Part I. Financial Information Item 1. Consolidated Financial Statements The company presents its unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Total assets | $77,745,122 | $79,380,253 | | Total current assets | $20,333,860 | $20,439,286 | | Cash | $40,914 | $102,766 | | Total liabilities | $19,012,459 | $17,563,768 | | Total current liabilities | $19,012,459 | $17,563,768 | | Total Equity | $58,732,663 | $61,816,485 | - The company's total assets decreased from $79.38 million at December 31, 2022, to $77.75 million at March 31, 2023, with cash significantly decreasing from $102,766 to $40,914 during the same period18 Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $620,229 | $3,630,692 | | Cost of revenue | $35,147 | $2,384,742 | | Gross profit | $585,082 | $1,245,950 | | Loss from operations | $(3,155,088) | $(30,680,968) | | Net loss | $(3,213,982) | $(34,897,457) | | Net loss attributable to Lottery.com Inc. | $(3,260,437) | $(34,750,964) | | Basic and diluted net loss per common share | $(0.06) | $(0.69) | - Revenue decreased by 83% from $3.63 million in Q1 2022 to $0.62 million in Q1 2023, while net loss significantly improved from $(34.90) million to $(3.21) million due to reduced operating expenses19 Condensed Consolidated Statements of Equity Condensed Consolidated Statements of Equity | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Common Stock (shares) | 50,540,906 | 50,540,906 | | Common Stock (amount) | $50,540 | $50,540 | | Additional paid-in capital | $267,907,707 | $267,549,357 | | Accumulated deficit | $(211,447,647) | $(208,187,210) | | Total Lottery.com Inc. stockholders' equity | $56,400,126 | $59,416,309 | - Total stockholders' equity decreased from $59.42 million at December 31, 2022, to $56.40 million at March 31, 2023, mainly due to the accumulated deficit increasing from $(208.19) million to $(211.45) million22 Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $(967,878) | $1,970,039 | | Net cash used in investing activities | $(896) | $(18,305) | | Net cash provided by financing activities | $1,021,016 | $(294,001) | | Net change in net cash and restricted cash | $(61,853) | $1,656,669 | | Cash and restricted cash at end of period | $40,913 | $34,295,639 | - The company experienced negative cash flow from operating activities of $(0.97) million in Q1 2023, a significant shift from positive cash flow of $1.97 million in Q1 202224 - Financing activities provided $1.02 million in Q1 2023, compared to using $(0.29) million in Q1 2022, primarily due to funding from Woodford24238 Notes to Condensed Consolidated Financial Statements 1. Nature of Operations - Lottery.com Inc provides domestic and international lottery products and services and acquired interests in Mexican iLottery operators in June 20212729 - On July 28, 2022, the company ceased most operations due to insufficient financial resources, with ticket sales resuming through its Texas retail network on April 25, 20233031 - A new wholly-owned subsidiary, Sports.Com, Inc, was formed on November 15, 2022, to expand into sports-related ventures32 2. Liquidity and Going Concern - Recurring net losses, negative cash flows, an accumulated deficit of approximately $211 million, and working capital of $1.3 million raise substantial doubt about its ability to continue as a going concern3537 - Management plans to meet operating cash flow requirements through financing activities, including a loan agreement with Woodford Eurasia Assets, Ltd36 3. Significant Accounting Policies - The financial statements are prepared on a going concern basis, with certain information condensed per Form 10-Q and Regulation S-X39 - The October 29, 2021 Business Combination with Trident Acquisitions Corp was accounted for as a reverse recapitalization, with AutoLotto as the accounting acquirer4243 - The company operates as one operating and reportable segment providing lottery products and services4647 - Revenue is recognized when performance obligations are satisfied, with the company acting as a principal in transactions717274 4. Business Combination - The Business Combination with Trident Acquisitions Corp (TDAC) on October 29, 2021, resulted in AutoLotto stockholders receiving approximately 3.0058 shares of Lottery.com common stock for each AutoLotto share85 - The transaction was treated as a reverse recapitalization, with approximately $63.8 million of Series B convertible notes converted into 9,764,511 shares of Lottery.com common stock8688 - AutoLotto received total net proceeds of approximately $42.79 million from TDAC's accounts, with total transaction costs of $9.46 million90 5. Property and Equipment, net Property and Equipment, net | Category | March 31, 2023 | December 31, 2022 | | :---------------------- | :------------- | :---------------- | | Property and equipment, net | $84,408 | $108,078 | | Accumulated depreciation | $(2,083,785) | $(2,059,219) | | Depreciation expense (3 months) | $24,556 | $38,291 | - Net property and equipment decreased from $108,078 at December 31, 2022, to $84,408 at March 31, 2023, with depreciation expense of $24,556 for the quarter92 6. Intangible assets, net Intangible assets, net | Category | March 31, 2023 (Net) | December 31, 2022 (Net) | | :---------------------- | :------------------- | :---------------------- | | Customer relationships | $512,365 | $568,615 | | Trade name | $1,801,528 | $1,907,778 | | Technology | $1,485,139 | $1,612,222 | | Software agreements | $7,775,556 | $8,481,389 | | Gaming license | $2,847,500 | $3,015,000 | | Internally developed software | $2,451,655 | $2,554,191 | | Domain name | $5,727,667 | $5,843,250 | | Total intangible assets, net | $22,601,410 | $23,982,445 | - Net intangible assets decreased from $23.98 million at December 31, 2022, to $22.60 million at March 31, 2023, with amortization expense of $1,381,035 for the quarter9394 7. Notes Receivable - As of March 31, 2023, the company had a secured promissory note agreement with a principal amount of $2,000,000 outstanding, bearing 3.1% annual interest96 - This note was received for development work performed for a borrower intending to launch an online game outside the U.S97 8. Notes Payable and Convertible Debt - The company has Series A notes totaling $771,500 outstanding, bearing 10% interest, which are in default as of March 31, 202398 - A remaining balance of $185,095 from Series B convertible notes is no longer convertible and has been reclassified to notes payable103 - The company entered a loan agreement with Woodford Eurasia Assets, Ltd for up to $2.5 million (with potential for $52.5 million), accruing 12% interest (22% upon default), with approximately $1.6 million received to date104 - Amounts borrowed from Woodford are convertible into common stock at the lender's option, subject to beneficial ownership limitations105107 - The company also has short-term loans, including a $150,000 Promissory Note with the SBA, and notes payable totaling $2,336,081 related to the TinBu acquisition, which are in default111113 9. Stockholders' Equity - As of March 31, 2023, there were 50,540,906 shares of common stock outstanding, with no preferred stock issued115116 - Public Warrants to purchase common stock became exercisable 30 days after the October 29, 2021 Business Combination and will expire five years thereafter117118 - As of March 31, 2023, 488,296 warrants were outstanding and exercisable at a weighted average exercise price of $1.52121 - A unit purchase option for 1,750,000 Units was sold to an underwriter, exercisable at $12.00 per Unit, and expires on May 29, 2023123 10. Stock-based Compensation Expense - The company recognized $358,349 of stock compensation expense related to employee restricted stock grants for the three months ended March 31, 2023135 - As of March 31, 2023, unrecognized stock-based compensation associated with restricted stock awards is $4,061,294, to be expensed over the next 2.83 years135 - The 2021 Equity Incentive Plan initially reserved 13,130,368 shares of Class A common stock for issuance, with an annual increase based on 5% of outstanding shares129 11. Income Taxes - The company uses the asset and liability method for income taxes, recognizing deferred tax assets and liabilities for temporary differences and carry-forwards138 - A valuation allowance is established to reduce deferred tax assets to expected realizable amounts138 12. Commitments and Contingencies - The company has indemnification agreements with various parties, with maximum potential future payments being unlimited139 - Holders of Digital Securities are entitled to 7% of net sweepstakes revenue, with an obligation of approximately $5,632 for 2021 remaining unsatisfied140 - The company is involved in litigation, including a complaint from TinBu Plaintiffs seeking over $4.6 million in damages143 - In Q1 2022, $30,000,000 in cash was pledged as security for a line of credit, which was foreclosed upon by Provident Bank in October 2022 due to default144 - The company obtained a $16.5 million judgment against J Streicher Financial, LLC for breach of contract, with ongoing collection efforts145147 13. Related Party Transactions - The company had an outstanding balance of $13,000 for borrowing arrangements with individual founders as of March 31, 2023149 - A service agreement with Master Goblin Games, LLC was terminated in January 2023 after a $53,000 payment150151 14. Subsequent Events - On April 22, 2023, the company signed an exclusive affiliate agreement with International Gaming Alliance (IGA) to supply Texas lottery tickets in the Dominican Republic152 - On April 25, 2023, the company recommenced its ticket sales operations through its Texas retail network153 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The company discusses its financial condition and operational results, focusing on its internal investigation, operational cessation, and restart efforts Overview - An internal investigation in July 2022 revealed non-compliance with laws and issues with internal accounting controls, leading to the termination of the CFO156 - Financial statements for 2021 and Q1 2022 were deemed unreliable, leading to an operational cessation on July 29, 2022, and furloughing of most employees157158159 - In December 2022, the company secured a loan agreement with Woodford Eurasia Assets, Ltd for up to $2.5 million (with potential for $52.5 million) to fund operations restart164 - The company acquired Global Gaming in June 2021, gaining 80% equity in Mexican iLottery operators Aganar and JuegaLotto for international expansion172 Operations Prior to Operational Cessation - Prior to the Operational Cessation, the company offered B2C and B2B platforms for remote lottery game purchases and a Data