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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, 2005 COMMISSION FILE NUMBER: 0-26015    YOUBET.COM, INC. DELAWARE
    
    95-4627253
 5901 De Soto Avenue, Woodland Hills, California 91367 (818) 668-2100 Indicate by check whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o As of March 31, 2005, the issuer had 31,705,815 shares of common stock, par value $0.001 per share,
issued and outstanding. The aggregate market value of the issuers common stock held by
non-affiliates (assuming that the Registrants only affiliates are its officers, directors and 10%
or greater stockholders) of the issuer as of March 31, 2005 was approximately $180,578,994 based
upon the closing market price of $5.86 per common share on that date as reported on the Nasdaq
SmallCap Market.




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YOUBET.COM, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2005 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated financial statementsBalance sheets as of March 31, 2005 (unaudited) and December 31, 2004
    
    
    3Statements of operations for the three months ended March 31, 2005
and 2004 (unaudited)
    
    
    4Statements of cash flows for the three months ended March 31, 2005
and 2004 (unaudited)
    
    
    5Notes to unaudited financial statements
    
    
    6Item 2. Managements discussion and analysis of financial condition and results of operations
    
    
    10Item 3. Quantitative and qualitative disclosures about market risk.
    
    
    16Item 4. Controls and procedures
    
    
    16PART II. OTHER INFORMATIONItem 1. Legal proceedings
    
    
    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
    
    
    18Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Preliminary Note This quarterly report on Form 10-Q is for the three-month period ended March 31, 2005. This
quarterly report modifies and supersedes documents filed prior to this quarterly report. The
Securities and Exchange Commission, referred to as the SEC, allows Youbet to incorporate by
reference information that Youbet files with it, which means that Youbet can disclose important
information to you by referring you directly to those documents. Information incorporated by
reference is considered to be part of this quarterly report. In addition, information that Youbet
files with the SEC in the future will automatically update and supersede information contained in
this quarterly report. 2




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##### Table of Contents



Part I. Financial Information 
 Item 1. Financial Statements
 YOUBET.COM, INC. 
 CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    15,057,356
    
    
    $
    13,287,492Current portion of restricted cash
    
    
    3,234,472
    
    
    
    3,197,468Accounts receivable, net of allowance for doubtful collection of $346,000 and
$346,000
    
    
    642,036
    
    
    
    595,108Other receivables, net of allowance for doubtful collection of $180,457 and
$180,457
    
    
    130,180
    
    
    
    254,805Prepaid expenses
    
    
    1,600,828
    
    
    
    936,524Current portion of deferred tax asset
    
    
    1,791,000
    
    
    
    1,791,00022,455,872
    
    
    
    20,062,397Property and equipment, net of accumulated depreciation and amortization of $8,063,076 and $7,912,388
    
    
    3,401,177
    
    
    
    3,210,841Restricted cash, net of current portion
    
    
    487,750
    
    
    
    487,750Licenses and patents
    
    
    29,899
    
    
    
    28,148Deposits and other
    
    
    175,214
    
    
    
    129,684Deferred tax asset, net of current portion
    
    
    1,523,000
    
    
    
    1,523,000$
    28,072,912
    
    
    $
    25,441,820LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long term debt
    
    $
    352,678
    
    
    $
    391,208Trade payables, TVG
    
    
    3,011,857
    
    
    
    3,928,161Trade payables, track related
    
    
    2,567,400
    
    
    
    2,088,774Trade payables, other
    
    
    661,315
    
    
    
    478,021Accrued expenses and other
    
    
    1,984,548
    
    
    
    860,713Customer deposits
    
    
    3,357,670
    
    
    
    3,327,132Deferred revenues
    
    
    122,751
    
    
    
    112,15612,058,219
    
    
    
    11,186,165Long term debt, net of current portion
    
    
    106,672
    
    
    
    157,89512,164,891
    
    
    
    11,344,060Stockholders equityPreferred stock, $0.001 par value, authorized
1,000,000 shares, none outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, authorized 100,000,000 shares
31,705,815 and 30,979,768 shares outstanding as of
March 31, 2005 and December 31, 2004, respectively
    
    
    31,706
    
    
    
    30,980Additional paid-in capital
    
    
    103,890,288
    
    
    
    103,110,751Deficit
    
    
    (86,185,264
    )
    
    
    (87,215,262
    )Treasury stock (623,683 shares at cost)
    
    
    (1,828,709
    )
    
