Affiliate Marketing

LOTTERY.COM INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

You should read the following discussion and analysis of our financial condition
and results of operations together with the consolidated financial statements
and the related notes appearing elsewhere in this Annual Report. This discussion
contains forward-looking statements that reflect our plans, estimates, and
beliefs that involve risks and uncertainties. As a result of many factors, such
as those set forth under the "Risk Factors" and "Cautionary Note Regarding
Forward-Looking Statements and Risk Factor Summary" sections and elsewhere in
this Annual Report, our actual results may differ materially from those
anticipated in these forward-looking statements.



Overview



We are a leading provider of domestic and international lottery products and
services. As an independent third-party lottery game service, we offer the
Platform, which we architected, developed, and operate to enable the remote
purchase of legally sanctioned lottery games in the U.S. and abroad. Our revenue
generating activities are consist of (i) offering the Platform via our BC2
Platform to users located in the U.S. and abroad where the sale of lottery games
is legal and our services are enabled for the remote purchase of sanctioned
lottery games; (ii) selling LotteryLink Credits that can be exchanged for
flexible promotion packages that include our marketing collateral, prepaid
advertising, development services, account management, and prepaid lottery games
for use in promotions to our Master Affiliates for use by them and by their Sub
Affiliates in undertaking affiliate marketing activities and promoting our B2C
Platform; (iii) offering an internally developed, created, and operated
business-to-business API of the Platform, or our B2B API, that enables our
commercial partners, in permitted U.S. and international jurisdictions, to
purchase certain legally operated lottery games from us and resell them to users
located within their respective jurisdictions; and (iv) providing our Data
Service, which entails delivering global lottery data, such as winning numbers
and results, to commercial digital subscribers and subscriptions to data sets of
our proprietary, anonymized transaction data pursuant to multi-year contracts.



We currently derive substantially all of our revenue from service fees paid to
us by users of our B2C Platform, sale of LotteryLink Credits, revenue share
arrangements with commercial partners participating in our B2B API, and
subscription fees from users of our Data Service. We intend to pursue growth by
implementing new products and features within our B2C Platform services, growing
our LotteryLink program, expanding our B2C offering into new domestic and
international jurisdictions, entering into additional agreements with new
commercial partners for our B2B API, growing our LotteryLink Credit program,
executing on strategic acquisitions and other synergistic opportunities,
including gaining access to complementary and new technology through such
acquisitions, and investing in and developing new technology and enhancing our
existing technology in each of our business lines, including distributed ledger
technology. In December 2021, we finalized the acquisition of the domain name
https://sports.com and are exploring opportunities for the intended strategic
entry into legal sports gaming verticals, which may include the distribution of
sports lottery games.



In addition, we also expect to grow our brand and commitment to social awareness
through our affiliation with WinTogether. WinTogether is a registered
501(c)(3) charitable trust that supports charitable, educational and scientific
causes. Messrs. DiMatteo and Clemenson formed WinTogether and continue to act as
trustees. We operate the WinTogether Platform on behalf of WinTogether, as well
as the sweepstakes offered through the WinTogether Platform, which support
charitable causes selected by the trustees of WinTogether. These sweepstakes
work to incentivize participants to donate to those chosen causes. Donors to
each campaign are automatically entered into the sweepstakes for the chance to
win cash prizes, luxury items, and exceptional experiences. In exchange for
operating the WinTogether Platform and the sweepstakes on behalf of WinTogether,
we receive a fee from the gross donations from each sweepstakes. While the
revenue received from the Company's services relating to the WinTogether
Platform are currently nominal, we believe that our operation of the WinTogether
website and sweepstakes could be a scalable source of revenue in the future as
well as a mechanism to increase our brand reputation and recognition by
sweepstake participants, which could result in the acquisition and monetization
of new users to our B2C Platform.



Recent Developments



Business Combination



On October 29, 2021, we consummated the Business Combination with Trident
Acquisitions Corp. ("TDAC" and after the Business Combination described herein,
the "Company"), pursuant to the terms of that certain Business Combination
Agreement, dated as of February 21, 2021 (the "Business Combination Agreement"),
by and among TDAC, Trident Merger Sub II Corp., a wholly-owned subsidiary of
TDAC ("Merger Sub") and AutoLotto. Pursuant to the terms of the Business
Combination Agreement, Merger Sub merged with and into AutoLotto with AutoLotto
surviving the merger as a wholly owned subsidiary of TDAC, which was renamed
"Lottery.com Inc." The aggregate value of the consideration paid by TDAC to the
holders of AutoLotto common stock in the Business Combination (excluding shares
that may be issued to former AutoLotto stockholders (the "Sellers") as earnout
consideration) was approximately $440 million, consisting of approximately
40,000,000 shares of Common Stock valued at $11.00 per share. In addition, the
Sellers and TDAC's founders are also entitled to receive up to 3 million and 2
million additional shares of Common Stock, respectively, to the extent that
certain share price targets are achieved following the Closing.



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Impacts of COVID-19



The continued outbreak of COVID-19, including its variant strains, and efforts
to control its spread has significantly impacted, and continues to impact,
economic conditions worldwide. In response to the COVID-19 pandemic U.S.
federal, state, local and international governments continue to institute
restrictive measures to mitigate the spread of the virus and its variants and
combat this public health crisis. The preventative measures that have primarily
impacted us include limitations on individual and business activities through
stay-at-home orders, operational and travel restrictions and physical distance
requirements.



