Business context and reporting period
Lottery.com Inc. (Nasdaq: LTRY; warrants: LTRYW) filed this Form 10-K for the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. The company provides lottery ticket sales through consumer and business-partner platforms, lottery and sports data services, and lottery operations in Mexico and Latin America.
Operations changed materially in July 2022. Following an internal investigation, cash-balance misstatements, and a determination that the company could not meet operating and payroll obligations, it furloughed most employees and generally suspended lottery sales on July 29. At the filing date, B2B API sales had resumed on a limited basis in April 2023, but the B2C platform remained offline. Data services and certain subsidiaries continued operating.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021, as restated |
|---|---|---|
| Revenue | $6.78 million | $16.41 million |
| Gross profit | $2.47 million | $8.25 million |
| Gross margin | 36.4% | 50.3% |
| Operating expenses | $58.26 million | $38.13 million |
| Operating loss | $(55.79) million | $(29.88) million |
| Net loss | $(60.38) million | $(52.91) million |
| Net cash used in operating activities | $(31.27) million | $(23.19) million |
| Net cash used in investing activities | $(1.25) million | $(13.94) million |
| Net cash from financing activities | $(0.02) million | $58.99 million |
Revenue fell 59%, principally because certain 2021 business-partner services did not recur. Gross profit declined 70%. Operating expenses rose 53%, including higher personnel and stock-compensation expense, public-company and administrative costs, marketing, and amortization. Reported stock-based compensation was $27.95 million, including $27.14 million related to restricted shares. The company reported a $412,450 impairment of software-related intangible assets.
At year-end, cash was $102,766, compared with $32.64 million a year earlier. Current assets were $20.44 million, including $19.41 million of prepaid expenses; current liabilities were $17.56 million, and reported working capital was approximately $2.9 million. Total assets were $79.38 million, total liabilities $17.56 million, and total equity $61.82 million. Operating cash outflow substantially exceeded available cash. The filing describes substantial doubt about the company’s ability to continue as a going concern for the following 12 months.
Debt and funding: The balance sheet reports $3.76 million of current notes payable and no non-current convertible debt. Elsewhere, MD&A reports $1.26 million of convertible debt outstanding at year-end; the debt classifications and reported amounts should be checked against the notes. A $30 million Provident Bank loan had been secured by $30 million of restricted cash; after default, the bank foreclosed on the collateral in October 2022. Under a December 2022 agreement, Woodford committed up to $52.5 million subject to conditions, but only $300,000 had been received by year-end. Borrowings bear 12% interest (22% upon default), are secured by substantially all company assets, and may convert into stock at a discount. A June 2023 amendment increased the conversion discount, creating further dilution risk.
Operating metrics for the B2C business also weakened: transactions per user declined to 6.86 from 17.18; tickets per transaction to 2.92 from 3.91; and gross revenue per transaction to $6.99 from $9.66. Gross margin per transaction was reported as 19.4%, versus 16.29%.
Material changes versus the prior comparable period
- Revenue, gross profit, and gross margin declined, while operating losses widened and operating cash use increased.
- Cash fell sharply, the company defaulted on its $30 million Provident loan, and the majority of staff were furloughed as lottery sales were suspended.
- The company restated its 2021 financial statements. Management said revenue was overstated by approximately $52.1 million in 2021, primarily involving non-routine transactions and revenue-recognition controls; 2021 figures above are identified as restated.
- The company reported material weaknesses in financial reporting controls for both 2021 and 2022, and management concluded disclosure controls and procedures were ineffective.
Outlook, risks, contingencies, and unusual items
No firm financial guidance is provided. Management expected operating costs to exceed revenues over the 12 months through April 30, 2024, with the funding gap dependent on additional debt or equity financing; it cautioned that financing was not assured. The company planned to expand limited B2B operations, relaunch B2C—then targeted by year-end 2023—and later restore other business lines. These plans depend on funding, staffing, platform readiness, and regulatory compliance.
Major risks include going-concern uncertainty; minimal cash and reliance on conditional financing; secured debt and potentially highly dilutive conversions; suspended operations and unpaid payroll (approximately $1.6 million at year-end 2022, increasing to approximately $1.9 million by March 2023); unresolved accounting-control weaknesses and delayed filings; and potential Nasdaq delisting. The Nasdaq panel reinstated trading in June 2023 subject to conditions through August 17, 2023; the filing states the company was not then in compliance with all continued-listing requirements.
Legal and regulatory matters include SEC and Department of Justice inquiries involving former officers, securities class actions, and a TinBu-related lawsuit alleging damages exceeding $4.6 million. Lottery.com obtained a $16.5 million judgment and a $397,037 fee award against J. Streicher Financial, but had collected only $125,000 in partial payments described in the filing and collection remained uncertain. The company also identifies risks from state and federal lottery rules, including a proposed Texas bill that could prohibit online lottery gaming and courier services if enacted.
Other notable items include the departure of the former auditor, Armanino, and engagement of Yusufali & Associates; delayed SEC reports; and the suspension of WinTogether’s relationship with the company in March 2023. The company also disclosed that its 2021 and 2022 U.S. federal and state income tax returns had not been filed as of the report date.
Important facts for investors to verify
- Reconcile debt disclosures: the balance sheet’s current notes payable, MD&A’s convertible-debt figure, accrued interest, and the status of the Woodford commitment and subsequent advances.
- Review the restated 2021 statements and revenue-recognition changes, including the approximately $52.1 million revenue overstatement and any remaining restatement or control issues.
- Confirm current unrestricted cash, near-term cash burn, unpaid payroll and other obligations, and whether financing is available on binding terms.
- Check progress toward B2B and B2C relaunch plans, actual post-restart revenue, and the status of required licenses and the Texas legislation.
- Verify Nasdaq listing compliance and the outcome of the panel’s conditions, as well as developments in the Streicher collection, securities litigation, TinBu claim, and government inquiries.