Service174 - The B2C Platform is currently not operational but is anticipated to relaunch in Q3 2023, while the B2B API Platform resumed limited operations in April 2023175 - The WinTogether platform, which administered sweepstakes for charitable causes, suspended its relationship with the company on March 29, 2023176177 - Wholly-owned subsidiaries TinBu, Aganar, and JuegaLotto continued to operate with decreased expenses and consistent or slightly decreased revenue post-cessation178179182 - The company acquired the Sports.com domain name in December 2021 and formed Sports.com, Inc in November 2022 for sports data distribution183 Plans for Recommencement of Company Operations - The company has a three-phase plan to recommence operations, starting with the B2B API Platform, followed by the B2C Platform in Q3 2023, and then other business lines184185186187 - The company is not in compliance with Nasdaq's continued listing requirements, and delisting could severely impact stock value and capital raising ability189190 - The ability to continue operations is dependent on obtaining new financing, raising substantial doubt about the company's going concern ability191 Performance Measures - The company uses operating metrics such as transactions per user and gross margin per transaction to evaluate its B2C business performance192193 Performance Measures | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Transactions per user | n/a | 12.58 | | Tickets per transaction | n/a | 3.68 | | Gross revenue per transaction | n/a | $8.75 | | Gross profit per transaction | n/a | $1.30 | | Gross margin per transaction | n/a% | 14.9% | - Due to the operational cessation, performance metrics for Q1 2023 are not available, indicating a halt in B2C platform activity compared to Q1 2022194 Components of Our Results of Operations (Prior to the Operational Cessation) - Revenue from the B2C Platform included the retail value of lottery games and a service fee; this platform is currently not operational201202 - Revenue from the B2B API involved a mark-up on lottery game costs and a service fee, with limited operations resuming in April 2023203 - Data Services revenue comes from subscriptions for access to global lottery data and was not impacted by the Operational Cessation204 - Operating costs included personnel costs, professional fees, general and administrative expenses, and depreciation and amortization205206 Key Trends and Factors Affecting Our Results - International operations face challenges from foreign currency fluctuations, inflation, and political instability, which are expected to materially impact revenues in fiscal 2023207 - The introduction of Project Nexus, a proprietary blockchain-enabled gaming platform, is subject to risks like implementation delays and integration issues208 - Intense competition in the online lottery market requires increased operating expenses for marketing, compliance, and M&A activities209 Current Plan of Operations - The primary revenue drivers for the next 12 months are the resumed B2B API platform and the launch of Sports.com, with the liquidity gap to be covered by financing210 - Beyond 12 months, plans include re-launching the B2C Platform, expanding domestically and internationally, and enhancing the mobile application211 Results of Operations Revenue Revenue | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :------ | :------ | :------ | :------- | :------- | | Revenue | $620,229 | $3,630,692 | $(3,010,463) | -83% | - Revenue decreased by $3.0 million (83%) due to the Cessation of Operations, with a $1.2 million decrease in lottery-related revenue and $1.8 million in non-recurring project revenue from Q1 2022216 Cost of Revenue Cost of Revenue | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :------------- | :------ | :------ | :------- | :------- | | Cost of revenue | $35,147 | $2,384,742 | $(2,349,595) | -99% | - Cost of revenue decreased by $2.35 million (99%) primarily due to the decrease in lottery games sold domestically following the Cessation of Operations217 Gross Profit Gross Profit | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :---------- | :------ | :------ | :------- | :------- | | Gross profit | $585,082 | $1,245,950 | $(660,868) | -53% | - Gross profit decreased by $661,000 (53%) due to the overall decrease in revenue, particularly non-recurring, higher-margin project-related revenue in 2022218 Operating Costs and Expenses Operating Costs and Expenses | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :-------------------------- | :---------- | :---------- | :----------- | :------- | | Personnel costs | $1,257,434 | $24,402,866 | $(23,145,432) | -95% | | Professional fees | $739,928 | $3,137,950 | $(2,398,022) | -76% | | General and administrative | $337,328 | $3,012,177 | $(2,674,849) | -89% | | Depreciation and amortization | $1,405,480 | $1,373,925 | $31,555 | 2% | | Total operating expenses | $3,740,170 | $31,926,918 | $(28,186,748) | -88% | | Loss from operations | $(3,155,088) | $(30,680,968) | $27,525,880 | -90% | - Total operating expenses decreased by $28.2 million (88%), primarily driven by a $23.1 million reduction in personnel costs and significant cuts in professional and administrative fees220221222224 - Depreciation and amortization increased slightly by 2% to $1.41 million, mainly due to the amortization of intangibles