##### 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
MARCH 31, 2007
 Commission File Number: 0-26015
 YOUBET.COM, INC.
  Delaware
    
    95-4627253(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 5901 De Soto Avenue
Woodland Hills, California 91367
 (818) 668-2100
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ




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##### 



YOUBET.COM, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTER ENDED
 MARCH 31, 2007
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Consolidated financial statements:Balance sheets as of March 31, 2007 (unaudited) and December 31, 2006
    
    
    2Statements of operations for the three months ended March 31, 2007 and 2006 (unaudited)
    
    
    3Statements of cash flows for the three months ended March 31, 2007 and 2006 (unaudited)
    
    
    4Notes to unaudited financial statements
    
    
    5Item 2.
    
    Managements discussion and analysis of financial condition and results of operations
    
    
    11Item 3.
    
    Quantitative and qualitative disclosures about market risk
    
    
    17Item 4.
    
    Controls and procedures
    
    
    17PART II. OTHER INFORMATIONItem 1.
    
    Legal proceedings
    
    
    18Item 1A.
    
    Risk factors
    
    
    18Item 2.
    
    Unregistered sales of equity securities and use of proceeds
    
    
    18Item 3.
    
    Defaults upon senior securities
    
    
    18Item 4.
    
    Submission of matters to a vote of security holders
    
    
    18Item 5.
    
    Other information
    
    
    18Item 6.
    
    Exhibits
    
    
    19Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Preliminary Note
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Part I. Financial Information
 
 Item 1. Consolidated Financial Statements
 
 YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    15,690
    
    
    $
    21,051Current portion of restricted cash
    
    
    5,169
    
    
    
    4,862Accounts receivable, net
    
    
    11,770
    
    
    
    13,287Inventory, net
    
    
    2,391
    
    
    
    2,587Prepaid expenses and other current assets
    
    
    1,696
    
    
    
    1,072Current portion of deferred tax asset
    
    
    1,164
    
    
    
    2,36737,880
    
    
    
    45,226Property and equipment, net
    
    
    30,221
    
    
    
    30,110Intangible assets other than goodwill, net
    
    
    13,538
    
    
    
    13,369Goodwill
    
    
    15,243
    
    
    
    15,243Deferred tax asset
    
    
    927
    
    
    
    Other assets
    
    
    1,539
    
    
    
    1,657$
    99,348
    
    
    $
    105,605LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesTrade payables
    
    $
    11,955
    
    
    $
    13,759Current portion of long-term debt
    
    
    6,408
    
    
    
    8,311Accrued expenses
    
    
    7,975
    
    
    
    9,489Customer deposits
    
    
    9,839
    
    
    
    8,441Deferred revenues
    
    
    536
    
    
    
    20736,713
    
    
    
    40,207Long-term debt, net of current portion
    
    
    12,385
    
    
    
    12,054Deferred tax liability
    
    
    
    
    
    
    57049,098
    
    
    
    52,831Stockholders equityPreferred stock, $0.001 par value, 1,000,000 shares
authorized, none outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value,
100,000,000 shares authorized, 42,454,480 and 42,118,446 shares issued
    
    
    42
    
    
    
    42Additional paid-in capital
    
    
    133,487
    
    
    
    137,597Accumulated deficit
    
    
    (81,969
    )
    
    
    (83,555
    )Accumulated other comprehensive loss
    
    
    (10
    )
    
    
    (10
    )Treasury stock (443,062 shares at cost)
    
    
    (1,300
    )
    
    
    (1,300
    )50,250
    
    
    
    52,774$
    99,348
    
    
    $
    105,605
 The accompanying notes are an integral part of these consolidated financial statements.
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YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
 Three Months EndedMarch 31,2007
    
    
    2006RevenuesCommissions
    
    $
    28,846
    
    
    $
    23,921Contract revenues
    
    
    5,102
    
    
    
    2,852Equipment sales
    
    
    120
    
    
    
    136Other
    
    
    915
    
    
    
    84734,983
    
    
    
    27,756Operating costs and expensesTrack fees
    
    
    14,625
    
    
    
    11,578Licensing, TVG
    
    
    2,823
    
    
    
    3,104Contract costs
    
    
    3,841
    
    
    
    1,934Equipment costs
    
    
    88
    
    
    
    89Network operations
    
    
    1,298
    
    
    
    1,284Research and development
    
    
    927
    
    
    
    766Sales and marketing
    
    
    2,421
    
    
    
    2,071General and administrative
    
    
    5,479
    
    
    
