<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, 1999
OR
/ / 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
------------------------
YOUBET.COM, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4627253
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1950 SAWTELLE BOULEVARD, SUITE 180, 90025
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(310) 444-3300
(Issuer's telephone number, including area code)
_________________________________________________________________________
(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 July 31, 1999, the issuer had 19,121,288 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes / / No /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
YOU BET.COM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets--December 31, 1998 and June 30, 1999.......................................... 3-4
Statements of Operations--Three months ended June 30, 1998 and 1999 and six months ended June
30, 1998 and 1999.......................................................................... 5-6
Statements of Cash Flows--Six months ended June 30, 1998 and 1999............................ 7-8
Notes to Financial Statements--Six months ended June 30, 1998 and 1999....................... 9-12
Item 2. Management's Discussion and Analysis or Plan of Financial Condition and Results of
Operations.......................................................................... 13-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 19
Item 2. Changes in Securities............................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................................... 20
</TABLE>
2
<PAGE>
YOUBET.COM, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1999
DECEMBER 31, -------------
1998
------------ (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $1,540,616 $ 75,245,089
Stock subscriptions receivable.................................................... 2,100,000 --
Receivables....................................................................... 50,364 71,176
Prepaid expenses.................................................................. 22,344 137,010
Other current assets.............................................................. 11,317 10,746
------------ -------------
Total current assets................................................................ 3,724,641 75,464,021
------------ -------------
Property and equipment.............................................................. 1,700,211 2,252,807
Less: Accumulated depreciation and amortization..................................... (820,535) (1,019,833)
------------ -------------
Property and equipment, net......................................................... 879,676 1,232,974
------------ -------------
Other assets:
Deferred financing costs, net of amortization..................................... 31,395 1,559,649
Deposits and other................................................................ 17,537 29,475
------------ -------------
Total other assets.................................................................. 48,932 1,589,124
------------ -------------
Total assets........................................................................ $4,653,249 $ 78,286,119
------------ -------------
------------ -------------
</TABLE>
3
<PAGE>
YOUBET.COM, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
1999
DECEMBER 31, --------------
1998
-------------- (UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable................................................................ $ 984,258 $ 1,205,832
Accrued compensation and related items.......................................... 144,252 178,769
Other accrued expenses.......................................................... 451,127 1,055,288
Deferred revenues............................................................... -- 257,092
Current portion of capitalized lease obligations................................ 220,317 138,721
-------------- --------------
Total current liabilities......................................................... 1,799,954 2,835,702
Notes payable..................................................................... -- 37,738,544
Capitalized lease obligations, less current portion............................... 60,134 34,991
-------------- --------------
Total liabilities................................................................. 1,860,088 40,609,237
-------------- --------------
Stockholders' equity (Note 2):
Convertible preferred stock, $.001 par value (aggregate liquidation preference
of $2,677,750 and $0 at December 31, 1998 and June 30, 1999, respectively);
authorized--1,000,000 shares; issued and outstanding--107,110 shares and no
shares at December 31, 1998 and June 30, 1999, respectively................... 107 --
Common stock, $.001 par value; authorized--50,000,000 shares; issued and
outstanding and issuable--13,970,268 shares at December 31, 1998 and
19,121,288 shares at June 30, 1999, respectively.............................. 13,970 19,121
Additional paid-in capital...................................................... 42,326,397 83,653,447
Accumulated deficit............................................................. (37,825,941) (44,293,477)
Deferred compensation........................................................... (1,161,372) (1,562,209)
Stock note receivable........................................................... (560,000) (140,000)
-------------- --------------
Total stockholders' equity........................................................ 2,793,161 37,676,882
-------------- --------------
Total liabilities and stockholders' equity........................................ $ 4,653,249 $ 78,286,119
-------------- --------------
-------------- --------------
</TABLE>
4
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues............................................................................ $ 20,170 $ 733,262
Operating expenses:
Network operations................................................................ 182,391 486,341
Research and development.......................................................... 348,231 599,833
Sales and marketing............................................................... 534,609 991,212
General and administrative........................................................ 783,277 958,675
Depreciation and amortization..................................................... 82,338 105,298
Non-cash compensation............................................................. 1,522,057 835,846
------------- -------------
Total operating expenses.......................................................... 3,452,903 3,977,205
------------- -------------
Loss from operations................................................................ (3,432,733) (3,243,943)
Other income (expense):
Interest expense.................................................................. (174,425) (1,016,544)
Amortization of deferred financing costs.......................................... (35,292) (89,109)
Discount on conversion of bridge loans, accounts payable and employee deferred
salaries into common stock and warrants......................................... (841,713) --
Fair value of warrants issued for financing costs................................. (882,522) (465,651)
Interest income................................................................... 735 494,355
Other............................................................................. 896 414
------------- -------------
Total other income (expense)...................................................... (1,932,321) (1,076,535)
------------- -------------
Net loss............................................................................ $ (5,365,054) $ (4,320,478)
------------- -------------
------------- -------------
Net loss per share--basic and diluted............................................... $ (0.54) $ (0.28)
