Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion and analysis of our financial condition and results of operations together with the consolidated
financial statements and the related notes appearing elsewhere in this Amended Report. This discussion contains forward-looking statements that
reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those set forth
under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary” sections
and elsewhere in this Amended Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
and Recent Developments
During FY 2023, the Company
addressed legacy issues while successfully regaining full compliance with Nasdaq’s continued listing rules and restarting operations
in order to stage Lottery.com for growth in FY 2024. The cornerstone of the Company’s operational progress for FY 2024
will be driven by technology, product and service capability enhancements.
This
Amended Report is reflective of the Company’s commitment to transparency,
integrity, and responsible corporate governance. The investment commitments from United Investments Capital London, including Prosperity
Investment Management and others, and investors placed by Univest Securities LLC, outlined in this report are evidence of investor belief
in Management’s capability to resume core lottery and gaming operations, monetize the Sports.com brand, and expand all the Company’s
brands across the globe.
Internal
Investigation and Operational Cessation
On
July 6, 2022, the Company announced that the Audit Committee (the “Audit Committee”) of the board of directors of the Company
(the “Board”) had retained outside counsel to conduct an independent investigation that revealed instances of non-compliance
with state and federal laws concerning the states in which lottery tickets were procured as well as order fulfillment. The investigation
also identified issues pertaining to the Company’s internal accounting controls (the “Internal Investigation”). Following
a report on the filings of the Internal Investigation, on June 30, 2022, the Board terminated the employment of Ryan Dickinson as the
Company’s President, Treasurer and Chief Financial Officer, effective July 1, 2022. Subsequently, the Company initiated a review
of its cash balances and related disclosures as well as its revenue recognition processes and other internal accounting controls.
On
July 20, 2022, Armanino LLP (“Armanino”), the Company’s registered independent public accountant for the fiscal years
ended December 31, 2021 and 2020, advised the Company that its audited financial statements for the year ended December 31, 2021 (the
“2021 Audit”) and the unaudited financial statements for the quarter ended March 31, 2022 (the “March 2022 Financials”),
should no longer be relied upon. Armanino advised that it had determined, subsequent to the 2021 Audit and review of the March 2022 Financials,
that the Company had entered into a line of credit in January 2022 that was not disclosed in the footnotes to the 2021 Audit and was
not properly recorded in the March 2022 Financials.
On
July 28, 2022, the Board determined that the Company did not have sufficient financial resources to fund its operations or pay certain
existing obligations, including its payroll and related obligations, due to a significant misstatement of our cash balances.
The following day, on July 29, 2022, the Company effectively ceased operations
(the “Operational Cessation”), when it furloughed the majority of its employees and generally suspended its lottery game sales.
The Company’s remaining employees were retained at the discretion of the Company’s then Chief Operating Officer and Chief
Legal Officer in order to provide the minimal business functions needed to address the Company’s legal and compliance issues and to
secure necessary funding to resume the Company’s operations. Less than twenty percent of these non-furloughed employees remain active
in the efforts to restore Company operations. Approximately $3.85 million in outstanding payroll and $1.0
million in outstanding director compensation obligations was unpaid as of December 31, 2023.
54
On
September 27, 2022, Armanino resigned as the independent registered public accounting firm of the Company, effective immediately and
subsequently, on October 7, 2022, the Audit Committee approved the engagement of Yusufali & Associates, LLC, (“Yusufali”)
as the Company’s new independent registered public accounting firm.
Since
the Operational Cessation, the Company has had minimal day-to-day operations and has primarily focused its operations on restarting
certain of its core businesses (as described in more detail under “- Plans for Recommencement of Company
Operations ” below), and completing and filing the following (i) the restatements of the Company’s 2021 Audit and
March 2022 Financials and preparing and filing the Company’s delinquent periodic reports, including Amendment No. 1 to the
Company’s Annual Report on Form 10-K/A for the year ended December 31, 2021, which the Company filed on May 10, 2023: (ii)
Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A for the three months ended March 31, 2022, which the Company
filed on May 15, 2023; (iii) the Company’s Quarterly Reports on Form 10-Q for the three months ended June 30, 2022 and
September 30, 2022, which the Company filed on May 22 and 24, 2023, respectively; (iv) the Company’s Annual Report on Form
10-K for the year ended December 31, 2022, (v) the Company’s Quarterly Report on Form 10-Q for the three months ended March
31, 2023; (vi) the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2023; (vii) the Company’s
Quarterly Report on Form 10-Q for the three months ended September 30, 2023; Amendment No. 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and (vii) this Amended Report.
Nasdaq
Listing
On
March 23, 2023, the Company requested a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal a determination
by the Listing Qualifications department (the “Staff”) of Nasdaq dated February 23, 2023, to delist the Company’s securities
from Nasdaq. At the hearing before the Panel on April 24, 2023, the Company presented its plan to complete the restatement of its financial
statements for the fiscal year ended December 31, 2021, and the subsequent quarter ended March 31, 2022, and to file the amended periodic
reports and all subsequent required filings with the SEC. The Company requested the continued listing of its securities on Nasdaq pending
the completion of its compliance plan.
By
letter dated May 8, 2023, the Panel granted the Company’s request for continued listing, on an interim basis, subject to the Company
submitting financial projections for fiscal 2023 and filing the restated financial statements for the fiscal year ended December 31,
2021, and quarter ended March 31, 2022, with the SEC by May 15, 2023. The Company satisfied these conditions and the Panel indicated
that it would review the filings, along with the updated projections, and thereafter determine whether to afford the Company additional
time to complete the compliance plan presented at the hearing.
By
letter dated May 24, 2023, the Panel notified the Company that it had determined to suspend trading and otherwise move to delist the
Company’s securities from Nasdaq effective with the open of the market on May 26, 2023. The Company’s securities were suspended
from trading on that date but the securities were not delisted because the Company thereafter requested that the Panel reconsider its
determination to delist the Company’s securities from Nasdaq based upon what the Company believed to be mistakes of material fact
upon which the Panel had based its decision.
On
June 8, 2023, the Panel notified the Company that it had determined to reverse its prior decision and grant the Company’s
request for continued listing subject to the Company’s timely compliance with a number of conditions ultimately expiring on
August 17, 2023, on which date the Company must satisfy all applicable criteria for continued listing on Nasdaq (the “June
8 th Decision”). As a result of the foregoing, the suspension from trading ceased and the Company’s securities
were reinstated for trading on Nasdaq effective with the open of the market on June 15, 2023. See “ Risk Factors - Risks
Related to Our Common Stock and Warrants – Although we are currently in full compliance with the continued listing standards
of Nasdaq. However, we may not be able to remain in full compliance with Nasdaq’s continued listing standards in the
future ” for more information.
