##### 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 JUNE 30, 2005
 COMMISSION
FILE NUMBER: 0-26015
 
 YOUBET.COM, INC.
 DELAWARE
    
    95-4627253
 5901 De Soto Avenue, Woodland Hills, California 91367
 (818) 668-2100
 þ o
 þ o




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YOUBET.COM, INC.
 INDEX TO FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2005
  
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated financial statementsBalance sheets as of June 30, 2005 (unaudited) and December 31, 2004
    
    
    3Statements of operations for the three months ended June 30, 2005 and 2004 (unaudited)
    
    
    4Statements of operations for the six months ended June 30, 2005 and 2004 (unaudited)
    
    
    5Statements of cash flows for the six months ended June 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.
    
    
    22Item 4.
    
    Controls and procedures
    
    
    22PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal proceedings
    
    
    23Item 2.
    
    Unregistered sales of equity securities and use of proceeds
    
    
    23Item 3.
    
    Defaults upon senior securities
    
    
    23Item 4.
    
    Submission of matters to a vote of security holders
    
    
    23Item 5.
    
    Other information
    
    
    23Item 6.
    
    Exhibits
    
    
    24Exhibit 4.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Preliminary Note
  2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 YOUBET.COM, INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2005
    

2004(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    18,292,236
    
    
    
    13,287,492Current portion of restricted cash
    
    
    3,844,239
    
    
    
    3,197,468Accounts receivable, net of allowance for doubtful collection of $346,000 and $346,000
    
    
    2,661,199
    
    
    
    595,108Other receivables, net of allowance for doubtful collection of $0 and $180,457
    
    
    29,353
    
    
    
    254,805Prepaid expenses
    
    
    1,798,445
    
    
    
    936,524Current portion of deferred tax asset
    
    
    1,791,000
    
    
    
    1,791,00028,416,472
    
    
    
    20,062,397Property and equipment, net of accumulated depreciation and amortization of $8,152,884 and $7,912,388
    
    
    3,774,894
    
    
    
    3,210,841Restricted cash, net of current portion
    
    
    382,016
    
    
    
    487,750Unamortized intangibles and other
    
    
    3,480,556
    
    
    
    157,832Deferred tax asset, net of current portion
    
    
    1,523,000
    
    
    
    1,523,000$
    37,576,938
    
    
    $
    25,441,820LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long term debt
    
    $
    422,947
    
    
    $
    391,208Trade payables, TVG
    
    
    5,882,331
    
    
    
    3,928,161Trade payables, track related
    
    
    3,492,757
    
    
    
    2,088,774Trade payables, other
    
    
    972,988
    
    
    
    478,021Accrued expenses and other
    
    
    1,834,798
    
    
    
    860,713Customer deposits
    
    
    5,439,742
    
    
    
    3,327,132Deferred revenues
    
    
    129,401
    
    
    
    112,15618,174,964
    
    
    
    11,186,165Long term debt, net of current portion
    
    
    121,459
    
    
    
    157,89518,296,423
    
    
    
    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
33,265,023 and 30,979,768 shares outstanding as of
June 30, 2005 and December 31, 2004, respectively
    
    
    33,265
    
    
    
    30,980Additional paid-in capital
    
    
    105,437,928
    
    
    
    103,110,751Deficit
    
    
    (84,848,183
    )
    
    
    (87,215,262
    )Treasury stock (457,015 and 623,683 shares at cost)
    
    
    (1,342,495
    )
    
    
    (1,828,709
    )19,280,515
    
    
    
    14,097,760$
    37,576,938
    
    
    $
    25,441,820
 See notes to unaudited consolidated financial statements
 3




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YOUBET.COM, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended June 30,2005
    
    2004RevenuesCommissions
    
    $
    22,587,863
    
    
    $
    16,055,799Other
    
    
    894,557
    
    
    
    627,21623,482,420
    
    
    
    16,683,015Operating costs and expensesTrack fees
    
    
    9,620,276
    
    
    
    6,518,027Licensing, TVG
    
    
    5,745,376
    
    
    
    4,002,173Network operations
    
    
    1,090,615
    
    
    
    692,662Research and development
    
    
    414,352
    
    
    
    440,361Sales and marketing
    
    
    1,799,563
    
    
    