    
    (1,828,709
    )15,908,021
    
    
    
    14,097,760$
    28,072,912
    
    
    $
    25,441,820
 See notes to consolidated financial statements 3




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##### Table of Contents



YOUBET.COM, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three months ended March 31,2005
    
    
    2004RevenuesCommissions
    
    $
    17,763,048
    
    
    $
    14,260,037Other
    
    
    752,310
    
    
    
    539,68218,515,358
    
    
    
    14,799,719Operating expensesTrack fees
    
    
    8,625,132
    
    
    
    6,767,825Licensing, TVG
    
    
    3,011,857
    
    
    
    2,020,538Network operations
    
    
    995,201
    
    
    
    839,375Research and development
    
    
    319,876
    
    
    
    415,841Sales and marketing
    
    
    1,276,148
    
    
    
    669,092General and administrative
    
    
    3,182,438
    
    
    
    2,983,514Depreciation and amortization
    
    
    231,825
    
    
    
    1,133,32317,642,477
    
    
    
    14,829,508Income (loss) from operations
    
    
    872,881
    
    
    
    (29,789
    )Other income (expense)Interest income
    
    
    89,421
    
    
    
    33,990Interest expense
    
    
    (18,827
    )
    
    
    (1,434
    )Other
    
    
    86,523
    
    
    
    12,344157,117
    
    
    
    44,900Income before income taxes
    
    
    1,029,998
    
    
    
    15,111Income taxes
    
    
    
    
    
    
    Net income
    
    $
    1,029,998
    
    
    $
    15,111Income per share  basic
    
    $
    0.03
    
    
    $
    0.00Income per share  diluted
    
    $
    0.03
    
    
    $
    0.00
 See notes to consolidated financial statements 4




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YOUBET.COM, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three months ended March 31,2005
    
    
    2004Operating activitiesNet income
    
    $
    1,029,998
    
    
    $
    15,111Adjustments to reconcile net income to
net cash provided by (used in) operating activitiesDepreciation and amortization
    
    
    231,825
    
    
    
    1,133,323Stock-based compensation (benefit)
    
    
    (52,726
    )
    
    
    (7,006
    )Increase in operating (assets) and liabilitiesRestricted cash
    
    
    (33,891
    )
    
    
    (2,182
    )Receivables
    
    
    (46,928
    )
    
    
    (237,869
    )Other receivables
    
    
    124,625
    
    
    
    (116,652
    )Prepaid expenses
    
    
    (664,304
    )
    
    
    81,983Deposits and other
    
    
    (45,529
    )
    
    
    501,047Trade payables, TVG
    

    
    (916,303
    )
    
    
    (1,188,751
    )Trade payables, track related
    
    
    478,626
    
    
    
    (173,982
    )Trade payables, other
    
    
    183,294
    
    
    
    116,398Accrued expenses and other
    
    
    1,123,835
    
    
    
    (550,876
    )Customer deposits
    
    
    30,538
    
    
    
    144,767Deferred revenues
    
    
    10,595
    
    
    
    6,665Net cash provided by (used in) operating activities
    
    
    1,453,655
    
    
    
    (278,023
    )Investing activitiesPurchases of property and equipment
    
    
    (416,807
    )
    
    
    (38,649
    )Intangibles
    
    
    (1,751
    )
    
    
    Decrease (increase) in restricted cash, other
    
    
    (3,113
    )
    
    
    97,728Net cash provided by (used in) investing activities
    
    
    (421,671
    )
    
    
    59,079Financing activitiesProceeds from exercise of stock options and warrants, net
    
    
    832,988
    
    
    
    304,922Repayment of long term debt
    
    
    (95,108
    )
    
    
    Net cash provided by financing activities
    
    
    737,880
    
    
    
    304,922Increase in cash and cash equivalents
    
    
    1,769,864
    
    
    
    85,978Cash and cash equivalents, beginning of period
    
    
    13,287,492
    
    
    