------------- -------------
------------- -------------
Weighted average number of shares................................................... 9,882,172 15,217,157
------------- -------------
------------- -------------
</TABLE>
5
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues............................................................................ $ 22,025 $ 1,193,868
Operating expenses:
Network operations................................................................ 331,603 898,617
Research and development.......................................................... 578,535 959,076
Sales and marketing............................................................... 691,164 1,467,000
General and administrative........................................................ 1,225,876 1,574,295
Depreciation and amortization..................................................... 158,133 201,033
Non-cash compensation............................................................. 2,745,289 1,493,391
------------- -------------
Total operating expenses.......................................................... 5,730,600 6,593,412
------------- -------------
Loss from operations................................................................ (5,708,575) (5,399,544)
Other income (expense):
Interest expense.................................................................. (243,601) (1,023,988)
Amortization of deferred financing costs.......................................... (47,456) (96,957)
Discount on conversion of bridge loans, accounts payable and employee deferred
salaries into common stock and warrants......................................... (841,713) --
Fair value of warrants issued for financing costs................................. (1,243,722) (465,651)
Interest income................................................................... 772 519,604
Other............................................................................. (110,662) (1,000)
------------- -------------
Total other income (expense)...................................................... (2,486,382) (1,067,992)
------------- -------------
Net loss............................................................................ $ (8,194,957) $ (6,467,536)
------------- -------------
------------- -------------
Net loss per share--basic and diluted............................................... $ (0.84) $ (0.44)
------------- -------------
------------- -------------
Weighted average number of shares................................................... 9,743,083 14,666,939
------------- -------------
------------- -------------
</TABLE>
6
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss.......................................................................... $ (8,194,957) $ (6,467,536)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 158,133 201,033
Amortization of deferred financing costs........................................ 47,456 96,958
Lease restructuring and other costs............................................. 64,750 1,237
Non-cash compensation........................................................... 3,997,724 1,493,391
Accounts payable and accrued liabilities settled through the issuance of common
stock and warrants............................................................ 275,712 --
Discount on conversion of bridge loans, accounts payable and employee deferred
salaries into common stock and warrants....................................... 841,713 --
Fair value of warrants issued for financing costs............................... -- 465,651
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables................................................................... (162) (20,812)
Prepaid expenses.............................................................. (271,663) (114,666)
Other current assets.......................................................... (11,993) 573
Deposits and other............................................................ -- (11,938)
Increase (decrease) in:
Accounts payable.............................................................. 180,120 221,573
Accrued compensation and related items........................................ (307,455) 34,519
Other accrued interest payable................................................ 156,792 --
Interest accreted on notes payable............................................ -- 1,010,034
Other accrued expenses........................................................ 331,418 637,923
Deferred revenues............................................................. -- 257,092
State income taxes payable.................................................... (6,400) --
------------- -------------
Net cash used in operating activities............................................... (2,738,812) (2,194,968)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment............................................... (138,908) (555,571)
------------- -------------
Net cash used in investing activities............................................... (138,908) (555,571)
------------- -------------
------------- -------------
</TABLE>
7
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1999
------------ -------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Proceeds from convertible notes.................................................... -- 36,728,510
Proceeds from warrant purchase..................................................... -- 2,438
Proceeds from exercise of stock options and warrants............................... 1,030,000 3,151,319
Increase in deferred financing costs............................................... (96,000) (1,625,213)
Net proceeds from sale of securities............................................... 4,661,583 38,304,697
Proceeds from advances and bridge loans:
Related parties.................................................................. 888,875 --
Unrelated parties................................................................ 1,190,000 --
Repayments of advances to unrelated parties........................................ (30,000) --
Payments on capitalized lease obligations.......................................... -- (106,739)
------------ -------------
Net cash provided by financing activities............................................ 7,644,458 76,455,012
------------ -------------
Cash and cash equivalents:
Net increase....................................................................... 4,766,738 73,704,473
Cash at beginning of period........................................................ 52,895 1,540,616
------------ -------------
Cash at end of period.............................................................. $ 4,819,633 $ 75,245,089
------------ -------------
------------ -------------
Supplemental disclosure of cash flow information
(a) Cash paid for:
Interest paid................................................................ $ 14,441 $ 13,956
------------ -------------
------------ -------------
(b) Non-cash transactions:
During the six months ended June 30, 1999, certain employees exercised 74,833
stock options in exchange for 74,833 common stock shares in a cashless
exercise. To effect this cashless exercise, 37,417 stock options were
forfeited.
During the six months ended June 30, 1999, the Company issued 13,505 common
stock shares to a consulting firm for $33,763 of services rendered.
During the six months ended June 30, 1999, the Company issued 1,071,100
common stock shares from the conversion of 107,110 preferred stock shares.
During the six months ended June 30, 1998 and 1999, the Company incurred and
deferred $2,680,384 and $1,186,379 of non-cash compensation.
During the six months ended June 30, 1999, the Company issued 50,000 warrants
at a total fair market value of $453,500 as closing costs of the public
offering.
During the six months ended June 30, 1999, the Company offset milestone
bonuses against $420,000 in stock notes receivable.
