Sports Entertainment Gaming Global Corp 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Yusufali & Associates, LLC, Independent Registered Public Accounting Firm (PCAOB ID:3313) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 (as restated) F-4 Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2022 and 2021 (as restated) F-5 Consolidated Statements of Equity for the Years ended December 31, 2022 and 2021 (as restated) F-6 Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021 (as restated) F-7 Notes to Consolidated Financial Statements (as restated) F-8 F- 1 F- 2 Yusufali & Associates, LLC ( 3313 ) Headquarters Address: 55 Addison Drive, Short Hills, NJ 07078 F- 3 LOTTERY.COM INC. CONSOLIDATED BALANCE SHEETS 2022 2021 December 31, December 31, 2022 2021 ASSETS Current assets: Cash $ 102,766 $ 32,638,970 Restricted cash - - Accounts receivable 208,647 79,181 Prepaid expenses 19,409,323 22,896,638 Other current assets 718,550 226,200 Total current assets 20,439,286 55,840,989 Notes receivable 2,000,000 - Investments 250,000 250,000 Goodwill 19,590,758 19,590,758 Intangible assets, net 23,982,445 28,710,980 Property and equipment, net 108,078 141,279 Other long term assets 13,009,686 - Total assets $ 79,380,253 $ 104,534,006 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade payables $ 7,607,633 $ 1,006,535 Deferred revenue 464,286 1,162,335 Notes payable - current 3,755,676 3,771,340 Accrued interest 484,172 176,260 Accrued and other expenses 4,626,973 4,416,168 Other liabilities 625,028 - Total current liabilities 17,563,768 10,532,638 Long-term liabilities: Convertible debt, net - non current - - Other long term liabilities - 1,169 Total long-term liabilities 1,169 Commitments and contingencies (Note 13) - - Total liabilities 17,563,768 10,533,807 Equity Controlling Interest - - Preferred Stock, par value $ 0.001 , 1,000,000 shares authorized, none issued and outstanding - - Common stock, par value $ 0.001 , 500,000,000 shares authorized, 50,540,906 and 50,256,317 issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 50,540 50,256 Additional paid-in capital 267,549,357 239,358,644 Accumulated other comprehensive loss 3,622 ( 655 ) Accumulated deficit ( 208,187,210 ) ( 148,188,138 ) Total Lottery.com Inc. stockholders’ equity 59,416,309 91,220,107 Noncontrolling interest 2,400,176 2,780,092 Total Equity 61,816,485 94,000,199 Total liabilities and stockholders’ equity $ 79,380,253 $ 104,534,006 The accompanying notes are an integral part of these consolidated financial statements. F- 4 LOTTERY.COM INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS 2022 2021 Years Ended December 31, 2022 2021 Revenue $ 6,779,057 $ 16,409,922 Cost of revenue 4,310,750 8,158,707 Gross profit 2,468,307 8,251,215 Operating expenses: Personnel costs 37,114,485 20,536,328 Professional fees 6,613,546 8,279,798 General and administrative 8,931,681 5,020,495 Depreciation and amortization 5,601,374 4,292,606 Total operating expenses 58,261,086 38,129,227 Loss from operations ( 55,792,779 ) ( 29,878,012 ) Other expenses Interest expense 764,839 19,789,451 Reserve loss of prepaid advertising credits - 2,000,000 Other expense 3,721,291 2,907,518 Total other expenses, net 4,486,130 24,696,969 Net loss before income tax ( 60,278,909 ) ( 54,574,981 ) Income tax expense (benefit) 104,356 ( 1,664,335 ) Net loss ( 60,383,265 ) ( 52,910,646 ) Other comprehensive loss Foreign currency translation adjustment, net 4,277 ( 655 ) Comprehensive loss ( 60,378,988 ) ( 52,911,301 ) Net income attributable to noncontrolling interest 379,916 ( 136,924 ) Net loss attributable to Lottery.com Inc. $ ( 59,999,072 ) $ ( 53,048,225 ) Net loss per common share Basic and diluted $ ( 1.19 ) $ ( 2.04 ) Weighted average common shares outstanding Basic and diluted 50,444,493 25,998,831 The accompanying notes are an integral part of these consolidated financial statements. F- 5 LOTTERY.COM INC. CONSOLIDATED STATEMENTS OF EQUITY FOR THE YEAR ENDING DECEMBER 31, 2021 and 2020 Shares Amount Capital Deficit Income Equity Interest Interest Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total AutoLotto Inc. Stockholders’ Noncontrolling Total Stockholder’s Shares Amount Capital Deficit Income Equity Interest Equity Balance as of December 31, 2020 22,658,006 $ 22,658 $ 111,752,883 $ ( 95,140,568 ) $ - $ 16,634,973 $ - $ 16,634,973 Issuance of common stock upon stock option exercise 737,732 738 252,979 - - 253,717 - 253,717 Issuance of common stock upon warrant exercise 177,684 177 117,833 - - 118,009 - 118,009 Effect of reverse capitalization, net 11,384,655 11,385 38,942,930 - - 38,954,315 - 38,954,315 Conversion of convertible debt 11,162,735 11,163 64,764,379 - - 64,775,542 - 64,775,542 Issuance of common stock in business acquisition 687,439 687 459,004 - - 459,691 - 459,691 Beneficial conversion feature on notes payable - - 8,480,697 - - 8,480,697 - 8,480,697 Issuance of digital securities - - 108,331 - - 108,331 - 108,331 Stock-based compensation 3,448,066 3,448 14,479,608 - - 14,483,057 - 14,483,057 Minority interest in business acquisition - - - - - - 2,643,168 2,643,168 Other comprehensive loss - - - - ( 655 ) ( 655 ) - ( 655 ) Net loss - - - ( 53,047,570 ) - ( 53,047,570 ) 136,924 ( 52,910,646 ) Balance as of December 31, 2021 50,256,317 50,256 239,358,644 ( 148,188,138 ) ( 655 ) 91,220,107 2,780,092 94,000,199 Beginning Balance 50,256,317 50,256 239,358,644 ( 148,188,138 ) ( 655 ) 91,220,107 2,780,092 94,000,199 Issuance of common stock upon stock option exercise 60,116 60 ( 60 ) - - - - - Issuance of common stock for legal settlement 60,000 60 241,680 - - 241,740 - 241,740 Stock based compensation 164,473 164 27,949,093 - - 27,949,257 - 27,949,257 Other comprehensive loss - - - - 4,277 4,277 - 4,277 Comprehensive loss - - - ( 59,999,072 ) - ( 59,999,072 ) ( 379,916 ) ( 60,378,988 ) Balance as of December 31, 2022 50,540,906 $ 50,540 $ 267,549,357 $ ( 208,187,210 ) $ 3,622 $ 59,416,309 $ 2,400,176 $ 61,816,485 Ending Balance 50,540,906 $ 50,540 $ 267,549,357 $ ( 208,187,210 ) $ 3,622 $ 59,416,309 $ 2,400,176 $ 61,816,485 The accompanying notes are an integral part of these consolidated financial statements. F- 6 LOTTERY.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS 2022 2021 Years Ended December 31, 2022 2021 Cash flow from operating activities Net loss attributable to Lottery.com Inc. $ ( 59,999,072 ) $ ( 53,048,225 ) Adjustments to reconcile net loss to net cash used in operating activities: Net income attributable to noncontrolling interest ( 379,916 ) 136,924 Depreciation and amortization 5,601,374 4,292,606 Non-cash interest expense - 17,274,299 Stock-based compensation expense 27,949,257 14,483,057 Forgiveness of PPP Loan - ( 493,125 ) Loss on impairment of intangibles 412,450 - Loss on extinguishment of debt 115,788 Issuance of common stock for legal settlement 241,740 - Issuance of debt to pay expenses - 2,732,167 Income tax valuation allowance - ( 1,653,067 ) Other non-cash items, net - 655 Changes in assets & liabilities: Accounts receivable ( 129,465 ) ( 18,852 ) Prepaid expenses 3,487,315 ( 878,504 ) Notes Receivable ( 2,000,000 ) - Other current assets ( 492,351 ) 627,182 Trade payables 6,601,098 ( 1,557,570 ) Deferred revenue ( 698,049 ) ( 6,735,965 ) Accrued interest 307,912 ( 545,457 ) Accrued and other expenses 210,805 2,080,818 Other liabilities 625,028 - Other long term assets ( 13,009,686 ) - Other long term liabilities ( 1,169 ) 1,169 Net cash provided by operating activities ( 31,272,729 ) ( 23,186,100 ) Cash flow from investing activities Purchases of property and equipment ( 127,265 ) ( 27,474 ) Purchases of intangible assets ( 1,124,823 ) ( 517,894 ) Investment in subsidiary, net - ( 13,399,408 ) Net cash used in investing activities ( 1,252,088 ) ( 13,944,776 ) Cash flow from financing activities Issuance of digital securities - 108,332 Proceeds from exercise of options and warrants - 371,726 Proceeds from issuance of convertible debt - 23,483,500 Proceeds from issuance of notes payable - 5,000,000 Proceeds from reverse recapitalization - 42,794,176 Payment of debt issuance costs - ( 1,115,031 ) Payments on notes payable - related parties ( 15,664 ) Principal payments on debt - ( 11,647,713 ) Net cash provided by financing activities ( 15,664 ) 58,994,990 Effect of exchange rate changes on cash 4,277 ( 655 ) Net change in net cash and restricted cash ( 32,536,204 ) 21,863,459 Cash and restricted cash at beginning of period 32,638,970 10,775,511 Cash and restricted cash at end of period $ 102,766 $ 32,638,970 Supplemental Disclosure of Cash Flow Information: Interest paid in cash $ 483,582 $ 4,438,623 Taxes paid in cash $ - $ 5,578 Non cash investing and financing activities $ - $ - Conversion of convertible debt into common stock $ - $ 63,484,240 Capitalization of interest from loan extinguishment $ - $ 44,614 Purchase of intangible assets through the issuance of convertible debt $ - $ 15,450,000 Issuance of convertible debt in exchange for outstanding liabilities $ - $ 1,855,000 Issuance of convertible debt in exchange for notes payable $ - $ 4,531,250 Common stock issued as part of acquisition $ - $ 459,691 Beneficial conversion feature on notes payable $ - $ 8,480,697 The accompanying notes are an integral part of these consolidated