Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Impact
of Legacy Matters on Current Operations
Legacy
Matters have had, and continue to have, a material impact on the Company’s current operations, financial condition, and
strategic execution. While the Company has transitioned from stabilization toward execution of its strategic growth phase, the
effects of prior operational disruption, control deficiencies, and capital constraints remain relevant to an understanding of
current performance.
Operational
Restart and Execution Focus
Following
the cessation of certain legacy operations in 2022, the Company has been engaged in a phased operational restart. Current operations
reflect a transition from a legacy model primarily dependent on lottery-based revenue toward a more diversified platform across sports,
entertainment, and gaming.
As
a result, period-over-period comparisons may not be indicative of underlying performance trends, as prior periods reflect a fundamentally
different operating structure. Current operating results are more closely aligned with early-stage platform development, integration
of newly acquired or partnered assets, and the reestablishment of commercial activities.
Revenue
Profile and Business Mix
The
Company’s historical concentration in lottery-related revenue has been replaced by a broader, but still developing, revenue base.
While this transition is expected to improve long-term scalability and diversification, it has resulted in near-term variability in revenue
and limited comparability to historical results.
Revenue
generation in the current period is increasingly tied to digital media, content platforms, and strategic acquisitions, including the
Company’s investment in Veloce, which expands the Company’s reach into global digital motorsports and gaming
audiences. These platforms introduce different revenue recognition patterns, margin profiles, and monetization timelines compared to
the Company’s legacy operations.
Cost
Structure and Investment Requirements
The
Company’s cost structure has been significantly impacted by its transition. Current operating expenses reflect:
●
Ongoing
investments in stabilizing and growing operational capabilities;
●
Costs
associated with integration of acquisitions and strategic initiatives, including Veloce-related activities;
●
Professional
fees related to legal, accounting, and compliance matters stemming from Legacy Matters; and
●
Continued
investment in infrastructure necessary to support scalable operating platforms.
These
costs are expected to remain elevated in the near term as the Company continues to execute its transformation strategy as part of the strategic growth phase.
Liquidity
and Capital Allocation
Legacy
Matters have materially affected the Company’s liquidity profile, necessitating a continued reliance on external financing to fund
operations and strategic initiatives.
On
March 16, 2026, the Company entered into a Securities Purchase Agreement pursuant to which it agreed to issue unsecured convertible promissory
notes in an aggregate principal amount of up to approximately $11.8 million, to be funded in multiple tranches. The initial tranche was
funded upon execution, with subsequent tranches subject to customary conditions.
This
financing, along with other recent capital raises, have been critical in supporting the Company’s operational restart, funding
strategic initiatives, and addressing obligations arising from Legacy Matters. However, such financings have resulted in, and may continue
to result in, dilution to existing stockholders.
Management
has implemented a disciplined capital allocation framework focused on deploying capital into revenue-generating opportunities and initiatives
that are expected to support near- to medium-term financial performance. The Company’s ability to execute its strategy remains
dependent on its ability to access additional capital on acceptable terms.
Internal
Controls and Reporting Processes
The
Company continues to operate under a remediation plan to address previously identified material weaknesses in internal control over financial
reporting. While progress has been made, these matters continue to impact the Company’s financial reporting processes, including
the timing and complexity of period-end close and reporting activities.
Management
continues to invest in personnel, systems, and processes to strengthen the control environment and support scalable operations.
Strategic
Execution and Integration Risk
The
Company’s current strategy includes the acquisition and integration of complementary businesses and platforms. While these initiatives
are expected to contribute to revenue growth and strategic positioning, they introduce execution risks, including integration complexity,
alignment of operating models, and realization of anticipated synergies.
Legacy
Matters have necessitated a more measured and disciplined approach to execution, with an emphasis on transactions that are expected to
deliver tangible revenue contributions and align with the Company’s capital constraints.
58
Inflection
Point and Transition to Execution
Management
believes the Company has reached an inflection point in its transformation. Having addressed critical Legacy Matters, stabilized operations,
and secured incremental capital, the Company is transitioning from a period defined by remediation and restructuring to one focused on
execution and revenue generation as part of the strategic growth phase.
