Item 5. Market for Registrant’s Common Equity
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Our
common stock and warrants trade on The Nasdaq Global Market under the symbols “LTRY” and “LTRYW,” respectively.
Our failure to remain in full compliance with these requirements may result in our securities being delisted from Nasdaq.
On
September 11, 2024, the Staff notified the Company that the bid price of its common stock had closed at less than $1 per share over the
previous 30 consecutive business days, and, as a result, did not comply with Nasdaq Listing Rule 5550(a)(1). Therefore, in accordance
with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days to regain compliance with such rule.
As
reported on form 8-K filed on November 1, 2024, on October 28, 2024, 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 in MVPHS 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.
If
at any time during the compliance period the Company’s MVPHS closed at $5,000,000 or more for a minimum of ten consecutive business
days, Nasdaq would provide written confirmation of compliance and the matter would be closed. The Company met this requirement, notified
Nasdaq and on March 6, 2025 received written notification from Nasdaq confirming that the Company has regained compliance with Nasdaq
Listing Rule 5450(b)(1)(C) and the matter is now closed . The notification also stated that the Company had
regained compliance with Nasdaq Listing Rule 5550(a)(1) and that matter was also 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 or trigger defaults and penalties under its outstanding
agreements or securities. Further, 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
or warrants and the ability of our stockholders to sell our common stock or warrants in the secondary market. If our common stock
or warrants are delisted by Nasdaq, our common stock 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 or warrants. In the event our common stock or warrants are delisted from The Nasdaq Global Market,
we may not be able to list our common stock 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.
60
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 Eurasia Assets, Limited
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, 2024 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 required 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.
61
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 was eligible to receive its pro rata portion of 150,000 Seller Earnout Shares and each Founder Holder
was eligible to receive one-third of 100,000 Founder Holders Earnout Shares, subject to adjustments in the normal course of business.
Conditions for earning the Seller Earnout Shares and Founder Holders Earnout Shares were not met within the designated deadline and all
potential earnout shares were forfeited.
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 were 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.
An adjustment was made to the Company’s warrants based on the 1-for-20 split ratio. The adjustment was made
automatically. The number of shares of common stock issued subject to stock options, warrants, or convertible securities was automatically
decreased by the split ratio and the exercise price or conversion ratio will automatically be proportionately increased by the same split
ratio.
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 held 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 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 2022 Operational Cessation
Prior to the 2022 Operational
Cessation, the Company was primarily a provider of domestic lottery products and services (subsidiary operations in Mexico, such as Aganar,
and JuegaLotto and TinBu in the U.S. were unaffected by the 2022 Operational Cessation and continued operations). 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”).
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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 Ticket Processing Platform resumed limited
operations for the month of April 2023. As of the date of this Report, our B2C Platform is not currently available to the public. We
anticipate that our B2C Platform will become available again by mid-year 2025.
The
WinTogether Platform
Prior to the U.S. 2022 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 2022 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.
On April
1, 2024, Lottery.com resumed its sweepstakes offerings through its partnership with the WinTogether .org foundation (DBA: DonateTo.Win).
In April 2025, Sports.com sponsored a sweepstakes to support the Florida International University surrounding the
Formula 1 Crypto.com Miami Grand Prix 2025.
Current
Operations
Despite the 2022 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 2022
Operational Cessation through the date of this 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.
63
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. On March 26, 2025, the Company registered Sports.com as a fictious name in the
state of Florida under AutoLotto, Inc, a wholly owned subsidiary (“Sports.com”). Sports.com is currently available
worldwide as a website and a mobile application.
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 of 2023 and anticipates the transaction closing
during the second quarter of 2025. 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 2022
Operational Cessation, the Company has had minimal day-to-day U.S. operations and has primarily focused on restarting certain of its core
businesses in the United States. The Company has developed a phased plan to recommence its U.S. operations.
Phase 1 - Resume B2C Platform
Operations. The Company believes that it will be in a position to relaunch its B2C Platform by mid-year 2025. As of the date of this
Report, the Company expects that it will initially relaunch its B2C Platform to customers in a limited number of US and International markets 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.
The
Company acquired Spektrum LTD in March of 2025. This acquisition provided the Company with ownership of platform that is designed to
run in dozens of international jurisdictions. The Company is in final phases of procuring the appropriate licensing and business services
to launch in multiple African and Asian jurisdictions. The launch date is scheduled for Q2 2025.
Phase
2 - Restore Other Business Lines and Projects. Assuming the success of Phase 1, the Company expects to restore other
products it previously offered, such as supplying lottery tickets to consumers in approved domestic jurisdictions, partnering with licensed
providers in international jurisdictions, monetizing Sports.com, and reviving other products and services that were
under development when the Operational Cessation occurred.
64
As of the date of this 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 Report,
our common stock and warrants are traded on The Nasdaq Stock Market LLC (“Nasdaq”) under the ticker symbols “LTRY”
and “LTRYW,” respectively. As of the date of this Report, we are 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 continue to improve 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 remain in compliance
with the applicable Nasdaq Listing Rules. 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 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.