financial statements. F- 7 LOTTERY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations Description of Business Lottery.com Inc. (formerly Trident Acquisitions Corp) (“TDAC”, “Lottery.com” or “the Company”), was formed as a Delaware corporation on March 17, 2016. On October 29, 2021, we consummated a business combination (the “Business Combination”) with AutoLotto, Inc. (“AutoLotto”). Following the closing of the Business Combination (the “Closing”) we changed our name from “Trident Acquisitions Corp.” to “Lottery.com Inc.” and the business of AutoLotto became our business. In connection with the Business Combination the Company moved its headquarters from New York, New York to Spicewood, Texas. The Company is a leading provider of domestic and international lottery products and services. As an independent third-party lottery game service, the Company offers a platform that it developed and operates to enable the remote purchase of legally sanctioned lottery games in the U.S. and abroad (the “Platform”). The Company’s revenue generating activities are focused on (i) offering the Platform via the Lottery.com app and our websites to users located in the U.S. and international jurisdictions where the sale of lottery games is legal and our services are 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 to enable commercial partners in permitted U.S. and international jurisdictions to purchase certain legally operated lottery games from the Company and resell them to users located within their respective jurisdictions (“B2B API”); and (iii) delivering global lottery data, such as winning numbers and results, and sports data, such as scores and statistics, to commercial digital subscribers and provide access to other proprietary, anonymized transaction data pursuant to multi-year contracts (“Data Service”). As a provider of lottery products and services, the Company is required to comply, and its business is subject to, regulation in each jurisdiction in which the Company offers the B2C Platform, or a commercial partner offers users access to lottery games through the B2B API. In addition, it must also comply with the requirements of federal and other domestic and foreign regulatory bodies and governmental authorities in jurisdictions in which the Company operates or with authority over its business. The Company’s business is additionally subject to multiple other domestic and international laws, including those relating to the transmission of information, privacy, security, data retention, and other consumer focused laws, and, as such, may be impacted by changes in the interpretation of such laws. On June 30, 2021, the Company acquired an interest in Medios Electronicos y de Comunicacion, S.A.P.I de C.V. (“Aganar”) and JuegaLotto, S.A. de C.V. (“JuegaLotto”). Aganar has been operating in the licensed iLottery market in Mexico since 2007 as an online retailer of Mexican National Lottery draw games, instant digital scratch-off games and other games of chance. JuegaLotto is licensed by the Mexican federal regulatory authorities to sell international lottery games in Mexico. On July 28, 2022, the Board determined that the Company did not currently have sufficient financial resources to fund its operations or pay certain existing obligations, including its payroll and related obligations and effectively ceased its operations furloughing certain employees effective July 29, 2022 (the “Operational Cessation”). Subsequently, the Company has had minimal day-to-day operations and has primarily focused its operations on restarting certain aspects of its core businesses (the “Plans for Recommencement of Company Operations”). On April 25, 2023, as part of the Plans for Recommencement of Company Operations, the Company resumed its ticket sales operations to support its affiliate partners through its Texas retail network. F- 8 2. Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“ GAAP ”) and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ ASC ”) and Accounting Standards Update (“ ASU ”) of the Financial Accounting Standards Board (“ FASB ”). All intercompany accounts and transactions have been eliminated in consolidation. Going Concern The accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and classification of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern. Pursuant to the requirements of the Financial Accounting Standards Board’s ASC Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Due to the Company’s Operational Cessation, the Company has experienced recurring net losses and negative cash flows from operations and has an accumulated deficit of approximately $ 208 million and working capital of approximately $ 2.9 million at December 31, 2022. For the year ending December 31, 2022, the Company sustained a net loss of $ 60 million. The Company sustained a loss from operations of $ 55.8 million and $ 29.9 million for the years ending December 31, 2022 and 2021, respectively. Subsequently, the Company sustained additional operating losses and anticipates additional operating losses for the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company has historically funded its activities almost exclusively from debt and equity financing. Management’s plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common stock, preferred stock offerings, and issuances of debt and convertible debt. Although Management believes that it will be able to continue to raise funds by sale of its securities to provide the additional cash needed to meet the Company’s obligations as they become due beginning with a loan agreement the Company entered into with Woodford Eurasia Assets, Ltd. (“Woodford”) on December 7, 2022 (see Subsequent Events), the Plans for Recommencement of Company Operations to require substantial funds to implement and there is no assurance that the Company will be able to continue raising the required capital. The Company’s ability to continue as a going concern for the next twelve months from the issuance of these financial statements depends on its ability to execute its business plan, increase revenue, and reduce expenditures. Such conditions raise substantial doubt about the Company’s ability to continue as a going concern. F- 9 Impact of Trident Acquisition Corp. Business Combination We accounted for the October 29, 2021 Business Combination as a reverse recapitalization whereby AutoLotto was determined as the accounting acquirer and Trident Acquisition Corp. (“TDAC”) as the accounting acquiree. This determination was primarily based on: ● former AutoLotto stockholders having the largest voting interest in Lottery.com Inc. (“Lottery.com”); ● the board of directors of Lottery.com having 7 members, and AutoLotto’s former stockholders having the ability to nominate the majority of the members of the board of directors; ● AutoLotto management continuing to hold executive management roles for the post-combination company and being responsible for the day-to-day operations; ● the post-combination company assuming the Lottery.com name; ● Lottery.com maintaining the pre-existing AutoLotto headquarters; and the intended strategy of Lottery.com being a continuation of AutoLotto’s strategy. Accordingly, the Business Combination was treated as the equivalent of AutoLotto issuing stock for the net assets of TDAC, accompanied by a recapitalization. The net assets of TDAC are stated at historical cost, with no goodwill or other intangible assets recorded. While TDAC was the legal acquirer in the Business Combination, because AutoLotto was determined as the accounting acquirer, the historical financial statements of AutoLotto became the historical financial statements of the combined company, upon the consummation of the Business Combination. As a result, the financial statements included in the accompanying consolidated financial statements reflect (i) the historical operating results of AutoLotto prior to the Business Combination; (ii) the combined results of the Company and AutoLotto following the closing of the Business Combination; (iii) the assets and liabilities of AutoLotto at their historical cost; and (iv) the Company’s equity structure for all periods presented. In connection with the Business Combination transaction, we have converted the equity structure for the periods prior to the Business Combination to reflect the number of shares of the Company’s common stock issued to AutoLotto’s stockholders in connection with the recapitalization transaction. As such, the shares, corresponding capital amounts and earnings per share, as applicable, related to AutoLotto convertible preferred stock and common stock prior to the Business Combination have been retroactively converted by applying the exchange ratio established in the Business Combination. Non-controlling Interests Non-controlling interests represent the proportionate ownership of Aganar and JuegaLotto, held by minority members and reflect their capital investments as well as their proportionate interest in subsidiary losses and other changes in members’ equity, including translation adjustments. Segment Reporting Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. Under the provisions of ASC 280, Segment Reporting, the Company is not organized around specific services or geographic regions. The Company operates in one service line, providing lottery products and services. F- 10 We determined that our Chief Financial Officer is the Chief Operating Decision Maker and he uses financial information, business prospects, competitive factors, operating results and other non-U.S. GAAP financial ratios to evaluate our performance, which is the same basis on which our results and performance are communicated to our Board of Directors. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment on a consolidated basis for each of the periods presented. Concentration of Credit Risks Financial instruments that are potentially subject to concentrations of credit risk are primarily cash. Cash holdings deposits are placed with major financial institutions deemed to be of high-credit-quality in order to limit credit exposure. The Company maintains deposits and certificates of deposit with banks which may exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limit and money market accounts which are not FDIC insured. In addition, deposits aggregating approximately $ 19,790 at April 30, 2023 are held in foreign banks. Management believes the risk of loss in connection with these accounts is minimal. Use of Estimates The preparation of the financial statements requires management to make estimates and assumptions to determine the reported amounts of assets, liabilities, revenue and expenses. Although management believes these estimates are reasonable, actual results could differ from these estimates. The Company evaluates its estimates on an ongoing basis and prepares its estimates on historical experience and other assumptions the Company believes to be reasonable under the circumstances. Reclassifications Certain balances have been reclassified in the accompanying consolidated financial statements to conform to the current year presentation. These reclassifications had no effect on the balances of current or total assets and prior year’s net loss or accumulated deficit. Foreign currency translation Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. Dollars are translated into U.S. Dollars using year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss). Cash and Restricted Cash As of December 31, 2021 and 2020, cash was comprised of cash deposits, and deposits with some banks exceeded federally insured limits with the majority of cash held in one financial institution. Management believes all financial institutions holding its cash are of high credit quality and does not believe the Company is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company had no marketable securities as of December 31, 2022 and December 31, 2021. The Company had no marketable securities as of December 31, 2022 and December 31, 2021 As of December 31, 2022, the restricted cash balance was $0 as the bank took the collateral in the restricted account during October of 2022 in order to satisfy the amount owed under the Line of Credit. (See Subsequent Events - In January of 2022, the Company pledged $30,000,000 for a line of credit which was subsequently claimed for settlement of such line of credit). F- 11 Accounts Receivable The Company through its various merchant providers pre-authorizes forms of payment prior to the sale of digital representation of lottery games to minimize exposure to losses related to uncollected payments and does not extend credit to the user of the B2C Platform or the commercial partner of the B2B API, which are its customers, in the normal course of business. The Company estimates its bad debt exposure each period and records a bad debt provision for accounts receivable it believes it may not collect in full. The Company did not record any allowance for uncollectible receivables as of December 31, 2022 and 2021. The Company has not incurred bad debt expense historically. Prepaid Expenses Prepaid expenses consist of payments made on contractual obligations for services to be consumed in future periods. The Company entered into an agreement with a third party to provide advertising services and issued equity instruments as compensation for the advertising services (“Prepaid advertising credits”). The Company expenses the service as it is performed by the third party. The value of the services provided were used to value these contracts, except for the year ended December 31, 2021 the Company reserved for potential inability to realize $ 2,000,000 of prepaid advertising credits in future periods. The current portion of prepaid expenses is included in current assets on the consolidated balance sheets. The Company has remaining prepaid expenses of $ 19,409,323 and $ 22,896,638 for the years ended December 31, 2022 and 2021, respectively. Investments On August 2, 2018, AutoLotto purchased 186,666 shares of Class A-1 common stock of a third party business development partner representing 4 % of the total outstanding shares of the company. As this investment resulted in less than 20 % ownership, it was accounted for using the cost basis method. Property and equipment, net Property and equipment are stated at cost. Depreciation and amortization are generally computed using the straight-line method over estimated useful lives ranging from three to five years . Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Routine maintenance and repair costs are expensed as incurred. The costs of major additions, replacements and improvements are capitalized. Gains and losses realized on the sale or disposal of property and equipment are recognized or charged to other expense in the consolidated statement of operations. Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives: Schedule of Depreciation of Property and Equipment Computers and equipment 3 years Furniture and fixtures 5 years Software 3 years Leases Right-of-use assets (“ROU assets”) represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use asset and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Otherwise, the implicit rate was used when readily determinable. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Under the available practical expedient, the Company accounts for the lease and non-lease components as a single lease component for all classes of underlying assets as both a lessee and lessor. Further, management elected a short-term lease exception policy on all classes of underlying assets, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). F- 12 Internal Use Software Development Software development costs incurred internally to develop software programs to be used solely to meet our internal needs and applications are capitalized once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software development costs are amortized on a straight line basis over the estimated useful life of the software. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of assets acquired over the fair value of the net assets at the date of acquisition. Intangible assets represent the fair value of separately recognizable intangible assets acquired in connection with the Company’s business combinations. The Company evaluates its goodwill and other intangibles for impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred in accordance with the provisions of ASC 350, “ Goodwill and Other Intangible Assets ”. The Company reviewed for impairment and determined that no impairment indicators exist as of December 31, 2022 and 2021. See Footnote 6 for further discussion. Revenue Recognition Under the new standard, Accounting Standards Update (“ASU”) 2014-09, “ Revenue from Contracts with Customers (Topic 606) ”, the Company recognizes revenues when the following criteria are met: (i) persuasive evidence of a contract with a customer exists; (ii) identifiable performance obligations under the contract exist; (iii) the transaction price is determinable for each performance obligation; (iv) the transaction price is allocated to each performance obligation; and (v) when the performance obligations are satisfied. Revenues are recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration expected to be entitled to in exchange for those goods or services. Lottery game revenue Items that fall under this revenue classification include: Lottery game sales The Company’s performance obligations of delivering lottery games are satisfied at the time in which the digital representation of the lottery game is delivered to the user of the B2C Platform or the commercial partner of the B2B API, therefore, are recognized at a point in time. The Company receives consideration for lottery game sales at the time of delivery to the customer, which may be the user or commercial partner, as applicable. There is no variable consideration related to lottery game sales. As each individual lottery game delivered represents a distinct performance obligation and consideration for each game sale is fixed, representing the standalone selling price, there is no allocation of consideration necessary. In accordance with Accounting Standards Codification (“ASC”) 606, the Company evaluates the presentation of revenue on a gross versus net basis dependent on if the Company is a principal or agent. In making this evaluation, some of the factors that are considered include whether the Company has control over the specified