Lottery.com Inc. (formerly Sports Entertainment Gaming Global Corp.) — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; this is an annual report, not a standalone fourth-quarter report. The company completed its business combination with AutoLotto on October 29, 2021; AutoLotto is the accounting acquirer, so the financial statements principally reflect its historical operations.
Business context
Lottery.com provides online lottery purchasing services to consumers, lottery distribution through a B2B API, affiliate marketing packages, and lottery data subscriptions. It also operates the WinTogether sweepstakes platform. The company acquired Global Gaming, which owns 80% of Mexican lottery businesses Aganar and JuegaLotto, and acquired the sports.com domain, while exploring entry into legal sports gaming.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $68.5 million | $7.5 million |
| Gross profit / gross margin | $49.4 million / 72.0% | $4.5 million / 60.4% |
| Operating income (loss) | $10.2 million | ($3.7 million) |
| Interest expense | $19.8 million | $1.2 million |
| Net loss | $11.0 million; $0.43 per share | $5.8 million; $0.26 per share |
| Cash from operating activities | $8.1 million | $4.7 million |
| Cash used in investing activities | $15.2 million | $0.02 million |
| Cash from financing activities | $59.0 million | $5.9 million |
| Cash and cash equivalents at year-end | $62.6 million | $3.8 million |
| Working capital at year-end | $88.3 million | Negative $0.5 million |
| Total liabilities at year-end | $10.1 million | $34.1 million |
Reported current notes payable were $3.8 million; no convertible debt remained outstanding at year-end. The company received approximately $42.8 million net from the business combination. Operating cash flow was positive, although it included substantial noncash adjustments, including $15.5 million of stock compensation and $17.3 million of noncash interest expense.
Material changes versus FY2020
- Revenue rose 819%, with management attributing much of the increase to $47.1 million of LotteryLink Credits sold in the second half of 2021, as well as lottery sales and Data Services revenue.
- Gross profit increased to $49.4 million. Operating results swung from a $3.7 million loss to $10.2 million of income, but the company still reported a net loss as interest and other expenses totaled $22.7 million.
- Operating expenses increased 377% to $39.2 million, including higher personnel costs, business-combination and public-company professional fees, marketing, and acquisition-related amortization.
- Accounts receivable rose to $21.7 million from $26,000. Prepaid expenses were $13.9 million, while deferred revenue fell to $0.7 million from $7.8 million.
- Cash increased following the business combination and LotteryLink Credit proceeds; investing outflows primarily reflected acquisitions and intangible-asset purchases.
Outlook, risks and unusual items
- Management expected cash on hand and operating cash flows to cover operating and capital needs for the next 12 months, while noting that expansion and acquisitions could require additional financing. No quantified revenue or earnings guidance was provided.
- Plans included expanding into additional U.S. jurisdictions, growing international operations and affiliate partnerships, and developing Project Nexus, a blockchain-enabled platform. Initial implementation was expected in the second quarter of 2022; timing and benefits were uncertain.
- Lottery and gaming regulation is fragmented and evolving. The company highlighted uncertainty around the Wire Act, interstate and international lottery transactions, licensing, permitted fees, responsible gaming, and data privacy. It held a Texas retail lottery license and planned to apply for New York and New Jersey courier licenses.
- The company reported an unremediated material weakness in financial-statement close and reporting controls, and concluded disclosure controls were ineffective. Management cited insufficient accounting expertise, ineffective review procedures, close timeliness, and incomplete segregation of duties; remediation was ongoing. The auditor did not opine on internal-control effectiveness.
- Notable items included $15.5 million of stock-based compensation, substantial noncash interest from debt discounts and conversion features, a $493,000 PPP loan forgiveness, and a $0.5 million settlement-related charge. The business combination converted substantial debt into equity.
- Key risks include regulatory changes, inability to sustain unusually high LotteryLink revenue, customer acquisition and retention, dependence on search traffic and third parties, cybersecurity and payment processing, acquisition integration, and access to future capital.
Most important facts for investors to verify
- Reconcile the $47.1 million LotteryLink Credit sales, their cash collection and revenue recognition, and the related $21.7 million year-end receivable. The filing also cites $30.0 million in cash received from Credit sales, so amounts and timing merit review.
- Assess the concentration and repeatability of LotteryLink revenue: the filing says the program launched in Q3 2021 and identifies one Master Affiliate as of March 2022.
- Review the material weakness, remediation progress, and any subsequent control findings or restatements; the 10-K says the weakness remained unremediated at year-end.
- Verify the debt maturity and repayment schedule, including the $3.8 million of current notes payable and the related-party Master Goblin arrangement.
- Reconcile inconsistent operating metrics in the filing: reported domestic gross profit per user and lifetime value differ between sections, as do some international user metrics. The filing also contains differing net-loss figures in narrative sections; the audited statements report net loss of $11.0 million and net loss attributable to Lottery.com of $11.1 million.
- Confirm whether projected expansion, Project Nexus deployment, new licensing, and the expected 12-month liquidity position were achieved after the filing date.