Attached files
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EX-10.8 - Epcylon Technologies, Inc. | v181878_ex10-8.htm |
EX-10.7 - Epcylon Technologies, Inc. | v181878_ex10-7.htm |
EX-10.9 - Epcylon Technologies, Inc. | v181878_ex10-9.htm |
EX-10.6 - Epcylon Technologies, Inc. | v181878_ex10-6.htm |
EX-10.11 - Epcylon Technologies, Inc. | v181878_ex10-11.htm |
EX-10.10 - Epcylon Technologies, Inc. | v181878_ex10-10.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE
OF EARLIEST EVENT REPORTED – April 19, 2010
LOTO
INC.
(Exact
name of Registrant as specified in its charter)
NEVADA
|
000-53770
|
27-0156048
|
(State
or other jurisdiction of
|
(Commission
|
(IRS
Employer
|
incorporation)
|
File
Number)
|
Identification
Number)
|
Suite
460, 20 Toronto Street
Toronto, Ontario, Canada M5C
2B8
(Address
of principal executive offices)
(416)
479-0880
(Registrant's
telephone number, including area code)
N/A
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
¨
|
Written
communications pursuant to Rule 425 under the Securities
Act
|
¨
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange
Act
|
¨
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange
Act
|
¨
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange
Act
|
TABLE
OF CONTENTS
ITEM 1.01: ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT |
3
|
ITEM 5.02: DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS | 4 |
ITEM 5.06: CHANGE IN SHELL COMPANY STATUS |
4
|
FORM 10 DISCLOSURES |
5
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
5
|
BUSINESS
|
5
|
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
|
12
|
RISK
FACTORS
|
13
|
FINANCIAL
INFORMATION
|
26
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
33
|
PROPERTIES
|
33
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
34
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
35
|
EXECUTIVE
COMPENSATION
|
38
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
39
|
LEGAL
PROCEEDINGS
|
40
|
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
|
40
|
RECENT
SALES OF UNREGISTERED SECURITIES
|
41
|
DESCRIPTION
OF REGISTRANT’S SECURITIES TO BE REGISTERED
|
41
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
|
42
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
F-1
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
43
|
FINANCIAL
STATEMENTS AND EXHIBITS
|
44
|
SIGNATURES |
45
|
2
Item
1.01:
|
Entry
into a Material Definitive
Agreement.
|
Tender
and Cancellation of 1,000,000 shares of the Company’s Common
Stock
On April
19, 2010, two of the shareholders of Loto Inc. (referred to herein as “Loto” or
the “Company”), A Few Brilliant Minds Inc. and Mhalka Capital Investments Ltd.,
each agreed to tender 500,000 shares of the Company’s common stock for
cancellation.
Standby
Tender and Cancellation of up to 8,000,000 Shares
At the
present time, the Company intends to sell up to 8,000,000 shares of the
Company’s common stock in private placements to foreign persons in reliance on
the exemption from securities registration under Section 4(2) of the U.S.
Securities Act of 1933, as amended, and Regulation S promulgated
thereunder. In connection therewith, two of the Company’s
shareholders, A Few Brilliant Minds Inc. and 2238646 Ontario Inc., have each
entered into an agreement with the Company, the Tender And Cancellation
Agreement Re Company Private Placements, pursuant to which they have agreed to
tender one-half-of-one share for each one share to be sold by the Company in
private placements, and to each tender up to 4,000,000 shares of the Company’s
common stock for cancellation, such that a total of up to 8,000,000 shares in
the aggregate would be tendered and cancelled by such shareholders
collectively.
Novation
to the Founder’s Agreement and Novation to the Standby Financing
Commitment
On April
19, 2010, Mhalka Capital Investment Ltd. sold its shares of the Company’s common
stock to 2238646 Ontario Inc. Mr. Randall Barrs, a director of the
Company, is the sole officer, director and shareholder of 2238646 Ontario
Inc.
On May
13, 2009, Mhalka Capital Investments Ltd., together with 1476448 Ontario Inc.,
entered into a Founder’s Agreement with the Company. On April 19,
2010, the Company entered into a Novation to the Founder’s Agreement, to permit
2238646 Ontario Inc. to replace Mhalka Capital Investments Ltd. as a party
thereto. Mr. Barrs recused himself from deliberations and voting in
respect of the Company’s Board of Directors assessment and decision to enter
into the Novation to the Founder’s Agreement.
On August
3, 2009, Mhalka Capital Investments Ltd., together with 1476448 Ontario Inc.,
made a standby financing commitment to the Company, under which they agreed to
provide the necessary funding to the Company of up to $1,500,000 if we are
unable to obtain third-party financing. On April 19, 2010, 2238646
Ontario Inc. entered into a Novation to the Standby Financing Commitment with
the Company pursuant to which 2238646 Ontario Inc. has agreed to the remaining
commitments of Mhalka Capital Investment Ltd. under the August 3, 2009, Standby
Financing Commitment. Mr. Barrs recused himself from deliberations
and voting in respect of the Company’s Board of Directors assessment and
decision to enter into the Novation to the Standby Financing
Commitment.
