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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _________________

 

Commission File Number: 001-38508

 

Lottery.com Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   81-1996183

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
20808 State Hwy 71 W, Unit B, Spicewood, Texas   78669
(Address of principal executive offices)   (zip code)

 

(512) 592-2451

(Registrant’s telephone number, including area code)

 

N/A

 (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

Common stock, $0.001 par value   LTRY   The Nasdaq Stock Market LLC
Warrants to purchase one share of common stock, each at an exercise price of $11.50   LTRYW   The Nasdaq Stock Market LLC

 

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 ☒ No

 

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 ☒ No

 

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 ☐
Non-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 ☒ No

 

As of May 19, 2023, 50,925,271 shares of common stock, par value $0.001 per share were issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
Part I. Financial Information  
Item 1. Consolidated Financial Statements 1
Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021 F-1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021 (unaudited) F-2
Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2022 and 2021 (unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2022 and 2021 (unaudited) F-4
Notes to Condensed Consolidated Financial Statements (unaudited) F-5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information  
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6. Exhibits 19

 

i
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “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 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 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 (as defined herein) 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 (as defined herein) 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 curtail 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 (as defined herein) 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 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.

 

  Page
Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021 F-1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021 (unaudited) F-2
Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2022 and 2021 (unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited) F-4
Notes to Condensed Consolidated Financial Statements (unaudited) F-5

 

1
 

 

LOTTERY.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2022   2021 
      

(As Restated)

 
ASSETS          
Current assets:          
Cash  $369,322   $32,638,970 
Restricted Cash   30,000,000    - 
Accounts receivable   202,064    79,181 
Prepaid expenses   20,627,111    22,896,638 
Other current assets   259,447    226,200 
Total current assets   51,457,944    55,840,989 
           
Notes Receivable   2,000,000    - 
Investments   250,000    250,000 
Other long term assets   13,009,686    - 
Goodwill   19,590,758    19,590,758 
Intangible assets, net   27,207,725    28,710,980 
Property and equipment, net   117,273    141,279 
Total assets  $113,633,386   $104,534,006 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Trade payables  $4,728,841   $1,006,535 
Deferred revenue   517,857    1,162,335 
Notes payable – current   3,292,244    3,771,340 
Accrued interest   365,376    176,260 
Accrued and other expenses   3,263,228    4,416,168 
Total current liabilities   12,167,546    10,532,638 
           
Long-term liabilities:          
Other long-term liabilities   1,522    1,169 
Total long-term liabilities   1,522    1,169 
Commitments & Contingencies (Note 12)   30,000,000    - 
Total liabilities   42,169,068    10,533,807 
           
Commitments and contingencies (Note 12)   -    - 
           
Equity          
Controlling Interest   -     -  
Preferred Stock, par value $0.001, 1,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, par value $0.001, 500,000,000 shares authorized, 50,540,906 and 50,256,317 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively   50,540    50,256 
Additional paid-in capital   267,191,008    239,358,644 
Accumulated other comprehensive loss   (11,720)    (655)
Accumulated deficit   (198,295,525)   (148,188,138)
Total Lottery.com Inc. stockholders’ equity   68,934,303    91,220,107 
Noncontrolling interest   2,530,015    2,780,092 
Total Equity   71,464,318    94,000,199 
           
Total liabilities and stockholders’ equity  $113,633,386   $104,534,006 

 

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)

 

   2022   2021   2022   2021 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
                 
Revenue  $1,885,171   $9,878,497   $5,515,863   $15,340,036 
Cost of revenue   1,577,239    1,063,355    3,961,981    4,010,336 
Gross profit   307,932    8,815,142    1,553,882    11,329,700 
                     
Operating expenses:                    
Personnel costs   9,512,356    2,025,745    33,915,222    3,121,538 
Professional fees   1,219,509    28,260    4,357,459    2,443,458 
General and administrative   

3,881,057

    

