NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 as of 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.
Tony DiMatteo and Matt Clemenson, the co-founders of AutoLotto, continue to lead our Company as Chief Executive Officer and Chief Revenue
Officer, respectively. In connection with the Business Combination the Company moved its headquarters from New York, New York to AutoLotto’s
offices in Spicewood, Texas.
The Company is a leading provider of
domestic and international lottery products and services. As an independent third-party lottery game service, the Company offers a platform
that it developed and operates to enable the remote purchase of legally sanctioned lottery games in the U.S. and abroad (the “Platform”).
The Company’s 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) selling credits (“LotteryLink
Credits”) that can be exchanged for flexible promotional packages that include our marketing collateral, prepaid advertising, development
services, account management, and prepaid promotional rewards for use by our third-party master affiliate marketing partners (“Lottery
Link Affiliates”) and their sub-affiliates in undertaking affiliate marketing activities and promoting our B2C Platform (“LotteryLink”);
(iii) 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 the Company and resell them to users located within their respective jurisdictions (“B2B API”); and (iv) delivering
global lottery data, such as winning numbers and results, to commercial digital subscribers and provide access to other proprietary, anonymized
transaction data pursuant to multi-year contracts (“Data Service”).
As
a provider of lottery products and services, the Company is required to comply, and its business is subject to regulation in each jurisdiction
in which the Company offers the B2C Platform, or a commercial partner offers users access to lottery games through the B2B API. In addition,
it must also comply with the requirements of federal and other domestic and foreign regulatory bodies and governmental authorities in
jurisdictions in which the Company operates or with authority over its business. The Company’s business is additionally 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, the Company acquired 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.
| 2. | 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 months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December
31, 2022.
The condensed consolidated balance
sheet as of December 31, 2021 has been derived from our audited financial statements at that date but does not include all disclosures
and financial information required by GAAP for complete financial statements. The information included in the 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 our annual report on Form 10-K, as filed with the Securities and Exchange Commission on April 1, 2022.
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 as 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) the combined results of the Company and AutoLotto following the
Closing; (iii) the assets and liabilities of AutoLotto at their historical cost; and (iv) the Company’s 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 the Company’s 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.
Segment
Reporting
Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker
in deciding how to allocate resources and in assessing operating performance. Under the provisions of ASC 280-10, “Segment Reporting”
(“ASC 280”), the Company is not organized around specific services or geographic regions. The Company operates in one service
line, providing lottery products and services.
We determined that our Chief Financial Officer
is the Chief Operating Decision Maker and they use 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 the Company is not exposed to any significant credit risk related to cash deposits.
Significant
customers are those which represent more than 10% of the Company’s revenue for each period presented, or the Company’s 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 three
months ended | | |
Accounts
Receivable | |
| | |
March
31, | | |
March
31, | |
| Customer | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Customer A | |
| 87.7 | % | |
| - | % | |
| 99.6 | % | |
| - | % |
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. The Company evaluates its estimates on an ongoing basis and prepares its estimates on historical experience and other assumptions
the Company believes to be reasonable under the circumstances.
Foreign
currency translation
Assets
and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. Dollars are translated
into U.S. Dollars using year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in effect during
the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss).
Cash and Cash Equivalents
As of March 31, 2022 and December
31, 2021, cash and cash equivalents comprised of cash deposits, and 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 the Company is subject to unusual credit risk beyond the normal credit risk associated with commercial banking
relationships.
The
Company had no marketable securities as of March 31, 2022 and December 31, 2021.
Accounts
Receivable
The Company through its various merchant
providers pre-authorizes forms of payment prior to the sale of digital representation of lottery games to minimize exposure to losses
related to uncollected payments and does not extend credit to the user of the B2C Platform or the commercial partner of the B2B API, being
its customers, in the normal course of business. The Company accrues 100 percent of all expenses associated with LotteryLink prior to
issuing accounts payable to a Master Affiliate or receiving associated payment. The Company estimates its bad debt exposure each period
and records a bad debt provision for accounts receivable it believes it may not collect in full. The Company did not record any allowance
for uncollectible receivables as of March 31, 2022 and December 31, 2021. The Company has not incurred bad debt expense historically.
Prepaid
Expenses
Prepaid
expenses consist of payments made on contractual obligations for services to be consumed in future periods. The Company entered into
an agreement with a third party to provide advertising services and issued equity instruments as compensation for the advertising services.
The Company expenses the service as it is performed. The value of the services provided were used to value these contracts. The current
portion of prepaid expenses is included in current assets on the condensed consolidated balance sheets.
Investments
On August 2, 2018, AutoLotto purchased 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 lent funds to outside parties. The Company accrues interest receivable over the
term of the outstanding notes and reviews for doubtful collectability periodically but in no instance less than annually.
