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| UBET > SEC Filings for UBET > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
Overview
We are a diversified provider of technology and pari-mutuel horse racing content
for consumers through the Internet and a leading supplier of totalizator
systems, terminals and other pari-mutuel wagering services and systems to the
pari-mutuel industry. Youbet Express is a leading online advance deposit
wagering (ADW) company focused on horse racing primarily in the United States.
Our website, www.youbet.com, enables our customers to securely wager on horse
races at over 150 racetracks worldwide from the convenience of their homes or
other locations. Our customers receive the same odds and expected payouts they
would receive if they were wagering directly at the host track and their wagers
are commingled with the host track betting pools.
We appeal to both new and experienced handicappers by providing a user-friendly
"one-stop-shop" experience. To place a wager, customers open an account and
deposit funds with us via several convenient options, including our ExpressCash
system, which links our customers' wagering accounts directly to their personal
checking accounts. To enable our customers to make informed wagers, we provide
24-hour access to up-to-the minute track information, real-time odds and
value-added handicapping products, such as Turf day Super Stats, a comprehensive
database of racing statistics and a grading system to assess trainers, jockeys
and horses. Our customers can view high-quality, live audio/video broadcasts of
races as well as replays of a horse's past races. Our convenient automated
services are complemented by our player service agents, who are available 15
hours a day, seven days a week to provide technical support and address any
wagering or funding questions.
Our content partners provide us the same live satellite feeds that they normally
broadcast at the track and to off-track betting facilities (OTBs). As a result,
our partners have the opportunity to increase the total handle wagered on their
racing signal, which we believe leads to higher revenues for the host track and
a higher quality of racing through larger purses for the horse owners. In
return, we receive a commission, or a percentage, of wagers processed by Youbet
Express.
We acquired United Tote Company in February 2006. United Tote is a leading
supplier of totalizator systems (equipment and technology that processes wagers
and payouts)and supplies pari-mutuel tote services to approximately 100 racing
facilities in North America and additional facilities in a number of foreign
markets. As result of this acquisition, we operate two business segments for
financial accounting purposes: ADW and totalizator systems.
As previously disclosed, we shutdown our IRG business effective February 15,
2008. As a result, IRG is treated as discontinued operations, and the revenues
and expenses associated with IRG have been excluded from the particular revenue
and expense line items on our condensed consolidated financial statements and
are reported as a net amount in discontinued operations. For more information
about our discontinued operations, see Note 10 to our condensed consolidated
financial statements in Item 1 of this report.
In the first quarter of 2009, we incurred unique compensation-related expenses.
We incurred a $0.1 million charge for severance in connection with the departure
of our chief financial officer. We also incurred additional compensation expense
primarily related to incentive stock options issued, to hire, retain and
motivate key personnel.
Critical accounting estimates and policies
Critical accounting policies are those that are important to the portrayal of
our financial condition and results, and which require management to make
difficult, subjective or complex estimates and judgments. Critical accounting
policies cover accounting matters that are inherently uncertain because the
future resolution of such matters is unknown. Our critical accounting estimates
and policies are set forth in management's discussion and analysis of financial
condition and results of operations in annual report on Form 10-K for the year
ended December 31, 2008. There have been no material changes to our critical
accounting policies or estimates.
Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent
accounting pronouncements or changes in accounting pronouncements issued, but
not yet effective or early adopted, that are of significance, or potential
significance to the Company.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements." SFAS No. 157 defines fair value and establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
No. 157 became effective for us only for financial assets and liabilities on
January 1, 2008. SFAS 157 becomes effective for nonfinancial assets January 1,
2009. However, since we carry no nonfinancial assets on an estimated fair value
basis of accounting, nor do we expect to elect to carry any at estimated fair
value, the adoption of SFAS No. 157 for nonfinancial assets will not have an
effect on our financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures About Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133".
SFAS No. 161 expands the disclosure requirements in SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, regarding an entity's derivative
instruments and hedging activities. SFAS No. 161 will be effective for the
Company's fiscal year and interim periods beginning January 1, 2009. We do not
expect that SFAS No. 161 will have an impact on the Company's future financial
condition, results of operations or cash flows.