In a typical year, the sales volume of draw games depends heavily on the
development of a few notably large jackpots. Suppression of sales (owing, for
instance, to restricted visits by players to locations where tickets are sold as
a result social distancing or other measures put in place as a result of
COVID-19, even if the drawings are themselves continued as scheduled) works
against the continued development of these notable jackpots. By contrast, the
betting opportunities offered through instant win games, such as scratchers, are
typically unaffected by the volume of play, and therefore, tickets for instant
win games are considered more like merchandise (similar to canned goods) that
may be "bought ahead," even during the curtailment of retail, or
person-to-person, visits. According to the World Lottery Association, during
2020, sales of instant win games remained within 1% of the 2019 levels for such
sales, despite pandemic-related restrictions that resulted in the temporary
closure of retail locations that are the primary point of sale for instant
win
games.


Throughout the COVID-19 pandemic, sales of Online Lottery games via digital
channels experienced more ticket sales growth than the alternative,
person-to-person sales. The proportion of all sales occurring through digital
channels reached 17% across World Lottery Association membership in 2021, an
increase of 11% over the same figure in 2020.



The shift in consumer purchasing activity toward online purchasing has catalyzed
demand for the mobile and online delivery of lottery games. As an early entrant
in the delivery of digitized representation of lottery games with an established
and growing user base in the U.S. and abroad, we believe that we remain
well-positioned to capitalize on what we expect to be a continued shift towards
a new demography of customers who rely on mobile and online means for
acquisition of consumer goods, including lottery games and other forms of online
gaming. For example, we experienced a 123% year-over-year increase in our
worldwide sale of unique lottery games between 2020 and 2021, which we primarily
attribute to the shift in consumer purchasing habits to mobile and online
purchases due to COVID-19.



As the COVID-19 pandemic remains ongoing, we continue to take steps to ensure
the health and safety of our employees by having an entirely remote workforce.
We also reassess our business continuity programs on an ongoing basis and in
light of new developments and governmental mandates to ensure that our employees
remain protected, our business is able to function with minimal disruptions to
normal work operations while employees work remotely, and that demand for our
products and services remains consistent. For more information on the
COVID-19-related impacts we may experience, see "Item 1A. Risk Factors - We face
risks related to health epidemics and other widespread outbreaks of contagious
disease, which could disrupt our operations and impact our operating results."



International Expansion



In June 2021, we closed the acquisition of Global Gaming, which holds 80% of the
equity of each of Aganar and JuegaLotto. Aganar operates in the licensed Online
Lottery market in Mexico and is licensed to sell Mexican National Lottery draw
games, instant win tickets, and other games of chance online with access to a
federally approved online casino and sportsbook gaming license. JuegaLotto is
licensed by Mexico authorities to commercialize international lottery games in
Mexico through an authorized gaming portal and to commercialize games of chance
in other countries throughout Latin America. As of December 31, 2020, Latin
America's estimated lottery market was approximately $9.1 billion across 26
countries. As of December 31, 2020, (the most recent date available) the
addressable market in the countries that JuegaLotto and Aganar cover includes
664 million people and potential customers. We believe these acquisitions will
provide inroads for the Company throughout Mexico and Latin America as we expand
our international operations, expand our portfolio of products, and expose our
existing products to new markets.



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In the first quarter of 2022, we announced the signing of an agreement with
ICARO pursuant to which ICARO will join LotteryLink as a Master Affiliate. As
part of this agreement, ICARO has agreed to market and promote the Company's
products to its customers in jurisdictions where ICARO operates, including
markets outside of the U.S. ICARO expects to launch its marketing efforts in one
of the Latin American markets where it operates.



Launch of LotteryLink


Our success relies, in part, on our ability to attract new customers to our B2C
Platform and convert such customers to ongoing users of the B2C Platform. To
further this objective, in the third quarter of 2021, we launched LotteryLink,
an affiliate marketing program. See below for more information.



Launch of Project Nexus


We are developing a proprietary, blockchain-enabled gaming platform, which we
have named Project Nexus. The Project Nexus platform is designed to handle high
volumes of user traffic with the goal of improving users' experience through
enhancing the security speed of our platforms and making them more reliable. The
initial phase of Project Nexus is expected to be implemented in the second
quarter of 2022. See below for more information.



Key Elements of our Business

Mobile Lottery Game Platform Services




Both our B2C Platform and our B2B API provide users with the ability to purchase
legally sanctioned draw lottery games via a mobile device or computer, securely
maintain their acquired lottery game, automatically redeem a winning lottery
game, as applicable, and receive support, if required, for the claims and
redemption process. Our registration and user interfaces are designed to be easy
to use, provide for the creation of an account and purchase of a lottery game
with minimum friction and without the creation of a mobile wallet or requirement
to pre-load minimum funds and - importantly - to provide instant confirmation of
the user's lottery game numbers, whether selected at random or picked by the
user. In consideration of our B2C Platform services, users pay a service fee
and, in certain non-U.S. jurisdictions, a mark-up on the purchase price. We
generate revenue from that service fee and mark-up.



LotteryLink Credits



In the third quarter of 2021, we launched LotteryLink, our affiliate marketing
program. As part of LotteryLink, we pay each of our Affiliates a percentage of
the revenues derived from each new customer they refer to us and, if such
customer is located in a jurisdiction in which they may lawfully use our B2C
Platform, is converted to a user. These commissions are paid for a contractually
specified duration of such user's activity on the B2C Platform. In support of
their promotional activities, our Master Affiliates purchase credits, referred
to as a LotteryLink Credit, from us that can be redeemed for flexible promotion
packages, consisting of marketing collateral, prepaid advertising, development
services, account management, and prepaid lottery games that can be used in
promotions. We generate revenue from the sale of the LotteryLink Credits and we
believe that we may generate additional revenue through LotteryLink in the
future by these Affiliates purchasing more LotteryLink Credits.



Data Services


Our application and websites offer comprehensive multi-jurisdiction lottery
result information, without the requirement to create an account. Additionally,
our Data Service delivers daily results of domestic and international lottery
games from more than 40 countries to over 400 digital publishers and media
organizations, pulled from real time primary source data.



