed
to continue during 1998 and 1999, and requires that the Company make advance
payments to the consulting firm to fund the program's costs and expenses.
During the three months ended June 30, 1998, approximately $189,000 was
charged to operations for this program.
The Company is continuing development efforts with respect to The You Bet
Racing Network, including the recruiting and hiring of management and
entering into agreements with strategic partners.
Interest expense increased by $82,724 or 90.2%, to $174,425 in 1998, as
compared to $91,701 in 1997, as a result of increases in advances and bridge
loans and capital lease obligations during 1998.
25
<PAGE>
During the three months ended June 30, 1998, the Company incurred non-cash
expenses related to stock options and warrants of $2,170,680, and non-cash
expenses related to the discount on conversion of various obligations into
common stock and warrants of $841,713. The Company recorded the fair value of
various stock options and warrants issued for services rendered as a charge to
operations. The Company also recorded deferred compensation cost as a result of
the issuance of stock options to employees at less than fair market value. The
recognition of these expenses did not have any effect on working capital, net
stockholders' equity (deficiency) or cash flows. The Company does not expect
that these types of costs will continue at these levels in the future.
Six Months Ended June 30, 1997 and 1998 -
Network operations increased by $16,786 or 5.3%, to $331,603 in 1998, as
compared to $314,817 in 1997.
Research and development costs decreased by $86,907 or 13.1%, to $578,535 in
1998, as compared to $665,442 in 1997, reflecting the Company's reallocation of
resources to its marketing programs.
Sales and marketing expenses increased by $368,747 or 114.4%, to $691,164 in
1998, as compared to $322,417 in 1997, reflecting the expansion of the Company's
marketing activities for The You Bet Racing Network.
General and administrative expenses increased by $450,440 or 58.1%, to
$1,225,876 in 1998, as compared to $775,436 in 1997, reflecting an increase in
personnel related costs and general operating activities, and the implementation
of an expanded stockholder relations program, as described below.
During March 1998, the Company entered into a supplemental agreement with a
financial and marketing consulting firm to develop and manage an expanded
investor relations program to publicize the Company to stockholders,
investors, brokerages, and industry professionals. This program is designed
to continue during 1998 and 1999, and requires that the Company make advance
payments to the consulting firm to fund the program's costs and expenses.
During the six months ended June 30, 1998, approximately $189,000 was charged
to operations for this program.
The Company is continuing development efforts with respect to The You Bet Racing
Network, including the recruiting and hiring of management and entering into
agreements with strategic partners.
Interest expense increased by $118,382 or 94.5%, to $243,601 in 1998, as
compared to $125,219 in 1997, as a result of increases in advances and bridge
loans and capital lease obligations during 1998.
During the six months ended June 30, 1998, the Company incurred non-cash
expenses related to stock options and warrants of $3,536,379, and non-cash
expenses related to the discount on conversion of various obligations into
common stock and warrants of $841,713. The Company recorded the fair value of
various stock options and warrants issued
26
<PAGE>
for services rendered as a charge to operations. The Company also recorded
deferred compensation cost as a result of the issuance of stock options to
employees at less than fair market value. The recognition of these expenses
did not have any effect on working capital, net stockholders' equity
(deficiency) or cash flows. The Company does not expect that these types of
costs will continue at these levels in the future. However, certain of these
costs will be recognized in the near term, particularly as they relate to
transactions that occurred during the year ended December 31, 1997 and the
six months ended June 30, 1998 aggregating approximately $1,528,000, which
are expected to provide future benefit in 1998 and 1999.