This
inflection point is characterized by:
●
The
reactivation of core operations following prior cessation;
●
The
deployment of capital into strategic acquisitions and partnerships, including Veloce;
●
The
establishment of a more diversified revenue model beyond lottery-based activities; and
●
The
implementation of a more disciplined operating and capital allocation framework.
While
risks remain, including liquidity constraints and execution risk associated with integrating new platforms, management believes the Company
is better positioned to pursue scalable growth opportunities and improve operating performance.
Ongoing
Impact and Path Forward
Notwithstanding
the progress achieved, Legacy Matters continue to influence the Company’s current operations, including through elevated operating
costs, a transitional revenue profile, and ongoing capital requirements.
Management
remains focused on scaling revenue-generating operations, improving operating efficiency, strengthening the balance sheet, and continuing
to enhance internal controls and compliance processes. The Company’s future performance will depend on its ability to successfully
execute this strategy and convert its repositioned platform into sustainable revenue growth and long-term stockholder value.
Our
Current Revenue
The
Company currently derives its revenue from three areas of focus:
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 under multi-year agreements and in accordance with our Terms of Service in consideration of a fee.
Digital Media and Advertising
Revenue generated from our digital media platforms is primarily driven by audience scale, engagement, and monetization through advertising,
sponsorships, and content partnerships.
Gaming Platforms Our gaming
and interactive revenue in 2025 was driven by our Mexican operations and includes iLottery products.
Company
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.
59
Key
Trends and Factors Affecting Our Results
Our results of operations and financial condition
are influenced by trends affecting our core business focuses—digital media, sports and esports, ticketing and live experiences,
and gaming and interactive platforms—as well as broader strategic, regulatory, and capital market factors.
Digital Media and Advertising Revenue
generated from our digital media platforms is primarily driven by audience scale, engagement, and monetization through advertising, sponsorships,
and content partnerships. Key factors affecting this area include:
● growth in global audience reach and monthly impressions across owned and partner platforms;
● pricing dynamics in digital advertising markets, including CPM variability and demand from brand advertisers;
● reliance on third-party distribution platforms and associated algorithm or policy changes; and
● continued investment in content creation, talent, and technology infrastructure.
Revenue in this area may fluctuate based on seasonality
in advertising spend, major sporting or entertainment events, and changes in platform monetization policies.
Sports and Esports Operations Our sports and
esports business generates revenue through sponsorships, commercial partnerships, media rights, and team-related activities. Results in
this segment are influenced by:
● the performance and visibility of affiliated teams and leagues;
● the ability to secure and renew commercial partnerships with global brands;
● growth in esports viewership and engagement; and
● expansion into new sports formats, leagues, and international markets.
This area may experience variability based on competitive
performance, event timing, and the timing of sponsorship agreements.
Ticketing and Live Experiences Revenue from
ticketing and live experiences will be driven by consumer demand for events, platform adoption, and strategic partnerships. Key factors
include:
● volume of ticket sales and transaction-based revenue;
● relationships with venues, promoters, and rights holders;
● seasonality tied to event calendars and major tours or sporting events; and
● consumer discretionary spending trends and macroeconomic conditions.
Our results in this area may also be impacted by
the timing of large-scale events and the pace of platform development and market adoption.
Gaming and Interactive Platforms Our gaming
and interactive business focus includes or will include initiatives in predictive gaming, digital engagement, and related technologies. Performance
in this area is influenced by:
● regulatory frameworks governing gaming and event-based contracts across jurisdictions;
● user acquisition, retention, and engagement levels;
● product development timelines and platform scalability; and
● strategic partnerships with technology providers and market operators.
This part of our business remains subject to evolving regulatory
conditions and may require ongoing investment prior to achieving scale.
Acquisition and Integration Activity Across
all of our business focus areas, our growth strategy includes the acquisition of complementary businesses and assets. Our results are affected by:
● the timing of acquisition closings and associated transaction costs;
● integration execution and realization of expected synergies;
● the revenue and profitability profile of acquired businesses; and
● the use of equity or other consideration, which may result in dilution.
