<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 March 31, 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
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 March 31, 1998, the issuer had 9,823,994 shares of common stock issued and
outstanding and issuable.
Transitional Small Business Disclosure Format: Yes [ ] No [X}
<PAGE>
YOU BET INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 1997 and March 31, 1998
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months Ended March 31, 1997 and 1998
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended March 31, 1997 and 1998
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Three Months Ended March 31, 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 Report on Form 8-K
SIGNATURES
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Balance Sheets (Unaudited) - Assets
December 31, 1997 and March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash $ 52,895 $ 81,286
Receivables 6,158 2,241
Prepaid expenses (Note 2) 49,315 26,017
Other current assets 4,288 26,270
---------- ----------
Total current assets 112,656 135,814
---------- ----------
Property and equipment (Note 2) 1,260,411 1,397,067
Less: Accumulated depreciation
and amortization (423,177) (498,972)
---------- ----------
Property and equipment, net 837,234 898,095
---------- ----------
Other assets:
Deferred financing costs, net
of amortization (Notes 2 and 3) 123,777
Deposits (Note 2) 53,963
---------- ----------
Total other assets 53,963 123,777
---------- ----------
Total assets $ 1,003,853 $ 1,157,686
----------- -----------
----------- -----------
</TABLE>
(continued)
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Balance Sheets - Liabilities and Stockholders' Deficiency
(Unaudited) (continued)
December 31, 1997 and March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---- ----
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
Current liabilities:
Accounts payable $ 910,278 $ 925,605
Accrued compensation and related items 503,467 402,928
Accrued interest payable 116,892 167,577
Other accrued expenses 341,108 341,916
Advances and bridge loans payable
(Note 3) -
Related parties 390,000 800,000
Unrelated parties 300,000 1,165,000
State income taxes payable 6,400 5,674
Current portion of capitalized
lease obligations (Note 2) 283,695 231,948
---------- ----------
Total current liabilities 2,851,840 4,040,648
Capitalized lease obligations,
less current portion (Note 2) 131,746
---------- ----------
Total liabilities 2,851,840 4,172,394
---------- ----------
Stockholders' deficiency (Note 4):
Preferred stock, $.001 par value;
authorized - 1,000,000 shares;
issued and outstanding - none
Common stock, $.001 par value;
authorized - 50,000,000 shares;
issued and outstanding and
issuable - 9,603,994 shares at
December 31, 1997 and 9,823,994
shares at March 31, 1998 9,604 9,824
Additional paid-in capital 23,413,989 26,735,219
Accumulated deficit during
development stage (23,964,394) (26,794,297)
---------- ----------
Total stockholders' deficiency (540,801) (49,254)
Less: Deferred compensation (Note 4) (1,307,186) (2,340,454)
Note receivable (Note 4) (625,000)
---------- ----------
Net stockholders' deficiency (1,847,987) (3,014,708)
---------- ----------
Total liabilities and
stockholders' deficiency $ 1,003,853 $ 1,157,686
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
(Note 1)
<S> <C> <C> <C>
Revenues $ $ 1,855 $ 1,855
---------- --------- -----------
Costs and expenses:
Research and development
and network operations 452,800 379,516 4,227,249
Sales and marketing 171,498 156,555 1,530,659
General and administrative 363,619 442,599 3,881,559
Depreciation and
amortization 74,195 75,795 509,259
Amortization of deferred
compensation (Note 4) 25,566 218,733 527,436
Amortization of deferred
financing costs (Note 3) 12,164 12,164
Fair value of warrants and
stock options issued for
services rendered (Note 4) 1,004,499 3,012,200
Release of forfeiture
restrictions on common
stock owned by officers/
major stockholders 7,875,000
---------- ---------- -----------
