##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 COMMISSION FILE NUMBER: 0-26015
 YOUBET.COM, INC.
 DELAWARE
    
    95-4627253
 5901 De Soto Avenue, Woodland Hills, California 91367
 (818) 668-2100
 R £
 R £
  ̈ þ




---



YOUBET.COM, INC.
 INDEX TO FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2005
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated financial statements
    
    
    3Balance sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Statements of operations for the three months ended September 30, 2005 and 2004 (unaudited)
    
    
    4Statements of operations for the nine months ended September 30, 2005 and 2004 (unaudited)
    
    
    5Statements of cash flows for the nine months ended September 30, 2005 and 2004 (unaudited)
    
    
    6Notes to unaudited financial statements
    
    
    7Item 2.
    
    Management's discussion and analysis of financial condition and results of operations
    
    
    13Item 3.
    
    Quantitative and qualitative disclosures about market risk
    
    
    21Item 4.
    
    Controls and procedures
    
    
    21PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal proceedings
    
    
    22Item 2.
    
    Unregistered sales of equity securities and use of proceeds
    
    
    22Item 3.
    
    Defaults upon senior securities
    
    
    22Item 4.
    
    Submission of matters to a vote of security holders
    
    
    22Item 5.
    
    Other information
    
    
    22Item 6.
    
    Exhibits
    
    
    23Exhibit 10.2Exhibit 10.4Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Preliminary Note
  2




---



##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 
 YOUBET.COM, INC.
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    19,128,535
    
    
    
    13,287,492Current portion of restricted cash
    
    
    3,968,031
    
    
    
    3,197,468Accounts receivable, net of allowance for doubtful
collection of $346,000 and $346,000
    
    
    2,356,835
    
    
    
    595,108Other receivables, net of allowance for doubtful
collection of $180,457 at December 31, 2004
    
    
    13,173
    
    
    
    254,805Prepaid expenses
    
    
    1,570,747
    
    
    
    936,524Current portion of deferred tax asset
    
    
    1,791,000
    
    
    
    1,791,00028,828,321
    
    
    
    20,062,397Property and equipment, net of accumulated
depreciation and amortization of $8,503,070 and $7,912,388
    
    
    4,370,046
    
    
    
    3,210,841Restricted cash, net of current portion
    
    
    381,962
    
    
    
    487,750Unamortized intangibles and other
    
    
    3,547,730
    
    
    
    157,832Deferred tax asset, net of current portion
    
    
    1,523,000
    
    
    
    1,523,000$
    38,651,059
    
    
    $
    25,441,820LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long term debt
    
    $
    634,181
    
    
    $
    391,208Trade payables, TVG
    
    
    6,092,207
    
    
    
    3,928,161Trade payables, track related
    
    
    2,209,433
    
    
    
    2,088,774Trade payables, other
    
    
    679,298
    
    
    
    478,021Accrued expenses and other
    
    
    1,599,267
    
    
    
    860,713Customer deposits
    
    
    5,903,140
    
    
    
    3,327,132Deferred revenues
    
    
    113,271
    
    
    
    112,15617,230,797
    
    
    
    11,186,165Long term debt, net of current portion
    
    
    213,186
    
    
    
    157,89517,443,983
    
    
    
    11,344,060Stockholders
equity
Preferred stock, $0.001 par value, authorized
1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, authorized
100,000,000 shares, 33,391,562 and 30,979,768
shares outstanding
    
    
    33,392
    
    
    
    30,980Additional paid-in capital
    
    
    105,514,569
    
    
    
    103,110,751Deficit
    
    
    (83,000,513
    )
    
    
    (87,215,262
    )Treasury stock (457,015 and 623,683 shares at cost)
    
    
    (1,340,372
    )
    
    
    (1,828,709
    )21,207,076
    
    
    
    14,097,760$
    38,651,059
    
    
    $
    25,441,820
 See notes to unaudited consolidated financial statements
 3




---



##### Table of Contents



YOUBET.COM, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended September 30,2005
    