Year 2000 Issue:
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a recent internal assessment, the Company has determined that its
software programs, both developed internally and purchased from outside
vendors, are already Year 2000 compliant, or that the cost of any needed
modifications will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows. However, the
Company is currently unable to determine if its strategic partners have fully
addressed the Year 2000 Issue as it relates to their respective operating
systems. A Year 2000 system failure by a strategic partner of the Company
could have a material adverse effect on the Company's results of operations.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Equity securities of the registrant sold by the registrant during the
three months ended June 30, 1998 that were not registered under the
Securities Act of 1933, as amended, other than unregistered sales made in
reliance on Regulation S, were as follows:
In January 1998, the Company commenced a new bridge financing, consisting of
a secured note with interest at 12% due December 1998, secured by a junior
lien on substantially all the assets of the Company. During the three months
ended June 30, 1998, the Company had issued $600,000 of bridge notes. At the
option of the holder, each note is convertible into a subsequent private
placement at the lower of $2.75 or 80% of the private placement price.
During July 1998, as a result of the preferred stock financing completed on
June 29, 1998, the holders of the bridge notes payable agreed to convert such
notes, plus accrued interest, at the rate of $2.00 per share, into shares of
common stock. The investments were made under Section 4(2) of the Securities
Act of 1933, as amended, based on the representations of the investors.
On April 21, 1998, the Company issued a stock option to the non-employee
director of the Company at that time under the 1995 Stock Option Plan for
Non-Employee Directors to purchase 5,000 shares of common stock at an
exercise price of $5.50 per share, the fair market value on the date of
grant. The stock option was fully vested upon issuance, and is exercisable
for a period of ten years. The stock option was issued under Section 4(2) of
the Securities Act of 1933, as amended, based on the representations of the
recipient.
On May 1, 1998, the Company granted a stock option to its newly-appointed
Executive Vice President and Chief Financial Officer under the 1995 Stock
Option Plan to purchase 75,000 shares of common stock at an exercise price of
$2.50 per share. The stock option vests in four equal annual installments
commencing one year after the grant date, and is exercisable for a period of
ten years. The stock option was issued under Section 4(2) of the Securities
Act of 1933, as amended, based on the representation of the recipient.
During the three months ended June 30, 1998, the Company issued 2,500 shares
of common stock to a former employee for services rendered which were valued
at $15,469 and charged to operations. The shares of common stock were issued
under Section 4(2) of the Securities Act of 1933, as amended, based on the
representations of the recipient.
During the three months ended June 30, 1998, the Company issued 16,267 shares
of common stock (and 8,134 Series D common stock purchase warrants) in
conjunction with the conversion of a 1997 bridge note with a principal
balance of $25,000 and accrued interest of $5,500 into common stock. The
shares of common stock were issued under Section 4(2) of the Securities Act
of 1933, as amended, based on the representations of the recipient.
During the three months June 30, 1998, the Company issued 342,000 shares of
common stock to three individuals, including one officer, in
28
<PAGE>
conjunction with the exercise of warrants and stock options with exercise
prices ranging from $2.50 to $3.125 per share, generating gross proceeds to
the Company of $1,030,000. The shares of common stock were issued under
Section 4(2) of the Securities Act of 1933, as amended, based on the
representations of the recipients.
During the three months ended June 30, 1998, the Company issued 11,200 shares
of common stock (and 5,600 Series D common stock purchase warrants) in
conjunction with the conversion of vendor debt of $28,000 into common stock.
The shares of common stock were issued under Section 4(2) of the Securities
Act of 1933, as amended, based on the representations of the recipients.
During the three months ended June 30, 1998, the Company issued 110,123
shares of common stock (and 55,063 Series C and 55,063 Series D common stock
purchase warrants), including 96,220 shares to two officers/major
stockholders, in conjunction with the conversion of employee deferred
compensation of $206,483 into common stock. The shares of common stock were
issued under Section 4(2) of the Securities Act of 1933, as amended, based on
the representations of the recipients.
During April 1998, the Company issued to a financial and marketing consulting
firm warrants to purchase 200,000 shares of common stock exercisable at
$3.125 per share and 100,000 shares of common stock exercisable at $5.25 per
share, for additional services rendered during January through June 1998.
The warrants are exercisable through March 2003. The warrants were issued
under Section 4(2) of the Securities Act of 1933, as amended, based on the
representations of the recipient.
