Business Overview and History

Lottery.com Inc. (NASDAQ:LTRY) is a leading technology company in the digital lottery and sports entertainment industry. The company's history and transition over the years demonstrate its resilience and adaptability in a rapidly evolving market.

Lottery.com Inc. was initially formed as Trident Acquisitions Corp., a Delaware corporation, on March 17, 2016. The company's trajectory changed significantly on October 29, 2021, when it consummated a business combination with AutoLotto, Inc. This transformative event resulted in AutoLotto becoming a wholly-owned subsidiary, with its business operations becoming the primary focus of the combined entity. As part of this transition, the company rebranded from Trident Acquisitions Corp. to Lottery.com Inc. and relocated its headquarters from New York, New York to Spicewood, Texas.

Before the business combination, the company had established itself as a provider of domestic and international lottery products and services. Its core offering was a platform that facilitated the remote purchase of legally sanctioned lottery games both in the United States and internationally. The company's revenue streams were diverse, including service fees and markups on lottery game purchases through its B2C platform, as well as income from commercial partners via its B2B API platform and data services.

In a strategic move to expand its international presence, Lottery.com acquired 100% of the equity of Global Gaming Enterprises, Inc. in June 2021. This acquisition was particularly significant as Global Gaming Enterprises held 80% of the equity in two Mexican companies: Medios Electronicos y de Comunicacion, S.A.P.I de C.V. (Aganar) and JuegaLotto, S.A. de C.V. (JuegaLotto). Aganar had been a player in the licensed iLottery market in Mexico since 2007, while JuegaLotto held a license from Mexican federal regulatory authorities to sell international lottery games within the country. This acquisition provided Lottery.com with a strong foothold in the Mexican market and opened up potential growth opportunities in Latin America.

Product Segments

Lottery.com operates through three main product segments:

1. B2C Platform: Prior to the Operational Cessation, this platform enabled users in the U.S. and international jurisdictions where lottery sales were legal to remotely purchase sanctioned lottery games. Users paid a service fee and, in certain non-U.S. jurisdictions, a mark-up on the purchase price. Revenue was generated from these service fees and mark-ups. As of the latest report, the B2C Platform is not currently available to the public, with an anticipated relaunch by fall 2024.

2. B2B API: In collaboration with third-party commercial partners, Lottery.com offers a B2B API that allows partners in permitted U.S. and international jurisdictions to purchase certain legally operated lottery games and resell them to users within their respective jurisdictions. The company receives a share of the net revenues from technology usage fees and service fees charged by its commercial partners. Following the Operational Cessation, the B2B API Platform resumed limited operations in April 2023.

3. Data Services: This segment delivers daily results of over 800 domestic and international lottery games from more than 40 countries to over 400 digital publishers and media organizations. Commercial acquirers of the Data Service pay a subscription fee and, for certain large data sets, an additional per-record fee. Lottery.com also enters into multi-year contracts to sell its proprietary, anonymized transaction data.

Financial Performance and Ratios

Lottery.com's financial performance has faced significant challenges in recent years. For the fiscal year ended December 31, 2023, the company reported total revenue of $6.99 million, a decrease from $6.78 million in the prior year. The company's net income for the same period was a loss of $25.74 million, compared to a loss of $60.38 million in 2022. Operating cash flow (OCF) and free cash flow (FCF) for 2023 were both negative $2.11 million.

The most recent quarter (Q2 2024) showed further decline, with revenue of $256,996, a 60% decrease compared to Q2 2023. Net income for Q2 2024 was a loss of $5,971,667, a 40% decrease from the same period in 2023. OCF and FCF for Q2 2024 were both negative $368,054, representing significant decreases from the previous year. These declines were primarily driven by lower revenue and higher operating expenses.

Liquidity

The company's liquidity position has been a concern, with a current ratio of 0.70 as of June 30, 2024, indicating potential difficulties in meeting short-term obligations. The quick ratio, a more stringent measure of liquidity, was also 0.70, suggesting a limited ability to quickly convert assets into cash to cover liabilities.

Lottery.com's solvency ratios have also been under pressure. The debt-to-equity ratio stood at 0.18 as of June 30, 2024, indicating a relatively high level of debt compared to equity. The company's cash position was extremely low at $27,950 as of June 30, 2024.

To support its operations, Lottery.com has secured additional financing through loan agreements. The company has a $52.5 million loan agreement with Woodford Eurasia Assets, Ltd., of which $798,350 was received as of December 31, 2023. Additionally, Lottery.com has entered into a credit facility with United Capital Investments London Limited (UCIL), although the full details of this facility have not been disclosed.

Operational Challenges and Turnaround Efforts

Lottery.com's operations were significantly impacted by the operational cessation in July 2022, which resulted in the furlough of the majority of the company's employees and the suspension of its lottery game sales operations. This event was largely due to the company's inability to fund its operations or pay certain existing obligations, including payroll and related obligations.