    
    2004RevenuesCommissions
    
    $
    25,225,696
    
    
    $
    16,923,439Other
    
    
    853,182
    
    
    
    619,85626,078,878
    
    
    
    17,543,295Operating costs and expensesTrack fees
    
    
    11,176,452
    
    
    
    6,611,558Licensing, TVG
    
    
    5,972,759
    
    
    
    4,495,723Network operations
    
    
    1,508,495
    
    
    
    905,586Research and development
    
    
    397,631
    
    
    
    415,352Sales and marketing
    
    
    1,642,618
    
    
    
    940,271General and administrative
    
    
    3,229,873
    
    
    
    3,147,850Depreciation and amortization
    
    
    506,999
    
    
    
    208,74724,434,827
    
    
    
    16,725,087Income from operations
    
    
    1,644,051
    
    
    
    818,208Other income (expense)Interest income
    
    
    165,859
    
    
    
    34,267Interest expense
    
    
    (19,609
    )
    
    
    (3,013
    )Other, net
    
    
    57,369
    
    
    
    (58,377
    )203,619
    
    
    
    (27,123
    )Income before income taxes
    
    
    1,847,670
    
    
    
    791,085Income tax benefit
    
    
    
    
    
    
    3,250,000Net income
    
    $
    1,847,670
    
    
    $
    4,041,085Income per share  basic
    
    $
    0.06
    
    
    $
    0.13Income per share  diluted
    
    $
    0.05
    
    
    $
    0.12
 See notes to unaudited consolidated financial statements
 4




---



##### Table of Contents



YOUBET.COM, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Nine Months Ended September 30,2005
    
    
    2004RevenuesCommissions
    
    $
    65,576,607
    
    
    $
    47,239,273Other
    
    
    2,500,049
    
    
    
    1,786,75468,076,656
    
    
    
    49,026,027Operating costs and expensesTrack fees
    
    
    29,421,861
    
    
    
    19,897,410Licensing, TVG
    
    
    14,729,993
    
    
    
    10,518,435Network operations
    
    
    3,594,311
    
    
    
    2,437,621Research and development
    
    
    1,131,859
    
    
    
    1,271,554Sales and marketing
    
    
    4,718,328
    
    
    
    2,578,383General and administrative
    
    
    9,737,198
    
    
    
    9,449,100Depreciation and amortization
    
    
    1,056,692
    
    
    
    2,056,14464,390,242
    
    
    
    48,208,647Income from operations
    
    
    3,686,414
    
    
    
    817,380Other income (expense)Interest income
    
    
    389,098
    
    
    
    97,631Interest expense
    
    
    (58,668
    )
    
    
    (5,519
    )Other, net
    
    
    197,905
    
    
    
    (63,530
    )528,335
    
    
    
    28,582Income before income taxes
    
    
    4,214,749
    
    
    
    845,962Income tax benefit
    
    
    
    
    
    
    3,250,000Net income
    
    $
    4,214,749
    
    
    $
    4,095,962Income per share  basic
    
    $
    0.13
    
    
    $
    0.14Income per share  diluted
    
    $
    0.12
    
    
    $
    0.12
 See notes to unaudited consolidated financial statements
 5




---



##### Table of Contents



YOUBET.COM, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months Ended September 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    4,214,749
    
    
    $
    4,095,962Adjustments to reconcile net income to net cash provided
by operating activitiesDepreciation and amortization
    
    
    1,056,692
    
    
    
    2,056,144Stock-based compensation benefit
    
    
    (164,609
    )
    
    
    (60,001
    )Provision for doubtful accounts
    
    
    131,791
    
    
    
    Income tax benefit from change in valuation allowance
    
    
    
    
    
    
    (3,250,000
    )Change in operating assets and liabilitiesRestricted cash
    
    
    (1,151,778
    )
    