good or services before they are transferred to the customer. The Company also assesses if it is primarily responsible for fulfilling the promise to provide the goods or services, has inventory risk, and has discretion in establishing the price. For all of the Company’s transactions, management concluded that gross presentation is appropriate, as the Company is primarily responsible for providing the performance obligation directly to the customers and assumes fulfillment risk of all lottery game sales as it retains physical possession of lottery game sales tickets from time of sale until the point of redemption. The Company also retains inventory risk an all lottery game sales tickets as they would be responsible for any potential winnings related to lost or unredeemable tickets at the time of redemption. Finally, while states have the authority to establish lottery game sales prices, the Company can add service fees to ticket prices evidencing its ability to establish the ultimate price of the lottery tickets being sold. F- 13 Other associated revenue The Company’s performance obligations in agreements with certain customers are to provide a license of intellectual property related to the use of the Company’s tradename for marketing purposes by partners of the Company. Customers pay a license fee up front. The transaction price is deemed to be the license issue fee stated in the contract. The license offered by the Company represents a symbolic license which provides the customer with the right to use the Company’s intellectual property on an ongoing basis with continued support throughout the term of the contract in the form of ongoing maintenance of the underlying intellectual property. There is no variable consideration related to these performance obligations. Arrangements with multiple performance obligations The Company’s contracts with customers may include multiple performance obligations. For such arrangements, management allocates revenue to each performance obligation based on its relative standalone selling price. Management generally determines standalone selling prices based on the prices charged to customers. Deferred Revenue The Company records deferred revenue when cash payments are received or due in advance of any performance, including amounts which are refundable. Payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, management requires payment before the products or services are delivered to the customer. Contract Assets Given the nature of the Company’s services and contracts, it has no contract assets. Taxes Taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions, that are collected by us from a customer, are excluded from revenue. Cost of Revenue Cost of revenue consists primarily of variable costs, comprising (i) the cost of procurement of lottery games, minus winnings to users, additional expenses related to the sale of lottery games, including, commissions, affiliate fees and revenue shares; and (ii) payment processing fees on user fees, including chargebacks imposed on the Company. Other non-variable costs included in cost of revenue include affiliate marketing credits acquired on a per-contract basis. Stock-based Compensation Effective October 1, 2019, the Company adopted ASU 2018-07, Compensation - “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting” (“ASC 718”), which addresses aspects of the accounting for nonemployee share-based payment transactions and accounts for share-based awards to employees in accordance with ASC 718, Stock Compensation . Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Advertising Costs Advertising costs are charged to operations when incurred. Advertising costs for the years ended December 31, 2022 and 2021 were approximately $ 1,261,000 and $ 1,888,000 , respectively. F- 14 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, the income and losses incurred by the limited liability companies 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. 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 2022 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 2017 through 2022 tax years remain open for examination by the tax authorities under the normal four-year statute of limitations. Fair Value of Financial Instruments The Company determines the fair value of its financial instruments in accordance with the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) , which establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below: ● Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities ● Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability ● Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. F- 15 The classification of an asset or liability in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. Fair value of stock options and warrants Management uses 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 the Company’s share price. In making these assumptions and estimates, management relies on historical market data. Recent Accounting Pronouncements In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and other (Topic 350) (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value limited to the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. The amendments in this ASU are effective for goodwill impairment tests in fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company is currently evaluating this new standard and management does not currently believe it will have a material impact on its consolidated financial statements, depending on the outcome of future goodwill impairment tests. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Adoption of ASU 2016-13 will require the Company to use forward-looking information to formulate its credit loss estimates. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating this new standard and currently does not expect it to have a significant impact on the Company’s consolidated financial statements. In December 2019, the FASB issued ASU No 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ( “ASU2019-12” ) . ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2021, and early adoption is permitted. The Company is currently evaluating this new standard and currently does not expect it to have a significant impact on the Company’s consolidated financial statements. In October 2020, the FASB issued ASU No. 2020-09, Debt (Topic 470) (“ASU 2020-09”). ASU 2020-09 amendments to SEC paragraphs pursuant to SEC release NO. 33-10762 amends terms related to Debt Guarantors and Issuers of Guaranteed Securities Registered or to be Registered with the SEC. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its financial statements. 3. Business Combination TDAC Combination On October 29, 2021, the Company and AutoLotto consummated the transactions contemplated by the Merger Agreement. At the Closing, each share of common stock and preferred stock of AutoLotto that was issued and outstanding immediately prior to the effective time of the Merger (other than excluded shares as contemplated by the Merger Agreement) was cancelled and converted into the right to receive approximately 3.0058 shares (the “Exchange Ratio”) of Lottery.com. common stock. F- 16 The Merger closing was a triggering event for the Series B convertible notes, of which $ 63.8 million was converted into 3,248,526 shares of AutoLotto that were then converted into 9,764,511 shares of Lottery.com common stock using the Exchange Ratio. At the Closing, each option to purchase AutoLotto’s common stock, whether vested or unvested, was assumed and converted into an option to purchase a number of shares of Lottery.com common stock in the manner set forth in the Merger Agreement. The Company accounted for the Business Combination as a reverse recapitalization whereby AutoLotto was determined as the accounting acquirer and TDAC as the accounting acquiree. Refer to Note 2, Summary of Significant Accounting Policies , for further details. Accordingly, the Business Combination was treated as the equivalent of AutoLotto issuing stock for the net assets of TDAC, accompanied by a recapitalization. The net assets of TDAC are stated at historical cost, with no goodwill or other intangible assets recorded. The accompanying consolidated financial statements and related notes reflect the historical results of AutoLotto prior to the merger and do not include the historical results of TDAC prior to the consummation of Business Combination. Upon the closing of the transaction, AutoLotto received total gross proceeds of approximately $ 42,794,000 , from TDAC’s trust and operating accounts. Total transaction costs were approximately $ 9,460,000 , which principally consisted of advisory, legal and other professional fees and were recorded in additional paid in capital. Cumulative debt repayments of approximately $ 11,068,000 , inclusive of accrued but unpaid interest, were paid in conjunction with the close, which included approximately $ 5,475,000 repayment of notes payable to related parties, and approximately $ 5,593,000 payment of accrued underwriter fees. Pursuant to the terms of the Business Combination Agreement, the holders of issued and outstanding shares of AutoLotto immediately prior to the Closing (the “Sellers”) were entitled to receive up to 