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We generate revenue from the subscription fees paid by our subscribers for
annual access and also additional per record fees. We also generate fees from
multi-year contracts pursuant to which we sell proprietary, anonymized
transaction data.




The WinTogether Platform



Unlike lottery games and other games of chance, participation in sweepstakes is
permissible in every state within the U.S. and most international jurisdictions
and sweepstakes offered on the WinTogether Platform are open to participants
within the U.S. and internationally, unless prohibited by local law or
regulation. When a participant donates to a campaign cause on the WinTogether
Platform, they are automatically entered to win a prize; provided, however, in
accordance with the sweepstakes requirements of most jurisdictions and the terms
of service for each sweepstakes, no purchase or donation is required for entry
into sweepstakes offered on the WinTogether Platform.



We are the operator and administrator of all sweepstakes on the WinTogether
Platform. In consideration of our operation of the WinTogether Platform and
administration of the sweepstakes, we receive a percentage of the gross
donations to a campaign, from which we pay certain dividends and all
administration costs. We expect that participation in the sweepstakes offered on
the WinTogether Platform will continue to grow as we and WinTogether's trustees
continue to develop its offerings. In addition to the benefit of the
philanthropic opportunities generated by the WinTogether Platform, we view its
operation as a scalable source of revenue as well as a mechanism to increase the
Company's brand reputation and recognition.



Synergistic Growth


In addition to organic growth of our current revenue generating activities, we
intend to grow our business through synergistic acquisitions, as evidenced by
our acquisition of Global Gaming in June 2021, which we believe provides growth
potential for us in the Mexican and Latin American markets, and our recent
acquisition of the "Sports.com" domain as part of our plan to enter sports
betting in December 2021.



Performance Measures


In managing our business and assessing financial performance, we supplement the
information provided by our financial statements with other operating metrics.
We use these metrics to evaluate our business, measure our performance, identify
trends affecting our business, formulate projections and make strategic
decisions. The primary operating metrics we use are:



 ? transactions per user;




 ? tickets per transaction;



? gross revenue per transaction;

? gross profit per transaction; and

? gross margin per transaction.





These metrics help enable us to evaluate pricing, cost and customer
profitability. We believe it is useful to provide investors with the same
metrics that we use internally to make comparisons of our historical operating
results, identify trends in our operating results and evaluate our business.
These metrics track our B2C business and exclude users who were referred by an
affiliate or who made purchases through an API partner.



                                    Year Ended December 31,
                                    2021               2020
Transactions Per User                  17.18              16.55
Tickets Per Transaction                 3.91               3.57
Gross Revenue Per Transaction   $       9.66       $       8.63
Gross Profit Per Transaction    $       1.57       $       1.19
Gross Margin per Transaction           16.29 %            13.81 %




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Transactions Per User


Transactions per user is the average number of individual transactions per user
in a given period. An individual transaction is defined as the placement of an
order by a user on our Platform. We use this measure to determine the overall
performance of our products on a per user basis. When considered with the other
operating metrics, transactions per user provides insight into user stickiness
and buying patterns and is a useful tool to identify our most active users,
which enables us to deploy more targeted marketing and other strategic
initiatives. This metric also gives us the ability to categorize users based on
their performance and determine where to expend marketing and/or operational
resources. Transactions per user may be subject to variables that are outside of
our control, for instance the size and popularity of a particular lottery game.



Tickets Per Transaction



Tickets per transaction is the average number of lottery game tickets purchased
by a user per transaction. We use this measure to analyze the impact of product
performance with our customers on the number of tickets sold in one transaction.
We believe this metric is useful for our investors because it gives insight into
the buying habits of our users. Similar to transactions per user, tickets per
transaction may be subject to variables that are outside of our control, for
instance the size and popularity of a particular lottery game.



Gross Revenue Per Transaction




Gross revenue per transaction is the average gross amount of revenue per
transaction. We use this measure to determine how our top line revenue is
performing on a per transaction basis, which helps us to identify and evaluate
pricing trends. We believe this metric is useful for our investors because it
provides insight into our revenue growth potential on a per transaction basis.



Gross Profit Per Transaction



Gross profit per transaction is our average gross profit per transaction,
calculated as gross revenue less the cost of the lottery game ticket and any
processing fees, including labor, printing and payment processing, per
transaction. We believe this metric to be useful to evaluate and analyze our
costs and fee structure across product offerings and user cohorts, and
additionally, helps our investors because it provides insight into our profit
growth potential on a per transaction basis.



Gross Margin Per Transaction


Gross margin per transaction is calculated by dividing gross profit per
transaction by gross revenue per transaction. We consider this metric to be a
measure of overall performance that provides useful information about the
profitability of our B2C Platform and B2B API businesses.

Components of Our Results of Operations



Our Revenue


Revenue from B2C Platform. Our revenue is the retail value of the acquired
lottery game and the service fee charged to the user, which we impose on each
lottery game purchased from our B2C Platform. The amount of the service fee is
based upon several factors, including the retail value of the lottery game
purchased by a user, the number of lottery games purchased by a user, and
whether such user is located within the U.S. or internationally. Currently, in
the U.S, the minimum service fee is $0.50 for the purchase of a $1 lottery game
and $1 for the purchase of a $2 lottery game; the service fee for additional
lottery games purchased in the same transaction is 6% of the face value of all
lottery games purchased. For example, the service fee for the purchase of five
$2 tickets is $1.60, being the $1 base service fee, plus 6% of the aggregate
value of the face value of all lottery games purchased. In 2021, our domestic
B2C Platform users purchased an average of 4.0 lottery games per transaction at
an average service fee of $0.37 per lottery game. In 2021, we had an average
gross profit per domestic B2C Platform user, where the definition of gross
profit is the same as defined under "Gross Profit per Transaction", of
approximately $16.08. The Company did not conduct any digital marketing spending
in 2021. The average customer acquisition cost during 2020 was $4.01 per new
user. Average customer acquisition costs per new user include digital marketing
costs, but exclude non-digital market costs and exclude any user referred by an
affiliate. We had a year-over-year retention rate of domestic users of 72%,
excluding any customers referred by an affiliate or API partner, which results
in a lifetime user value, on average, of $57.43.