As a result, period-over-period comparisons may be
impacted by acquisition timing and integration progress.
Capital Resources and Funding Strategy Execution
across our segments depends on available capital and disciplined allocation of resources. We prioritize investments that support near-term
revenue generation or are supported by committed funding sources. Our results may be affected by:
● access to capital and cost of financing;
● working capital requirements; and
● efforts to manage dilution while funding strategic initiatives.
Regulatory Environment and Compliance Our operations
across media, gaming, and live experiences subject us to multiple regulatory regimes. Our results are influenced by:
● compliance costs and reporting obligations as a Nasdaq-listed company;
● licensing and regulatory requirements in gaming and international markets; and
● ongoing remediation and governance enhancements related to legacy matters.
60
We have implemented strengthened
internal controls, governance frameworks, and financial reporting processes, and needed to restate prior period financials, which may
continue to impact comparability.
Reputational and Market Factors Our operating
performance may be affected by investor confidence, analyst coverage, and broader market perception as we continue to execute our strategic
transformation. We believe that improved governance, operational discipline, and a focus on revenue-generating activities position the
Company for long-term growth; however, market perception may continue to evolve.
Industry Trends and Convergence We operate
in markets characterized by increasing convergence across sports, media, entertainment, and gaming. Our results are influenced by:
● shifts toward digital and interactive content consumption;
● growth in esports and alternative sports formats;
● integration of content, commerce, and community-driven platforms; and
● evolving monetization models, including advertising, sponsorship, and direct-to-consumer revenue streams.
Our ability to capitalize
on these trends depends on execution, strategic partnerships, and continued innovation across our platform.
Current
Plan of Operations
Our plan of operations is focused
on disciplined execution and revenue generation as we position the Company for sustainable growth. Following a period of restructuring
and remediation of legacy issues, management has adopted a strategy centered on (i) completing and integrating targeted acquisitions,
(ii) scaling revenue-generating business lines, (iii) strengthening operational infrastructure and controls, and (iv) allocating capital
to initiatives with clear, near-term economic return.
We are prioritizing the completion
and integration of previously announced acquisitions. The Company has already completed the acquisition of Veloce Esports Limited and
anticipates finalization of the acquisitions of Nook Holdings Limited once current regional conflicts in the Middle East are resolved.
These transactions are intended to expand our footprint across sports, gaming, and entertainment while adding scalable, revenue-generating
assets. Our focus is on achieving operational integration, realizing synergies, and leveraging shared technology, media distribution,
and commercial partnerships across these platforms.
Through
our Sports.com, Concerts.com, and related digital properties, we are building a unified media ecosystem designed to drive audience engagement
and monetization. We intend to expand content distribution, increase direct-to-consumer engagement, and develop diversified revenue streams,
including advertising, sponsorships, content licensing, and transactional platforms. The addition of Veloce’s digital media network
is expected to significantly enhance our global reach and audience scale.
Management
is prioritizing initiatives that are either currently generating revenue or have a clear and near-term path to monetization. We have
deprioritized or discontinued certain non-core or capital-intensive initiatives that do not meet our return thresholds. This disciplined
approach is intended to improve operating efficiency and accelerate the path to profitability.
We
are pursuing selective international expansion opportunities, beginning with targeted markets such as Mexico, where we believe there
is strong demand for our sports, gaming, and entertainment offerings. Our strategy is to enter new markets through partnerships, acquisitions,
or localized platforms that leverage our existing technology and media capabilities.
We
are continuing to invest in strengthening our operational and financial infrastructure. This includes enhancing internal controls over
financial reporting, improving financial close processes, and expanding our accounting and finance capabilities to support complex transactions
and multi-entity operations. We are also implementing improved governance, oversight, and compliance frameworks to support our growth
as a public company.
Our
capital allocation strategy is focused on preserving liquidity while funding high-priority initiatives. We intend to utilize a combination
of equity and debt financing, strategic partnerships, and structured transactions to fund our operations and acquisitions. We will continue
to evaluate opportunities to strengthen our balance sheet and reduce dilution to existing shareholders.