    969,020General and administrative
    
    
    3,324,887
    
    
    
    3,317,739Depreciation and amortization
    
    
    317,869
    
    
    
    714,31722,312,938
    
    
    
    16,654,299Income from operations
    
    
    1,169,482
    
    
    
    28,716Other income (expense)Interest income
    
    
    133,818
    
    
    
    29,375Interest expense
    
    
    (20,232
    )
    
    
    (1,071
    )Other
    
    
    54,014
    
    
    
    (17,254
    )167,600
    
    
    
    11,050Net income
    
    $
    1,337,082
    
    
    $
    39,766Income per share  basic and diluted
    
    $
    0.04
    
    
    $
    0.00
 See notes to unaudited consolidated financial statements
 4




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YOUBET.COM, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Six Months Ended June 30,2005
    
    2004RevenuesCommissions
    
    $
    40,350,910
    
    
    $
    30,315,836Other
    
    
    1,646,868
    
    
    
    1,166,89741,997,778
    
    
    
    31,482,733Operating costs and expensesTrack fees
    
    
    18,245,409
    
    
    
    13,285,852Licensing, TVG
    
    
    8,757,233
    
    
    
    6,022,711Network operations
    
    
    2,085,816
    
    
    
    1,532,037Research and development
    
    
    734,229
    
    
    
    856,202Sales and marketing
    
    
    3,075,711
    
    
    
    1,638,112General and administrative
    
    
    6,507,325
    
    
    
    6,301,251Depreciation and amortization
    
    
    549,694
    
    
    
    1,847,64039,955,417
    
    
    
    31,483,805Income (loss) from operations
    
    
    2,042,361
    
    
    
    (1,072
    )Other income (expense)Interest income
    
    
    223,240
    
    
    
    63,364Interest expense
    
    
    (39,059
    )
    
    
    (2,506
    )Other
    
    
    140,537
    
    
    
    (4,910
    )324,718
    
    
    
    55,948Net income
    
    $
    2,367,079
    
    
    $
    54,876Income per share  basic and diluted
    
    $
    0.07
    
    
    $
    0.00
 See notes to unaudited consolidated financial statements
 5




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YOUBET.COM, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six Months Ended June 30,2005
    
    2004Operating activitiesNet income
    
    $
    2,367,079
    
    
    
    54,876Adjustments to reconcile net income to
net cash provided by operating activitiesDepreciation and amortization
    
    
    549,694
    
    
    
    1,847,640Stock-based compensation (benefit)
    
    
    (115,753
    )
    
    
    65,006Provision for doubtful accounts
    
    
    131,791
    
    
    
    Change in operating assets and liabilitiesRestricted cash
    
    
    (653,276
    )
    
    
    (308,712
    )Receivables
    
    
    (472,213
    )
    
    
    (175,777
    )Other receivables
    
    
    235,802
    
    
    
    (262,720
    )Prepaid expenses
    
    
    (861,921
    )
    
    
    110,404Unamortized intangibles and other
    
    
    (205,983
    )
    
    
    495,926Trade payables, TVG
    
    
    1,954,171
    
    
    
    793,418Trade payables, track related
    
    
    1,226,209
    
    
    
    (938,825
    )Trade payables, other
    
    
    43,208
    
    
    
    234,420Accrued expenses and other
    
    
    928,776
    
    
    
    (393,420
    )Customer deposits
    
    
    477,876
    
    
    
    622,365Deferred revenues
    
    
    17,245
    
    
    
    6,112Net cash provided by operating activities
    
    
    5,622,705
    
    
    
    2,150,713Investing activitiesPurchases of property and equipment
    
    
    (790,697
    )
    
    
    (269,144
    )Proceeds from sale of property and equipment
    
    
    3,020
    
    
    
    Investments in intangibles and other
    
    
    (1,610,838
    )
    
    
    Decrease in restricted cash, other
    
    
    112,239
    
    
    
    259,588Net cash used in investing activities
    
    
    (2,286,276
    )
    
    
    (9,556
    )Financing activitiesProceeds from exercise of stock options and warrants, net
    
    
    1,931,429
    
    
    
    975,319Repayment of long term debt
    
    
    (263,112
    )
    
    
    Net cash provided by financing activities
    
    
    1,668,317
    
    
    
