UBET Youbet.Com (MM)

 

 

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, 2010

Commission File Number: 001-34276

YOUBET.COM, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4627253
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

2600 West Olive Avenue, 5 ^th Floor
Burbank, Ca. 91505
(Address of principal executive offices)

(818) 668-2100
(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 6, 2010, the issuer had approximately 41,730,038 shares of common stock, par value $0.001 per share, outstanding (net of treasury shares).

 

 

YOUBET.COM, INC.
INDEX TO FORM 10-Q/A
FOR THE QUARTER ENDED
March 31, 2010

		Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements:
Balance sheets as of March 31, 2010 (unaudited) and December 31, 2009			2
Statements of operations for the three months ended March 31, 2010 and 2009 (unaudited)			3
Statements of cash flows for the three months ended March 31, 2010 and 2009 (unaudited)			4
Notes to unaudited financial statements			5
Item 2. Management’s discussion and analysis of financial condition and results of operations			12
Item 3. Quantitative and qualitative disclosures about market risk			19
Item 4. Controls and procedures			19
PART II. OTHER INFORMATION
Item 1. Legal proceedings			20
Item 1A. Risk factors			20
Item 2. Unregistered sales of equity securities and use of proceeds			20
Item 3. Defaults upon senior securities			20
Item 4. Submission of matters to a vote of security holders			20
Item 5. Other information			20
Item 6. Exhibits			20
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Preliminary Note

This quarterly report on Form 10-Q is for the three-month period ended March 31, 2009. This quarterly report updates reports previously filed with the Securities and Exchange Commission, which 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 Securities and Exchange Commission in the future will update and, to the extent inconsistent, supersede information contained in this quarterly report.

Part I. Financial Information

Item 1. Consolidated Financial Statements

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

		March 31,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets
Cash and equivalents		$	12,061			$	15,884
Restricted cash			4,787				4,616
Accounts receivable, net of allowance for doubtful collections of $814 and $578			3,364				3,413
Inventories			1,241				1,278
Prepaid expenses and other			1,060				1,141
Deferred tax assets			2,700				2,700
			25,213				29,032
Property and equipment, net of accumulated depreciation and amortization of $36,471 and $34,928			11,835				12,890
Intangible assets, net of amortization of $2,962 and $2,802			3,788				3,948
Deferred tax assets			5,400				5,400
Other assets			312				374
		$	46,548			$	51,644
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	2,675			$	7,196
Trade payables			4,881				5,430
Accrued expenses			4,364				4,622
Customer deposits			4,776				4,558
Deferred revenues			359				162
			17,055				21,968
Stockholders’ equity
Preferred stock, $0.001 par value, authorized 1,000,000 shares, none issued or outstanding
Common stock, $0.001 par value, authorized 100,000,000 shares, 42,829,373 shares issued			43				43
Additional paid-in capital			137,291				136,970
Deficit			(105,333	)			(104,806	)
Accumulated other comprehensive loss			(129	)			(152	)
Less treasury stock, 1,099,335 common shares			(2,379	)			(2,379	)
			29,493				29,676
		$	46,548			$	51,644

See notes to these unaudited consolidated financial statements.

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(Dollars in thousands, except per share amounts)

		Three Months Ended
		March 31,
		2010				2009
Revenues
Commissions		$	21,213			$	23,118
Contract services			4,123				4,281
Equipment sales			81				86
Other			548				563
			25,965				28,048
Costs and expenses
Track fees			12,451				13,063
Licensing fees			840				1,317
Network costs			923				1,005
Contract costs			3,237				3,240
Equipment costs			49				58
			17,500				18,683
Gross profit			8,465				9,365
Operating expenses
General and administrative			5,147				4,181
Sales and marketing			1,627				1,406
Research and development			961				903
Depreciation and amortization			1,692				1,834
			9,427				8,324
Income (loss) from continuing operations before other income (expense) and income tax (benefit)			(962	)			1,041
Other income (expense)
Interest income			1				26
Interest expense			(97	)			(224	)
Other			104				81
Income (loss) from continuing operations before income tax (benefit)			(954	)			924
Income tax (benefit)			(427	)			88
Net income (loss) from continuing operations			(527	)			836
Loss from discontinued operations, with no tax effect			—				(16	)
Net income (loss)		$	(527	)		$	820
Basic income (loss) and diluted income per share
Income (loss) from continuing operations		$	(0.01	)		$	0.02
Loss from discontinued operations			0.00				0.00
Net income (loss)		$	(0.01	)		$	0.02
Weighted average shares outstanding
Basic			41,730,038				41,463,470
Diluted			44,713,780				42,109,982

See notes to unaudited consolidated financial statements.

YOUBET.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

		Three Months Ended
		March 31,
		2010				2009
Operating activities
Net income (loss)		$	(527	)		$	820
Loss from discontinued operations			—				16
Income (loss) from continuing operations			(527	)			836
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities
Depreciation and amortization of property and equipment			1,532				1,674
Amortization of intangibles			160				160
Stock-based compensation			321				300
Provision for bad debt			249				161
Increase in operating (assets) and liabilities			(641	)			(663	)
Net cash provided by continuing operations			1,094				2,468
Net cash provided by discontinued operations			—				788
Net cash provided by operating activities			1,094				3,256
Investing activities
Purchase of property and equipment			(477	)			(626	)
Decrease in restricted cash (other than Players Trust SM )			58
Net cash used in investing activities			(419	)			(626	)
Financing activities
Repayment of debt			(4,521	)			(1,489	)
Foreign currency translation adjustments			23				(5	)
Net increase (decrease) in cash and equivalents			(3,823	)			1,136
Cash and equivalents, beginning of period			15,884				16,538
Cash and equivalents, end of period		$	12,061			$	17,674

See notes to unaudited consolidated financial statements.