6,000,000 additional shares of Common Stock (the “Seller Earnout Shares”) and Vadim Komissarov, Ilya Ponomarev and Marat Rosenberg (collectively the “TDAC Founders”) were also entitled to receive up to 4,000,000 additional shares of Common Stock (the “TDAC Founder Earnout Shares” and, together with the Seller Earnout Shares, the “Earnout Shares”). One of the earnout criteria had not been met by the December 31, 2021 deadline thus no earnout shares were granted specific to that criteria. As of December 31, 2021, 3,000,000 of the Seller Earnout Shares and 2,000,000 TDAC Founder Earnout Shares were still eligible Earnout Shares until December 31, 2022. Global Gaming Acquisition On June 30, 2021, the Company completed its acquisition of 100 percent of 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 Mexico regulatory authorities with jurisdiction over the ability to sell international lottery games in Mexico through an authorized federal gaming portal and is licensed for games of chance in other countries throughout Latin America. Aganar has been operating in the licensed iLottery market in Mexico since 2007 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 and additionally issues a proprietary scratch lottery game in Mexico under the brand name Capalli. The opening balance of the acquirees have been included in our consolidated balance sheet since the date of the acquisition. Since the acquirees’ financial statements were denominated in Mexican pesos, the exchange rate of 22.0848 pesos per dollar was used to translate the balances. The net purchase price was allocated to the assets and liabilities acquired as per the table below. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The fair values of the acquired intangible assets were determined using Level 3 inputs which were not observable in the market. F- 17 The total purchase price of $ 10,989,691 , consisting of cash of $ 10,530,000 and 687,439 shares of common stock of AutoLotto at $ 0.67 per share. The total consideration transferred was approximately $ 10,055,214 , reflecting the purchase price, net of cash on hand at Global Gaming and the principal amount of certain loans acquired. The purchase price is for an 80 % ownership interest and is therefore grossed up to $ 13,215,843 to reflect the 20 % minority interest in the acquirees. The purchase price was allocated to the identified tangible and intangible assets acquired based on their estimated fair values at the acquisition date as follows: Schedule of Tangible and Intangible Asset Acquisition Cash $ 517,460 Accounts receivable, net 34,134 Prepaids 5,024 Property and equipment, net 2,440 Other assets, net 65,349 Intangible assets 8,590,000 Goodwill 4,940,643 Total assets $ 14,155,051 Accounts payable and other liabilities $ ( 387,484 ) Customer deposits ( 134,707 ) Related party loan ( 417,017 ) Total liabilities $ ( 939,208 ) Total net assets of Acquirees $ 13,215,843 Goodwill recognized in connection with the acquisition - is primarily attributed to an anticipated growing lottery market in Mexico that are expected to be achieved from the integration of these Mexican entities. None of the goodwill is expected to be deductible for income tax purposes. Following are details of the purchase price allocated to the intangible assets acquired. Schedule of Intangible Assets Acquired Category Fair Value Customer relationships $ 410,000 Gaming licensees 4,020,000 Trade names and trademarks 2,540,000 Technology 1,620,000 Total Intangibles $ 8,590,000 4. Property and Equipment, net Property and equipment, net as of December 31, 2022 and 2021, consisted of the following: Schedule of Property and Equipment December 31, December 31, 2022 2021 Computers and equipment $ 124,199 $ 113,151 Furniture and fixtures 16,898 23,760 Software 2,026,200 1,903,121 Property and equipment 2,167,297 2,040,032 Accumulated depreciation ( 2,059,219 ) ( 1,898,753 ) Property and equipment, net $ 108,078 $ 141,279 Depreciation expense for the years ended December 31, 2022 and 2021 amounted to $ 160,466 and $ 560,246 , respectively. F- 18 5. Intangible assets, net Gross carrying values and accumulated amortization of intangible assets: Schedule of Finite Lived Intangible Assets Amortization Expenses December 31, 2022 December 31, 2021 Useful Life Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Amortizing intangible assets Customer relationships 6 years $ 1,350,000 $ ( 781,385 ) $ 568,615 $ 1,350,000 $ ( 556,387 ) $ 793,613 Trade name 6 years 2,550,000 ( 642,222 ) 1,907,778 2,550,000 ( 217,223 ) 2,332,777 Technology 6 years 3,050,000 ( 1,437,778 ) 1,612,222 3,050,000 ( 929,444 ) 2,120,556 Software agreements 6 years 14,450,000 ( 5,968,611 ) 8,481,389 14,450,000 ( 3,145,277 ) 11,304,723 Gaming license 6 years 4,020,000 ( 1,005,000 ) 3,015,000 4,020,000 ( 335,000 ) 3,685,000 Internally developed software 2 - 10 years 2,904,473 ( 350,232 ) 2,554,241 2,192,050 ( 23,323 ) 2,168,727 Domain name 15 years 6,935,000 ( 1,091,750 ) 5,843,250 6,935,000 ( 629,416 ) 6,305,584 $ 35,259,473 $ ( 11,276,978 ) $ 23,982,495 $ 34,547,050 $ ( 5,836,070 ) $ 28,710,980 Amortization expense with respect to intangible assets for the year ended December 31, 2022 and 2021 totaled $ 5,440,908 and $ 5,836,070 , respectively, which is included in depreciation and amortization in the Statements of Operations. The Company determined that there was an impairment of long-lived assets of $ 412,450 during the year ended December 31, 2022, as it relates to a project no longer being pursued by the Company. Estimated amortization expense for years of useful life remaining is as follows: Schedule of Estimated Amortization Expense Years ending December 31, Amount 2023 $ 5,319,214 2024 4,876,562 2025 4,556,562 2026 4,556,562 Thereafter 4,673,595 Total $ 23,982,495 The Company had software development costs of $ 1,336,020 and $ 2,080,999 related to projects not placed in service as of December 31, 2022 and December 31, 2021, respectively, which is included in intangible assets in the Company’s consolidated balance sheets. Amortization will be calculated using the straight-line method over the appropriate estimated useful life when the assets are put into service. F- 19 6. Notes Payable and Convertible Debt Secured Convertible Note In connection with the Lottery.com domain purchase, the Company issued a secured convertible promissory note (“Secured Convertible Note”) with a fair value of $ 935,000 that matured in March 2021. The Company used the fair value of the Secured Convertible Note to value the debt instrument issued. In March 2021, the Secured Convertible Note was fully converted into 1,398,221 shares of the Company’s common stock (see Note 8). Series A 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 bear interest at 10 % per year, are unsecured, and were due and payable on June 30, 2019. The parties have verbally agreed to extend the maturity of the notes to December 31, 2021 . As of December 31, 2022 and December 31, 2021, the balance due on these notes was $ 771,500 and $ 821,500 , respectively. The Company cannot prepay the loan without consent from the noteholders. As of December 31, 2021, there were no Qualified Financing events, that trigger conversion, this included the TDAC combination. As of December 31, 2022, the remaining outstanding balance of $ 771,500 relates to notes that are no longer convertible and have been reclassified to Notes Payable as per the agreement. Accrued interest on the Series A notes payable was $ 138,822 at December 31, 2022. Series B Notes From November 2018 to December 2020, the Company entered into multiple Convertible Promissory Note agreements with unaffiliated investors for an aggregate amount of $ 8,802,828 . The notes bear interest at 8 % per year, are unsecured, and were due and payable on dates ranging from December 2020 to December 2021. For those notes maturing on or before December 31, 2020, the parties entered into amendments in February 2021 to extend the maturity of the notes to December 21, 2021 . The Company cannot prepay the loans without consent from the noteholders. During the year ended December 31, 2021, the Company entered into multiple Convertible Promissory Note agreements with unaffiliated investors for an aggregate amount of $ 38,893,733 . The notes bear interest at 8 % per year, are unsecured, and are due and payable on dates ranging from December 2021 to December 2022. The Company cannot prepay these loans without consent from the noteholders. As of December 31, 2021, the Series B Convertible Notes had a balance of $ 0 . The Company also issued additional convertible promissory notes with unaffiliated investors for an aggregate amount of $ 10,000,000 which bear interest at 6 % per year, are unsecured and are due in May 2023. During the year ended December 31, 2021, the Company entered into amendments with six of the Series B promissory noteholders to increase the principal value of the notes. The additional principal associated with the amendments totaled $ 3,552,114 . The amendments were accounted for as a debt extinguishment, whereby the old debt was derecognized and the new debt was recorded at fair value. The Company recorded loss on extinguishment of $ 71,812 as a result of the amendment which is mapped in “Other expenses” on