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Internationally, we impose a mark-up on the cost to be imposed on the sale of
each lottery game together with a service fee to be charged to the user. In
2021, our international B2C Platform users purchased an average of 2.1 lottery
games per transaction at an average service fee and ticket price mark-up of
$2.30 per lottery game. We typically charge a higher service fee on lottery
games in our international jurisdictions, and, as a result, in 2021, the average
service fee per international transaction was 90% higher than domestic
transactions. In 2021, our average gross profit per international user of our
B2C Platform was $31.71. The Company did not conduct any digital marketing
spending in 2021. The average customer acquisition cost during 2020 was $4.26
per new user. The year-over-year retention rate was slightly lower
internationally, at 69%, resulting in a user lifetime value of $102.92. Although
revenues from our international jurisdictions comprised 10% of our total
revenues in 2021, we are focused on the growth of this business organically and
through the pursuit of strategic acquisitions and other synergistic
opportunities.



In 2021, we delivered approximately 2,585,000 lottery games to users of our B2C
Platform worldwide.




Revenue from Sale of LotteryLink Credits. We sell LotteryLink Credits to our
third-party Affiliates, which may be redeemed for advertising credits, marketing
collateral, development services, account management services and prepaid
lottery games for promotional activities. In 2021, we sold $47.1 million in
LotteryLink Credits for prepaid advertising, prepaid lottery games, marketing
materials and development services.



Revenue from B2B API. Together with our third-party commercial partner, we agree
on the amount of the mark-up on the cost to be imposed on the sale of each
lottery game purchased through the B2B API, if any, together with a service fee
to be charged to the user; we receive up to 50% of the net revenues from such
mark-up and service fee pursuant to our commercial agreement with each
commercial partner. In the U.S., the Company's average gross revenue per such
lottery game sale was $2.59. Internationally, the Company's average gross
revenue per lottery game sale was $3.96. We currently do not charge our
commercial partners a fee for the use of the B2B API.



In the third quarter of 2021, we launched LotteryLink, which is intended to
leverage third party Affiliates across multiple industries and marketing
channels to acquire users on our behalf. The initial phase of this program
involved the sale and transfer of LotteryLink Credits to a Master Affiliate for
use in providing affiliate marketing packages to other third party Affiliates.
Affiliate marketing packages include the LotteryLink Credits, which, in the next
phase of this program, such third party Affiliates will be able to use to
promote and distribute our products on their platforms. We believe that we may
generate additional revenue through LotteryLink in the future by these third
party Affiliates purchasing more LotteryLink Credits.



In 2021, we had agreements to acquire and sell lottery games through the B2B API
with three international third-party commercial partners, including a French
betting solution and one U.S. third-party commercial partner, which operates a
proprietary mobile wallet for use at traditionally coin-operated machines, such
as arcade games, vending machines, and laundry machines, which enabled our
offerings on its mobile application. Collectively, these agreements provided us
with access to over 420,000 unique points of sale for users to acquire lottery
games via our B2B API.


In 2021, we delivered 333,485 lottery games to end users of our B2B API,
worldwide.

Data Services. Commercial acquirers of our Data Service pay a subscription for
access to the Data Service and, for acquisition of certain large data sets, an
additional per record fee. The Company additionally enters into multi-year
contracts pursuant to which it sells proprietary, anonymized transaction data
pursuant to multi-year agreements and in accordance with our Terms of Service in
consideration of a fee.



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Our Operating Costs and Expenses

Personnel Costs. Personnel costs include salaries, payroll taxes, health
insurance, worker’s compensation and other benefits for management and office
personnel.

Professional Fees. Professional fees include fees paid for legal and financial
advisors, accountants and other professionals related to the Business
Combination and other transactions.

General and Administrative. General and administrative expenses include
marketing and advertising, expenses, office and facilities lease payments,
travel expenses, bank fees, software dues and subscriptions, expensed research
and development (“R&D”) costs and other fees and expenses.

Depreciation and Amortization. Depreciation and amortization expenses include
depreciation and amortization expenses on real property and other assets.

Key Trends and Factors Affecting Our Results

The following describes the trends associated with our business that have
impacted, and which we expect will continue to impact, our business and results
of operations in a material way:

COVID-19. For the trends and other impacts related to the COVID-19 pandemic that
may continue to impact our business and results of operations, please see
“Recent Developments-Impacts of COVID-19,” above.




International operations. We face challenges related to expanding our footprint
globally and the related process of obtaining the licenses and regulatory
approvals necessary to provide services and products within new and emerging
markets. Largely as a result of the COVID-19 pandemic and more recently as a
result of the war in Ukraine, the international jurisdictions where we operate
and seek to expand have been subject to increasing foreign currency fluctuations
against the U.S. dollar, soaring inflation and political and economic
instability. We expect these trends to continue during fiscal 2022 and believe
they are likely to cause a material decrease in consumer spending, which could
have a material impact on our revenues. We expect that it will take a longer
period of time to achieve revenue gains or generate cash in the new regions or
any new international jurisdictions in which we expand, outside of our domestic
geographies.



Introduction of a new gaming platform. We have developed a proprietary,
blockchain-enabled gaming platform, which we have named Project Nexus. Project
Nexus is designed to handle high levels of user traffic and transaction volume,
while maintaining expediency, security, and reliability in processing lottery
game sales, the retail requirements of the B2C Platform, the administrative and
back-office functionality required by the B2B API, and the claims and redemption
process. We expect to utilize this platform to launch new products, including
any proprietary products we may introduce. The introduction of new technology
like Project Nexus is subject to risks including, for example, implementation
delays, issues successfully integrating the technology into our solutions, or
the possibility that the technology does not produce the expected benefits.