Total costs and expenses 1,087,678 2,289,861 21,576,042
---------- ---------- -----------
Other income (expense):
Interest expense (33,518) (69,176) (508,334)
Discount on conversion of
bridge loans, accounts
payable and employee
deferred salaries into
common stock and warrants (573,348)
Fair value of warrants
issued for financing costs
(Note 4) (361,200) (4,017,402)
Interest income 353 37 93,384
Consulting revenues 2,025 164,602
Other (831) (111,558) (82,514)
--------- ---------- -----------
Total other expense (31,971) (541,897) (4,923,612)
--------- ---------- -----------
Loss before provision for
state income and franchise
taxes (1,119,649) (2,829,903) (26,497,799)
</TABLE>
(continued)
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited) (continued)
Three Months Ended March 31, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
(Note 1)
<S> <C> <C> <C>
Provision for state income
and franchise taxes 4,629 16,673
----------- ----------- ------------
Net loss $(1,119,649) $(2,829,903) $(26,514,472)
----------- ----------- ------------
----------- ----------- ------------
Net loss per common share $(0.19) $(0.29)
----------- -----------
----------- -----------
Weighted average number of
common shares 5,783,666 9,603,994
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
Increase (Decrease) in Cash (Note 1)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(1,119,649) $(2,829,903) $(26,514,472)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 74,195 75,795 509,259
Amortization of deferred
compensation 25,566 218,733 527,436
Amortization of deferred
financing costs 12,164 12,164
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 280,438
Fair value of warrants
and stock options
issued 1,365,699 7,030,118
Discount on conversion
of bridge loans,
accounts payable and
employee deferred
salaries into common
stock and warrants 573,348
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 675 3,917 27,759
Prepaid expenses 28,827 12,512 (36,803)
Other current assets (24,944) (13,270) (17,558)
Deposits (53,963)
Increase (decrease) in -
Accounts payable (44,731) 15,326 925,604
Accrued compensation
and related items 394,335 (100,539) 389,522
</TABLE>
(continued)
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended March 31, 1997 and 1998, and 1995 to Date
<TABLE>
<CAPTION>
1997 1998 1995 to Date
---- ---- ------------
Increase (Decrease) in Cash (Note 1)
<S> <C> <C> <C>
Accrued interest payable 19,698 65,781 165,594
Other accrued expenses (63,484) 808 341,916
State income taxes payable (2,020) (726) 4,874
---------- ---------- -----------
Net cash used in operating
activities (711,532) (1,108,953) (7,915,014)
---------- ---------- -----------
Cash flows from investing
activities:
Disposition (purchases)
of property and equipment 2,568 (56,656) (1,060,174)
---------- ---------- -----------
Net cash used in investing
activities 2,568 (56,656) (1,060,174)
---------- ---------- -----------
Cash flows from financing
activities:
Proceeds from lease
financing 150,261 150,261
Proceeds from sale of
securities, net of
offering costs 5,354,495
Proceeds from advances
and bridge loans -
Related parties 150,000 410,000 1,739,987
Unrelated parties 375,000 865,000 2,180,000
Repayments of advances -
Related parties (104,000)
Unrelated parties (105,000)
Payments on capitalized
lease obligations (47,430) (133,746)
Increase in deferred
financing costs (81,000) (81,000)
---------- ---------- -----------
Net cash provided by
financing activities 627,831 1,194,000 9,000,997
---------- ---------- -----------
Cash and cash equivalents:
Net increase (decrease) (81,133) 28,391 25,809
At beginning of period 87,318 52,895 55,477
---------- ---------- -----------
At end of period $ 6,185 $ 81,286 $ 81,286
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
You Bet International, Inc. and Subsidiaries
(a Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 1997 and 1998, and 1995 to Date
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 private network.
Development Stage -
As of March 31, 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 March 31, 1998.