</TABLE>
8
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS
Youbet.com, Inc. is a Delaware corporation. 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 being offered to subscribers is the You Bet Network, an
interactive online horseracing network that is broadcast over the Company's
virtual private network.
During the quarter ended June 30, 1999, the Company determined it had
successfully completed the development stage by incurring revenues of over
$1,000,000 since the beginning of the year. Accordingly, the Company is no
longer in the development stage and is now in the operating stage.
BASIS OF PRESENTATION
The accompanying 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, 1999, the results of operations for the six
months and three months ended June 30, 1998 and 1999, and the cash flows for the
six months ended June 30, 1998 and 1999. These adjustments are of a normal
recurring nature. The results of operations for the six months and three months
ended June 30, 1999 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 1999.
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 year ended December 31, 1998, as filed with the Securities and
Exchange Commission.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
LOSS PER SHARE
Basic earnings per share are calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are calculated by dividing net loss by the basic shares outstanding
and all dilutive securities, including stock options, warrants, convertible
notes and preferred stock, but does not include the impact of potential common
shares which would be antidilutive.
For all periods presented, potential dilutive securities were not included
in the earnings per share calculation since their effect would be anti-dilutive.
Basic and diluted earnings per share are the same for all periods presented.
9
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
NOTE 2--NOTES PAYABLE
On April 5, 1999, the Company issued $45,500,000 principal amount of 11%
Senior Convertible Discount Notes for cash proceeds of $36,728,510, which
represents a discount of 11% per year, compounded semi-annually, to April 5,
2001. The Company incurred approximately $1,625,000 of costs related to this
offering and issued 50,000 warrants exercisable at $10.00 per share as a
finder's fee. These warrants had an aggregate fair value of $352,000. The Notes
begin accruing interest on April 5, 2001 at 11% per year, payable semi-annually.
Principal and unpaid interest are due and payable on April 5, 2004. The Notes
plus accrued, unpaid interest are convertible at any time at the rate of $10 per
common share. Based on a valuation report prepared by an investment and merchant
banking firm dated April 28, 1999, the Company has determined that the Notes
conversion price at $10.00 per share was at fair market value. Accordingly, the
Company will recognize a charge to operations of $352,000 over the five year
maturity period, with a corresponding credit to paid-in capital. The notes also
contain customary financial covenants and restrictions limiting the ability of
the Company to engage in certain financings, other transactions and dividend
distributions.
NOTE 3--STOCKHOLDERS' EQUITY
A. ISSUANCE OF COMMON STOCK AND WARRANTS
During the three months ended March 31, 1999, the Company issued 74,833
shares of common stock in conjunction with the exercise of stock options by
certain employees. In order to effect a cashless transaction, an additional
37,417 stock options were forfeited. This cashless exercise resulted in a charge
to non cash compensation of $300,000.
During the three months ended March 31, 1999, the Company issued 100,000
shares of common stock at a price of $2.50 per share, generating gross proceeds
to the Company of $250,000.
During the three months ended March 31, 1999, the Company issued 13,505
shares of common stock in conjunction with the conversion of vendor debt of
$33,763.
During the six months ended June 30, 1999, the Company issued 1,028,000
shares of common stock, in conjunction with the exercise of warrants and stock
options with exercise prices ranging from $2.50 to $5.25 per share, generating
gross proceeds to the Company of $3,151,318.
During the six months ended June 30, 1999, 107,110 shares of convertible
preferred stock were converted into 1,071,100 shares of common stock.
As final settlement for the finder's fee related to the preferred stock
financing in June 1998, additional fees of $122,500 were paid to the finder. The
fees are charged to additional paid-in capital at June 30, 1999. In addition,
13,000 warrants with an exercise price of $.01 and 26,000 warrants with an
exercise price of $2.50 were issued to the finder. These warrants are
exercisable through March 2004.
In June 1999, the Company completed its public offering and issued 2,863,582
common stock shares at a price of $14.00 per share, generating gross proceeds of
$37,283,838. The Company also issued 654,275 shares of common stock, in
conjunction with the exercise of warrants, generating gross proceeds to the
Company of $2,163,553. The Company incurred $1,660,142 of closing fees in
conjunction with these transactions.
10
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
NOTE 3--STOCKHOLDERS' EQUITY (CONTINUED)
During the six months ended June 30, 1999, the Company issued 100,000
warrants to its joint venture partner which concurrently agreed to purchase
142,857 shares at an aggregate cost of $2,000,000 of the Company's common stock
in the secondary public offering and agreed to contribute funds to their joint
venture project. The total fair market value of these warrants was $907,000 of
which 50% was charged as financing costs and the remaining 50% was charged
against paid-in capital. The warrants have an exercise price of $19.50 and a
term of five years.
During the six months ended June 30, 1999, the Company issued 50,000
warrants in exchange for services. The fair value of these warrants of $405,000
is being charged to operations over the vesting period. The warrants have an
exercise price of $11.50 and a term of five years. The warrants vest over 3
years.
B. STOCK OPTIONS
During the six months ended June 30, 1999, deferred compensation of
$1,186,379 was recorded as a result of the issuance of stock options being
granted in exchange for future services. Deferred compensation charged to
operations for the six months ended June 30, 1999 was $785,542.