Leases
Right-of-use
assets (“ROU assets”) represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation
of the right-of-use asset and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period
incurred. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. Otherwise, the implicit rate was used when readily
determinable. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will
exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Under
the available practical expedient, the Company accounts for the lease and non-lease components as a single lease component for all classes
of underlying assets as both a lessee and lessor. Further, management elected a short-term lease exception policy on all classes of underlying
assets, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with
terms of 12 months or less).
Internal
Use Software Development
Software
development costs incurred internally to develop software programs to be used solely to meet our internal needs and applications are
capitalized once the preliminary project stage is complete and it is probable that the project will be completed and the software will
be used to perform the intended function. Additionally, we capitalize qualifying costs incurred for upgrades and enhancements to existing
software that result in additional functionality. Costs related to preliminary project planning activities, post-implementation activities,
maintenance and minor modifications are expensed as incurred. Internal-use software development costs are amortized on a straight line
basis over the estimated useful life of the software.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of the
cost of assets acquired over the fair value of the net assets at the date of acquisition. Intangible assets represent the fair value of
separately recognizable intangible assets acquired in connection with the Company’s business combinations. The Company evaluates
its goodwill and other intangibles for impairment on an annual basis or whenever events or circumstances indicate that an impairment may
have occurred in accordance with the provisions of ASC 350, “Goodwill and Other Intangible Assets” (“ASC 350”).
The Company reviewed for impairment and determined that no impairment indicators exist as of March 31, 2022 and December 31, 2021. See
Footnote 5 for further discussion.
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, are recognized at
a point in time. The Company receives consideration for lottery game sales at the time of delivery to the customer, being 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, being the game sales prices,
the Company charges a separate and additional fee for the services it provides.
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. Other 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.
Recent
Accounting Pronouncements
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and other (Topic 350) (“ASU 2017-04”).
ASU 2017-04 simplifies the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test. Goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value limited to the total amount of goodwill
allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative
impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero
or negative carrying amounts. The amendments in this ASU are effective for goodwill impairment tests in fiscal years beginning after
December 15, 2021, and early adoption is permitted. The Company is currently evaluating this new standard and management does not currently
believe it will have a material impact on its condensed consolidated financial statements, depending on the outcome of future goodwill
impairment tests.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires the measurement of all expected
credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. Adoption of ASU 2016-13 will require the Company to use forward-looking information to formulate its credit loss
estimates. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022, and early adoption is permitted.
The Company is currently evaluating this new standard and currently does not expect it to have a significant impact on the Company’s
condensed consolidated financial statements.
In
December 2019, the FASB issued ASU No 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU2019-12”).
ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12
is effective for annual reporting periods beginning after December 15, 2021, and early adoption is permitted. The Company is currently
evaluating this new standard and currently does not expect it to have a significant impact on the Company’s condensed consolidated
financial statements.
In
October 2020, the FASB issued ASU No. 2020-09, Debt (Topic 470) (“ASU 2020-09”). ASU 2020-09 amendments
to SEC paragraphs pursuant to SEC release NO. 33-10762 amends terms related to Debt Guarantors and Issuers of Guaranteed Securities Registered
or to be Registered with the SEC. The amendments in ASU 2020-09 are generally effective for filings on or after January 4, 2021, with
early application permitted. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its financial
statements.
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 Merger (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
Merger 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 2, Summary of 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 immediately 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 March 31, 2022, 3,000,000 of the Seller Earnout
Shares and 2,000,000 TDAC Founder Earnout Shares are still eligible Earnout Shares until December 31, 2022.
Global
Gaming Acquisition
On
June 30, 2021, the Company executed upon its acquisition of 100 percent of 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, consisting 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.
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 three months ended March 31, 2022 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 three months ended March 31, 2022 | |
| | |
| | |
Global | | |
| |
| | |
Lottery.com
(As presented
above) | | |
Gaming
Acquisition
(Historical)
(unaudited) | | |
Pro
forma
Lottery.com | |
| Total revenues | |
$ | 5,461,539 | | |
| 1,038,737 | | |
$ | 6,500,276 | |
| Net income (loss) | |
| (5,456,034 | ) | |
| (7,171 | ) | |
| (5,463,205 | ) |
| Net income (loss) attributable
to shareholders | |
$ | (5,456,034 | ) | |
| (7,171 | ) | |
$ | (5,463,205 | ) |
| | |
| | | |
| | | |
| | |
| Net income (loss) per common share | |
| | | |
| | | |
| | |
| Basic
and diluted | |
$ | (0.24 | ) | |
| | | |
$ | (0.24 | ) |
| | |
| | | |
| | | |
| | |
| Weighted average common shares outstanding | |
| | | |
| | | |
| | |
| Basic
and diluted | |
| 22,888,700 | | |
| | | |
| 22,888,700 | |
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.
| 4. | Property
and Equipment, net |
Property
and equipment, net as of March 31, 2022 and December 31, 2021, consisted of the following:
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Computers
and equipment | |
$ | 110,498 | | |
$ | 113,151 | |
| Furniture and fixtures | |
| 31,818 | | |
| 23,760 | |
| Software | |
| 1,903,121 | | |
| 1,903,121 | |
| Property and equipment | |
| 2,045,437 | | |
| 2,040,032 | |
| Accumulated
depreciation | |
| (1,924,144 | ) | |
| (1,898,753 | ) |
| Property and equipment,
net | |
$ | 121,293 | | |
$ | 141,279 | |
Depreciation
expense for the three months ended March 31, 2022 and 2021 amounted to $38,291 and $135,842, respectively.
