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 SECon 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.comapp 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 $11.00per 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
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 Associationmembership 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 Delawarecorporation ("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 $ 10.16Gross Profit Per Transaction $ 1.30 $ 1.48Gross 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
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 $0.50for the purchase of a $1lottery game and $1for the purchase of a $2lottery 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 $2tickets is $1.60, being the $1base 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 $0.37per 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 millionin 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 $2.00in 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:
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
The following table summarizes our operating results for the three months ended
Three Months Ended March 31, 2022 2021 $ Change % Change Revenue
$ 21,150,892 $ 5,461,539 $ 15,689,353287 % 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
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, 2022was $21.2 million, an increase of $15.7 million, or 287%, compared to revenue of $5.5 millionfor the three months ended March 31, 2021. The increase in revenue was driven by the sale of $18 millionin LotteryLink Credits for prepaid promotional rewards, marketing materials and development services. Cost of Revenue. Cost of revenue for the three months ended March 31, 2022was $3.2 million, an increase of $0.2 million, or 7%, compared to cost of revenue of $2.9 millionfor 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, 2022was $18 millioncompared to $2.5 millionfor 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 millionof 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 $ 24,880,0702,271 % 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 $ 28,343,204542 % 10 Operating expenses for the three months ended March 31, 2022were $33.8 million, an increase of $28.5 million, or 542%, compared to $5.3 millionfor the three months ended March 31, 2021. The increase was primarily driven by increased personnel expenses incurred from $22.2 millionof 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 millionfor the three months ended March 31, 2021, to $26 millionfor the three months ended March 31, 2022. The increase was due primarily to an increase of $22.2 millionin 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 millionfor the three months ended March 31, 2021to $3.1 millionfor 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
$195,000. Sales and Marketing. Sales and marketing expenses for the three months ended March 31, 2022were approximately $908 thousand, compared to $1.3 millionfor 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 millionfor the three months ended March 31, 2021to $2.5 millionfor 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 millionfor business development opportunities, increased business licensing, bank fees, and insurance of $0.9 million, and $0.8 millionof 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 millionfor the three months ended March 31, 2021to $1.4 millionfor 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 millionfor 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, 2022as compared to interest expense of $0.2 millionfor 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 millionin cash. As of March 31, 2022, we had $50.8 millionof cash and cash equivalents and $88.8 millionof working capital (current assets minus current liabilities), compared with $62.6 millionof cash and $88.3 millionof 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 2021to extend the maturity date to December 21, 2021. As of both March 31, 2022and December 31, 2021, the balance of these notes was $771,500.
November 2019through October 28, 2021, we issued approximately $48.2 millionin 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 2020to 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, 2021through 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 millionof 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 millionfor the three months ended March 31, 2022, compared to net cash provided by operating activities of $3.9 millionfor 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, 2022were $1.1 million, compared to $3.1 millionfor 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 millionfor the three months ended March 31, 2022, compared to net cash provided of $14.5 millionfor 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 millionof 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
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. 13
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