During the six months ended June 30, 1999, the Company granted various stock
options, as follows:
(1) The Company issued stock options to four executives under the 1998 Stock
Option Plan to purchase a total of 350,000 shares of common stock at an
exercise price of $10.50 per share, the fair market price at the date of
grant. The stock options vest at specified dates during a period of four
years and are exercisable for a period of ten years.
(2) Stock options were granted to employees to purchase 247,400 shares of
common stock at an average price of $12.59 per share. Of these stock
options 36,150 shares of common stock were issued below the fair value on
the date of grant. The aggregate difference between the exercise price
and the fair value at the date of grant was $171,629, which is being
charged to operations over the option's vesting period. These options
vest over four years and are exercisable for a period of five years.
(3) Stock options were granted to a consultant to purchase 25,000 shares of
common stock at the fair value on the date of grant. The fair value of
these options were $257,750, which was charged to deferred compensation
and amortized over the vesting period. These options vest ratably over
two years commencing on the grant date. These options are exercisable for
a period of ten years.
NOTE 4--JOINT VENTURE AGREEMENT
On June 9, 1999, the Company announced that it had entered into a letter of
intent with Station Casinos, Inc., to create a joint venture which will offer
in-home interactive and sports wagering to Nevada residents. The joint venture
will be owned on a 50/50 basis by the Company and Station Casinos. The Company
will adapt its proprietary software and technology and license it on a
non-exclusive basis to the joint venture. Station Casinos will fund a portion of
the Company's software development cost and contribute to funding the joint
venture's advertising and other costs. The Company agreed to spend $1,600,000 to
develop software to be used by the joint venture. The joint venture is subject
to execution of
11
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
NOTE 4--JOINT VENTURE AGREEMENT (CONTINUED)
definitive agreements, and its service will be offered only after obtaining all
required regulatory approvals, including the approval of the Nevada gaming
authorities.
The Company also agreed to grant Station Casinos a 5-year warrant to
purchase 100,000 shares of the Company's common stock. See Note 3a.
NOTE 5--SIGNIFICANT AGREEMENTS
During the three months ended June 30, 1999 the Company's Board of
Directors, acting on the recommendation of the Compensation Committee, approved
the payment of performance based bonuses to Fell & Company, Inc., David
Marshall, Inc., and Russell M. Fine based on the Company's achievement of
certain milestones. At June 30, 1999, two of the four milestones were met by the
Company through the placement of the convertible note and the June public
offering. As such, Fell & Company, Inc. had earned bonuses totaling $420,000
which were applied against a note receivable due from the Robert M. Fell Living
Trust. David Marshall, Inc. and Russell M. Fine had earned bonuses totaling
$150,000 each, which were accrued at June 30, 1999. These bonuses have been
charged to operations. If the remaining milestones are achieved the Company
would grant Fell & Company, Inc. additional bonuses of $140,000 and David
Marshall, Inc. and Russell M. Fine will receive additional bonuses of $150,000
each.
NOTE 6--LEGAL PROCEEDINGS
On June 4, 1999, a complaint was filed against Youbet.com in the Court of
Chancery of the State of Delaware in and for New Castle County entitled Georg
Von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint Mr. Von Opel
alleges that Youbet.com breached its obligation to register the shares of common
stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr.
Von Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. Youbet.com filed its answer to the complaint on July 15, 1999.
Youbet.com intends to defend itself vigorously in the action. Among other
things, Mr. Von Opel executed a letter on February 24, 1998 which Youbet.com
contends effected a waiver of such registration rights. As the litigation is in
an initial stage, Youbet.com cannot predict its outcome, although if the claim
is determined adversely to Youbet.com, it could have a material adverse effect
on Youbet.com.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF YOUBET.COM, INC. SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS 10-QSB. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. YOUBET.COM'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Youbet.com intends to establish itself as the leading global brand name for
online live event wagering. Youbet.com has initially focused its efforts
primarily on the United States horse track racing industry and believes that its
principal product, the You Bet Network, is currently the only legal system
available for online wagering in the United States. Youbet.com believes that
online communication is an ideal medium for live event wagering. First, online
communication allows bettors instant access to vast amounts of historical
performance data used in assessing potential wagers. Second, online
communication offers the ability to sort and analyze such data in ways and at
speeds that are unachievable manually. Third, online communication technology
allows wagers to be placed from virtually any location within a jurisdiction
where wagering is legal, thus freeing bettors from traditional site-specific
wagering locations. In addition, the speed of electronic communication allows
wagers to be placed and acknowledged in seconds.
Youbet.com's initial product, the You Bet Network, is a PC-based system
which utilizes the infrastructure of the Internet and a closed-loop private
network with Internet access to provide up-to-the minute detailed information on
races taking place at horse tracks nationwide. Youbet.com also delivers a live
simulcast of most of these races directly to the subscriber's computer. In
addition, subscribers can use the You Bet Network to transmit information and
thereby facilitate wagers, using the system's icon-driven menus to fill out an
electronic betting ticket with a brief series of mouse-clicks. The information
is then transmitted electronically to a licensed account wagering entity,
currently Mountain Laurel Racing, Inc., and Washington Trotting Association,
Inc., both of which are subsidiaries of Ladbroke USA (collectively "Ladbroke").