YOUBET.COM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED March 31, 2010

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) relating to interim information. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been omitted. For further information, please refer to the consolidated financial statements and the related notes included in the Company’s annual report on Form 10-K and related 10-K/As for the year ended December 31, 2009.

The unaudited consolidated financial statements include the accounts of Youbet.com, Inc. (“Youbet”) and its wholly-owned subsidiaries (collectively, the “Company”). Youbet’s UT Gaming, Inc. subsidiary and its wholly-owned subsidiaries, United Tote Company and United Tote Canada, Inc., are collectively referred to as “United Tote,” unless the context requires otherwise. The group of Youbet’s subsidiaries consisting of IRG U.S. Holdings Corp., IRG Holdings Curacao, N.V., International Racing Group N.V., and IRG Services, Inc. are collectively referred to herein as “IRG,” unless the context requires otherwise. The operations of IRG were shut down effective February 15, 2008. Accordingly, IRG has been retroactively accounted for and reported in these unaudited consolidated financial statements as discontinued operations. All significant inter-company accounts and transactions have been eliminated in consolidation.

Preparation of these unaudited consolidated financial statements involves and requires the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results for current interim periods are not necessarily indicative of the results to be expected for the full year.

Certain minor reclassifications in prior period amounts have been made to conform to the current period presentation.

Note 2: Earnings Per Share

Basic earnings per share are calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share are calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. Following is a reconciliation of the numerators and denominators of the continuing operations computations for the periods presented (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2010				2009
Numerator:
Income (loss) from continuing operations		$	(527	)		$	836
Denominator:
Basic weighted average shares outstanding			41,730				41,463
Dilutive stock options			2,984				647
Diluted weighted average shares outstanding			44,714				42,110
Income (loss) per share — basic and diluted		$	(0.01	)		$	0.02

Note 3: Debt

Debt (in thousands) consisted of the following:

		March 31,				December 31,
		2010				2009
		(unaudited)
Promissory notes		$	—			$	3,200
Bank term loan			2,500				3,750
Capital lease and other obligations			175				246
			2,675				7,196
Current portion of long-term debt			2,675				7,196
Long-term debt, less current maturities		$	—			$	—

The Company’s credit facility consists of a $5.0 million revolving line of credit and a $10.0 million term loan. The revolving line of credit requires monthly interest payments and the outstanding principal, if any, is due at maturity. The principal of the term loan is to be repaid in equal monthly installments ($1.25 million quarterly) plus interest, and payments commenced on December 31, 2008. The term loan and the revolving credit facility each mature on November 30, 2010. At March 31, 2010, the Company owed $2.5 million under the term loan and no amount was outstanding under the revolving credit facility.

Any indebtedness under the term loan and the revolving credit facility bears interest at a variable rate equal to either, at the Company’s discretion, prime plus 200 to 250 basis points or LIBOR plus 325 to 375 basis points. The applicable basis point margin is determined by the Company’s leverage ratio as at the most recently delivered calculation thereof pursuant to provisions of the loan and security agreement. Any interest accruing on the basis of the prime rate is due and payable on the first business day of each month. Any interest accruing on the basis of LIBOR is due and payable on the date upon which such LIBOR loan ends as determined by the Company. LIBOR loans may have a one, two or three month term. At March 31, 2010, the interest rate on the term loan was 5.75% per annum.

The loan and security agreement relating to the credit facility provides for mandatory prepayment upon the occurrence of certain specified events. The Company’s indebtedness under the loan and security agreement is guaranteed by certain of the Companies subsidiaries and is secured by substantially all of the Company’s assets. The loan and security agreement contains customary covenants, including restrictions on the Company’s ability to incur indebtedness, make investments, pay dividends or engage in mergers and acquisitions. The loan and security agreement also contains certain financial covenants, including (i) a requirement to maintain a specified debt service coverage ratio, (ii) a requirement to maintain a leverage ratio not to exceed 2:1, (iii) a requirement to maintain a certain specified adjusted EBITDA, and (iv) limitations on capital expenditures.

As of March 31, 2010, the Company was in compliance with the financial covenants under the loan and security agreement. However, the pending merger with Churchill Downs (Note 10) will result in a change of control under our credit facility, which constitutes an event of default. As a result, the lenders on the credit facility may accelerate our obligations under the credit facility at that time.

Note 4: Income Taxes

The Company has federal and state net operating loss carryforwards in the amount of $63.8 and $70.0 million, respectively at March 31, 2010, which are expected to expire beginning in 2012 and 2013, respectively. Due to the change of ownership provisions of the Tax Reform Act of 1986 (Internal Revenue Code Section 382), utilization of a portion of our net operating loss and tax credit carryforwards may be limited in the event of an ownership change in future periods, such as discussed in Note 10. The Company does not have any known limits under IRC Section 382 at this time. However, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. The Company has California income tax credit carryforwards totaling $342,000. The Company’s effective tax rate varies from the statutory federal rate primarily due to changes in the valuation allowance, stock-based compensation and state income taxes. Any carryforwards that may expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance.

