<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, 1999
[ ] 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
incorporation or organization) Identification Number)
1950 Sawtelle Boulevard, Suite 180, Los Angeles, California 90025
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 April 30, 1999, the issuer had 14,395,231 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
YOU BET.COM, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheets -- December 31, 1998, March 31, 1999 and
Pro Forma at March 31, 1999...................................... 3-4
Statements of Operations -- Three months ended March 31,
1998 and 1999 and 1995 to March 31, 1999......................... 5
Statements of Cash Flows -- Three months ended March 31,
1998 and 1999, 1995 to March 31, 1999, and Pro Forma
for the three months ended March 31, 1999........................ 6-7
Notes to Financial Statements -- Three months ended March 31,
1998, 1999, and 1995 to March 31, 1999........................... 8-11
Item 2. Management's Discussion and Analysis or Plan of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
2
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, AT MARCH 31,
1998 1999 1999 (NOTE 3)
------------ ------------ ------------
<S> <C> <C> <C>
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash $ 1,540,616 $ 2,543,084 $ 37,661,594
Stock subscriptions receivable 2,100,000 -- --
Receivables 50,364 64,801 64,801
Prepaid expenses 22,344 63,483 63,483
Other current assets 11,317 16,176 16,176
------------ ------------ ------------
Total current assets 3,724,641 2,687,544 37,806,054
------------ ------------ ------------
Property and equipment 1,700,211 1,871,523 1,871,523
Less: Accumulated depreciation and amortization (820,535) (914,534) (914,534)
------------ ------------ ------------
Property and equipment, net 879,676 956,989 956,989
------------ ------------ ------------
Other assets:
Deferred financing costs, net of amortization 31,395 78,817 2,040,817
Deferred public offering costs -- 49,395 49,395
Deposits 17,537 17,037 17,037
------------ ------------ ------------
Total other assets 48,932 145,249 2,107,249
------------ ------------ ------------
Total assets $ 4,653,249 $ 3,789,782 $ 40,870,292
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE PRO FORMA COLUMN REFLECTS THE EFFECT OF THE APRIL 5, 1999 FINANCING
TRANSACTION ON THE MARCH 31, 1999 BALANCE SHEET (SEE NOTE 3).
3
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, AT MARCH 31,
1998 1999 1999 (NOTE 3)
------------ ------------ ------------
<S> <C> <C> <C>
(Unaudited) (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 984,258 $ 1,039,319 $ 1,039,319
Accrued compensation and related items 144,252 147,512 147,512
Other accrued expenses 451,127 528,866 528,866
Current portion of capitalized lease obligations 220,317 180,231 180,231
------------ ------------ ------------
Total current liabilities 1,799,954 1,895,928 1,895,928
Notes payable -- -- 36,728,510
Capitalized lease obligations, less current portion 60,134 47,678 47,678
------------ ------------ ------------
Total liabilities 1,860,088 1,943,606 38,672,116
------------ ------------ ------------
Stockholders' equity (Note 2):
Convertible preferred stock, $.001 par value (aggregate liquidation
preference of $2,677,750 and $2,627,750 at December 31, 1998 and
March 31, 1999, respectively); authorized - 1,000,000 shares;
issued and outstanding - 107,110 shares and 105,110 shares at
December 31, 1998 and March 31, 1999, respectively 107 105 105
Common stock, $.001 par value; authorized - 50,000,000
Shares; issued and outstanding - 13,970,268 shares
at December 31, 1998 and 14,314,731 shares at
March 31, 1999, respectively 13,970 14,315 14,315
Additional paid-in capital 42,326,397 43,224,232 43,576,232
Accumulated deficit during development stage (37,825,941) (39,972,999) (39,972,999)
Deferred compensation (1,161,372) (859,477) (859,477)
Stock note receivable (560,000) (560,000) (560,000)
------------ ------------ ------------
Total stockholders' equity 2,793,161 1,846,176 2,198,176
------------ ------------ ------------
Total liabilities and stockholders' equity $ 4,653,249 $ 3,789,782 $ 40,870,292
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE PRO FORMA COLUMN REFLECTS THE EFFECT OF THE APRIL 5, 1999 FINANCING
TRANSACTION ON THE MARCH 31, 1999 BALANCE SHEET (SEE NOTE 3).