Ladbroke accepts and processes the wager from its hub in Pennsylvania. After
processing the wager, Ladbroke sends an electronic confirmation to the bettor
through the You Bet Network. The round-trip time from information submission to
acknowledgment is usually less than three seconds.
Youbet.com currently derives revenue from the You Bet Network in three ways.
First, it charges a monthly subscription fee, currently $5.95 per month. Second,
it receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers.
Third, it receives revenue from the sale of handicapping information.
Since mid-1995, Youbet.com has been engaged in developing the You Bet
Network, its first service being offered to subscribers. Youbet.com has incurred
substantial software development costs since inception, which have been charged
to operations as research and development costs. Management believes that the
technological feasibility of Youbet.com's proprietary software technology has
been established.
During the quarter ended June 30, 1999, Youbet.com determined it had
successfully completed the development stage by incurring revenues of over
$1,000,000 since the beginning of the year. Accordingly, Youbet.com is no longer
in the development stage and is now in the operating stage.
Youbet.com has expanded its operations in recent years and has grown to 69
employees at June 30, 1999. Youbet.com expects to add additional personnel in
the United States and plans to commence operations internationally and add
personnel as operations expand. Youbet.com currently expects to significantly
increase its operating expenses in order to grow its sales and marketing
operations, expand in international markets and upgrade and enhance its service
and technologies.
13
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998
REVENUES
Revenues for the three months ended June 30, 1999 were $733,000, of which
$642,000 represented Youbet.com's commission on the gross amount of each wager
placed by its subscribers. The remaining revenue included $66,000 from
subscription fee revenue as Youbet.com commenced charging a monthly subscription
fee to its subscribers in February 1999, and $25,000 from information revenue as
Youbet.com began charging subscribers for handicapping information in April,
1999.
OPERATING EXPENSES
NETWORK OPERATIONS. Network operations costs consist primarily of salaries
and costs to support the private network. Network operations costs increased by
$304,000 or 166.6% to $486,000 for the three months ended June 30, 1999 from
$182,000 for the three months ended June 30, 1998 reflecting the continued
development and expansion of the You Bet Network. Youbet.com expects network
operations costs to increase significantly as the You Bet Network expands to
support the growth in subscribers.
RESEARCH AND DEVELOPMENT. Research and development costs consist primarily
of salaries. Research and development costs increased by $252,000 or 72.3% to
$600,000 for the three months ended June 30, 1999 from $348,000 for the three
months ended June 30, 1998. This increase resulted from payment of $150,000 in
performance bonuses and the hiring of developers and continued development of
the Youbet network. Youbet.com will continue to invest in the development of the
You Bet Network, which Youbet.com believes is critical to achieving its
strategic objectives and, as a result, expects research and development costs to
increase significantly in future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing program expense and salaries. Sales and marketing expenses increased
by $456,000 or 85.4% to $991,000 for the three months ended June 30, 1999 from
$535,000 for the three months ended June 30, 1998. The increase in sales and
marketing reflects the expansion of Youbet.com's marketing activities as the
Youbet Network did not launch until the third quarter of 1998. Marketing
activities during the current quarter were concentrated on the rollout of direct
mailing campaigns, including the mailing of CD's to potential subscribers.
Youbet.com expects sales and marketing expenses to increase significantly to
brand the You Bet Network, grow its subscriber base, hire additional sales and
marketing personnel and expand internationally.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries, facilities expenses, legal and accounting and investor
relations. General and administrative expenses increased by $176,000 or 22.4% to
$959,000 for the three months ended June 30, 1999 from $783,000 for the three
months ended June 30, 1998. The increase resulted primarily from payment of
$150,000 in performance bonuses. Youbet.com expects that general and
administrative expenses will increase in future periods as it hires additional
personnel to provide for the growth of the business.
NON-CASH COMPENSATION. Non-cash compensation relates to the recording of
the fair value of warrants and stock options charged to the period of benefit.
Non-cash compensation decreased $686,000 or 45.1% to $836,000 for the three
months ended June 30, 1999 from $1,522,000 for the three months ended June 30,
1998. The decrease resulted from fewer warrants and options being issued during
the current fiscal year, offset by recognition of $420,000 in performance
bonuses. In lieu of payment, the bonuses were applied against a $560,000 note
receivable. Youbet.com expects that these non-cash compensation costs will
continue as it issues additional warrants and stock options and amortizes the
deferred costs associated with these transactions.
14
<PAGE>
OTHER INCOME (EXPENSE)
NET INTEREST EXPENSE. Net interest expense increased by $348,000 or 200.6%
to $522,000 for the three months ended June 30, 1999 compared to $174,000 for
the three months ended June 30, 1998. The increase in net interest expense is
due to the issuance in April 1999 of $45.5 million of 11% Senior Convertible
Discount Notes. However, Youbet.com will not pay cash interest thereon until
October 2001. The net interest expense for the three months ended June 30, 1998
is the result of advances and bridge loans being outstanding during the period
that were subsequently converted to common stock during the third quarter ended
September 30, 1998. Youbet.com expects interest expense to increase
significantly in 1999 as a result of the issuance of the 11% Senior Convertible
Discount Notes.