placed in service mid-2022225 Other (Income) Expense, Net Other (Income) Expense, Net | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :------------ | :----- | :---------- | :--------- | :------- | | Interest expense | $23 | $3,981 | $(3,958) | -99% | | Other expense | $58,871 | $4,189,144 | $(4,130,273) | -99% | | Total other expenses, net | $58,894 | $4,193,125 | $(4,134,231) | -99% | - Total other expenses, net, decreased by $4.13 million (99%), primarily due to a non-recurring expense of approximately $4.2 million in Q1 2022228 Liquidity and Capital Resources - The company's sole source of liquidity is the Woodford Loan Agreement, with $900,000 remaining available to fund the business restart229230 - The company's lack of material revenue, significant debt, and reliance on future financing raise substantial doubt about its ability to continue as a going concern231 - As of March 31, 2023, $1.6 million of convertible debt from Woodford is outstanding232234235 Cash Flow Activity | Cash Flow Activity | Q1 2023 | Q1 2022 | | :-------------------------- | :---------- | :---------- | | Net cash used in operating activities | $(968,000) | $1,970,039 | | Net cash used in investing activities | $(1,000) | $(18,000) | | Net cash provided by financing activities | $1,000,000 | $(300,000) | - Operating cash flow shifted from a $1.97 million inflow in Q1 2022 to a $0.97 million outflow in Q1 2023, while financing cash flow improved from a $0.3 million outflow to a $1 million inflow due to Woodford funding236238 Emerging Growth Company Accounting Election - The company is an 'emerging growth company' and has elected to use the extended transition period for complying with new or revised financial accounting standards239 Critical Accounting Policies and Estimates - Key estimates and assumptions include the recoverability of long-lived assets and inventory obsolescence240 - The company is evaluating the impact of ASU 2016-02 (Leases) and ASU 2016-13 (Credit Losses), with the latter's adoption deferred until January 2023241242 Item 3. 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 exempt from providing quantitative and qualitative disclosures about market risk as it qualifies as a 'smaller reporting company'243 Item 4. Controls and Procedures The company identifies material weaknesses in its internal controls and outlines ongoing remediation efforts Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to material weaknesses in internal control246 - Third-party accounting consultants were retained to perform additional analysis to ensure financial statements were prepared in accordance with GAAP246 - Efforts to strengthen internal controls over accounting and financial reporting are ongoing247 Material Weakness in Internal Control Over Financial Reporting - Material weaknesses include insufficient personnel with complex accounting knowledge, ineffective review processes, and incomplete segregation of duties248 - Deficiencies in revenue recognition controls led to an overstatement of approximately $52.1 million in revenue for 2021, requiring restatement of financial statements249 - Remediation steps include adding accounting personnel, adopting more rigorous review processes, and improving segregation of duties250 Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during Q1 2023, except for the ongoing remediation efforts252 Part II. Other Information Item 1. Legal Proceedings The company details material legal proceedings, including collection efforts, a class action lawsuit, and a breach of contract complaint J. Streicher - The company obtained a $16.5 million judgment against J Streicher Financial, LLC for breach of contract, plus $397,036.94 in attorney's fees255 - Partial payments of $75,000 and $50,000 have been received, but Streicher failed to make a subsequent $75,000 payment, leading to further legal action255 Preston Million Class Action - A class action lawsuit was filed against the company and former officers alleging violations of Federal Securities Laws, including materially false and misleading statements256 - The company filed a motion to dismiss the amended complaint on April 3, 2023256 TinBu Complaint - TinBu Plaintiffs filed a complaint against Lottery.com alleging breach of contract and misrepresentation with damages exceeding $4.6 million258 - The company intends to oppose Plaintiffs' Motion for Court Default and respond to discovery requests258 Item 1A. Risk Factors The company refers to the comprehensive list of risk factors detailed in its Annual Report on Form 10-K - The company's actual results could differ materially from forward-looking statements due to risks described in the 'Risk Factors' section of its Annual Report on Form 10-K259 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report260 Item 3. Defaults Upon Senior Securities This section states there were no defaults upon senior securities to report for the period - No defaults upon senior securities to report261 Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company262 Item 5. Other Information This section states there is no other information to report for the period - No other information to report263 Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q - Exhibits include certifications (31.1, 32.1) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)264
Lottery(LTRY) - 2023 Q1 - Quarterly Report