Results of continuing operations for the three months ended March 31, 2009
compared to the three months ended March 31, 2008
Revenues
Total revenues increased $3.9 million, or 16%, for the first quarter of 2009
when compared with the first quarter of 2008. ADW segment revenue, which
consists primarily of commissions on wagers placed by our customers, increased
approximately $4.9 million, or 25%, compared to 2008 resulting primarily from a
30% improvement in handle, as discussed below. The increase in commissions was
offset by higher customer incentives, which amounted to $0.9 million and
represented a 57% increase in such incentives compared with the first quarter of
2008. Totalizator segment revenues decreased $1.0 million, or 17%, when compared
to the first quarter of 2008.
Total handle for the three months ended March 31, 2009 was $124.0 million, an
increase of $28.5 million, or 30%, compared to the first quarter of 2008
primarily due to the return of TrackNet content.
Youbet Express yield, defined as commission revenue less track and licensing
fees (each calculated in accordance with generally accepted accounting
principles), decreased 1% to 7.4% in the first quarter of 2009 versus 8.4% in
the first quarter of 2008. The yield decline reflects the impact of changes in
track mix resulting from the return of lower yielding TrackNet content and an
increase in player incentives. We believe that yield is a useful measure to
evaluate our operating results and profitability. Yield, however, should not be
considered an alternative to operating income or net income as indicators of
Youbet's financial performance and may not be comparable to similarly titled
measures used by other companies.
Revenue generated by our United Tote operations in the first quarter of 2009
included contract revenue associated with the service of totalizator systems of
$4.6 million and equipment sales of $0.1 million, representing a decrease of
$0.9 million and a decrease of $0.1 million, respectively, compared to the first
quarter of 2008. Service revenue declined as a result of track closures and
reduced racing days due to inclement weather and track maintenance.
Costs and Expenses
Track fees: Track fees, which primarily consist of host and market access fees
paid and payable to various tracks increased $4.8 million or 58% in the first
quarter of 2009 compared to the first quarter of 2008. The quarter-over-quarter
increase is attributable to increased handle and host fee rate increases.
Licensing fees: Licensing fees, which represent amounts paid and payable under
our licensing agreement with TVG, decreased $0.8 million, or 37%, in the first
quarter of 2009 compared to first quarter 2008, primarily due to decreased
wagering on horse races at TVG tracks.
Network operations: Network operations expense, which consists of costs for
salaries, data center management, telecommunications and various totalizator
fees, increased $0.1 million or 9% in the first quarter of 2009 compared to
first quarter of 2008. This increase was primarily attributable to higher data
communication, AV fees and totalizator fees associated with increased handle
volume.
Contract costs: Contract costs, which represent costs of United Tote associated
with providing totalizator services at racetracks, decreased $0.3 million, or
8%, in the first quarter of 2009 compared to the first quarter of 2008, largely
due to further hub consolidation and decreases in communication, ticket paper
and travel related costs. These decreases were partially offset by increases in
equipment rental and repairs and maintenance costs.
Equipment Costs: Equipment costs, which represent costs of United Tote
associated with earning equipment sales revenue, were flat in the first quarter
of 2009, when compared with 2008, due to a modest decrease in equipment sales.
Operating Expenses
Research and development: Research and development expense of $0.9 million
remained flat in the first quarter of 2009 when compared with the first quarter
of 2008. We continue to invest in the development of our network infrastructure
and to support continued technology upgrades as necessary, which may increase
our research and development expenses in the future.
Sales and marketing: Sales and marketing expense of $1.4 million in the first
quarter of 2009 increased $0.2 million, or 13%, compared to the first quarter of
2008. This increase was primarily in the Youbet Express business and resulted
from an increase in sales and marketing personnel and management's priority to
more appropriately develop and target marketing efforts to specific initiatives
including online customer acquisition, conversion and retention.
General and administrative: General and administrative expense of $4.2 million
in the first quarter of 2009 were flat when compared to the first quarter of
2008 and represented 15% of total revenue for the first quarter of 2009 versus
17% of total revenue in the first quarter of 2008. Expense increases in the
first quarter of 2009 relating to a severance payment to our former chief
financial officer, non-cash compensation, bad debt, utility and accounting
expenses were substantially offset in the prior year period comparison by the
absence of $0.6 million in legal fees incurred in the first quarter of 2008
relating to a settlement finalized in May 2008 involving the Company, Colonial
Downs, L.P., the Virginia Horsemen's Benevolent and Protective Association the
Virginia Racing Commission (VRC), and the Commonwealth of Virginia.