As
reported on form 8-K filed on December 7, 2023, on November 29, 2023, the Company received a letter from Nasdaq stating that based upon
its review of the Company’s Market Value of Publicly Held Shares (“MVPHS”) for the last 30 consecutive business days,
the Company no longer met the minimum requirement of $5,000,000 set forth in Nasdaq Listing Rule 5450(b)(1)(C). However, under the Listing
Rules, the Company was provided a 180-calendar day grace period to regain compliance, through May 28, 2024.
If
at any time during the compliance period the Company’s MVPHS closes at $5,000,000 or more for a minimum of ten consecutive business
days, Nasdaq will provide written confirmation of compliance and the matter will be closed. The company received such notification from
Nasdaq on April 10, 2024 and the matter was closed.
Furthermore,
the requirement that we maintain a majority of independent directors and at least three members on our audit committee are Nasdaq requirements
that we currently meet but have not met from time to time.
If
the Company’s securities are delisted from Nasdaq, it could be more difficult to buy and sell the Company’s common stock
and warrants or to obtain accurate quotations, and the price of the Company’s common stock and warrants could suffer a material
decline. Delisting could also impair the Company’s ability to raise capital and/or trigger defaults and penalties under its outstanding
agreements or securities. Further, even if we regain compliance with Nasdaq listing requirements, there is no guarantee that we will
be able to maintain our listing for any period of time.
Delisting
from Nasdaq could also result in negative publicity. Further, if we are delisted, we would also incur additional costs under state blue
sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock
and/or warrants and the ability of our stockholders to sell our common stock and/or warrants in the secondary market. If our common stock
and/or warrants are delisted by Nasdaq, our common stock and/or warrants may be eligible to trade on an over-the-counter quotation system,
such as the OTCQB Market, where an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market
value of our common stock and/or warrants. In the event our common stock and/or warrants are delisted from The Nasdaq Global Market,
we may not be able to list our common stock and/or warrants on another national securities exchange or obtain quotation on an over-the
counter quotation system.
AutoLotto
$30,000,000 Business Loan
On
January 4, 2022, AutoLotto entered into a Business Loan Agreement (the “Business Loan”) with bank prov,
pursuant to which the Company borrowed $30,000,000 from bank prov, which was evidenced by a $30,000,000 Promissory Note. The Promissory
Note accrued interest at the rate of 2.750% per annum (7.750% upon the occurrence of an event of default) and had a maturity date of
January 4, 2024. Monthly interest payments were due under the Promissory Note beginning February 4, 2022. The Promissory Note could be
repaid at any time without penalty. The Promissory Note included customary events of default for a debt obligation of the size of the
Promissory Note. The Business Loan included representations and warranties of AutoLotto and covenants (both positive and negative) which
were customary for a transaction of this nature and size, including rights to set off. Upon the occurrence of an event
of default, Provident could declare the entire amount owed immediately due and payable. We were required to pay a 1% commitment fee at
the time of our entry into the Business Loan, and another 1% annual loan fee would have been due on the first anniversary thereof.
55
In
accordance with the terms of the Business Loan, upon entering into the agreement, $30,000,000 in a separate account with bank prov was
pledged as security for the amount outstanding under the loan (“Collateral Security”). The $30,000,000 Collateral Security
became restricted and remained restricted until October 12, 2022, when AutoLotto defaulted on its obligations under the Business Loan
and bank prov foreclosed on the $30,000,000 of Collateral Security. The Collateral Security, which was in the form of restricted cash,
was presented as a contingent liability on the Company’s balance sheet from March 31, 2022 until the obligation was satisfied in
October of 2022. See Note 3i to our consolidated financial statements for additional information.
Loan
Agreement with Woodford
On
December 7, 2022, the Company entered into a loan agreement with Woodford Eurasia Assets, Ltd. (“Woodford”), (the “Woodford
Loan Agreement”) pursuant to which Woodford agreed to provide the Company with up to $52.5 million, subject to certain conditions
and requirements, of which, per the Company’s books and records $798,351 was received by December 31, 2023 and is owed pursuant
to the terms of the Woodford Loan Agreement. Amounts borrowed accrue interest at the rate of 12% per annum (or 22% per annum upon the
occurrence of an event of default) and are due within 12 months of the date of each loan advance. Amounts borrowed can be repaid at any
time without penalty.
Amounts
borrowed pursuant to the Woodford Loan Agreement are convertible, at Woodford’s option, into shares of the Company’s common
stock, beginning 60 days after the first loan date at the rate of 80% of the lowest publicly available price per share of common stock
within 10 business days of the date of the Loan Agreement (which was equal to $5.60 per share), subject to a 4.99% beneficial ownership
limitation and a separate limitation preventing Woodford from holding more than 19.99% of the issued and outstanding common stock of
the Company, without the Company obtaining shareholder approval for such issuance.
Conditions
to the Loan Agreement included the resignation of four prior members of the Board (Lisa Borders, Steven M. Cohen, Lawrence Anthony DiMatteo
and William Thompson, all of whom resigned from the Board in September 2022), and the appointment of two new independent directors. Subsequent
loans under the Woodford Loan Agreement also require the Company to comply with all listing requirements, unless waived by Woodford.
The Woodford Loan Agreement also allows Woodford to nominate another director to the Board of Directors, in the event any independent
member of the Board of Directors resigns.
Proceeds
of the loans can only be used by to restart the Company’s operations and for general corporate purposes agreed to by Woodford.
The
Woodford Loan Agreement includes confidentiality obligations, representations, warranties, covenants, and events of default, which
are customary for a transaction of this size and nature. Included in the Loan Agreement are covenants prohibiting us from (a) making
any loan in excess of $1 million or obtaining any loan in an amount exceeding $1 million without the consent of Woodford, which
consent may not be unreasonably withheld; (b) selling more than $1 million in assets; (c) maintaining less than enough assets to
perform our obligations under the Loan Agreement; (d) encumbering any assets, except in the normal course of business, and not in an
amount to exceed $1 million; (e) amending or restating our governing documents; (f) declaring or paying any dividend; (g) issuing
any shares which negatively affects Woodford; and (h) repurchasing any shares.
