UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
For
the quarterly period ended
OR
For the transition period from _______________ to _______________
Commission
file number
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices, including zip code)
Registrant’s
telephone number, including area code:
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
| ||||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☐ Yes ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☐ Yes ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of May 9, 2022, shares of common stock, par value $0.001 per share were issued and outstanding.
EXPLANATORY NOTE
Part I – Item 1. Financial Statements
Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I – Item 4. Controls and Procedures
Part II – Item 6. Exhibits
The complete text of those Items is revised in this Amended Report. The other Items of the Original Report have not been amended and, accordingly, have not been repeated in this Amended Report.
The only changes to the Original Report are those related to the matters described below and only in the items listed above. Except as described herein, this Amended Report does not modify, amend or update any of the other financial information or other information contained in the Original Report. In addition, in accordance with SEC rules, this Amended Report includes updated certifications from our Chief Executive Officer as Exhibits 31.1 and 32.1. Otherwise, the information contained in this Amended Report is as of the date of the Original Report and does not reflect any information or events occurring after the date of the Original Report. Such subsequent information or events include, among other things, the information and events described in our Current Reports on Form 8-K filed subsequent to the date of the Original Report and the information and events described in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on May 10, 2023 (the “Amended Annual Report”). For a description of such subsequent information and events, please read our reports filed pursuant to the Exchange Act subsequent to the date of the Original Report, which update and supersede certain information contained in the Original Report and this Amended Report.
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, among other things, 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.
Restatement of the Company’s Financial Statements
On September 20, 2021, the Company entered into a purchase agreement with a major customer for the sale of various service credits with a total purchase price of $30,000,000. In accordance with the terms of the purchase agreement, the customer was required to pay the purchase price within 90 days. Upon execution of the purchase agreement, the Company recognized the $30,000,0000 as income. The customer provided payment prior to December 31, 2021, in the form of a check accepted by the Company for deposit and included in undeposited funds. During 2022, the Company discovered that the service credits it had sold to the customer were non-transferrable and that the Company had pledged its own cash accounts to secure a line of credit in the amount of $30,000,000 utilized by the customer to provide the Company with payment towards the purchase of the service credits. Since the Company was prohibited from transferring the advertising portion of the service credits and therefore could not complete the sale of such credits, the Company cancelled the transaction and could not recognize the income or recognize a cash payment in the Company’s financial statements. In addition, the Company had recorded cost of sales related to this transaction in the amount of $10,000,000. As a result, in the restated December 31, 2021 financial statements included in the Amended Annual Report (the “Restated Audited Financials”), the Company decreased both cash and revenue by $30,000,000 for the year ended December 31, 2021 and reversed the related cost of sales which resulted in a decrease to cost of sales and an increase in prepaid assets by $10,000,000 each for the year ended December 31, 2021.
In addition, the Company had invoiced the customer a further $17,117,472 for various services and advertising credits for the year ended December 31, 2021 and $18,539,472 during the three months ending March 31, 2022. The Company recorded such amounts to both revenue and accounts receivable. As a result of the cancellation of the transaction, the Company decreased both accounts receivables and revenues by $17,117,472, in the Restated Audited Financials; and $18,539,472, in the restated financial statements for the three months ended March 31, 2022 included in this Amended Report.
In an unrelated transaction, the Company entered into an arrangement with another customer totaling $5,000,000 in 2021. The Company recognized the full amount of the arrangement and recorded $5,000,000 as revenue and accounts receivable for the year ended December 31, 2021. The Company started performing the services under the arrangement during 2021, which services were to be completed in 2022. In October of 2021, the customer paid $500,000 towards these services. Subsequently, the Company determined that, in accordance with ASC 606, due to an uncertainty of collectability of the remaining accounts receivable, the Company should not have recognized any revenue from this arrangement during the year ended December 31, 2021. As a result of the payment of $500,000 received during the year ended December 31, 2021, the Company is allowed to record deferred revenue in the amount of $500,000. As a result, the Company (i) decreased accounts receivable by $4,500,000, increased deferred revenue by $500,000 and decreased revenue by $5,000,000, for the year ended December 31, 2021 in the Restated Audited Financials; and (ii) recorded revenue of $500,000 for the three months ended March 31, 2022.
In addition, related to the transaction stated above, in February 2022, the Company loaned the customer $450,000 and initially recorded it as a bridge loan receivable from the customer. In March 2022, the parties executed a formal agreement for the arrangement described above, in the form of a secured promissory note (the “Secured Promissory Note”). The Secured Promissory Note includes provisions regarding the development, implementation, operation, and maintenance of the technology platform contemplated in the arrangement and also indicates that all work previously performed on the project is to be considered performed under and governed by the Secured Promissory Note. The Secured Promissory Note provides that the $450,000 bridge loan made in February be rolled into such note. In connection with the execution of the Secured Promissory Note, an escrow was established and the Company deposited a total of $6,050,000 in the escrow account. The parties subsequently agreed that the conditions of the escrow had been met and all of the funds were released, with $4,500,000 going back to the Company and $1,550,000 going to the customer. The Company recorded the entire $6,500,000 as a Note Receivable and reported it as such in the Original Report. In connection with the restatement of the financial statements included in the Original Report, the Company reviewed this transaction again and determined that since the Company had received $4,500,000 of the $6,050,000 from the escrow, the actual amount loaned to the customer under the Secured Promissory Note was $1,550,000 along with the $450,000 bridge loan, for a total of $2,000,000. As a result, the amount of the Note Receivable has been corrected to $2,000,000 for the three months ended March 31, 2022.