Management believes there are no significant uncertain tax positions requiring recognition in its financial statements or related disclosures. Accordingly, as of March 31, 2010, there is no liability recorded for income taxes associated with uncertain tax positions.

Note 5: Contingencies

Shareholder Litigation Related to Pending Merger with Churchill Downs Incorporated

On November 17, 2009, a putative class action lawsuit, Wayne Witkowski v. Youbet.com, Inc., et al. , was filed in the Superior Court of Los Angeles, California against the Company, various of the Company’s directors, Churchill Downs Incorporated (“Churchill Downs”), Tomahawk Merger Corp. (“Merger Corp”) and Tomahawk Merger LLC (“Merger LLC”). Subsequently, five additional lawsuits were also filed in the Los Angeles Superior Court, two of which name the Company and its directors as defendants and three of which also name Churchill Downs as a defendant. All six lawsuits (the “Los Angeles Litigation”), are putative class actions brought on behalf of the Company’s stockholders. Plaintiffs in the Los Angeles Litigation have since moved to consolidate the Los Angeles Litigation, to file a single consolidated complaint and to appoint lead counsel. That motion was granted on January 22, 2010.

The complaints in the Los Angeles Litigation all allege that the Company’s directors have breached their fiduciary duties, including alleged duties of loyalty, due care and candor, in connection with the proposed merger. In that regard, the various complaints include, among other things, allegations that the proposed merger is the result of an inadequate sales process which has not been designed to maximize stockholder value; that the consideration to be received by the Company’s shareholders is unfair and inadequate; that the Agreement and Plan of Merger dated November 11, 2009 by and among the Company, Churchill Downs, Merger Corp and Merger LLC (the “Merger Agreement”) includes inappropriate “no solicitation,” “matching rights,” no standstill waiver, and termination fee provisions; that the combined effect of these provisions, together with the waiver of the Company’s stockholder rights agreement that the Company signed in connection with the Merger Agreement with respect to Churchill Downs and the entry into voting agreements by defendants and certain others pursuant to which they have agreed to vote in favor of the merger, is to “lock up” the proposed merger, foreclose potential alternative bidders and illegally restrain the Company’s ability to solicit or engage in negotiations with a third party; that various defendants acted for their own benefit in approving the proposed merger, including for the purpose of obtaining positions or pursuing opportunities at Churchill Downs; and that material information has not been provided in connection with the proposed merger and was not provided at the time that the Company submitted its stockholder rights agreement to a stockholder vote. Those lawsuits which name Churchill Downs or its affiliates as defendants also allege that Churchill Downs has aided and abetted the alleged breaches of fiduciary duty by the Company’s directors. The Company is also alleged to have aided and abetted the alleged breaches of fiduciary duty by the Company’s directors. Among the relief sought by the complaints is an enjoining of the proposed merger, or unspecified damages if the transaction is consummated, together with payment of attorneys’ fees and costs.

On December 23, 2009, a putative class action lawsuit, Raymond Balch v. Youbet.com, Inc., et al., was filed in the Delaware Court of Chancery against the Company, various of the Company’s directors, Churchill Downs, Merger Corp and Merger LLC. The initial Balch complaint contained allegations similar to those made in the Los Angeles Litigation, including a claim that Churchill Downs aided and abetted alleged breaches of fiduciary duty by the Company’s directors. On January 8, 2010, an amended complaint was filed in Balch , adding a claim against the Company’s directors for an alleged breach of the fiduciary duty of disclosure, and adding allegations that the draft Registration Statement on Form S-4 filed by Churchill Downs with the SEC in connection with the proposed merger omits material information and is materially misleading in various respects. Among the relief sought by the Balch amended complaint is an enjoining of the proposed merger, or unspecified damages if the transaction is consummated, together with payment of attorneys’ fees and costs.

On March 2, 2010, the Company, the Company’s directors, Churchill Downs, Merger Corp, and Merger LLC entered into a memorandum of understanding with the plaintiffs in the Los Angeles litigation and the plaintiffs in the Balch litigation reflecting an agreement in principle to settle the cases based on defendants’ agreement to include additional disclosures relating to the proposed merger in the Company’s proxy statement/prospectus relating to the merger that was mailed to the Company’s stockholders on March 4, 2010. The Company, the Company’s directors, Churchill Downs, Merger Corp, and Merger LLC each deny that they have committed or aided and abetted in the commission of any violation of law or engaged in any of the wrongful acts alleged in the complaints, and expressly maintain that they diligently and scrupulously complied with any and all of their legal duties. Although the Company, the Company’s directors, Churchill Downs, Merger Corp, and Merger LLC believe the lawsuits are without merit, they entered into the memorandum of understanding to eliminate the burden and expense of further litigation. The memorandum of understanding provides that the settlement is subject to customary conditions including the completion of appropriate settlement documentation, completion of confirmatory discovery, court approval of the settlement, dismissal of the Los Angeles litigation with prejudice, dismissal of the Balch litigation with prejudice, and the consummation of the proposed merger by the Outside Date (as such term is defined in the Merger Agreement). Additionally, plaintiffs’ counsel is entitled to void the memorandum of understanding if they determine in good faith that, based upon facts learned subsequent to the execution of the memorandum of understanding, the proposed settlement is not fair, reasonable and adequate.