The
Company also agreed to grant warrants to purchase shares of common stock to Woodford (the “Woodford Warrants”) in an amount
equal to 15% of the Company’s then issued and outstanding shares of common stock. Each Woodford Warrant has an exercise price equal
to the average of the closing price of the Company’s common stock for each of the ten days prior to the first amount being debited
from the bank account of Woodford, which equates to an exercise price of $5.60 per share. In the event the Company fails to repay the
amounts borrowed when due or Woodford fails to convert the amount owed into shares, the exercise price of the warrants may be offset
by amounts owed to Woodford, and in such case, the exercise price of the warrants will be subject to a further 25% discount.
56
In connection with our entry into the Woodford Loan Agreement, the Company also entered into a Loan Agreement Deed, Debenture Deed and
Securitization, with Woodford (the “Security Agreement”), which provides Woodford with a first floating charge security interest
over all present and future assets of the Company in order to secure the repayment of amounts owed under the Loan Agreement.
On
June 12, 2023, the Company entered into an amendment of the Woodford Loan Agreement (the “Woodford Loan Agreement Amendment”).
The Woodford Loan Agreement Amendment provides that Woodford shall henceforth be able to convert, in whole or in part, the outstanding
balance of its loan into the conversion shares at a conversion price that represents a further 25% discount to the original conversion
price of 20%. The validity and application of the Woodford Loan Agreement Amendment is disputed by the Company.
Despite requests from the Company, Woodford has repeatedly amongst other things: failed to prove the amounts borrowed by the Company or
claimed to have been advanced by Woodford to the Company; failed to indicate if it would accept accelerated payment of those verified
amounts; failed to provide an anti-money laundering acceptable account to which payment could be made by the Company and failed to explain
failure to respond to requests for other funding to be accepted in the context of the Woodford Loan Agreement; failed to respond to requests
for funding under the accordion facility of the Woodford Loan Agreement; and failed to respond to allegations of money laundering and
conspiracy to defraud the Company and others.
Information regarding ongoing legal proceedings with Woodford can be found in the “Legal Proceedings” section of this form.
Business
Combination
On
October 29, 2021, we, as AutoLotto, Inc. (“AutoLotto”), consummated the Business Combination with Trident Acquisitions Corp.
(“TDAC” and after the Business Combination described herein, the “Company”), pursuant to the terms of that certain
Business Combination Agreement, dated as of February 21, 2021 (the “Business Combination Agreement”), by and among TDAC,
Trident Merger Sub II Corp., a wholly-owned subsidiary of TDAC (“Merger Sub”) and AutoLotto. Pursuant to the terms of the
Business Combination Agreement, Merger Sub merged with and into AutoLotto with AutoLotto surviving the merger as a wholly owned subsidiary
of TDAC, which was renamed “Lottery.com Inc.” The aggregate value of the consideration paid by TDAC to the holders of AutoLotto
common stock in the Business Combination (excluding shares that may be issued to former AutoLotto stockholders (the “Sellers”)
as earnout consideration) was approximately $440 million, consisting of approximately 2,000,000 shares of common stock valued at $220.00
per share. In addition, each Seller shall receive its pro rata portion of 150,000 Seller Earnout Shares and each Founder Holder shall
receive one-third of 100,000 Founder Holders Earnout Shares, subject to adjustments in the normal course of business.
Reverse Stock Split
On August 9, 2023, the Company
amended its Charter to implement, effective at 5:30 p.m., Eastern time, a 1-for-20 Reverse Stock Split. At the effective time of the Reverse
Stock Split, every 20 shares of common stock either issued and outstanding or held as treasury stock were automatically combined into
one issued and outstanding share of common stock, without any change in the par value per share. Stockholders who would have otherwise
been entitled to fractional shares of common stock as a result of the Reverse Stock Split received a cash payment in lieu of receiving
fractional shares. In addition, as a result of the Reverse Stock Split, proportionate adjustments will be made to the number of shares
of common stock underlying the Company’s outstanding equity awards, the number of shares issuable upon the exercise of the Company’s
outstanding warrants and the number of shares issuable under the Company’s equity incentive plans and certain existing agreements,
as well as the exercise, grant and acquisition prices of such equity awards and warrants, as applicable. The Reverse Stock Split was approved
by the Company’s stockholders at the Company’s 2023 Annual Meeting of Stockholders on August 7, 2023 and was subsequently
approved by the Board of Directors on August 7, 2023.
The
effects of the Reverse Stock Split were reflected in the Quarterly Report on Form 10-Q for the period ended September 30, 2023 and
in all subsequent reports for all periods presented.
International
Expansion
In
June 2021, we closed the acquisition of Global Gaming, which holds 80% of the equity of each of Aganar and JuegaLotto. Aganar operates
in the licensed Online Lottery market in Mexico and is licensed to sell Mexican National Lottery draw games, instant win tickets, and
other games of chance online with access to a federally approved online casino and sportsbook gaming license. JuegaLotto is licensed
by Mexico authorities to commercialize international lottery games in Mexico through an authorized gaming portal and to commercialize
games of chance in other countries throughout Latin America. As of the date of this Amended Report, according to Statista, the estimated size
of the Latin American lottery market is $.68 billion with a compound annual growth rate projected at 6.05% through 2028. Furthermore,
it is projected that there will be 3,000,000 online lottery players in the South American lottery market alone by 2028. Based on these
projections, we believe these acquisitions will provide opportunities for growth of our international operations throughout Mexico and
Latin America as we expand our portfolio of products and expose our existing products to new markets.
Operations
Prior to Operational Cessation
Prior
to the Operational Cessation, the Company was a provider of domestic and international lottery products and services. As an independent
third-party lottery game service, we offered a platform that we developed and operated to enable the remote purchase of legally sanctioned
lottery games in the U.S. and abroad (the “Platform”). Our revenue generating activities included (i) offering the Platform
via our Lottery.com app and our websites to users located in the U.S. and international jurisdictions where the sale of lottery games
was legal and our services were enabled for the remote purchase of legally sanctioned lottery games (our “B2C Platform”);
(ii) offering an internally developed, created and operated business-to-business application programming interface (“API”)
of the Platform, which enabled our commercial partners, in permitted U.S. and international jurisdictions, to purchase certain legally
operated lottery games from us and to resell them to users located within their respective jurisdictions (“B2B API”); and
(iii) delivering global lottery data, such as winning numbers and results, and subscriptions to data sets of our proprietary, anonymized
transaction data pursuant to multi-year contracts to commercial digital subscribers (“Data Service”).
