LOTTERY.COM INC. Management’s discussion and analysis of financial condition and results of operations. (Form 10-Q)

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The following discussion and analysis of our financial condition and results of
operations together with the condensed consolidated financial statements and the
related notes appearing elsewhere in this Quarterly Report contains
forward-looking statements that involve risks and uncertainties. Our actual
results and the timing of events may differ materially from those expressed or
implied in such forward- looking statements as a result of various factors,
including those set forth in "Cautionary Note Regarding Forward-Looking
Statements" included herein and "Risk Factors" included in this Quarterly Report
and our Annual Report on Form 10-K for the year ended December 31, 2021, filed
with the SEC on April 1, 2022 (our "Annual Report").



Overview


Lottery.com (formerly known as Trident Acquisitions Corp., or "TDAC") is a
leading provider of domestic and international lottery products and services. As
an independent third-party lottery game service, we offer a platform that we
architected, developed, and operate to enable the remote purchase of legally
sanctioned lottery games in the U.S. and abroad (the "Platform"). Our revenue
generating activities consist of (i) offering the Platform via our Lottery.com
app and our websites to users located in the U.S. and international
jurisdictions where the sale of lottery games is legal and our services are
enabled for the remote purchase of sanctioned lottery games (our "B2C
Platform"); (ii) selling credits ("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 third-party master affiliate marketing partners
(our "Master Affiliates") for use by them and by their sub-affiliates (together
with the Master Affiliates, the "Affiliates") in undertaking affiliate marketing
activities and promoting our B2C Platform ("LotteryLink"); (iii) offering an
internally developed, created, and operated business-to-business application
programming interface ("API") of the Platform to enable our commercial partners,
in permitted U.S. and international jurisdictions, to purchase certain legally
operated lottery games from us and to resell them to users located within their
respective jurisdictions ("B2B API"); and (iv) delivering global lottery data,
such as winning numbers and results, and subscriptions to data sets of our
proprietary, anonymized transaction data pursuant to multi-year contracts to
commercial digital subscribers ("Data Service").



We currently derive substantially all of our revenue from the sale of
LotteryLink Credits, service fees paid to us by users of our B2C Platform,
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 https://wintogether.org (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.



                                       2





Business Combination



On October 29, 2021, we consummated a business combination (the "Business
Combination") with AutoLotto, Inc. ("AutoLotto"). Following the closing of the
Business Combination (the "Closing") we changed our name from "Trident
Acquisitions Corp." to "Lottery.com Inc." and the business of AutoLotto became
our business. The Business Combination was 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.



Recent Developments



COVID-19 Update



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, which are paid
entirely from mobile devices or computers ("Online Lottery") 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.



We believe in attracting the best talent wherever it is located and that a
distributed remote workforce is the best objective of the Company's
organizational needs. We also reassess our business continuity programs on an
ongoing basis and in light of new developments relating to the COVID 19 pandemic
to ensure that our employees remain protected, and that demand for our products
and services remains consistent.



                                       3





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 was implemented in the second quarter of 2022.
See below for more information.



Key Elements of our Business


Mobile lottery gaming 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 promotional rewards that may redeemed
by users, upon account activation, to acquire 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.



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



The WinTogether Platform



Unlike lottery games and other games of chance, participation in sweepstakes is
permissible in almost every state within the U.S. and sweepstakes offered on the
WinTogether Platform are open to participants within the U.S. and certain
international jurisdictions, 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.



                                       4





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 100% of the equity of Global Gaming Enterprises, Inc., a
Delaware corporation ("Global Gaming"), which holds 80% of the equity of each of
Medios Electronicos y de Comunicacion, S.A.P.I de C.V. ("Aganar") and
JuegaLotto, S.A. de C.V. ("JuegaLotto") 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 margin 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.



                                       Three Months Ended
                                            March 31,
                                        2022          2021
Transactions Per User (annualized)        12.58         9.46
Tickets Per Transaction                    3.68         4.09
Gross Revenue Per Transaction        $     8.75      $ 10.16
Gross Profit Per Transaction         $     1.30      $  1.48
Gross Margin per Transaction               14.9 %       14.6 %




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.