Further, during the Company’s reassessment of all accounts as of December 31, 2021, the Company determined that approximately $2,000,000 of prepaid advertising credits purchased during 2017 and 2018 may not be able to be fully utilized. As a result, the Company decreased prepaid expenses by $2,000,000 and increased its reserve loss for prepaid advertising credits by $2,000,000, in the Restated Audited Financials.
The following table presents the impact of the restatements on the Company’s previously reported consolidated balance sheet for the year ended December 31, 2021. The values as previously reported were derived from the 2021 consolidated financial statements contained in the Company’s previously reported balance sheet as of December 31, 2021 filed in the original Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 1, 2022.
| Fiscal Year Ended December 31, 2021 | ||||||||||||
| As Previously | Restatement | As | ||||||||||
| Reported | Impacts | Restated | ||||||||||
| ASSETS | ||||||||||||
| Cash | $ | 62,638,970 | $ | (30,000,000 | ) | $ | 32,638,970 | |||||
| Accounts receivable | 21,696,653 | (21,617,472 | ) | 79,181 | ||||||||
| Prepaid expenses | 13,896,638 | 9,000,000 | 22,896,638 | |||||||||
| Total Assets | $ | 147,151,478 | $ | (42,617,472 | ) | $ | 104,534,006 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Deferred revenue | 662,335 | 500,000 | 1,162,335 | |||||||||
| Accrued and other expenses | 4,528,815 | (112,647 | ) | 4,416,168 | ||||||||
| Total current liabilities | 10,145,285 | 387,353 | 10,532,638 | |||||||||
| Total liabilities | 10,146,454 | 387,353 | 10,533,807 | |||||||||
| Accumulated deficit | (106,232,518 | ) | (41,955,620 | ) | (148,188,138 | ) | ||||||
| Total Lottery.com Inc. stockholders’ equity | 134,224,933 | (43,004,826 | ) | 91,220,107 | ||||||||
| Total Equity | 137,005,024 | (43,004,825 | ) | 94,000,199 | ||||||||
| Total liabilities and stockholders’ equity | $ | 147,151,478 | $ | (42,617,472 | ) | $ | 104,534,006 | |||||
The following tables present the impact of the restatements on the Company’s previously reported consolidated financial statements for the three months ended March 31, 2022. The values as previously reported were derived from the consolidated financial statements contained in the Original Report.
LOTTERY.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| As of March 31, 2022 | ||||||||||||
| As Previously | Restatement | As | ||||||||||
| Reported | Impacts | Restated | ||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash | $ | 50,795,889 | $ | (46,500,250 | ) | $ | 4,295,639 | |||||
| Restricted Cash | - | 30,000,000 | 30,000,000 | |||||||||
| Accounts receivable | 35,796,548 | (34,356,944 | ) | 1,439,604 | ||||||||
| Prepaid expenses | 12,843,029 | 9,000,000 | 21,843,029 | |||||||||
| Long-term assets | 54,962,270 | 8,509,686 | 63,471,956 | |||||||||
| Total assets | $ | 154,644,335 | (33,352,190 | ) | $ | 121,292,145 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Trade payables | 2,559,846 | (167,602 | ) | 2,392,244 | ||||||||
| Accrued and other expenses | 4,081,672 | 391,435 | 4,473,107 | |||||||||
| Commitments and contingencies (Note 14) | - | 30,000,000 | 30,000,000 | |||||||||
| Total liabilities | 10,845,303 | 30,223,833 | 41,069,136 | |||||||||
| Total liabilities and stockholders’ equity | $ | 154,644,335 | $ | (33,352,190 | ) | $ | 121,292,145 | |||||
LOTTERY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
| For the three months ending March 31, 2022 | ||||||||||||
| As Previously | Restatement | As | ||||||||||
| Reported | Impacts | Restated | ||||||||||
| Revenue | $ | 21,150,892 | (17,520,200 | ) | $ | 3,630,692 | ||||||
| Cost of revenue | 3,165,469 | (780,727 | ) | 2,384,742 | ||||||||
| Operating expenses: | 33,804,723 | (1,877,805 | ) | 31,926,918 | ||||||||
| Total other expenses, net | (3,389 | ) | 4,196,514 | 4,193,125 | ||||||||
| Net loss | (15,815,911 | ) | (19,081,546 | ) | (34,897,457 | ) | ||||||
| Comprehensive loss | (15,816,975 | ) | (19,081,546 | ) | (34,898,521 | ) | ||||||
| Net income attributable to noncontrolling interest | 129,222 | 18,335 | 147,557 | |||||||||
| Net loss attributable to Lottery.com Inc. | (15,687,753 | ) | (19,063,211 | ) | (34,750,964 | ) | ||||||
LOTTERY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the three months ending March 31, 2022 | ||||||||||||
| As Previously | Restatement | As | ||||||||||
| Reported | Impacts | Restated | ||||||||||
| Net loss attributable to Lottery.com Inc. | $ | (15,686,689 | ) | $ | (19,064,275 | ) | $ | (34,750,964 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | 23,419,191 | (2,195,301 | ) | 21,223,890 | ||||||||
| Net cash provided by operating activities | (3,904,838 | ) | 5,874,877 | 1,970,037 | ||||||||
| Net cash used in investing activities | (1,143,178 | ) | 1,124,873 | (18,305 | ) | |||||||
| Net cash provided by financing activities | (6,794,001 | ) | 6,500,000 | (294,001 | ) | |||||||
| Net change in net cash and restricted cash | $ | (11,843,081 | ) | $ | 13,499,750 | $ | 1,656,669 | |||||
Management evaluated the quantitative and qualitative impact of these accounting errors on the Company’s previously issued consolidated financial statements included in the Original Report (the “previously issued financial statements”) and concluded that the errors were material to its previously issued financial statements. Accordingly, the Company is restating its previously issued financial statements in this Amended Report. Management also identified material errors in its audited consolidated financial statements for the year ended December 31, 2021 and has restated those financial statements in the Amended Annual Report.