Organization -
Continental Embassy Acquisition, Inc. ("CEA") was organized in the State of
Utah in 1987 for the purpose of raising capital and acquiring a suitable
business opportunity through a merger with, or acquisition of, a private
business enterprise seeking to obtain the perceived benefits of being a
publicly-owned company. On December 6, 1995, CEA reorganized in the state of
Delaware and acquired 100% of the outstanding capital stock of You Bet!,
Inc., a Delaware corporation, in exchange for the issuance of 5,800,000
shares of common stock, including 5,710,000 shares of common stock to two
officers/major stockholders of the Company (who were the founders of the
Company's predecessor entity), their nominees and a stockholder related to
one of the officers. In conjunction with the contemporaneous private
placement of the Company's securities, 2,500,000 of the 5,710,000 shares were
deemed subject to forfeiture by the holders under certain conditions, which
were released effective December 31, 1997. Concurrent with this transaction,
CEA reorganized in the State of Delaware and changed its name to You Bet
International, Inc., and the
<PAGE>
management of You Bet!, Inc. became the management of You Bet International,
Inc. For accounting purposes, the acquisition of You Bet!, Inc. by You Bet
International, Inc. has been treated as a reverse acquisition of You Bet!,
Inc. with You Bet!, Inc. considered the acquiror. The operating results
reflected in the accompanying financial statements, where 1995 to Date
amounts are presented, do not include CEA's operating activities prior to the
You Bet!, Inc. acquisition, as the amounts are not significant.
Concurrent with this transaction, 100% of the capital stock of Middleware
Telecom Corporation was contributed by its stockholders, who were
substantially the same as the stockholders of You Bet!, Inc., to You Bet!,
Inc. for no additional consideration. The historical financial information
presented includes the combined financial statements of You Bet!, Inc. and
Middleware Telecom Corporation due to the common control, management and
operations of the companies. All intercompany transactions have been
eliminated in consolidation.
Concurrent with this transaction, the Company also effected a 1 for 1.5
reverse stock split of its common stock in December 1995. All references to
shares and per share amounts have been retroactively restated to reflect this
reverse stock split.
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 and has
experienced significant continuing liquidity problems since late 1996 that
are expected to continue until the Company is able to complete a long-term
debt or equity financing of substantial size and/or until significant
operating revenues are generated on an ongoing basis. The Company has
negative working capital of $2,739,184 as of December 31, 1997, which had
increased to $3,904,834 as of March 31, 1998 as a result of the Company's use
of short-term debt to finance operations. As a result, the Company's
independent certified public accountants have expressed substantial doubt
about the Company's ability to continue as a going concern.
In order to conserve working capital, the Company 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 three months ended March 31,
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 $3,900,000 and
$1,200,000, respectively, to fund its operating requirements. During the
three months ended March 31, 1998, the Company received advances from related
parties of $410,000 and bridge financing of $865,000 to partially fund its
<PAGE>
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
also exploring various other options to raise additional operating capital
during the remainder of 1998.
The Company is dependent on the proceeds from the previously described
financing efforts for the continuation of its current testing and marketing
efforts related to The You Bet Racing Network, as well as for the
continuation and expansion of the Company's development activities and
planned marketing efforts. The Company expects that its cash on hand,
combined with the funds that the Company expects to raise from new debt and
equity financings during the remainder of 1998, will be sufficient to fund
operating and capital expenditures at least through December 1998. However,
there can be no assurances that the Company will be able to complete such
financings on a timely basis and/or under acceptable terms and conditions.
To the extent that adequate working capital is not available to fund the
Company's operations, management will consider a variety of alternatives,
including seeking a joint venture partner, selling or licensing its
proprietary software technology, curtailing product development, delaying the
introduction, marketing and expansion of The You Bet Racing Network, and
reducing or suspending operations.
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. In addition, the Company's business plans may
change based on changes in technology, new developments in the marketplace or
unforeseen events which could require the Company to raise additional funds.
The unavailability of additional funds under acceptable terms and conditions
when needed could have a material adverse effect on the Company.
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 March 31, 1998, the
results of operations for the three months ended March 31, 1997 and 1998, and
the cash flows for the three months ended March 31, 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
<PAGE>
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 ended March 31, 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 and convertible notes, but does
not include the impact of potential common shares which would be
antidilutive. These dilutive securities were antidilutive in 1997 and 1998.