4,880,934

    6,893,234    6,269,508 
Depreciation and amortization   1,297,394    808,382    2,671,319    1,175,641 
Total operating expenses   15,910,316    7,743,321    47,837,234    13,010,145 
Income (loss) from operations   (15,602,384)  $1,071,821    (46,283,352)  $(1,680,445)
                     
Other expenses                    
Interest (income) expense   71,045    2,742,163    75,026    5,214,211 
Other (income) expense   (247,851)   (251,771)   3,941,293    (20,051)
Total other expenses (income), net   

(176,806

)   2,490,392    4,016,319    5,194,160 
                     
Net loss before income tax  $(15,425,578)  $(1,418,571)  $(50,299,671)  $(6,874,605)
Income tax expense (benefit)   23,364    -    46,728    - 
Net loss   (15,448,942)   (1,418,571)   (50,346,399)   (6,874,605)
                     
Other comprehensive loss                    
Foreign currency translation adjustment, net   (10,001)    -    (11,065)    - 
Comprehensive loss   (15,458,941)   (1,418,571)   (50,357,464)   (6,874,605)
                     
Net income attributable to noncontrolling interest   102,520    -    250,077    - 
Net loss attributable to Lottery.com Inc.   (15,356,422)   (1,418,571)   

(50,107,386

)   (6,874,605)
                     
Net loss per common share                    
Basic and diluted  $(0.30)  $(0.06)  $(1.00)  $(0.29)
                     
Weighted average common shares outstanding                    
Basic and diluted   50,412,982    24,080,026    50,346,649     23,492,214 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-2

 

 

LOTTERY.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the Six Months Ended June 30, 2022 and 2021

 

   Shares   Amount   Capital   Deficit   Income   Equity   Interest   Equity 
            Additional       Accumulated
Other
   Total
AutoLotto Inc.
        Total 
   Common Stock   Paid-In   Accumulated   Comprehensive   Stockholders’   Noncontrolling   Stockholders’ 
   Shares   Amount   Capital   Deficit   Income   Equity   Interest   Equity 
Balance as of December 31, 2020   22,658,006   $22,658   $111,752,883   $(95,140,568)  $   -   $       16,634,973   $ -   $16,634,973 
Issuance of common stock upon stock option exercise   115,724    116    6,882    -    -    6,998    -    6,998 
Conversion of convertible debt   1,398,224    1,398    933,602    -    -    935,000    -    935,000 
Beneficial conversion feature   -    -    9,149,683    -    -    9,149,683    -    9,149,683 
Issuance of digital securities   -    -    108,332    -    -    108,332    -    108,332 
Stock based compensation   -    -    4,320    -    -    4,320    -    4,320 
Issuance of common stock for the purchase of JuegaLotto     688,335       688       459,462       -       -       460,150       -       460,150  
Net loss   -    -    -    (6,874,605)   -    (6,874,605)   -    (6,874,605)
                                         
Balance as of June 30, 2021     24,860,289       24,860       122,415,164       (102,015,173 )     -       20,424,851       -       20,424,851  
                                                                 
Balance as of March 31, 2021   24,071,259   $24,071   $121,947,545   $(100,596,602)  $-   $21,375,014   $-   $21,375,014 
                                         
Stock based compensation   -    -   $2,160    -    -    2,160    -    2,160 
Issuance of common stock upon stock option exercise   100,695    101    5,997    -    -    6,098    -    6,098 
Issuance of common stock for the purchase of JuegaLotto   688,335    688    459,462    -    -    460,150    -    460,150 
Net loss   -    -         (1,418,571)            -    (1,418,571)                -    (1,418,571)
Balance as of June 30, 2021   24,860,289   $24,860   $122,415,164   $(102,015,173)  $-   $20,424,851   $-   $20,424,851 

 