If the settlement is consummated, the Los Angeles litigation and the Balch litigation will each be dismissed with prejudice and the defendants and other released persons will receive from or on behalf of all of the Company’s non-affiliated public stockholders who held the Company’s common stock at any time from November 10, 2009 through the date of the consummation of the merger a release of all claims relating to the proposed merger, the Merger Agreement and the transactions contemplated therein, disclosures made relating to the proposed merger, and any compensation or other payments made to the defendants in connection with the proposed merger; except that the settlement will not include a release of claims by current and former Youbet stockholders to exercise their appraisal rights under Delaware law. Likewise, the plaintiffs will receive a release from the defendants, on the same or substantially equivalent terms as the release to be provided to the defendants. Members of the purported plaintiff class will be sent notice of the proposed settlement, and a hearing date before the Superior Court of California, County of Los Angeles, California, will be scheduled regarding, among other things, approval of the proposed settlement and any application by plaintiffs’ counsel for an award of attorneys’ fees and expenses.

Other Litigation

The Company is a party to legal proceedings that are ordinary and incidental to its business. Management is unable to estimate any minimum losses from these matters and the Shareholder Litigation.  Accordingly, no losses have been accrued with respect to these matters.

General Economic Conditions

The United States is currently experiencing a widespread recession accompanied by, among other things, reduced credit availability and highly curtailed gaming and other recreational activities. The effects and duration of these developments and related risks and uncertainties on the Company’s future operations and cash flows cannot be estimated at this time but may be significant.

The Company often carries cash on deposit with financial institutions substantially in excess of federally-insured limits. The extent of a future loss as a result of uninsured deposits in the event of a future failure of a bank or other financial institutions, if any, is not subject to estimation at this time.

Note 6: Stockholders’ Equity

The following table summarizes the status of the Company’s equity incentive plan at March 31, 2010:

Options available per the equity incentive plan			13,750
Stock options outstanding			6,560
Options available for grant			1,545

Information with respect to stock option activity for the three months ended March 31, 2010 and 2009 is summarized below:

		2010								2009
						Weighted								Weighted
						Average								Average
		Stock				Option				Stock				Option
		Options				Price				Options				Price
		(in thousands)								(in thousands)
Balance at January 1			6,795			$	1.72				5,559			$	1.99
Options granted											2,090				1.26
Options exercised
Options cancelled			(235	)			3.66				(276	)			2.56
Balance at March 31			6,560			$	1.65				7,373			$	1.76

Additional information about outstanding options to purchase the Company’s common stock at March 31, 2010 is as follows:

		Options Outstanding												Options Exercisable
										Weighted
						Weighted				Average								Weighted
						Average				Remaining								Average
		Number of Shares				Exercise				Contractual				Number of Shares				Exercise
Range of Exercise Prices:		(in thousands)				Price				Life (years)				(in thousands)				Price
$0.50 to $0.95			669			$	0.56				2.49				650			$	0.55
$1.10 to $1.95			4,153				1.32				7.59				1,959				1.30
$2.23 to $2.81			1,266				2.35				4.62				1,186				2.33
$3.04 to $3.92			240				3.73				6.67				180				3.73
$4.00 to $4.91			155				4.53				5.41				154				4.53
$5.03 to $5.62			77				5.32				5.10				77				5.32
			6,560				1.65				6.38				4,206				1.77

Note 7: Fair Value of Financial Instruments

The carrying value of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their estimated fair value due to the short maturities of these financial instruments. The estimated fair value of long-term receivables and debt approximates their carrying value. In estimating the fair value of other financial instruments, consisting of long-term receivables and debt, the Company generally uses third-party market quotes (level 2 inputs).

Note 8: Segment Reporting

The Company operates as two reportable segments. The Company’s advance deposit wagering (ADW) segment consists of the operations of Youbet Express and Youbet Services Corporation. Its totalizator services segment consists of the operations of United Tote. Each segment operates independently, under separate management and provides distinctly separate services. The ADW segment provides internet wagering services to the general public, whereas the totalizator segment provides totalizator equipment and services to racetracks, as well as off-track betting facilities and ADWs, including the Company. Both segments are impacted by the amount of wagering handle processed, however, the ADW segment is more immune to track closures due to inclement weather, etc. as players may shift their wagering activities to other tracks. The revenue and expenses attributable to the services provided by the Company’s totalizator segment to the company’s ADW segment are eliminated in the Company’s consolidated financial statements.