Since the operational cessation, Lottery.com has primarily focused on restarting certain aspects of its core businesses, with a three-phase plan for recommencement. The first phase involved the relaunch of the company's B2B API platform, which resumed limited operations in April 2023. The second phase aims to resume the B2C platform operations, with the company anticipating a relaunch by fall 2024. The third phase involves restoring other business lines and projects, including the supply of lottery tickets to consumers in approved domestic jurisdictions and partnerships with licensed providers in international jurisdictions.

Turnaround Financing and Strategic Initiatives

To support its turnaround efforts, Lottery.com has secured additional financing through loan agreements. In December 2022, the company entered into a loan agreement with Woodford Eurasia Assets, Ltd., providing up to $52.5 million in financing, of which $798,350 was received by the end of 2023. In July 2023, the company entered into a credit facility with United Capital Investments London Limited (UCIL), which has been subsequently amended and restated.

Additionally, Lottery.com has been actively pursuing strategic initiatives to diversify its business and enhance its long-term prospects. In December 2021, the company finalized the acquisition of the Sports.com domain name and subsequently formed a wholly-owned subsidiary, Sports.com, Inc. Sports.com has since partnered with various entities, including the Saudi Motorsports Company and Data Sports Group, to expand its sports content and data offerings.

In September 2024, Lottery.com announced the successful completion of its acquisition of S&MI Ltd., the innovative technology company behind the Sports.com brand and app. This acquisition is expected to unlock new growth opportunities for Lottery.com, particularly in the Middle East and North Africa regions, and further strengthen the company's position in the global sports entertainment market.

Regulatory Compliance and Nasdaq Listing

Lottery.com has faced significant regulatory challenges in the past, including instances of non-compliance with state and federal laws concerning the procurement and distribution of lottery tickets. These issues were uncovered during an internal investigation in 2022, leading to the operational cessation and the need for the company to restate its financial statements.

The company's ability to maintain compliance with Nasdaq's continued listing requirements has also been a concern. In 2023, Lottery.com faced potential delisting from Nasdaq due to issues related to its Market Value of Publicly Held Shares (MVPHS). However, the company was able to regain compliance through proactive measures, and its securities remain listed on Nasdaq as of the time of this report.

Legal and Regulatory Challenges

The company has faced several challenges in the past year, including findings from an internal investigation that exposed the company to legal proceedings, investigations, and inquiries by governmental agencies. This has resulted in significant legal and other expenses and required substantial time and attention from senior management.

Lottery.com was also named as a defendant in several lawsuits filed by purchasers of its securities, including class action lawsuits. Matters relating to or arising from the restatement and the internal investigation, including adverse publicity and potential concerns from users, customers, or others with whom the company does business, have had and could continue to have an adverse effect on the company's business and financial condition.

The company has also faced challenges in implementing an effective system of internal controls, which has caused and may continue to cause substantial delays in its SEC filings.

Outlook and Risks

As Lottery.com continues its turnaround efforts, the company faces a range of risks and challenges. The competitive landscape in the digital lottery and sports entertainment industries remains intense, with the company competing against established players and new entrants. Regulatory changes and compliance requirements in the markets where Lottery.com operates could also impact the company's operations and financial performance.

The company's ability to successfully execute its three-phase plan for recommencement and effectively integrate the Sports.com acquisition will be critical to its long-term success. Securing the necessary capital and maintaining compliance with Nasdaq's listing requirements will also be key focus areas for Lottery.com's management.

The company needs additional capital to support and restart its operations, re-hire employees, and pay its expenses. Such capital may not be available on commercially acceptable terms, if at all. If the company does not receive the additional capital, it may be forced to curtail or abandon its plans to recommence operations and may need to permanently cease operations.

The lottery, lottery games, or online gaming/betting industry is highly competitive, with the company facing competition from other forms of entertainment for consumers' discretionary time and income. Economic conditions, inflation, geopolitical and political factors, and market conditions beyond the company's control could also adversely impact its business. Negative events or media coverage relating to the company, its management, the lottery industry, or online gaming/betting could also hurt the company.

Despite the challenges, the company's diversification into the sports entertainment market through the Sports.com brand presents potential opportunities for growth and revenue diversification. The global demand for high-quality sports content and the company's strategic partnerships in emerging markets could provide a pathway for Lottery.com to regain its footing and capitalize on new market opportunities.

Conclusion

Lottery.com's journey has been marked by both successes and setbacks, but the company's resilience and adaptability have been tested. As it navigates the digital lottery and sports entertainment landscape, Lottery.com must address its operational and financial challenges, strengthen its regulatory compliance, and execute its strategic initiatives to unlock long-term value for its shareholders. The company's ability to successfully integrate its Sports.com acquisition and capitalize on the growing global demand for sports entertainment will be crucial in determining its future trajectory. However, the company's current financial position and ongoing operational challenges present significant risks that must be carefully managed for Lottery.com to achieve a sustainable turnaround and long-term success.