57
Mobile
Lottery Game Platform Services
Both
our B2C Platform and our B2B API provided users with the ability to purchase legally sanctioned draw lottery games via a mobile device
or computer, securely maintain their acquired lottery game, automatically redeem a winning lottery game, as applicable, and receive support,
if required, for the claims and redemption process. Our registration and user interfaces were designed to be easy to use, provide for
the creation of an account and purchase of a lottery game with minimum friction and without the creation of a mobile wallet or requirement
to pre-load minimum funds and - importantly - to provide instant confirmation of the user’s lottery game numbers, whether selected
at random or picked by the user. Users of our B2C Platform services paid a service fee and, in certain non-U.S. jurisdictions, a mark-up
on the purchase price. Prior to the Operational Cessation, we generated revenue from this service fee and mark-up. Our B2B API Platform
resumed limited operations for the month of April 2023. As of the date of this Amended Report, our B2C Platform is not currently available to
the public. We anticipate that our B2C Platform will become available again by mid-year 2024.
The
WinTogether Platform
Prior
to the Operational Cessation, we operated and administered of all sweepstakes offered by WinTogether, a registered 501(c)(3) charitable
organization (“WinTogether”), which was formed in April 2020 to support charitable, educational, and scientific causes. In
consideration of our operation of the WinTogether platform and administration of the sweepstakes, we received a percentage of the gross
donations to a campaign, from which we paid certain dividends and all administration costs.
The
WinTogether platform continued operating after the Operational Cessation, until all sweepstakes campaigns were completed, and all prizes
awarded. On March 29, 2023, the board of directors of WinTogether voted to suspend its relationship with the Company. The suspension
of the relationship was rescinded by the WinTogether board on November 16, 2023. WinTogether is now operating under the DonateTo.Win brand.
Current
Operations
Despite
the Operational Cessation, the Company’s subsidiaries have continued to operate under the direction of the leadership teams
that were in place prior to the Company’s acquisition of such companies. While the operational activities of these
subsidiaries vary, from the Operational Cessation through the date of this Amended Report, each of Aganar and JuegaLotto have
decreased their expenses and has had their revenues remain consistent or decrease slightly from pre-Operational Cessation levels. TinBu has decreased its expenses and had their revenues remain consistent for a period of time but revenue is now beginning to decrease
from pre-Operational Cessation levels.
Data
Services
In
2018, we acquired TinBu, LLC (“TinBu”), a digital publisher and provider of lottery data results, jackpots, results, and
other data, as a wholly-owned subsidiary. Through TinBu, our Data Service delivers daily results of over 800 domestic and international
lottery games from more than 40 countries, including the U.S., Canada, and the United Kingdom, to over 400 digital publishers and media
organizations. See “ Item 1A. Risk Factors – We are party to pending litigation and investigations in various jurisdictions
and with various plaintiffs and we may be subject to future litigation or investigations in the operation of our business. An adverse
outcome in one or more proceedings could adversely affect our business, financial condition, and results of operations ” for
more information about our relationship with Tinbu.
Our
technology pulls real time primary source data, and, in some instances, we acquire data from dedicated data feeds from the lottery authorities.
Our data is constantly monitored to ensure accuracy and timely delivery. We are not required to obtain licenses or approvals from the
lottery authorities to pull this primary source data or to acquire the data from such dedicated feeds. Commercial acquirers of our Data
Service pay a subscription for access to the Data Service and, for acquisition of certain large data sets, an additional per record fee.
We
additionally enter into multi-year contracts pursuant to which we sell proprietary, anonymized transaction data pursuant to multi-year
agreements and in accordance with our Terms of Service in consideration of a fee and in other instances provide the Data Service within
a bundle of provided services.
58
Aganar
and JuegaLotto
On
June 30, 2021, we acquired 100% of the equity of Global Gaming Enterprises, Inc., a Delaware corporation (“Global Gaming”),
which holds 80% of the equity of each of Medios Electronicos y de Comunicacion, S.A.P.I de C.V. (“Aganar”) and JuegaLotto,
S.A. de C.V. (“JuegaLotto”). JuegaLotto is federally licensed by the Mexican regulatory authorities with jurisdiction over
the ability to commercialize lottery games in Mexico through an authorized federal gaming portal and to commercialize games of chance
in other countries throughout Latin America. Aganar has been operating in the licensed Online Lottery market in Mexico since 2007 and
has certain rights to sell Mexican National Lottery draw games, instant win tickets, and other games of chance online with access to
a federally approved online casino and sportsbook gaming license and additionally issues a proprietary scratch lottery game in Mexico
under the brand name Capalli. See “ Item 1A. Risk Factors – We need additional capital to, among other things, support
and restart our operations, re-hire employees and pay our expenses. Such capital may not be available on commercially acceptable terms,
if at all. If we do not receive the additional capital, we may be forced to curtail or abandon our plans to recommence our operations
and we may need to permanently cease our operations” for additional information.
Sports.com
In
December 2021, we finalized the acquisition of the domain name https://sports.com and on November 15, 2022, we formed a wholly-owned
subsidiary called Sports.com, Inc., a Texas corporation (“Sports.com”). Subsequently, Sports.com announced a partnership
with the Saudi Motorsports Company, which enabled the Company to roll out the Sports.com brand at the FIFA World Cup decider at the end
of November 2022. In December 2022, Sports.com signed an agreement with Data Sports Group, GmbH (“ DSG ”), which provides
Sports.com the exclusive North American distribution rights for sports data products offered and maintained by DSG (the “DSG Data”).
The DSG Data is being sold through the same sales resources and sales channels as the lottery data offered by TinBu. On July 23, 2023,
DSG exercised its right to terminate the exclusive distribution rights due to Sports.com not meeting its contractual obligations.
Nook Holdings, LTD
On
September 28, 2023, the company entered into Stock Purchase Agreement with the shareholders of Nook
Holdings Limited (“Nook”), a private limited company incorporated and registered in the Abu Dhabi Global Market, Abu Dhabi,
United Arab Emirates (“UAE”). The total purchase price is approximately $2.314 million. The Company made three payments totaling
$137,500 in the fourth quarter and anticipates the transaction closing by June 30, 2024 or as otherwise agreed by the parties. Nook
is known for its innovative approach to co-working in Dubai and has procured 200 licenses for individuals and companies in the sports,
health and wellness sector seeking access to Dubai and the broader Middle Eastern market. With its exclusive partnership with the Dubai
Multi-Commodities Centre Free Zone (DMCC), Nook offers a wide range of services, including business setup support, insurance, VAT registration,
and networking opportunities for like-minded sports entrepreneurs. As part of the acquisition, Nook will be rebranded under the Sports.com
umbrella.