    8,273,926Cash and cash equivalents, end of period
    
    $
    15,057,356
    
    
    $
    8,359,904Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    17,864
    
    
    $
    2,121Cash paid for income tax
    
    $
    64,000
 See notes to consolidated financial statements 5




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YOUBET.COM, INC. 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005
 Note 1: Basis of presentation The accompanying financial statements have been prepared by Youbet.com, Inc. (the Company)
pursuant to the rules and regulations of the Securities and Exchange Commission relating to interim
financial statements. Accordingly, certain information and note disclosures normally included in
the annual financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. For further information, please refer to the annual
financial statements of the Company, and the related notes, included within the Companys Form 10-K
for the fiscal year ended December 31, 2004, previously filed with the Securities and Exchange
Commission, from which the balance sheet information as of December 31, 2004, is derived. In the opinion of management, all adjustments considered necessary for a fair presentation have
been included. The results for the interim period are not necessarily indicative of the results to
be expected for the full year. Certain amounts, as previously reported, have been reclassified to conform to the current period
presentation. Note 2: Customer deposits As of March 31, 2005 and December 31, 2004, customers deposits totaled $3,357,670 and $3,327,132,
including IRS tax withholdings of $298,198 and $434,125, respectively. Note 3: Income taxes In assessing the Companys ability to realize its deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which deferred tax assets become deductible. Management considers the
amount and timing of scheduled reversals of deferred tax liabilities and forecasted future taxable
income over the periods for which the deferred tax assets are deductible. Management believes that
Youbet will continue to be profitable for the foreseeable future and that it is more likely than
not that the recorded net deferred tax asset of $3,314,000 will be realized. Management has
assessed a valuation allowance against the remainder of the deferred tax assets. Youbet has federal and state net operating loss carry forwards in the amount of $61,408,000 and
$19,871,000, respectively, at March 31, 2005. The Company expects these federal and state net
operating loss carry forwards to begin expiring in 2005 and 2006, respectively. Youbet may be limited in its ability to fully utilize its net operating loss carry forwards due to
ownership changes described in Internal Revenue Code Section 382. The Company has estimated the
amount of net operating loss carry forwards that it could utilize in any one year based on certain
prior year dates which could potentially be deemed as ownership changes. Of the approximately
$60,000,000 federal net operating losses prior to 2003, at a minimum $11,690,000 would be allowed
against taxable income per year. Youbet is conducting further analysis to assess the impact of the 6




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annual limitation. Management currently believes it is more likely than not that the full amount
of recorded net deferred tax asset will be realized. These estimates are based on the current beliefs and expectations of management, as well as
assumptions made by, and information currently available to, management. Although management
believes the expectations reflected in these estimates are based upon reasonable assumptions, it
can give no assurance that actual results will not differ materially from these expectations. See
Forward Looking Statements in Item 2 below for more information about managements assumptions
contained in this Form 10-Q. Note 4: Earnings per share The following table is a reconciliation of the weighted average shares used in the computation of
basic and diluted earnings per share (EPS) for the periods presented: Three Months Ended March 31,2005
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    
    Average
    
    
    
    
    
    
    Net
    
    
    AverageIncome
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSEarnings
per share -
Basic
    
    $
    1,029,998
    
    
    
    31,161,936
    
    
    $
    0.03
    
    
    $
    15,111
    
    
    
    28,549,772
    
    
    $
    0.00Effect of
dilutive
securities
    
    
    
    
    
    
    3,899,603
    
    
    
    
    
    
    
    
    
    
    
    4,286,671
    
    
    
    Earnings
per share -
Diluted
    
    $
    1,029,998
    
    
    
    35,061,539
    
    
    $
    0.03
    
    
    $
    15,111
    
    
    
    32,836,443
    
    
    $
    0.00
 Note 5: Stockholders equity The Company has issued various stock options and warrants in non-capital raising transactions for
services rendered and to be rendered and as financing costs. In accordance with the election
available under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, the Company accounts for stock options issued to officers and employees
under the recognition and measurement principles of Accounting Policy Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of grant. However,
certain repriced options discussed below resulted in compensation adjustments, which have been
reflected in net income. The Company has calculated the fair value of warrants and non-employee
stock options according to the Black-Scholes pricing model. 7




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Warrants Information with respect to common stock purchase warrants issued is summarized as follows: WeightedAverage ExerciseWarrants
    
    
    PriceBalance, December 31, 2004
    
    
    351,363
    
    
    $
    0.80Warrants expired
    
    
    (137,108
    )
    
    
    0.81Warrants exercised
    
    
    (79,255
    )
    
    
    0.81Warrants Exercisable at March 31, 2005
    
    
    135,000
    
    
    $
    0.78
 Additional information about outstanding warrants to purchase the Companys common
stock at March 31, 2005 is as follows: Warrants Outstanding and ExercisableWeighted Avg.
    