4
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995
------------------------------ TO MARCH 31,
1998 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
Revenues $ - $ 460,606 $ 724,399
Operating expenses:
Network operations 149,212 412,276 2,585,691
Research and development 230,304 359,243 4,588,009
Sales and marketing 156,555 475,788 3,254,644
General and administrative 442,599 615,620 6,795,183
Depreciation and amortization 75,795 95,735 926,556
Non-cash compensation 1,223,232 657,545 7,237,428
------------ ------------- --------------
Total operating expenses 2,277,697 2,616,207 25,387,511
------------ ------------- --------------
Loss from operations (2,277,697) (2,155,601) (24,663,112)
Other income (expense):
Interest expense (69,176) (7,444) (778,365)
Amortization of deferred financing costs (12,164) (7,848) (127,394)
Release of forfeiture restrictions on common
stock owned by officers/major stockholders - - (7,875,000)
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into
common stock and warrants - - (1,423,311)
Fair value of warrants issued for financing costs (361,200) - (5,061,886)
Interest income 37 25,249 189,223
Consulting revenues - 164,602
Other (109,703) (1,414) (98,858)
------------ ------------ -------------
Total other income (expense) (552,206) 8,543 (15,010,989)
------------ ------------ -------------
Loss before provision for state income and franchise taxes (2,829,903) (2,147,058) (39,674,101)
Provision for state income and franchise taxes - - (19,073)
------------ ------------ -------------
Net loss $ (2,829,903) $ (2,147,058) $ (39,693,174)
------------ ------------ --------------
------------ ------------ --------------
Net loss per share - basic and diluted $ (0.29) $ (0.15)
------------ ------------
------------ ------------
Weighted average number of shares 9,603,994 14,059,310
------------ ------------
------------ ------------
</TABLE>
5
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
THREE
THREE MONTHS ENDED MONTHS
MARCH 31, 1995 ENDED
------------------------------ TO MARCH 31, MARCH 31,
1998 1999 1999 1999 (NOTE 3)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss $ (2,829,903) $ (2,147,058) $(39,693,174) $ (2,147,058)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities:
Depreciation and amortization 75,795 95,735 926,556 95,735
Amortization of deferred financing
costs 12,164 7,848 127,394 7,848
Lease restructuring and other costs 64,750 1,237 71,877 1,237
Reduction of loan from settlement
agreement -- -- (20,000) --
Non-cash compensation 1,584,432 657,545 7,237,428 657,545
Discount on conversion of bridge
loans, accounts payable and employee
deferred salaries into common stock
and warrants -- -- 1,423,311 --
Fair value of warrants issued for
financing costs -- -- 5,061,886 --
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 3,917 (14,437) (34,801) (14,437)
Prepaid expenses 12,512 (41,139) (80,158) (41,139)
Other current assets (13,270) (4,857) 7,387 (4,857)
Deposits -- 500 (71,000) 500
Increase (decrease) in:
Accounts payable 15,326 55,061 1,107,319 55,061
Accrued compensation and related
items (100,539) 3,262 347,178 3,262
Accrued interest payable 65,781 -- 533,415 --
Other accrued expenses 808 111,500 562,628 111,500
State income taxes payable (726) -- (800) --
------------ ------------ ------------ ------------
Net cash used in operating activities (1,108,953) (1,274,803) (14,618,554) (1,274,803)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (56,656) (174,287) (1,537,605) (174,287)
------------ ------------ ------------ ------------
Net cash used in investing activities (56,656) (174,287) (1,537,605) (174,287)
------------ ------------ ------------ ------------
</TABLE>
6
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
THREE
THREE MONTHS ENDED MONTHS
MARCH 31, 1995 ENDED
------------------------------ TO MARCH 31, MARCH 31,
1998 1999 1999 1999 (NOTE 3)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from financing activities:
Proceeds from exercise of stock options
and warrants -- 381,266 1,450,266 381,266
Increase in deferred financing costs (81,000) (55,271) (151,271) (1,665,271)
Proceeds from lease financing -- -- 150,261 --
Proceeds from sale of securities, net of
offering costs -- 250,000 11,105,617 250,000
Proceeds from advances and bridge loans:
Related parties 410,000 -- 2,218,862 --
Unrelated parties 865,000 -- 2,505,000 --
Repayments of advances:
Related parties -- -- (127,875) --
Unrelated parties -- -- (135,000) --
Payments on capitalized lease obligations -- (52,542) (300,199) (52,542)
Proceeds from subscription receivable -- 2,100,000 2,100,000 2,100,000
Increase in deferred offering costs -- (49,395) (49,395) (49,395)
Additional costs related to preferred stock
financing -- (122,500) (122,500) (122,500)
Proceeds from notes payable -- -- -- 36,728,510
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,194,000 2,451,558 18,643,766 37,570,068
------------ ------------ ------------ ------------
Cash and cash equivalents:
Net increase 28,391 1,002,468 2,487,607 36,120,978
Cash at beginning of period 52,895 1,540,616 55,477 1,540,616
------------ ------------ ------------ ------------
Cash at end of period $ 81,286 $ 2,543,084 $ 2,543,084 $ 37,661,594
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
THE PRO FORMA COLUMN REFLECTS THE EFFECT OF THE APRIL 5, 1999 FINANCING
TRANSACTION ON THE THREE MONTHS ENDED MARCH 31, 1999 STATEMENT OF CASH FLOWS
(SEE NOTE 3).