Plans
for Recommencement of Company Operations
As
noted above, since the Operational Cessation, the Company has had minimal day-to-day operations and has primarily focused on restarting certain of its core businesses. The Company has developed a three-phase plan to recommence its operations, which plan is
outlined below.
Phase
1 - Relaunch B2B API Platform . During the Operational Cessation, the Company maintained positive relationships with its ticket-printing
and courier partners, as well as several distribution partners that have been found to be in compliance with local, state, and federal
rules related to ticket procurement and distribution. These partners have implemented the Lottery.com API and have advised the Company
that they expect to be ready to offer lottery games to their customers through their sales channels when the Company resumes operations.
As such, the Company believes that it has sufficient demand to resume operation of its B2B API platform operations, assuming it is able
to maintain the core employee team to manage the lottery ticket fulfillment process and access sufficient capital to relaunch Project
Nexus, which was designed to, among other things, handle high levels of user traffic and transaction volume, while maintaining expediency,
security, and reliability in the administrative and back-office functionality required by the B2B API. Our B2B API Platform resumed limited
operations in April 2023.
Phase
2 - Resume B2C Platform Operations. The Company believes that it will be in a position to relaunch its B2C Platform by mid-year 2024.
As of the date of this Amended Report, the Company expects that it will initially relaunch its B2C Platform to customers in Texas for a period
of time before rolling it out to other jurisdictions. The Company may elect to accelerate the relaunch of its Platform to customers in
another state. The Company plans to limit the rollout in order to give it additional time to properly vet and confirm compliance with
local, state and federal rules related to ticket procurement and distribution. For more information, see “ Item 1A. Risk Factors
- Regulatory and Compliance Risks - A jurisdiction may enact, amend, or reinterpret laws and regulations governing our operations in
ways that impair our revenues, cause us to incur additional legal and compliance costs and other operating expenses, or are otherwise
not favorable to our existing operations or planned growth, all of which may have a material adverse effect on us or our results of operations,
cash flow, or financial condition .” The Company has also maintained various pre-paid media credits that it expects to use to
launch and maintain promotional campaigns geared towards encouraging prior customers to return to the Platform and to acquire new customers.
Phase
3 - Restore Other Business Lines and Projects. Assuming the success of Phase 1 and Phase 2, the Company expects to restore other
products it used to offer, such as supplying lottery tickets to consumers in approved domestic jurisdictions, partnering with licensed
providers in international jurisdictions to supply legitimate domestic lottery games, and reviving other products and services that were
under development when the Operational Cessation occurred.
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As
of the date of this Amended Report, the current estimated cash balance of the Company and subsidiaries is approximately $63,346. The Company
believes that this cash on hand, along with future borrowings, will be sufficient for the Company to resume its core operations.
As
of the date of this Amended Report, our common stock and warrants are traded on The Nasdaq Stock Market LLC (“Nasdaq”) under the
ticker symbols “LTRY” and “LTRYW,” respectively. As of the date of this Amended Report, we are in compliance with Nasdaq’s
continued listing requirements (the “Listing Rules”). See, “ Risk Factors - Risks Related to Our Common Stock and
Warrants – Although we are not currently in full compliance with the continued listing standards of Nasdaq, we may not be able
to remain in full compliance with Nasdaq’s continued listing standards in the future .” Additionally, under its new management,
the Company continues to work to improve its disclosure and reporting controls. Also, the Company plans to overhaul its systems of internal
control over financial reporting and invest in additional legal, accounting, and financial resources.
Even
if the Company’s three phase plan to recommence its operations is successful, there can be no assurance that the Company will be
able to fully regain compliance with the applicable Listing Rules, or that the Nasdaq Panel will continue to stay the delisting of the
Company’s securities on Nasdaq. If the Company’s securities are delisted from Nasdaq, it could be more difficult to buy or
sell the Company’s common stock and warrants or to obtain accurate quotations, and the price of the Company’s common stock
and warrants could suffer a material decline. Delisting could also impair the Company’s ability to raise additional capital needed
to fund its operations and/or trigger defaults and penalties under outstanding agreements or securities of the Company.
There
can be no assurance that we will have sufficient capital to support our operations and pay expenses, repay our debt, or that additional
funds will be available on favorable terms, if at all. We may not be able to restart our operations or generate sufficient funding
to support such operations in the future. The Company’s ability to continue its current operations, prepare and refile deficient
and restated reports, and restart its prior operations, is dependent upon obtaining new financing. Future financing options available
to the Company include equity financings, debt financings or other capital sources, including collaborations with other companies or
other strategic transactions. Equity financings may include sales of common stock. Such financing may not be available on terms favorable
to the Company or at all. The terms of any financing may adversely affect the holdings or rights of the Company’s stockholders
and may cause significant dilution to existing stockholders. There can be no assurance that the Company will be successful in obtaining
sufficient funding on terms acceptable to the Company, if at all, which would have a material adverse effect on its business, financial
condition and results of operations, and it could ultimately be forced to discontinue its operations and liquidate. These matters, when
considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable
period of time, which is defined as within one year after the date that the financial statements are issued. The accompanying financial
statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
60
Components
of Our Results of Operations (Prior to the Operational Cessation)
Our
Revenue
Revenue
from B2C Platform. Our revenue is the retail value of the acquired lottery game and the service fee charged to the user, which we
impose on each lottery game purchased from our B2C Platform. The amount of the service fee is based upon several factors, including the
retail value of the lottery game purchased by a user, the number of lottery games purchased by a user, and whether such user is located
within the U.S. or internationally. Currently, in the U.S, the minimum service fee is $0.50 for the purchase of a $1 lottery game and
$1 for the purchase of a $2 lottery game; the service fee for additional lottery games purchased in the same transaction is 6% of the
face value of all lottery games purchased. For example, the service fee for the purchase of five $2 tickets is $1.60, comprised of the $1 base
service fee, plus 6% of the aggregate value of the face value of all lottery games purchased. The Company did not operate its B2C platform in 2023.
Internationally,
B2C sales in jurisdictions where we do not have direct or indirect authority generate an immaterial amount of revenue, and we are assessing
our operations in these jurisdictions. As discussed above, our B2C Platform is not currently operational. We anticipate that our B2C
Platform will become operational by mid-year 2024.