No prior period earnings per share amounts have been restated as a result of
SFAS 128.
As of March 31, 1998, potential dilutive securities represented by 1,621,433
outstanding stock options, 6,405,011 outstanding common stock purchase
warrants and $1,350,000 of convertible bridge notes, plus accrued interest,
are not included in the earnings per share calculation since their effect
would be antidilutive.
During the three months ended March 31, 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.
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 restricted common stock to the lessor with an
approximate fair market value of $79,000. The effective interest
<PAGE>
rate on the restructured lease agreement is approximately 41% per annum.
In conjunction with the restructuring of these leases, 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. Advances and Bridge Loans Payable
Advances and bridge loans consisted of the following at December 31, 1997 and
March 31, 1998:
<TABLE>
<CAPTION>
Related Unrelated
Parties Parties
------- -------
Advances
- --------
<S> <C> <C>
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 $
------- --------
------- --------
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
------- ---------
------- ---------
</TABLE>
The due date of the $300,000 of bridge loans outstanding at December 31, 1997
has been extended to December 1998. The holders of the $300,000 of bridge
loans have the option of converting such loans, including accrued interest,
into the lesser of 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 offering price of an offering over $5,000,000.
The $300,000 of bridge loans is secured by substantially all the assets of
the Company. Upon a successful public offering or private placement of
$5,000,000 or more, the Company must repay all outstanding bridge loans and
accrued interest.
<PAGE>
In January 1998, the Company commenced a 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 March 31, 1998, the
Company had issued $1,050,000 of bridge notes, including $185,000 to related
parties. Subsequent to March 31, 1998, the Company issued an additional
$570,000 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. To the extent that the holders of the bridge
notes convert into a subsequent private placement, the Company will record a
charge to operations at that time to reflect the 20% discount on conversion
of bridge notes. In addition, at that time the Company will be obligated to
issue 84,375 warrants to certain finders with respect to such bridge
financing. Such 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 $81,000 have been recorded as deferred financing costs and are
being amortized through December 31, 1998.
The holders of the $615,000 of advances also have the right to convert the
amounts due them into the 1998 bridge financing until such time as the bridge
notes are either called or repaid.
4. Stockholders' 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, 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.
Exercise of Warrant -
During March 1998, a warrant holder exercised a warrant for 200,000 shares of
common stock at $3.125 per share. The warrant holder exercised the warrant
by issuing a non-recourse note for $625,000 to the Company. During April and
May 1998, the Company had received partial payments of such note aggregating
approximately $523,000. The Company expects to receive the remaining
approximately $102,000 by May 31, 1998. The note has been presented in the
accompanying condensed consolidated balance sheet at March 31, 1998 as a
reduction to stockholders' deficiency.
Issuance of Warrants -
During April 1998, the Company issued a financial and marketing consulting
firm warrants to purchase 200,000 shares of common stock exercisable at
$3.125 per share and warrants to purchase 100,000 shares of common stock
exercisable at $5.25 per share, for additional services
<PAGE>
rendered during January through June 1998. The warrants are exercisable
through December 31, 2002. The aggregate fair value of the 300,000 warrants
was $1,444,000 and has been recorded as a charge to deferred compensation,
with a corresponding credit to additional paid-in capital. Of such amount,
$722,000 was charged to operations during the three months ended March 31,
1998, and the remaining $722,000 will be charged to operations during the
three months ending June 30, 1998.
During the three months ended March 31, 1998, the Company issued Series C
common stock purchase warrants representing the right to purchase 109,000
shares of common stock. The Series C common stock purchase warrants are
exercisable at $2.50 per share through December 31, 2002. The Company issued
5,000 warrants to a vendor which deferred an amount due it and 104,000
warrants to related parties who provided short-term unsecured advances to the
Company. Aggregate fair market value of the warrants was $361,200, including
$346,400 allocable to related parties, all of which was charged to operations
as a financing cost during the three months ended March 31, 1998.
5. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
No. 129, "Disclosure of Information about Capital Structure", which is
effective for financial statements issued for fiscal years ending after
December 15, 1997. The new standard reinstates various securities disclosure
requirements previously in effect under Accounting Principles Board Opinion
No. 15, which has been superseded by this statement. Adoption of this
statement did not have an impact on the Company's current disclosures and
presentation.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. This
statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net
income. Adoption of this statement is not expected to have an impact on the
Company's current disclosures and presentation.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is effective for financial statements issued for fiscal years beginning
after December 15, 1997. This statement requires that public companies
report certain information about their major customers, operating segments,
products and services, and the geographic areas in which they operate.
Adoption of this statement is not expected to have an impact on the Company's
current disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", which is effective for financial statements
<PAGE>
issued for fiscal years beginning after December 15, 1997. This statement
revises employers' disclosures about pension and other postretirement benefit
plans. Adoption of this statement is not expected to have an impact on the
Company's current disclosures and presentation.
<PAGE>
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 March 31, 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 March 31, 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 private network. The Company has
incurred substantial software development costs during 1995 through March 31,
1998, which have been charged to operations as research and development
costs. During the three months ended March 31, 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 is
scheduled to be implemented 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.
<PAGE>
Liquidity and Capital Resources - March 31, 1998:
The Company has had recurring losses and has experienced significant
continuing liquidity problems since late 1996 that are expected to continue
until the Company is able to complete a long-term debt or equity financing of
substantial size and/or until significant operating revenues are generated on
an ongoing basis. The Company had negative working capital of $2,739,184 as
of December 31, 1997, which had increased to $3,904,834 as of March 31, 1998
as a result of the Company's use of short-term debt to finance operations.
As a result, the Company's independent certified public accountants have
expressed substantial doubt about the Company's ability to continue as a
going concern.
In order to conserve working capital, the Company has 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 three months ended March 31,
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 $3,900,000 and
$1,200,000, respectively, to fund its operating requirements. During the
three months ended March 31, 1998, the Company received advances from related
parties of $410,000 and bridge financing of $865,000 to partially fund
estimated 1998 cash requirements of $7,000,000, which includes estimated
discretionary costs related to marketing and promotion activities of
$2,000,000, research and development activities of $800,000 and estimated
capital expenditures of $2,000,000. The Company is also exploring various
other options to raise additional operating capital during the remainder of
1998.
The Company is dependent on the proceeds from its financing efforts for the
continuation of its current testing and marketing efforts related to The You
Bet Racing Network, as well as for the short-term continuation and expansion
of the Company's development activities and planned marketing activities.
The Company expects that its cash on hand, combined with the funds that the
Company expects to raise from new debt and equity financings during the
remainder of 1998, will be sufficient to fund operating and capital
expenditures at least through December 1998. However, there can be no
assurances that the Company will be able to complete such financings on a
timely basis and/or under acceptable terms and conditions. To the extent
that adequate working capital is not available to fund the Company's
operations, management will consider a variety of other alternatives,
including seeking a joint venture partner, selling or licensing its
proprietary software technology, curtailing product development, delaying the
introduction, marketing and expansion of The You Bet Racing Network, and
reducing or suspending operations.
<PAGE>
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. In addition, the Company's business plans may
change based on changes in technology, new developments in the marketplace or
unforeseen events which could require the Company to raise additional funds.
The unavailability of additional funds under acceptable terms and conditions
when needed could have a material adverse effect on the Company.
During the three months ended March 31, 1998, the Company's operations used
$1,108,953 of cash, as compared to $711,532 of cash during the three months
ended March 31, 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 testing and marketing activities.
During the three months ended March 31, 1998, cash flows used in investing
activities aggregated $56,656 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 restricted 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 these leases, 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.