In addition, the Company re-evaluated the effectiveness of its internal controls over financial reporting and identified additional control deficiencies associated with the accounting errors, which the Company has concluded represent material weaknesses in the Company’s internal control over financial reporting as of March 31, 2022. Accordingly, the Company is filing this Amended Report to reiterate management’s assessment of the Company’s internal control over financial reporting and its disclosure controls and procedures to indicate that they were not effective as of March 31, 2022.
For a more detailed description of these accounting errors and the restatement of the previously issued financial statements, please refer to Note 4, Restatement of Financial Statements, to the consolidated financial statements of the Company included in Item 1 of this Amended Report.
TABLE OF CONTENTS
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Amendment No. 1 to Quarterly Report on Form 10-Q/A (this “Amended Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements about the financial condition, results of operations, earnings outlook and prospects of Lottery.com Inc. (“Lottery.com”, the “Company”, “we” or “us”). Forward-looking statements appear in a number of places in this Amended Report, including, without limitation, under the heading in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.
Forward-looking statements are based on the current expectations of the management of Lottery.com and are inherently subject to uncertainties and changes in circumstances and their potential effects and speak only as of the date of such statement. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors discussed and identified in the section entitled “Risk Factors” in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2021 (the “Amended Annual Report”) and in this Amended Report, as such factors may be updated in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), as well as the following:
| ● | The findings of the previously disclosed Internal Investigation and other matters have exposed us to a number of legal proceedings, investigations and inquiries, resulted in significant legal and other expenses, required significant time and attention from our senior management, among other adverse impacts. | |
| ● | We and certain of our former officers are, and in the future, we or our officers and directors may become, the subject of legal proceedings, investigations and inquiries by governmental agencies with respect to the findings of the Internal Investigation and other matters, which could have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations, and could result in additional claims and material liabilities. | |
| ● | We have been named as a defendant in a number of lawsuits filed by purchasers of our securities, including class action lawsuits that could have a material adverse impact on our business, financial condition, results of operation and cash flows, and our reputation. | |
| ● | Matters relating to or arising from the restatement and the Internal Investigation, including adverse publicity and potential concerns from our users, customers or others with whom we do business, have had and could continue to have an adverse effect on our business and financial condition. | |
| ● | 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 resources 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. | |
| ● | 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. |
| ii |
| ● | If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the trading price of our common stock and warrants may be materially and adversely affected. | |
| ● | The circumstances that led to the failure to file our annual report and quarterly reports on time, and our efforts to investigate, assess and remediate those matters have caused and may continue to cause substantial delays in our SEC filings. | |
| ● | Our inability to compete with other forms of entertainment for consumers’ discretionary time and income. | |
| ● | Economic downturns, inflation, geopolitical and political and market conditions beyond our control. | |
| ● | Negative events or media coverage relating to our business, our management and directors, the lottery, lottery games or online gaming or betting. | |
| ● | Our inability to attract and retain users, including as a result of failing to appear in Internet search engine results. | |
| ● | Our continued ability to use domain names to promote and increase the value of our brand. | |
| ● | Scrutiny by stakeholders with respect to responsible gaming and ethical conduct. | |
| ● | Our ability to achieve profitability and growth in the newly-developed market for online lottery games. | |
| ● | Our inability to profitably expand into new markets or capitalize on new gaming and lottery industry trends and changes, such as by developing successful new product offerings. | |
| ● | The effectiveness of our marketing efforts in developing and maintaining our brand and reputation. | |
| ● | Failure to offer high-quality user support. | |
| ● | Adverse impacts to user relationships resulting from disruptions to our information technology. | |
| ● | The vulnerability of our information systems to cyberattacks and disruptions caused with respect thereto, including an inability to securely maintain personal and other proprietary user information. | |
| ● | Our inability to adapt to changes or updates in the Internet, mobile or personal devices, or new technology platforms or network infrastructures. | |
| ● | The exposure of our online infrastructure to risks relating to new and untested distributed ledger technology. | |
| ● | Our inability to comply with complex, ever-changing and multi-jurisdictional regulatory regimes and other legal requirements applicable to the gaming and lottery industries. | |
| ● | Geopolitical shifts and changes in applicable laws or regulations or the manner in which they are interpreted. | |
| ● | Our inability to successfully expand geographically and acquire and integrate new operations. | |
| ● | Our dependence on third-party service providers to timely perform services or software component products for our gaming platforms, product offerings and the processing of user payments and withdrawals. | |
| ● | Our inability to maintain successful relationships and/or agreements with lottery organizations and other third-party marketing or service provider affiliates. |
| iii |
| ● | Failure of third-party service providers to protect, enforce, or defend intellectual property rights required to fulfill contractual obligations required for the operation of our business. | |
| ● | The effectiveness of our transition and compliance with the regulatory and other requirements of being a newly public company. | |
| ● | We are currently not in compliance with the continued listing standards of Nasdaq and may not be able to regain compliance with Nasdaq’s continued listing standards in the future. | |
| ● | Limited liquidity and trading of our securities. | |
| ● | Woodford may not loan us the amounts they agreed to under the Loan Agreement. | |
| ● | Our obligations under the Loan Agreement are secured by a first priority security interest in substantially all of our assets and if we were to default, they could force us to curtain or abandon our business plans and operations. | |
| ● | The issuance and sale of common stock upon conversion of the amounts owed or upon exercise of the warrants issued to Woodford under the Loan Agreement may depress the market price of our common stock and cause substantial dilution | |
| ● | We currently owe a significant amount of money under our Loan Agreement, which we may not be able to repay. |