Revenue
from B2B API. Together with our third-party commercial partner(s), we agree on the amount of the technology usage fee to be imposed
on the sale of each lottery game purchased through the B2B API, if any, together with a service fee to be charged to the user; we receive
up to 50% of the net revenues from such technology usage fee and service fee pursuant to our commercial agreement with each commercial
partner. As discussed above, following the Operational Cessation, our B2B API Platform resumed limited operations in April 2023.
Data
Services. Commercial acquirers of our Data Service pay a subscription for access to the Data Service and, for acquisition of certain
large data sets, an additional per record fee. The Company additionally enters into multi-year contracts pursuant to which it sells proprietary,
anonymized transaction data pursuant to multi-year agreements and in accordance with our Terms of Service in consideration of a fee.
Our Data Services operations were not impacted by the Operational Cessation.
Our
Operating Costs and Expenses
Personnel
Costs. Personnel costs include salaries, payroll taxes, health insurance, worker’s compensation and other benefits for management
and office personnel.
Professional
Fees. Professional fees include fees paid for legal and financial advisors, accountants and other professionals related to the Business
Combination and other transactions.
General
and Administrative. General and administrative expenses include marketing and advertising expenses, office and facilities lease
payments, travel expenses, bank fees, software dues and subscriptions, expensed research and development (“R&D”) costs
and other fees and expenses.
Depreciation
and Amortization. Depreciation and amortization expenses include depreciation and amortization expenses on real property and other
assets.
61
Key
Trends and Factors Affecting Our Results
The
following describes the trends associated with our business prior to the Operational Cessation that have impacted, and which we expect
will continue to impact, our business and results of operations in a material way:
International
operations . We face challenges related to expanding our footprint globally and the related process of obtaining the licenses and
regulatory approvals necessary to provide services and products within new and emerging markets. The international jurisdictions where
we operate and seek to expand have been subject to increasing foreign currency fluctuations against the U.S. dollar, inflationary pressures
and political and economic instability. We expect these trends to continue during fiscal 2024 and believe they are likely to affect consumer
spending, which could have a material impact on our revenues. As a result, it may take longer to achieve projected revenue gains or
generate cash in any such regions affected or any new foreign jurisdiction into which we expand.
Introduction
of a new gaming platform . We developed a proprietary, blockchain-enabled gaming platform, which we named Project Nexus.
Project Nexus is designed to handle high levels of user traffic and transaction volume, while maintaining expediency, security, and reliability
in (i) the processing of lottery game sales, (ii) fulfillment of retail requirements of the B2C Platform, (iii) the administrative and
back-office functionality required by our B2B API, and (iv) the requirements of our claims and redemption process. We expect to utilize
this platform to launch new products, including any proprietary products we may introduce. The introduction of new technology like
Project Nexus is subject to risks including, among other things, implementation delays, issues successfully integrating the technology
into our solutions, or the possibility that the technology does not produce the expected benefits.
Our
growth plans and the competitive landscape. Our direct competitors operate in the global entertainment and gaming industries and,
like us, seek to expand their product and service offerings with integrated products and solutions. Our short-to-medium term focus is
on increasing our penetration in our existing U.S. jurisdictions by increasing direct to consumer marketing campaigns, introducing our
B2C Platform into new U.S. and select foreign jurisdictions and acquiring synergistic regulated and sports betting enterprises domestically
and abroad.
Competition
in the sale of online lottery games has significantly increased in recent years, is currently characterized by intense price-based
competition, and is subject to changing technology, shifting needs and frequent introductions of new games, development platforms
and services. To maintain our competitive edge alongside other established industry players (many of which have more resources, or
capital), we expect to incur greater operating short-term expenses, such as increased marketing expenses, increased compliance
expenses, increased personnel and advisory expenses associated with being a public company, additional operational expenses and
salaries for personnel to support expected growth, additional expenses associated with our ability to execute on our strategic
initiatives including our aim to undertake merger and acquisition activities, as well as additional capital expenditures associated
with potential further development of Project Nexus, the initial phase of which was implemented in the second quarter of 2022.
Current
Plan of Operations
As
of the date of this Amended Report, the Company’s primary revenue drivers are the resumption of its B2B API platform and the launch of
Sports.com. It is anticipated that operational costs for the next 12 months through April 30, 2024 will be greater than revenues. It
is anticipated that the liquidity gap will be satisfied by equity investment or debt incurred, of which there is no assurance. We anticipate
that our B2C Platform will become operational by mid-year 2024.
Beyond
the next 12 months, the Company plans to continue to expand in domestic and international operations. The Moreover, the Company plans
to enhance its mobile application to include pool plays, ticket subscriptions, loyalty programs and various gamification modules.
62
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, 2023 Compared to Year Ended December 31, 2022
The
following table summarizes our results of operations for the years ended December 31, 2023 and December 31, 2022, respectively.
For the Year Ended December 31,
2023
2022
$ Change
% Change
Revenue
$ 7,018,819
$ 6,779,057
$ 239,762
4 %
Cost of revenue
5,666,544
4,310,750
1,355,794
31 %
Gross profit
$ 1,352,275
$ 2,468,307
$ (1,116,032 )
-45 %
Operating expenses:
Personnel costs
$ 4,570,206
$ 37,114,485
$ (32,544,279 )
-88 %
Professional fees
6,766,709
6,613,546
153,163
2 %
General and administrative
9,484,881
9,012,673
472,208
5 %
Depreciation and amortization
5,691,322
5,601,374
89,948
2 %
Total operating expenses
26,513,118
58,342,078
(31,828,960 )
-55 %
Loss from operations
$ (25,160,843 )
$ (55,873,771 )
$ (30,712,928 )
-55 %
Other expenses
Interest expense
$ 408,767
$ 764,839
$ (356,072 )
-47 %
Other expense
136,429
3,721,291
(3,584,862 )
-96 %
Total other expenses, net
545,196
4,486,130
(3,940,934 )
-88 %
Net loss before income tax
$ (25,706,039 )
$ (60,359,901 )
(34,653,862 )
-57 %
Income tax expense (benefit)
60,000
23,364
36,636
157 %
Net loss
$ (25,766,039 )
$ (60,383,265 )
$ (34,617,226 )
-57 %
Other comprehensive loss
Foreign currency translation adjustment, net
$ (70,273 )
$ 4,277
$ (74,550 )
-1743 %
Comprehensive loss
$ (25,836,312 )
$ (60,378,988 )
$ 34,542,676
57 %
Net income attributable to noncontrolling interest
$ 272,613
$ 379,916
$ (107,303 )
-28 %
Net loss attributable to Lottery.com, Inc.
$ (25,563,699 )
$ (59,999,072 )
$ 34,435,373
57 %
Revenues
Revenue.