We
expect our primary uses of capital over the next 12 months to include:
● Funding
acquisition-related obligations and integration activities;
● Supporting
working capital needs and ongoing operations;
● Investing
in technology development and platform enhancements; and
● Expanding
sales, marketing, and commercial capabilities.
Over
the next 12 months, our operating plan is centered on transitioning from a restructuring phase to a growth phase driven by execution.
Key milestones include completing pending acquisition tranches, integrating acquired businesses, scaling revenue across our core platforms,
and improving overall financial performance.
61
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, 2025 Compared to Year Ended December 31, 2024
The
following table summarizes our results of operations for the years ended December 31, 2025 and December 31, 2024, respectively.
For the Year Ended December 31,
2025
2024
$ Change
% Change
Revenue
$
559,590
$
958,645
$
(399,055
)
-42
%
Cost of revenue
774,823
320,869
453,954
141
%
Gross profit
$
(215,233
)
$
637,776
$
(853,009
)
-134
%
Operating expenses:
Personnel costs
$
2,469,812
$
4,761,186
$
(2,291,374
)
-48
%
Professional fees
6,637,644
5,436,831
1,200,813
22
%
General and administrative
4,306,273
3,688,547
617,726
17
%
Depreciation and amortization
4,238,921
5,020,647
(781,726
)
-16
%
Total operating expenses
17,652,650
18,907,211
(1,254,561
)
-7
%
Loss from operations
$
(17,867,883
)
$
(18,269,435
)
$
401,552
-2
%
Other expenses
Interest expense
$
217,905
$
508,563
$
(290,658
)
-57
%
Other expenses
1,248,967
968,903
280,064
29
%
Other Income
(4,234,581
)
(107,143
)
4,127,438
3,852
%
Reserve for loss of prepaid advertising credits
5,688,078
4,745,000
943,078
20
%
Loss on impairment of intangibles & goodwill
-
4,298,002
(4,298,002
)
-100
%
Total other expenses, net
2,920,369
10,413,325
(7,492,956
)
-72
%
Net loss before income tax
$
(20,788,252
)
$
(28,682,760
)
7,894,508
-28
%
Income tax expense (benefit)
16,815
26,315
(9,500
)
-36
%
Net loss
$
(20,805,067
)
$
(28,709,075
)
$
7,904,008
-28
%
Other comprehensive loss
Foreign currency translation adjustment, net
$
280,490
$
317,424
$
(36,934
)
-12
%
Comprehensive loss
$
(20,524,577
)
$
(28,391,651
)
$
7,867,074
-28
%
Net income (loss) attributable to noncontrolling interest
$
(220,969
)
$
(170,046
)
$
(50,923
)
30
%
Net loss attributable to Lottery.com, Inc.
$
(20,303,608
)
$
(28,221,605
)
$
7,917,997
-28
%
Revenues
Revenue. Revenue for the
year ended December 31, 2025 was $560,000, a decrease of $399,000, or (42)%, compared to revenue of $959,000 thousand for the year ended
December 31, 2024. The decrease is the result of decreases both in Tinbu ($287,000) and Global Gaming ($175,000) partially offset by an
increase of $63,000 for Sports.com Media which is included for twelve months in 2025 but only four months 4 in 2024 because it was acquired
on September 1, 2024.
Cost of Revenue . Cost of
revenue includes product costs, commission expense to affiliates and commercial partners, and merchant processing fees. Cost of revenue
for the year ended December 31, 2025 was $775,000 thousand, an increase of $454,000 thousand, or 141%, compared to cost of revenue of
$321,000 thousand for the year ended December 31, 2024. The increase in COGS was due to a $315,000 thousand increase at Sports.com Media
and a $127,000 increase at AutoLotto.
Gross Profit (Loss) . Gross
loss for the year ended December 31, 2025 was ($215,000), compared to a gross profit of $638,000 for the year ended December 31, 2024,
a decrease of $853,000, or (134%). Decreases in revenue for Tinbu, and Global Gaming and increases in COGS in AutoLotto and Sports.com
which is an early stage growth business combine to result in a decrease to gross profit of $831,000.