The risks described herein or in the “Risk Factors” sections of our other public filings referenced above are not exhaustive. Other sections of this Amended Report describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time and it is not possible to predict all such risk factors, nor can we assess the impact of all such risk factors on our business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements, which speak only as of the date hereof. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
| iv |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
| 1 |
LOTTERY.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (As Restated) | (As Restated) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Notes receivable | ||||||||
| Investments | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Property and equipment, net | ||||||||
| Other long term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade payables | $ | $ | ||||||
| Deferred revenue | ||||||||
| Notes payable – current | ||||||||
| Accrued interest | ||||||||
| Accrued and other expenses | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Convertible debt, net – noncurrent | ||||||||
| Other long term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Total liabilities | ||||||||
| Equity | ||||||||
| Controlling Interest | ||||||||
| Preferred Stock, par value $, shares authorized, issued and outstanding | ||||||||
| Common stock, par value $, shares authorized, and issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Lottery.com Inc. stockholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total Equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
LOTTERY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (As Restated) | ||||||||
| Revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Personnel costs | ||||||||
| Professional fees | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other expenses | ||||||||
| Interest expense | ||||||||
| Other expense | ||||||||
| Total other expenses, net | ||||||||
| Net loss before income tax | ( | ) | ( | ) | ||||
| Income tax expense (benefit) | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Other comprehensive loss | ||||||||
| Foreign currency translation adjustment, net | ( | ) | ||||||
| Comprehensive loss | ( | ) | ( | ) | ||||
| Net income attributable to noncontrolling interest | ||||||||
| Net loss attributable to Lottery.com Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share | ||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
LOTTERY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| Common Stock | Preferred Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total AutoLotto Inc. Stockholders’ | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Issuance of common stock upon stock option exercise | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | - | |||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total AutoLotto Inc. Stockholders’ | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock upon stock option exercise | - | |||||||||||||||||||||||||||||||||||||||
| Conversion of convertible debt | - | |||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of digital securities | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
LOTTERY.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flow from operating activities | ||||||||
| Net loss attributable to Lottery.com Inc. | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Net income attributable to noncontrolling interest | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Non-cash interest expense | ||||||||
| Stock-based compensation expense | ||||||||
| Issuance of debt to pay expenses | ||||||||
| Changes in assets & liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Notes Receivable | ( | ) | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Trade payables | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Accrued interest | ( | ) | ||||||
| Accrued and other expenses | ||||||||
| Other long term asset | ( | ) | ||||||
| Other long term liabilities | ||||||||
| Net cash provided by operating activities | ( | ) | ||||||
| Cash flow from investing activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flow from financing activities | ||||||||
| Issuance of digital securities | ||||||||
| Proceeds from exercise of options and warrants | ||||||||
| Proceeds from issuance of convertible debt | ||||||||
| Payments on notes payable - related parties | ( | ) | ||||||
| Principal payments on debt | ( | ) | ||||||
| Net cash provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net change in net cash and restricted cash | ||||||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid in cash | $ | $ | ||||||
| Taxes paid in cash | $ | $ | ||||||
| Non cash investing and financing activities | ||||||||
| Conversion of convertible debt into common stock | $ | $ | ||||||
| Purchase of intangible assets through the issuance of convertible debt | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
LOTTERY.COM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Nature of Operations
Description of Business
Lottery.com Inc. (formerly Trident Acquisitions Corp) (“TDAC”, “Lottery.com” or “the Company”), was formed as a Delaware corporation on March 17, 2016. On October 29, 2021, we consummated a business combination (the “Business Combination”) with AutoLotto, Inc. (“AutoLotto”) pursuant to the terms of a Business Combination Agreement, dated February 21, 2021 (“Business Combination Agreement”). Following the closing of the Business Combination (the “Closing”) we changed our name from “Trident Acquisitions Corp.” to “Lottery.com Inc.” and the business of AutoLotto became our business. In connection with the Business Combination, we moved our headquarters from New York, New York to AutoLotto’s offices in Spicewood, Texas.
We are a provider of domestic and international lottery products and services. As an independent third-party lottery game service, we offer a platform developed and operated by us to enable the remote purchase of legally sanctioned lottery games in the U.S. and abroad (the “Platform”). Our revenue generating activities are focused on (i) offering the Platform via the Lottery.com app and our websites to users located in the U.S. and international jurisdictions where the sale of lottery games is legal and our services are enabled for the remote purchase of legally sanctioned lottery games (our “B2C Platform”); (ii) offering an internally developed, created and operated business-to-business application programming interface (“API”) of the Platform to enable commercial partners in permitted U.S. and international jurisdictions to purchase certain legally operated lottery games from us and resell them to users located within their respective jurisdictions (“B2B API”); and (iii) delivering global lottery data, such as winning numbers and results, to commercial digital subscribers and providing access to other proprietary, anonymized transaction data pursuant to multi-year contracts (“Data Service”).
We have been a provider of lottery products and services, our business is subject to regulation in each jurisdiction in which we offer the B2C Platform, or a commercial partner offers users access to lottery games through the B2B API. In addition, we must also comply with the requirements of federal and other domestic and foreign regulatory bodies and governmental authorities in jurisdictions in which we operate or with authority over our business. Our business is also subject to multiple other domestic and international laws, including those relating to the transmission of information, privacy, security, data retention, and other consumer focused laws, and, as such, may be impacted by changes in the interpretation of such laws.