FAIR VALUE OF WARRANTS ISSUED FOR FINANCING COSTS. Fair value of warrants
issued for financing costs decreased by $417,000 or 47.2% to $466,000 for the
three months ended June 30, 1999 compared to $883,000 for the three months ended
June 30, 1998. The 1998 expense resulted from warrants issued during 1997, with
the related expense amortized during 1997 and 1998. The 1999 expense of $466,000
resulted primarily from issuance of warrants to Station Casinos, Inc.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues for the six months ended June 30, 1999 were $1,194,000, of which
$1,077,000 represented Youbet.com's commission on the gross amount of each wager
placed by its subscribers. The remaining revenue included $92,000 from
subscription fee revenue as Youbet.com commenced charging a monthly subscription
fee to its subscribers in February 1999, and $25,000 from information revenue as
Youbet.com began charging subscribers for handicapping information in April,
1999.
OPERATING EXPENSES
NETWORK OPERATIONS. Network operations costs consist primarily of salaries
and costs to support the private network. Network operations costs increased by
$567,000 or 171.0% to $899,000 for the six months ended June 30, 1999 from
$332,000 for the six months ended June 30, 1998 reflecting the continued
development and expansion of the You Bet Network. Youbet.com expects network
operations costs to increase significantly as the You Bet Network expands to
support the growth in subscribers.
RESEARCH AND DEVELOPMENT. Research and development costs consist primarily
of salaries. Research and development costs increased by $380,000 or 65.8% to
$959,000 for the six months ended June 30, 1999 from $579,000 for the six months
ended June 30, 1998. This increase resulted from payment of $150,000 in
performance bonuses and the hiring of developers and continued development of
the Youbet Network. Youbet.com will continue to invest in the development of the
You Bet Network, which Youbet.com believes is critical to achieving its
strategic objectives and, as a result, expects research and development costs to
increase significantly in future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing program expense and salaries. Sales and marketing expenses increased
by $776,000 or 112.3% to $1,467,000 for the six months ended June 30, 1999 from
$691,000 for the six months ended June 30, 1998. The increase in sales and
marketing reflects the expansion of Youbet.com's marketing activities as the You
Bet Network did not launch until the third quarter of 1998. Marketing activities
during 1999 have focused on the rollout of direct mailing campaigns, including
the mailing of CD's to potential subscribers. Youbet.com expects sales and
marketing expenses to continue increasing significantly to brand the You Bet
Network, grow its subscriber base, hire additional sales and marketing personnel
and expand internationally.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries, facilities expenses, legal and accounting and investor
relations. General and administrative expenses
15
<PAGE>
increased by $348,000 or 28.4% to $1,574,000 for the six months ended June 30,
1999 from $1,226,000 for the six months ended June 30, 1998. The increase
resulted from payment of $150,000 in performance bonuses and a general increase
in personnel related costs, legal and accounting fees, and general operating
activity. Youbet.com expects that general and administrative expenses will
increase in future periods as it hires additional personnel to provide for the
growth of the business.
NON-CASH COMPENSATION. Non-cash compensation relates to the recording of
the fair value of warrants and stock options charged to the period of benefit.
Non-cash compensation decreased $1,252,000 or 45.6% to $1,493,000 for the six
months ended June 30, 1999 from $2,745,000 for the six months ended June 30,
1998. The decrease resulted from fewer warrants and options being issued during
the current fiscal year, offset by recognition of $420,000 in performance
bonuses. In lieu of payment, the bonuses were applied against a $560,000 note
receivable. Youbet.com expects that these non-cash compensation costs will
continue as it issues additional warrants and stock options and amortizes the
deferred costs associated with these transactions.
OTHER INCOME (EXPENSE)
NET INTEREST EXPENSE. Net interest expense increased by $261,000 or 107.7%
to $504,000 for the six months ended June 30, 1999 compared to $243,000 for the
six months ended June 30, 1998. The increase in net interest expense is due to
the issuance in April 1999 of $45.5 million of 11% Senior Convertible Discount
Notes. However, Youbet.com will not pay cash interest thereon until October
2001. Youbet.com expects interest expense to increase significantly in 1999 as a
result of the issuance of the 11% Senior Convertible Discount Notes.
FAIR VALUE OF WARRANTS ISSUED FOR FINANCING COSTS. Fair value of warrants
issued for financing costs decreased by $778,000 or 62.6% to $466,000 for the
six months ended June 30, 1999 compared to $1,244,000 for the six months ended
June 30, 1998. The 1998 expense resulted from warrants issued during 1997, with
the related expense amortized during 1997 and 1998. The 1999 expense of $466,000
resulted primarily from issuance of warrants to Station Casinos, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Youbet.com has financed its operations primarily through the sale of its
securities and issuance of debt. Youbet.com finalized two significant
transactions during the quarter ending June 30, 1999, as follows:
In April 1999, Youbet.com issued $45,500,000 principal amount of 11% Senior
Convertible Discount Notes for cash proceeds of $36,728,510 (generating net
proceeds of approximately $35,103,000), which represents a discount of 11% per
year, compounded semi-annually to April 2001. The notes begin accruing interest
in April 2001 at 11% per year, payable semi-annually. Principal and unpaid
interest are due and payable on April 5, 2004.