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(a) Cash paid for:
<TABLE>
<S> <C> <C> <C> <C>
Interest paid $ 7,554 $ 7,444 $ 124,827 $ 7,444
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(b) Non-cash transactions:
During the quarter ended March 31, 1999, four employees and one former
employee exercised 74,833 stock options in exchange for 74,833 common
stock shares. To effect this cashless exercise, 37,417 stock options
were forfeited. This cashless exercise resulted in a charge to
noncash compensation of $300,000.
During the quarter ended March 31, 1999, the Company issued 13,505
common stock shares to a consulting firm for $33,763 of services
rendered.
During the quarter ended March 31, 1999, the Company issued 20,000
common stock shares from the conversion of 2,000 preferred stock
shares.
During the quarters ended March 31, 1998 and 1999, the Company incurred
$0 and $55,650 non-cash compensation.
7
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998, 1999 AND 1995 TO DATE
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
Youbet.com, Inc., a Delaware corporation (formerly known as You Bet
International, Inc.), You Bet!, Inc., a Delaware corporation and a
wholly-owned subsidiary of Youbet.com, Inc., and Middelware Telecom
Corporation, a California corporation and a wholly-owned subsidiary of You
Bet!, Inc., are collectively referred to herein as the "Company".
Youbet.com, Inc. is the successor to You Bet International, Inc. through a
merger transaction effective January 22, 1999. The subsidiaries of You Bet
International, Inc. were also merged into Youbet.com. 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 being offered to
subscribers is The You Bet Network, an interactive online horseracing network
that is broadcast over the Company's virtual private network.
DEVELOPMENT STAGE
As of March 31, 1999, the Company is considered to be a development stage
entity, as it has not realized a significant amount of revenues from planned
principal operations. Accordingly, the Company has provided cumulative
statements of operations, and statements of cash flows for the period from
inception of development stage (January 1, 1995) through March 31, 1999.
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 March 31, 1999, the results of operations for the
three months ended March 31, 1998 and 1999, and the cash flows for the three
months ended March 31, 1998 and 1999. These adjustments are of a normal
recurring nature. The balance sheet as of December 31, 1998 is derived from the
Company's audited financial statements.
Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
financial statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission.
8
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998, 1999 AND 1995 TO DATE
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results of operations to be expected for
the full year ending December 31, 1999.
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.
As of March 31, 1999, potential dilutive securities representing
10,581,710 shares of common stock were not included in the earnings per share
calculation since their effect would be anti-dilutive. Potential dilutive
securities consisted of 1,956,596 outstanding stock options, 7,574,014
outstanding common stock purchase warrants, and 105,110 shares of preferred
stock convertible into 1,051,100 shares of common stock. Basic and diluted
earnings per share are the same for all periods presented.
NOTE 2--STOCKHOLDERS' EQUITY
a. ISSUANCE OF COMMON STOCK AND WARRANTS
During the three months ended March 31, 1999, the Company issued 136,125
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 $381,266.
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
four employees and one former employee. In order to effect a cashless
transaction, an additional 37,417 stock options were forfeited. This cashless
exercise resulted in a charge to noncash compensation of $300,000.
During the three months ended March 31, 1999, 2,000 shares of convertible
preferred stock were converted into 20,000 shares of common stock.
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.
9
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998, 1999 AND 1995 TO DATE
NOTE 2--STOCKHOLDERS' EQUITY (CONTINUED)
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.
