The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and the notes related thereto which are included in "Item 8.
Financial Statements and Supplementary Data" of this Amendment. Certain
information contained in the discussion and analysis set forth below includes
forward-looking statements. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those set forth under "Special Note Regarding Forward-Looking
Statements" and elsewhere in this Amendment and the Original 10-K.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations has been amended and restated to give effect to the restatement of
our financial statements as more fully described in the Explanatory Note and in
"Note 2-Restatement of Previously Issued Financial Statements" to our
accompanying financial statements. For further detail regarding the restatement
adjustments, see Explanatory Note and Item 9A: Controls and Procedures, both
contained herein.
Overview
We are a blank check company formed under the laws of the State of Delaware on
March 17, 2016 for the purpose of effecting a merger, share exchange, asset
acquisition, stock purchase, recapitalization, reorganization or other similar
Business Combination with one or more businesses or entities. We intend to
utilize cash derived from the proceeds of our Initial Public Offering and the
private placement of the Private Units, our securities, debt or a combination of
cash, securities and debt, in effecting our Business Combination.
Recent Developments
Proposed Business Combination with Lottery.com
On February 21, 2021, we entered into a business combination agreement (the
"Merger Agreement") with Trident Merger Sub II Corp. ("Merger Sub") and
AutoLotto, Inc. ("Lottery.com"). Upon the closing (the "Closing") of the
business combination with Lottery.com, Merger Sub will merge with and into
Lottery.com, with Lottery.com as the surviving company, continuing as our wholly
owned subsidiary, following the transaction and the separate existence of Merger
Sub shall cease. At the Closing, each share of Lottery.com common stock issued
and outstanding as of immediately prior to the Closing shall be converted into
the right to receive the Per Share Merger Consideration. "Per Share Merger
Consideration" means the quotient obtained by dividing (a) 40,000,000 shares of
our common stock by (b) the aggregate number of shares of Lottery.com common
stock (including shares issued upon the conversion or exercise of Lottery.com
convertible securities) issued and outstanding as of immediately prior to the
Closing (the "Lottery.com Shares"). The Per Share Merger Consideration shall be
reduced by the number of shares of our common stock equal to the quotient of (i)
the amount by which Net Indebtedness exceeds $10,000,000, as mutually agreed
between us and Lottery.com (each acting reasonably), divided by (ii) 11.00. "Net
Indebtedness" means the amount equal to Lottery.com's Indebtedness, less cash
and cash equivalents. For the avoidance of doubt, Lottery.com's Indebtedness
shall not include current liabilities or any intercompany Indebtedness between
or among Lottery.com and any of its subsidiaries.
The holders of the Lottery.com Shares (the "Sellers") will also be entitled to
receive up to 6,000,000 additional shares of our common stock (the "Seller
Earnout Shares") that may be issuable from time to time as set forth below. The
aggregate value of the consideration to be paid by us in the business
combination (excluding the Seller Earnout Shares) is approximately $444 million
(calculated as follows: 40,000,000 shares of our common stock to be issued to
the Sellers, multiplied by $11.00). Upon the Closing, we will change our name to
"Lottery.com."
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If, at any time on or prior to December 31, 2021, the daily volume-weighted
average price of shares of our common stock equals or exceeds $13.00 per share
for 20 of any 30 consecutive trading days commencing after the Closing, each
Seller shall receive its pro rata portion of 3,000,000 Seller Earnout Shares and
Vadim Komissarov, Ilya Ponomarev and Marat Rosenberg (the "Founder Holders")
shall receive an aggregate of 2,000,000 shares of our common stock. If, at any
time on or prior to December 31, 2022, the daily volume-weighted average price
of shares of our common stock equals or exceeds $16.00 per share for 20 of any
30 consecutive trading days commencing after the Closing, each Seller shall
receive its pro rata portion of 3,000,000 Seller Earnout Shares and the Founder
Holders shall receive an aggregate of 2,000,000 shares of our common stock. The
Seller Earnout Shares then earned and issuable shall be issued to the Sellers on
a pro-rata basis based on the percentage of the Lottery.com Shares owned by them
immediately prior to the Closing.
The parties agreed that immediately following the Closing, our board of
directors will consist of five directors, four of which will be designated by
Lottery.com and one of which will be designated by us, such appointment by us to
be an independent director. The boards of directors of each of us and
Lottery.com have unanimously approved this business combination. The transaction
will require the approval of our stockholders and of Lottery.com, the
effectiveness of a registration statement on Form S-4 to be filed with the
Securities and Exchange Commission (the "SEC") in connection with the
transaction, satisfaction of the conditions stated in the Merger Agreement and
other customary closing conditions.
