Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion and analysis of our financial condition and results of operations together with the consolidated
financial statements and the related notes appearing elsewhere in this Report. This discussion contains forward-looking statements that
reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those set forth
under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary” sections
and elsewhere in this Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
and Recent Developments
Internal
Investigation and Operational Cessation
On
July 6, 2022, the Company announced that the Audit Committee (the “Audit Committee”) of the board of directors of the Company
(the “Board”) had retained outside counsel to conduct an independent investigation that revealed instances of non-compliance
with state and federal laws concerning the states in which lottery tickets were procured as well as order fulfillment. The investigation
also identified issues pertaining to the Company’s internal accounting controls (the “Internal Investigation”). Following
a report on the filings of the Internal Investigation, on June 30, 2022, the Board terminated the employment of Ryan Dickinson as the
Company’s President, Treasurer and Chief Financial Officer, effective July 1, 2022. Subsequently, the Company initiated a review
of its cash balances and related disclosures as well as its revenue recognition processes and other internal accounting controls.
On
July 20, 2022, Armanino LLP (“Armanino”), the Company’s registered independent public accountant for the fiscal years
ended December 31, 2021 and 2020, advised the Company that its audited financial statements of for the year ended December 31, 2021 (the
“2021 Audit”) and the unaudited financial statements for the quarter ended March 31, 2022 (the “March 2022 Financials”),
should no longer be relied upon. Armanino advised that it had determined, subsequent to the 2021 Audit and review of the March 2022 Financials,
that the Company had entered into a line of credit in January 2022 that was not disclosed in the footnotes to the 2021 Audit and was
not properly recorded in the March 2022 Financials.
On
July 28, 2022, the Board determined that the Company did not have sufficient financial resources to fund its operations or pay certain
existing obligations, including its payroll and related obligations, due to a significant misstatement of our cash balances.
The
following day, on July 29, 2022, the Company effectively ceased operations (the “Operational Cessation”), when it furloughed
the majority of its employees and generally suspended its lottery game sales. The Company’s remaining employees were limited to
the heads of the product, information technology and human resources teams as well as the entire legal and compliance team. Within one
week, several additional employees were recalled from furlough. All non-furloughed employees were retained, at the discretion of the
Company’s then Chief Operating Officer and Chief Legal Officer, to provide the minimal business functions needed to address the
Company’s legal and compliance issues and to secure necessary funding to resume the Company’s operations. Less than half
of these non-furloughed employees remain active in the efforts to restore Company operations and as of December 31, 2022, approximately
$1.6 million in outstanding payroll obligations remain unpaid.
54
On
September 27, 2022, Armanino resigned as the independent registered public accounting firm of the Company, effective immediately.
On
October 7, 2022, the Audit Committee approved the engagement of Yusufali & Associates, LLC, (“Yusufali”) as the Company’s
new independent registered public accounting firm.
Since
the Operational Cessation, the Company has had minimal day-to-day operations and has primarily focused its operations on restarting certain
of its core businesses (as described in more detail under “- Plans for Recommencement of Company Operations ” below),
completing the restatements of the Company’s 2021 Audit and March 2022 Financials and preparing and filing the Company’s
delinquent periodic reports, including Amendment No. 1 to the Company’s Annual Report on Form 10-K/A for the year ended December
31, 2021, which the Company filed on May 10, 2023, Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A for the three
months ended March 31, 2022, which the Company filed on May 15, 2023, the Company’s Quarterly Reports on Form 10-Q for the three
months ended June 30, 2022 and September 30, 2022, which the Company filed on May 22 and 24, 2023, respectively, the Company’s
Quarterly Report on Form 10-Q for the three months ended March 31, 2023, and this Report.
Nasdaq
Listing
On
March 23, 2023, the Company requested a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal a determination
by the Listing Qualifications department (the “Staff”) of Nasdaq dated February 23, 2023, to delist the Company’s securities
from Nasdaq. At the hearing before the Panel on April 24, 2023, the Company presented its plan to complete the restatement of its financial
statements for the fiscal year ended December 31, 2021, and the subsequent quarter ended March 31, 2022, and to file the amended periodic
reports and all subsequent required filings with the SEC. The Company requested the continued listing of its securities on Nasdaq pending
the completion of its compliance plan.
By
letter dated May 8, 2023, the Panel granted the Company’s request for continued listing, on an interim basis, subject to the Company
submitting financial projections for fiscal 2023 and filing the restated financial statements for the fiscal year ended December 31,
2021, and quarter ended March 31, 2022, with the SEC by May 15, 2023. The Company satisfied these conditions and the Panel indicated
that it would review the filings, along with the updated projections, and thereafter determine whether to afford the Company additional
time to complete the compliance plan presented at the hearing.
By
letter dated May 24, 2023, the Panel notified the Company that it had determined to suspend trading and otherwise move to delist the
Company’s securities from Nasdaq effective with the open of the market on May 26, 2023. The Company’s securities were suspended
from trading on that date but the securities were not delisted because the Company thereafter requested that the Panel reconsider its
determination to delist the Company’s securities from Nasdaq based upon what the Company believed to be mistakes of material fact
upon which the Panel had based its decision.
On
June 8, 2023, the Panel notified the Company that it had determined to reverse its prior decision and grant the Company’s request
for continued listing subject to the Company’s timely compliance with a number of conditions ultimately expiring on August 17,
2023, on which date the Company must satisfy all applicable criteria for continued listing on Nasdaq (the “June 8 th
Decision”). As a result of the foregoing, the suspension from trading ceased and the Company’s securities were reinstated
for trading on Nasdaq effective with the open of the market on June 15, 2023. See “ Risk Factors - Risks Related to Our Common
Stock and Warrants - We are not currently in compliance with the continued listing standards of Nasdaq and may not be able to regain
compliance with Nasdaq’s continued listing standards in the future ” for more information.
AutoLotto
$30,000,000 Business Loan
On
January 4, 2022, AutoLotto entered into a Business Loan Agreement (the “Business Loan”) with The Provident Bank (“Provident”),
pursuant to which the Company borrowed $30,000,000 from Provident, which was evidenced by a $30,000,000 Promissory Note. The Promissory
Note accrued interest at the rate of 2.750% per annum (7.750% upon the occurrence of an event of default) and had a maturity date of
January 4, 2024. Monthly interest payments were due under the Promissory Note beginning February 4, 2022. The Promissory Note could be
repaid at any time without penalty. The Promissory Note included customary events of default for a debt obligation of the size of the
Promissory Note. The Business Loan included representations and warranties of AutoLotto and covenants (both positive and negative) which
were customary of a customary for a transaction of this nature and size, including rights to set off. Upon the occurrence of an event
of default, Provident could declare the entire amount owed immediately due and payable. We were required to pay a 1% commitment fee at
the time of our entry into the Business Loan, and another 1% annual loan fee on the first year anniversary thereof.