    4,417Depreciation and amortization
    
    
    1,878
    
    
    
    1,14033,380
    
    
    
    26,383Income from operations
    
    
    1,603
    
    
    
    1,373Other income (expense)Interest income
    
    
    199
    
    
    
    157Interest expense
    
    
    (456
    )
    
    
    (188
    )Other
    
    
    10
    
    
    
    102(247
    )
    
    
    71Income before income tax expense or benefit
    
    
    1,356
    
    
    
    1,444Income tax benefit (expense)
    
    
    230
    
    
    
    (94
    )Net income
    
    $
    1,586
    
    
    $
    1,350Income per share  basic and diluted
    
    $
    0.04
    
    
    $
    0.04
 The accompanying notes are an integral part of these consolidated financial statements.
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YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Three Months EndedMarch 31,2007
    
    
    2006Operating activitiesNet income
    
    $
    1,586
    
    
    $
    1,350Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization of property
    
    
    1,449
    
    
    
    896Amortization of intangibles
    
    
    429
    
    
    
    244Stock-based compensation
    
    
    175
    
    
    
    202Provision for doubtful accounts
    
    
    280
    
    
    
    Increase in operating (assets) liabilities
    
    
    (1,972
    )
    
    
    138Net cash provided by operating activities
    
    
    1,947
    
    
    
    2,830Investing activitiesCash paid for United Tote Company,
net of cash acquired in 2006 of $160
    
    
    (4,473
    )
    
    
    (10,094
    )Purchases of property and equipment
    
    
    (1,560
    )
    
    
    (1,088
    )Decrease in restricted cash
    
    
    108
    
    
    
    1,019Increase in restricted cash
    
    
    
    
    
    
    (250
    )Other
    
    
    
    
    
    
    38Net cash used in investing activities
    
    
    (5,925
    )
    
    
    (10,375
    )Financing activitiesProceeds from long-term debt
    
    
    1,081
    
    
    
    Repayment of long-term debt
    
    
    (2,653
    )
    
    
    (723
    )Proceeds from exercise of stock options and warrants
    
    
    277
    
    
    
    97Costs of prior period common stock issuance
    
    
    (88
    )
    
    
    Net cash used in financing activities
    
    
    (1,383
    )
    
    
    (626
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (11
    )Decrease in cash and cash equivalents
    
    
    (5,361
    )
    
    
    (8,182
    )Cash and cash equivalents, beginning of period
    
    
    21,051
    
    
    
    16,686Cash and cash equivalents, end of period
    
    $
    15,690
    
    
    $
    8,504
 The accompanying notes are an integral part of these consolidated financial statements.
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YOUBET.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006
 Note 1: Basis of Presentation
    Note 2: Earnings Per Share
  Three Months Ended March 31,2007
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageNet Income
    
    
    Shares
    
    
    EPS
    
    
    Net Income
    
    
    Shares
    
    
    EPSEPS  Basic
    
    $
    1,586
    
    
    
    41,695
    
    
    $
    0.04
    
    
    $
    1,350
    
    
    
    34,208
    
    
    $
    0.04Effect of dilutive securities
    
    
    
    
    
    
    1,295
    
    
    
    
    
    
    
    
    
    
    
    2,170
    
    
    
    EPS  Diluted
    
    $
    1,586
    
    
    
    42,990
    
    
    $
    0.04
    
    
    $
    1,350
    
    
    
    36,378
    
    
    $
    0.04
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Note 3: Detail of Selected Balance Sheet Accounts:
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands)Accounts receivable, net:Track receivables
    
    $
    11,815
    
    
    $
    12,512Player receivables
    
    
    1,082
    
    
    
    1,249Other
    
    
    429
    
    
    
    1,33913,326
    
    
    
    15,100Less: allowance for doubtful accounts
    
    
    (1,556
    )
    
    
    (1,813
    )$
    11,770
    
    
    $
    13,287Inventory, net:Totalizator components
    
    $
    1,716
    
    
    $
    1,498Work in process
    
    
    190
    
    
    
    130Ticket stock
    
    
    488
    
    
    
    493Finished goods
    
    
    515
    
    
    
    9872,909
    
    
    
    3,108Less: allowance for obsolescence
    
    
    (518
    )
    
    
    (521
    )$
    2,391
    
    
    $
    2,587Property and equipment, net:Pari-mutuel equipment
    
    $
    22,734
    
    
    $
    21,668Computer equipment
    
    
    14,080
    
    
    
    14,138Software
    
    
    4,675
    
    
    