   Common Stock   Additional
Paid-In
   Accumulated   Accumulated
Other
Comprehensive
   Total
AutoLotto Inc.
Stockholders’
   Noncontrolling   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Income   Equity   Interest   Equity 
Balance as of December 31, 2021   50,256,317   $50,256   $239,358,644   $(148,188,138)  $                     (655)  $     91,220,107   $2,780,092   $94,000,199 
Issuance of common stock upon stock option exercise   60,116    60    (60)   -      -    -    -    - 
Issuance of common stock for legal settlement   60,000    60    241,680    -    -    241,740    -    241,740 
Stock based compensation   164,473    164    27,590,744    -    -    27,590,908    -    27,590,908 
Other comprehensive loss   -    -    -    -    

(11,065

)   

(11,065

)   -    

(11,065

)
Net loss   -    -    -    

(50,107,387

)   -    

(50,107,387

)   

(250,077

)   

(50,357,464

)
                                         
Balance as of June 30, 2022   50,540,906   $50,540   $267,191,008   $

(198,295,525

)  $

(11,720

)   $

68,934,303

    $2,530,015    $

71,464,318

 
                                         
Balance as of March 31, 2022     50,376,433       50,376       260,480,919       (182,939,102 )     (1,719 )   $ 77,590,474     $ 2,632,535       80,223,009  
Stock based compensation   164,473    164   $6,710,089    -    -    6,710,253    -    6,710,253 
Other comprehensive loss   -    -    -    -   $

(10,001

)    (10,001)    -    

(10,001

) 
Net loss        -        $

(15,356,423

)   -    

(15,356,423

)   

(102,520

)   

(15,458,943

)
Balance as of June 30, 2022   50,540,906   $50,540   $267,191,008   $

(198,295,525

)  $(11,720)  $

68,934,303

   $2,530,015   $71,464,318 

 

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)

For the Six Months Ended June 30, 2022 and 2021

 

   2022   2021 
   Six Months Ended June 30, 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Loss  $

(50,107,386

)  $(6,874,605)
Adjustments to reconcile net income to net cash used in operating activities:          
Loss Attributable to noncontrolling interest   

(250,077

)   - 
Depreciation and amortization   

2,707,239

    1,343,744 
Non-cash interest expense   -    1,841,807 
Issuance of common stock for legal settlement   241,740    - 
Stock based compensation   27,590,908    2,160 
Changes in assets and liabilities:          
Accounts receivable   

(122,883

)   

-

 
Prepaid expenses   

2,269,527

    894,872 
Other current assets   

(33,247

)   

(54,853

)
Other long-term assets   

(13,009,686

)   - 
Note receivable   (2,000,000)   - 
Trade payables   

3,722,305

    

(354,736

)
Accounts payable and accrued expenses   

(1,152,940

)   

1,512,125

 
Deferred revenue   (644,478)   

(2,039,113

)
Accrued interest   189,116    

(605,961

)
Other long term liabilities   353    

-

 
Commitments and contingencies   30,000,000    - 
Net cash (used in) provided by operating activities   

(599,509

)   (4,334,560)
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of fixed assets   

(18,305

)   

(57,452

)
Purchase of intangibles   

(1,161,673

)   

(3,050,000

)
Net cash used in investing activities   (1,179,978)   (3,107,452)
CASH FLOWS FROM FINANCING ACTIVITIES          
Issuance of digital securities   

-

    

108,332

 
Proceeds from exercise of options and warrants     -       895  
Proceeds from issuance of convertible debt     -       19,282,619  

Payments on notes payable - related parties

   (479,096)    - 
Principal payments on debt   -    

(4,856,250

)
Net cash (used in) provided by financing activities   (479,096)   14,535,596 
Net effect of exchange rate changes on Cash   (11,065)    - 
NET CHANGE IN NET CASH AND RESTRICTED CASH   

(2,269,648

)   7,093,584 
CASH AND RESTRICTED CASH - BEGINNING OF YEAR   

32,638,970

    158,492 
CASH AND RESTRICTED CASH - END OF PERIOD  $

30,369,322

   $

7,252,076

 

Supplemental Disclosure of Cash Flow Information:

          
Interest paid in cash  $-   $24,280 
Taxes paid in cash  $-   $- 
Noncash investing and financing activities          
Conversion of convertible debt into common stock  $-    $935,000 
Purchase of intangible assets through the issuance of convertible debt  $-    $15,450,000 

 

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)

THREE AND SIX MONTHS ENDED JUNE 30, 2022

 

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.

 

F-5

 

 

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 $198 million and a working capital of approximately $9.3 million at June 30, 2022. For the three and six months ended June 30, 2022, the Company sustained loss from operations of 15.6 million and $46.3 million, respectively. The Company had income from operations of $1.1 million and loss from operations of $1.6 million for the three and six months ended June 30, 2021, respectfully.

 

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 14. 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  

 

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 and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

 

F-6
 

 

The condensed consolidated balance sheet as of December 31, 2021 has been derived from our unaudited 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/A 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.

 

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.

 

F-7
 

 

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 is placed with major financial institutions deemed to be of high-credit-quality in order to limit credit exposure. Cash is regularly maintained in excess of federally insured limits at the financial institutions. Management believes that we are not exposed to any significant credit risk related to cash deposits.

 

Significant customers are those which represent more than 10% of our revenues for each period presented, or our accounts receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:

 

   Revenue 
   For the six
months ended
 
   June 30, 
Customer  2022   2021 
Customer A   24%   -%
Customer B   8%   19%
Customer C   -%   46%
Customer D   -%   20%

 

The customers above had no outstanding receivables as of June 30, 2022 and 2021.

 

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.

 

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 June 30, 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.

 

F-8
 

 

The Company had no marketable securities as of June 30, 2022 and December 31, 2021.

 

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, or 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 June 30, 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 186,666 shares of Class A-1 common stock of a third-party business development partner representing 4% of the total outstanding shares of such company. As this investment resulted in less than 20% ownership, it was accounted for using the cost basis method.

 

Property and equipment, net

 

Property and equipment are stated at cost. Depreciation and amortization are generally computed using the straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Routine maintenance and repair costs are expensed as incurred. The costs of major additions, replacements and improvements are capitalized. Gains and losses realized on the sale or disposal of property and equipment are recognized or charged to other expense in the condensed consolidated statement of operations.

 

Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:

 

Computers and equipment  3 years
Furniture and fixtures  5 years
Software  3 years

 

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.

 

F-9
 

 

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.

 

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 website domain names which are being amortized on a straight-line method over estimated useful lives.

 

F-10
 

 

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 six months ended June 30, 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-11
 

 

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.

 

Stock-based Compensation

 

Effective October 1, 2019, the Company adopted ASU 2018-07, Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting” (“ASC 718”), which addresses aspects of the accounting for nonemployee share-based payment transactions and accounts for share-based awards to employees in accordance with ASC 718. 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.

 

F-12
 

 

Net Loss per Share

 

Basic net loss per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using various methods such as the treasury stock or modified treasury stock method in the determination of dilutive shares outstanding during each reporting period. As of June 30, 2022, the Company excluded 345,661 stock options, 3,832,431 restricted awards, 488,296 warrants, 5,000,000 earn out shares and 1,750,000 unit purchase options respectively in the calculation of diluted loss per share, as the effect would be anti-dilutive due to losses incurred.

 

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. Business Combination

 

TDAC Combination

 

On October 29, 2021, the Company and AutoLotto consummated the transactions contemplated by the Business Combination Agreement. At the Closing, each share of common stock and preferred stock of AutoLotto that was issued and outstanding immediately prior to the effective time of the Business Combination (other than excluded shares as contemplated by the Business Combination Agreement) was canceled and converted into the right to receive approximately 3.0058 shares (the “Exchange Ratio”) of Lottery.com. common stock.

 

The Business Combination closing was a triggering event for the Series B convertible notes, of which $63.8 million was converted into 3,248,526 shares of AutoLotto that were then converted into 9,764,511 shares of Lottery.com common stock using the Exchange Ratio.

 

At the Closing, each option to purchase AutoLotto’s common stock, whether vested or unvested, was assumed and converted into an option to purchase a number of shares of Lottery.com common stock in the manner set forth in the Business Combination Agreement.

 

The Company accounted for the Business Combination as a reverse recapitalization whereby AutoLotto was determined as the accounting acquirer and TDAC as the accounting acquiree. Refer to Note 3, Significant Accounting Policies, for further details. Accordingly, the Business Combination was treated as the equivalent of AutoLotto issuing stock for the net assets of TDAC, accompanied by a recapitalization. The net assets of TDAC are stated at historical cost, with no goodwill or other intangible assets recorded.

 

The accompanying condensed consolidated financial statements and related notes reflect the historical results of AutoLotto prior to the merger and do not include the historical results of TDAC prior to the consummation of the Business Combination.

 

Upon the Closing, AutoLotto received total net proceeds of approximately $42,794,000 from TDAC’s trust and operating accounts. Total transaction costs were approximately $9,460,000, which principally consisted of advisory, legal and other professional fees and were recorded in additional paid in capital. Cumulative debt repayments of approximately $11,068,000, inclusive of accrued but unpaid interest, were paid in conjunction with the close, which included approximately $5,475,000 repayment of notes payable to related parties, and approximately $5,593,000 payment of accrued underwriter fees.

 

Pursuant to the terms of the Business Combination Agreement, the holders of issued and outstanding shares of AutoLotto prior to the Closing (the “Sellers”) were entitled to receive up to 6,000,000 additional shares of Common Stock (the “Seller Earnout Shares”) and Vadim Komissarov, Ilya Ponomarev and Marat Rosenberg (collectively the “TDAC Founders”) were also entitled to receive up to 4,000,000 additional shares of Common Stock (the “TDAC Founder Earnout Shares” and, together with the Seller Earnout Shares, the “Earnout Shares”). One of the earnout criteria had not been met by the December 31, 2021 deadline, thus no earnout shares were granted specific to that criteria. As of June 30, 2022, 3,000,000 of the Seller Earnout Shares and 2,000,000 TDAC Founder Earnout Shares were still eligible Earnout Shares until December 31, 2022.

 

F-13
 

 

Global Gaming Acquisition

 

On June 30, 2021, the Company acquired 100 percent of the equity of Global Gaming Enterprises, Inc., a Delaware corporation (“Global Gaming”), which holds 80 percent 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 authorized by the Mexico regulatory authorities with jurisdiction over the ability to sell international lottery games in Mexico through an authorized federal gaming portal and is authorized for games of chance in other countries throughout Latin America. Aganar has been operating in the licensed iLottery market in Mexico since 2007 and is authorized to sell Mexican National Lottery draw games, instant win tickets, and other games of chance online and additionally issues a proprietary scratch lottery game in Mexico under the brand name Capalli. The opening balance of the acquirees have been included in our condensed consolidated balance sheet since the date of the acquisition. Since the acquirees’ financial statements were denominated in Mexican pesos, the exchange rate of 22.0848 pesos per dollar was used to translate the balances.

 

The net purchase price was allocated to the assets and liabilities acquired as per the table below. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The fair values of the acquired intangible assets were determined using Level 3 inputs which were not observable in the market.

 

The total purchase price of $10,989,691, consisted of cash of $10,530,000 and 687,439 shares of common stock of AutoLotto at $0.67 per share. The total consideration transferred was approximately $10,055,214, reflecting the purchase price, net of cash on hand at Global Gaming and the principal amount of certain loans acquired. The purchase price is for an 80 percent ownership interest and is therefore grossed up to $13,215,843 as to reflect the 20 percent minority interest in the acquirees. The purchase price was allocated to the identified tangible and intangible assets acquired based on their estimated fair values at the acquisition date as follows:

 

 

      
Cash  $517,460 
Accounts receivable, net   34,134 
Prepaids   5,024 
Property and equipment, net   2,440 
Other assets, net   65,349 
Intangible assets   8,590,000 
Goodwill   4,940,643 
Total assets  $14,155,051 
      
Accounts payable and other liabilities  $(387,484)
Customer deposits   (134,707)
Related party loan   (417,017)
Total liabilities  $(939,208)
      
Total net assets of Acquirees  $13,215,843 

 

Goodwill recognized in connection with the acquisition is primarily attributed to an anticipated growing lottery market in Mexico that is expected to be achieved from the integration of these Mexican entities. None of the goodwill is expected to be deductible for income tax purposes.

 

F-14
 

 

The following are details of the purchase price allocated to the intangible assets acquired.

 

Category  Fair Value 
     
Customer relationships  $410,000 
Gaming approvals   4,020,000 
Trade names and trademarks   2,540,000 
Technology   1,620,000 
      
Total Intangibles  $8,590,000 

 

The following unaudited pro forma condensed consolidated results of operations for the six months ended June 30, 2021 have been prepared as if the acquisition of Global Gaming had occurred on January 1, 2021 and includes adjustments for amortization of intangibles and the addition to basic and diluted weighted average number of shares outstanding.

 

   For the six months ended June 30, 2021 
       Global     
   Lottery.com
(As presented
above)
   Gaming
Acquisition
(Historical)
(unaudited)
   Pro forma
Lottery.com
 
Total revenues  $15,340,036    1,038,737   $16,378,773 
Net loss   (6,874,157)   (7,171)   (6,881,328)
Net loss attributable to shareholders  $(6,874,157)   (7,171)  $(6,881,328)
                
Net loss per common share               
Basic and diluted  $(0.29)       $(0.29)
                
Weighted average common shares outstanding               
Basic and diluted   23,492,214         23,492,214 

 

Subsequently, the Company adjusted Goodwill for the recording of related deferred tax liabilities as the Company released $1.6 million of valuation allowance since the additional deferred tax liabilities represent a future source of taxable income. See Note 11.

 

  5. Property and Equipment, net

 

Property and equipment, net as of June 30, 2022 and December 31, 2021, consisted of the following:

 

   June 30,   December 31, 
   2022   2021 
         
Computers and equipment  $110,498   $113,151 
Furniture and fixtures   64,075    23,760 
Software   1,903,121    1,903,121 
Property and equipment   2,077,694    2,040,032 
Accumulated depreciation   (1,960,421)   (1,898,753)
Property and equipment, net  $117,273   $141,279 

 

Depreciation expense was $36,277 and $61,668 for the three and six months ended June 30, 2022, respectively, and was $68,522 and $221,975 for the three and six months ended June 30, 2021.

 

F-15
 

 

6. Intangible assets, net

 

Gross carrying values and accumulated amortization of intangible assets:

 

   June 30, 2022  December 31, 2021 
   Useful Life  Gross Carrying Amount   Accumulated Amortization   Net   Gross Carrying Amount   Accumulated Amortization   Net 
Amortizing intangible assets                                 
Customer relationships  6 years  $1,350,000   $(590,554)  $759,446   $1,350,000   $(556,387)  $793,613 
Trade name  6 years   2,550,000    (428,890)   2,121,110    2,550,000    (217,223)   2,332,777 
Technology  6 years   3,050,000    (1,064,444)   1,985,556    3,050,000    (929,444)   2,120,556 
Software agreements  6 years   14,450,000    (4,755,276)   9,694,724    14,450,000    (3,145,277)   11,304,723 
Gaming license  6 years   4,020,000    (670,000)   3,350,000    4,020,000    (335,000)   3,685,000 
Internally developed software  2 - 10 years   3,316,923    (94,451)   3,222,472    2,192,050    (23,323)   832,709 
Domain name  15 years   6,935,000    (860,583)   6,074,417    6,935,000    (629,416)   6,305,584 
      $35,671,923   $(8,464,198)  $27,207,725   $34,547,050   $(5,836,070)  $28,710,980 

 

Amortization expense with respect to intangible assets for the three months ended June 30, 2022 and 2021 totaled $1,209,465 and $1,278,500, respectively, and for the six months ended June 30, 2022 and 2021 totaled $2,664,928 and $2,199,083, respectively, which is included in depreciation and amortization in the Statements of Operations.

 

Estimated amortization expense for years of useful life remaining is as follows:

 

Years ending December 31,  Amount 
Remainder of 2022  $1,375,523 
2023   5,169,975 
2024   5,169,975 
2025   5,169,975 
2026   5,169,975 
Thereafter  $2,514,841 

 

The Company had software development costs of $2,342,163 and $2,080,999 related to projects not placed in service as of June 30, 2022 and December 31, 2021, respectively, which is included in intangible assets in the Company’s consolidated balance sheets. Amortization will be calculated using the straight-line method over the appropriate estimated useful life when the assets are put into service.

 

7. Notes Receivable

 

On March 22, 2022, the Company entered into a three year secured promissory note agreement with a principal amount of $2,000,000. The note bears simple interest at the rate of approximately 3.1% annually, due upon maturity of the note. The note is secured by all assets, accounts, and tangible and intangible property of the borrower and can be prepaid any time prior to its maturity date. As of June 30, 2022, the entire $2,000,000 in principal was outstanding and the Company had $17,109 in accrued interest.

 

F-16
 

 

This note was received in consideration for a portion of the development work that the Company performed for the borrower who intends to use the Company’s technology to launch its own online game in a jurisdiction outside the U.S., where the Company is unlikely to operate.

 

8. Notes Payable and Convertible Debt

 

Series A Notes

 

From August to October 2017, the Company entered into seven Convertible Promissory Note Agreements with unaffiliated investors for an aggregate amount of $821,500. The notes bear interest at 10% per year, are unsecured, and were due and payable on June 30, 2019. The parties have verbally agreed to extend the maturity of the notes to December 31, 2022. The Company cannot prepay the loan without consent from the noteholders. As of June 30, 2022, there have been no Qualified Financing events that trigger conversion. As of June 30, 2022, the remaining outstanding balance of $771,500 is no longer convertible and has been reclassified to Notes Payable as per the agreement. Accrued interest on the notes payable was $138,822 at June 30, 2022. These Notes Payable are in default.

 

Series B Notes

 

From November 2018 to December 2020, the Company entered into multiple Convertible Promissory Note agreements with unaffiliated investors for an aggregate amount of $8,802,828. The notes bear interest at 8% per year, are unsecured, and were due and payable on dates ranging from December 2020 to December 2021. For those notes maturing on or before December 31, 2020, the parties entered into amendments in February 2021 to extend the maturity of the notes to December 21, 2021. The Company cannot prepay the loan without consent from the noteholders.

 

During the year ended December 31, 2021, the Company entered into multiple Convertible Promissory Note agreements with unaffiliated investors for an aggregate amount of $38,893,733. The notes bear interest at 8% per year, are unsecured, and are due and payable on dates ranging from December 2021 to December 2022. The Company cannot prepay the loan without consent from the noteholders. As of December 31, 2021, the Series B Convertible Notes had a balance of $0. The Company also issued additional convertible promissory notes with unaffiliated investors for an aggregate amount of $10,000,000. The notes bear an interest at 6% per year, are unsecured and are due in May 2023.

 

During the year ended December 31, 2021, the Company entered into amendments with six of the Series B promissory noteholders to increase the principal value of the notes. The additional principal associated with the amendments totaled $3,552,114. The amendments were accounted for as a debt extinguishment, whereby the old debt was derecognized and the new debt was recorded at fair value. The Company recorded loss on extinguishment of $71,812 as a result of the amendment which is included in “Other expenses” on the condensed consolidated statements of operations and comprehensive loss.

 

As of October 29, 2021, all except $185,095 of the series B convertible notes were converted into 9,764,511 shares of Lottery.com common stock. As of June 30, 2022, the remaining outstanding balance of $185,095 is no longer convertible and has been reclassified to notes payable (See Note 3). Accrued interest on this note as of June 30, 2022 was $35,184.

 

Short term loans

 

On June 29, 2020, the Company entered into a Promissory Note with the U.S. Small Business Administration (“SBA”) for $150,000. The loan has a thirty-year term and bears interest at a rate of 3.75% per annum. Monthly principal and interest payments were deferred for twelve months after the date of disbursement. The loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. As of June 30, 2022 and December 31, 2021, the balance of the loan was $150,000. As of June 30, 2022, the accrued interest on this note was $6,276.

 

In August 2020, the Company entered into three separate note payable agreements with three individuals for an aggregate amount of $37,199. The notes bear interest at variable rates, are unsecured, and the parties have verbally agreed the notes will be due upon a qualifying financing event. As of June 30, 2022 and December 30, 2021 the balance of the loans totaled $13,000.

 

F-17
 

 

Notes payable

 

On August 28, 2018, in connection with the purchase of the entire membership interest of TinBu, the Company entered into several notes payable totaling $12,674,635 with the sellers of the TinBu and a broker involved in the transaction. The notes had an initial interest rate of 0%, and original maturity date of January 25, 2022. The notes payable were modified during 2021 to extend the maturity to June 30, 2022 and modified the interest rate to include simple interest of 4.1% per annum effective October 1, 2021. Each of the amendments were evaluated and determined to be loan modifications and accounted for accordingly. As of June 30, 2022 and December 31, 2021, the balance of the notes was $2,357,744 and $2,628,234, respectively. These Notes Payable are in default.

 

9. Stockholders’ Equity

 

Common Stock

 

Our Certificate of Incorporation, as amended, authorizes the issuance of an aggregate of 500,000,000 shares of Common Stock, par value $0.001 per share. The shares of Common Stock are duly authorized, issued, fully paid and non-assessable. Our purpose is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the DGCL. Unless our Board determines otherwise, we will issue all shares of our common stock in uncertificated form. Holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The holders of Common Stock do not have cumulative voting rights in the election of directors. Upon our liquidation, dissolution or winding up and after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our Common Stock will be entitled to receive pro rata our remaining assets available for distribution.

 

As of June 30, 2022 and December 31, 2021, 50,540,906 shares of common stock and 50,256,317 shares of common stock, respectively, were outstanding. During the six months ended June 30, 2022, the Company issued the following shares of common stock.

 

 

      
Issuance of Common Stock for legal settlement   60,000 
Exercise of options (Note 10)   60,116 
Restricted stock award   164,473 
      
Total   284,589 

 

Public Warrants

 

The Public Warrants became exercisable 30 days after the Closing as the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their Public Warrants on a cashless basis and such cashless exercise is exempt from registration under the Securities Act). The S-1 registration became effective November 24, 2021. The Public Warrants will expire five years after October 29, 2021, which was the completion of the TDAC Combination or earlier upon redemption or liquidation.

 

The Company may redeem the Public Warrants:

 

  in whole and not in part;
  at a price of $0.01 per warrant;
  upon a minimum of 30 days’ prior written notice of redemption;
  if, and only if, the last sale price of the Company’s common stock equals or exceeds $16.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders; and
  if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying such warrants at the time of redemption and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption.

 

F-18
 

 

If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. These warrants cannot be net cash settled by the Company in any event.

 

After giving effect to the Business Combination, there were 20,125,002 warrants to purchase shares of Common stock outstanding, 20,125,000 of which are Public Warrants and two of which were previously granted warrants of AutoLotto, which are now warrants of Lottery.com and are exercisable to purchase an aggregate of 488,296 shares of common stock.

 

           Weighted     
       Weighted   Average     
       Average   Remaining     
   Number of   Exercise   Contractual    Aggregate 
   Shares   Price   Life (years)   Intrinsic Value 
                 
Outstanding at December 31, 2021   395,675   $0.11    4.0   $2,478,501 
Granted   92,621    7.56    3.0      
Exercised   -                
Forfeited/cancelled   -                
Outstanding at June 30, 2022   488,296