In June, 1999, Youbet.com sold 2,863,582 shares of common stock in a
secondary public offering at an offering price of $14 per share, for cash
proceeds of $37,283,838 (generating net proceeds of approximately $36,087,000).
In addition, warrant holders sold an additional 654,275 shares upon the exercise
of warrants, generating additional net proceeds to the Company of $2,153,553.
During January and February 1999, Youbet.com received $2,100,000 from stock
subscription receivables, resulting from the sale of common stock and Series A
Convertible Preferred Stock during December, 1998. During January 1999,
Youbet.com sold 100,000 shares of common stock to a private investor for a cash
purchase price of $2.50 per share, resulting in proceeds to Youbet.com of
$250,000. During the six months ended June 30, 1999, Youbet.com issued 373,725
shares of common stock in conjunction with the exercise of warrants and stock
options with exercise prices ranging from $2.50 to $5.25, generating net
proceeds to Youbet.com of $988,000.
16
<PAGE>
At June 30, 1999 Youbet.com had $75,245,089 in cash. Youbet.com's principal
commitments consist of the aforementioned Senior Convertible Discount Notes and
obligations under capital leases.
Net cash used in operating activities was $2,195,000 and $2,739,000 for the
six months ended June 30, 1999 and 1998, respectively. The principal use of cash
was to fund losses from operations. The decrease in the net cash used in
operating activities was the result of the deferral of payment of expenses
associated with the debt financing and equity placement.
Net cash used in investing activities was $556,000 and $139,000 for the six
months ended June 30, 1999 and 1998, respectively, for purchases of property and
equipment. The increase was the primary result of purchases of computer
equipment to support the growth of Youbet.com.
Net cash provided by financing activities was $76,455,000 and $7,644,000 for
the six months ended June 30, 1999 and 1998, respectively. The increase was the
result of the aforementioned debt and equity transactions.
Youbet.com does not currently have any material commitments for capital
expenditures. However, Youbet.com anticipates that it will experience a
substantial increase in capital expenditures and lease commitments consistent
with Youbet.com's anticipated growth in operations and infrastructure, including
various capital expenditures associated with the expansion of operations into
foreign markets. Youbet.com anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
these expenses will be a material use of cash resources. Youbet.com believes
that its existing cash will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures at least for the next twelve months.
IMPACT OF THE YEAR 2000
The year 2000 risk 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. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS
Based on an internal assessment, Youbet.com believes that its software
programs, both those developed internally and purchased from material outside
vendors, are year 2000 compliant or will be by December 31, 1999. Youbet.com
began assessing its state of year 2000 readiness during October 1998. This
included reviewing the year 2000 compliance of the following:
- Youbet.com's internally developed proprietary software incorporated in the
You Bet Network
- Ladbroke's pool wagering and other software
- Third party handicapping information suppliers
- Third-party software vendors
Youbet.com will continue to require its vendors of material hardware and
software to provide assurances of their year 2000 compliance.
COSTS
To date, Youbet.com has incurred approximately $25,000 of costs in
identifying and evaluating year 2000 compliance issues. Most of Youbet.com's
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation of
year 2000 compliance matters. At this time, Youbet.com does not possess the
information necessary to estimate the
17
<PAGE>
potential costs of future revisions to software relating to the You Bet Network
should revisions be required or the replacement of third-party software,
hardware or services, if any, that are determined to not be year 2000 compliant.
Although Youbet.com believes that its software programs, both developed
internally and purchased from outside vendors are either already year 2000
compliant or will be by December 31, 1999, failure to identify non year 2000
compliant software could have a material and adverse effect on Youbet.com's
business, results of operations and financial condition.
RISKS
Youbet.com is not currently aware of any significant year 2000 compliance
problems relating to the You Bet Network or other software systems that would
have a material and adverse effect on business, results of operations and
financial condition. However, there can be no assurance that Youbet.com will not
discover year 2000 compliance problems in its proprietary software or other
third party software that will require a substantial investment to correct.
Youbet.com's inability to fix such hardware or software on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on
Youbet.com's business, results of operations and financial condition.
Failure to adequately address year 2000 compliance issues in Youbet.com's
proprietary software or third party software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, there can be no
assurance that utility companies, Internet network companies, Internet access
companies, third-party service providers and others outside Youbet.com's control
will be year 2000 compliant. The failure by these entities to be year 2000
compliant could result in a systemic failure beyond Youbet.com's control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent Youbet.com from providing subscribers access
to the You Bet Network or other value added handicapping services any of which
would have a material and adverse effect on Youbet.com's business, results of
operations and financial condition.