55
In
accordance with the terms of the Business Loan, upon entering into the agreement, $30,000,000 in a separate account with Provident was
pledged as security for the amount outstanding under the loan (“Collateral Security”). The $30,000,000 Collateral Security
became restricted and remained restricted until October 12, 2022, when AutoLotto defaulted on its obligations under the Business Loan
and Provident foreclosed on the $30,000,000 of Collateral Security. The Collateral Security, which was in the form of restricted cash,
was presented as a contingent liability on the Company’s balance sheet from March 31, 2022 until the obligation was satisfied in
October of 2022. See Note 3 to our consolidated financial statements for additional information.
Loan
Agreement with Woodford
On
December 7, 2022, the Company entered into a loan agreement (the “Loan Agreement”) with Woodford Eurasia Assets, Ltd. (“Woodford”),
pursuant to which Woodford agreed to provide the Company with up to $52.5 million, subject to certain conditions and requirements, of
which $300 thousand was received by December 31, 2022 and is owed pursuant to the terms of the Loan Agreement. Amounts borrowed accrue
interest at the rate of 12% per annum (or 22% per annum upon the occurrence of an event of default) and are due within 12 months of the
date of each loan. Amounts borrowed can be repaid at any time without penalty.
Amounts
borrowed pursuant to the Loan Agreement are convertible, at Woodford’s option, into shares of the Company’s common stock,
beginning 60 days after the first loan date at the rate of 80% of the lowest publicly available price per share of common stock within
10 business days of the date of the Loan Agreement (which was equal to $0.28 per share), subject to a 4.99% beneficial ownership limitation
and a separate limitation preventing Woodford from holding more than 19.99% of the issued and outstanding common stock of the Company,
without the Company obtaining shareholder approval for such issuance.
Conditions
to the Loan Agreement included the resignation of four prior members of the Board (Lisa Borders, Steven M. Cohen, Lawrence Anthony DiMatteo
and William Thompson, all of whom resigned from the Board in September 2022), and the appointment of two new independent directors. Subsequent
loans under the Loan Agreement also require the Company to comply with all listing requirements, unless waived by Woodford. The Loan
Agreement also allows Woodford to nominate another director to the Board of Directors, in the event any independent member of the Board
of Directors resigns.
Proceeds
of the loans can only be used by to restart the Company’s operations and for general corporate purposes agreed to by Woodford.
The
Loan Agreement includes confidentiality obligations, representations, warranties, covenants, and events of default, which are customary
for a transaction of this size and nature. Included in the Loan Agreement are covenants prohibiting us from (a) making any loan in excess
of $1 million or obtaining any loan in amount exceeding $1 million without the consent of Woodford, which consent may not be unreasonably
withheld; (b) selling more than $1 million in assets; (c) maintaining less than enough assets to perform our obligations under the Loan
Agreement; (d) encumbering any assets, except in the normal course of business, and not in an amount to exceed $1 million; (e) amending
or restating our governing documents; (f) declaring or paying any dividend; (g) issuing any shares which negatively affects Woodford;
and (h) repurchasing any shares.
The
Company also agreed to grant warrants to purchase shares of common stock to Woodford (the “Woodford Warrants”) in an amount
equal to 15% of the Company’s 7,619,207 issued and outstanding shares of common stock. Each Woodford Warrant has an exercise price
equal to the average of the closing price of the Company’s common stock for each of the ten days prior to the first amount being
debited from the bank account of Woodford, which equates to an exercise price of $0.28 per share. In the event the Company fails to repay
the amounts borrowed when due or Woodford fails to convert the amount owed into shares, the exercise price of the warrants may be offset
by amounts owed to Woodford, and in such case, the exercise price of the warrants will be subject to a further 25% discount (i.e., will
equal $0.21 per share).
56
In
connection with our entry into the Loan Agreement, the Company also entered into a Loan Agreement Deed, Debenture Deed and Securitization,
with Woodford (the “Security Agreement”), which provides Woodford with a first floating charge security interest over all
present and future assets of the Company in order to secure the repayment of amounts owed under the Loan Agreement. The floating charge
may be converted into a fixed charge upon the occurrence of certain events including: an event of default; if Woodford reasonably believes
that any secured property may be in jeopardy or danger of being seized or sold; or if Woodford reasonably considers that it is desirable
to protect its security interest. The floating charge may be automatically converted into a fixed charge upon the occurrence of certain
other events. The Security Agreement prohibits the Company from providing any other security interest over our assets, even if secondary
to Woodford, while the amounts borrowed under the Loan Agreement remain unpaid.
On June 12, 2023, the Company entered into an amendment of its Loan Agreement
with Woodford (the “Loan Agreement Amendment”). The Loan Agreement Amendment provides that Woodford shall henceforth be able
to convert, in whole or in part, the outstanding balance of its loan into the conversion shares at a conversion price that represents
a further 25% discount to the original conversion price of 20%. All other terms and conditions of securitization remain in full force
and effect.
Business
Combination
On
October 29, 2021, we consummated the Business Combination with Trident Acquisitions Corp. (“TDAC” and after the Business
Combination described herein, the “Company”), pursuant to the terms of that certain Business Combination Agreement, dated
as of February 21, 2021 (the “Business Combination Agreement”), by and among TDAC, Trident Merger Sub II Corp., a wholly-owned
subsidiary of TDAC (“Merger Sub”) and AutoLotto. Pursuant to the terms of the Business Combination Agreement, Merger Sub
merged with and into AutoLotto with AutoLotto surviving the merger as a wholly owned subsidiary of TDAC, which was renamed “Lottery.com
Inc.” The aggregate value of the consideration paid by TDAC to the holders of AutoLotto common stock in the Business Combination
(excluding shares that may be issued to former AutoLotto stockholders (the “Sellers”) as earnout consideration) was approximately
$440 million, consisting of approximately 40,000,000 shares of common stock valued at $11.00 per share. In addition, the Sellers and
TDAC’s founders are also entitled to receive up to 3 million and 2 million additional shares of common stock, respectively, to
the extent that certain share price targets are achieved following the Closing.