    
    WeightedRemaining
    
    
    AverageNumber
    
    
    Contractual Life
    
    
    Exerciseof Shares
    
    
    (in years)
    
    
    PriceRange of Exercise Prices:$0.50  0.99
    
    
    125,000
    
    
    
    1.97
    
    
    $
    0.50$2.00  4.99
    
    
    10,000
    
    
    
    0.75
    
    
    
    4.28Total
    
    
    135,000
    
    
    
    
    
    
    $
    0.78
 Stock options As of March 31, 2005, there were options for 8,484,480 shares of common
stock issued under the Companys 1998 Stock Option Plan, out of a total approved pool of
8,500,000 shares. There were no
stock options issued during the three months ended March 31, 2005. Information with respect to activity under the Companys 1998 Stock Option Plan is
summarized below. Weighted AverageStock Options
    
    
    Exercise PriceBalance, December 31, 2004
    
    
    6,154,325
    
    
    $
    1.52Options exercised
    
    
    (646,792
    )
    
    
    1.19Options forfeited
    
    
    (50
    )
    
    
    1.90Balance, March 31, 2005
    
    
    5,507,483
    
    
    
    1.56Options Exercisable (Vested) at March 31, 2005
    
    
    4,666,649
    
    
    $
    1.34
 8




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##### Table of Contents



Additional information about outstanding options to purchase the Companys common stock
at March 31, 2005 is as follows: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    Number of
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExercisePrices
    
    Shares
    
    
    Life (in years)
    
    
    Price
    
    
    Shares
    
    
    Price$0.26 - $0.99
    
    
    3,032,501
    
    
    
    5.48
    
    
    $
    0.65
    
    
    
    2,846,436
    
    
    $
    0.65$1.00 - $1.99
    
    
    227,209
    
    
    
    2.05
    
    
    
    1.36
    
    
    
    161,647
    
    
    
    1.25$2.00 - $4.99
    
    
    2,152,773
    
    
    
    6.14
    
    
    
    2.69
    
    
    
    1,613,567
    
    
    
    2.45$5.00 - $10.50
    
    
    95,000
    
    
    
    6.50
    
    
    
    5.35
    
    
    
    45,000
    
    
    
    5.62TOTAL
    
    
    5,507,483
    
    
    
    5.62
    
    
    $
    1.56
    
    
    
    4,666,649
    
    
    $
    1.34
 If compensation expense for stock options issued to officers and employees had been
determined based upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, the net loss and basic loss per share would have been as
shown below. The fair value of stock options granted under the 1998 Stock Option Plan was
estimated on the date of grant using the Black-Scholes option pricing model using the
following weighted average assumptions for grants in the respective periods. Three Months Ended March 31,2005
    
    
    2004Expected life in years
    
    
    4.36
    
    
    
    4.86Risk free interest rate
    
    
    5.75
    %
    
    
    4.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    45.6
    %
    
    
    73.5
    %
 No stock options or warrants were issued during the three month period ended March 31,
2005. Three Months Ended March 31,2005
    
    
    2004As reported net income
    
    $
    1,029,998
    
    
    $
    15,111Add: Stock-based
employee compensation
expense included in
reported income, net of
related tax effects
    
    
    (52,726
    )
    
    
    (10,168
    )Less: Total stock based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects
    
    
    (815,767
    )
    
    
    (1,433,785
    )Pro forma net income (loss)
    
    $
    161,505
    
    
    $
    (1,428,842
    )Net income (loss) per share:As reported, fully diluted
    
    $
    0.03
    
    
    $
    0.00Pro forma, fully diluted
    
    $
    0.00
    
    
    $
    (0.05
    )
 9




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As of
March 31, 2005, the number of stock options that had been
granted or otherwise promised subject to
stockholder approval of the equity incentive plan to be voted on at
the Companys June 2, 2005
annual meeting of shareholders is as follows: All non-employee directors (1 person)
    
    
    20,000All employees other than executive officers (14 persons)
    