TinBu
Acquisition
The
following intangible assets, net relate to the acquisition of TinBu LLC (“TinBu”):
Customer
Relationships
Customer
relationships represent the valuation of acquired customer accounts. The cost is amortized on the straight-line method over its
estimated useful life of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 940,000 | | |
$ | 940,000 | |
| Less: accumulated amortization | |
| (561,389 | ) | |
| (522,222 | ) |
| | |
$ | 378,611 | | |
$ | 417,778 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $39,167. Estimated amortization expense for each of the ensuing
years through December 31, 2024 will be $156,667 (except for 2024, which will be $104,444).
Trade
Name
Trade
name consists of the valuation of the Company’s trademarks and brand identity. The trade name is being amortized on the straight-line
method over its respective term of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 10,000 | | |
$ | 10,000 | |
| Less: accumulated amortization | |
| (5,972 | ) | |
| (5,556 | ) |
| | |
$ | 4,028 | | |
$ | 4,444 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $416. Estimated amortization expense for each of the ensuing years through
December 31, 2024 will be $1,667 (except for 2024, which will be $1,111).
Technology
Technology
represents the valuation of acquired technology. The cost is amortized on the straight-line method over its estimated useful life
of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 1,430,000 | | |
$ | 1,430,000 | |
| Less: accumulated amortization | |
| (854,028 | ) | |
| (794,444 | ) |
| | |
$ | 575,972 | | |
$ | 635,556 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $59,584. Estimated amortization expense for each of the ensuing years
through December 31, 2024 will be $238,333 (except for 2024, which will be $158,889).
Software
Agreements
The
Company entered into a software agreement with a third party. As part of the agreement, the Company paid $2,000,000 for unlimited
access to the software of the third party. The cost of this software agreement is amortized on the straight-line method over its estimated
useful life of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 2,000,000 | | |
$ | 2,000,000 | |
| Less: accumulated amortization | |
| (1,361,111 | ) | |
| (1,277,777 | ) |
| | |
$ | 638,889 | | |
$ | 722,223 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $83,334. Estimated amortization expense for each of the ensuing years
through December 31, 2024 will be $333,333 (except for 2024, which will be $55,556).
Playsino,
Inc.
On March 9, 2018, the Company
and Playsino, Inc. (“Playsino”) executed a Merger Agreement (the “Playsino Agreement”), which included a provision
that, in the event of the Playsino Agreement’s termination, the Company would receive a non-exclusive license to certain programs,
databases and operating systems owned by Playsino, Inc. without further action required by either the Company or Playsino. On February 15,
2021, the Company terminated the majority of the Playsino Agreement to pursue a business combination with TDAC. The surviving provision
was the non-exclusive license for which the Company issued Playsino a Series B note in the principal amount to $12.45 million.
The Company’s non-exclusive license to certain programs, databases and operating systems became effective as of the date of
the termination of the Playsino Agreement, being February 15, 2021, on which both parties were able to agree on the value for the
non-exclusive license. The non-exclusive license is treated as an intangible asset under ASC 350 “Intangibles —
Goodwill and Other”. The useful life of the intangible asset is five years. The cost of the intangible asset is amortized on
the straight-line method over its estimated useful life. As of the date of this filing, the Company’s management assessed that
there were no triggering events or circumstances that indicated that the asset carrying value would be impaired. Management will continue
to evaluate for impairment periodically in accordance with ASC 360-10 “Overall — Recoverability of Carrying Amounts
— Assets to Be Held and Used”.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 12,450,000 | | |
$ | 12,450,000 | |
| Less: accumulated amortization | |
| (2,490,000 | ) | |
| (1,867,500 | ) |
| | |
$ | 9,960,000 | | |
$ | 10,582,500 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $622,500. Estimated amortization expense for each of the ensuing years
through December 31, 2026 will be $2,075,000 (except for 2026, which will be $207,500).
Sports.com
Domain Acquisition
In February 2021, the Company purchased
the domain name sports.com. The total purchase price for title to the domain name was $6,000,000 which was partially paid in cash
for $3,000,000 and the balance was settled by issuing Series B convertible debt of $3,000,000 (see Note 7). The cost is amortized
on the straight-line method over its estimated useful life of fifteen years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 6,000,000 | | |
$ | 6,000,000 | |
| Less: accumulated amortization | |
| (433,333 | ) | |
| (333,333 | ) |
| | |
$ | 5,566,667 | | |
$ | 5,666,667 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $100,000 and $33,333, respectively. Estimated amortization expense for
each of the ensuing years through December 31, 2036 will be $400,000 (except for 2036, which will be $66,667).