International
Expansion
In
June 2021, we closed the acquisition of Global Gaming, which holds 80% of the equity of each of Aganar and JuegaLotto. Aganar operates
in the licensed Online Lottery market in Mexico and is licensed to sell Mexican National Lottery draw games, instant win tickets, and
other games of chance online with access to a federally approved online casino and sportsbook gaming license. JuegaLotto is licensed
by Mexico authorities to commercialize international lottery games in Mexico through an authorized gaming portal and to commercialize
games of chance in other countries throughout Latin America. As of December 31, 2020 (the most recent date available), Latin America’s
estimated lottery market was approximately $9.1 billion across 26 countries. As of December 31, 2020 (the most recent date available),
the addressable market in the countries that JuegaLotto and Aganar cover includes 664 million people and potential customers. We believe
these acquisitions will provide inroads for the Company throughout Mexico and Latin America as we expand our international operations,
expand our portfolio of products, and expose our existing products to new markets.
Operations
Prior to Operational Cessation
Prior
to the Operational Cessation, the Company was a provider of domestic and international lottery products and services. As an independent
third-party lottery game service, we offered a platform that we developed and operated to enable the remote purchase of legally sanctioned
lottery games in the U.S. and abroad (the “Platform”). Our revenue generating activities included (i) offering the Platform
via our Lottery.com app and our websites to users located in the U.S. and international jurisdictions where the sale of lottery games
was legal and our services were enabled for the remote purchase of legally sanctioned lottery games (our “B2C Platform”);
(ii) offering an internally developed, created and operated business-to-business application programming interface (“API”)
of the Platform, which enabled our commercial partners, in permitted U.S. and international jurisdictions, to purchase certain legally
operated lottery games from us and to resell them to users located within their respective jurisdictions (“B2B API”); and
(iii) delivering global lottery data, such as winning numbers and results, and subscriptions to data sets of our proprietary, anonymized
transaction data pursuant to multi-year contracts to commercial digital subscribers (“Data Service”).
57
Mobile
Lottery Game Platform Services
Both
our B2C Platform and our B2B API provided users with the ability to purchase legally sanctioned draw lottery games via a mobile device
or computer, securely maintain their acquired lottery game, automatically redeem a winning lottery game, as applicable, and receive support,
if required, for the claims and redemption process. Our registration and user interfaces were designed to be easy to use, provide for
the creation of an account and purchase of a lottery game with minimum friction and without the creation of a mobile wallet or requirement
to pre-load minimum funds and - importantly - to provide instant confirmation of the user’s lottery game numbers, whether selected
at random or picked by the user. Users of our B2C Platform services paid a service fee and, in certain non-U.S. jurisdictions, a mark-up
on the purchase price. Prior to the Operational Cessation, we generated revenue from this service fee and mark-up. Our B2B API Platform
resumed limited operations in April 2023. As of the date of this Report, our B2C Platform is not currently operational. We anticipate
that our B2C Platform will become operational by the end of 2023.
The
WinTogether Platform
Prior
to the Operational Cessation, we operated and administered of all sweepstakes offered by WinTogether, a registered 501(c)(3) charitable
organization (“WinTogether”), which was formed in April 2020 to support charitable, educational, and scientific causes. In
consideration of our operation of the WinTogether platform and administration of the sweepstakes, we received a percentage of the gross
donations to a campaign, from which we paid certain dividends and all administration costs.
The
WinTogether platform continued operating after the Operational Cessation, until all sweepstakes campaigns were completed and all prizes
awarded. On March 29, 2023, the board of directors of WinTogether voted to suspend its relationship with the Company.
Current
Operations
Despite
the Operational Cessation, certain of the Company’s wholly-owned subsidiaries have continued to operate under the direction of
the leadership teams that were in place prior to the Company’s acquisition of such companies. While the operational activities
of these subsidiaries vary, from the Operational Cessation through the date of this Report, each of TinBu, Aganar and JuegaLotto has
decreased its expenses and has had its revenue remain consistent or decrease slightly from pre-Operational Cessation levels.
Data
Services
In
2018, we acquired TinBu, LLC (“TinBu”), a digital publisher and provider of lottery data results, jackpots, results, and
other data, as a wholly-owned subsidiary. Through TinBu, our Data Service delivers daily results of over 800 domestic and international
lottery games from more than 40 countries, including the U.S., Canada, and the United Kingdom, to over 400 digital publishers and media
organizations. See “ Item 1A. Risk Factors – We are party to pending litigation and investigations in various jurisdictions
and with various plaintiffs and we may be subject to future litigation or investigations in the operation of our business. An adverse
outcome in one or more proceedings could adversely affect our business, financial condition, and results of operations ” for
more information about our relationship with Tinbu.
Our
technology pulls real time primary source data, and, in some instances, we acquire data from dedicated data feeds from the lottery authorities.
Our data is constantly monitored to ensure accuracy and timely delivery. We are not required to obtain licenses or approvals from the
lottery authorities to pull this primary source data or to acquire the data from such dedicated feeds. Commercial acquirers of our Data
Service pay a subscription for access to the Data Service and, for acquisition of certain large data sets, an additional per record fee.
We
additionally enter into multi-year contracts pursuant to which we sell proprietary, anonymized transaction data pursuant to multi-year
agreements and in accordance with our Terms of Service in consideration of a fee and in other instances provide the Data Service within
a bundle of provided services.
58
Aganar
and JuegaLotto
On
June 30, 2021, we acquired 100% of the equity of Global Gaming Enterprises, Inc., a Delaware corporation (“Global Gaming”),
which holds 80% of the equity of each of Medios Electronicos y de Comunicacion, S.A.P.I de C.V. (“Aganar”) and JuegaLotto,
S.A. de C.V. (“JuegaLotto”). JuegaLotto is federally licensed by the Mexican regulatory authorities with jurisdiction over
the ability to commercialize lottery games in Mexico through an authorized federal gaming portal and to commercialize games of chance
in other countries throughout Latin America. Aganar has been operating in the licensed Online Lottery market in Mexico since 2007 and
has certain rights to sell Mexican National Lottery draw games, instant win tickets, and other games of chance online with access to
a federally approved online casino and sportsbook gaming license and additionally issues a proprietary scratch lottery game in Mexico
under the brand name Capalli. See “ Item 1A. Risk Factors – We need additional capital to,
among other things, support and restart our operations, re-hire employees and pay our expenses. Such capital may not be available on commercially
acceptable terms, if at all. If we do not receive the additional capital, we may be forced to curtail or abandon our plans to recommence
our operations and we may need to permanently cease our operations” for additional information.