    
    271,850
 Note 6: Purchase contingency In February 2005, Youbet announced that it has entered into a Letter of Intent to acquire
International Racing Group (IRG), a privately-held, pari-mutuel account wagering company based in
Curacao, a Netherlands Antilles territory. The purchase of IRG is contingent upon certain events,
including the completion of Youbets due diligence, execution of definitive transaction documents
and the approval of Youbets Board of Directors. The final terms of the transaction remain under
negotiation. Youbet expects to have sufficient surplus cash-on-hand together with shares held in
treasury to finance this transaction. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. Forward looking statements The following discussion and analysis of Youbets financial condition and results of
operations should be read in conjunction with Youbets Condensed Consolidated Financial
Statements and other financial information included herein. This discussion and other
sections of this report contain forward-looking statements that are based on the current
beliefs and expectations of management, as well as assumptions made by, and information
currently available to, management. Such statements include those regarding general economic
and e-gaming industry trends. Such statements involve risks and uncertainties including,
without limitation: the timely development and market acceptance of products and
technologies; the successful integration of acquisitions; Youbets ability to secure
external sources of financing on acceptable terms; Youbets ability to control operating
expenses; increased competition in the advance deposit wagering business; a decline in the
public acceptance of wagering; wagering ceasing to be legal in jurisdictions where Youbet
currently operates; the limitation, conditioning, or suspension of any of Youbets licenses;
a decline in the general economy; and other factors described in our filings with the
Securities and Exchange Commission. Actual actions and strategies and the timing and
expected results may differ materially from those expressed or implied by such
forward-looking statements, and Youbets future results, performance or achievements could
differ materially from those expressed in, or implied by, any such forward-looking
statements. Future events and actual results could differ materially from those set forth
in or underlying the forward-looking statements. Overview Youbet has established itself as a leading, global brand name for online pari-mutuel horse
race wagering. Wagering on live events is a large global industry, and Youbet believes that
its Internet-based platform could be easily modified to accommodate wagering on other live
events such as car racing, soccer and football. To date, Youbet has focused on the United
States pari-mutuel horse race wagering market through its main product, Youbet
ExpressSM, which features online wagering, simulcast viewing, and in-depth,
up-to-the-minute 10




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##### Table of Contents



information on horse racing. Youbets customers receive interactive, real-time audio/video
broadcasts, access to a comprehensive database of handicapping information, and, in most
states, the ability to wager on a wide selection of horse races in the United States,
Canada, Australia, South Africa, Hong Kong, and the United Kingdom. Youbet is working to expand
the Youbet.comSM brand, its products, and its services throughout the United
States and in select international markets. In addition to Internet-based wagering, off-track wagering occurs at off-track betting
facilities and through telephone live operator and interactive voice recognition (IVR)
assisted calling. Customers using Youbets advanced deposit wagering (ADW) service receive
the same odds as they would receive if the were physically at the track. In fact,
approximately 87% of all horse racing wagers are placed away from the track. The shift from
at-the-track to off-track wagering has been driven by the betting publics desire for
convenience and access to a wide range of horse racing events. Technological developments
and the concept of ADW has made this shift possible. ADW involves a customer opening an
account and depositing money with a state-licensed betting facilitator and then using the
deposited amounts, plus any realized winnings, for on-going wagering. Similar to most forms of gaming, live event wagering is most enjoyable when a wide variety
of wagering options is available. Youbet covers action at more than 100 domestic and
international horse tracks and offers dozens of races daily. Our web-based, interactive
system completes the wagering process, including exotic selections, much faster than
face-to-face or telephone transactions with winning outcomes instantly credited to the
customers account for future events or prompt disbursement. As Youbet considers expansion
into gaming venues beyond horse racing, our advanced gaming platforms and wagering products
may be leveraged into new markets. Youbet believes that the convenience of remote wagering has encouraged new customers and
experienced handicappers to become more engaged with the sport of horse racing. Youbet also
believes that its marketing activities and user-friendly products have attracted consumers
who have rarely or never wagered, but have now found an efficient, friendly method in which
to experience the thrill of wagering. Many countries either have or are in the process of enacting laws and procedures for
operating web-based wagering systems. As these systems are perceived to be increasingly
reliable and legal, Youbet believes sports fans will be correspondingly interested in
viewing and wagering on international horse racing and other live entertainment events using
an interactive, web-based system. Key developments In January 2005, Youbet announced that it had renewed its endorsement contract with harness
driver John Campbell for the 2005 racing season. Campbell is harness racings all time
leading money earner who, along with a group of fellow drivers, broke new ground last year
by featuring corporate advertising on their uniforms. In February 2005, Youbet announced that it has entered into a Letter of Intent to acquire
International Racing Group (IRG), a privately-held, pari-mutuel account wagering company
based in Curacao, a Netherlands Antilles territory. The purchase of IRG is contingent upon
certain events, including the completion of Youbets due diligence, execution of definitive 11