                                       5





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 profit per trade is calculated by dividing gross profit per trade by gross revenue per trade. We consider this indicator as an overall performance measure that provides useful insights into the profitability of our B2C platform.

Components of our operating results


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 the quarter-ended
March 31, 2022, our domestic B2C Platform users purchased an average of 3.7
lottery games per transaction at an average service fee of $0.37 per lottery
game. For the twelve months ended March 31, 2022, 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 $34.60. During
the quarter-ended March 31, 2022, the Company's digital marketing spend was
focused on testing the effectiveness of sample marketing campaigns. We had a
retention rate of domestic users of 85% for the twelve months ended March 31,
2022, excluding any customers referred by an affiliate or API partner, which
results in a lifetime user value, on average, of $176.55.



                                       6




Internationally, B2C sales in jurisdictions over which we have no direct or indirect authority generate an insignificant amount of revenue, and we evaluate our operations in these jurisdictions.



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
promotional rewards. In the three months ended March 31, 2022, we sold $18.0
million in LotteryLink Credits for prepaid promotional rewards, marketing
materials and development services. Revenue from the sale of LotteryLink Credits
in future periods may vary due to regulatory or contractual obligations
applicable to our affiliates or sub-affiliates, which may impact our, our
affiliates', or their sub-affiliates' ability to undertake the campaign that
management initially anticipated.



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 $2.00 in the three months ended March 31, 2022. 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 the three months ended March 31, 2022, 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.



                                       7




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.


Our operating costs and expenses

Personnel costs. Staff costs include salaries, payroll taxes, health insurance, workers’ compensation and other benefits for management and clerical staff.

Professional fees. Professional fees include fees paid to 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 facility rental payments, travel expenses, bank charges, software fees and subscriptions, research and development expenses (” R&D”) and other costs and expenses.

Depreciation and amortization. Depreciation expense includes depreciation expense for real estate and other assets.

Trends and key factors affecting our results

The following describes trends associated with our business that have had and which we believe will continue to have a significant impact on our business and results of operations:

COVID-19[FEMININEFortrendsandotherimpactsrelatedtotheCOVID-19pandemicthatmaycontinuetoimpactourbusinessandoperatingresultspleasesee“RecentDevelopments-ImpactsofCOVID-19”above[FEMININEPourlestendancesetautresimpactsliésàlapandémiedeCOVID-19quipourraientcontinueràavoirunimpactsurnosactivitésetnosrésultatsd’exploitationveuillezconsulterlasection«Développementsrécents-ImpactsdeCOVID-19»ci-dessus



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, 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.

                                       8





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.



Results of Operations


Three months completed March 31, 2022 Compared to the three months ended March 31, 2021

The following table summarizes our operating results for the three months ended March 31, 2022 and March 31, 2021respectively.


                                                 Three Months Ended
                                                     March 31,
                                               2022              2021           $ Change         % Change

Revenue                                    $  21,150,892     $  5,461,539     $  15,689,353            287 %
Cost of revenue                                3,165,469        2,946,981           218.488              7 %
Gross profit                                  17,985,423        2,514,558        15,470,865            615 %

Operating expenses:
Personnel costs                               25,975,863        1,095,793        24,880,070          2,271 %
Professional fees                              3,055,039        2,415,198           445,146             26 %
General and administrative                     3,399,896        1,388,574         2,011,322            145 %
Depreciation and amortization                  1,373,925          367,259  
      1,006,666            274 %
Total operating expenses                      33,804,723        5,266,824        28,716,747            542 %
Loss from operations                       $ (15,819,300 )   $ (2,752,266 )     (12,872,339 )          475 %

Other expenses
Interest expense                                    (953 )      2,472,048        (2,473,001 )         (100 )%
Other (income) expense                            (2,436 )        231,720          (234,156 )         (100 )%
Total other (income) expenses, net                (3,389 )      2,703,768  