Sports.com
In
December 2021, we finalized the acquisition of the domain name https://sports.com and on November 15, 2022, we formed a wholly-owned
subsidiary called Sports.com, Inc., a Texas corporation (“Sports.com”). Subsequently, Sports.com announced a partnership
with the Saudi Motorsports Company, which enabled the Company to roll out the Sports.com brand at the FIFA World Cup decider at the end
of November 2022. In December 2022, Sports.com signed an agreement with Data Sports Group, GmbH (“ DSG ”), which provides
Sports.com the exclusive North American distribution rights for sports data products offered and maintained by DSG (the “DSG Data”).
The DSG Data is being sold through the same sales resources and sales channels as the lottery data offered by TinBu.
Plans
for Recommencement of Company Operations
As
noted above, since the Operational Cessation, the Company has had minimal day-to-day operations and has primarily focused its operations
on restarting certain of its core businesses. The Company has developed a three phase plan to recommence its operations, which plan is
outlined below.
Phase
1 - Relaunch B2B API Platform . During the Operational Cessation, the Company maintained positive relationships with its ticket-printing
and courier partners, as well as several distribution partners that have been found to be in compliance with local, state, and federal
rules related to ticket procurement and distribution. These partners have implemented the Lottery.com API and have advised the Company
that they expect to be ready to offer lottery games to their customers through their sales channels when the Company resumes operations.
As such, the Company believes that it has sufficient demand to resume operation of its B2B API platform operations, assuming it is able
to maintain the core employee team to manage the lottery ticket fulfillment process and access sufficient capital to relaunch Project
Nexus, which was designed to, among other things, handle high levels of user traffic and transaction volume, while maintaining expediency,
security, and reliability in the administrative and back-office functionality required by the B2B API. Our B2B API Platform resumed limited
operations in April 2023.
Phase
2 - Resume B2C Platform Operations. The Company believes that it will be in a position to relaunch its B2C Platform by the end of
2023. As of the date of this Report, the Company expects that it will initially relaunch its B2C Platform to customers in Texas for a
period of time before rolling it out to other jurisdictions. If the Texas Bill is enacted into law as drafted, the Company may elect
to accelerate the relaunch of its Platform to customers in another state. The Company plans to limit the rollout in order to give it
additional time to properly vet and confirm compliance with local, state and federal rules related to ticket procurement and distribution.
For more information, see “ Item 1A. Risk Factors - Regulatory and Compliance Risks - A jurisdiction may enact, amend, or reinterpret
laws and regulations governing our operations in ways that impair our revenues, cause us to incur additional legal and compliance costs
and other operating expenses, or are otherwise not favorable to our existing operations or planned growth, all of which may have a material
adverse effect on us or our results of operations, cash flow, or financial condition .” The Company has also maintained various
pre-paid media credits that it expects to use to launch and maintain promotional campaigns geared towards encouraging prior customers
to return to the Platform and to acquire new customers.
Phase
3 - Restore Other Business Lines and Projects. Assuming the success of Phase 1 and Phase 2, the Company expects to restore other
products it used to offer, such as supplying lottery tickets to consumers in approved domestic jurisdictions, partnering with licensed
providers in international jurisdictions to supply legitimate domestic lottery games, and reviving other products and services that were
under development when the Operational Cessation occurred.
59
As
of the date of this Report, the current estimated cash balance of the Company and subsidiaries is approximately $102,766. The Company
believes that this cash on hand, along with future borrowings, will be sufficient for the Company to pay its service providers in connection
with the filings of its deficient periodic reports, including this Report and the Company’s Quarterly Report on Form 10-Q for the
three months ended March 31, 2023.
As
of the date of this Report, our common stock and warrants are traded on The Nasdaq Stock Market LLC (“Nasdaq”) under the
ticker symbols “LTRY” and “LTRYW,” respectively. As of the date of this Report, we are not in compliance with
Nasdaq’s continued listing requirements (the “Listing Rules”), as discussed in greater detail below under “ Risk
Factors - Risks Related to Our Common Stock and Warrants - We are not currently in compliance with the continued listing standards of
Nasdaq and may not be able to regain compliance with Nasdaq’s continued listing standards in the future ,” and have been
granted a limited exception from Nasdaq to continue the listing of our securities. Additionally, under its new management, the Company
continues to work to improve its disclosure and reporting controls, and plans to overhaul its systems of internal control over financial
reporting and invest in additional legal, accounting, and financial resources.
Even
if the Company’s three phase plan to recommence its operations is successful, there can be no assurance that the Company will be
able to regain compliance with the applicable Listing Rules, or that the hearings panel will continue to stay the delisting of the Company’s
securities from Nasdaq. If the Company’s securities are delisted from Nasdaq, it could be more difficult to buy or sell the Company’s
common stock and warrants or to obtain accurate quotations, and the price of the Company’s common stock and warrants could suffer
a material decline. Delisting could also impair the Company’s ability to raise additional capital needed to funds its operations
and/or trigger defaults and penalties under outstanding agreements or securities of the Company.
There
can be no assurance that we will have sufficient capital to support our operations and pay expenses, repay our debt, or that additional
funds will be available on favorable terms, if at all. We may not be able to restart our operations and/or generate sufficient funding
to support such operations in the future. The Company’s ability to continue its current operations, prepare and refile deficient
and restated reports, and restart its prior operations, is dependent upon obtaining new financing. Future financing options available
to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or
other strategic transactions. Equity financings may include sales of common stock. Such financing may not be available on terms favorable
to the Company or at all. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders
and may cause significant dilution to existing stockholders. There can be no assurance that the Company will be successful in obtaining
sufficient funding on terms acceptable to the Company, if at all, which would have a material adverse effect on its business, financial
condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when
considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable
period of time, which is defined as within one year after the date that the financial statements are issued. The accompanying financial
statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Performance
Measures
In
managing our business and assessing financial performance, we supplement the information provided by our financial statements with other
operating metrics. We use these metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate
projections and make strategic decisions. The primary operating metrics we use are:
●
transactions
per user;
●
tickets
per transaction;
●
gross
revenue per transaction;
●
gross
profit per transaction; and
●
gross
margin per transaction.
60
These
metrics help enable us to evaluate pricing, cost and customer profitability. We believe it is useful to provide investors with the same
metrics that we use internally to make comparisons of our historical operating results, identify trends in our operating results and
evaluate our business. These metrics track our B2C business and exclude users who were referred by an affiliate or who made purchases
through an API partner.