As final settlement for the finder's fee related to the preferred stock
financing in June 1998, additional fees of $122,500 are owed to the finder. The
fees are charged to additional paid-in capital and accrued at March 31, 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.
b. STOCK OPTIONS
During the quarter ended March 31, 1999, deferred compensation of $55,560
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 quarter ended March 31, 1999 was $657,545.
During the quarter ended March 31, 1999, the Company granted various stock
options, as follows:
(1) The Company issued a stock option to its Executive Vice President
and Chief Financial Officer under the 1998 Stock Option Plan to
purchase 50,000 shares of common stock at an exercise price of
$10.50 per share, the fair market price at the date of grant. The
stock option vests in four equal annual installments commencing one
year after the grant date, and is exercisable for a period of ten
years.
(2) The Company issued a stock option to its Executive Vice President
and Chief Operating Officer under the 1998 Stock Option Plan to
purchase 100,000 shares of common stock at an exercise price of
$10.50 per share, the fair market price at the date of grant. The
stock option vests in four equal annual installments commencing one
year after the grant date, and is exercisable for a period of ten
years.
(3) Stock options were granted to employees to purchase 8,200 shares of
common stock at an average price of $10.50 per share, which was the
fair value on the date of grant. These options vest over four years
and are exercisable for a period of five years.
(4) Stock options were granted to a consultant to purchase 5,000 shares
of common stock at the fair value on the date of grant. These
options vest 50% after the first year of service and the remainder
vest upon achieving certain milestones. The options are exercisable
for a period of five years.
10
<PAGE>
YOUBET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998, 1999 AND 1995 TO DATE
NOTE 3--SUBSEQUENT EVENTS
On April 5, 1999, the Company issued $45,500,000 principal amount of
11% Senior Convertible Discount Notes for cash proceeds of $36,738,510, which
represents a discount of 11% per year, compounded semi-annually, to April 5,
2001. The Company incurred approximately $1,610,000 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, subject to reset provisions as defined in
the Notes. 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. The conversion price resets one time at the earlier of
(1) a placement, after April 5, 1999, of common stock and any securities
convertible into common stock which raises at least $15 million gross
proceeds to the Company or (2) April 5, 2000. In the event that a placement
of common stock or convertible securities occurs first, the conversion price
will be reset to the lesser of $10 per share or the lowest price per share at
which the Company sells common stock after the date of the placement of
common stock or convertible securities (excluding options, warrants and other
convertible securities existing prior to April 5, 1999). In the event that
the reset occurs on April 5, 2000, the conversion price will be reset to the
lower of $10 per share or the average daily closing price for the ten-day
period ending on April 5, 2000, but in no event less than $5 per share. 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.
On April 9, 1999, the Company filed a registration statement with the
Securities and Exchange Commission to permit the Company to sell 2,700,000
shares of its common stock to the public and to permit certain warrant
holders to exercise 675,000 of their warrants and sell the underlying common
stock to the public.
In May 1999, Youbet.com's Compensation Committee recommended to the
Board of Directors the payment of certain performance-based bonuses to Fell &
Company, Inc., David Marshall, Inc., and Mr. Fine. Fell & Company, Inc. would
be paid an aggregate bonus equal to the amounts payable to Youbet.com by the
Robert M. Fell Living Trust (the "Fell Trust") in connection with its
purchase in 1998 of Series A Convertible Preferred Stock and stock purchase
warrants. The amount of such indebtedness is $560,000, plus accrued interest.
50% of such bonus would be credited upon approval of the Board of Directors
in recognition of the completion of the placement of 11% Senior Convertible
Discount Notes, 25% would be credited upon the completion of this offering,
12 1/2% would be credited upon Youbet.com achieving 15,000 subscribers and 12
1/2% would be credited upon Youbet.com achieving 25,000 subscribers. Any
bonuses paid under the proposal to Fell & Company, Inc. would be applied to
reduce amounts owed to Youbet.com by the Fell Trust. David Marshall, Inc. and
Mr. Fine would each be granted a bonus of $300,000, payable as follows: 10%
upon approval of the Board of Directors in recognition of the completion of
the placement of the 11% Senior Convertible Discount Notes; 40% upon
completion of this offering; 25% upon Youbet.com achieving 15,000 subscribers
and 25% upon Youbet.com achieving 25,000 subscribers. The Board of Directors
has not yet acted on these proposals.
11
<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, 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 wages 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.