    975,319Increase in cash and cash equivalents
    
    
    5,004,745
    
    
    
    3,116,476Cash and cash equivalents, beginning of period
    
    
    13,287,492
    
    
    
    8,273,926Cash and cash equivalents, end of period
    
    $
    18,292,236
    
    
    $
    11,390,402Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    32,467
    
    
    $
    2,506Cash paid for income tax
    
    $
    64,000
    
    
    $
    Non-cash investing and financing activities:Stock issuance for surrender of TVGs Additional Warrant
    
    $
    
    
    
    $
    3,640,000Stock issuance for TVG legal expense reimbursement
    
    $
    
    
    
    $
    415,882Re-issuance of 166,668 shares of treasury stock for IRG acquisition
    
    $
    1,000,000
    
    
    $
    Acquisition of property and equipment with long term capital lease obligation
    
    $
    258,414
    
    
    $
    
 See notes to unaudited consolidated financial statements
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YOUBET.COM, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2005
 Note 1: Basis of presentation
    Note 2: Income taxes
    7




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Note 3: Earnings per share
  Three Months Ended June 30,2005
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    Average
    
    
    
    
    
    Net
    
    AverageIncome
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSEPS  Basic
    
    $
    1,337,082
    
    
    
    31,915,699
    
    
    $
    0.04
    
    
    $
    39,766
    
    
    
    29,808,490
    
    
    $
    0.00Effect of
dilutive
securities
    
    
    
    
    
    
    2,717,208
    
    
    
    
    
    
    
    
    
    
    
    5,113,675
    
    
    
    EPS  Diluted
    
    $
    1,337,082
    
    
    
    34,632,907
    
    
    $
    0.04
    
    
    $
    39,766
    
    
    
    34,922,165
    
    
    $
    0.00
 Six Months Ended June 30,2005
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    WeightedNet
    
    Average
    
    
    
    
    
    Net
    
    AverageIncome
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSEPS  Basic
    
    $
    2,367,080
    
    
    
    31,226,976
    
    
    $
    0.07
    
    
    $
    54,876
    
    
    
    28,867,290
    
    
    $
    0.00Effect of
dilutive
securities
    
    
    
    
    
    
    2,643,447
    
    
    
    
    
    
    
    
    
    
    
    4,760,750
    
    
    
    EPS  Diluted
    
    $
    2,367,080
    
    
    
    33,870,423
    
    
    $
    0.07
    
    
    $
    54,876
    
    
    
    33,628,040
    
    
    $
    0.00
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Note 4: Stockholders equity
  Warrants
  WeightedAverage ExerciseWarrants
    
    PriceBalance, December 31, 2004
    
    
    351,363
    
    
    $
    0.80Warrants expired
    
    
    (137,108
    )
    
    
    0.81Warrants exercised
    
    
    (179,255
    )
    
    
    0.64Warrants exercisable at June 30, 2005
    
    
    35,000
    
    
    $
    1.58
  Warrants Outstanding and ExercisableWeighted Avg.
    
    WeightedRemaining
    
    AverageNumber
    
    Contractual Life
    
    Exerciseof Shares
    
    (in years)
    
    PriceRange of Exercise Prices:$0.50  0.99
    
    
    25,000
    
    
    
    1.72
    
    
    $
    0.50$2.00  4.99
    
    
    10,000
    
    
    
    0.50
    
    
    
    4.2835,000
    
    
    
    
    
    
    $
    1.58
 9




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Stock options
   Weighted AverageStock Options
    
    Exercise PriceBalance, December 31, 2004
    
    
    6,154,325
    
    
    $
    1.52Options granted
    
    
    175,050
    
    
    
    4.38Options exercised
    
    
    (2,106,000
    )
    
    
    0.86Options cancelled
    
    
    (18,400
    )
    
    
    0.85Options forfeited
    
    
    (30,512
    )
    
    
    2.97Balance, June 30, 2005
    
    
    4,174,463
    
    
    $
    1.96Options exercisable (vested) at June 30, 2005
    
    
    3,266,376
    
    
    $
    1.64
  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
    
    
    1,593,293
    
    
    
    4.53
    
    
    $
    0.63
    
    
    