Year Ended December 31,
2022
2021
Transactions Per User
6.86
17.18
Tickets Per Transaction
2.92
3.91
Gross Revenue Per Transaction
$ 6.99
$ 9.66
Gross Profit Per Transaction
$ 1.36
$ 1.57
Gross Margin per Transaction
19.4 %
16.29 %
Transactions
Per User
Transactions
per user is the average number of individual transactions per user in a given period. An individual transaction is defined as the placement
of an order by a user on our Platform. We use this measure to determine the overall performance of our products on a per user basis.
When considered with the other operating metrics, transactions per user provides insight into user stickiness and buying patterns and
is a useful tool to identify our most active users, which enables us to deploy more targeted marketing and other strategic initiatives.
This metric also gives us the ability to categorize users based on their performance and determine where to expend marketing and/or operational
resources. Transactions per user may be subject to variables that are outside of our control, for instance the size and popularity of
a particular lottery game.
Tickets
Per Transaction
Tickets
per transaction is the average number of lottery game tickets purchased by a user per transaction. We use this measure to analyze the
impact of product performance with our customers on the number of tickets sold in one transaction. We believe this metric is useful for
our investors because it gives insight into the buying habits of our users. Similar to transactions per user, tickets per transaction
may be subject to variables that are outside of our control, for instance the size and popularity of a particular lottery game.
Gross
Revenue Per Transaction
Gross
revenue per transaction is the average gross amount of revenue per transaction. We use this measure to determine how our top line revenue
is performing on a per transaction basis, which helps us to identify and evaluate pricing trends. We believe this metric is useful for
our investors because it provides insight into our revenue growth potential on a per transaction basis.
Gross
Profit Per Transaction
Gross
profit per transaction is our average gross profit per transaction, calculated as gross revenue less the cost of the lottery game ticket
and any processing fees, including labor, printing and payment processing, per transaction. We believe this metric to be useful to evaluate
and analyze our costs and fee structure across product offerings and user cohorts, and additionally, helps our investors because it provides
insight into our profit growth potential on a per transaction basis.
Gross
Margin Per Transaction
Gross
margin per transaction is calculated by dividing gross profit per transaction by gross revenue per transaction. We consider this metric
to be a measure of overall performance that provides useful information about the profitability of our B2C Platform and B2B API businesses.
61
Components
of Our Results of Operations (Prior to the Operational Cessation)
Our
Revenue
Revenue
from B2C Platform. Our revenue is the retail value of the acquired lottery game and the service fee charged to the user, which we
impose on each lottery game purchased from our B2C Platform. The amount of the service fee is based upon several factors, including the
retail value of the lottery game purchased by a user, the number of lottery games purchased by a user, and whether such user is located
within the U.S. or internationally. Currently, in the U.S, the minimum service fee is $0.50 for the purchase of a $1 lottery game and
$1 for the purchase of a $2 lottery game; the service fee for additional lottery games purchased in the same transaction is 6% of the
face value of all lottery games purchased. For example, the service fee for the purchase of five $2 tickets is $1.60, being the $1 base
service fee, plus 6% of the aggregate value of the face value of all lottery games purchased.
Internationally,
B2C sales in jurisdictions where we do not have direct or indirect authority generate an immaterial amount of revenue, and we are assessing
our operations in these jurisdictions. As discussed above, our B2C Platform is not currently operational. We anticipate that our B2C
Platform will become operational by the end of 2023.
Revenue
from B2B API. Together with our third-party commercial partner, we agree on the amount of the technology usage fee to be imposed
on the sale of each lottery game purchased through the B2B API, if any, together with a service fee to be charged to the user; we receive
up to 50% of the net revenues from such technology usage fee and service fee pursuant to our commercial agreement with each commercial
partner. As discussed above, following the Operational Cessation, our B2B API Platform resumed limited operations in April 2023.
Data
Services. Commercial acquirers of our Data Service pay a subscription for access to the Data Service and, for acquisition of certain
large data sets, an additional per record fee. The Company additionally enters into multi-year contracts pursuant to which it sells proprietary,
anonymized transaction data pursuant to multi-year agreements and in accordance with our Terms of Service in consideration of a fee.
Our Data Services operations were not impacted by the Operational Cessation.
Our
Operating Costs and Expenses
Personnel
Costs. Personnel costs include salaries, payroll taxes, health insurance, worker’s compensation and other benefits for management
and office personnel.
Professional
Fees. Professional fees include fees paid for legal and financial advisors, accountants and other professionals related to the Business
Combination and other transactions.
General
and Administrative. General and administrative expenses include marketing and advertising, expenses, office and facilities lease
payments, travel expenses, bank fees, software dues and subscriptions, expensed research and development (“R&D”) costs
and other fees and expenses.
Depreciation
and Amortization. Depreciation and amortization expenses include depreciation and amortization expenses on real property and other
assets.
62
Key
Trends and Factors Affecting Our Results
The
following describes the trends associated with our business prior to the Operational Cessation that have impacted, and which we expect
will continue to impact, our business and results of operations in a material way:
International
operations . We face challenges related to expanding our footprint globally and the related process of obtaining the licenses and
regulatory approvals necessary to provide services and products within new and emerging markets. The international jurisdictions where
we operate and seek to expand have been subject to increasing foreign currency fluctuations against the U.S. dollar, soaring inflation
and political and economic instability. We expect these trends to continue during fiscal 2023 and believe they are likely to cause a
material decrease in consumer spending, which could have a material impact on our revenues. We expect that it will take a longer period
of time to achieve revenue gains or generate cash in the new regions or any new international jurisdictions in which we expand, outside
of our domestic geographies.
Introduction
of a new gaming platform . We have developed a proprietary, blockchain-enabled gaming platform, which we have named Project Nexus.
Project Nexus is designed to handle high levels of user traffic and transaction volume, while maintaining expediency, security, and reliability
in processing lottery game sales, the retail requirements of the B2C Platform, the administrative and back-office functionality required
by the B2B API, and the claims and redemption process. We expect to utilize this platform to launch new products, including any proprietary
products we may introduce. The introduction of new technology like Project Nexus is subject to risks including, for example, implementation
delays, issues successfully integrating the technology into our solutions, or the possibility that the technology does not produce the
expected benefits.