During the three months ended June 30, 1998, the Company issued Series C
common stock purchase warrants representing the right to purchase 145,593
shares of common stock to various parties. The Series C common stock
purchase warrants are exercisable at $2.50 per share through June 2003. The
Company issued 55,063 warrants in conjunction with the conversion into common
stock of employee deferred compensation of $206,483, and 73,000 warrants as
additional consideration for short-term advances of $180,000, all of which
were considered financing costs. The Company also issued 17,530 warrants for
legal fees. The warrants were issued under Section 4(2) of the Securities
Act of 1933, as amended, based on the representations of the recipients.
During the three months ended June 30, 1998, the Company issued Series D
common stock purchase warrants representing the right to purchase 68,797
shares of common stock to various parties. The Series D common stock
purchase warrants are exercisable at $5.25 per share through June 2000. The
Company issued 8,134 warrants in conjunction with the conversion into common
stock of a 1997 bridge note with a principal balance of $25,000, 5,600
warrants in conjunction with the conversion into common stock of vendor debt
of $28,000, and 55,063 warrants in conjunction with the conversion into
common stock of employee deferred compensation of $206,483, all of which were
considered financing costs. The warrants were issued under Section 4(2) of
the Securities Act of 1933, as amended, based on the representations of the
recipients.
During the three months ended June 30, 1998, the Company issued a Series E
common stock purchase warrant representing the right to purchase 50,000
shares of common stock to a consulting firm. The
29
<PAGE>
Series E common stock purchase warrant is exercisable at $3.125 per share
through April 2001. During the three months ended June 30, 1998, in
conjunction with the 1997 private placement, the Company also issued 8,532
Series E common stock purchase warrants exercisable through June 2001. The
warrants were issued under Section 4(2) of the Securities Act of 1933, as
amended, based on the representations of the recipients.
On June 29, 1998, the Company entered into a Stock Purchase Agreement with
certain private and institutional investors. Pursuant to the Stock Purchase
Agreement, the Company sold 200,000 shares of Series A Senior Convertible
Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00
per share, resulting in gross proceeds to the Company of $5,000,000. The
Preferred Stock was sold as a private placement pursuant to Regulation D of
Section 4(2) of the Securities Act of 1933, as amended.
The Preferred Stock has a liquidation preference of $25.00 per share and will
rank senior to all other series of preferred stock that may be issued in the
future. Each share of Preferred Stock is convertible into ten shares of
common stock of the Company, and will be automatically converted into common
stock at the then prevailing conversion rate at such time as the Company has
completed a secondary public offering which raises not less than $15,000,000
in gross proceeds and has its common stock listed on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market System.
The holders of the Preferred Stock are not entitled to dividends, except that
if dividends are paid on the Company's common stock, holders of Preferred
Stock will be entitled to dividends on the basis of the number of shares of
common stock into which the Preferred Stock is then convertible. The
Preferred Stock will vote together with the holders of common stock on all
matters presented to stockholders for a vote on the basis of the number of
shares of common stock into which the Preferred Stock is then convertible.
The holders of the Preferred Stock have unlimited piggyback registration
rights and certain demand registration rights.
Based on a valuation report prepared by an investment and merchant banking
firm dated July 31, 1998, the Company has determined that the Preferred Stock
was sold at fair market value.
