10-K/A: Lottery.com Files Amended 2023 Report Highlighting Operational Restart Efforts Amidst Financial Struggles and Ongoing Investigations

Lottery.com Inc. details its challenging fiscal year 2023 in an amended annual report, outlining efforts to resume operations and secure funding following a significant operational cessation, while grappling with substantial losses, material weaknesses, and legal proceedings.

Summary

• Lottery.com Inc. filed an amended annual report (Form 10-K/A) for the fiscal year ending December 31, 2023, detailing a period marked by significant challenges and efforts to recover.
• The company experienced an operational cessation in July 2022 due to insufficient funds and accounting issues, furloughing most staff and suspending lottery game sales.
• Despite minimal operations, subsidiaries TinBu, Aganar, and JuegaLotto continued generating some revenue, totaling $7.02 million for FY2023, slightly up from $6.8 million in FY2022.
• However, the company reported a net loss of $25.8 million for FY2023, an improvement from a $60.4 million loss in FY2022, largely due to reduced personnel costs including lower stock compensation.
• As of December 31, 2023, the company had an accumulated deficit of $235.1 million and significant unpaid obligations, including approximately $3.85 million in payroll and $1.0 million in director compensation.
• Management identified material weaknesses in internal controls over financial reporting as of December 31, 2023, related to accounting personnel, review processes, timely closing, and segregation of duties.
• The company secured funding commitments through loan agreements with Woodford Eurasia Assets Ltd. (disputed), United Capital Investments London Limited (UCIL), and investors placed by Univest Securities LLC to support restarting operations.
• Lottery.com regained compliance with Nasdaq listing requirements after periods of non-compliance related to timely filings and minimum bid price.
• Future plans involve a phased relaunch, starting with the B2B API platform (resumed limited operations in April 2023), followed by the B2C platform (expected mid-2024), and restoring other business lines, including Sports.com.
• The report emphasizes management's commitment to transparency and addressing legacy issues, but substantial doubt remains about the company's ability to continue as a going concern without further successful financing.

Sentiment

Score: 2

Explanation: The document reflects a company in severe distress, facing operational cessation, significant losses, material weaknesses, legal challenges, and going concern doubts. While management expresses commitment to recovery and some funding has been secured, the overall situation remains highly precarious and uncertain, warranting a very low sentiment score from an investment perspective.

Positives

• The company successfully regained full compliance with Nasdaq's continued listing rules during FY2023.
• Revenue slightly increased to $7.02 million in FY2023 from $6.8 million in FY2022, primarily from subsidiary operations.
• Operating expenses decreased significantly to $26.5 million in FY2023 from $58.3 million in FY2022, mainly due to lower personnel and stock compensation costs.
• Net loss decreased to $25.8 million in FY2023 from $60.4 million in FY2022.
• Secured a credit facility with UCIL, providing access to potential funding up to $50 million (initial $1M loan plus $49M accordion).
• Entered into a placement agent agreement with Univest Securities LLC for an offering of up to $5 million.
• The B2B API platform resumed limited operations in April 2023 as part of a phased restart plan.
• Subsidiaries TinBu, Aganar, and JuegaLotto continued operations despite the parent company's challenges.
• Management expressed commitment to transparency, integrity, and responsible corporate governance.
• The company is developing Project Nexus, a proprietary blockchain-enabled gaming platform.
• The company acquired the Sports.com domain and formed a subsidiary to monetize the brand.
• The board approved the 2023 Equity Incentive Plan to attract and retain personnel.

Negatives

• The company experienced an operational cessation in July 2022 due to lack of funds and accounting issues, suspending core lottery sales.
• Significant unpaid obligations exist, including $3.85 million in payroll and $1.0 million in director compensation as of Dec 31, 2023.
• Material weaknesses in internal control over financial reporting persist as of December 31, 2023.
• The company has a history of net losses, with an accumulated deficit of $235.1 million as of Dec 31, 2023.
• The company's cash balance was very low at $359,826 as of December 31, 2023.
• Substantial doubt exists about the company's ability to continue as a going concern.
• The company is involved in multiple legal proceedings, including a class action lawsuit and disputes with former partners (TinBu founders) and a lender (Woodford).
• The previous independent auditor, Armanino LLP, resigned in September 2022, citing inability to rely on management representations.
• Previously issued financial statements for FY2021 and Q1 2022 required restatement due to accounting errors and lack of disclosure.
• The loan agreement with Woodford Eurasia Assets Ltd. is disputed, and funding has been minimal relative to the commitment.
• The UCIL loan agreement involves related parties (CEO Matthew McGahan and Director Barney Battles have interests in UCIL).
• A significant portion of prepaid expenses ($19 million) relates to advertising credits, the realizability of which could be uncertain.
• Goodwill and intangible asset impairment charges totaling $7.5 million were recorded in FY2023.

Risks

• There is substantial doubt about the company's ability to continue as a going concern due to recurring losses, negative cash flows, and significant debt.
• The company requires additional capital to restart operations fully and sustain them, which may not be available on acceptable terms, if at all.
• Failure to secure sufficient funding could force the company to curtail or cease operations permanently.
• Material weaknesses in internal controls could lead to further financial reporting errors, fraud, or loss of investor confidence.
• Ongoing legal proceedings and investigations (SEC, DOJ, civil suits) could result in significant costs, penalties, and reputational damage.
• The company may not be able to maintain compliance with Nasdaq's listing standards, risking delisting.
• Intense competition exists in the online lottery and gaming industries from established and well-financed companies.
• Regulatory risks are significant, including potential changes in laws (e.g., Wire Act interpretation, state-level restrictions like the Texas Bill) governing online lottery, data privacy, and gaming.
• Dependence on third-party platforms (Apple App Store, Google Play), payment processors, and data providers creates operational risks.
• Cybersecurity threats and potential data breaches could compromise user information and harm the company's reputation.
• The company's ability to attract and retain users and key personnel, especially after the operational cessation and furloughs, is uncertain.
• Successful execution of the three-phase operational restart plan is not guaranteed.
• Potential dilution exists for current shareholders due to convertible debt and warrants associated with recent funding agreements.
• The dispute with Woodford Eurasia Assets Ltd. creates uncertainty regarding funding and potential legal liabilities.
• Economic downturns or changes in consumer spending could negatively impact demand for lottery and gaming products.

Future Outlook

The company aims to address legacy issues and stage itself for growth in FY2024, driven by technology, product, and service enhancements. Key plans include fully relaunching the B2B API platform, resuming B2C platform operations by mid-2024 (initially in Texas), restoring other business lines, monetizing the Sports.com brand, and expanding globally. Success is heavily dependent on securing sufficient ongoing funding through existing commitments (UCIL, Univest) and potentially other sources, improving internal controls, and successfully executing its phased operational restart plan. Substantial doubt about the company's ability to continue as a going concern remains.

Management Comments

• Management stated that during FY 2023, the Company addressed legacy issues while successfully regaining full compliance with Nasdaq's continued listing rules and restarting operations to stage Lottery.com for growth in FY 2024.
• Management highlighted that the cornerstone of operational progress for FY 2024 will be driven by technology, product and service/capability enhancements.
• The company affirmed that this Amended Report reflects its commitment to transparency, integrity, and responsible corporate governance.
• Management cited investment commitments from UCIL, Prosperity Investment Management, and investors placed by Univest Securities LLC as evidence of investor belief in their capability to resume core operations, monetize Sports.com, and expand globally.
• Management concluded that identified accounting errors were not material but restating previously issued financial statements is consistent with the company's pledge of transparency.
• Management re-evaluated internal controls and concluded that remaining control deficiencies represent material weaknesses as of December 31, 2023.
• Management believes cash on hand as of the report date (~$37k), along with future borrowings, will be sufficient to resume core operations, though substantial doubt about continuing as a going concern exists.

Industry Context

The company operates in the evolving online lottery and gaming sector, which faces intense competition and significant regulatory scrutiny across various jurisdictions (U.S. federal/state, international). Key legal frameworks like the U.S. Wire Act and state-specific laws (e.g., Texas prohibiting courier services) directly impact business models. The industry is characterized by technological advancements, consolidation among competitors, and increasing focus on responsible gaming and data privacy compliance. Lottery.com's model of facilitating remote lottery purchases and providing data services places it amidst these trends and challenges.

Comparison to Industry Standards

• The document does not provide specific comparisons of Lottery.com's financial performance or operational metrics against named industry competitors or global benchmarks.
• Companies like Jackpocket and theLotter operate similar online lottery courier services in the US and internationally, representing direct competitors, but their specific results are not compared.
• State-run online lottery platforms (e.g., in Pennsylvania, Michigan) also compete, offering direct sales without third-party service fees, but no comparison is made.
• The company's financial performance, particularly the large net losses, operational halt, and going concern warning, contrasts sharply with expectations for a viable public company in any industry.
• The identified material weaknesses in internal controls indicate significant deficiencies compared to the standards expected under Sarbanes-Oxley for public companies.