Our
growth plans and the competitive landscape. Our direct competitors operate in the global entertainment and gaming industries and,
like us, seek to expand their product and service offerings with integrated products and solutions. Our short-to-medium term focus is
on increasing our penetration in our existing U.S. jurisdiction by increasing direct to consumer marketing campaigns, introducing our
B2C Platform into new U.S. and international jurisdictions and acquiring synergistic regulated and sports betting enterprises domestically
and abroad. Competition in the sale of online lottery games has significantly increased in recent years, is currently characterized by
intense price-based competition, and is subject to changing technology, shifting needs and frequent introductions of new games, development
platforms and services. To maintain our competitive edge alongside other established industry players (many of which have more resources,
or capital), we expect to incur greater operating expenses in the short-term, such as increased marketing expenses, increased compliance
expenses, increased personnel and advisory expenses associated with being a public company, additional operational expenses and salaries
for personnel to support expected growth, additional expenses associated with our ability to execute on our strategic initiatives including
our aim to undertake merger and acquisition activities, as well as additional capital expenditures associated with the ongoing development
and implementation of Project Nexus.
Current
Plan of Operations
As
of the date of this Report, the Company’s primary revenue drivers are the resumption of its B2B API platform and the launch of
Sports.com. It is anticipated that operational costs for the next 12 months through April 30, 2024 will be greater than revenues. It
is anticipated that the liquidity gap will be satisfied by equity or debt raised, of which there is no assurance. We anticipate that
our B2C Platform will become operational by the end of 2023.
Beyond
the next 12 months, the Company plans to continue to expand in domestic and international jurisdictions. The Company plans to enhance
its mobile application to include pool plays, tickets subscriptions, loyalty programs and various gamification modules.
63
Results
of Operations
Our
consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include
adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should
we be unable to continue in operation. We will require additional capital to meet our long-term operating requirements. We expect
to raise additional capital through, among other things, the sale of equity or debt securities.
Year
Ended December 31, 2022 Compared to Year Ended December 31, 2021
The
following table summarizes our results of operations for the years ended December 31, 2022 and December 31, 2021, respectively.
For the Year Ended December 31,
2022
2021
$ Change
% Change
Revenue
$ 6,779,057
$ 16,409,922
(9,630,865 )
-59 %
Cost of revenue
4,310,750
8,158,707
(3,847,957 )
-47 %
Gross profit
2,468,307
8,251,215
(5,782,908 )
-70 %
Operating expenses:
Personnel costs
37,114,485
20,536,328
16,578,157
81 %
Professional fees
6,613,546
8,279,798
(1,666,252 )
-20 %
General and administrative
8,931,681
5,020,495
3,911,186
78 %
Depreciation and amortization
5,601,374
4,292,606
1,308,768
30 %
Total operating expenses
58,261,086
38,129,227
20,131,859
53 %
Loss from operations
(55,792,779 )
$ (29,878,012 )
(25,914,767 )
87 %
Other expenses
Interest expense
764,839
19,789,451
(19,024,612 )
-96 %
Other expense
3,721,291
2,907,518
813,773
28 %
Total other expenses, net
4,486,130
22,696,969
(18,210,839 )
-80 %
Net loss before income tax
$ (60,278,909 )
$ (54,574,981 )
(5,703,928 )
10 %
Income tax expense (benefit)
104,356
(1,664,335 )
1,768,691
100 %
Net loss
(60,383,265 )
(52,910,646 )
(7,472,619 )
14 %
Revenues
Revenue.
Revenue for the year ended December 31, 2022 was $6.8 million, a decrease of $9.6 million, or (59.1%), compared to revenue of $16.4
million for the year ended December 31, 2021. The decrease in revenue was driven by a decrease in services provided to business partners
in 2021 which was not reoccurring.
Cost of Revenue. Cost of revenue for the year ended December 31, 2022 was
$4.3 million, a decrease of $3.8 million, or (47%), compared to cost of revenue of $8.2 million for the year ended December 31, 2021.
The decrease in the cost of revenue was driven by the decrease in the number of lottery games sold in 2022. Cost of revenue includes product
costs, commission expense to affiliates and commercial partners, and merchant processing fees.
Gross
Profit. Gross profit for the year ended December 31, 2022 was $2.5 million, compared to $8.3million for the year ended December 31,
2021, a decrease of $5.8 million, or (70%). This decrease was due primarily to the decrease in revenue partially offset by the decrease
in commissions expense.
64
Operating
Costs and Expenses
For the Year Ended December 31,
2022
2021
$ Change
% Change
Operating expenses:
Personnel costs
37,114,485
20,536,328
16,578,157
81 %
Professional fees
6,613,546
8,279,798
(1,666,252 )
(20 )%
General and administrative
8,931,681
5,020,495
3,911,186
78 %
Depreciation and amortization
5,601,374
4,292,606
1,308,768
30 %
Total operating expenses
58,261,086
38,129,227
20,131,859
53 %
Operating
expenses for the year ended December 31, 2022 were $58.3 million, an increase of $20.1 million, or 53%, compared to $38.1 million for
the year ended December 31, 2021. The increase was primarily driven by increased administrative expenses associated with the Business
Combination, increased stock compensation expense, increased headcount to support the Company’s growth, increased marketing spends
resulting from the use of Gatehouse Media credits, which we received several years ago in exchange for warrants, and increased amortization
expenses driven by acquisitions made during the 2022 fiscal year.
Personnel
Costs. Personnel costs increased by $16.6 million, or 81%, from $20.5 million for the year ended December 31, 2021, to $37.1 million
for the year ended December 31, 2022. The increase was due primarily to increases in stock compensation expense of $13.5 million.
Professional
Fees. Professional fees decreased by $1.7 million, or (20.0%) from $8.3 million
for the year ended December 31, 2021 to $6.6 million for the year ended December 31, 2022. The decrease was driven by legal and professional
fees associated with the Business Combination in 2021.
General
and Administrative. General and administrative expenses increased $3.9 million, or 78%, from $3.9 million for the year ended December
31, 2021 to $8.9 million for the year ended December 31, 2022. Expenses for D&O and E&O coverage in connection with being a public
company were $2.5 million higher in 2022. Advertising expenses increased by $732 thousand, expenses for SaaS software used to operate
the business increased by $158 thousand, and product development expenses were $179 thousand higher in 2022 than in 2021. Additionally
an expense of $412,500 was recorded for the impairment of an intangible asset that had been recorded for a software application, which
was being developed for a use with a partner, that the company determined will not be completed or put into its intended purpose as the
relationship with that partner ended in the fall of 2022.
Depreciation
and Amortization. Depreciation and amortization increased $1.3 million, or 30%, from $4.3 million for the year ended December 31,
2021 to $5.6 million for the year ended December 31, 2022. The increase was driven by amortization of intangibles acquired in 2021 and
placed in service during 2022.