Information with respect to each segment for the three months ended March 31, 2010 and 2009 is summarized below:

		Three Months Ended
		March 31,
		(in thousands)
		2010				2009
Revenue
Advance deposit wagering segment		$	21,762			$	23,681
Totalizator services segment			4,482				4,659
			26,244				28,340
Intersegment eliminations			(279	)			(292	)
		$	25,965			$	28,048
Revenue by Geographic Area
United States		$	25,460			$	27,673
International			505				375
		$	25,965			$	28,048
Reconciliation to Income Before Income Tax (Benefit)
Income (loss) from operations, before other income (expense) and income tax (benefit)
Advance deposit wagering segment		$	301			$	2,261
Totalizator service segment			(1,263	)			(1,220	)
			(962	)			1,041
Interest income			1				26
Interest expense			(97	)			(224	)
Other			104				81
Income (loss) from continuing operations before income tax (benefit)			(954	)			924
Loss from discontinued operations before income tax (benefit)			0				(16	)
Income (loss) before income tax (benefit)		$	(954	)		$	908
Capital Spending, includes capital leases (non-cash)
Advance deposit wagering segment		$	330			$	492
Totalizator services segment			147				134
		$	477			$	626
Depreciation and Amortization
Advance deposit wagering segment		$	688			$	520
Totalizator services segment			1,004				1,314
		$	1,692			$	1,834

		March 31,				December 31,
		2009				2009
		(in thousands)
Total Assets
Advance deposit wagering segment		$	30,500			$	34,253
Totalizator services segment			16,048				17,391
		$	46,548			$	51,644

Note 9: Impairment and other Long-lived Assets

Intangibles and other long-lived assets are reviewed for impairment annually during the third quarter or when circumstances exist which indicate a possible impairment has occurred. The fair value of the reporting unit associated with the intangibles and other assets is typically estimated using the expected present value of future cash flows. If expected future cash flows are less than the carrying amount of an asset, an impairment charge is taken to reduce the amount on the Company’s balance sheet to fair value.

During the third quarter of 2009, the Company conducted its annual impairment test and concluded that there was no impairment.

Note 10: Pending Merger with Churchill Downs

On November 11, 2009, the Company entered into the Merger Agreement with Churchill Downs, Merger LLC, and Merger Corp., both wholly-owned subsidiaries of Churchill Downs, pursuant to which Churchill Downs would acquire all of the outstanding shares of the Company. Under the terms of the pending merger, the Company’s shareholders would receive a fixed ratio of 0.0598 shares of Churchill Down’s common stock plus $0.97 in cash for each share of the Company’s common stock they own, subject to possible future adjustment to the exchange ratio in limited circumstances to increase the cash consideration and correspondingly decrease the stock consideration, to ensure that the transaction does not require Churchill Downs to issue more than 19.6% of its outstanding common stock prior to the transaction. Consummation of the merger is conditioned upon, among other things, the approval of the Company’s shareholders which was obtained on April 6, 2010, the receipt of required regulatory approvals, which is pending, and other customary closing conditions.

Item 2. Management’s discussion and analysis of financial condition and results of operations

Forward-looking statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements included in Item 1 of this report. 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 pending merger with and into Churchill Downs Incorporated (“Churchill Downs”), the timely development and market acceptance of new products and technologies; our ability to achieve further cost reductions; our assessment of strategic alternatives for United Tote, including a possible sale, as to which there can be no assurance of success; increased competition in the advance deposit wagering business; a decline in the public acceptance of wagering; wagering ceasing to be legal in jurisdictions where we currently operate; the limitation, conditioning, or suspension of any of our licenses; increases in or new taxes imposed on wagering revenues; the adoption of future industry standards; the loss or retirement of key executives; our ability to meet our liquidity requirements and maintain our financing arrangements; and general economic and market conditions; and other factors described in our annual report on Form 10-K and related 10-K/As for the year ended December 31, 2009 and from time to time in our other 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 our future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

We are a diversified provider of technology and pari-mutuel horse racing content for consumers through the Internet and a leading supplier of totalizator systems, terminals and other pari-mutuel wagering services and systems to the pari-mutuel industry. Youbet Express is a leading online advance deposit wagering (ADW) company focused on horse racing primarily in the United States.

Our website, www.youbet.com , enables our customers to securely wager on horse races at over 150 racetracks worldwide from the convenience of their homes or other locations. Our customers receive the same odds and expected payouts they would receive if they were wagering directly at the host track and their wagers are commingled with the host track betting pools.

We appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop” experience. To place a wager, customers open an account and deposit funds with us via several convenient options, including our ExpressCash system, which links our customers’ wagering accounts directly to their personal checking accounts. To enable our customers to make informed wagers, we provide 24-hour access to up-to-the minute track information, real-time odds and value-added handicapping products, such as Turf day Super Stats, a comprehensive database of racing statistics and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality, live audio/video broadcasts of races as well as replays of a horse’s past races. Our convenient automated services are complemented by our player service agents, who are available 15 hours a day, seven days a week to provide technical support and address any wagering or funding questions.

Our content partners provide us the same live satellite feeds that they normally broadcast at the track and to off-track betting facilities (OTBs). As a result, our partners have the opportunity to increase the total handle wagered on their racing signal, which we believe leads to higher revenues for the host track and a higher quality of racing through larger purses for the horse owners. In return, we receive a commission, or a percentage, of wagers processed by Youbet Express.

United Tote is a leading supplier of totalizator systems (equipment and technology that processes wagers and payouts) and supplies pari-mutuel tote services to racing facilities in North America and a number of foreign markets.

As a result of the United Tote acquisition, we operate two business segments for financial accounting purposes: ADW and totalizator services. Our ADW segment consists of the operations of Youbet Express and Youbet Services Corporation. Our totalizator services segment consists of the operations of United Tote. Each segment operates independently, under separate management and provides distinctly separate services. The ADW segment provides internet wagering services and caters to the general public, whereas the totalizator segment provides totalizator equipment and services to racetracks, as well as off-track betting facilities and ADWs, including the our ADW segment. Both segments are impacted by the amount of wagering handle processed, however, the ADW segment is more immune to track closures due to inclement weather, and other factors as players may shift their wagering activities to other tracks. The revenue and expenses attributable to the services provided by our totalizator segment to our ADW segment are eliminated in our consolidated financial statements. Our reporting segments follow the same accounting policies used for our consolidated financial statements. Management evaluates each segment’s performance based upon its individual financial results of operations. For more information about our segment reporting, see Note 8 to our consolidated financial statements in Item 1 of this report.