Lottery.com
Domain Acquisition
In
March 2017, the Company purchased the domain name lottery.com. The total purchase price was $935,000 for the domain name. The cost
is amortized on the straight-line method over its estimated useful life of fifteen years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 935,000 | | |
$ | 935,000 | |
| Less: accumulated amortization | |
| (311,667 | ) | |
| (296,083 | ) |
| | |
$ | 623,333 | | |
$ | 638,917 | |
Amortization
expense for the three months ended March 31, 2022 and 2021 was $15,584. Estimated amortization expense for each of the ensuing years
through December 31, 2032, will be $62,333 (except for 2032, which will be $15,588).
Aganar
and JuegaLotto Acquisition
The
following intangible assets, net relate to the acquisition of Aganar and JuegaLotto:
Customer
Relationships
Customer
relationships represent the valuation of acquired customer accounts. The asset will be amortized on the straight-line method over
its estimated useful life of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 410,000 | | |
$ | 410,000 | |
| Less: accumulated amortization | |
| (51,250 | ) | |
| (34,167 | ) |
| | |
$ | 358,750 | | |
$ | 375,833 | |
Amortization
expense for the three months ended March 31, 2022 was $17,083. Estimated amortization expense for each of the ensuing years through December
31, 2027 will be $68,333 (except for 2027, which will be $34,167).
Trade
Name
Trade
name consists of the valuation of the Company’s trademarks and brand identity. The trade name is being amortized on the straight-line
method over its respective term of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 2,540,000 | | |
$ | 2,540,000 | |
| Less: accumulated amortization | |
| (317,500 | ) | |
| (211,667 | ) |
| | |
$ | 2,222,500 | | |
$ | 2,328,333 | |
Amortization
expense for the three months ended March 31, 2022 was $105,833. Estimated amortization expense for each of the ensuing years through
December 31, 2027 will be $423,333 (except for 2027, which will be $211,667).
Technology
Technology
represents the valuation of acquired technology. The asset will be amortized on the straight-line method over its estimated useful
life of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 1,620,000 | | |
$ | 1,620,000 | |
| Less: accumulated amortization | |
| (202,500 | ) | |
| (135,000 | ) |
| | |
$ | 1,417,500 | | |
$ | 1,485,000 | |
Amortization
expense for the three months ended March 31, 2022 was $67,500. Estimated amortization expense for each of the ensuing years through December
31, 2027 will be $270,000 (except for 2027, which will be $135,000).
Gaming Approvals
Gaming approvals represent the valuation
of certain approvals allowing the entities to operate in certain jurisdictions. The asset will be amortized on the straight-line method
over its estimated useful life of six years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 4,020,000 | | |
$ | 4,020,000 | |
| Less: accumulated amortization | |
| (502,500 | ) | |
| (335,000 | ) |
| | |
$ | 3,517,500 | | |
$ | 3,685,000 | |
Amortization
expense for the three months ended March 31, 2022 was $167,000. Estimated amortization expense for each of the ensuing years through
December 31, 2027 will be $670,000 (except for 2027, which will be $335,000).
Internal
Use Software Development
The
Company has reviewed the software development expenses associated with a variety of software development efforts during the year 2021
and three months ended March 31, 2022 and determined that a significant amount of the expense associated with internally developed software
should be capitalized under ASC 350-40.
The
Company’s identified capitalized software intangible assets are amortized on a straight-line basis over their estimated useful
lives, ranging from 2 to 10 years.
| | |
March
31, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost basis | |
$ | 974,760 | | |
$ | 111,951 | |
| Less: accumulated amortization | |
| (80,457 | ) | |
| (23,323 | ) |
| | |
$ | 894,303 | | |
$ | 88,628 | |
Amortization
expense for the three months ended March 31, 2022 was $57,134. Estimated amortization expense for years of useful life remaining is as
follows:
| Years ending
December 31, | |
Amount | |
| 2022 | |
| 228,537 | |
| 2023 | |
| 205,214 | |
| 2024 | |
| 172,562 | |
| 2025 | |
| 172,562 | |
| 2026 | |
| 115,428 | |
The Company had software development
costs of $2,342,163 and $2,080,999 related to project not placed in service as of March 31, 2022 and December 31, 2021, respectively
which is included 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.
On
March 22, 2022, the Company entered into a three year secured promissory note agreement with a principal amount of $6,500,000. 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 March 31, 2022, the
entire $6,500,000 in principal was outstanding and the Company had $4,932 in accrued interest.
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.
| 7. | 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 March
31, 2022, there have been no Qualified Financing events that trigger conversion. As of March 31, 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 note
payable was $138,822 at March 31, 2022.
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 mapped 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 March
31, 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 March 31, 2022 was $38,835.