(2,707,157) (100)%

Net loss before income tax                 $ (15,815,911 )   $ (5,456,034 )   $ (10,165,182 )         (290 )%
Income tax expense (benefit)                           -                -
Net loss                                     (15,815,911 )     (5,456,034 )

Other comprehensive loss
Foreign currency translation adjustment,
net                                               (1,064 )              -
Comprehensive loss                           (15,816,975 )     (5,456,034 )

Net income attributable to
noncontrolling interest                          129,222                -
Net loss attributable to Lottery.com
Inc.                                         (15,687,753 )     (5,456,034 )

Net loss per common share
Basic and diluted                          $       (0.33 )   $      (0.35 )

Weighted average common shares
outstanding
Basic and diluted                             46,832,919       15,740,414




                                       9





Revenues.



Revenue. Revenue for the three months ended March 31, 2022 was $21.2 million, an
increase of $15.7 million, or 287%, compared to revenue of $5.5 million for the
three months ended March 31, 2021. The increase in revenue was driven by the
sale of $18 million in LotteryLink Credits for prepaid promotional rewards,
marketing materials and development services.



Cost of Revenue. Cost of revenue for the three months ended March 31, 2022 was
$3.2 million, an increase of $0.2 million, or 7%, compared to cost of revenue of
$2.9 million for the three months ended March 31, 2021. The increase in the cost
of revenue was driven by a larger percentage of internal development costs
attributable to customer sales during the current quarter, partially offset by
the expiration of a high percentage of the pre-paid promotional rewards
underlying the LotteryLink Credits that were issued to a Master Affiliate in the
first quarter as a result of the delayed launch of such affiliate's promotional
program. The Company did not incur costs associated with redemption of most of
such LotteryLink credits.



Gross Profit. Gross profit for the three months ended March 31, 2022 was $18
million compared to $2.5 million for the three months ended March 31, 2021, an
increase of $15.4 million, or 615%. This increase was primarily due to the sale
of $18.0 million of LotteryLink Credits for prepaid promotional rewards,
marketing materials and development services, which generated significant gross
profit.



Operating Costs and Expenses.





                                     Three Months Ended
                                         March 31,
                                    2022            2021           $ Change        % Change
Operating expenses
Personnel costs                 $ 25,975,863     $ 1,095,793     $ 24,880,070          2,271 %
Professional fees                  3,055,039       2,415,198          445,146             26 %
Sales & marketing                    907,686       1,244,906         (337,220 )          (27 )%
General and Administrative         2,492,210         143,668        2,348,542          1,635 %
Depreciation and amortization      1,373,925         367,259        1,006,666            274 %
Total operating expenses        $ 33,804,723     $ 5,266,824     $ 28,343,204            542 %




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Operating expenses for the three months ended March 31, 2022 were $33.8 million,
an increase of $28.5 million, or 542%, compared to $5.3 million for the three
months ended March 31, 2021. The increase was primarily driven by increased
personnel expenses incurred from $22.2 million of stock compensation expense and
increased general and administrative expenses from public company expenses,
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 $24.9 million, from $1.1 million
for the three months ended March 31, 2021, to $26 million for the three months
ended March 31, 2022. The increase was due primarily to an increase of $22.2
million in stock compensation expense as a result of equity grants that were
valued at the share price soon after the Business Combination.



Professional Fees. Professional fees increased by $0.6 million, or 26%, from
$2.4 million for the three months ended March 31, 2021 to $3.1 million for the
three months ended March 31, 2022. The increase was driven primarily by public
company legal and professional fees including non-cash warrant issuances of
an
approximate $195,000.



Sales and Marketing. Sales and marketing expenses for the three months ended
March 31, 2022 were approximately $908 thousand, compared to $1.3 million for
the three months ended March 31, 2021, a decrease of $337,000, or 27%. This
decrease was due primarily to a decrease in media credits used during the
current period.