Critical accounting estimates and policies

Critical accounting policies are those that are important to the portrayal of our financial condition and results, and which require management to make difficult, subjective or complex estimates and judgments. Critical accounting estimates cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Our critical accounting estimates and policies are set forth in management’s discussion and analysis of financial condition and results of operations in our annual report on Form 10-K and related 10-K/As for the year ended December 31, 2009. There have been no material changes to our critical accounting policies or estimates.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements issued, but not yet effective or early adopted, that management believes are of significance, or potential significance to the Company.

Results of continuing operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009

The following table sets forth, for the periods indicated, certain operating data for each of our operating segments prior to the elimination of intersegment revenues of $0.3 million and $0.3 million in the first quarter of 2010 and 2009, respectively.

		ADW Segment																Totalizator Segment
		Three months ended March 31,																Three months ended March 31,
										Increase				%												Increase				%
		2010				2009				(Decrease)				Change				2010				2009				(Decrease)				Change
		(in thousands)
Revenues		$	21,762			$	23,681			$	(1,919	)			-8.1	%		$	4,482			$	4,659			$	(177	)			-3.8	%
Gross profit			7,268				8,004				(736	)			-9.2	%			1,197				1,361				(164	)			-12.0	%
As % of revenues			33.4	%			33.8	%											26.7	%			29.2	%
Operating expenses			6,967				5,743				1,224				21.3	%			2,460				2,581				(121	)			-4.7	%
As % of revenues			32.0	%			24.3	%											54.9	%			55.4	%
Income from continuing operations before other income (expense) and income tax		$	301			$	2,261			$	(1,960	)			-86.7	%		$	(1,263	)		$	(1,220	)		$	(43	)			-3.5	%
As % of revenues			1.4	%			9.5	%											-28.2	%			-26.2	%

Revenues

Total revenues decreased $2.1 million, or approximately 7%, for the first quarter of 2010 when compared with the first quarter of 2009. Excluding the impact of intersegment eliminations, the revenue decrease was the result of a decrease in our ADW segment revenues of $1.9 million, or approximately 8%, and a decrease in our totalizator segment revenues of $0.2 million, or approximately 4%, over those periods. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our revenues on an operating segment basis.

ADW Segment Revenues

ADW segment revenues, which consist primarily of commissions on wagers placed by our customers, net of player incentives, decreased by $1.9 million, or approximately 8%, in the first quarter of 2010 compared to the first quarter of 2009. Gross commissions, before deduction of player incentives, during the first quarter of 2010 decreased $1.1 million compared to the same period in 2009 due to a 7% reduction in handle. The decrease in gross commissions was also negatively impacted by a $0.8 million or approximate 32% increase in player incentives during the first quarter of 2010 when compared with the first quarter of 2009, due to an increase in player promotions.

Total handle for the three months ended March 31, 2010 was $115.7 million versus handle for the comparative period of 2009 of $124.0 million. The $8.3 million or approximately 7% decline is attributable to an overall wagering decline in the thoroughbred racing industry of approximately 10% during the quarter due to reduced racing days as a result of poor weather at many key tracks, continued weakness in the U.S. economy and higher unemployment rates. The impact of the general industry decline was lessened by our efforts to attract handle via our incentive and marketing activities.

Youbet Express yield, defined as “commission revenue less track and licensing fees as a percentage of handle” (each calculated in accordance with generally accepted accounting principles), decreased 0.2% to 6.8% in the first quarter of 2010 versus 7.0% in the first quarter of 2009. The lower yield reflects the impact of the increase in player incentives described above.

The following table sets forth our calculation of Youbet Express yield for the periods indicated:

		Three months ended March 31,
										Favor
		2010				2009				(Unfavor)				%
		(in thousands)
Handle		$	115,700			$	123,981			$	(8,281	)			-6.7	%
Commissions			21,213				23,118				(1,905	)			-8.2	%
Less:
Track fees			12,451				13,063				(612	)			-4.7	%
License fees			840				1,317				(477	)			-36.2	%
Net revenue		$	7,922			$	8,738			$	(816	)			-9.3	%
Yield %			6.8	%			7.0	%

We believe that yield is a useful measure to evaluate our operating results and profitability. Yield, however, should not be considered an alternative to operating income or net income as indicators of Youbet’s financial performance and may not be comparable to similarly titled measures used by other companies.

Totalizator Segment Revenues

Totalizator segment revenues, which consist of contract revenues associated with the service of totalizator systems and equipment sales, decreased $0.2 million, or approximately 4%, in the first quarter of 2010 when compared to the first quarter of 2009 primarily due to a decrease in service revenues, as well as a modest reduction in equipment sales, as described below. Contract revenues from the service of totalizator systems, which is driven by wagering handle at tracks serviced, were $4.4 million in the first quarter of 2010, representing a decrease of $0.2 million, or approximately 4%, compared to the first quarter of 2009, primarily as a result of track closures, a general industry decline in wagering and poor weather causing an unusually high number of cancelled races. Equipment sales in the first quarter of 2010 were $81,000 versus $86,000 in the first quarter of 2009.