3
Item
5.02
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
|
Appointment
of Stephen Knight to the Board of Directors
Effective
as of April 19, 2010, Mr. Stephen Knight has been appointed to the Company’s
Board of Directors. Mr. Knight has served as Loto’s President and
Chief Executive Officer since May 13, 2009. From October 2008 to May
12, 2009, Mr. Knight was President and CEO of Mobilotto Systems,
Inc. From December 2007 through September 2008, Mr. Knight was
engaged in marketing consulting for major brands in the United States and
Canada. From November 1998 through December 2007, Mr. Knight served
as Senior Vice President of Credit & Loyalty Management as well as an
officer for Hudson’s Bay Company. Mr. Knight was appointed Chief
Financial Officer of Loto on June 3, 2009. Mr. Knight was appointed
as a Director of the Company on April 19, 2010. As of the date of
this Report on Form 8-K, no decisions have been made regarding Mr. Knight’s
compensation as a director of the Company. Loto is currently
negotiating compensation arrangements with its executive officers and expects to
enter into agreements with them in the foreseeable future.
Stock
Option Grants
On April
19, 2010, the Company granted to following options to four members of the
Company’s Board of Directors: Donald Ziraldo, Randall Barrs, Trevor Eyton and
Alan Ralph. Each of the respective Director recipients of the option
grants recused himself from deliberation and voting in respect of grants made by
the Board to him.
Donald
Ziraldo in his capacity as a director of the Company has been granted options to
purchase 1,300,000 shares of the Company’s common stock at a purchase price of
$1.50 per share. The options will vest 12 months on April 19, 2011, and
Mr. Ziraldo may exercise up to 650,000 such options on April 19, 2011 and a
further 650,000 options on April 19, 2012. The right to exercise all of
the options will expire and terminate on April 19, 2013.
Randall
Barrs in his capacity as a director of the Company has been granted options to
purchase 450,000 shares of the Company’s common stock at a purchase price of
$1.50 per share. The options will vest on April 19, 2011 and Mr. Barrs may
exercise up to 225,000 such options on April 19, 2011 and 225,000 options on
April 19, 2012. The right to exercise all of the options will expire and
terminate on April 19, 2013.
Trevor
Eyton in his capacity as a director of the Company has been granted compensation
arrangements which provide that he may elect compensation in either cash or in
options of the Company as follows: in Calendar Year One, $75,000 if election for
Cash or 250,000 Shares at option exercise price of $1.00 per share if election
for Options; Calendar Year Two $150,000 if election for Cash or 300,000 Shares
at option exercise price of $1.00 per share if election for
Options. Mr. Eyton may elect compensation either in cash or in
options of the Company to be issued 12 months after the date of hereof with
respect to Calendar year one and 24 months after the date hereof with respect to
calendar year two. In the event Mr. Eyton selects options in lieu of cash,
all such options shall be fully vested and exercisable upon the respective date
of grant and Mr. Eyton may exercise all such options following the date of
issuance thereof until expiration thirty-six months from the date hereof.
If Mr. Eyton elects to receive all of his compensation in options, he will have
the right to acquire up to an aggregate of 550,000 shares of Company common
stock upon exercise of such options.
Alan
Ralph in his capacity as a director of the Company has been granted options to
purchase 150,000 shares of the Company’s common stock at a purchase price of
$1.50 per share. The options will vest on April 19, 2011 and Mr. Ralph may
exercise up to 75,000 such options on April 19, 2011 and 75,000 options on April
19, 2012. The right to exercise all of the options will expire and
terminate on April 19, 2013.
Item
5.06
|
Change
in Shell Company Status.
|
Due to
the recent growth and development of the staff and operations of the Company,
the Company is no longer a “shell company” as such term is defined in Rule 405
of the Securities Act and Rule 12b-2 of the Exchange
Act. Accordingly, we are providing below the information herein that
would be included in a Form 10.
4
In this
report, we rely on and refer to information and statistics regarding our
industry that we have obtained from a variety of sources. Some of this
information is publicly available and has not been specifically prepared for us
for use in this report or otherwise. Although we believe that this information
is generally reliable, we cannot guarantee, nor have we independently verified,
the accuracy and completeness of such third party information.
FORM 10
DISCLOSURES
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements
in this Report may be “forward-looking statements,” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be
identified by the use of terminology such as "estimates," "projects," "plans,"
"believes," "expects," "anticipates," "intends," or the negative or other
variations, or by discussions of strategy that involve risks and uncertainties.
However, as the Company intends to issue “penny stock,” as such term is defined
in Rule 3a51-1 promulgated under the Exchange Act, the Company is ineligible to
rely on these safe harbor provisions. Forward-looking statements include, but
are not limited to, statements that express our intentions, beliefs,
expectations, strategies, predictions or any other statements relating to our
future activities or other future events or conditions. These statements are
based on current expectations, estimates and projections about our business
based, in part, on assumptions made by management. These statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may, and are likely to, differ materially from what is expressed or
forecasted in the forward-looking statements due to numerous factors, including
those described above and those risks discussed from time to time in this
Report, including the risks described under “Risk Factors,” “Management’s
Discussion and Analysis” and “Our Business.”