Other
Expense, Net
For the Year Ended December 31,
2022
2021
$ Change
% Change
Other expenses
Interest expense
764,839
19,789,451
(19,024,612 )
-96 %
Other expense
3,721,291
2,907,518
813,773
28 %
Total other expenses, net
4,486,130
22,696,969
(18,210,839 )
-80 %
Interest
Expense. Interest expense decreased by $19 million, or (96%), for the year ended December 31, 2022, from 19.8 million to $764 thousand
as compared to the year ended December 31, 2021. This decrease relates to interest on convertible debt in 2021 which did not occur in
2022 following conversion of the notes in connection with the business combination on October 29, 2021.
Other
Expense. Other expense increased by $0.8 million, or 28%, for the year ended December 31, 2022 as compared to the year ended December
31, 2021 from $2.9 million to $3.7 million. This increase was driven primarily by a discount on asset with periodic payments of $3.5
million, partially offset by a decrease in royalties expense of $1.9 million and a decrease of other expenses of $800 thousand.
65
Liquidity
and Capital Resources
Prior
to the Operational Cessation, our primary need for liquidity was to fund working capital requirements of our business, growth, capital
expenditures and for general corporate purposes. Our primary source of liquidity had historically been funds generated by financing activities.
Upon the Closing on October 29, 2021, we received net proceeds of approximately $42.8 million in cash.
Following the Operational Cessation, our primary need for liquidity has
been to fund the restart of our business operations, re-hire employees and pay our expenses. The most likely source of such future funding
presently available to us is through additional borrowings under the Loan Agreement or through the issuance of equity or debt securities.
If Woodford does not advance us amounts owed under the Loan Agreement or we are otherwise not able to secure the necessary capital to
restart our operations, hire new employees, and obtain funding sufficient to support and restart our operations, we may be forced to permanently
cease our operations, sell off our assets and operations, and/or seek bankruptcy protection, which could cause the value of our securities
to become worthless.
These
conditions, along with our current lack of material revenue producing activities, and significant debt, raise substantial doubt about
our ability to continue as a going concern for the next 12 months. For more information, see Note 2 - Significant Accounting Policies,
Going Concern to the consolidated financial statements included herein, as well as the risk factors included in Item 1A of this Report
entitled “ In July 2022, we furloughed the majority of our employees and suspended our lottery game sales operations after determining
that we did not have sufficient financial sources to fund our operations or pay certain existing obligations, including our payroll and
related obligations. As a result, we may not be able to continue as a going concern ” and “ We need additional capital
to, among other things, support and restart our operations, re-hire employees and pay our expenses. Such capital may not be available
on commercially acceptable terms, if at all. If we do not receive the additional capital, we may be forced to curtail or abandon our
plans to recommence our operations and we may need to permanently cease our operations. ”
Convertible
Debt Obligations
Prior
to the Closing, we funded our operations through the issuance of convertible promissory notes.
From
August to October 2017, the Company entered into seven Convertible Promissory Note Agreements with unaffiliated investors for an aggregate
amount of $821,500. The notes bore interest at 10% per year, were unsecured, and were due and payable on June 30, 2019. The Company and
the noteholders executed amendments in February 2021 to extend the maturity date to December 21, 2021.
From
November 2019 through October 28, 2021, we issued approximately $48.2 million in aggregate principal amount of Series B convertible promissory
notes. The notes bear interest at 8% per year, were unsecured, and were due and payable on dates ranging from December 2020 to December
2022. For those promissory notes that would have matured on or before December 31, 2020, the parties extended the maturity date to December
21, 2021 through amendments executed in February 2021. The amendments also allowed for automatic conversion to equity as a result of
the Business Combination. Nearly all of the aforementioned promissory notes automatically converted into shares of Common Stock or were
terminated pursuant to their terms, as applicable, in connection with the Closing. Those that remain outstanding do not have conversion
terms that were triggered by the Closing.
Immediately
prior to the Closing, approximately $60.0 million of convertible debt was converted into equity of AutoLotto.
As
of December 31, 2022, we had $1,256,595 of convertible debt outstanding.
See
“- Recent Developments- Loan Agreement with Woodford ” above for additional information on the terms of the Loan Agreement.
66
Cash
Flows
Net cash used by operating activities was $31.3 million for the year ended
December 31, 2022, compared to net cash used by operating activities of $23.2 million for the year ended December 31, 2021. Factors affecting
changes in operating cash flows were interest and stock-based compensation expense along with increased expenses for personnel costs,
and sales and marketing activities in 2022 as compared to 2021. Net cash used in investing activities during the year ended December 31,
2022 was $1.3 million, compared to $13.9 million for the prior year. The increase was primarily the result of the acquisition of the sports.com
domain name as well as the acquisition of Global Gaming completed on June 30, 2021. Net cash provided by financing activities was $16
thousand for the year ended December 31, 2022, compared to $59.0 million for the year ended December 30, 2021. The increase was primarily
due to the issuance of debt and proceeds from the Business Combination offset by repayments during 2021.
Changes
in or Adoption of Accounting Practices
The
following U.S. GAAP standards have been recently issued by the Financial Accounting Standards Board (the “FASB”). We are
in the process of assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not
applicable or where it has been determined do not have a significant impact on the Company have been excluded herein.
ASC
606, Revenue from Contracts with Customers
Between
May 2014 and December 2016, the FASB issued several Accounting Standards Updates (“ASUs”)’s on ASC 606, which updates
superseded nearly all previous revenue recognition guidance under U.S. GAAP. The core principle is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. A five-step process has been defined to achieve this core principle, and, in doing so, more judgment and
estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standards are effective
for annual periods beginning after December 15, 2017 using either of the following transition methods: (i) a full retrospective approach
reflecting the application of the standards in each prior reporting period with the option to elect certain practical expedients; or
(ii) a retrospective approach with the cumulative effect of initially adopting the standards recognized at the date of adoption (which
includes additional footnote disclosures). The Company adopted these standards effective on January 1, 2018, and management concluded
the adoption of this standard did not result in any financial statement impacts or changes to revenue recognition policies or processes
as revenue is primarily derived from arrangements in which the transfer of control coincides with the fulfillment of performance obligations.