Costs and Expenses

Consolidated costs and expenses decreased $1.2 million, or approximately 6%, in the first quarter of 2010 compared to the first quarter of 2009 primarily as a result of decreases in track and license fees and network expenses resulting from reduced wagering activity during the first quarter of 2010. As a percentage of revenues, consolidated costs and expenses remained flat at approximately 67% in both the first quarter of 2009 and first quarter of 2010. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our costs and expenses on an operating segment basis.

ADW Segment Costs and Expenses

Costs and expenses in our ADW segment consist of track fees, licensing fees and network operations, each as described below.

Track fees : Track fees, which primarily consist of host and market access fees paid and payable to various tracks decreased $0.6 million or approximately 5% in the first quarter of 2010 compared to the first quarter of 2009. The quarter-over-quarter decrease is primarily attributable to reduced handle in the first quarter of 2010. Expense decreases were experienced in host fees ($0.4 million) and source market fees ($0.4 million). These decreases were partially offset by a $0.2 million increase in Illinois state handle taxes over the same periods.

Licensing fees : Licensing fees, which represent amounts paid and payable under our licensing agreement with TVG, decreased $0.5 million, or approximately 36%, in the first quarter of 2010 compared to the first quarter of 2009, primarily due to a reduction in the number of tracks with respect to which we pay licensing fees to TVG.

Network operations : Network operations expense, which consists of costs for salaries, data center management, telecommunications and various totalizator fees decreased $0.1 million or approximately 8% in the first quarter of 2010, when compared to the first quarter of 2009. The decrease was attributable to lower tote and AV streaming costs associated with the decline in handle.

As a percentage of ADW segment revenues, costs and expenses in our ADW segment increased from approximately 66% in the first quarter of 2009 to 67% in the first quarter of 2010.

Totalizator Segment Costs and Expenses

Costs and expenses in our totalizator segment consist of contract costs and equipment costs, each as described below.

Contract costs : Contract costs, which represent costs of United Tote associated with providing totalizator services at racetracks were flat in the first quarter of 2010 when compared to the first quarter of 2009. Due to the nature of the totalizator business and contractual obligation to provide equipment and totalizator services, its cost structure is fairly rigid and less sensitive to fluctuations in handle processed and reduction in race days.

Equipment Costs: Equipment costs, which represent costs of United Tote that are associated with earning equipment sales revenue, declined slightly, from $58,000 in the first quarter of 2009 to $49,000 in the first quarter of 2010, due to the decrease in equipment sales.

As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment increased from approximately 71% in the first quarter of 2009 to 73% in the first quarter of 2010.

Gross Profit

Consolidated gross profit decreased $0.9 million, or approximately 10%, in the first quarter of 2010 compared to the first quarter of 2009 primarily due to reduced handle and increased player incentives in our ADW segment and the decline in revenues and flat cost structure in our totalizator segment. As a percentage of revenues, consolidated gross profit remained flat at approximately 33% in both the first quarter of 2009 and the first quarter of 2010. Set forth below is a quantitative and qualitative analysis of the effects of the various factors affecting our gross profit on an operating segment basis.

ADW Segment Gross Profit

Gross profit in our ADW segment was $7.3 million for the three month period ended March 31, 2010, as compared to $8.0 million for the same period in 2009, a $0.7 million or approximately 9% decline. The decline was primarily due to lower revenues in the first quarter of 2010, as a result of reduced gross commissions associated with reduced wagering handle and increased player incentives, which were partially offset by decreases in track and license fees described above. As a percentage of ADW segment revenues, gross profit in our ADW segment decreased from approximately 34% in the first quarter of 2009 to 33% in the first quarter of 2010.

Totalizator Segment Gross Profit

Gross profit in our totalizator segment was $1.2 million for the three month period ended March 31, 2010, representing a decrease of $0.2 million, or approximately 12%, compared to the same period in 2009. This decline is primarily attributable to the 4% decline in revenue, while our contract costs remained flat, as described above. As a percentage of totalizator segment revenues, gross profit in our totalizator segment decreased from approximately 29% in the first quarter of 2009 to 27% in the first quarter of 2010.

Operating Expenses

Research and development : Research and development expense of $1.0 million, increased $0.1 million or approximately 6% when compared with the first quarter of 2009 primarily due to an increase in employee-related costs associated with higher employment levels in both our ADW and Totalizator segments.

Sales and marketing : Sales and marketing expense of $1.6 million in the first quarter of 2010 increased $0.2 million, or approximately 16%, compared to the first quarter of 2009. This increase was primarily in the Youbet Express business and resulted from an increase of $0.1 million in employee-related costs of sales and marketing personnel and $0.1 million in costs relating to management’s priority to develop and target marketing efforts to specific initiatives including online customer acquisition, conversion and retention.

General and administrative : General and administrative expense of $5.1 million in the first quarter of 2010 increased $1.0 million or approximately 23%, when compared to the first quarter of 2009 and represented 20% of total revenue for the first quarter of 2010 versus 15% of total revenue in the first quarter of 2009. The increase is primarily due to increased legal fees of $1.0 million primarily associated with the proposed merger of the company with Churchill Downs and an increase of $0.1 million in employee-related costs, which were partially offset by a $0.1 million reduction in recruiting and outside labor costs.