Our growth plans and the competitive landscape. Our direct competitors operate
in the global entertainment and gaming industries and, like us, seek to expand
their product and service offerings with integrated products and solutions. Our
short-to-medium term focus is on increasing our penetration in our existing U.S.
jurisdiction by increasing direct to consumer marketing campaigns, introducing
our B2C Platform into new U.S. and international jurisdictions, growing our
LotteryLink program through the addition of new Affiliates, and acquiring
synergistic regulated and sports betting enterprises domestically and abroad.
Competition in the sale of online lottery games has significantly increased in
recent years, is currently characterized by intense price-based competition, and
is subject to changing technology, shifting needs and frequent introductions of
new games, development platforms and services. To maintain our competitive edge
alongside other established industry players (many of which have more resources,
or capital), we expect to incur greater operating expenses in the short-term,
such as increased marketing expenses, increased compliance expenses, increased
personnel and advisory expenses associated with being a public company,
additional operational expenses and salaries for personnel to support expected
growth, additional expenses associated with our ability to execute on our
strategic initiatives including our aim to undertake merger and acquisition
activities, as well as additional capital expenditures associated with the
ongoing development and implementation of Project Nexus.



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Results of Operations


Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table summarizes our results of operations for the years ended
December 31, 2021 and December 31, 2020, respectively.




                                              Years Ended December 31,
                                               2021              2020           $ Change        % Change

Revenue                                    $  68,527,394     $  7,459,514     $ 61,067,880          818.7 %
Cost of revenue                               19,158,707        2,952,415       16,206,292          548.9 %
Gross profit                                  49,368,687        4,507,099       44,861,588          995.4 %

Operating expenses:
Personnel costs                               21,585,534        4,477,955       17,107,579          382.0 %
Professional fees                              8,279,798        1,121,218        7,158,580          638.5 %
General and administrative                     5,020,495        1,084,784        3,935,711          362.8 %
Depreciation and amortization                  4,292,606        1,533,994        2,758,612          179.8 %
Total operating expenses                      39,178,433        8,217,951       30,960,482          376.7 %
Income (loss) from operations                 10,190,254     $ (3,710,852 )
    13,901,106         (374.6 )%

Other expenses
Interest expense                              19,789,451        1,221,928       18,567,523         1519.5 %
Other expense                                  2,907,518          879,083        2,028,435          230.7 %
Total other expenses, net                     22,696,969        2,101,011  

20,595,958 980.3 %

Net loss before income tax                 $ (12,506,715 )   $ (5,811,863 )   $ (6,694,852 )        115.2 %
Income tax expense (benefit)                  (1,551,689 )            800
Net loss                                     (10,955,026 )     (5,812,663 )

Other comprehensive loss
Foreign currency translation adjustment,
net                                                 (655 )              -
Comprehensive loss                           (10,955,681 )     (5,812,663 )

Net income attributable to
noncontrolling interest                          136,924                -
Net loss attributable to Lottery.com
Inc.                                         (11,092,605 )     (5,812,663 )

Net loss per common share
Basic and diluted                          $       (0.43 )   $      (0.26 )

Weighted average common shares
outstanding
Basic and diluted                             25,998,831       22,658,006




Revenues.


Revenue. Revenue for the year ended December 31, 2021 was $68.5 million, an
increase of $61.0 million, or 819%, compared to revenue of $7.5 million for the
year ended December 31, 2020. The increase in revenue was driven by the sale of
$47.1 million in LotteryLink Credits for prepaid advertising, prepaid lottery
games, marketing materials and development services in the third and fourth
quarters of 2021. We also experienced increased lottery game sales as a result
of the availability of large multi-state lottery game jackpots in the first
quarter of 2021. Additionally, we believe that our increased brand recognition
resulted in an increasing number of users on our Platform, as well as increased
lottery game sales during 2021.



Cost of Revenue. Cost of revenue for the year ended December 31, 2021 was $19.2
million, an increase of $16.2 million, or 549%, compared to cost of revenue of
$3.0 million for the year ended December 31, 2020. The increase in the cost of
revenue was driven by the increase in the number of lottery games sold in 2021.
Cost of revenue includes product costs, commission expense to affiliates and
commercial partners, and merchant processing fees. Additionally, the sale of
LotteryLink Credits for prepaid advertising, prepaid lottery games, marketing
materials and development services also increased cost of revenue in 2021, as
there were no sales of LotteryLink credits in 2020.



Gross Profit. Gross profit for the year ended December 31, 2021 was $49.4
million, compared to $4.5 million for the year ended December 31, 2020, an
increase of $44.9 million, or 995%. This increase was due to the sale of $47.1
million of LotteryLink Credits for prepaid advertising, prepaid lottery games,
marketing materials and development services in 2021, which generated
significant gross profit, the sale of $9 million worth of Data Services, which
did not incur any costs, and an overall increase in the number of lottery games
sold.



                                       71





Operating Costs and Expenses.



                                        Years Ended
                                        December 31,
                                    2021            2020           $ Change        % Change
Operating expenses
Personnel costs                 $ 21,585,534     $ 4,477,955     $ 17,107,579          382.0 %
Professional fees                  8,279,798       1,121,218        7,158,580          638.5 %
Sales & marketing                  1,887,870         313,442        1,574,428          502.3 %
General and Administrative         3,132,624         771,342        2,361,282          306.1 %
Depreciation and amortization      4,292,606       1,533,994        2,758,612          179.8 %
Total operating expenses        $ 39,178,432     $ 8,217,951       30,960,481          376.7 %



Operating expenses for the year ended December 31, 2021 were $39.2 million, an
increase of $31.0 million, or 377%, compared to $8.2 million for the year ended
December 31, 2020. The increase was primarily driven by increased professional
and administrative expenses associated with the Business Combination, increased
stock compensation expense, increased headcount to support the Company's growth,
increased marketing spends resulting from the use of Gatehouse Media credits,
which we received several years ago in exchange for warrants, and increased
amortization expenses driven by acquisitions made during the 2021 fiscal year.