    
    (314,881
    )Receivables
    
    
    (167,849
    )
    
    
    (265,565
    )Other receivables
    
    
    251,982
    
    
    
    (218,677
    )Prepaid expenses
    
    
    (634,223
    )
    
    
    14,119Unamortized intangibles and other
    
    
    (234,359
    )
    
    
    473,291Trade payables, TVG
    
    
    2,164,047
    
    
    
    1,069,647Trade payables, track related
    
    
    (57,116
    )
    
    
    (972,085
    )Trade payables, other
    
    
    (250,483
    )
    
    
    321,712Accrued expenses and other
    
    
    693,245
    
    
    
    (797,753
    )Customer deposits
    
    
    941,274
    
    
    
    504,627Deferred revenues
    
    
    1,115
    
    
    
    12,956Net cash provided by operating activities
    
    
    6,794,478
    
    
    
    2,669,496Investing activitiesPurchases of property and equipment
    
    
    (1,187,987
    )
    
    
    (425,819
    )Proceeds from sale of property and equipment
    
    
    3,020
    
    
    
    243Investments in intangibles and other
    
    
    (1,806,449
    )
    
    
    (41,809
    )Decrease in restricted cash
    
    
    487,003
    
    
    
    260,644Net cash used in investing activities
    
    
    (2,504,413
    )
    
    
    (206,741
    )Financing activitiesProceeds from exercise of stock options and warrants, net
    
    
    2,059,176
    
    
    
    1,008,224Repayment of long term debt
    
    
    (508,198
    )
    
    
    Net cash provided by financing activities
    
    
    1,550,978
    
    
    
    1,008,224Increase in cash and cash equivalents
    
    
    5,841,043
    
    
    
    3,470,979Cash and cash equivalents, beginning of period
    
    
    13,287,492
    
    
    
    8,273,926Cash and cash equivalents, end of period
    
    $
    19,128,535
    
    
    $
    11,744,905
 See notes to unaudited consolidated financial statements
 6




---



##### Table of Contents



YOUBET.COM, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005
 Note 1: Basis of presentation
    Note 2: Income taxes
     7




---



##### Table of Contents



Note 3: Income per share
  Three Months Ended September 30,2005
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    1,847,670
    
    
    
    32,883,310
    
    
    $
    0.06
    
    
    $
    4,041,085
    
    
    
    30,023,787
    
    
    $
    0.13Effect of dilutive securities
    
    
    
    
    
    
    2,664,930
    
    
    
    
    
    
    
    
    
    
    
    3,797,270
    
    
    
    EPS  Diluted
    
    $
    1,847,670
    
    
    
    35,548,240
    
    
    $
    0.05
    
    
    $
    4,041,085
    
    
    
    33,821,057
    
    
    $
    0.12
 Nine Months Ended September 30,2005
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    4,214,749
    
    
    
    31,779,087
    
    
    $
    0.13
    
    
    $
    4,095,962
    
    
    
    29,252,789
    
    
    $
    0.14Effect of dilutive securities
    
    
    
    
    
    
    2,557,526
    
    
    
    
    
    
    
    
    
    
    
    4,472,431
    
    
    
    EPS  Diluted
    
    $
    4,214,749
    
    
    
    34,336,613
    
    
    $
    0.12
    
    
    $
    4,095,962
    
    
    
    33,725,220
    
    
    $
    0.12
 Note 4: Stockholders equity
 Accounting
for Stock-Based Compensation Accounting for Stock Issued to Employees
 Share-Based Payment
 Warrants
  WeightedAverage ExerciseWarrants
    
    
    PriceBalance, December 31, 2004
    
    
    351,363
    
    
    $
    0.80Warrants expired
    
    
    (137,108
    )
    
    
    0.81Warrants exercised
    
    
    (179,255
    )
    
    
    0.64Warrants exercisable at September 30, 2005
    
    
    35,000
    
    
    $
    1.58
 8




---



##### Table of Contents



Warrants Outstanding and ExercisableWeighted Avg.
    