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transaction documents and the approval of Youbets Board of Directors. The final terms of
the transaction remain under negotiation. Youbet expects to have sufficient surplus
cash-on-hand together with shares held in treasury to finance this transaction. In March 2005, Youbet launched a horse racing entertainment website exclusively for access
by customers in Mainland China. Through March 2005, Youbet has appointed five outside experts in law enforcement, security,
gaming, and financial transactions to its new independent wagering compliance committee to
ensure Youbets ongoing use of best practices in its gaming and pari-mutuel wagering
controls. Critical accounting estimates and policies Although our financial statements necessarily make use of certain accounting estimates by
management, we believe no matters that are the subject of such estimates are so highly
uncertain or susceptible to change as to present a significant risk of a material impact on
our financial condition or operating performance if managements estimates turn out to be
incorrect. Moreover, except as described below, Youbet does not employ any critical
accounting policies that are selected from among available alternatives or that require the
exercise of significant management judgment in their application. Revenues.Youbet records commission revenues and the related track and market access fees
as operating expenses when wagers are settled, typically the same day as the wager. Other
sources of revenue are relatively insignificant. Incentives offered to customers for them
to wager on tracks that generate the greatest margins are deducted from revenues. Licenses and patents. Licenses and patents are stated at cost and are amortized over their
estimated economic life or agreement term, whichever is shorter. Results of Operations for the Three Months Ended March 31, 2005, Compared to the Three Months Ended March 31, 2004 Total revenues increased 25% for the first quarter of 2005, compared to the first quarter of
2004. Total wagers (handle) for the three months ended March 31, 2005 was $88,250,922, an
increase of 23% from the same period of 2004. This increase in handle is due, in part, to
Youbet carrying all of Magna Entertainment Corporations (Magna) content in the first quarter of
this year, compared to carrying only Magnas California content in the same quarter last year.
In addition to the increase in handle, the increase in total revenues can also be attributed, in
part, to the higher yields earned on wagers placed on horse races at Magna tracks under our 2005
license agreement, compared to the yields earned on wagers placed on horse races at Magna tracks
in 2004. Our higher margin tracks (primarily the tracks that are not subject to our agreement
with ODS Technologies, a subsidiary of Gemstar-TV Guide International, doing business as
Television Games Network (TVG) and our Magna agreement) accounted for 47% of our commission
revenues for the quarter, a decrease of 18% over the prior year quarter, primarily due to the
increased Magna content offering. 12




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Operating expenses TRACK FEES: Track fees increased 27% to $8,625,132 in the first quarter of 2005, compared
to $6,767,825 in the first quarter of 2004. The increase was primarily due to an increase
in handle and revenues. Track fees consist of amounts paid and payable to various tracks,
the California Horse Racing Board, and the Oregon Racing Commission. LICENSING FEES  TVG: For the three months ended March 31, 2005, these fees increased 49%
to $3,011,857, compared to $2,020,538 for the first quarter of 2004, primarily due to
increased wagering on horse races at TVG tracks. Licensing fees represent amounts paid and
payable as a result of our licensing agreement with TVG. NETWORK OPERATIONS: Network operations expense increased 19% to $995,201 in the first
quarter of 2005, compared to $839,375 in the first quarter of 2004. This increase was
primarily due to increased totalizator (the systems that process wagers and payouts) fees
related to increased wager volume. The increase was also due to an increased number of data
center personnel and increased data center expenses. Network operations expense consists of
costs for salaries, data center management, telecommunications, and various totalizator
fees. RESEARCH AND DEVELOPMENT: Research and development expense decreased 23% to $319,876 in the
first quarter of 2005, compared to $415,841 in the first quarter of 2004. The decrease was
due to the capitalization of internally developed software costs in 2005. We will continue
to invest in the development of our network infrastructure and to support continued
technology upgrades, which could increase our research and development expenses in the
future. SALES AND MARKETING: Sales and marketing expense increased 91% to $1,276,148 in the first
quarter of 2005, compared to $669,092 in the first quarter of 2004. The increase was
primarily due to increased international and Nevada-based business development efforts and
increased marketing programs, including expenses associated with our National Thoroughbred
Racing Association and ESPN agreements that did not exist during the first quarter of 2004.
Sales and marketing expense consists of costs for salaries, marketing and advertising,
member services, account services, and business development. GENERAL AND ADMINISTRATIVE: General and administrative expense increased 7% to $3,182,437
in the first quarter of 2005, compared to $2,983,513 in the first quarter of 2004. The
increase was primarily due to increased transaction processing fees related to the increased
transaction volume. The increase was also due to increased fully burdened salaries,
performance related bonuses, outside legal expenses, and investor relations expenses.
General and administrative expense consists primarily of salaries, benefits, insurance,
facilities expenses, legal, accounting, board fees, and investor relations. As we grow our
business and expand our operations, we expect our general and administrative expense to
increase; however, we believe that general and administrative expense as a percentage of net
revenues will decline. DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased 80% to $231,825 in
the first quarter of 2005 compared to $1,133,323 in the first quarter of 2004. Depreciation
and amortization historically primarily consisted of amortization of licensing rights
related to the TVG license agreement, which was fully amortized in May 2004. 13