Revenue for the year ended December 31, 2023 was $7.02 million, an increase of $240 thousand, or 4%, compared to revenue of $6.8 million
for the year ended December 31, 2022. Revenue was up slightly for the year ended December 31, 2023 with a change in the mix which was
more heavily weighted to ticket sales and data services and less to services delivered to partners.
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, 2023 was $5.7 million, an increase of $1.36 million, or 31%,
compared to cost of revenue of $4.3 million for the year ended December 31, 2022. The increase in COGS is the result of a product
mix that was more heavily weighted towards products and less on higher-margin services for the year ended December 31, 2023. In 2022
there was revenue from services provided to partners that had lower costs and higher margins.
Gross
Profit. Gross profit for the year ended December 31, 2023 was $1.35 million, compared to $2.5 million for the year ended December 31,
2022, a decrease of $1.12 million, or (45%). This decrease was the result of higher cost of sales on higher ticket revenue in 2023 than
in 2022 and because higher margin revenue for services provided to partners in 2022 was not recurring.
63
Operating
Costs and Expenses
For the Year Ended December 31,
2023
2022
$ Change
% Change
Operating expenses:
Personnel costs
4,570,206
37,114,485
(32,544,279 )
-88 %
Professional fees
6,766,709
6,613,546
153,163
2 %
General and administrative
9,484,881
9,012,673
472,208
5 %
Depreciation and amortization
5,691,322
5,601,374
89,948
2 %
Total operating expenses
26,513,118
58,342,078
(31,828,960 )
-55 %
Operating
expenses for the year ended December 31, 2023 were $26.5 million, a decrease of $30.7 million, or 55%, compared to $58.3 million for
the year ended December 31, 2022. The decrease was primarily driven by decreased stock compensation expense, decreased headcount, decreased
marketing spend and decreased depreciation and amortization expenses during the 2023 fiscal year.
Personnel
Costs. Personnel costs decreased by $32.5 million, or 88%, from $37.1 million for the year ended December 31, 2022, to $4.6 million
for the year ended December 31, 2023. The decrease was due primarily to decreases in stock compensation expense by $25.7 million combined
with lower headcount in 2023.
Professional
Fees. Professional fees increased by $153 thousand, or 2% from $6.61 million for the year ended December 31, 2022 to $6.77 million
for the year ended December 31, 2023. While there were decreases in other types of professional fees, the increase was driven by fees
for outside attorneys and accountants helping the company complete amended and new filings of reports 10-K and 10-Q during 2023 to regain
compliance with reporting requirements.
General
and Administrative. General and administrative expenses of $9.5 million for the year ended December 31, 2023 are $472 thousand, or
5%, higher than the $9.0 million reported for the year ended December 31, 2022. For the year ended December 31 2023, general and administrative
expenses include write-offs to goodwill of $5.6 million related to the TinBu subsidiary and $1.1M related to the Global Gaming subsidiary
as well as write offs of $800 thousand related to intangible assets of Global Gaming. Without these write-offs for impairment of intangible
assets, which total $ 7.5 million, general and administrative expenses for 2023 would have been $1.97 million and 78% lower than in 2022.
Some key drivers of the decrease for the year ended December 31, 2023 were business insurance expense $3 million lower, expensed developed
software $530 thousand lower, software services $200 thousand lower, royalty expense $160 thousand lower, and facilities rent $110 thousand
lower than for the year ended December 31, 2022.
Depreciation
and Amortization. Depreciation and amortization increased $90 thousand, or 2%, from $5.6 million for the year ended December 31,
2022 to $5.7 million for the year ended December 31, 2023. The increase is due to a full year of amortization for Project Nexus in 2023
vs only half a year in 2022 as it was placed in service and amortization began mid-year 2022.
Other
Expense, Net
For the Year Ended December 31,
2023
2022
$ Change
% Change
Other expenses
Interest expense
408,767
764,839
(356,072 )
-47 %
Other expense
136,429
3,721,291
(3,584,862 )
-96 %
Total other expenses, net
545,196
4,486,130
(3,940,934 )
-88 %
Interest
Expense. Interest expense decreased by $336 thousand, or (47%), for the year ended December 31, 2023, from $765 thousand to $409
thousand as compared to the year ended December 31, 2022. This decrease relates primarily to interest on the Bank Prov line of credit
in 2022 which did not occur in 2023.
Other
Expense. Other expense decreased by $3.6 million, or (96)%, for the year ended December 31, 2023 as compared to the year ended December
31, 2022 from $3.7 million to $136 thousand. This decrease was driven primarily by a discount on an asset with periodic payments of $3.5
million which was recorded in 2022.
64
Liquidity
and Capital Resources
Prior
to the Operational Cessation, our primary need for liquidity was to fund working capital requirements of our business, growth,
capital expenditures and for general corporate purposes. Our primary source of liquidity had historically been funds generated by
financing activities. Upon the Closing of the business combination on October 29, 2021, we received net proceeds of approximately
$42.8 million in cash.
Following
the Operational Cessation, our primary need for liquidity has been to fund the restart of our business operations, re-hire employees
and pay our expenses. The most likely source of such future funding presently available to us is through additional borrowings under
loan agreements or through the issuance of equity or debt securities. If lenders do not advance us amounts as agreed under loan agreements
or we are otherwise not able to secure the necessary capital to restart our operations, hire new employees, and obtain funding sufficient
to support and restart our operations, we may be forced to permanently cease our operations, sell off our assets and operations, and/or
seek bankruptcy protection, which could cause the value of our securities to become worthless.
These
conditions, along with our current lack of material revenue producing activities, and significant debt, raise substantial doubt about
our ability to continue as a going concern for the next 12 months. For more information, see Note 2 - Significant Accounting Policies ,
Going Concern to the consolidated financial statements included herein, as well as the risk factors included in Item 1A of this Amended 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, 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, 2023, we had $2,570,993 of convertible debt outstanding.
See
Item 1: Business: Overview and Recent Developments: “Loan Agreement with Woodford ,” “Loan Agreement with
United Capital Investments London Limited,” and “Placement Agent Agreement with Univest Securities, LLC” above
for additional information.