On June 30, 2021, we acquired an interest in Medios Electronicos y de Comunicacion, S.A.P.I de C.V. (“Aganar”) and JuegaLotto, S.A. de C.V. (“JuegaLotto”). Aganar is authorized to operate in the licensed iLottery market in Mexico since 2007 as an online retailer of Mexican National Lottery draw games, instant digital scratch-off games and other games of chance. JuegaLotto is authorized by the Mexican federal regulatory authorities to sell international lottery games in Mexico.
On July 28, 2022, the Board determined that the Company did not currently have sufficient financial resources to fund its operations or pay certain existing obligations, including its payroll and related obligations and effectively ceased its operations furloughing certain employees effective July 29, 2022 (the “Operational Cessation”). Subsequently, the Company has had minimal day-to-day operations and has primarily focused its operations on restarting certain aspects of its core business (the “Plans for Recommencement of Company Operations”).
On April 25, 2023, as part of the Plans for Recommencement of Company Operations, the Company resumed its ticket sales operations to support its affiliate partners through its Texas retail network.
2. Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and classification of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern.
Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
Due to
losses experienced by the Company’s Operational Cessation, the Company has experienced recurring net losses and negative cash
flows from operations and has an accumulated deficit of approximately $
| F-5 |
The Company has historically funded its activities to date almost exclusively from debt and equity financing. Management’s plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common stock, preferred stock offerings, and issuances of debt and convertible debt. Although Management believes that it will be able to continue to raise funds by sale of its securities to provide the additional cash needed to meet the Company’s obligations as they become due beginning with a loan agreement the Company entered into with Woodford Eurasia Assets, Ltd. (“Woodford”) on December 7, 2022 (see Note 16. Subsequent Events), the Plans for Recommencement of Company Operations to require substantial funds to implement and there is no assurance that the Company will be able to continue raising the required capital.
The Company’s ability to continue as a going concern for the next twelve months from the issuance of these financial statements depends on its ability to execute its business plan, increase revenue, and reduce expenditures. Such conditions raise substantial doubt about the Company’s ability to continue as a going concern.
We will require additional financing to continue to execute on our business plan. However, there can be no assurances that we will be successful in raising the additional capital necessary to continue operations and execute on our business plan.
3. Significant Accounting Policies
Restatement
On
January 4, 2022, AutoLotto entered into a Business Loan Agreement (the “Business Loan”) with The Provident Bank (“Provident”),
pursuant to which the Company borrowed $
As previously disclosed in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission (“SEC”) on July 22, 2022, as amended on July 22, 2022, the Company’s Management met on July 19, 2022 in consultation with the Chairman of the Board of Directors of the Company, the Company’s legal counsel and the Company’s auditors at that time (Armanino LLP) and concluded that the Company’s previously issued audited consolidated financial statements for the fiscal year ended December 31, 2021, and the unaudited consolidated financial statements for the quarter ended March 31, 2022, previously filed with the SEC should no longer be relied upon and should be restated.
The need for the restatement arose out of the Company’s reexamination of various transactions that occurred in 2021 and which were later rescinded or canceled in 2022. The Company has restated its financial statements for the year ended December 31, 2021, as included herein as discussed below and to reflect a change in the recognition of income in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606.
On
September 20, 2021, the Company entered into a purchase agreement with a major customer for the sale of various service credits with
a total purchase price of $
In
addition, the Company had invoiced the customer a further $
| F-6 |
In
an unrelated transaction, the Company entered into an arrangement with another customer totaling $
In addition, related to the transaction
stated above, in February 2022, the Company loaned the customer $
Further, during the Company’s reassessment of all accounts as of
December 31, 2021, the Company determined that approximately $
The following table presents the impact of the restatements on the Company’s previously reported consolidated balance sheet for the fiscal year ended December 31, 2021. The values as previously reported were derived from the 2021 consolidated financial statements contained in the Company’s previously reported balance sheet as of December 31, 2021 filed in the Company’s Annual Report on Form 10-K, which were included in the Company’s Annual Report on Form 10-K that was filed with the SEC on May 10, 2023.
| Fiscal Year Ended December 31, 2021 | ||||||||||||
| As Previously | Restatement | As | ||||||||||
| Reported | Impacts | Restated | ||||||||||
| ASSETS | ||||||||||||
| Cash | $ | $ | ( | ) | $ | |||||||
| Accounts receivable | ( | ) | ||||||||||
| Prepaid expenses | ||||||||||||
| Total Asset | $ | $ | ( | ) | $ | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Deferred revenue | ||||||||||||
| Accrued and other expenses | ( | ) | ||||||||||
| Total current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | - | |||||||
| Total Lottery.com Inc. stockholders’ equity | ( | ) | ||||||||||
| Total Equity | ( | ) | ||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ( | ) | $ | |||||||
| F-7 |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain footnotes and other financial information normally required by accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted in accordance with such rules and regulations. In management’s opinion, these condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and notes thereto and include all adjustments, consisting of normal recurring items, considered necessary for the fair presentation. The operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The condensed consolidated balance sheet as of December 31, 2021 has been derived from our audited financial statements at that date but does not include all disclosures and financial information required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2021, which were included in Amendment No. 1 to our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on May 10, 2023.
Impact of Trident Acquisition Corp. Business Combination
We accounted for the October 29, 2021 Business Combination as a reverse recapitalization whereby AutoLotto was determined as the accounting acquirer and TDAC as the accounting acquiree. This determination was primarily based on:
| ● | former AutoLotto stockholders having the largest voting interest in Lottery.com; | |
| ● | the Board of Directors of Lottery.com having not less than 5 members, and TDAC only having the ability under the Business Combination Agreement to nominate one member to the Board of Directors for an initial two year term; | |
| ● | AutoLotto management continuing to hold executive management roles for the post-Business Combination entity and being responsible for the day-to-day operations; | |
| ● | the post-Business Combination entity assuming the Lottery.com name, which was the assumed name under which AutoLotto conducted business; | |
| ● | Lottery.com maintaining the pre-existing AutoLotto headquarters; and | |
| ● | the intended strategy of Lottery.com being a continuation of AutoLotto’s strategy. |
Accordingly, the Business Combination was treated as the equivalent of AutoLotto issuing stock for the net assets of TDAC, accompanied by a recapitalization. The net assets of TDAC are stated at historical cost, with no goodwill or other intangible assets recorded.