    
    WeightedRemaining
    
    
    AverageNumber
    
    
    Contractual Life
    
    
    Exerciseof Shares
    
    
    (in years)
    
    
    PriceRange of Exercise Prices:$0.50  0.99
    
    
    25,000
    
    
    
    1.47
    
    
    $
    0.50$2.00  4.99
    
    
    10,000
    
    
    
    0.25
    
    
    
    4.2835,000
    
    
    
    1.12
    
    
    $
    1.58
 Stock options
   Weighted AverageStock Options
    
    
    Exercise PriceBalance, December 31, 2004
    
    
    6,154,325
    
    
    $
    1.52Options granted
    
    
    367,175
    
    
    
    4.56Options exercised
    
    
    (2,232,539
    )
    
    
    0.87Options cancelled
    
    
    (159,475
    )
    
    
    3.06Options forfeited
    
    
    (30,812
    )
    
    
    2.96Balance, September 30, 2005
    
    
    4,098,674
    
    
    $
    2.09Options exercisable (vested) at September 30, 2005
    
    
    3,432,883
    
    
    $
    1.77
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life (in years)
    
    
    Price
    
    
    Shares
    
    
    Price$0.26  $0.99
    
    
    1,513,921
    
    
    
    4.45
    
    
    $
    0.63
    
    
    
    1,458,278
    
    
    $
    0.62$1.00  $1.99
    
    
    183,605
    
    
    
    1.89
    
    
    
    1.43
    
    
    
    133,155
    
    
    
    1.31$2.00  $4.99
    
    
    2,194,023
    
    
    
    6.33
    
    
    
    2.85
    
    
    
    1,771,450
    
    
    
    2.61$5.00  $10.50
    
    
    207,125
    
    
    
    8.04
    
    
    
    5.31
    
    
    
    70,000
    
    
    
    8.04TOTAL
    
    
    4,098,674
    
    
    
    5.52
    
    
    $
    2.09
    
    
    
    3,432,883
    
    
    $
    1.77
  9




---



##### Table of Contents



Nine Months Ended September 30,2005
    
    
    2004Expected life in years
    
    
    7.33
    
    
    
    4.58Risk free interest rate
    
    
    6.75
    %
    
    
    4.5
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    38.9
    %
    
    
    56.1
    %
 Nine Months Ended September 30,2005
    
    
    2004As reported net income
    
    $
    4,214,749
    
    
    $
    4,095,962Add stock-based employee
compensation expense
included in reported
income, net of related tax
effects
    
    
    (164,609
    )
    
    
    (60,001
    )Less total stock based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects
    
    
    (1,090,403
    )
    
    
    (1,518,465
    )Pro forma net income (loss)
    
    $
    2,959,737
    
    
    $
    2,517,496Net income (loss) per share:As reported, fully diluted.
    
    $
    0.12
    
    
    $
    0.12Pro forma, fully diluted
    
    $
    0.09
    
    
    $
    0.07
 Note 5: Acquisition
     10




---



##### Table of Contents



Purchase price allocation
    
    June 2, 2005
    
    
    Adjustments
    
    
    September 30, 2005Purchase price paid at closing
    
    $
    3,000,000
    
    
    $
    
    
    
    $
    3,000,000Legal and other closing costs
    
    
    
    
    
    
    341,800
    
    
    
    341,800$
    3,000,000
    
    
    $
    341,800
    
    
    $
    3,341,800Cash
    
    
    617,069
    
    
    
    (81,817
    )
    
    
    535,252Accounts receivable
    
    
    1,713,495
    
    
    
    12,174
    
    
    
    1,725,669Other current assets
    
    
    
    
    
    
    10,350
    
    
    
    10,350Property and equipment, net
    
    
    46,219
    
    
    
    (3,635
    )
    