Management Changes

Corporate Governance

Legal Proceedings

• AutoLotto, Inc. dba Lottery.com v. J. Streicher Financial, LLC: Company obtained a judgment for $16.5 million plus fees against Streicher for breach of contract; collection efforts are ongoing with only partial payments received.
• Preston Million, Individually and on Behalf of All Others Similarly Situated vs. Lottery.com, Inc. et al.: A class action lawsuit alleging violations of federal securities laws (Sections 10(b), 14(a), 20(a) of the Exchange Act) related to alleged false and misleading statements. The company's motion to dismiss was granted, but plaintiffs amended their complaint.
• John Brier, Bin Tu and JBBT, LLC vs. Lottery.com, Inc. and TinBu, LLC: Lawsuit by former owners of TinBu alleging breach of contract and misrepresentation with damages claimed over $4.6 million. The court granted the company's motion to compel arbitration in Texas; plaintiffs have appealed.
• Lottery.com, Inc. and TinBu, LLC v. John J. Brier, Jr., Bin Tu, and Global Gaming Data, LLC: Lawsuit filed by the company against TinBu founders alleging violations of trade secrets acts, deceptive trade practices, and breaches of contract/fiduciary duties. Defendants filed counterclaims.
• Woodford Eurasia Assets Limited v Lottery.com Inc.: Woodford initiated legal actions in the UK and Delaware seeking injunctive relief/TRO, which were denied/dismissed. Woodford voluntarily dismissed the Delaware action without prejudice. The company disputes the validity of the Woodford loan amendment and is determining its next steps.
• The company is cooperating with investigations by the SEC and DOJ involving certain former officers related to findings of the Internal Investigation.
• The company issued cease and desist notices in April 2024 related to alleged dissemination of false information.

Related Party Transactions

• The company entered into a Loan Agreement with United Capital Investments London Limited (UCIL), an entity in which CEO Matthew McGahan and Director Barney Battles have a direct or indirect interest.
• The company previously had a services agreement with Master Goblin Games, LLC, an entity owned by former officer Ryan Dickinson, which was terminated in January 2023 with a settlement payment.
• The company had borrowing arrangements with individual founders, with $13,000 outstanding as of December 31, 2023.

Stakeholder Impact

• Shareholders face risks of significant dilution from potential conversions of debt and exercise of warrants related to funding agreements, potential delisting from Nasdaq, and loss of investment value due to the company's financial condition and operational uncertainties.
• Employees experienced furloughs in July 2022, and significant unpaid wages ($3.85 million) remain outstanding, impacting morale and financial security.
• Directors have significant unpaid compensation ($1.0 million), potentially affecting governance and oversight.
• Customers experienced service suspension when lottery game sales ceased in July 2022, impacting trust and loyalty.
• Creditors, including lenders and trade payables ($8.0 million), face risks regarding the company's ability to meet its repayment obligations given its financial state and going concern doubts.
• Business partners (e.g., B2B API partners, data subscribers) may be impacted by operational instability and uncertainty about the company's long-term viability.

Next Steps

• Continue efforts to fully restart B2B API platform operations.
• Relaunch the B2C platform, expected by mid-year 2024, initially targeting Texas.
• Restore other business lines and projects, including international lottery partnerships and Sports.com monetization.
• Utilize funding from UCIL, Univest placements, and potentially other sources to support operations and growth.
• Continue efforts to remediate material weaknesses in internal control over financial reporting.
• Address ongoing legal proceedings and investigations.
• Maintain compliance with Nasdaq listing requirements.
• Complete the acquisition of Nook Holdings Limited, expected by June 30, 2024.
• Explore potential partnerships, such as the MOUs with WA Technology Group Limited and S&MI Ltd. (SportLocker.com).

Key Dates

Keywords

Lottery.com, LTRY, online lottery, mobile gaming, 10-K/A, financial restatement, internal controls, material weakness, going concern, operational cessation, Nasdaq compliance, debt financing, convertible notes, warrants, equity incentive plan, stock plan, B2C platform, B2B API, data services, Sports.com, Mexico lottery, Latin America gaming, Woodford Eurasia Assets, United Capital Investments London, Univest Securities, class action lawsuit, SEC investigation, DOJ investigation