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INCOME TAXES: During 2004, we determined that $4,000,000 of Youbets aggregate $24,661,000
deferred tax asset should be recognized. Youbets growth plans potentially may include
industry consolidation, acquisitions, international expansion, a Nevada gaming license, and
expanding into other gaming businesses. Although we anticipate that all potential
transactions will be accretive to earnings, we are aware of the risks involved with an
aggressive growth strategy. Therefore, based on the current level of uncertainty, combined
with our cautious optimism, we believe that $3,314,000 of the deferred tax asset recognized
in 2004 continues to be appropriate. The current change in the deferred tax asset valuation allowance created an income tax
benefit of $409,939 which was offset by $409,939 of current period income tax expense. This
did not affect our first quarter net income of $1,029,998. See Note 3 to Youbets consolidated financial statements included under Item 1 of this Form
10-Q for more information about our income taxes. Liquidity and capital resources During the first three months of 2005, we funded our operations primarily with net cash provided
by operating activities, in addition to proceeds received from the exercise of stock options and
warrants. As of March 31, 2005, we had net working capital of $10,397,653 (including the
current portion of our deferred tax asset of $1,791,000), compared to $8,876,233 (including the
current portion of our deferred tax asset of $1,791,000) at December 31, 2004. As of March 31,
2005, we had $15,057,356 in cash and cash equivalents, $3,722,222 in restricted cash, and no
debt from borrowed funds. Our principal cash requirements consist of payroll and benefits,
business insurance, real estate leases, legal, data center operations, and telecommunications.
Management believes that its on-going efforts to reduce costs and operate more efficiently,
combined with the growth in handle, has improved cash flow to a level that will support our
operations. We expect that our cash flow from operations and our cash and cash equivalents will
be 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, reduce our liabilities, and fund our expansion plans consistent with our anticipated
changes in operations and infrastructure. 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. The sale of additional equity or convertible securities would
result in additional dilution to our stockholders. Net cash provided by operating activities was $1,453,655 for the three months ended March 31,
2005, compared to net cash used in operating activities of $278,023 for the three months ended
March 31, 2004. The year-over-year increase of $1,731,678 was primarily due to an increase in
net income of $1,014,887 from the same period in 2004 and an increase in accrued expenses,
partially offset by decreased depreciation and amortization and decreased trade payables and
prepaid expenses. Net cash used in investing activities for the three months ended March 31, 2005 was $421,671,
compared to net cash provided by investing activities of $59,079 in the same period of 2004. The
year-over-year decrease of $480,750 resulted primarily from increased purchases of property and
equipment. Net cash provided by financing activities was $737,880 and $304,922 for the three months ended
March 31, 2005 and 2004, respectively. The year-over-year increase of $432,958 was primarily due 14




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to increased proceeds from the exercise of stock options and warrants, partially offset by
increased repayment of long term debt in 2005. During the first three months of 2005, we entered into capital lease arrangements totaling
$5,355, and $3,270 will become due under this capital lease within the next 12 months. Recent accounting pronouncements On April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance dates
for Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS No. 123R). Under SFAS No. 123R, we would have been
required to implement the revised standard as of the beginning of the third quarter of this
year. The SECs new rule allows us to implement Statement No. 123R at the beginning of our next
fiscal year. Accordingly, Youbet will implement the revised standard as of January 1, 2006 for
our fiscal year ending December 31, 2006 and will first report results in accordance with SFAS
No. 123R for the quarter ended March 31, 2006. The SECs new rule does not change the
accounting required by SFAS No. 123R; it changes only the dates for compliance with the
standard. SFAS 123R was issued in December 2004 and requires that compensation cost related to share-based
employee compensation transactions be recognized in the financial statements. Share-based
employee compensation transactions within the scope of SFAS 123R include stock options,
restricted stock plans, performance-based awards, stock appreciation rights and employee share
purchase plans. Currently, we account for our share-based employee compensation transactions
under the provisions of APB 25, which does not necessarily require the recognition of
compensation cost in the financial statements. We have not completed our evaluation or
determined the impact of adopting SFAS 123R, which may be material to our results of operations
in the first quarter of fiscal year 2006 and thereafter. See Note 5 to Youbets consolidated
financial statements included under Item 1 of this Form 10-Q for more information about Youbets
accounting for compensation expenses. Recent developments On April 7, 2005, the Appellate Body of the World Trade Organization (WTO) circulated its report
in a dispute settlement proceeding brought by the Government of Antigua and Barbuda (Antigua)
challenging certain U.S. measures affecting the cross-border supply of gambling and 15