While TDAC was the legal acquirer in the Business Combination, because AutoLotto was determined to be the accounting acquirer, the historical financial statements of AutoLotto became the historical financial statements of the combined company, upon the consummation of the Business Combination. As a result, the financial statements included in the accompanying condensed consolidated financial statements reflect (i) the historical operating results of AutoLotto prior to the Business Combination; (ii) our combined results and AutoLotto following the Closing; (iii) the assets and liabilities of AutoLotto at their historical cost; and (iv) our equity structure for all periods presented.
In connection with the Business Combination transaction, we have converted the equity structure for the periods prior to the Business Combination to reflect the number of shares of our common stock issued to AutoLotto’s stockholders in connection with the recapitalization transaction. As such, the shares, corresponding capital amounts and earnings per share, as applicable, related to AutoLotto convertible preferred stock and common stock prior to the Business Combination have been retroactively converted by applying the exchange ratio established in the Business Combination.
| F-8 |
Non-controlling Interests
Non-controlling interests represent the proportionate ownership of Aganar and JuegaLotto, held by minority members and reflect their capital investments as well as their proportionate interest in subsidiary losses and other changes in members’ equity, including translation adjustments.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by our management in deciding how to allocate resources and in assessing operating performance. Under the provisions of ASC 280-10, “Segment Reporting” (“ASC 280”), we are not organized around specific services or geographic regions. We operate in one service line, providing lottery products and services.
Our management uses financial information, business prospects, competitive factors, operating results and other non-U.S. GAAP financial ratios to evaluate our performance, which is the same basis on which our results and performance are communicated to our Board of Directors. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment on a condensed consolidated basis for each of the periods presented.
Concentration of Credit Risks
Financial instruments
that are potentially subject to concentrations of credit risk are primarily cash. Cash holdings are placed with major financial
institutions deemed to be of high-credit-quality in order to limit credit exposure. The Company maintains deposits and certificates of
deposit with banks which may exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limit and money market accounts
which are not FDIC insured. In addition, deposits aggregating approximately $
Use of Estimates
The preparation of the financial statements requires management to make estimates and assumptions to determine the reported amounts of assets, liabilities, revenue and expenses. Although management believes these estimates are reasonable, actual results could differ from these estimates. We evaluate our estimates on an ongoing basis and prepare our estimates on a historical experience using assumptions we believe to be reasonable under the circumstances.
| F-9 |
Foreign currency translation
The financial statements of the Company’s significant non-U.S. subsidiaries are translated into United States dollars in accordance with ASC 830, “Foreign Currency Matters”, using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs and expenses and historical rates for equity. Resulting foreign currency translation adjustments are recorded directly in accumulated other comprehensive loss as a separate component of shareholders’ deficit. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss when realized.
Cash
As of March 31, 2022 and December 31, 2021, cash and cash equivalents were composed of cash deposits. Certain deposits with some banks exceeded federally insured limits with the majority of cash held in one financial institution. Management believes all financial institutions holding its cash are of high credit quality and does not believe we are subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The
Company had
Accounts Receivable
Through the various merchant providers used by us, we pre-authorize forms of payment prior to the sale of digital representation of lottery games to minimize exposure to losses related to uncollected payments and we do not extend credit to the user of the B2C Platform or the commercial partner of the B2B API, as its customers, in the normal course of business. We accrue 100 percent of all expenses associated with LotteryLink prior to issuing accounts payable to a Master Affiliate or receiving associated payments. We estimate our bad debt exposure each period and record a bad debt provision for accounts receivable we believe may not be collected in full. The Company did not record any allowance for uncollectible receivables as of March 31, 2022 and December 31, 2021. The Company has not incurred bad debt expense historically.
Prepaid Expenses
Prepaid expenses consist of payments made on contractual obligations for services to be consumed in future periods. The Company entered into an agreement with a third party to provide advertising services and issued equity instruments as compensation for the advertising services. The Company expenses the service as it is performed. The value of the services provided were used to value these contracts. The current portion of prepaid expenses is included in current assets on the condensed consolidated balance sheets.
Investments
On
August 2, 2018, AutoLotto purchased shares of Class A-1 common stock of a third-party business development partner representing
% of the total outstanding shares of such company. As this investment resulted in less than
Property and equipment, net
Property
and equipment are stated at cost. Depreciation and amortization are generally computed using the straight-line method over estimated
useful lives ranging from to
| F-10 |
Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:
| Computers and equipment | ||
| Furniture and fixtures | ||
| Software |
Notes Receivable
Notes receivable consist of contracts where the Company has loaned funds to outside parties. The Company accrues interest receivable over the term of the outstanding notes and reviews for doubtful collectability periodically but in no instance less than annually.
Leases
Right-of-use assets (“ROU assets”) represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use asset and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Otherwise, the implicit rate was used when readily determinable. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Under the available practical expedient, the Company accounts for the lease and non-lease components as a single lease component for all classes of underlying assets as both a lessee and lessor. Further, management elected a short-term lease exception policy on all classes of underlying assets, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).
Internal Use Software Development
Software development costs incurred internally to develop software programs to be used solely to meet our internal needs and applications are capitalized once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities, maintenance and minor modifications are expensed as incurred. Internal-use software development costs are amortized on a straight line basis over the estimated useful life of the software.