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 are 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 March 31, 2022 and December
31, 2021, the balance of the loan was $150,000. As of March 31, 2022, the accrued interest on this note was $2,624.
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 a variable rate, are unsecured, and the parties have verbally agreed the notes will be due upon a qualifying
financing event. As of March 31, 2022 and December 30, 2021 the balance of the loans totaled $13,000.
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
for $12,674,635 with the sellers of the TinBu and a broker involved in the transaction. The notes had an 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 March 31, 2022 and December 30, 2021, the balance of the notes was $2,357,744 and $2,628,234, respectively.
Preferred
and Common Stock
Preferred
Stock
Pursuant
to the Company’s charter, the Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.001 per
share. Our board of directors has the authority without action by the stockholders, to designate and issue shares of preferred stock
in one or more classes or series, and the number of shares constituting any such class or series, and to fix the voting powers, designations,
preferences, limitations, restrictions and relative rights of each class or series of preferred stock, including, without limitation,
dividend rights, conversion rights, redemption privileges and liquidation preferences, which rights may be greater than the rights of
the holders of the common stock. As of March 31, 2022, there were no shares of preferred stock issued and outstanding.
Common
Stock
Our
Charter 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, validly 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 March 31, 2022 and December 31, 2021, 46,928,367 shares and 46,808,251 shares, respectively, were outstanding.
During the three months ended March 31, 2022, the Company issued the following shares of common stock.
| Issuance of Common Stock for legal
settlement | |
| 60,000 | |
| Exercise of options (Note 9) | |
| 60,116 | |
| | |
| | |
| Total | |
| 120,116 | |
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. |
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.
As
of December 31, 2021, there were 20,125,000 Public Warrants outstanding. Immediately after giving effect to the Business Combination,
there were 20,125,002 warrants to purchase share of Common stock outstanding, 20,125,000 of which are public warrants
and two of which were previously warrants of AutoLotto, which are now warrants of Lottery.com and are exercisable to purchase an aggregate
of 395,675 shares of common stock.
Private
Warrants
Private
warrants of TDAC issued before the business combination were forfeited and did not transfer to the surviving entity.
Unit
Purchase Option
On
June 1, 2018, the Company sold to the underwriter (and its designees), for $100, an option to purchase up to a total of 1,750,000 Units
exercisable at $12.00 per Unit (or an aggregate exercise price of $21,000,000) commencing on the consummation of the Business Combination.
The 1,750,000 Units represents the right to purchase 1,750,000 shares of common stock and 1,750,000 warrants
to purchase 1,750,000 shares of common stock. The unit purchase option may be exercised for cash or on a cashless basis, at
the holder’s option, and expires on May 29, 2023. The Units issuable upon exercise of this option are identical to those offered
by Lottery.com. The Company accounted for the unit purchase option, inclusive of the receipt of $100 cash payment, as an expense
of the Business Combination resulting in a charge directly to stockholders’ equity. As of December 31, 2021 all of the 1,750,000 Units
are vested, exercisable and outstanding.
Common
Stock Warrants
On
February 15, 2022, the Company issued warrants to purchase an aggregate 92,621 shares of the Company’s common stock at an exercise
price of $7.56 per share. The warrants were valued at $194,695 using a Black-Scholes pricing model.
The Company has classified the warrants
as having Level 2 inputs, and used the Black-Scholes option-pricing model to value the warrants. The fair value at the issuance
dates for the above warrants was based upon the following management assumptions:
| | |
Issuance
dates | |
| Risk-free interest rate | |
| 1.80 | % |
| Expected dividend yield | |
| 0 | % |
| Expected volatility | |
| 113.17 | % |
| Term | |
| 3 years | |
| Fair value of common stock | |
$ | 3.75 | |
The Company did not issue any other
warrants during the three months ended March 31, 2022 and the year ended December 31, 2021. All outstanding warrants are fully vested
and have a weighted average remaining contractual life of 3.6 years. The Company incurred expenses related to outstanding warrants
of $194,695 and $0 for the three months ended March 31, 2022 and 2021, respectively.
| | |
Number
of Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual Life (years) | | |
Aggregate
Intrinsic
Value | |
| Outstanding at December 31, 2020 | |
| 573,359 | | |
$ | 0.28 | | |
| 4.8 | | |
$ | 272,638 | |
| Granted | |
| - | | |
| - | | |
| - | | |
| | |
| Exercised | |
| (177,684 | ) | |
| 0.66 | | |
| - | | |
| | |
| Forfeited/canceled | |
| - | | |
| - | | |
| - | | |
| | |
| Outstanding at December 31, 2021 | |
| 395,675 | | |
| 0.11 | | |
| 4.0 | | |
| 2,478,501 | |
| Granted | |
| 92,621 | | |
| 7.56 | | |
| 3.0 | | |
| | |
| Exercised | |
| - | | |
| - | | |
| - | | |
| | |
| Forfeited/canceled | |
| - | | |
| - | | |
| - | | |
| | |
| Outstanding at March 31, 2022 | |
| 488,296 | | |
$ | 1.52 | | |
| 3.6 | | |
$ | 1,200,387 | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at March 31, 2022 | |
| 488,296 | | |
$ | 1.52 | | |
| 3.6 | | |
$ | 1,200,387 | |
Beneficial
Conversion Feature – Convertible Debt
As
detailed in Note 6 – Notes Payable and Convertible Debt, the Company has issued two series of convertible debt. Both issuances
resulted in the recognition of the beneficial conversion features contained within both of the instruments. The Company recognized the
proceeds allocable to the beneficial conversion feature of $8,480,697 as additional paid in capital and a corresponding debt discount
of $2,795,000. This additional paid in capital is reflected in the condensed consolidated Statements of Equity for the year ended December
31, 2021.