62
Operating
Costs and Expenses
For the Year Ended December 31,
2025
2024
$ Change
% Change
Operating expenses:
Personnel costs
2,469,812
4,761,186
(2,291,374
)
-48
%
Professional fees
6,637,644
5,436,831
1,200,813
22
%
General and administrative
4,306,273
3,688,547
617,726
17
%
Depreciation and amortization
4,238,921
5,020,647
(781,692
)
-16
%
Total operating expenses
17,652,650
18,907,211
(1,254,561
)
-7
%
Operating
expenses for the year ended December 31, 2025 were $17.7 million, a decrease of $1.3 million or (7%), compared to $18.9 million for the
year ended December 31, 2024. Personnel costs decreased by $2.3 million and Depreciation and Amortization decreased by $782,000 whereas
Professional fees increased by $1.2 million and General and administrative increased by $618,000 .
Personnel
Costs. Personnel costs decreased by $2.3 million, or (48%), from $4.8 million for the year ended December 31, 2024, to $2.5 million
for the year ended December 31, 2025. The decrease was due to stock grants made to officers in 2024 for retention during the turnaround
that did not recur in 2025 and also due to the reduction of highly compensated people at one of the Company’s subsidiaries approximately
half way through 2025.
Professional
Fees. Professional fees increased by $1.2 million, or 22% from $5.4 million for the year ended December 31, 2024 to $6.6 million
for the year ended December 31, 2025. Utilization of attorneys was higher in 2025 than in 2024 particularly for matters such as the class
action, DOJ lawsuit and other matters including the TinBu lawsuit.
General
and Administrative. General and administrative expenses of $4.3 million for the year ended December 31, 2025 are $618,000 or 17%
higher than the $3.7 million incurred for the year ended December 31, 2024. The increase relates primarily to sponsorships and investor
relations activities in 2025 that were not present in 2024 offset by lower use of outside consultants in 2025 and also because stock
grants which were made to outside consultants in 2024 did not recur in 2025.
Depreciation
and Amortization. Depreciation and amortization decreased $782,000, or (16%), from $5.0 million for the year ended December 31, 2024
to $4.2 million for the year ended December 31, 2025. The decrease in 2025 is because intangible assets for TinBu became fully amortized
around mid-2024 and because write-offs of other intangibles in 2023 and 2024 resulted in lower amortization expense during 2025.
Other
Expense, Net
For the Year Ended December 31,
2025
2024
$ Change
% Change
Other expenses
Interest expense
217,905
508,563
(290,658 )
-57 %
Other expense
1,248,967
968,903
280,064
29
%
Other income
(4,234,581
)
(107,143 )
4,127,438
3,852
%
Reserve for loss of prepaid advertising credits
5,688,078
4,745,000
943,078
20 %
Loss on impairment of intangibles & goodwill
-
4,298,002
(4,298,002 )
-100 %
Total other expenses, net
2,920,369
10,413,325
(7,492,956 )
-72 %
Interest Expense. Interest
expense decreased by $291,000, or (57%), for the year ended December 31, 2025, from $509,000 to $218,000 as compared with the year ended
December 31, 2024. This decrease is due to a large conversion from debt to equity by UCIL in the summer of 2024 along with more frequent
conversions by UCIL during 2025 and conversions in the second quarter of 2025 of convertible debt placed by Univest in 2024 which combined
to result in lower balances of convertible debt and therefore lower interest accruals in 2025.
Other Expense. Other expense
increased by $280,000 or 29%, for the year ended December 31, 2025 as compared to the year ended December 31, 2024 from $969,000 to $1.25
million. This increase resulted primarily from increases to other expense for Global Gaming due to differences in classification of certain
expenses during 2025 as compared with prior periods.
Other Income. Other
income increased by $4.1 million or 3,852%, for the year ended December 31, 2025 as compared to the year ended December 31, 2024 from
$107,000 to $4.2 million. This increase was the result of recording statutory interest accrued on the Streicher judgement for the year
ended December 31, 2025. In previous years we had taken a conservative approach given the uncertainty of collecting on this judgement.