Depreciation and amortization: Depreciation and amortization in the first
quarter of 2009 remained flat when compared to the first quarter of 2008.
Interest expense (income): Interest expense of $0.2 million in the first quarter
of 2009, decreased $0.1 million compared to $0.3 million in the first quarter of
2008. This decrease is primarily due to lower interest rates. Interest income
remained flat when compared to the three months ended March 31, 2008.
Other income: Other income remained flat when compared to the three months ended
March 31, 2008.
Income Taxes: The combined estimated annual effective income tax rate used in
the quarter ended March 31, 2009, was higher than in the comparable prior year
period due to several permanent book/tax differences such as amortization of
intangibles, asset impairments and stock-based compensation. Additionally, in
the third quarter of 2008, the State of California suspended the use of net
operating loss carry forwards, resulting in additional tax of $0.1 million being
recognized in the first quarter of 2009 versus the first quarter of 2008.
Discontinued Operations: Effective February 15, 2008, we ceased operations at
IRG and, accordingly, have accounted for such operations retroactively as
discontinued operations. For the three months ended March 31, 2009, IRG
sustained a loss of $16 thousand compared to a loss of $0.4 million in the same
period in 2008, primarily due to the timing of such closure in 2008.
Liquidity and capital resources
As of March 31, 2009, the Company had net working capital of $0.8 million,
compared to negative working capital of $0.8 million at December 31, 2008, a
$1.6 million improvement. During the first three months of 2009, the Company
funded operations primarily with net cash provided by operating activities.
Principal ongoing cash requirements consist of payroll and benefits, business
insurance, real estate and equipment leases, legal fees, data center operations,
telecommunications and debt service.
During the first quarter of 2009, we funded our operations primarily with net
cash provided by operating activities. As of March 31, 2009, we had net working
capital of $0.8 million, compared to negative working capital of $0.8 million at
December 31, 2008. As of March 31, 2009, we had $17.7 million in cash and cash
equivalents, $4.6 million in restricted cash and $11.2 million in debt.
Net cash provided by operating activities for the three months ended March 31,
2009 of $3.3 million decreased by $1.4 million from the $4.7 million provided by
operating activities in the same 2008 period, primarily due to unfavorable
working capital fluctuations.
Net cash used in investing activities for the first three months of 2009 was
$0.6 million, compared to net cash used in investing activities of $0.3 million
for the same period of 2008. The $0.3 million increase is attributable to
increased capital spending in 2009, associated with the continued improvement of
our ADW platform.
Net cash used in financing activities in the first three months of 2009 of
$1.5 million decreased $0.4 million when compared to that used in the same
period in 2008, primarily due to higher loan repayments in 2008 in accordance
with the terms of the related debt.
The United States is currently experiencing a widespread recession accompanied
by, among other things, reduced credit availability and highly curtailed gaming
and other recreational activities, employment and general discretionary consumer
spending. The effects and duration of these developments and related risks and
uncertainties on our future operations and cash flows cannot be estimated by
management at this time; however, such effects may be significant.
Nevertheless management presently believes that our borrowing capacity, as well
as on-going efforts to contain costs and operate efficiently, and growth in
handle and yield improvement at Youbet Express will generate sufficient cash
flow to adequately support its operations. We believe that our cash flow from
operations and our unrestricted cash and cash equivalents are sufficient to fund
our working capital and capital expenditure requirements for at least the next
12 months. However, we may from time to time seek additional capital to fund our
operations, and to reduce our liabilities in response to changes in the business
environment. To raise capital, we may seek to sell additional equity securities,
issue debt or convertible securities or seek to obtain credit facilities through
financial institutions or other resources. We have an effective shelf
registration statement under which we may from time to time issue shares of
preferred stock, shares of common stock, warrants, stock purchase contracts,
stock purchase units, and stock purchase rights for an original maximum
aggregate offering amount of approximately $30 million. Unless otherwise
described in future prospectus supplements, we intend to use the net proceeds
from the sale of securities registered under this universal shelf registration
statement for general corporate purposes, which may include additions to working
capital, the repayment or redemption of existing indebtedness and the financing
of capital expenditures and future acquisitions. The sale of additional equity
or convertible securities would result in additional dilution to our
stockholders.
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