    1,455,438
    
    
    $
    0.62$1.00  $1.99
    
    
    223,472
    
    
    
    1.83
    
    
    
    1.36
    
    
    
    158,834
    
    
    
    1.26$2.00  $4.99
    
    
    2,262,698
    
    
    
    5.88
    
    
    
    2.81
    
    
    
    1,582,104
    
    
    
    2.45$5.00  $10.50
    
    
    95,000
    
    
    
    6.26
    
    
    
    5.35
    
    
    
    70,000
    
    
    
    5.43TOTAL
    
    
    4,174,463
    
    
    
    5.16
    
    
    $
    1.96
    
    
    
    3,266,376
    
    
    $
    1.64
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Six Months Ended June 30,2005
    
    2004Expected life in years
    
    
    3.03
    
    
    
    4.18Risk free interest rate
    
    
    6.25
    %
    
    
    3.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    53.5
    %
    
    
    57.6
    %
 Six Months Ended June 30,2005
    
    2004As reported net income
    
    $
    2,367,079
    
    
    $
    54,876Add stock-based employee
compensation expense
included in reported
income, net of related
tax effects
    
    
    (115,753
    )
    
    
    65,006Less total stock based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects
    
    
    (944,318
    )
    
    
    (1,460,662
    )Pro forma net income (loss)
    
    $
    1,307,008
    
    
    $
    (1,340,780
    )Net income (loss) per share:As reported, fully diluted
    
    $
    0.07
    
    
    $
    0.00Pro forma, fully diluted
    
    $
    0.04
    
    
    $
    (0.05
    )
 Note 5: Acquisition
    11




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Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Revenue
    
    $
    25,381,084
    
    
    $
    22,375,348
    
    
    $
    46,515,789
    
    
    $
    40,839,759Net income
    
    
    1,634,976
    
    
    
    1,091,313
    
    
    
    2,936,108
    
    
    
    1,220,004Basic earnings per share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.04Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.09
    
    
    $
    0.04
 12




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




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Key developments
 cbs.sportsline.com
   14




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Critical accounting estimates and policies
  Revenues.
 Licenses and patents
 Stock based compensation.
   15




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




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17




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Results of Operations for the Six Months Ended June 30, 2005, Compared to the Six Months Ended June
30, 2004
   Operating expenses
      18




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Liquidity and capital resources
   19




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Regulatory considerations
 Legal issues concerning online wagering that may adversely effect our business.
  20




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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 .
  21




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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures
   22




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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
   Nominee:
    
    Votes For
    
    Votes WithheldCharles F. Champion
    
    
    28,992,432
    
    
    
    118,653David M. Marshall
    
    
    28,916,882
    
    
    
    194,185Gary Adelson
    
    
    28,912,582
    
    
    
    198,485James Edgar
    
    
    28,687,930
    
    
    
    423,137Joseph Barletta
    
    
    28,533,357
    
    
    
    577,710Robert E. Brierley
    
    
    28,899,782
    
    
    
    211,285R. Douglas Donn
    
    
    28,903,482
    
    
    
    207,585F. Jack Liebau
    
    
    28,903,282
    
    
    
    206,785
  
 Item 5. Other Information
  23




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Item 6. Exhibits
 2.1
    
    Stock Purchase Agreement, dated as of June 1, 2005, by and among IRG Holdings
Curacao, N.V., IRG US Holdings Corp., International Racing Group, N.V., Its All Good
Buddy, Inc., Louis J. Tavano, James Scott and Richard M. Tavano (incorporated by
reference to Exhibit 2.1 to the Form 8-K of Youbet.com, Inc. filed June 2, 2005).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).4.1
    
    Registration Rights Agreement, dated as of June 1, 2005, by and among
Youbet.com, Inc., and Louis J. Tavano, James Scott and Richard M. Tavano.10.1
    
    Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit
10.2 the Form S-3, SEC File No. 333-126131).*10.2
    
    Form of Incentive Stock Option Agreement.*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.
 
  24




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SIGNATURES
  YOUBET.COM, INC.August 9, 2005
    
    By:  /s/
    
    Charles F. ChampionCharles F. ChampionPresident and Chief Executive OfficerAugust 9, 2005
    
    By:  /s/
    
    Gary W. SprouleGary W. SprouleChief Financial Officer
 25