The Company does not currently have any existing capital expenditure
commitments for 1998. 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 the establishment of an East Coast
operations and customer service center at a cost of approximately $2,000,000
during the latter half of 1998 to support the anticipated increase in
activity on The You Bet Racing Network.
Consolidated Results of Operations - Three Months Ended March 31, 1997 and
1998:
Research and development and network operations decreased from $452,800 in
1997 to $379,516 in 1998, a decrease of $73,284 or 16.2%. Sales and
<PAGE>
marketing expense decreased from $171,498 in 1997 to $156,555 in 1998, a
decrease of $14,943 or 8.7%. General and administrative expenses increased
from $363,619 in 1997 to $442,599 in 1998, an increase of $78,980 or 21.7%.
The decrease in research and development and network operations, and sales
and marketing expense, reflects a reduction in personnel and the effect from
the Company's limited working capital resources. The Company is continuing
development efforts with respect to The You Bet Racing Network, including the
recruitment and hiring of management, horse racing and technical teams, and
entering into agreements with strategic partners. General and administrative
expenses increased as a result of an increase in personnel related costs and
the expenses associated with the operation of a public company.
Interest expense increased from $33,518 in 1997 to $69,176 in 1998 primarily
as a result of an increase in advances and bridge loans during 1998.
During the three months ended March 31, 1998, the Company also incurred
$1,584,432 of non-cash expenses related to stock options and warrants. 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' 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
occurring during the year ended December 31, 1997 and the three months ended
March 31, 1998 aggregating approximately $2,300,000, which are expected to
provide future benefit in 1998 and 1999, a substantial portion of which is
related to services rendered by a financial and marketing consulting firm.
In addition, to the extent the 1998 bridge financing is converted into
equity, the Company expects to recognize a non-cash charge to operations in
1998 resulting from the conversion discount.
<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 March 31, 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:
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 restricted 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. 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 lessor.
1998 Bridge Financing -
In January 1998, the Company commenced a 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 March 31, 1998, the
Company had issued $1,050,000 of bridge notes, including $185,000 to related
parties. Subsequent to March 31, 1998, the Company issued an additional
$570,000 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. In addition, at that time the Company will
be obligated to issue 84,375 warrants to certain finders with respect to
such bridge financing. Such warrants will be exercisable at $3.125 per share
for a period of three years.
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, 2003.
Exercise of Warrant -
During March 1998, a warrant holder exercised a warrant for 200,000 shares of
common stock at $3.125 per share. The warrant holder
<PAGE>
exercised the warrant by issuing a non-recourse note for $625,000 to the
Company. During April and May 1998, the Company had received partial
payments of such note aggregating approximately $523,000. The Company
expects to receive the remaining approximately $102,000 by May 31, 1998. 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 warrant holder.
Issuance of Warrants -
During April 1998, the Company issued a financial and marketing consulting
firm warrants to purchase 200,000 shares of common stock exercisable at
$3.125 per share and warrants to purchase 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 December 31,
2002. 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 March 31, 1998, the Company issued Series C
common stock purchase warrants representing the right to purchase 109,000
shares of common stock. The Series C common stock purchase warrants are
exercisable at $2.50 per share through December 31, 2002. The Company issued
5,000 warrants to a vendor which deferred an amount due it and 104,000
warrants to related parties who provided short-term unsecured advances to the
Company. The warrants were issued under Section 4(2) of the Securities Act
of 1933, as amended, based on the representations of the recipients.
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 March 31, 1998:
The Company filed a Current Report on Form 8-K dated March 4, 1998, to
report the retention of BDO Seidman, LLP as the Company's new independent
certified public accountants (Item 4).
<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: May 13, 1998 By: /s/ DAVID M. MARSHALL
---------------------------
David M. Marshall
President and Chief
Executive Officer
(Duly Authorized Officer)
Date: May 13, 1998 By: /s/ ROBERT N. WEINGARTEN
---------------------------
Robert N. Weingarten
Chief Financial Officer
(Principal Financial
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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