Personnel Costs. Personnel costs increased by $17.1 million, or 382%, from
$4.5 million for the year ended December 31, 2020, to $21.6 million for the year
ended December 31, 2021. The increase was due to increases in headcount to
support the growth of the Company's business operations and to support public
company functions as well as stock compensation expense.



Professional Fees. Professional fees increased by $7.2 million, or 639%, from
$1.1 million for the year ended December 31, 2020 to $8.3 million for the year
ended December 31, 2021. The increase was driven by legal and professional fees
associated with the Business Combination



Sales and Marketing. Sales and marketing expenses for the year ended
December 31, 2021 were $1.9 million, compared to $0.3 million for the year ended
December 31, 2020, an increase of $1.6 million, or 502%. The Company used
$1.0 million of Gatehouse media credits in 2021 as compared to $0.3 million used
in 2020, which credits were received by the Company in consideration of the
issuance of the Company's warrants. Additionally, spend on non-digital
advertising and public relations activities increased throughout the year in
conjunction with our growth plans.



General and Administrative. General and administrative expenses increased
$2.4 million, or 306%, from $0.8 million for the year ended December 31, 2020 to
$3.1 million for the year ended December 31, 2021. These costs increased in
general with the growth of the business and can be broken down further into:
increased travel of $0.4 million for business development opportunities,
increased business licensing, bank fees, and insurance of $0.9 million, and $0.8
million of additional office and software-related costs to support the increased
headcount.



Depreciation and Amortization. Depreciation and amortization increased
$2.8 million, or 180%, from $1.5 million for the year ended December 31, 2020 to
$4.3 million for the year ended December 31, 2021. The increase was driven by
the acquisition of the sports.com domain name in 2021 as well as the intangibles
created through the purchase of Global Gaming.



Other Expense, Net.



                                    Years Ended
                                    December 31,
                                2021            2020           $ Change       % Change
Other expenses
Interest expense              19,789,451       1,221,928       18,567,523        1519.5 %
Other expense                  2,907,518         879,083        2,028,435         230.7 %
Total other expenses, net   $ 22,696,969     $ 2,101,011       20,595,957  
      980.3 %




Interest Expense. Interest expense increased by $18.6 million, or 1,519%, for
the year ended December 31, 2021, as compared to the year ended December 31,
2020. This increase relates to amortization of debt discounts and beneficial
conversion features for additional convertible debt and short-term loans issued
in 2021, most of which was converted into equity at the time of the Business
Combination or settled in cash following the Closing.



Other Expense. Other expense increased by $2.0 million, or 231%, for the year
ended December 31, 2021 as compared to the year ended December 31, 2020. This
increase was driven primarily by $1.7 million of additional revenue share
expense based on increased revenue in 2021 as compared to 2022. Additionally,
there was $0.5 million in fees incurred during 2021 as part of a settlement with
a subsidiary's former shareholders.



                                       72




Liquidity and Capital Resources




Our primary need for liquidity is to fund working capital requirements of our
business, growth, capital expenditures and for general corporate purposes. Our
primary source of liquidity has historically been funds generated by financing
activities. For 2022, we expect to fund our operations, undertake anticipated
growth activities and make planned capital expenditures utilizing primarily the
proceeds from the Business Combination and cash flows from operating activities,
although our ability to do so depends on our future operating performance, which
is subject to prevailing economic conditions and financial, business and other
factors, some of which are beyond our control.



Upon the Closing on October 29, 2021, we received net proceeds of approximately
$42.8 million in cash. As of December 31, 2021, we had $62.6 million of cash and
cash equivalents and $88.3 million of working capital (current assets minus
current liabilities), compared with $10.8 million of cash and negative
$0.5 million of working capital as of December 31, 2020. The increase of
$88.3 million in our working capital was primarily due to $30.0 million in cash
received the sale of LotteryLink Credits in the third quarter of 2021, $42.8
million in net proceeds from the Business Combination, $12.2 million reduction
on in current notes payable and a $8.9 million reduction in current net
convertible debt from 2020 to 2021.



We expect that our cash on hand and cash provided by operations will allow us to
meet our capital requirements and operational needs for the next twelve months.
As of December 31, 2021, there were no regulatory capital requirements
applicable to our industry.



We expect to deploy capital to fund our growth through implementing new products
and features within our B2C Platform services; expanding our B2C offering into
new domestic and international jurisdictions; entering into additional
agreements with new commercial partners for our B2B API and LotteryLink credits;
executing on strategic acquisitions and other synergistic opportunities;
investing in and developing new technology; and enhancing our existing
technology in each of our business lines, including distributed ledger
technology.



Execution of our growth plans, including further expansion of our business to
new U.S. states and international jurisdictions, may require additional capital,
which we may seek through the issuance of equity or debt securities. If we are
not able to secure the necessary capital, or if the terms of financing are less
desirable than we expect, we could be forced to decrease our level of investment
in new product launches and related marketing initiatives or to scale back our
existing operations, each of which could have an adverse impact on our business,
results of operations and financial prospects. For more information, see "Item
1A. Risk Factors - We may require additional capital to support our growth
plans, including in connection with our expansion into new markets and our
strategic acquisitions, and such capital may not be available on reasonable
terms or at all. This could hamper our growth and adversely affect our
business."