Earnout
Shares
As
detailed in Note 3 – as part of the TDAC Combination as of December 31, 2021 a total of 5,000,000 Earnout Shares are
eligible for issuance until December 31, 2022.
| 9. | Stock-based
Compensation Expense |
2015
Stock Option Plan
Prior to the Closing, AutoLotto had
the AutoLotto, Inc. 2015 Stock Option/Stock Issuance Plan (the “2015 Plan”) in place. Under the 2015 Plan, incentive stock
options could be granted at a price not less than fair market value of the AutoLotto common stock (the “AutoLotto Common Stock”).
If the AutoLotto Common Stock was at the time of grant listed on any stock exchange, then such fair market value would be the closing
selling price per share of AutoLotto Common Stock on the date in question on such stock exchange, as such price is officially quoted
in the composite tape of transactions on such stock exchange and published in The Wall Street Journal. If there was no closing selling
price for the Common Stock on the date in question, then the fair market value would be the closing selling price on the last preceding
date for which such quotation exists. If the Common Stock is at the time neither listed on any Stock Exchange, then the fair market value
would be determined by the Board of Directors or the Committee acting in its capacity as administrator of the Plan after taking into
account such factors as the Plan Administrator shall deem appropriate. The maximum number of shares of Common Stock that could have
been issued over the term of the Plan could not exceed Four Hundred Fifty Thousand (450,000). Options are exercisable over periods not
to exceed 10 years (five years for incentive stock options granted to holders of 10% or more of voting stock) from the date of grant. Shares
of AutoLotto Common Stock issued under the 2015 Plan could, in the discretion of the Plan Administrator, be fully and immediately vested
upon issuance or vest in one or more installments over the Participant’s period of service or upon attainment of specified performance
objectives. The Plan Administrator could not impose a vesting schedule upon any option grant or the shares of Common Stock subject to
that option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur not later than one
(1) year after the option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are
officers of the Corporation, non-employee Board members or independent consultants.
2021
Equity Incentive Plan
In connection with the Business Combination,
our Board of Directors adopted, and our stockholders approved, the Lottery.com 2021 Incentive Plan (the “2021 Plan”) under
which 13,130,368 shares of Class A common stock were initially reserved for issuance. The 2021 Plan allows for the issuance
of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock or cash
based awards. The number of shares of the Company’s Class A common stock available for issuance under the 2021 Plan increases annually
on the first day of each calendar year, beginning on and including January 1, 2022 and ending on and including January 1, 2031 by a number
of shares of Company common stock equal to five percent of the total outstanding shares of Company common stock on the last day of the
prior calendar year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide that there
will be no such increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser
number of shares of Company common stock than would otherwise occur pursuant to the preceding sentence.
Stock
Options
The
Company did not issue any new stock options during the three months ended March 31, 2022 and 2021. The following table shows stock option
activity for the three months ended March 31, 2022 and 2021:
| | |
Shares
Available
for Grant | | |
Outstanding
Stock
Awards | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Life (years) | | |
Aggregate
Intrinsic
Value | |
| Outstanding
at December 31, 2020 | |
| 37,405 | | |
| 1,315,218 | | |
$ | 0.30 | | |
| 5.5 | | |
$ | 362,841 | |
| Granted | |
| - | | |
| - | | |
| - | | |
| - | | |
| | |
| Exercised | |
| | | |
| (737,732 | ) | |
| (0.28 | ) | |
| - | | |
| | |
| Forfeited/canceled | |
| 231,825 | | |
| (231,825 | ) | |
| (0.65 | ) | |
| - | | |
| | |
| Outstanding
at December 31, 2021 | |
| 269,230 | | |
| 345,661 | | |
| 0.97 | | |
| 4.4 | | |
| 2,061,303 | |
| Granted | |
| - | | |
| - | | |
| - | | |
| - | | |
| | |
| Exercised | |
| - | | |
| (60,116 | ) | |
| (0.67 | ) | |
| - | | |
| | |
| Forfeited/canceled
(uncanceled) | |
| (60,116 | ) | |
| 60,116 | | |
| 0.67 | | |
| - | | |
| | |
| Outstanding
at March 31, 2022 | |
| 209,114 | | |
| 345,661 | | |
$ | 0.41 | | |
| 4.2 | | |
$ | 944,544 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Exercisable
at March 31, 2022 | |
| 209,114 | | |
| 345,661 | | |
$ | 0.41 | | |
| 4.2 | | |
$ | 944,544 | |
Stock-based
compensation expense related to the employee options was $0 and $2,160 for the three months ended March 31, 2022 and 2021, respectively.