CONTINGENCY PLAN
Although Youbet.com continues to evaluate its software for possible year
2000 compliance issues, Youbet.com believes that its software programs, both
those developed internally and purchased from material outside vendors, are
already year 2000 compliant or will be by December 31, 1999. Therefore,
Youbet.com does not have a formal contingency plan for a major year 2000
problem. Youbet.com's inability to locate or correct a significant year 2000
problem, if one exists, could result in an interruption in, or a failure of,
certain normal business activities or operations. In addition, year 2000
problems may affect sub-systems of the You Bet Network, such as the ability to
provide value added handicapping information. Any such failure could cause
Youbet.com's subscribers to seek alternate providers for online wagering. This
could require Youbet.com to incur significant unanticipated expenses to remedy
and could divert Youbet.com's management's time and attention, either of which
could have a material and adverse effect on business, results of operation and
financial condition.
18
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 4, 1999, a complaint was filed against Youbet.com in the Court of
Chancery of the State of Delaware in and for New Castle County entitled Georg
Von Opel v. Youbet.com, Inc. (C.A. No. 17200 NC). In the complaint Mr. Von Opel
alleges that Youbet.com breached its obligation to register the shares of common
stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr.
Von Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. Youbet.com filed its answer to the complaint on July 15, 1999.
Youbet.com intends to defend itself vigorously in the action. Among other
things, Mr. Von Opel executed a letter on February 24, 1998 which Youbet.com
contends effected a waiver of such registration rights. As the litigation is in
an initial stage, Youbet.com cannot predict its outcome, although if the claim
is determined adversely to Youbet.com, it could have a material adverse effect
on Youbet.com.
ITEM 2. CHANGES IN SECURITIES
In April 1999, Youbet.com issued 50,000 warrants to various finders in
connection with the issuance of the 11% Senior Convertible Discount Notes. The
warrants are exercisable at $10.00 per share and expire on April 5, 2004. The
fair value of the warrants is $352,000.
In April 1999, Youbet.com issued 50,000 warrants to a horse racing track for
services rendered. The warrants are exercisable at $11.50 per share and expire
on March 25, 2004. The fair value of the warrants is $405,000.
In April 1999, Youbet.com issued 25,000 options to an outside consultant for
services rendered. The options are exercisable at $10.50 per share and expire in
March, 2004. The fair value of the options is $257,750.
In May 1999, Youbet.com issued warrants as final settlement to a finder in
connection with the issuance of Series A Convertible Preferred Stock in June
1998. Youbet.com issued 13,000 warrants with an exercise price of $.01 and
26,000 warrants with an exercise price of $2.50. The warrants are exercisable
through March 2004. The fair value of the warrants is $216,060.
In May 1999, various warrantholders exercised their warrants into 133,000
shares of Youbet.com common stock at $2.50 per share and 10,000 shares of
Youbet.com common stock at $3.125 per share generating proceeds of $363,750.
In June 1999, various warrantholders exercised their warrants into 24,000
shares of Youbet.com common stock at $2.50 per share generating proceeds of
$60,000.
In June 1999, the former outside General Counsel of Youbet.com exercised his
options to purchase 100 shares of Youbet.com common stock at $2.50 per share
generating proceeds of $250.
In June 1999, Youbet.com issued 100,000 warrants to Station Casinos, Inc.
The warrants are exercisable at $19.50 per share and expire on June 8, 2004. The
fair value of the warrants is $907,000.
During the quarter ended June 30, 1999, Youbet.com issued 439,200 options to
employees at exercise prices ranging from $10.50 to $12.59. The options vest
over a four year period.
19
<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, 1999:
Youbet.com filed a form 8-k on June 10, 1999 to report a joint letter of
intent to enter into a joint venture agreement with Station Casinos, Inc.,
to amend registration rights granted to convertible preferred shareholders,
to report a legal complaint filed by Georg Von Opel and to disclose
correspondence with Michael Lovern, Sr.
20
<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.
<TABLE>
<S> <C> <C>
YOUBET.COM, INC.
(Registrant)
Date: August 16, 1999 By: /s/ ROBERT M. FELL
-----------------------------------------
Robert M. Fell
CHIEF EXECUTIVE OFFICER
Date: August 16, 1999 By: /s/ PHILLIP HERMANN
-----------------------------------------
Phillip Hermann
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 75,245,089 75,245,089
<SECURITIES> 0 0
<RECEIVABLES> 71,176 71,176
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 75,464,021 75,464,021
<PP&E> 2,252,807 2,252,807
<DEPRECIATION> (1,019,833) (1,019,833)
<TOTAL-ASSETS> 78,286,119 78,286,119
<CURRENT-LIABILITIES> 2,835,702 2,835,702
<BONDS> 0 0
0 0
0 0
<COMMON> 19,121 19,121
<OTHER-SE> 37,657,761 37,657,761
<TOTAL-LIABILITY-AND-EQUITY> 78,286,119 78,286,119
<SALES> 1,193,868 733,262
<TOTAL-REVENUES> 1,193,868 733,262
<CGS> 0 0
<TOTAL-COSTS> 6,593,412 3,977,205
<OTHER-EXPENSES> 44,004 59,991
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,033,988 1,016,544
<INCOME-PRETAX> (6,467,536) (4,320,478)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,467,536) (4,320,478)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,467,536) (4,320,478)
<EPS-BASIC> (.44) (.28)
<EPS-DILUTED> (.44) (.28)
</TABLE>