Depreciation and amortization : Depreciation and amortization in the first quarter of 2010 decreased $0.1 million when compared to the first quarter of 2009, primarily due to the continued aging of totalizator assets and reduced capital investment in our totalizator segment.

Interest expense: Interest expense of $0.1 million in the first quarter of 2009, decreased $0.1 million compared to $0.2 million in the first quarter of 2009. This decrease is primarily due to lower debt levels.

Other income : Other income of $0.1 million in the first quarter of 2010 was flat when compared to the three months ended March 31, 2009 and relates to the recovery by United Tote of pre-acquisition receivables previously written off to expense.

Income Taxes: For the three months ended March 31, 2010, we had an income tax benefit of $0.4 million compared to income tax provision of $0.1 million for the comparable period in 2009. The income tax benefit is attributable to the pre-tax operating loss sustained in the period and the use of estimated annual statutory rates, adjusted for several permanent book/tax differences such as amortization of intangibles and stock-based compensation.

Liquidity and capital resources

As of March 31, 2010, the Company had net working capital of $8.2 million, compared to working capital of $7.1 million at December 31, 2009, a $1.1 million improvement. During the first three months of 2010, the Company funded operations primarily with net cash provided by operating activities. Principal ongoing cash requirements consist of payroll and benefits, business insurance, real estate and equipment leases, legal fees, data center operations, telecommunications and debt service.

As of March 31, 2010, we had $12.1 million in cash and cash equivalents, $4.8 million in restricted cash and $2.7 million in debt.

The following table presents a summary of the net increase in cash and cash equivalents in the periods presented:

		For the Three Month Period
		Ended March 31,
		2010				2009
		(in thousands)
Net cash provided by operating activities, from continuing operations		$	1,094			$	2,468
Net cash used in investing operations			(419	)			(626	)
Net cash used in financing activities			(4,521	)			(1,489	)
Net cash provided by discontinued operations			0				788
Foreign currency translation adjustments			23				(5	)
Net increase (decrease) in cash and equivalents		$	(3,823	)		$	1,136

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2010 of $1.1 million decreased by $1.4 million from the $2.5 million provided by operating activities in the same 2009 period, primarily due to an unfavorable $1.3 million reduction in net income for the first three months of 2010 when compared to 2009 attributable to the items mentioned previously and the payment of various current liabilities which were accrued for in 2009.

Investing Activities

Net cash used in investing activities for the first three months of 2010 was $0.4 million, compared to net cash used in investing activities of $0.6 million for the same period of 2009. The $0.2 million decrease is attributable to decreased capital spending in the first quarter of 2010. Capital spending in the first quarter 2010 in our ADW and totalizator segments was $0.3 million and $0.1 million, respectively. We continue to invest in the development of our network infrastructure and to support continued technology upgrades as necessary.

Financing Activities

Net cash used in financing activities in the first three months of 2010 of $4.5 million increased $3.0 million when compared to that used in the same period in 2009, due to higher loan repayments in 2010 in accordance with the terms of the related debt, with no additional borrowings.

The United States is currently experiencing a recession accompanied by, among other things, reduced credit availability and highly curtailed gaming and other recreational activities, employment and general discretionary consumer spending. The effects and duration of these developments and related risks and uncertainties on our future operations and cash flows cannot be estimated by management at this time; however, such effects may be significant.

Nevertheless management presently believes that our current resources and borrowing capacity, as well as on-going efforts to contain costs and operate efficiently, and revenues at Youbet Express will generate sufficient cash flow to adequately support our operations. We believe that our cash flow from operations and our unrestricted cash and cash equivalents are sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. However, we may from time to time seek additional capital to fund our operations, and to reduce our liabilities in response to changes in the business environment. To raise capital, we may seek to sell additional equity securities, issue debt or convertible securities or seek to obtain credit facilities through financial institutions or other resources. We have an effective shelf registration statement under which we may from time to time issue shares of preferred stock, shares of common stock, warrants, stock purchase contracts, stock purchase units, and stock purchase rights for an original maximum aggregate offering amount of approximately $30 million. Unless otherwise described in future prospectus supplements, we intend to use the net proceeds from the sale of securities registered under this universal shelf registration statement for general corporate purposes, which may include additions to working capital, the repayment or redemption of existing indebtedness and the financing of capital expenditures and future acquisitions. The sale of additional equity or convertible securities would result in additional dilution to our stockholders.

Item 3. Quantitative and qualitative disclosures about market risk

We do not undertake any specific actions to diminish our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in our annual report on Form 10-K and related 10-K/As for the year ended December 31, 2009, as amended.

Item 4. Controls and procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other information

Item 1. Legal proceedings

Refer to Note 5: “Contingencies” in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk factors

We have included in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2009, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes in the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our common stock.

Item 2. Unregistered sales of equity securities and use of proceeds

None.

Item 3. Defaults upon senior securities

None.

Item 4. (Removed and Reserved)

Item 5. Other information

None

Item 6. Exhibits

	31.1			Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	31.2			Certification of Principal Financial Officer 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

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.

EXHIBIT INDEX

	31.1			Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	31.2			Certification of Principal Financial Officer 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.

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