Convertible Debt Obligations


Prior to the Closing, we funded our operations through the issuance of
convertible promissory 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 bore interest at 10% per year, were unsecured, and were
due and payable on June 30, 2019. The Company and the noteholders executed
amendments in February 2021 to extend the maturity date to December 21, 2021. As
of December 31, 2021 and December 31, 2020, the balance of these notes was
$771,500 and $821,500, respectively.



From November 2019 through October 28, 2021, we issued approximately
$48.2 million in aggregate principal amount of Series B convertible promissory
notes. The notes bear interest at 8% per year, were unsecured, and were due and
payable on dates ranging from December 2020 to December 2022. For those
promissory notes that would have matured on or before December 31, 2020, the
parties extended the maturity date to December 21, 2021 through amendments
executed in February 2021. The amendments also allowed for automatic conversion
to equity as a result of the Business Combination. Nearly all of the
aforementioned promissory notes automatically converted into shares of Common
Stock or were terminated pursuant to their terms, as applicable, in connection
with the Closing. Those that remain outstanding do not have conversion terms
that were triggered by the Closing.



Immediately prior to the Closing, approximately $60.0 million of convertible
debt was converted into equity of AutoLotto. As of December 31, 2021, we had no
convertible debt outstanding.



Cash Flows



Net cash provided by operating activities was $8.1 million for the year ended
December 31, 2021, compared to net cash provided by operating activities of
$4.7 million for the year ended December 31, 2020. Factors affecting changes in
operating cash flows were increased revenue from operations which were offset by
increased expenses for professional fees, personnel costs, and sales and
marketing activities in 2021 as compared to 2020. Net cash used in investing
activities during the year ended December 31, 2021 were $15.2 million, compared
to $0.0 million for the prior year. The increase was primarily the result of the
acquisition of the sports.com domain name as well as the acquisition of Global
Gaming completed on June 30, 2021. Net cash provided by financing activities was
$59.0 million for the year ended December 31, 2021, compared to $6.0 million for
the year ended December 30, 2020. The increase was primarily due to the issuance
of debt and proceeds from the Business Combination offset by repayments during
2021.



                                       73




Changes in or Adoption of Accounting Practices




The following U.S. GAAP standards have been recently issued by the Financial
Accounting Standards Board (the "FASB"). We are in the process of assessing the
impact of these new standards on future consolidated financial statements.
Pronouncements that are not applicable or where it has been determined do not
have a significant impact to the Company have been excluded herein.



ASC 606, Revenue from Contracts with Customers




Between May 2014 and December 2016, the FASB issued several Accounting Standards
Updates ("ASUs")'s on ASC 606, which updates superseded nearly all previous
revenue recognition guidance under U.S. GAAP. The core principle is to recognize
revenues when promised goods or services are transferred to customers in an
amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. A five-step process has been defined to achieve
this core principle, and, in doing so, more judgment and estimates may be
required within the revenue recognition process than are required under existing
U.S. GAAP. The standards are effective for annual periods beginning after
December 15, 2017 using either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standards in each prior
reporting period with the option to elect certain practical expedients; or
(ii) a retrospective approach with the cumulative effect of initially adopting
the standards recognized at the date of adoption (which includes additional
footnote disclosures). The Company adopted these standards effective on
January 1, 2018, and management concluded the adoption of this standard did not
result in any financial statement impacts or changes to revenue recognition
policies or processes as revenue is primarily derived from arrangements in which
the transfer of control coincides with the fulfillment of performance
obligations.



Critical Accounting Policies


Our financial statements are prepared in conformity with U.S. GAAP. Certain of
our accounting policies require that management apply significant judgments and
estimates in defining the appropriate assumptions integral to financial
estimates. Judgments are based on historical experience and other factors that
we believe to be reasonable under the circumstances, such as terms of contracts,
industry trends and information available from outside sources, as appropriate.
However, by their nature, judgments are subject to an inherent degree of
uncertainty, and therefore actual results could differ from our estimates. We
have applied significant estimates and assumptions related to the following:



Revenue and Cost Recognition



Revenue



In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") 2014-09, Revenue from Contracts with
Customers (Topic 606) ("ASC 606"), amending revenue recognition guidance and
requiring a more structured approach to measuring and recognizing revenue as
well as provide more detailed disclosures to enable users of financial
statements to understand the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. The amended guidance is
effective for accounting periods commencing on or after January 1, 2018.



We have applied ASC 606 to all revenue contracts. The core principle of ASC 606
is that an entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. Revenues
are generally recognized upon the transfer of control of promised products
provided to our users, customers and subscribers, reflecting the amount of
consideration we expect to receive for those products. We enter into contracts
that can include various products, which are generally capable of being distinct
and accounted for as separate performance obligations. Revenue is recognized net
of any taxes collected from users, commercial partners and subscribers, which
are subsequently remitted to governmental authorities. The revenue recognition
policy is consistent for sales generated directly with users and sales generated
indirectly through affiliates, other solution partners, and our commercial
partners.



                                       74




Revenues are recognized upon the application of the following steps:

1. Identification of a contract or contracts with a user, customer or subscriber;

2. Identification of performance obligation(s) in the contract;

3. Determination of the transaction price;

4. Allocation of the transaction price to the performance obligations in the

    contract; and



5. Recognition of revenue when, or as, the performance obligation is satisfied.

Contracts with users and customers for lottery game sales are at the point of
sale and may include transfer of multiple products to a user or a customer and
generally do not require future obligations. In these situations, the Company
generally considers each transferred product as a separate performance
obligation. The Company also has contracts with subscribers for the continued
delivery of lottery and anonymized transaction data over a defined period of
time. In accounting for these contracts, the Company generally considers each
set of data as a separate performance obligation and recognizes revenue on their
delivery ratably over the service period of the agreement. The Company's
products are sold without a right of return or refund; the Company's terms of
service and contracts generally include specific language that disclaims any
warranties.