Software License
Software license represents the Company’s license agreements for third party software, which are amortized over their estimated economic lives.
Customer relationships
Customer relationships are finite-lived intangible assets, which are amortized over their estimated economic lives. Customer relationships are generally recognized as the result of business combinations.
Gaming Licenses
The Company incurs fees in connection with applying for and maintaining good standing in jurisdictions via business licenses. Fees incurred in connection with the application and subsequent renewals are capitalized and amortized using the straight-line method over an estimated useful life. These fees are capitalized and amortized over the shorter of their expected benefit under the partnership agreement or estimated useful life.
| F-11 |
Trademarks and Tradenames
The Company incurs fees in connection with applying for and maintaining trademarks and tradenames as well as trademarks and tradenames resulting from acquisitions. Fees incurred in connection with the application and subsequent renewals are capitalized and amortized using the straight-line method over an estimated useful life.
Domain Name
Domain name represents the cost incurred to purchase the website domain name and is being amortized on a straight-line method over an estimated useful life.
Impairment of Long-Lived Assets
Long-lived assets, except for goodwill, consist of property and equipment and finite-lived acquired intangible assets, such as internal-use software, software licenses, customer relationships, gaming licenses, trademarks, tradenames and customer relationships. Long-lived assets, except for goodwill and indefinite-lived assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. Impairment expense is recognized to the extent an asset’s expected undiscounted future cash flows are less than the asset’s carrying amount. The Company determined that there was no significant impairment of long-lived assets during the three months ended March 31, 2022 or the year ended December 31, 2021.
Goodwill
The Company’s business is classified into one reporting unit. In testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in the Company’s management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative goodwill impairment analysis by comparing the carrying amount to the fair value of the reporting unit. If the carrying amount exceeds the fair value, goodwill will be written down to the fair value and recorded as impairment expense in the consolidated statements of operations. The Company performs its impairment testing annually and when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Revenue Recognition
Under the new standard, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”), the Company recognizes revenues when the following criteria are met: (i) persuasive evidence of a contract with a customer exists; (ii) identifiable performance obligations under the contract exist; (iii) the transaction price is determinable for each performance obligation; (iv) the transaction price is allocated to each performance obligation; and (v) when the performance obligations are satisfied. Revenues are recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration expected to be entitled to in exchange for those goods or services.
Lottery game revenue
Items that fall under this revenue classification include:
Lottery game sales
The Company’s performance obligations of delivering lottery games are satisfied at the time in which the digital representation of the lottery game is delivered to the user of the B2C Platform or the commercial partner of the B2B API, therefore, revenue is recognized at a point in time. The Company receives consideration for lottery game sales at the time of delivery to the customer, either the user or commercial partner, as applicable. There is no variable consideration related to lottery game sales. As each individual lottery game delivered represents a distinct performance obligation and consideration for each game sale is fixed, representing the standalone selling price, there is no allocation of consideration necessary.
In accordance with ASC 606, the Company evaluates the presentation of revenue on a gross versus net basis dependent on if the Company is a principal or agent. In making this evaluation, some of the factors that are considered include whether the Company has control over the specified good or service before it is transferred to the customer. The Company also assesses if it is primarily responsible for fulfilling the promise to provide the specified good or service, has inventory risk, and has discretion in establishing the price. For all of the Company’s transactions, management concluded that gross presentation is appropriate, as the Company is primarily responsible for providing the performance obligation directly to the customers and assumes fulfillment risk of all lottery game sales as it retains physical possession of lottery game sales tickets from time of sale until the point of redemption. The Company also retains inventory risk on all lottery game sales tickets as they are responsible for any potential winnings related to lost or unredeemable tickets at the time of redemption. Finally, while each jurisdiction establishes the face value of the lottery ticket, representing the game sales prices, the Company charges a separate and additional fee for the services it provides.
| F-12 |
Affiliate marketing credit revenue
The Company’s performance obligation in agreements with certain customers is to transfer previously acquired affiliate marketing credits (“credits”). Customers’ payment for these credits 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 customer. This transfer is point-in-time when the revenue is recognized, and there are no variable considerations related to this performance obligation.
Arrangements with multiple performance obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, management allocates revenue to each performance obligation based on its relative standalone selling price. Management generally determines standalone selling prices based on the prices charged to customers.
Deferred Revenue
The Company records deferred revenue when cash payments are received or due in advance of any performance, including amounts which are refundable.
Payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, management requires payment before the products or services are delivered to the customer.
Contract Assets
Given the nature of the Company’s services and contracts, it has no contract assets.
Taxes
Taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions, that are collected by us from a customer, are excluded from revenue.
Cost of Revenue
Cost of revenue consists primarily of variable costs, comprising (i) the cost of procurement of lottery games, minus winnings to users, additional expenses related to the sale of lottery games, including, commissions, affiliate fees and revenue shares; and (ii) payment processing fees on user fees, including, chargebacks imposed on the Company. Non-variable costs included in cost of revenue include affiliate marketing credits acquired on a per-contract basis.
Effective October 1, 2019, the Company adopted ASU 2018-07, Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting” (“ASC 718”), which addresses aspects of the accounting for nonemployee share-based payment transactions and accounts for share-based awards to employees in accordance with ASC 718. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that may have an impact on our accounting and reporting. We believe that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations and cash flows when implemented.