    
    42,584Customer list
    
    
    1,200,362
    
    
    
    468,348
    
    
    
    1,668,710Non-competition agreements
    
    
    1,200,362
    
    
    
    468,348
    
    
    
    1,668,710Total assets
    
    
    4,777,507
    
    
    
    873,768
    
    
    
    5,651,275Current liabilities
    
    
    96,948
    
    
    
    577,794
    
    
    
    674,742Customer deposits
    
    
    1,680,559
    
    
    
    (45,826
    )
    
    
    1,634,733Total liabilities
    
    
    1,777,507
    
    
    
    531,968
    
    
    
    2,309,475Total allocated purchase price
    
    $
    3,000,000
    
    
    $
    341,800
    
    
    $
    3,341,800
  Note 6: Contingencies
 TVG
   11




---



##### Table of Contents



(
  Warrant Litigation
  12




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward looking statements
  Overview
 SM SM
    13




---



##### Table of Contents



Key developments
  Critical accounting estimates and policies
  Revenues.
 Intangibles
 Internally developed software Accounting for the costs of Computer Software Developed
or Obtained for Internal Use
  Stock based compensation. Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued
to Employees
 14




---



##### Table of Contents



Other recent accounting pronouncements. Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and SFAS No. 3 Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 Material changes in financial condition
    15




---



##### Table of Contents



Results of Operations for the Three Months Ended September 30, 2005, Compared to the Three Months Ended September 30, 2004
   Operating expenses
      16




---



##### Table of Contents



Results of Operations for the Nine Months Ended September 30, 2005, Compared to the Nine Months Ended September 30, 2004
   Operating expenses
   17




---



##### Table of Contents



Liquidity and capital resources
  18




---



##### Table of Contents



Accounting for Contingencies
  19




---



##### Table of Contents



Regulatory considerations
 Legal issues concerning online wagering that may adversely effect our business.
 e.g.
 Various state legislatures, Congress and federal and state executive authorities have proposed laws and regulations directly applicable to online and Internet gaming which could have a material adverse effect on our business .
   20




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures
   Internal Control-Integrated Framework
 21




---



##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  22




---



##### Table of Contents



Item 6. Exhibits
 3.1
    
    Certificate of Incorporation of Youbet.com, as amended through November 12,
2001 (incorporated by reference to Exhibit 3.1 to the Form 10-Q of Youbet.com.
Inc. for the quarter ended September 30, 2003).3.2
    
    Amended and Restated Bylaws of Youbet.com (incorporated by reference to Exhibit
3.1 to the Form 8-K of Youbet.com, Inc. filed February 23, 2004).10.1
    
    Employment Agreement dated as of June 16, 2003 by and between Youbet.com, Inc.
and Charles F. Champion (incorporated by reference to
Exhibit 10.25 to the Form 10-KSB
of Youbet.com, Inc. for the year ended December 31, 2003).10.2
    
    First Amendment, dated as of August 1, 2005, to Employment Agreement dated as
of June 16, 2003 by and between Youbet.com, Inc. and Charles F. Champion.10.3
    
    Employment Agreement dated as of January 1, 2004 by and between Youbet.com,
Inc. and Gary W. Sproule (incorporated by reference to
Exhibit 10.2 to the Form 10-Q
of Youbet.com, Inc. for the quarter ended June 30, 2004).10.4
    
    First Amendment, dated as of August 1, 2005, to Employment Agreement dated as
of January 1, 2004 by and between Youbet.com, Inc. and Gary W. Sproule.31.1
    
    Certification of President and Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer and Treasurer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.32.1
    
    Certification Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934.
 23




---



##### Table of Contents



SIGNATURES
  YOUBET.COM, INC.November 9, 2005
    By:
    /s/ Charles F. ChampionCharles F. ChampionPresident and Chief Executive OfficerNovember 9, 2005
    By:
    /s/ Gary W. SprouleGary W. SprouleChief Financial Officer 24