the consolidated statements of operations and comprehensive loss. As of October 29, 2021, all except $ 185,095 of the series B convertible notes were converted into 9,764,511 shares of Lottery.com common stock. As of December 31, 2022, the remaining notes comprising the outstanding balance of $ 185,095 are no longer convertible and have been reclassified to notes payable. See Note 4 Accrued interest on this note payable as of December 31, 2022 and 2021 was $ 49,992 and $ 35,184 , respectively. F- 20 PPP Loan On May 1, 2020, the Company entered into a Promissory Note with Cross River Bank, which provides for a loan in the aggregate amount of $493,225, pursuant to the Paycheck Protection Program, (“PPP”). The PPP, established under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) enacted on March 27, 2020, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities (“Qualified Expenses”), and maintains its payroll levels. On August 24, 2021, the PPP loan and accrued interest was forgiven by the U.S. Small Business Administration (“SBA”) in full. The Company recorded the full amount related to the forgiveness of the PPP loan as a gain on extinguishment of debt during the third quarter of fiscal year 2021. Short term loans On June 29, 2020, the Company entered into a Promissory Note with the U.S. Small Business Administration (“SBA”) for $ 150,000 . The loan has a thirty-year term and bears interest at a rate of 3.75 % per annum. Monthly principal and interest payments are deferred for twelve months after the date of disbursement. The loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. As of December 31, 2022 and 2021, the balance of the loan was $ 150,000 . As of December 31, 2022, the accrued interest on this note was $ 3,753 . In August 2020, the Company entered into three separate note payable agreements with three individuals for an aggregate amount of $ 37,199 . The notes bear interest at a variable rate, are unsecured, and the parties have verbally agreed the notes will be due upon a qualifying financing event. As of December 30, 2022 and 2021, the balance of the loans totaled $ 13,000 , respectively. Notes payable On August 28, 2018, in connection with the purchase of the entire membership interest of TinBu, the Company entered into several notes payable for $ 12,674,635 with the sellers of the TinBu and a broker involved in the transaction. The notes had an interest rate of 0 %, and original maturity date of January 25, 2022. The notes payable were modified during 2021 to extend the maturity to June 30, 2022 and change the interest rate to include simple interest of 4.1 % per annum effective October 1, 2021. Each of the amendments were evaluated and determined to be loan modifications and accounted for accordingly. As of December 30, 2022 and December 31, 2021, the balance of the notes was $ 2,601,370 and $ 2,628,234 , respectively. 7. Stockholders’ Equity Preferred Stock Pursuant to the Company’s charter, the Company is authorized to issue 1,000,000 shares of preferred stock, par value $ 0.001 per share. Our board of directors has the authority without action by the stockholders, to designate and issue shares of preferred stock in one or more classes or series, and the number of shares constituting any such class or series, and to fix the voting powers, designations, preferences, limitations, restrictions and relative rights of each class or series of preferred stock, including, without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences, which rights may be greater than the rights of the holders of the common stock. As of December 31, 2022, there were no shares of preferred stock issued and outstanding. F- 21 Common Stock Our Charter authorizes the issuance of an aggregate of 500,000,000 shares of Common Stock, par value $ 0.001 per share. The shares of Common Stock are duly authorized, validly issued, fully paid and non-assessable. Our purpose is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the DGCL. Unless our Board determines otherwise, we will issue all shares of our common stock in an uncertificated form. Holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The holders of Common Stock do not have cumulative voting rights in the election of directors. Upon our liquidation, dissolution or winding up and after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our Common Stock will be entitled to receive pro rata our remaining assets available for distribution. As of December 31, 2022 and December 31, 2021, 50,540,906 shares and 50,256,317 shares, respectively, were outstanding. During the year ended December 31, 2022, the Company issued the following shares of common stock. Schedule of Common Stock Issuance of Common Stock for legal settlement 60,000 Exercise of options (Note 10) 60,116 Restricted stock award 164,473 Total 284,589 Public Warrants The Public Warrants became exercisable 30 days after the Closing as the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their Public Warrants on a cashless basis and such cashless exercise is exempt from registration under the Securities Act). The S-1 registration became effective November 24, 2021. The Public Warrants will expire five years after October 29, 2021, which was the completion of the TDAC Combination or earlier upon redemption or liquidation. The Company may redeem the Public Warrants: ● in whole and not in part; ● at a price of $ 0.01 per warrant; ● upon a minimum of 30 days’ prior written notice of redemption; ● if, and only if, the last sale price of the Company’s common stock equals or exceeds $ 16.00 per share for any 20 trading days within a 30 -trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders; and ● if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying such warrants at the time of redemption and for the entire 30 -day trading period referred to above and continuing each day thereafter until the date of redemption. F- 22 If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. These warrants cannot be net cash settled by the Company in any event. As of December 31, 2021, there were 20,125,000 Public Warrants outstanding. Immediately after giving effect to the Business Combination, there were 20,125,002 warrants to purchase share of Common stock outstanding, 20,125,000 of which are public warrants and two of which were previously warrants of AutoLotto, which are now warrants of Lottery.com and are exercisable to purchase an aggregate of 395,675 shares of common stock. Private Warrants Private warrants of TDAC issued before the business combination were forfeited and did not transfer to the surviving entity. Unit Purchase Option On June 1, 2018, the Company sold to the underwriter (and its designees), for $ 100 , an option to purchase up to a total of 1,750,000 Units exercisable at $ 12.00 per Unit (or an aggregate exercise price of $ 21,000,000 ) commencing on the consummation of the Business Combination. The 1,750,000 Units represents the right to purchase 1,750,000 shares of common stock and 1,750,000 warrants to purchase 1,750,000 shares of common stock. The unit purchase option may be exercised for cash or on a cashless basis, at the holder’s option, and expires on May 29, 2023. The Units issuable upon exercise of this option are identical to those offered by Lottery.com. The Company accounted for the unit purchase option, inclusive of the receipt of $ 100 cash payment, as an expense of the Business Combination resulting in a charge directly to stockholders’ equity. As of December 31, 2022 all of the 1,750,000 Units are vested, exercisable and outstanding. Common Stock Warrants The Company did not issue any warrants during the years ended December 31, 2022 and 2021. All 395,675 outstanding warrants are fully vested and have a weighted average remaining contractual life of 3.7 years. The Company did not incur any expense for the year ended December 31, 2022 and 2021. Schedule of Common Stock Warrant Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Shares Price Life (years) Value Outstanding at December 31, 2020 573,359 $ 0.28 4.8 $ 272,638 Granted - - - Exercised ( 177,684 ) 0.66 - Forfeited/cancelled - - - Outstanding at December 31, 2021 395,675 0.11 4.0 2,478,501 Granted 92621 7.56 3 0 Exercised - - - Forfeited/cancelled - - - Outstanding at December 31, 2022 488,296 $ 0.11 3.7 $ 1,200,387 Exercisable at December 31, 2022 488,296 $ 0.11 3.7 $ 1,200,387 F- 23 Beneficial Conversion Feature - Convertible Debt As detailed in Note 7 - Notes Payable and Convertible Debt, the Company has issued two series of convertible debt. Both issuances resulted in the recognition of the beneficial conversion features contained within both of the instruments. The Company recognized the proceeds allocable to the beneficial conversion feature of $ 8,480,697 as additional paid in capital and a corresponding debt discount of $ 2,795,000 . This additional paid in capital is reflected in the accompanying consolidated Statements of Equity. Earnout Shares As detailed in Note 4 - as part of the TDAC Combination as of December 31, 2021 a total of 5,000,000 Earnout Shares were eligible for issuance until December 31, 2022. 