4. Restatement of Financial Statements
Management of the Company re-evaluated its accounting for three months ending March 31, 2022, the Company determined to restate its previously issued financial statements as of March 31, 2022 to correct accounting errors related to cash on hand, accounts receivable, other assets, deferred revenue, accrued expenses, revenue, costs of revenue and stock-based compensation which caused the following misstatements.
| F-13 |
The following tables summarize the effect of the restatements on the specific items presented in our previously reported financial statements:
LOTTERY.COM
CONSOLIDATED BALANCE SHEET
| March 31, | March 31, | |||||||||||
| 2022 | Adjustments | 2022 | ||||||||||
| (As Filed) | (As Restated) | |||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash | $ | ( | )(1) (2) | $ | ||||||||
| Restricted cash | (1) | |||||||||||
| Accounts receivable | ( | )(1) (2) | ||||||||||
| Prepaid expenses | (1) | |||||||||||
| Other current assets | ( | ) | ||||||||||
| Total current assets | ||||||||||||
| Long-term assets | (1) (2) | |||||||||||
| Total assets | $ | $ | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Trade payables | $ | ( | )(3) | $ | ||||||||
| Deferred revenue | ||||||||||||
| Notes payable - current | ||||||||||||
| Accrued interest | ||||||||||||
| Accrued and other expenses | (3) | |||||||||||
| Total current liabilities | ||||||||||||
| Long-term liabilities: | ||||||||||||
| Other long term liabilities | ||||||||||||
| Total long-term liabilities | ||||||||||||
| Commitments and contingencies (Note 14) | (1) | |||||||||||
| Total liabilities | ||||||||||||
| Commitments and contingencies | ||||||||||||
| Equity | ||||||||||||
| Controlling Interest | ||||||||||||
| Preferred Stock, par value $, shares authorized, issued and outstanding | ||||||||||||
| Common stock, par value $, shares authorized, and issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | (7) | |||||||||||
| Additional paid-in capital | ( | )(4) | ||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||||||
| Accumulated deficit | ( | ) | ( | )(9) | ( | ) | ||||||
| Total Lottery.com Inc. stockholders’ equity | ||||||||||||
| Noncontrolling interest | ( | )(9) | ||||||||||
| Total Equity | ||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||
| F-14 |
LOTTERY.COM
CONSOLIDATED STATEMENT OF OPERATIONS
| Three Months Ended March 31, | ||||||||||||
| 2022 | Adjustments | 2022 | ||||||||||
| (As Filed) | (As Restated) | |||||||||||
| Revenue | $ | ( | )(1) (2) | $ | ||||||||
| Cost of revenue | ( | )(1) (2) | ||||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ( | )(2) | ||||||||||
| Loss from operations | ( | ) | $ | ( | ) | |||||||
| Other expenses | ||||||||||||
| Interest expense | ( | ) | (3) | |||||||||
| Other expense | ( | ) | (2) | |||||||||
| Total other expenses, net | ( | ) | ||||||||||
| Net loss before income tax | $ | ( | ) | $ | ( | ) | ||||||
| Income tax expense (benefit) | (2) | |||||||||||
| Net loss | ( | ) | ( | ) | ||||||||
| Other comprehensive loss | ||||||||||||
| Foreign currency translation adjustment, net | ( | ) | ||||||||||
| Comprehensive loss | ( | ) | ( | ) | ||||||||
| Net income attributable to noncontrolling interest | (3) | |||||||||||
| Net loss attributable to Lottery.com Inc. | ( | ) | ( | ) | ||||||||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding, basic and diluted | ||||||||||||
| F-15 |
LOTTERY.COM
CONSOLIDATED STATEMENT OF CASH FLOWS
| Three Months Ending March 31, | ||||||||||||
| 2022 | Adjustments | 2022 | ||||||||||
| (As Filed) | (As Restated) | |||||||||||
| Cash flow from operating activities | ||||||||||||
| Net loss attributable to Lottery.com Inc. | ( | ) | $ | ( | )(9) | ( | ) | |||||
| Adjustments to reconcile net loss to net cash used in operating activities: | $ | ($ | ) (9) | |||||||||
| Changes in assets & liabilities: | ||||||||||||
| Accounts receivable | ( | ) | (1) (2) | ( | ) | |||||||
| Prepaid expenses | ||||||||||||
| Note Receivable | ( | )(6) | ( | ) | ||||||||
| Other current assets | ( | ) | (9) | ( | ) | |||||||
| Trade payables | ( | )(9) | ||||||||||
| Deferred revenue | ( | ) | ( | ) (1) (2) | ( | ) | ||||||
| Accrued interest | ||||||||||||
| Accrued and other expenses | ( | ) | (9) | |||||||||
| Other long term assets | ( | )(8) | ( | ) | ||||||||
| Other long term liabilities | ||||||||||||
| Net cash provided by operating activities | ( | ) | ||||||||||
| Cash flow from investing activities | ||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||||||
| Purchases of intangible assets | ( | ) | (9) | |||||||||
| Investment in subsidiary, net | ||||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||
| Cash flow from financing activities | ||||||||||||
| Issuance of digital securities | ||||||||||||
| Proceeds from exercise of options and warrants | ||||||||||||
| Proceeds from issuance of convertible debt | ||||||||||||
| Payment of debt issuance costs | ||||||||||||
| Issuance of note receivable | ( | ) | (6) | |||||||||
| Proceeds from issuance of notes payable | ||||||||||||
| Principal payments on debt | ( | ) | ( | ) | ||||||||
| Net cash provided by financing activities | ( | ) | ( | ) | ||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||||||
| Net change in net cash and restricted cash | ( | ) | (9) | |||||||||
| Cash and restricted cash at beginning of period | ( | )(1) | ||||||||||
| Cash and restricted cash at end of period | ||||||||||||
| F-16 |
The following tables summarize the effect of the restatements on the specific items presented in our previously reported financial statements:
The specific explanations for the items noted above in the restated financial statements are as follows: