Lottery(LTRY) - 2022 Q2 - Quarterly Report

Part I. Financial Information Consolidated Financial Statements The unaudited financial statements for H1 2022 reveal significant distress, including a cash drop, increased liabilities, a large net loss, and operational cessation Condensed Consolidated Balance Sheets The June 30, 2022 balance sheet shows a severe cash decline, quadrupled liabilities due to a contingent liability, and decreased total equity Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | June 30, 2022 | Dec 31, 2021 (Restated) | | :--- | :--- | :--- | | Assets | | | | Cash | $369,322 | $32,638,970 | | Restricted Cash | $30,000,000 | $0 | | Total current assets | $51,457,944 | $55,840,989 | | Total assets | $113,633,386 | $104,534,006 | | Liabilities & Equity | | | | Total current liabilities | $12,167,546 | $10,532,638 | | Commitments & Contingencies | $30,000,000 | $0 | | Total liabilities | $42,169,068 | $10,533,807 | | Accumulated deficit | $(198,295,525) | $(148,188,138) | | Total Equity | $71,464,318 | $94,000,199 | Condensed Consolidated Statements of Operations and Comprehensive Loss Q2 2022 revenue plummeted 81% year-over-year, leading to a $15.4 million net loss, while the H1 2022 net loss widened to $50.1 million Q2 2022 vs Q2 2021 Performance (Unaudited) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Revenue | $1,885,171 | $9,878,497 | | Gross Profit | $307,932 | $8,815,142 | | Total operating expenses | $15,910,316 | $7,743,321 | | Income (loss) from operations | $(15,602,384) | $1,071,821 | | Net loss attributable to Lottery.com | $(15,356,422) | $(1,418,571) | | Basic and diluted EPS | $(0.30) | $(0.06) | H1 2022 vs H1 2021 Performance (Unaudited) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Revenue | $5,515,863 | $15,340,036 | | Gross Profit | $1,553,882 | $11,329,700 | | Total operating expenses | $47,837,234 | $13,010,145 | | Loss from operations | $(46,283,352) | $(1,680,445) | | Net loss attributable to Lottery.com | $(50,107,386) | $(6,874,605) | | Basic and diluted EPS | $(1.00) | $(0.29) | Condensed Consolidated Statements of Cash Flows For H1 2022, the company used $0.6 million in operating cash and saw a net decrease in total cash of $2.3 million Cash Flow Summary for Six Months Ended June 30 (Unaudited) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(599,509) | $(4,334,560) | | Net cash used in investing activities | $(1,179,978) | $(3,107,452) | | Net cash (used in) provided by financing activities | $(479,096) | $14,535,596 | | Net Change in Cash and Restricted Cash | $(2,269,648) | $7,093,584 | | Cash and Restricted Cash - End of Period | $30,369,322 | $7,252,076 | Notes to Condensed Consolidated Financial Statements The notes disclose an operational cessation in July 2022, substantial doubt about its going concern status, and critical subsequent events like new financing - On July 28, 2022, the Board determined the company lacked sufficient financial resources to fund operations, leading to an effective cessation of operations and furloughing of employees starting July 29, 2022[31][162] - Management has concluded that there is substantial doubt about the Company's ability to continue as a going concern due to recurring net losses, negative cash flows, and an accumulated deficit of approximately $198 million[36][38] - As of June 30, 2022, the company had restricted cash of $30,000,000 pledged as collateral, which was later seized by the bank in October 2022 to extinguish a partner's debt[149] - Subsequent to the quarter end, the company secured a loan agreement with Woodford Eurasia Assets, Ltd on December 7, 2022, for up to $2.5 million, crucial for restarting operations[169] - Several notes payable are in default, including Series A Notes with an outstanding balance of $771,500 and notes related to the TinBu acquisition with a balance of $2,357,744[108][116] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses severe operational challenges, an internal investigation revealing control issues, the cessation of operations, and a plan for recommencement Recent Developments An internal investigation uncovered non-compliance and control issues, leading to an operational halt and a new loan agreement to secure liquidity - An independent investigation revealed non-compliance with state and federal laws and issues with internal accounting controls, leading to the termination of the CFO on July 1, 2022[183] - On July 29, 2022, the company effectively ceased operations and furloughed the majority of its employees due to insufficient financial resources[186] - On December 7, 2022, the company secured a loan agreement with Woodford for up to $2.5 million to restart operations, which accrues interest at 12% and is convertible into common stock[192] Operations and Plans for Recommencement The company has a three-phase plan to restart its core B2B and B2C platforms, contingent on securing sufficient capital - The company has a three-phase plan to recommence operations: - Phase 1: Relaunch B2B API Platform (resumed limited operations in April 2023) - Phase 2: Resume B2C Platform Operations (expected Q3 2023) - Phase 3: Restore other business lines and projects[212][213][214][215] - Despite the operational halt of the parent company, wholly-owned subsidiaries TinBu (Data Services), Aganar, and JuegaLotto (Mexico operations) have continued to operate[206][207][210] Results of Operations Q2 2022 revenue fell 81% due to non-recurring project revenue, while operating expenses surged 105%, resulting in a $15.4 million net loss Comparison of Three Months Ended June 30, 2022 and 2021 | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $1,885,171 | $9,878,497 | (81)% | | Gross Profit | $307,932 | $8,815,142 | (97)% | | Total Operating Expenses | $15,910,316 | $7,743,321 | 105% | | Loss from Operations | $(15,602,384) | $1,071,821 | (1,556)% | | Net Loss | $(15,448,941) | $(1,418,571) | 1,159% | - The primary driver for the Q2 revenue decrease was $8.0 million of non-recurring project-related revenue from business partners in Q2 2021[244] - Personnel costs for Q2 2022 surged by 370% to $9.5 million, mainly due to a $6.7 million increase in stock compensation expense[247][248] Liquidity and Capital Resources The company's critical liquidity position relies solely on a new loan agreement, and its financial state raises substantial doubt about its going concern status - The company's primary source of liquidity is a loan agreement with Woodford, with $1.25 million remaining available[273] - The company's current financial state, lack of revenue, and significant debt raise substantial doubt about its ability to continue as a going concern for the next 12 months[274] Cash Flow Summary for Six Months Ended June 30 | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(0.6M) | $(4.3M) | | Net cash used in investing activities | $(1.2M) | $(3.1M) | | Net cash (used in)/provided by financing activities | $(0.5M) | $14.5M | Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Lottery.com Inc is not required to provide quantitative and qualitative disclosures about market risk - The company is not required to provide this information as it qualifies as a 'smaller reporting company'[288] Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2022, due to material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of the end of the reporting period[290] - Material weaknesses were identified in internal control over financial reporting, including a lack of sufficient accounting personnel and ineffective review processes[291] - A specific control deficiency related to revenue recognition resulted in an overstatement of revenue by approximately $52.1 million for the year ended December 31, 2021, which required a restatement[292] - The company is implementing remediation steps, but these measures are not yet fully remediated[293] Part II. Other Information Legal Proceedings The company is involved in several material legal proceedings, including a class-action lawsuit and a breach of contract complaint - J. Streicher Lawsuit: The company sued J. Streicher Financial to recover $16.5 million and won a summary judgment, though collection efforts are ongoing[298] - Preston Million Class Action: A securities class-action lawsuit was filed against the company and former officers/directors, alleging materially false and misleading statements[299] - TinBu Complaint: Former owners of TinBu, LLC filed a complaint against the company alleging breach of contract and misrepresentation, seeking damages over $4.6 million[300] Risk Factors The report refers to the company's Amended Annual Report on Form 10-K/A for a detailed description of risk factors - For a detailed discussion of risk factors, the report directs readers to the 'Risk Factors' section of its Amended Annual Report on Form 10-K/A[301] Other Items (Items 2, 3, 4, 5, 6) No material information was reported under Items 2-5 for the quarter, while Item 6 lists the exhibits filed with the report - No information was reported for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[302][303][304][305] - Item 6 lists exhibits filed with the 10-Q, including a Business Loan Agreement and officer certifications[306]