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betting services. Antigua had claimed that certain federal and state laws have the effect of
prohibiting the supply of gambling services from outside the United States in violation of
certain United States obligations under the General Agreement on Trade in Services (GATS). In
relevant part, Antigua argued that the United States was discriminating between domestic and
foreign remote suppliers of wagering services for horse racing because the Interstate
Horseracing Act purports to exempt domestic service suppliers, like Youbet, from the
prohibitions of the Wire Act, the Travel Act and the Illegal Gambling Business Act, but does not
exempt foreign services suppliers. The Appellate Body of the WTO found, inter alia, that the United States has not shown, in light
of the Interstate Horseracing Act that the prohibitions embodied in [the Wire Act, the Travel
Act and the Illegal Gambling Business Act] are applied to both foreign and domestic service
suppliers of remote betting services for horse racing and, therefore, has not established that
these measures satisfy the requirements of [Article XIV of the GATS]. On April 20, 2005, the
Appellate Body report was adopted by the Dispute Settlement Body (DSB) of the WTO, and the
United States was requested to bring its measures into conformity with its obligations under the
GATS. Pursuant to WTO dispute settlement procedures, the United States Government is obliged, at a DSB
meeting to be held within thirty days after the adoption of the report, to inform the DSB of its
intentions in respect of the report. If it is impracticable for a WTO member government to
comply immediately, the member is given a reasonable period of time (e.g., fifteen months) in
which to do so. While the WTO decision does not affect any existing federal or state law, we
cannot predict what actions, if any, the United States government will take in response to the
request of the WTO in light of the Appellate Body report . 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our exposure to market risk and related changes in interest rates relates primarily to our
investment portfolio. As of March 31, 2005, our portfolio of investments included $15,057,356
in cash and cash equivalents and $3,722,222 of restricted cash. Due to the conservative nature
of our investment portfolio, we believe that a sudden 10% change in interest rates would not
have a material effect on the value of the portfolio since the average yield on our investments
is approximately 3% at March 31, 2005. The impact on our future interest income will depend
largely on the gross amount of our investment portfolio. We do not expect our operating results
or cash flows to be affected to any significant degree by a sudden change in market interest
rates. 
 Item 4. Controls and Procedures As of March 31, 2005, our management, including our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended). Based on that evaluation, our management, including our
Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls
and procedures are: effective to ensure that information required to be disclosed by Youbet in
the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and include controls and procedures designed to ensure that information
required to be disclosed by Youbet in such reports is accumulated and communicated to the 16




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companys management, including the Chief Executive Officer and the Chief Financial Officer, to
allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during
the quarter ended March 31, 2005, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. 17




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Part II. Other Information 
 Item 1. Legal Proceedings None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits Exhibit 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).Exhibit 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).Exhibit 10.1
    
    First Amended and Restated Services Agreement, dated as of January 28, 2005, by
and between Youbet.com, Inc. and David Marshall, Inc. (incorporated by reference to
Youbet.coms Form 8-K dated January 28, 2005 and filed February 2, 2005).Exhibit 31.1
    
    Certification of President and Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.Exhibit 31.2
    
    Certification of Chief Financial Officer and Treasurer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.Exhibit 32.1
    
    Certification Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934.
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. YOUBET.COM, INC.May 3, 2005
    
    By:
    
    /s/
    
    Charles F. ChampionCharles F. ChampionPresident and Chief Executive OfficerMay 3, 2005
    
    By:
    
    /s/
    
    Charles R. BearchellCharles R. BearchellChief Financial Officer
 19