Extensions of Time Period to Complete a Business Combination
On November 26, 2019, we held our Annual Meeting of the Stockholders (the
"Annual Meeting") at which the stockholders approved a proposal to amend our
Amended and Restated Certificate of Incorporation (the "Charter Amendment") to
extend the period of time for which we are required to complete a Business
Combination two times for an additional 90 days each time to June 1, 2020 (the
termination date as so extended, the "Extended Termination Date"). Our
stockholders were able to elect to redeem their shares in connection with the
Annual Meeting for a pro rata portion of the amount then on deposit in the trust
account ($10.00 per share, plus any pro rata interest earned on the funds held
in the trust account and not previously released to us to pay franchise and
income taxes). With respect to public shares not redeemed in connection with the
Annual Meeting, we agreed to make a cash contribution of $500,000 to the trust
account for each 90-day extension. As of March 31, 2020, we had contributed an
aggregate of $1,000,015 to the trust account and extended the time to complete a
Business Combination to June 1, 2020.
In connection with the approval of the Charter Amendment, stockholders elected
to redeem an aggregate of 13,081,434 shares of our common stock. As a result, an
aggregate of approximately $137,130,484 (or approximately $10.48 per share) was
removed from our trust account to pay such stockholders, and 13,224,816 shares
of common stock were then issued and outstanding following such redemption.
On May 28, 2020, we held a Special Meeting of the Stockholders at which the
stockholders approved a proposal to amend our Amended and Restated Certificate
of Incorporation (the "Second Charter Amendment") to extend the period of time
for which we are required to complete a Business Combination to September 1,
2020 (the "Second Extended Date"). We made a cash contribution of $962,476 to
the trust account for the three-month extension period. In addition, the
stockholders elected to redeem an aggregate of 627,059 shares of our common
stock. As a result, an aggregate of $6,666,775 (or approximately $10.63 per
share) was removed from our trust account to pay such stockholders and
12,597,757 shares of common stock were then issued and outstanding following
such redemption.
On August 28, 2020, we held a Special Meeting of the Stockholders at which the
stockholders approved a proposal to amend our Amended and Restated Certificate
of Incorporation (the "Third Charter Amendment") to extend the period of time
for which we are required to complete a Business Combination to December 1, 2020
(the "Third Extended Date"). We made a cash contribution of $867,971 to the
trust account for the three-month extension period. In addition, the
stockholders elected to redeem an aggregate of 630,037 shares of our common
stock. As a result, an aggregate of $6,781,851 (or approximately $10.76 per
share) was removed from our trust account to pay such stockholders and
11,967,720 shares of common stock were issued and outstanding following such
redemption as of December 31, 2020.
On November 30, 2020, we held a Special Meeting of Stockholders, pursuant to
which the stockholders approved the extension to the Third Extended Date from
December 1, 2020 to March 1, 2021, with an ability to further extend for an
additional three months to June 1, 2021 (the "Fourth Extended Date") if approved
by our board of directors. We agreed to contribute $0.05 for each Public Share
outstanding that was not redeemed for each month of the extension going forward.
On December 1, 2020, we contributed an aggregate of $289,323 to the trust
account. On February 26, 2021, our board of directors approved the extension of
the Fourth Extended Date to June 1, 2021 to permit sufficient time for us to
consummate our proposed business combination with Lottery.com, including filing
a registration statement on Form S-4 that will include a proxy statement.
On May 27, 2021, we held a Special Meeting of Stockholders, pursuant to which
our stockholders approved the extension to the Fourth Extended Date from June 1,
2021 to September 1, 2021, with an ability to further extend for an additional
three months to December 1, 2021 (the "Fifth Extended Date") if approved by our
board of directors. We agreed to contribute $0.05 for each Public Share
outstanding that was not redeemed for each month of the extension going forward,
provided if the daily volume weighted average price of the Company's common
stock for any 10 consecutive trading days in the prior month is below $11.40 per
share, as determined two (2) trading days prior to the last day of such month.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities from inception through December 31, 2020 were organizational
activities and those necessary to prepare for the Initial Public Offering and,
after our Initial Public Offering, identifying a target company for a Business
Combination and activities in connection with the proposed acquisition of
Lottery.com. Following the Initial Public Offering, we do not expect to generate
any operating revenues until after the completion of our Business Combination.
We generate non-operating income in the form of interest income on marketable
securities held in the trust account. We incur expenses as a result of being a
public company (for legal, financial reporting, accounting and auditing
compliance), as well as for due diligence expenses.
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As a result of the restatement described in Note 2 of the notes to the financial
statements included herein, we classify the Private Warrants as liabilities at
their fair value and adjust the warrant instrument to fair value at each
reporting period. This liability is subject to re-measurement at each balance
sheet date until exercised, and any change in fair value is recognized in our
statement of operations.