    4,386Leasehold improvements
    
    
    3,183
    
    
    
    3,130Office furniture, fixtures and equipment
    
    
    603
    
    
    
    57645,275
    
    
    
    43,898Less: accumulated depreciation and amortization
    
    
    (15,054
    )
    
    
    (13,788
    )$
    30,221
    
    
    $
    30,110Intangibles assets other than goodwill, net:Developed technology
    
    $
    3,805
    
    
    $
    3,805Non-compete agreements
    
    
    3,936
    
    
    
    3,636Customer lists
    
    
    3,936
    
    
    
    3,636Trademarks
    
    
    3,400
    
    
    
    3,400Other
    
    
    721
    
    
    
    72115,798
    
    
    
    15,198Less: accumulated amortization
    
    
    (2,260
    )
    
    
    (1,829
    )$
    13,538
    
    
    $
    13,369
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Note 4: Debt
  March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands)Promissory notes
    
    $
    3,200
    
    
    $
    5,000Bank revolving line of credit
    
    
    2,081
    
    
    
    990Bank term loan
    
    
    13,257
    
    
    
    14,007Capital lease obligations and other
    
    
    255
    
    
    
    36818,793
    
    
    
    20,365Less: short-term debt and current portion of long-term debt
    
    
    (6,408
    )
    
    
    (8,311
    )Long-term debt, less current maturities
    
    $
    12,385
    
    
    $
    12,054
   Note 5: Income Taxes
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Note 6: Contingencies
 Note and warrant litigation
 Other
 Note 7: Stockholders Equity
 Stock options
 WeightedAverageStock
    
    
    ExerciseOptions
    
    
    Price(in thousands)Balance at December 31, 2006
    
    
    4,906
    
    
    $
    2.61Options granted
    
    
    160
    
    
    
    3.69Options exercised
    
    
    (336
    )
    
    
    0.82Options cancelled
    
    
    (35
    )
    
    
    3.78Balance at March 31, 2007
    
    
    4,695
    
    
    
    2.76
  Options Outstanding
    
    
    Options ExercisableWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Remaining
    
    
    Number of
    
    
    AverageShares
    
    
    Exercise
    
    
    Contractual
    
    
    Shares
    
    
    Exercise(in thousands)
    
    
    Price
    
    
    Life (years)
    
    
    (in thousands)
    
    
    PriceRange of Exercise Prices:$0.49 to $1.00
    
    
    1,010
    
    
    $
    0.55
    
    
    
    4.5
    
    
    
    1,010
    
    
    $
    0.55$1.49 to $1.99
    
    
    1,413
    
    
    
    2.26
    
    
    
    5.0
    
    
    
    1,400
    
    
    
    2.26$2.74 to $3.99
    
    
    1,117
    
    
    
    3.53
    
    
    
    8.2
    
    
    
    283
    
    
    
    3.12$4.00 to $4.99
    
    
    1,008
    
    
    
    4.47
    
    
    
    7.9
    
    
    
    593
    
    
    
    4.44$5.00 to $6.19
    
    
    147
    
    
    
    5.30
    
    
    
    8.2
    
    
    
    63
    
    
    
    5.34Total at March 31, 2007
    
    
    4,695
    
    
    
    2.76
    
    
    
    6.4
    
    
    
    3,349
    
    
    
    2.26
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Note 8: United Tote Acquisition
   
    
    $9.75 million in cash;
    
    Three unsecured promissory notes with an aggregate principal amount of $10.2 million; and
 
    
    2,181,818 shares of Youbet common stock that were subject to a make-whole provision
which valued such shares at $5.50 per share.
    Pro forma
    
    
    As reportedRevenue
    
    $
    30,100
    
    
    $
    27,756Net income
    
    $
    1,100
    
    
    $
    1,350Earnings per share  basic and diluted
    
    $
    0.03
    
    
    $
    0.04
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Note 9: Segment Reporting
  Three Months EndedMarch 31,2007
    
    
    2006(unaudited, in thousands)RevenueAdvance deposit wagering segment
    
    $
    30,010
    
    
    $
    24,769Totalizator services segment
    
    
    5,401
    
    
    
    3,07435,411
    
    
    
    27,843Intersegment eliminations
    
    
    (428
    )
    
    
    (87
    )$
    34,983
    
    
    $
    27,756Revenue by Geographic AreaUnited States
    
    $
    34,574
    
    
    $
    27,148International
    
    
    409
    
    
    