Critical
Accounting Policies
Our
financial statements are prepared in conformity with U.S. GAAP. Certain of our accounting policies require that management apply significant
judgments and estimates in defining the appropriate assumptions integral to financial estimates. Judgments are based on historical experience
and other factors that we believe to be reasonable under the circumstances, such as terms of contracts, industry trends and information
available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty,
and therefore actual results could differ from our estimates. We have applied significant estimates and assumptions related to the following:
67
Revenue
and Cost Recognition
Revenue
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606) (“ASC 606”), amending revenue recognition guidance and requiring a more
structured approach to measuring and recognizing revenue as well as provide more detailed disclosures to enable users of financial statements
to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amended
guidance is effective for accounting periods commencing on or after January 1, 2018.
We
have applied ASC 606 to all revenue contracts. The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. Revenues are generally recognized upon the transfer of control of promised products provided to
our users, customers and subscribers, reflecting the amount of consideration we expect to receive for those products. We enter into contracts
that can include various products, which are generally capable of being distinct and accounted for as separate performance obligations.
Revenue is recognized net of any taxes collected from users, commercial partners and subscribers, which are subsequently remitted to
governmental authorities. The revenue recognition policy is consistent for sales generated directly with users and sales generated indirectly
through affiliates, other solution partners, and our commercial partners.
Revenues
are recognized upon the application of the following steps:
1.
Identification of a contract or contracts with a user, customer
or subscriber;
2.
Identification of performance obligation(s) in the contract;
3.
Determination of the transaction price;
4.
Allocation of the transaction price to the performance obligations
in the contract; and
5.
Recognition of revenue when, or as, the performance obligation
is satisfied.
Contracts
with users and customers for lottery game sales are at the point of sale and may include transfer of multiple products to a user or a
customer and generally do not require future obligations. In these situations, the Company generally considers each transferred product
as a separate performance obligation. The Company also has contracts with subscribers for the continued delivery of lottery and anonymized
transaction data over a defined period of time. In accounting for these contracts, the Company generally considers each set of data as
a separate performance obligation and recognizes revenue on their delivery ratably over the service period of the agreement. The Company’s
products are sold without a right of return or refund; the Company’s terms of service and contracts generally include specific
language that disclaims any warranties.
In
addition, the Company’s performance obligation in agreements with certain third parties is to transfer previously acquired Affiliate
Marketing Credits. The payment for these credits by the third parties is priced on a per-contract basis. The performance obligation in
these agreements is to provide title rights of the previously acquired credits to the third party. This transfer is point-in-time when
the revenue is recognized, and there are no variable considerations related to this performance obligation.
Income
Taxes
For
both financial accounting and tax reporting purposes, the Company reports income and expenses based on the accrual method of accounting.
For
federal and state income tax purposes, the Company reports income or loss from their investments in limited liability companies on the
consolidated income tax returns. As such, all taxable income and available tax credits are passed from the limited liability companies
to the individual members. It is the responsibility of the individual members to report the taxable income and tax credits, and to pay
any resulting income taxes. Therefore, in relation to the income and losses incurred by the limited liability companies, they have been
consolidated in the Company’s tax return and provision based upon its relative ownership.
Income
taxes are accounted for in accordance with ASC 740, “ Income Taxes ” (“ASC 740”), using the asset and liability
method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred
tax assets for which it is more likely than not that the related benefit will not be realized.
68
The
Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (i) the Company determines
whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position; and
(ii) for those tax positions that meet the more likely than not recognition threshold, the Company recognizes the largest amount of tax
benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company’s
policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit.
To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.
Generally,
the taxing authorities can audit the previous three years of tax returns and in certain situations audit additional years. For federal
tax purposes, the Company’s 2018 through 2020 tax years generally remain open for examination by the tax authorities under the
normal three-year statute of limitations. For state tax purposes, the Company’s 2018 through 2020 tax years remain open for examination
by the tax authorities under the normal four-year statute of limitations.
Business
combination
In
a business combination, substantially all identifiable assets, liabilities and contingent liabilities acquired are recorded at the date
of acquisition at their respective fair values. One of the most significant areas of judgment and estimation relates to the determination
of the fair value of these assets and liabilities, including the fair value of contingent consideration, if applicable. If any intangible
assets are identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent external
valuation expert may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total
expected future net cash flows. These valuations are linked closely to the assumptions made by our management regarding the future performance
of the assets concerned and any changes in the discount rate applied.
Fair
value of financial assets and financial liabilities
Fair
value of financial assets and financial liabilities recorded in the consolidated statements of financial position, which cannot be derived
from active markets, is determined using a variety of techniques including the use of valuation models. The inputs to these models are
derived from observable market data where possible, but where observable market data is not available, judgment is required to establish
fair values. Judgment includes, but is not limited to, consideration of model inputs such as volatility, estimated life and discount
rates.
Fair
value of stock options and warrants
We
use the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants. Use of this method requires management
to make assumptions and estimates about the expected life of options and warrants, anticipated forfeitures, the risk-free rate, and the
volatility of our share price. In making these assumptions and estimates, management relies on historical market data.
Estimated
useful lives, depreciation of property, plant and equipment, and amortization of intangible assets
Depreciation
of property, plant and equipment and amortization of intangible assets is dependent upon estimates of useful lives based on management’s
judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that consider factors such
as economic and market conditions and the useful lives of assets.
69
Goodwill
and intangible assets
Goodwill
and indefinite life intangible asset impairment testing require us to make estimates in the impairment testing model. On an annual basis,
we test whether goodwill and indefinite life intangible assets are impaired. Impairment is influenced by judgment in defining a cash-generating
unit (“CGU”) and determining the indicators of impairment, and estimates used to measure impairment losses. The recoverable
amount is the greater of value in use and fair value less costs to sell. The recoverable value of goodwill, indefinite and definite long-lived
assets is determined using discounted future cash flow models, which incorporate assumptions regarding projected future cash flows and
capital investment, growth rates and discount rates.
Deferred
Tax Asset and Valuation Allowance
Accounting
for deferred tax assets, including those arising from tax loss carry-forwards, requires management to assess the likelihood that we will
generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation
of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could
limit our ability to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly
from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.
Emerging
Growth Company Accounting Election
Section
102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards
until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth
companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an “emerging growth
company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and have elected to take advantage of the benefits
of this extended transition period. We expect to remain an emerging growth company through the end of the 2023 fiscal year and we expect
to continue to take advantage of the benefits of the extended transition period. This may make it difficult or impossible to compare
the financial results with the financial results of another public company that is either not an emerging growth company or is an emerging
growth company that has chosen not to take advantage of the extended transition period exemptions for emerging growth companies because
of the potential differences in accounting standards used.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company”
as defined by Rule 10(f)(1) of Regulation S-K, the Company is not required to provide this information.
70
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