For the year ended December 31, 2020, we had net loss of $3,166,547, which
consists of operating costs of $1,385,738, a non-cash charge for the loss on
change in fair value of derivative liabilities of $2,357,500, offset by interest
income on marketable securities held in the trust account of $348,425, refund of
the tender bid of subsidiary of $11,180, and a benefit from income taxes of
$217,086.
For the year ended December 31, 2019, we had net income of $2,533,106, which
consists of interest income on marketable securities held in the trust account
of $4,324,060 offset by operating costs of $1,100,138 and a provision for income
taxes of $690,816.
Liquidity and Capital Resources
As of December 31, 2020, we had marketable securities held in the trust account
of $63,405,336 (including approximately $1,537,000 of interest income). Interest
income on the balance in the trust account may be used to pay taxes. During the
year ended December 31, 2020, we withdrew $490,865 of interest earned on the
trust account to pay our tax obligations.
For the year ended December 31, 2020, cash used in operating activities was
$1,848,754. Net loss of $3,166,547 was affected by the interest earned on
marketable securities held in the trust account of $348,425 and a deferred tax
benefit of $217,086, offset by a non-cash charge for the loss on change in fair
value of derivative liabilities of $2,357,500 and changes in operating assets
and liabilities which used $474,196 of cash for operating activities.
For the year ended December 31, 2019, cash used in operating activities was
$1,525,377. Net income of $2,533,106 was the result of interest earned on
marketable securities held in the trust account of $4,324,060 and a deferred tax
provision of $851, principally offset by cash used in operating activities and
taxes payable. Changes in operating assets and liabilities provided $266,428 of
cash for operating activities.
We intend to use substantially all of the funds held in the trust account to
acquire a target business or businesses and to pay our expenses relating
thereto, including a deferred underwriting fee payable to our underwriters. To
the extent that our capital stock or debt is used, in whole or in part, as
consideration to effect a Business Combination, the remaining proceeds held in
the trust account as well as any other net proceeds not expended will be used as
working capital to finance the operations of the target business. Such working
capital funds could be used in a variety of ways including continuing or
expanding the target business' operations, for strategic acquisitions and for
marketing, research and development of existing or new products.
As of December 31, 2020, we had cash of $972,787 held outside the trust account.
We intend to use the funds held outside the trust account primarily to identify
and evaluate target businesses, perform business due diligence on prospective
target businesses, travel to and from the offices, plants or similar locations
of prospective target businesses or their representatives or owners, review
corporate documents and material agreements of prospective target businesses,
and structure, negotiate and complete a Business Combination.
On December 17, 2019, Viktoria Group, LLC, a company owned by Vadim Komissarov,
loaned us $180,000 to fund our working capital requirements and finance
transaction expenses in connection with a Business Combination. The loan was
non-interest bearing and payable on December 2, 2020. We repaid the loan on June
18, 2020.
On January 30, 2020, VK Consulting loaned us $425,000 to fund our working
capital requirements and finance transaction expenses in connection with a
Business Combination. The promissory note is non-interest bearing and currently
payable on demand.
On February 7, 2020, May 15, 2020 and August 27, 2020, BGV Group Limited loaned
us an aggregate of $3,400,000 to fund our working capital requirements and
finance transaction expenses in connection with a Business Combination. The
promissory notes are non-interest bearing and currently payable on demand.
On November 27, 2020, one of our affiliates loaned us an aggregate of $150,000
to fund the our working capital requirements and finance transaction expenses in
connection with a Business Combination. The loans are non-interest bearing and
payable on December 1, 2021.
On November 30, 2020 and December 28, 2020, one of our affiliates loaned us an
aggregate of $1,100,000 to fund our working capital requirements and finance
transaction expenses in connection with a Business Combination. The loans are
non-interest bearing and are currently payable on demand.
In order to fund working capital deficiencies or finance transaction costs in
connection with a Business Combination, certain of our initial stockholders, our
officers and directors may, but are not obligated to, loan us funds from time to
time or at any time as may be required. If we complete a Business Combination,
we would repay such loaned amounts out of the proceeds of the trust account
released to us. In the event that a Business Combination does not close, we may
use a portion of the working capital held outside the trust account to repay
such loaned amount, but no proceeds from our trust account would be used to
repay such loaned amounts. Up to $200,000 of such loans may be convertible into
Private Units at a price of $10.00 per unit at the option of the lender. The
units would be identical to the Private Units. The terms of such loans, if any,
have not been determined and no written agreements exist with respect to such
loans.