In addition, the Company's performance obligation in agreements with certain
third parties is to transfer previously acquired Affiliate Marketing Credits.
The payment for these credits by the third parties 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 third party. This transfer is
point-in-time when the revenue is recognized, and there are no variable
considerations related to this performance obligation.



Income Taxes


For both financial accounting and tax reporting purposes, the Company reports
income and expenses based on the accrual method of accounting.




For federal and state income tax purposes, the Company reports income or loss
from their investments in limited liability companies on the consolidated income
tax returns. As such, all taxable income and available tax credits are passed
from the limited liability companies to the individual members. It is the
responsibility of the individual members to report the taxable income and tax
credits, and to pay any resulting income taxes. Therefore, in relation to the
income and losses incurred by the limited liability companies, they have been
consolidated in the Company's tax return and provision based upon its relative
ownership.



Income taxes are accounted for in accordance with ASC 740, "Income Taxes"
("ASC 740"), using the asset and liability method. Under this method, deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
those deferred tax assets for which it is more likely than not that the related
benefit will not be realized.



The Company records uncertain tax positions in accordance with ASC 740 on the
basis of a two-step process in which (i) the Company determines whether it is
more likely than not that the tax positions will be sustained on the basis of
the technical merits of the position; and (ii) for those tax positions that meet
the more likely than not recognition threshold, the Company recognizes the
largest amount of tax benefit that is more than 50 percent likely to be realized
upon ultimate settlement with the related tax authority. The Company's policy is
to recognize interest and penalties related to the underpayment of income taxes
as a component of income tax expense or benefit. To date, there have been no
interest or penalties charged in relation to the unrecognized tax benefits.


                                       75




Generally, the taxing authorities can audit the previous three years of tax
returns and in certain situations audit additional years. For federal tax
purposes, the Company's 2018 through 2020 tax years generally remain open for
examination by the tax authorities under the normal three-year statute of
limitations. For state tax purposes, the Company's 2018 through 2020 tax years
remain open for examination by the tax authorities under the normal four-year
statute of limitations.



Business combination



In a business combination, substantially all identifiable assets, liabilities
and contingent liabilities acquired are recorded at the date of acquisition at
their respective fair values. One of the most significant areas of judgment and
estimation relates to the determination of the fair value of these assets and
liabilities, including the fair value of contingent consideration, if
applicable. If any intangible assets are identified, depending on the type of
intangible asset and the complexity of determining its fair value, an
independent external valuation expert may develop the fair value, using
appropriate valuation techniques, which are generally based on a forecast of the
total expected future net cash flows. These valuations are linked closely to the
assumptions made by our management regarding the future performance of the
assets concerned and any changes in the discount rate applied.



Fair value of financial assets and financial liabilities




Fair value of financial assets and financial liabilities recorded in the
consolidated statements of financial position, which cannot be derived from
active markets, are determined using a variety of techniques including the use
of valuation models. The inputs to these models are derived from observable
market data where possible, but where observable market data is not available,
judgment is required to establish fair values. Judgment includes, but is not
limited to, consideration of model inputs such as volatility, estimated life and
discount rates.


Fair value of stock options and warrants




We use the Black-Scholes option-pricing model to calculate the fair value of
stock options and warrants. Use of this method requires management to make
assumptions and estimates about the expected life of options and warrants,
anticipated forfeitures, the risk-free rate, and the volatility of our share
price. In making these assumptions and estimates, management relies on
historical market data.



Estimated useful lives, depreciation of property, plant and equipment, and
amortization of intangible assets




Depreciation of property, plant and equipment and amortization of intangible
assets is dependent upon estimates of useful lives based on management's
judgment. The assessment of any impairment of these assets is dependent upon
estimates of recoverable amounts that consider factors such as economic and
market conditions and the useful lives of assets.



Goodwill and intangible assets

Goodwill and indefinite life intangible asset impairment testing require us to
make estimates in the impairment testing model. On an annual basis, we test
whether goodwill and indefinite life intangible assets are impaired. Impairment
is influenced by judgment in defining a cash-generating unit ("CGU") and
determining the indicators of impairment, and estimates used to measure
impairment losses. The recoverable amount is the greater of value in use and
fair value less costs to sell. The recoverable value of goodwill, indefinite and
definite long-lived assets is determined using discounted future cash flow
models, which incorporate assumptions regarding projected future cash flows and
capital investment, growth rates and discount rates.



                                       76




Deferred Tax Asset and Valuation Allowance

Deferred tax assets, including those arising from tax loss carry-forwards,
requires management to assess the likelihood that we will generate sufficient
taxable earnings in future periods in order to utilize recognized deferred tax
assets. Assumptions about the generation of future taxable profits depend on
management's estimates of future cash flows. In addition, future changes in tax
laws could limit our ability to obtain tax deductions in future periods. To the
extent that future cash flows and taxable income differ significantly from
estimates, the ability of the Company to realize the net deferred tax assets
recorded at the reporting date could be impacted.



Emerging Growth Company Accounting Election




Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being
required to comply with new or revised financial accounting standards until
private companies are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that a company can choose not to
take advantage of the extended transition period and comply with the
requirements that apply to non-emerging growth companies, and any such election
to not take advantage of the extended transition period is irrevocable. We are
an "emerging growth company" as defined in Section 2(a) of the Securities
Act of 1933, as amended, and have elected to take advantage of the benefits of
this extended transition period. We expect to remain an emerging growth company
through the end of the 2023 fiscal year and we expect to continue to take
advantage of the benefits of the extended transition period. This may make it
difficult or impossible to compare the financial results with the financial
results of another public company that is either not an emerging growth company
or is an emerging growth company that has chosen not to take advantage of the
extended transition period exemptions for emerging growth companies because of
the potential differences in accounting standards used.

© Edgar Online, source Glimpses

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