    608$
    34,983
    
    
    $
    27,756Reconciliation to Income Before Income Tax Expense or BenefitIncome (loss) from operationsAdvance deposit wagering segment
    
    $
    2,829
    
    
    $
    1,591Totalizator services segment
    
    
    (1,226
    )
    
    
    (218
    )1,603
    
    
    
    1,373Interest income
    
    
    199
    
    
    
    157Interest expense
    
    
    (456
    )
    
    
    (188
    )Other
    
    
    10
    
    
    
    102Income before income tax expense or benefit
    
    $
    1,356
    
    
    $
    1,444
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands)Total AssetsAdvance deposit wagering segment
    
    $
    44,098
    
    
    $
    50,280Totalizator services segment
    
    
    55,250
    
    
    
    55,325$
    99,348
    
    
    $
    105,605
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Item 2. Managements discussion and analysis of financial condition and results of operations
 Forward-looking statements
  Overview
  www.youbet.com
      - 11 -




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Critical accounting estimates and policies
  Revenues
   Allowance for doubtful accounts
  
    
    customer-specific allowance;
 
    
    amounts based upon an aging schedule; and
 
    
    an estimated amount, based on our historical experience, for issues not yet identified.
 Inventory obsolescence
  Valuation of long-lived and intangible assets
   
    
    significant underperformance relative to expected historical or projected future operating results;
 
    
    significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
 
    
    significant negative industry or economic trends;
 
    
    significant decline in our stock price for a sustained period; and
 
    
    our market capitalization relative to net book value.
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Internally developed software
 Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
 Recent accounting pronouncements
 Fair Value Measurements. The Fair Value Option for Financial Assets and Financial Liabilities
 including an amendment of FAS 115.
 Results
of operations for the three months ended March 31, 2007 compared to the three months ended March 31, 2006
 Revenues
     - 13 -




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Operating expenses
 Track fees
 Licensing, TVG
 Contract costs
 Network operations
 Research and development
 Sales and marketing
 General and administrative
 Depreciation and amortization
 Interest expense
 Liquidity and capital resources
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Credit facility
    United Tote make-whole provision
   - 15 -




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IRG
  Potential repurchase of equity securities (stock buy-back)
  Competition
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NYRA bankruptcy
  
 Item 3. Quantitative and qualitative disclosures about market risk
  
 Item 4. Controls and procedures
   
    
    Pervasive control deficiencies across key Committee of Sponsoring Organizations of the
Treadway Commission components, including information technology general controls (ITGC),
information technology (IT) application controls, and business processes.
 
    
    Pervasive control deficiencies across key ITGC categories relating to IT operations, planning and management.
 
    
    Control deficiencies across key business processes at all operating units.
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Part II. Other information
 
 Item 1. Legal proceedings
  
 Item 1A. Risk factors
  
    
    We face strong competition from the Television Games Network and others.
 
    
    Our inability to retain our relationships with our content providers would have a material
adverse effect on our business.
 
    
    Our inability to collect revenue due to the NYRA bankruptcy could reduce our revenue and
cause our businesses to suffer.
  
 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
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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, as amended (incorporated by reference
to Exhibit 3.1 to the Form 8-K of Youbet.com, Inc. filed April 20, 2007).10.1
    
    
    Credit Agreement, dated as of July 27, 2006, by and among Youbet.com, Inc. and
United Tote Company, as borrowers, the lenders signatory thereto, as lenders,
and Wells Fargo Foothill, Inc., as arranger and administrative agent
(incorporated by reference to Exhibit 10.1 to Youbets Current Report on Form
8-K filed July 28, 2006).10.2
    
    
    First Amendment to Credit Agreement and Waiver, dated as of March 14, 2007, by
and among Youbet.com, Inc. and United Tote Company, as borrowers, and Wells
Fargo Foothill, Inc., as arranger and agent (incorporated by reference to
Exhibit 10.16 to Youbets Form 10-K for the year ended December 31, 2006).10.3
    
    
    Consent to Stock Repurchase, dated April 10, 2007, between Youbet.com, Inc., as
administrative borrower, and Wells Fargo Foothill, Inc., as administrative agent
(incorporated by reference to Exhibit 10.3 to Youbets Current Report on Form
8-K filed April 11, 2007).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.
  SIGNATURES
  YOUBET.COM, INC.May 10, 2007
    By:
    /s/ Charles F. ChampionCharles F. ChampionPresident and Chief Executive OfficerMay 10, 2007
    By:
    /s/ Gary W. SprouleGary W. SprouleChief Financial Officer  - 19 -