8. Stock-based Compensation Expense 2015 Stock Option Plan Prior to the closing of the Business Combination, AutoLotto had the AutoLotto, Inc. 2015 Stock Option/Stock Issuance Plan (the “2015 Plan”) in place. Under the 2015 Plan, incentive stock options may be granted at a price not less than fair market value of the common stock (110% of fair value to holders of 10% or more of voting stock). If the Common Stock is at the time of grant listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. If the Common Stock is at the time neither listed on any Stock Exchange, then the Fair Market Value shall be determined by the Board of Directors or the Committee acting in its capacity as administrator of the Plan after taking into account such factors as the Plan Administrator shall deem appropriate. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed Four Hundred Fifty Thousand (450,000). Options are exercisable over periods not to exceed 10 years (five years for incentive stock options granted to holders of 10% or more of voting stock) from the date of grant. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more instalments over the Participant’s period of Service or upon attainment of specified performance objectives. The Plan Administrator may not impose a vesting schedule upon any option grant or the shares of Common Stock subject to that option which is more restrictive than twenty percent ( 20 %) per year vesting, with the initial vesting to occur not later than one ( 1 ) year after the option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants. 2021 Equity Incentive Plan In connection with the Business Combination, our board of directors adopted, and our stockholders approved, the Lottery.com 2021 Incentive Award Plan (the “2021 Plan”) under which 13,130,368 shares of Class A common stock were initially reserved for issuance. The 2021 Plan allows for the issuance of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock or cash based awards. The number of shares of the Company’s Class A common stock available for issuance under the 2021 Plan increases annually on the first day of each calendar year, beginning on and including January 1, 2022 and ending on and including January 1, 2031 by a number of shares of Company common stock equal to five percent ( 5 %) of the total outstanding shares of Company common stock on the last day of the prior calendar year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide that there will be no such increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of Company common stock than would otherwise occur pursuant to the preceding sentence. As of December 31, 2022, the Company has not granted awards under the 2021 Plan. F- 24 Stock Options The Company did not issue any new stock options during the years ended December 31, 2022 and 2021. The following table shows stock option activity for the years ended December 31, 2022 and 2021: Schedule of Stock Option Activity Weighted Weighted Average Shares Outstanding Average Remaining Aggregate Available Stock Exercise Contractual Intrinsic for Grant Awards Price Life (years) Value Outstanding at December 31, 2020 37,405 1,315,218 $ 0.30 5.5 $ 362,841 Granted - - - - Exercised - ( 737,732 ) ( 0.28 ) - Forfeited/cancelled 231,825 ( 231,825 ) ( 0.65 ) - Outstanding at December 31, 2021 269,230 345,661 0.97 4.4 2,061,303 Granted - - - - Exercised - ( 60,116 ) ( 0.67 ) - Forfeited/cancelled (uncancelled) ( 60,116 ) 60,116 0.67 - Outstanding at December 31, 2022 209,114 345,661 $ 0.41 4.2 $ 944,544 Exercisable at December 31, 2022 209,114 345,661 $ 0.41 4.2 $ 944,544 Stock-based compensation expense related to the employee options was $ 0 and $ 10,077 for the year ended December 31, 2022, and 2021 respectively. Restricted awards The Company awarded restricted stock to employees on October 28, 2021, which were granted with various vesting terms including immediate vesting, service-based vesting, and performance-based vesting. In accordance with ASC 718, the Company has classified the restricted stock as equity. For employee issuances, the measurement date is the date of grant, and the Company recognizes compensation expense for the grant of the restricted shares, over the service period for the restricted shares that vest over a period of multiple years and for performance-based vesting awards, the Company recognizes the expense when management believes it is probable the performance condition will be achieved. As of December 31, 2021, the Company had granted 3,832,431 shares with vesting to begin April 2022. For the year ended December 31, 2022, the Company recognized $ 27,137,991 of stock compensation expense related to the employee restricted stock grants. As of December 31, 2022, unrecognized stock-based compensation associated with the restricted stock awards is $ 4,061,294 which will be expensed over the next 2.83 years. The Company had restricted stock activity summarized as follows: Schedule of Restricted Stock Awards Activity Weighted Average Number of Grant Shares Fair Value Outstanding at December 31, 2021 3,832,431 $ 14.75 Granted - - Vested - - Forfeited/cancelled - - Restricted shares unvested at December 31, 2022 3,832,431 $ 14.75 F- 25 9. Loss Per Share The following table sets forth the computation of basic and diluted net loss per share : Schedule of Basic and Diluted Net Income Loss Per Share 2022 2021 Year ended December 31, 2022 2022 2021 Comprehensive net loss attributable to stockholders $ ( 32,930,867 ) $ ( 5,456,034 ) Weighted average common shares outstanding Basic and diluted 46,832,919 22,888,700 Net loss per common share Basic and diluted $ ( 0.70 ) $ ( 0.24 ) As of December 31, 2022, the Company excluded 209,114 stock options, 468,335 of restricted awards, 488,296 of warrants, 5,000,000 of earn out shares and 1,750,000 of unit purchase options from the calculation of diluted net loss per share with the effect being anti-dilutive. As of December 31, 2021, the Company excluded 345,661 stock options, 2,012,774 convertible debt into common shares, 3,832,431 of restricted awards, 3,869,305 of warrants, 1,726,027 of earn out shares and 604,110 of unit purchase options from the calculation of diluted net loss per share with the effect being anti-dilutive. 10. Income Taxes The Company’s pre-tax income (loss) by jurisdiction was as follows for the years ending December 31, 2022 and December 31, 2021; Schedule of Pre-tax Income (Loss) by Jurisdiction Year ended Year ended December 31, 2022 December 31, 2021 Domestic $ ( 58,379,329 ) $ ( 55,259,603 ) Foreign $ ( 1,899,580 ) 684,622 Total $ ( 60,278,909 ) $ ( 54,574,981 ) The provision for income taxes for continuing operations for the year ended December 31, 2022 and 2021 consist of the following: Schedule of Income Tax for Continuing Operations Year ended December 31, 2022 Year ended December 31, 2021 Current income taxes - Federal - ( 16,846 ) State 104,356 5,578 Foreign - - Total current income taxes 104,356 ( 11,268 ) Deferred income taxes Federal - ( 1,757,535 ) State - - Foreign - 104,467 Total deferred income taxes - ( 1,653,067 ) Valuation allowance - - Total income tax expense (benefit) 104,356 ( 1,664,335 ) F- 26 A reconciliation between the amount of reported income tax expense (benefit) and the amount computed by multiplying income from continuing operations before income taxes by the statutory federal income tax rate is shown below. Income tax expense for the year ended December 31, 2022 includes state minimum taxes, permanent differences, and deferred tax assets for which a full valuation allowance has been placed. A corresponding tax expense is included for the year ended December 31, 2022 to reflect the increase in the valuation allowance. Schedule of Increase in the Valuation Allowance Year ended December 31, 2022 Year ended December 31, 2021 Tax Expense at statutory federal rate of 21 % $ ( 12,680,485 ) $ ( 11,460,747 ) State income taxes, net of federal income tax benefit 34,594 - Foreign rate differential ( 135,255 ) 127,739 Permanent differences 37,919 2,106,611 Other – Miscellaneous - - Change in valuation allowance 12,825,669 7,562,061 Income tax expense (benefit) $ 104,356 $ ( 1,664,335 ) Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The following table discloses those significant components of our deferred tax assets and liabilities, including any valuation allowance: Schedule of Deferred Tax Assets and Liabilities 2022 2021 Long-term deferred tax assets: Federal net operating loss carryforwards $ 24,838,785 $ 20,145,126 Foreign net operating loss carryforwards 625,440 ( 321,330 ) Stock compensation 9,136,562 3,308,116 Fixed assets - - Intangible assets - - Other 19,540 19,540 Total deferred tax assets before valuation allowance $ 34,620,327 $ 23,151,451 Deferred tax liabilities: Fixed assets $ ( 46,035 ) $ 336,699 Intangible assets 478,213 1,452,273 Total deferred tax liabilities 432,178 1,788,972 Valuation allowance ( 34,188,149 ) ( 21,362,480 ) Net deferred tax assets and liabilities $ - $ - Due to the Global Gaming acquisition and the recording of related deferred tax liabilities, the Company released approximately $ 1,600,000 of valuation allowance since the additional deferred tax liabilities represent a future source of taxable income. For the year ended December 31, 2022, the valuation allowance increased by approximately $ 12,825,669 . the Company believes a full valuation allowance against the net deferred tax asset is appropriate at this time. The Company will continue to evaluate the realizability of its deferred tax assets in future years. F- 27 At December 31, 2021, our carryforwards available to offset future taxable income consisted of federal net operating loss (“NOL”) carryforwards of approximately $ 116,408,640 , $ 21,739,564 of which expires between 2036 and 2037 and $ 94,564,720 of which has no expiration date. We account for uncertain tax positions in accordance with ASC 740-10-25, which prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We have not recorded any unrecognized tax benefits as of December 31, 2022. Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. We did not have any interest or penalties on unrecognized tax benefits accrued at December 31, 2022. The Company files U.S. federal and state returns. The Company’s foreign subsidiary also files a local tax return in their local jurisdiction. From a U.S. federal, state and Mexican perspective the years that remain open to examination are consistent with each jurisdiction’s statute of limitations. The Company has not filed its 2021 and 2022 U.S. federal and state corporate income tax returns. The Company’s foreign subsidiary in Mexico is current with the filing of its tax returns through 2022. The Company expects to file these documents as soon as possible. While the Company is in a net loss position and expects no income tax amounts to be due except for minimum state and local income taxes, the Company is at risk for failure to file. As of the date of this Report, the Company has not been informed that such penalties have been assessed, therefore no accrual for such has been recorded in the Company’s financial statements. The Company’s federal income tax returns for the years 2017-2022 remain subject to examination by the Internal Revenue Service. 11. Commitments and Contingencies Indemnification Agreements The Company enters into indemnification provisions under its agreements with other entities in its ordinary course of business, typically with business partners, customers, landlords, lenders and lessors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2021 and 2021. Digital Securities In 2018, the Company commenced a sale offering and issuance (the “LDC Offering”) of 285 million revenue participation interests (the “Digital Securities”) of the net raffle revenue of LDC Crypto Universal Public Company Limited (“LDC”). The Digital Securities do not have any voting rights, redemption rights, or liquidation rights, nor are they tied in any way to other equity securities of LDC or the Company nor do they otherwise hold any rights that a holder of equity securities of LDC or the Company may have or that a holder of traditional equity securities or capital stock may have. Rather, each of the holders of the Digital Securities has a pro rata right to receive 7 % of the net raffle revenue. If the net raffle revenue is zero for a given period, holders of the Digital Securities are not eligible to receive any cash distributions from any raffle sweepstakes of LDC for such period. For the year ended December 31, 2022, the company did not incur any obligations to the holders of the outstanding Digital Securities. For the year ended December 31, 2021, the Company incurred an obligation to pay an aggregate amount of approximately $ 5,632 to holders of the outstanding Digital Securities. The Company did not satisfy any of those obligations during the years ended December 31, 2021 or 2022. F- 28 Leases The Company leases office space in Spicewood, Texas which expires January 21, 2024. For the year ended December 31, 2022 and 2021, the Company’s total rent expense was approximately $ 173,837 and $ 206,471 , respectively. As of December 31, 2022, future minimum rent payments due under non-cancellable leases with initial maturities greater than one year are as follows: Schedule of Future Minimum Rent Payments Due Under Non-Cancellable Leases Years ending December 31, Amount 2023 135,222 2024 30,404 Total $ 165,626 Litigation and Other Loss Contingencies As of December 31, 2022, there were no pending proceedings that are deemed to be materially detrimental. The Company is a party to legal proceedings in the ordinary course of its business. The Company believes that the nature of these proceedings is typical for a company of its size and scope. See Note 15 for additional information. 12. Related Party Transactions The Company has entered into transactions with related parties. The Company regularly reviews these transactions; however, the Company’s results of operations may have been different if these transactions were conducted with nonrelated parties. During the year ended December 31, 2020, the Company entered into borrowing arrangements with the individual founders to provide operating cash flow for the Company. The Company paid $ 4,700 during 2021 and the outstanding balance was $ 13,000 at December 31, 2022 and December 31, 2021. During the years ended December 31, 2021 and 2020, the Company entered into a services agreement with Master Goblin Games, LLC (“Master Goblin Games”), an entity owned by Ryan Dickinson, a former officer of the Company, to facilitate the establishment of receipt of retail lottery licenses in certain jurisdictions. As of December 31, 2022, the Company had no outstanding related party payables. Pursuant to the Service Agreement, Master Goblin is authorized and approved by the Company to incur up to $ 100,000 in initial expenses per location for the commencement of operations at each location, including, without limitation, tenant improvements, furniture, inventory, fixtures and equipment, security and lease deposits, and licensing and filing fees. Similarly, pursuant to the Service Agreement, during each month of operation, Master Goblin is authorized to submit to the Company for reimbursement on-going expenses of up to $ 5,000 per location for actually incurred lease expenses. The initial expenses are submitted by Master Goblin to the Company upon Master Goblin securing a lease and leases are only secured by Master Goblin in any location upon request of the Company. Such initial expenses are recorded by the Company as lease obligations. On-going expenses are submitted by Master Goblin to the Company on a monthly basis, subject to offset, and are recorded by the Company as an expense. To the extent Master Goblin has a positive net income in any month, exclusive of the sale of lottery games, such net income reduces or eliminates such reimbursable expenses for that month. F- 29 In January 2023, Woodford Eurasia Assets, Ltd. signed a letter of intent to acquire Master Goblin. Such letter of intent would give Woodford the right to appoint a director to the Board of Directors of the Company (see Subsequent Events). As of the date of this Report, no definitive documentation for this transaction has been signed. 13. Revenue Disaggregation Revenue disaggregation consists of the following: Schedule of Revenue Disaggregation 2022 2021 Gaming 4,851,911 8,506,176 Other 1,927,146 7,903,746 Total 6,779,057 16,409,922 14. Subsequent Events On January 30, 2023, Mr. Edward K. Moffly resigned as Interim Chief Financial Officer of the Company. On February 1, 2023, the Board of Directors of the Company appointed Mr. Mark Gustavson as Chief Executive Officer and principal executive officer of the Company. Mr. Gustavson will also serve as principal financial/accounting officer of the Company until a replacement is found. Mr. Mark Gustavson, as CEO, replaced Mr. Sohail S. Quraeshi, who is no longer serving as Chief Executive Officer or as a principal executive officer of the Company, effective February 1, 2023, as a result of the change in Chief Executive Officer of the Company approved by the Board of Directors. On March 13, 2023, John Brier, Bin Tu and JBBT, LLC (collectively, the “TinBu Plaintiffs”) filed its original complaint against Lottery.com, Inc. f/k/a AutoLotto, Inc. and its wholly-owned subsidiary TinBu, LLC (“TinBu”) in the Circuit Court of the 13 th Judicial District in and for Hillsborough County, Florida (the “TinBu Complaint”). The Complaint alleges breach of contract(s) and misrepresentation with alleged damages in excess of $ 4.6 million. The parties agreed to extend the Company and its subsidiary’s deadline to respond until May 1, 2023. On May 2, 2023, the Company and its subsidiary retained local counsel who filed a Notice of Appearance on behalf of the Company and TinBu and filed its Motion for Enlargement requesting the Court to extend its deadline to file its initial response to the Complaint by an additional 30 days (the “TinBu Motion”). As of the date of this Report, the TinBu Motion has not been set for a hearing. On March 29, 2023, the WinTogether Foundation Board of Directors voted to suspend its relationship with the Company. On April 22, 2023, the Company signed an exclusive affiliate agreement with International Gaming Alliance (IGA), to supply official Texas lottery tickets in the Dominican Republic. On April 25, 2023, the Company recommenced its ticket sales operations through its Texas retail network. F- 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. See “ Item 14. Principal Accounting Fees and Services. ”