No
income tax benefit has been recognized related to the stock-based compensation expense, and no tax benefits have been realized from the
exercised stock options. As of March 31, 2022 and December 31, 2021, unrecognized stock-based compensation associated with stock options
amounted to $0.
Restricted
awards
The Company has awarded restricted
stock to employees on October 28, 2021, which were granted with various vesting terms including, service-based vesting, and performance-based
vesting. In accordance with ASC 718, the Company has classified the restricted stock as equity.
For employee issuances, the measurement
date is the date of grant, and the Company recognizes compensation expense for the grant of the restricted shares, over the service period
for the restricted shares that vest over a period of multiple months or years and for performance-based vesting awards, the Company recognizes
the expense when management believes it is probable the performance condition will be achieved. As of December 31, 2021, the Company
had granted 3,832,431 shares with vesting to begin April 2022. For the three months ended March 31, 2022, the Company recognized
$22,174,488 of stock compensation expense related to the employee restricted stock grants. As of March 31, 2022, unrecognized stock-based
compensation associated with the restricted stock awards is $18,831,680 which will be expensed over the next 3.5 years.
The
Company had restricted stock activity summarized as follows:
| | |
| | |
Weighted | |
| | |
| | |
Average | |
| | |
Number
of | | |
Grant | |
| | |
Shares | | |
Fair
Value | |
| Outstanding
at December 31, 2021 | |
| 3,832,431 | | |
$ | 14.75 | |
| Granted | |
| - | | |
| - | |
| Vested | |
| - | | |
| - | |
| Forfeited/canceled | |
| - | | |
| - | |
| Restricted
shares unvested at March 31, 2022 | |
| 3,832,431 | | |
$ | 14.75 | |
The
following table sets forth the computation of basic and diluted net loss per share:
| | |
Three
Months Ended
March 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Comprehensive
net loss attributable to stockholders | |
$ | (15,493,058 | ) | |
$ | (5,456,034 | ) |
| | |
| | | |
| | |
| Weighted
average common shares outstanding | |
| | | |
| | |
| Basic
and diluted | |
| 46,832,919 | | |
| 22,888,700 | |
| | |
| | | |
| | |
| Net
loss per common share | |
| | | |
| | |
| Basic
and diluted | |
$ | (0.33 | ) | |
$ | (0.24 | ) |
As of March 31, 2022, the Company
excluded 345,661 stock options, 3,832,431 of restricted awards, 488,296 of warrants, 5,000,000 of
earn out shares and 1,750,000 of unit purchase options respectively in the calculation of diluted loss per share, as the effect
would be anti-dilutive due to losses incurred.
The Company did not record any income tax expense or benefit for the three months ended March 31, 2022 or 2021. Management increased
the valuation allowance and reduced the net deferred tax assets to zero. The assessment of the realization of the deferred
tax assets has not changed, and, as a result, management continues to maintain a full valuation allowance for the net deferred
assets as of March 31, 2022 and 2021.
As
of March 31, 2022, the Company did not have any unrecognized tax benefits. There were no significant changes to the calculation
since December 31, 2021.
| 12. | Commitments
and Contingencies |
Indemnification
Agreements
The Company enters into indemnification
provisions under its agreements with other entities in its ordinary course of business, typically with members of its Board of Directors,
Officers, business partners, customers, landlords, lenders and lessors. Under these provisions, the Company generally indemnifies and
holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities
or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future
payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material
costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated
fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2022
and December 31, 2021.
Digital
Securities
In 2018, the Company commenced a sale
offering and issuance (the “LDC Offering”) of 285 million revenue participation interests (the “Digital Securities”)
of net sweepstakes revenue of a wholly owned entity of the Company, LDC Crypto Universal Public Company Limited (“LDC”);
in February 2022, LTRY WinTogether, Inc. (“LTRY WinTogether”), a wholly owned subsidiary of the Company assumed the obligations
and liabilities of LDC, including, without limitation, with respect to the Digital Securities. The Digital Securities do not have
any voting rights, redemption rights, or liquidation rights, nor are they tied in any way to other equity securities of any other subsidiary
of the Company or of the Company nor do they otherwise hold any rights that a holder of equity securities of LTRY WinTogether or the
Company may have or that a holder of traditional equity securities or capital stock may have. Rather, each of the holders of the Digital
Securities has a pro rata right to receive 7% of the net sweepstakes revenue. If the net sweepstakes revenue is zero for a
given period, holders of the Digital Securities are not eligible to receive any cash distributions from any sweepstakes of LTRY WinTogether
for such period. For the year ended December 31, 2021, the Company incurred an obligation to pay an aggregate amount of approximately
$5,632 to holders of the outstanding Digital Securities. The Company has not satisfied any of those obligations as of March 31,
2022.