As of March 31, 1999 Youbet.com was considered to be a development stage
entity as it had not realized a significant amount of revenues from planned
principal operations. During 1995, Youbet.com shifted its business strategy by
de-emphasizing consulting services and software licensing, as a result of which
Youbet.com became a development stage company.
Youbet.com has expanded its operations in recent years and has grown to
57 employees at March 31, 1999. Youbet.com expects to add additional
personnel in the United States and plans to commence
12
<PAGE>
operations and add personnel internationally 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. As a result of these
and other factors, Youbet.com expects to incur significant losses at least
through 1999.
Youbet.com has incurred significant losses since inception, and as of
March 31, 1999 had an accumulated net loss of $39,973,000. Included in this
accumulated deficit is $21,598,000 in non-cash expenses related to the
recording of the fair value of warrants and stock options charged to
operations over the period of benefit, discount on conversion of bridge
loans, accounts payable and employee deferred salaries into common stock and
warrants, and the release of forfeiture provisions on certain shares of
common stock. The recognition of these expenses did not affect working
capital, net stockholders' equity (deficiency) or cash flows. The remaining
deferred compensation at March 31, 1999 of $859,000 is expected to be
amortized as compensation during 1999 and subsequent years. Youbet.com does
not expect that these types of costs will continue at the previous levels.
On January 22, 1999 Youbet.com became the successor to You Bet
International, Inc. through a merger transaction. The subsidiaries of You Bet
International, Inc. (You Bet!, Inc., a Delaware corporation, and Middleware
Telecom Corporation, a California corporation) were also merged into
Youbet.com.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
REVENUES
Revenues for the three months ended March 31, 1999 were $461,000, of
which $435,000 represented Youbet.com's commission on the gross amount of
each wager placed by its subscribers. The remaining $26,000 represented
subscription fee revenue as Youbet.com commenced charging a monthly
subscription fee to its subscribers in February 1999.
13
<PAGE>
In June 1997, Youbet.com and Ladbroke entered into a Telecommunication
Facilitation Agreement which expires in November 2002. The agreement provides
for Youbet.com to receive a fee from Ladbroke equal to fifty percent (50%) of
the net commissions to Ladbroke derived from wagers placed by Youbet.com
subscribers who use the Call-A-Bet System either through the computer
graphics interface provided by Youbet.com or more traditional telephone
communication. During the three months ended March 31, 1999, 94.4% of
Youbet.com's revenues were generated from the Ladbroke agreement, and
Youbet.com expects that approximately 60% of its revenues during the year
ending December 31, 1999 will also be generated from the Ladbroke agreement.
Youbet.com currently estimates that net commissions will exceed $1,000,000
during the initial eighteen month period beginning January 1998 and ending
June 1999. However, should net commissions be less than $1,000,000 during
such eighteen month period, Ladbroke could elect to terminate the agreement,
which could have a material adverse effect on Youbet.com.
OPERATING EXPENSES
NETWORK OPERATIONS. Network operations costs consist primarily of
salaries and costs to support the private network. Network operations costs
increased by $263,000 or 176.3% to $412,000 for the three months ended March
31, 1999 from $149,000 for the three months ended March 31, 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 $129,000 or 56.0% to
$359,000 for the three months ended March 31, 1999 from $230,000 for the three
months ended March 31, 1998 reflecting the hiring of developers and the
continued development of the You Bet 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 $319,000 or 203.9% to $476,000 for the three months ended March 31, 1999 from
$157,000 for the three months ended March 31, 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. 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 $173,000
or 39.1% to $616,000 for the three months ended March 31, 1999 from $443,000
for the three months ended March 31, 1998. The increases reflect a general
increase in personnel related costs, legal and accounting fees, and general
operating activity. Youbet.com expects that general
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<PAGE>
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 $566,000 or 46.3% to $657,000 for the three
months ended March 31, 1999 from $1,223,000 for the three months ended March 31,
1998. The decrease is due to Youbet.com reducing the number of warrants and
stock options issued, offset by a $300,000 charge resulting from a cashless
exercise of stock options. Youbet.com expects that these costs will continue as
it issues warrants and stock options.
LOSS FROM OPERATIONS
As described above, Youbet.com has made a significant investment in
developing the You Bet Network to maintain its technological advantage and to
begin to brand and market the service. The loss from operations for the three
months ended March 31, 1999 decreased $122,000 or 5.4% to $2,155,000 from
$2,277,000 for the three months ended March 31, 1998. Youbet.com expects to
incur significant losses at least through 1999.