65
Components of Our Results of Operations (Prior to the U.S. 2022 Operational
Cessation)
Our
Revenue
Revenue
from B2C Platform. Our revenue is the retail value of the acquired lottery game and the convenience fee charged to the user, which
we impose on each lottery game purchased from our B2C Platform. The amount of the convenience 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 convenience fee is $0.50 for the purchase of a $1 lottery game
and $1 for the purchase of a $2 lottery game; the convenience fee for additional lottery games purchased in the same transaction is 6%
of the face value of all lottery games purchased. For example, the convenience 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 2024.
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 2022 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 2022 Operational Cessation.
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.
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Key Trends and Factors Affecting Our Results
The following describes the trends
associated with our business prior to the U.S. 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 2025 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 (Exclusive of Subsidiaries, Tinbu LLC, Aganar
and JuegaLotto)
As of the date of this Report,
the Company’s primary revenue drivers are the resumption of its B2B API platform, the full resumption of its sweepstakes business and the launch of Sports.com. It is anticipated
that operational costs for the next 12 months through April 30, 2026 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 2025.
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.
The Company is moving forward with its previously announced plans to monetize
the Sports.com brand. Those plans include introducing an advertising-supported subscription model; the creation and licensing of original
content through Sports.com Studios; and completing the acquisition of Nook and marketing business licenses to companies in the sports,
health and wellness markets seeking access to Dubai and the broader Middle Eastern market.
67
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, 2024 Compared to Year Ended December 31, 2023
The
following table summarizes our results of operations for the years ended December 31, 2024 and December 31, 2023, respectively.
For the Year Ended December 31,
2024
2023
$ Change
% Change
Revenue
$
1,065,7884
$
7,018,819
$
(5,953,031
)
-85
%
Cost of revenue
320,869
5,666,544
(5,349,676
)
-94
%
Gross profit
$
744,919
$
1,352,275
$
(603,355
)
-45
%
Operating expenses:
Personnel costs
$
4,761,186
$
4,570,206
$
190,980
4
%
Professional fees
5,436,831
5,654,504
(217,673
)
-5
%
General and administrative
3,688,547
3,886,886
(198,339
)
-5
%
Depreciation and amortization
5,020,647
4,891,522
129,125
3
%
Total operating expenses
18,907,211
19,003,118
(95,907
)
-1
%
Loss from operations
$
(18,162,292
)
$
(17,650,843
)
$
(511,449
)
3
%
Other expenses
Interest expense
$
508,563
$
408,767
$
99,796
24
%
Other expenses
968,903
136,429
832,474
622
%
Reserve for loss of prepaid advertising
credits
4,745,000
-
4,745,000
-
%
Loss on impairment of intangibles & goodwill
4,298,002
7,510,000
(3,211,998
)
-43
%
Total other expenses, net
10,520,468
8,055,196
2,465,272
31
%
Net loss before income tax
$
(28,682,760
)
$
(25,706,039
)
( 2,976,721
)
12
%
Income tax expense (benefit)
26,315
60,000
(33,685
)
-56
%
Net loss
$
(28,709,075
)
$
(25,766,039
)
$
(1,801,964
)
-7
%
Other comprehensive loss
Foreign currency translation adjustment, net
$
317,424
$
(70,273
)
$
387,697
-553
%
Comprehensive loss
$
(28,391,651
)
$
(25,836,312
)
$
(2,555,339
)
10
%
Net income (loss) attributable to noncontrolling interest
$
(170,046
)
$
(272,613
)
$
(102,567
)
-38
%
Net loss attributable to Lottery.com, Inc.
$
(28,221,605
)
$
(25,563,699
)
$
(2,657,906
)
12
%
Revenues
Revenue.
Revenue for the year ended December 31, 2024 was $1.07
million, a decrease of $5.95 million, or (85)%, compared to revenue of $7.02 million for the year ended December 31, 2023. The decrease
is primarily because revenue from the bulk ticket sale that took place in April of 2023 did not reoccur in 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, 2024 was $321,000, a decrease of $5.35 million, or 94%, compared to cost of revenue of $5.67 million for the year
ended December 31, 2023. The decrease in COGS is because the costs for tickets and commissions to a retail partner resulting from the
bulk ticket sale that took place in April of 2023 did not reoccur in 2024.
Gross Profit. Gross profit for
the year ended December 31, 2024 was $745,000, compared to $1.35 million for the year ended December 31, 2023, a decrease of $603,000,
or (45%). This decrease is primarily because the bulk ticket sale that took place in April of 2023 did not reoccur in 2024.
68
Operating Costs and Expenses
For
the Year Ended December 31,
2024
2023
$
Change
%
Change
Operating expenses:
Personnel costs
4,761,186
4,570,206
190,980
4
%
Professional fees
5,436,831
5,654,504
(198,339
)
-4
%
General and administrative
3,688,547
4,891,552
129,125
-5
%
Depreciation
and amortization
5,020,647
4,891,522
129,125
3
%
Total
operating expenses
18,907,211
19,003,118
(95,907
)
-1
%
Operating
expenses for the year ended December 31, 2024 were $18.9 million, a decrease of $96,000, or (1%), compared to $19.0 million for the year
ended December 31, 2023. Changes in personnel costs and general and administrative expenses essentially offset and there was a net decrease
of $96,000 between professional fees and depreciation and amortization.