However, prior to filing this report, the Company gained new information which increases confidence of management that we will collect
on the Streicher judgement and the statutory interest.
Reserve
for loss of prepaid advertising credits. Reserve for loss of prepaid advertising credits increased by $943,000 or 20% to 5.7 million
for the year ended December 31, 2025 as compared to $4.75 million for the year ended December 31, 2024. These reserves were recorded
to reflect the possibility that the Company may not be able to fully utilize the value of prepaid advertising credits that was included
on its Balance Sheet at December 31 2025 and 2024.
Loss on impairment of intangibles & goodwill
decreased by ($4.3) million or (100%) for the year ended December 31, 2025 as compared with the year ended December 31, 2024. For
the year ended December 31, 2025, there were no impairments recorded to goodwill or intangible assets whereas for the year ended December
31 2024, impairments to intangible assets were recorded for $1.6 million related to the TinBu subsidiary and $2.7 million related to the
Global Gaming subsidiary, respectively, for a total of $4.3 million.
63
Liquidity
and Capital Resources
Prior to the 2022 operational
cessation, the Company’s primary liquidity requirements were driven by working capital needs, growth initiatives, capital expenditures
and general corporate purposes. Historically, these requirements were funded primarily through financing activities, including the proceeds
received in connection with the business combination completed on October 29, 2021, which generated approximately $42.8 million in net
cash proceeds.
Following the 2022 operational
cessation, the Company has repositioned its liquidity strategy to support the disciplined restart and scaling of operations, with a focus
on capital-efficient growth and the acquisition of revenue-generating businesses. The Company’s liquidity needs are currently centered
on funding strategic acquisitions, supporting integration activities, rebuilding operational capabilities, and investing in core infrastructure
aligned with its long-term growth objectives.
In March 2026, the Company entered
into a Securities Purchase Agreement providing for the issuance of unsecured convertible promissory notes. This financing provides the
Company with near-term capital to advance its strategic initiatives and reflects continued access to institutional capital in support
of its business plan. The Company expects to deploy proceeds from this financing, together with additional capital sources, to execute
on its acquisition strategy, including the completion of the integration of Veloce Media Group, and to pursue additional accretive opportunities
across its target markets.
The Company’s operating
strategy is focused on building a diversified, revenue-generating platform at the intersection of sports, entertainment and gaming. Management
believes that its ability to structure and execute strategic transactions, combined with access to capital markets, positions the Company
to accelerate growth while maintaining flexibility in capital allocation. The Company continues to evaluate a range of financing alternatives,
including debt, equity and structured capital solutions, to support its expansion and optimize its capital structure over time.
Capital Deployment Framework
The Company employs a disciplined
capital deployment framework designed to prioritize investments that drive near- and medium-term revenue generation while preserving balance
sheet flexibility. Capital is allocated based on a structured evaluation of (i) the ability of a transaction or initiative to contribute
to revenue growth and cash flow generation, (ii) the strategic alignment with the Company’s core verticals of sports, entertainment
and gaming, (iii) the potential for operational synergies and scalable platform integration, and (iv) the overall impact on shareholder
value, including dilution considerations. The Company prioritizes transactions that can be funded through existing or committed capital
sources and that demonstrate a clear path to monetization. Management continuously evaluates capital allocation decisions to ensure alignment
with its objective of building a sustainable, high-growth, revenue-generating platform.
While the Company’s growth
strategy is dependent on continued access to capital, management believes that the progress made in securing financing and advancing key
transactions provides a strong foundation for execution. The Company remains focused on aligning capital deployment with revenue-generating
initiatives and maintaining financial discipline as it scales operations.
There can be no assurance that additional financing will be available on favorable terms, or at all; however, the
Company believes it is well-positioned to access capital in support of its strategic objectives. If the Company is unable to obtain sufficient
capital, it may be required to adjust the pace of its growth initiatives; however, management intends to prioritize capital allocation
toward opportunities that enhance the Company’s revenue profile and long-term shareholder value.