OTHER INCOME (EXPENSE)
NET INTEREST INCOME (EXPENSE). Net interest income of $18,000 for the
three months ended March 31, 1999 compares to $69,000 of net interest expense
for the three months ended March 31, 1998. The net interest expense for the
three months ended March 31, 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 in April 1999 of its 11% Senior Convertible Discount Notes. However,
Youbet.com will not pay cash interest thereon until October 2001.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Youbet.com has financed its operations primarily through the sale of its
securities and short-term debt as Youbet.com has generated only negative cash
flow from operations since inception. Between December 5, 1995 and March 31,
1999, Youbet.com has received an aggregate of $18,795,000 in net proceeds from
the sale of common stock, Series A Convertible Preferred Stock and the exercise
of stock options, warrants and short term debt. At March 31, 1999 Youbet.com had
$2,543,000 in cash. Youbet.com's principal commitments consists of obligations
under capital leases.
Net cash used in operating activities was $1,275,000 and $1,109,000 for
the three months ended March 31, 1999 and 1998, respectively. The principal
use of cash was to fund losses from operations. The increases in the net cash
used in operating activities reflected a general increase in all levels of
activity as Youbet.com developed the You Bet Network and commenced marketing
activities during 1998.
Net cash used in investing activities was $174,000 and $57,000 for the
three months ended March 31, 1999 and 1998, respectively, for purchases of
property and equipment.
Net cash provided by financing activities was $2,452,000 and $1,194,000
for the three months ended March 31, 1999 and 1998, respectively. Net cash
provided by and used by financing activities consisted principally of
proceeds from the exercise of stock options and warrants and the private
placement of common stock. During the three months ended March 31, 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, $381,000 from the exercise of stock options and warrants and
$250,000 from the sale of common stock. Offsetting these receipts was
$280,000 of deferred financing costs, payments of lease obligations, deferred
offering costs and costs related to stock financing.
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 quarter ended March 31, 1999, Youbet.com issued 136,125 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 gross proceeds to
Youbet.com of $381,000.
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<PAGE>
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 proceeds of approximately $35,119,000), 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. The notes
plus accrued, unpaid interest are convertible at any time at the rate of $10
per common share, subject to reset provisions as defined in the notes. The
conversion price resets one time at the earlier of (1) a placement, after
April 1999, of common stock and any securities convertible into common stock
which raises at least $15 million gross proceeds to Youbet.com or (2) April
5, 2000. In the event that a placement of common stock or convertible
securities occurs first, the conversion price will be reset to the lesser of
$10 per share or the lowest price per share at which Youbet.com sells common
stock after the date of the placement of common stock or convertible
securities (excluding options, warrants and other convertible securities
existing prior to April 1999). In the event that the reset occurs on April 5,
2000, the conversion price will be reset to the lower of $10 per share or the
average daily closing price for the ten-day period ending on April 5, 2000,
but in no event less than $5 per share.
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 and the proceeds from the sale of the 11% Senior
Convertible Discount Notes, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures at least for the next twelve
months. Additionally, upon completion of the offering, Youbet.com intends to use
such proceeds to pursue the opportunities described in this prospectus.
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;
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<PAGE>
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 year
2000 compliance matters. At this time, Youbet.com does not possess the
information necessary to estimate the 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 2. CHANGES IN SECURITIES
In April 1999, various warrantholders exercised their warrants into 53,500
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 $165,000.
In April 1999, the former outside General Counsel of Youbet.com exercised his
options to purchase 7,000 shares of Youbet.com common stock at $2.50 per
share generating proceeds of $17,500.
Additional information relating to the period covered by this Item 2 has been
previously reported on the Form 10-KSB filed April 9, 1999.
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 March 31, 1999:
Youbet.com filed a Form 8-K on January 26, 1999, to report a name change
from You Bet International, Inc. to Youbet.com, Inc.
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.
YOUBET.COM, INC.
--------------------------------
(Registrant)
Date: May 12, 1999 By: /s/ ROBERT M. FELL
--------------------------------
Robert M. Fell
Chief Executive Officer
Date: May 12, 1999 By: /s/ PHILLIP HERMANN
--------------------------------
Phillip Hermann
Executive Vice President
and Chief Financial Officer
21
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