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We will need to raise additional capital through loans or additional investments
from our initial stockholders, officers or directors. Our initial stockholders,
officers or directors may, but are not obligated to, loan us funds, from time to
time or at any time, in whatever amount they deem reasonable in their sole
discretion, to meet our working capital needs. Accordingly, we may not be able
to obtain additional financing. If we are unable to raise additional capital, we
may be required to take additional measures to conserve liquidity, which could
include, but not necessarily be limited to, curtailing operations, suspending
the pursuit of a potential transaction, and reducing overhead expenses. We
cannot provide any assurance that new financing will be available to us on
commercially acceptable terms, if at all. These conditions raise substantial
doubt about our ability to continue as a going concern through December 1, 2021,
the date that we will be required to cease all operations, except for the
purpose of winding up, if a Business Combination is not consummated. These
consolidated financial statements do not include any adjustments relating to the
recovery of the recorded assets or the classification of the liabilities that
might be necessary should we be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2020.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities, other than an agreement to pay VK
Consulting an aggregate monthly fee of $7,500 for office space, secretarial and
administrative services provided to us. We began incurring these fees on May 30,
2018 and will continue to incur these fees monthly until the earlier of the
completion of a Business Combination or our liquidation.
The underwriter is entitled to a deferred fee of two and one-half percent (2.5%)
of the gross proceeds of the Initial Public Offering, or $5,031,250. The
deferred fee will be paid in cash upon the closing of a Business Combination
from the amounts held in the trust account, subject to the terms of the
underwriting agreement.
In addition, we have agreed to pay the underwriter a warrant solicitation fee of
five percent (5%) of the exercise price of each Public Warrant exercised during
the period commencing thirty days after the consummation of the Business
Combination, including warrants acquired by security holders in the open market,
but excluding warrants exercised during the 30 day period following notice of a
proposed redemption. The warrant solicitation fee will be payable in cash. There
is no limitation on the maximum warrant solicitation fee payable to the
underwriter, except to the extent it is limited by the number of Public Warrants
outstanding.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and income and expenses
during the periods reported. Actual results could materially differ from those
estimates. We have identified the following critical accounting policies:
Derivative Financial Instruments
We evaluate our financial instruments (including the unit purchase option issued
to the underwriter in our initial public offering (the "UPO Warrants")) to
determine if such instruments are derivatives or contain features that qualify
as embedded derivatives in accordance with ASC Topic 815, "Derivatives and
Hedging". For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
on the grant date and is then re-valued at each reporting date, with changes in
the fair value reported in the statements of operations. The classification of
derivative instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting period.
Warrant Liability
We account for warrants in accordance with the guidance contained in ASC
815-40-15-7D under which the warrants that do not meet the criteria for equity
treatment are recorded as liabilities. As the Private Warrants meet the
definition of a derivative as contemplated in ASC 815, we classify the Private
Warrants as liabilities at their fair value and adjust the warrants to fair
value at each reporting period. This liability is subject to re-measurement at
each balance sheet date until exercised, and any change in fair value is
recognized in our statement of operations. The fair value of the Private
Warrants was estimated using a Black-Scholes Model approach.
Common Stock Subject to Possible Redemption
We account for our common stock subject to possible conversion in accordance
with the guidance in Accounting Standards Codification ("ASC") Topic 480
"Distinguishing Liabilities from Equity." Common stock subject to mandatory
redemption is classified as a liability instrument and measured at fair value.
Conditionally redeemable common stock (including common stock that features
redemption rights that are either within the control of the holder or subject to
redemption upon the occurrence of uncertain events not solely within our
control) is classified as temporary equity. At all other times, common stock is
classified as stockholders' equity. Our common stock features certain redemption
rights that are considered to be outside of our control and subject to
occurrence of uncertain future events. Accordingly, common stock subject to
possible redemption is presented at redemption value as temporary equity,
outside of the stockholders' equity section of our consolidated balance sheets.
Net (Loss) Income Per Common Share
We apply the two-class method in calculating earnings per share. Net (loss)
income per common share, basic and diluted for common stock subject to possible
redemption is calculated by dividing the interest income earned on the trust
account, net of applicable taxes, if any, by the weighted average number of
shares of common stock subject to possible redemption outstanding for the
period. Net (loss) income per common share, basic and diluted for non-redeemable
common stock is calculated by dividing net loss less income attributable to
common stock subject to possible redemption, by the weighted average number of
shares of non-redeemable common stock outstanding for the period presented. We
did not consider the impact of any outstanding warrants or exercise of the UPO
Warrants in the calculation of diluted loss per share since the inclusion of
such warrants would be anti-dilutive.
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Recent Accounting Standards
Management does not believe that any other recently issued, but not yet
effective, accounting standards, if currently adopted, would have a material
effect on our consolidated financial statements.
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