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 “ [w]e 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 of the Business Combination, 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 bore 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, 2025, we had $ 2,297,683 of convertible debt outstanding. A portion of this debt has matured and is theoretically in default.
See
“- Recent Developments- Loan Agreement with Woodford ” and “Loan Agreement with United Capital Investments
London Limited” above for additional information.
64
Cash
Flows
Net cash used by operating activities was negative $3.43 million for the
year ended December 31, 2025, compared to net cash used by operating activities of negative $1.88 million for the year ended December
31, 2024. Factors affecting changes in operating cash flows were increased legal fees and expenses for investor relations and sponsorships
in 2025 as compared to 2024.
Net cash used in investing activities during the year ended December 31, 2025 was $2.57 million, compared
to $1.55 million for the prior year. The increase for 2025 was due to payments made during 2025 as deposits for pending acquisitions of
Veloce eSports and Nook
Net cash provided by financing activities was $6.27 million for the year ended December 31, 2025, compared to
$3.25 million used by financing activities for the year ended December 31, 2024. The increase was primarily due to funding received under
the Stock Purchase Agreement with Generating Alpha during 2025.
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.
ASU 2023-07, Segment Reporting (Topic 280)
In November 2023, the FASB
issued ASU 2023-07, which enhances disclosures for reportable segments, including the requirement to disclose significant segment
expenses and other segment items. The amendments are effective for fiscal years beginning after December 15, 2023. The Company
adopted this guidance in the current fiscal year. The adoption has not had a material impact on the Company’s consolidated
financial statements but the Company is currently evaluating the impact of this standard on its future consolidated financial
statements.
ASU 2023-09, Improvements to Income Tax Disclosures
(Topic 740)
In December 2023, the FASB issued
ASU 2023-09, which enhances income tax disclosures, including additional disaggregation of the effective tax rate reconciliation and income
taxes paid by jurisdiction. The amendments are effective for fiscal years beginning after December 15, 2024. The Company is currently
evaluating the impact of this standard on its consolidated financial statements.
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 that was required under previous 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.
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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:
Revenue
and Cost Recognition
Revenue
The Company recognizes revenue in accordance with ASC 606. 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 evaluates whether it acts as a principal or agent in these arrangements. Where
the Company acts as an agent, revenue is recognized on a net basis representing the commission or fee retained.
The Company also has contracts with subscribers for the continued delivery of lottery 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.
Cost
of Revenue
Cost of revenue consists primarily of payments
to lottery providers and partners, data acquisition costs, content and media production expenses, platform and transaction processing
fees, and affiliate commissions. Costs are recognized as incurred and are matched to the period in which the related revenue is recognized.
Certain costs, such as revenue share arrangements, are recognized concurrently with the associated revenue.
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.
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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 2021 through 2024 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 2021 through 2024 tax years remain open for examination
by the tax authorities under the normal four-year statute of limitations.
Income
taxes for the year ended December 31, 2025 were not a significant component of the Company’s results of operations. The Company
has incurred cumulative losses and maintains a full valuation allowance against its deferred tax assets. As a result, no material income
tax expense or benefit has been recognized.
The
Company’s accounting for income taxes reflects management’s current assessment of available information and is subject to
refinement as additional analysis is completed. Any such adjustments are not expected to be material.
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.
Collectability
of Note Receivable
The
Company maintains a secured note receivable from a third party with an outstanding principal balance of $2.0 million as of December 31,
2025. The note matured during 2025 and remains outstanding. Management evaluates the collectability of this receivable in accordance
with ASC 326 and exercises significant judgment in estimating expected credit losses. In performing this assessment, management considers
the borrower’s financial condition, the value of the collateral securing the note, the personal guarantee provided by the borrower’s
principal, the Company’s contractual enforcement rights, and other available information. Based on this evaluation, management
concluded that no allowance for expected credit losses was required as of December 31, 2025. Changes in the financial condition of the
borrower or guarantor, the value of the collateral, or other facts and circumstances could result in changes to this estimate in future
periods.
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.
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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 2024 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.
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