65
Cash
Flows
Net
cash used by operating activities was $2.4 million for the year ended December 31, 2023, compared to net cash used by operating
activities of $31.3 million for the year ended December 31, 2022. Factors affecting changes in operating cash flows were stock-based
compensation expense along with decreased expenses for personnel costs, and sales and marketing activities in 2023 as compared to
2022. Net cash used in investing activities during the year ended December 31, 2023 was $0, compared to $1.3 million for the prior
year. The decrease was because there were no expenditures for development of intangible assets during 2023. Net cash provided by
financing activities was $2.3 million for the year ended December 31, 2023, compared to $16 thousand used by financing activities
for the year ended December 31, 2022. The increase was due to funding received under convertible debt arrangements in
2023.
Changes
in or Adoption of Accounting Practices
The
following U.S. GAAP standards have been recently issued by the Financial Accounting Standards Board (the “FASB”). We are
in the process of assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not
applicable or where it has been determined do not have a significant impact on the Company have been excluded herein.
ASC
606, Revenue from Contracts with Customers
Between
May 2014 and December 2016, the FASB issued several Accounting Standards Updates (“ASUs”)’s on ASC 606, which updates
superseded nearly all previous revenue recognition guidance under U.S. GAAP. The core principle is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. A five-step process has been defined to achieve this core principle, and, in doing so, more judgment and
estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standards are effective
for annual periods beginning after December 15, 2017 using either of the following transition methods: (i) a full retrospective approach
reflecting the application of the standards in each prior reporting period with the option to elect certain practical expedients; or
(ii) a retrospective approach with the cumulative effect of initially adopting the standards recognized at the date of adoption (which
includes additional footnote disclosures). The Company adopted these standards effective on January 1, 2018, and management concluded
the adoption of this standard did not result in any financial statement impacts or changes to revenue recognition policies or processes
as revenue is primarily derived from arrangements in which the transfer of control coincides with the fulfillment of performance obligations.
Critical
Accounting Policies
Our
financial statements are prepared in conformity with U.S. GAAP. Certain of our accounting policies require that management apply significant
judgments and estimates in defining the appropriate assumptions integral to financial estimates. Judgments are based on historical experience
and other factors that we believe to be reasonable under the circumstances, such as terms of contracts, industry trends and information
available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty,
and therefore actual results could differ from our estimates. We have applied significant estimates and assumptions related to the following:
66
Revenue
and Cost Recognition
Revenue
In
May of 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606) (“ASC 606”), amending revenue recognition guidance and requiring a more
structured approach to measuring and recognizing revenue as well as provide more detailed disclosures to enable users of financial statements
to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amended
guidance is effective for accounting periods commencing on or after January 1, 2018.
We
have applied ASC 606 to all revenue contracts. The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. Revenues are generally recognized upon the transfer of control of promised products provided to
our users, customers and subscribers, reflecting the amount of consideration we expect to receive for those products. We enter into contracts
that can include various products, which are generally capable of being distinct and accounted for as separate performance obligations.
Revenue is recognized net of any taxes collected from users, commercial partners and subscribers, which are subsequently remitted to
governmental authorities. The revenue recognition policy is consistent for sales generated directly with users and sales generated indirectly
through affiliates, other solution partners, and our commercial partners.
Revenues
are recognized upon the application of the following steps:
1.
Identification
of a contract or contracts with a user, customer or subscriber;
2.
Identification
of performance obligation(s) in the contract;
3.
Determination
of the transaction price;
4.
Allocation
of the transaction price to the performance obligations in the contract; and
5.
Recognition
of revenue when, or as, the performance obligation is satisfied.
Contracts
with users and customers for lottery game sales are at the point of sale and may include transfer of multiple products to a user or a
customer and generally do not require future obligations. In these situations, the Company generally considers each transferred product
as a separate performance obligation. The Company also has contracts with subscribers for the continued delivery of lottery and anonymized
transaction data over a defined period of time. In accounting for these contracts, the Company generally considers each set of data as
a separate performance obligation and recognizes revenue on their delivery ratably over the service period of the agreement. The Company’s
products are sold without a right of return or refund; the Company’s terms of service and contracts generally include specific
language that disclaims any warranties.
In
addition, the Company’s performance obligation in agreements with certain third parties is to transfer previously acquired Affiliate
Marketing Credits. The payment for these credits by the third parties is priced on a per-contract basis. The performance obligation in
these agreements is to provide title rights of the previously acquired credits to the third party. This transfer is point-in-time when
the revenue is recognized, and there are no variable considerations related to this performance obligation.
Income
Taxes
For
both financial accounting and tax reporting purposes, the Company reports income and expenses based on the accrual method of accounting.
For
federal and state income tax purposes, the Company reports income or loss from their investments in limited liability companies on the
consolidated income tax returns. As such, all taxable income and available tax credits are passed from the limited liability companies
to the individual members. It is the responsibility of the individual members to report the taxable income and tax credits, and to pay
any resulting income taxes. Therefore, in relation to the income and losses incurred by the limited liability companies, they have been
consolidated in the Company’s tax return and provision based upon its relative ownership.
Income
taxes are accounted for in accordance with ASC 740, “ Income Taxes ” (“ASC 740”), using the asset and liability
method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred
tax assets for which it is more likely than not that the related benefit will not be realized.
67
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 2020 through 2023 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 2019 through 2023 tax years remain open for examination
by the tax authorities under the normal four-year statute of limitations.
Business
combination
In
a business combination, substantially all identifiable assets, liabilities and contingent liabilities acquired are recorded at the date
of acquisition at their respective fair values. One of the most significant areas of judgment and estimation relates to the determination
of the fair value of these assets and liabilities, including the fair value of contingent consideration, if applicable. If any intangible
assets are identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent external
valuation expert may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total
expected future net cash flows. These valuations are linked closely to the assumptions made by our management regarding the future performance
of the assets concerned and any changes in the discount rate applied.
Fair
value of financial assets and financial liabilities
Fair
value of financial assets and financial liabilities recorded in the consolidated statements of financial position, which cannot be derived
from active markets, is determined using a variety of techniques including the use of valuation models. The inputs to these models are
derived from observable market data where possible, but where observable market data is not available, judgment is required to establish
fair values. Judgment includes, but is not limited to, consideration of model inputs such as volatility, estimated life and discount
rates.
Fair
value of stock options and warrants
We
use the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants. Use of this method requires management
to make assumptions and estimates about the expected life of options and warrants, anticipated forfeitures, the risk-free rate, and the
volatility of our share price. In making these assumptions and estimates, management relies on historical market data.
Estimated
useful lives, depreciation of property, plant and equipment, and amortization of intangible assets
Depreciation
of property, plant and equipment and amortization of intangible assets is dependent upon estimates of useful lives based on management’s
judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that consider factors such
as economic and market conditions and the useful lives of assets.
68
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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