In addition, on June 29, 1998, the Company entered into a Securities Purchase
Agreement with the Robert M. Fell Living Trust (the "Fell Trust"). Pursuant
to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares
of Preferred Stock and a warrant to purchase 1,200,000 shares of the
Company's common stock (the "Fell Warrant"). The purchase price of the
Preferred Stock acquired by the Fell Trust was $25.00 per share, or an
aggregate of $500,000, of which $10,000 was paid in cash and $490,000 was
paid in the form of a promissory note (the "$490,000 Note"). The purchase
price of the Fell Warrant was $75,000, of which $5,000 was paid in cash and
$70,000 was paid in the form of a promissory note (the "$70,000 Note"). The
Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to
purchase 1,200,000 shares of common stock at $2.50 per share. The Fell
Warrant is exercisable one-sixth on June 29, 1998, and one-sixth thereafter
on each six month anniversary date. The $490,000 Note bears interest at the
rate of 8% per annum, which may, at the option of the Fell Trust,
30
<PAGE>
be paid currently or added to the principal amount of the note. The $490,000
Note is due June 29, 2002, provided that the Fell Trust is required to prepay
the note, without penalty, as soon as possible consistent with its other cash
requirements. The $70,000 Note bears interest at the rate of 6% per annum,
which may, at the option of the Fell Trust, be paid currently or added to the
principal amount of the note. The $70,000 Note is due on June 29, 2008. The
Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired
pursuant to the Securities Purchase Agreement to secure its obligations under
the $490,000 Note and the $70,000 Note. The 20,000 shares of Preferred Stock
and the Fell Warrant were issued under Section 4(2) of the Securities Act of
1933, as amended, based on the representations of the recipient.
Based on a valuation report prepared by an investment and merchant banking
firm dated July 31, 1998, the Company has determined that the exercise price
of the Fell Warrant was at not less than fair market value.
Effective June 29, 1998, the number of directors of the Company was increased
to seven and Robert M. Fell, Alan Landsburg, Bill Roedy and Caesar Kimmel
were elected to the Board of Directors of the Company. Such persons were
designated by Mr. Fell pursuant to a Stockholders Agreement entered into in
conjunction with the sale of the Preferred Stock. David M. Marshall, Russell
M. Fine and Jess Rifkind remain as directors of the Company, as the designees
of Mr. Marshall and Mr. Fine. At such time as the Company retains a
permanent Chief Executive Officer, the number of directors of the Company
will be increased to eight and the Chief Executive Officer will be elected to
the Board of Directors. As a result of the ability to designate four
directors as provided in the Stockholders Agreement, Mr. Fell may be deemed
to have acquired control of the Company.
In conjunction the Preferred Stock Financing, the Company incurred direct
costs related to such financing of $343,417, which were charged to additional
paid-in capital. Of such amount, $217,493 was paid to a firm for investment
advisory services. In addition, this firm has the right to acquire warrants
to purchase 72,498 shares of common stock for $.0625 per warrant, consisting
of 24,166 warrants exercisable at $.01 per share and 48,332 warrants
exercisable at $2.50 per share. The warrants are exercisable through June
2003, and have certain piggyback registration rights. In addition, the
Company paid cash finder's fees to other parties aggregating $13,500.
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K - Three Months Ended June 30, 1998:
The Company filed a Current Report on Form 8-K on July 13, 1998, to
report a change in control of the Company in conjunction with a
$5,500,000 preferred stock financing, consisting of the sale of
220,000 shares of Series A Senior Convertible Preferred Stock at
$25.00 per share on June 29, 1998 (Item 1).
32
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
YOU BET INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: August 12, 1998 By: /s/ ROBERT M. FELL
------------------------
Robert M. Fell
Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 1998 By: /s/ PHILLIP HERMANN
------------------------
Phillip Hermann
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCURRED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,819,633
<SECURITIES> 0
<RECEIVABLES> 6,320
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,166,956
<PP&E> 1,479,319
<DEPRECIATION> 581,309
<TOTAL-ASSETS> 6,168,450
<CURRENT-LIABILITIES> 5,310,817
<BONDS> 179,374
0
220
<COMMON> 10,106
<OTHER-SE> 2,936,033
<TOTAL-LIABILITY-AND-EQUITY> 6,168,450
<SALES> 22,025
<TOTAL-REVENUES> 22,025
<CGS> 331,603
<TOTAL-COSTS> 331,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,601
<INCOME-PRETAX> (8,194,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,194,957)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,194,957)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