General and Administrative. General and administrative expenses increased $2.3
million, or 1,635%, from $.1 million for the three months ended March 31, 2021
to $2.5 million for the three months ended March 31, 2022. 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 $1.0
million, or 274%, from $0.4 million for the three months ended March 31, 2021 to
$1.4 million for the three months ended March 31, 2022. 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 (income) Expenses, Net.


                                                  Three Months Ended
                                                       March 31,
                                                 2022           2021           $ Change         % Change
Other expenses
Interest expense                                   (953)       2,472,048       (2,473,001)          (100) %
Other (income) expense                           (2,436)         234,720         (234,156)          (100) %
Total other (income) expense, net              $ (3,389)     $ 2,703,768   
   (2,707,157)          (100) %




Interest Expense. We had minimal interest expenses for the three months ended
March 31, 2022, compared to interest expense of $2.5 million for the three
months ended March 31, 2021. This change was driven by lower debt levels as a
result of debt that converted into equity at the time of the Business
Combination or settled in cash following the Closing.



                                       11




Other Expense. We had no other expense for the three months ended March 31, 2022
as compared to interest expense of $0.2 million for the three months ended
March
31, 2021.


Cash 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 March 31, 2022, we had $50.8 million of cash and
cash equivalents and $88.8 million of working capital (current assets minus
current liabilities), compared with $62.6 million of cash and $88.3 million of
working capital as of December 31, 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 March 31, 2022, 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; marketing our B2C Platform
offering to new users; 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.



Convertible Debt Obligations


Prior to closing, we financed 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 both March 31, 2022 and December 31, 2021, the balance of these notes was
$771,500.


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.



                                       12





Immediately prior to the Closing, approximately $60.0 million of convertible
debt was converted into equity of AutoLotto. As of March 31, 2022, we had no
convertible debt outstanding.



Cash Flows



Net cash provided by operating activities was $3.9 million for the three months
ended March 31, 2022, compared to net cash provided by operating activities of
$3.9 million for the three months ended March 31, 2021. 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 2022 as compared to 2021. Net cash used in
investing activities during the year ended March 31, 2022 were $1.1 million,
compared to $3.1 million for the prior year. The decrease was primarily the
result of a decrease in spending on capitalized software development. Net cash
used by financing activities was $6.8 million for the three months ended March
31, 2022, compared to net cash provided of $14.5 million for the three months
ended March 31, 2021. The decrease was primarily due convertible debt being
issued in 2021 which did not repeat in 2022 as well as the purchase of $6.5
million of debt in 2022.



Accounting Election for Emerging Growth Companies



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.



Recent accounting pronouncements



In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This
guidance requires recognition of most lease liabilities on the balance sheet to
give investors, lenders, and other financial statement users a more
comprehensive view of a company's long-term financial obligations, as well as
the assets it owns versus leases. ASU 2016-02 will be effective for fiscal years
beginning after December 15, 2021, and for interim periods within annual periods
after December 15, 2022. In July 2018, the FASB issued ASU 2018-11 making
transition requirements less burdensome. The standard provides an option to
apply the transition provisions of the new standard at its adoption date instead
of at the earliest comparative period presented in the Company's financial
statements. We are currently evaluating the impact that this guidance will have
on our financial statements as well as the expected adoption method. We do not
believe the adoption of this standard will have a material impact on our
financial statements.



In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit
Losses: Measurement of Credit Losses on Financial Instruments", as additional
guidance on the measurement of credit losses on financial instruments. The new
guidance requires the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current
conditions and reasonable supportable forecasts. In addition, the guidance
amends the accounting for credit losses on available-for-sale debt securities
and purchased financial assets with credit deterioration. The new guidance is
effective for all public companies for interim and annual periods beginning
after December 15, 2019, with early adoption permitted for interim and annual
periods beginning after December 15, 2018. In October 2019, the FASB approved a
proposal which grants smaller reporting companies additional time to implement
FASB standards on current expected credit losses (CECL) to January 2023. As a
smaller reporting company, we will defer adoption of ASU No. 2016-13 until
January 2023. We are currently evaluating the impact this guidance will have on
our condensed consolidated financial statements.



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