Leases
The
Company leases office space in Spicewood, Texas (the “Spicewood Lease”), which expires January 21, 2022. For the
three months ended March 31, 2022 and 2021, the Company’s total rent expense for the Spicewood Lease was approximately
$109,608 and $13,475, respectively.
The Company additionally leases office
space in Waco, Texas (the “Waco Lease”), which expires December 31, 2024, and leased an office space in Dallas, Texas (the
“Dallas Lease”), which lease expired March 31, 2022. Pursuant to the provisions of a third amendment to the Waco Lease and
a termination agreement to the Dallas Lease, the Company paid an aggregate of $244,945.91 in rent expense for the aggregate period from
the third quarter of 2016 to March 31, 2022 under the Waco Lease and for the aggregate period from the third quarter of 2016 to the date
of termination under the Dallas Lease.
As
of March 31, 2022, future minimum rent payments due under non-cancellable leases with initial maturities greater than one year are as
follows:
| Years ending December 31, | |
Amount | |
| 2022 (nine months) | |
| 144,457 | |
| 2023 | |
| 153,222 | |
| 2024 | |
| 48,404 | |
| | |
$ | 346,083 | |
Litigation
and Other Loss Contingencies
As
of March 31, 2022, there were no pending proceedings that are deemed to be materially detrimental. The Company is a party to legal proceedings
in the ordinary course of its business. The Company believes that the nature of these proceedings is typical for a company of its size
and scope.
| 13. | Related
Party Transactions |
The
Company has entered into transactions with related parties. The Company regularly reviews these transactions; however, the Company’s
results of operations may have been different if these transactions were conducted with nonrelated parties.
During
the year ended December 31, 2020, the Company entered into borrowing arrangements with the individual founders to provide operating cash
flow for the Company. The Company paid $4,700 during the year ended December 31, 2020 and has an outstanding balance at March 31,
2022 of $13,000.
Services Agreement with Master
Goblin Games, LLC
In March 2020, the Company entered
into a service agreement (as amended, the “Service Agreement”), with Master Goblin Games, LLC (“Master Goblin”),
an entity that is wholly owned by our CFO and President, Ryan Dickinson. Master Goblin leases retail locations in certain U.S. jurisdictions
from which it operates tabletop game retail stores and, ancillary to such retail operations, acts as sales agent or retailer licensed
by the state lottery commission of such jurisdiction to sell lottery game tickets from such retail stores. The Company acquires lottery
games as requested by users from Master Goblin on a non-exclusive basis in such jurisdictions.
Pursuant to the
Service Agreement, Master Goblin is authorized and approved by the Company to incur up to $100,000 in initial expenses per location for
the commencement of operations at each location, including, without limitation, tenant improvements, furniture, inventory, fixtures and
equipment, security and lease deposits, and licensing and filing fees. Similarly, pursuant to the Service Agreement, during each month
of operation, Master Goblin is authorized to submit to the Company for reimbursement on-going expenses of up to $5,000 per location for
actually incurred lease expenses. The initial expenses are submitted by Master Goblin to the Company upon Master Goblin securing a lease,
and leases are only secured by Master Goblin in any location upon request of the Company. On-going expenses are submitted by Master Goblin
to the Company for reimbursement on a monthly basis, subject to offset, and are recorded by the Company as an expense. To the extent
Master Goblin has a positive net income in any month, exclusive of the sale of lottery games, such net income reduces or eliminates such
reimbursable expenses for that month. In addition, from time to time Master Goblin may incur certain additional reimbursable expenses
for the benefit of the Company. The Company paid Master Goblin an aggregate of $133,339.50, including expense reimbursements, under the
Service Agreement, as of March 31, 2022. As of March 31, 2022 and December 31, 2021, the Company had no outstanding
payables to Master Goblin Games under the Service Agreement.
| 14. | Revenue
Disaggregation |
Revenue
disaggregation consists of the following:
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Gaming | |
$ | 2,301,275 | | |
$ | 3,232,448 | |
| Other | |
| 18,849,617 | | |
| 2,229,091 | |
| Total | |
$ | 21,150,892 | | |
$ | 5,461,539 | |
We
have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine
if they must be reported. Management has determined that other than below, there were no additional reportable subsequent events
to be disclosed.
Restricted
Stock Award issuance and share repurchase
On
April 29, 2022, restricted stock awards for certain employees vested and resulted in withhold tax for those employees. Given the limited
trading liquidity of the Company’s common shares, the Company withheld 130,546 shares, valued at $2.38 per share (the closing price
on April 29, 2022) from the employees, and paid the withhold tax on the employees’ behalf.