Personnel Costs. Personnel
costs increased by $191,000, or 4%, from $4.6 million for the year ended December 31, 2023, to $4.8 million for the year ended
December 31, 2024. The increase was due primarily due to increases in base compensation and related payroll taxes for the
Company’s three officers approved by the Compensation Committee of our Board of Directors for 2024.
Professional Fees. Professional
fees decreased by $218,000, or (5%) from $5.65 million for the year ended December 31, 2023 to $5.44 million for the year ended December
31, 2024. Utilization of contract attorneys and accountants was lower in 2024 than it was in 2023 when the company was under significant
pressure to file amended and delinquent 10-K’s and 10-Q’s in order to regain compliance with SEC reporting requirements and
Nasdaq listing rules.
General and Administrative.
General and administrative expenses of $3.7 million for the year ended December 31, 2024 are $198,000, (5%) lower than the $3.88
million reported for the year ended December 31, 2023. Marketing expenses and expenses for software services lower for the year ended
December 31, 2024 than for the year ended December 31, 2023.
Depreciation and Amortization.
Depreciation and amortization increased $129 thousand, or (3%), from $4.9 million for the year ended December 31, 2023 to $5.0 million
for the year ended December 31, 2024. Part of the increase was due to amortization of new intangible assets resulting from the SM&I
Ltd acquisition in September of 2024 and the rest was the result of revised amortization expenses over remaining useful lives after recognizing
impairments at the end of the three months ended September 30, 2024.
Other
Expense, Net
For
the Year Ended December 31,
2024
2023
$
Change
%
Change
Other expenses
Interest expense
508,563
408,767
99,796
24
%
Other
expense
968,903
136,429
832,474
610
%
Reserve for loss of prepaid advertising
credits
4,745,000
-
4,745,000
-
Loss
on impairment of intangibles & goodwill
4,298,002
7,510,000
(3,211,998
)
-43
%
Total
other expenses, net
10,520,468
8,055,196
(2,465,272
)
31
%
Interest
Expense. Interest expense increased by $100,000, or (24%), for the year ended December 31, 2024, from $409,000 thousand to $509,000
as compared with the year ended December 31, 2023. This increase is due to interest accruals on convertible debt placed by Univest in December
of 2023 which was present for a longer period in 2024 vs for only part of one month in 2023 and for interest accrued on additional convertible debt
placed by Univest between January and April of 2024.
Other
Expense. Other expense increased by $832,000, or 610%, for the year ended December 31, 2024 as compared to the year ended December
31, 2023 from $136,000 to $969,000. This increase was driven primarily by payment of a commitment fee for a Stock Purchase Agreement
entered into in November of 2024.
Reserve
for loss of prepaid advertising credits. Reserve for loss of prepaid advertising credits increased by $4.75 million for the year
ended December 31, 2024 as compared to the year ended December 31, 2023. This increase was driven primarily by concern about management’s
assessment regarding the Company’s ability to fully utilize the advertising credits.
Loss
on impairment of intangibles & goodwill decreased
to $4.3 million or 43% from $7.5 million for the year ended December 31, 2024. For the quarter ended September 30, 2024, the Company
wrote-off goodwill of $1.57 million related to the TinBu subsidiary and $1.91 million related to the Global Gaming subsidiary and
$817,000 related to intangible assets of Global Gaming. There were no other write-offs to goodwill and intangibles during the year
ended December 31,2024. For the year ended December 31 2023, there were 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 $800,000 related to intangible assets of
Global Gaming for a total of $7.5 million.
69
Liquidity
and Capital Resources
Prior to the 2022 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 2022 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, or seek bankruptcy protection,
which could cause the value of our securities to become worthless.
These
conditions, along with our current lack of material revenue producing activities, and significant debt, raise substantial doubt about
our ability to continue as a going concern for the next 12 months. For more information, see Note 2 - Significant Accounting Policies ,
Going Concern to the consolidated financial statements included herein, as well as the risk factors included in Item 1A of this Report
entitled “ In July 2022, we furloughed the majority of our employees and suspended our lottery game sales operations after determining
that we did not have sufficient financial sources to fund our operations or pay certain existing obligations, including our payroll and
related obligations. As a result, we may not be able to continue as a going concern ” and “ [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, 2024, we had
$2,088,135 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.
70
Cash
Flows
Net cash used by operating activities
was $1.52 million for the year ended December 31, 2024, compared to net cash used by operating activities of $2.1 million for the year
ended December 31, 2023. 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 2024 as compared to 2023. Net cash used in investing activities during
the year ended December 31, 2024 was $1.5 million, compared to $0 for the prior year. Net cash provided by financing activities was $2.88
million for the year ended December 31, 2024, compared to $2.27 million used by financing activities for the year ended December 31, 2023.
The increase was due to funding received under convertible debt arrangements in 2024.
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:
71
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.
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.
72
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.
73
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.
74