There are
important factors that could cause our actual results to differ materially from
those in the forward-looking statements. These factors, include, without
limitation, the following: our ability to develop our technology platform and
our products; our ability to protect our intellectual property; the risk that we
will not be able to develop our technology platform and products in the current
projected timeframe; the risk that our products will not achieve performance
standards in clinical trials; the risk that the clinical trial process will take
longer than projected; the risk that our products will not receive regulatory
approval; the risk that the regulatory review process will take longer than
projected; the risk that we will not be unsuccessful in implementing our
strategic, operating and personnel initiatives; the risk that we will not be
able to commercialize our products; any of which could impact sales, costs and
expenses and/or planned strategies. Additional information regarding factors
that could cause results to differ can be found in this Report and in our other
filings with the Securities and Exchange Commission.
Item 1.
|
Business
|
Introduction
Our
company, Loto Inc. operates through our wholly owned subsidiary Mobilotto
Systems, Inc. We are a development stage company. We are
developing a patent-pending software application that permits the secure
purchase of lottery tickets on commercially available “smart” phones and similar
mobile telecommunications devices. A smart phone is a mobile phone
offering advanced capabilities, often with personal computer-like functionality,
such as e-mail, Internet access and other applications. Our
proprietary technology and designs for facilitating the purchase of lottery
tickets through commercially available smart phones and other mobile devices
addresses all elements of lottery play, including secure player registration and
authorization, number selection, settlement, winning number notification and
other direct-to-customer marketing opportunities. Our software has
not yet been employed on a commercial scale. We believe the next
version of our application will be commercially viable and will provide a
complete, fully functional and flexible mobile lottery platform for lottery
operators worldwide.
We intend
to license our software application to governments and other lottery operators
as our primary source of revenue. We do not intend to become a
lottery operator. During the foreseeable future, we expect to pursue
our business outside of the United States until applicable laws in the United
States permit sales of lottery tickets utilizing mobile telecommunications
devices. Our assessment of the market for our product indicates that
areas of opportunity for commercialization of mobile lottery solutions currently
exist in Canada, Mexico, Asia (China), Europe (Turkey and the United Kingdom of
Great Britain), Africa (South Africa), and South America. We intend
to pursue opportunities in the United States as soon as applicable laws permit
operation of our business.
5
Lottery
operators have a pressing need to expand into new sales channels to expand their
revenue base, provide a more secure distribution channel, and be able to
communicate directly with their players. The significant industry
challenges include cost, player convenience and enhanced marketing. A
cumbersome current requirement for lottery sales is the need to provide access
to a lottery sales terminal. Conventionally, lottery operators must
place expensive traditional stand-alone terminals which are limited to high
geographic density areas. In addition, in many jurisdictions the
public has become skeptical of the integrity of retail lottery ticket kiosks and
their clerks. Our high technology solutions address all of these
issues by providing a secure lottery application for use on commercially
available smart phones and other mobile communications devices. Our
application can be used conveniently, securely and privately at any time and in
any location within an authorized jurisdiction. Our software also
permits two-way personalized messaging capability for enhanced operator
promotional activities.
Loto was
incorporated in the state of Nevada on April 22, 2009, and our subsidiary
Mobilotto was incorporated in the province of Ontario in September
2008. On May 13, 2009 we acquired all of the issued and outstanding
shares of Mobilotto (including all of the intellectual property of the mobile
lottery software application).
Current
Status of our Business
As of the
date of this Report, our mobile lottery software application has not yet been
commercially tested or utilized by any lottery operators and we have not yet
generated any revenues from our technology. We have developed working
demonstrations of our lottery application (which is operable on most Blackberry
smart phones including the Pearl, the Curve, the Bold, and 8800 series), as well
as a scratch card game which is operating on Android devices. Our
current lottery demonstration model of our software includes three of the six
components that together will constitute our full mobile lottery
application. The completed components include lottery game selection,
lottery number picking and lottery number authorization. The three
components remaining to be developed include player registration, financial
settlement and player messaging functions. We issued an RFP (request
for proposal) to six qualified suppliers on August 25, 2009, indicating that we
intend to develop the remaining components of our full feature
system. The purpose of this RFP is to build the various modules
necessary for lottery play on mobile cell phones, including player registration,
ticket selection, ticket registration, settlement, and direct to player
communication and marketing. After scoring, conducting due diligence,
and initial contracting, we have selected one supplier to develop our software
products. Pending final contract completion and execution, we expect
the next version of our software to be ready for commercialization in
approximately nine months from the date of this Report.
During
the next twelve months, we intend to concentrate our efforts on completing the
development of our software application to its full feature commercially
deployable version, commencing the international launch of our product, and
soliciting lottery operators who are in a position to implement mobile lottery
sales solutions. We will also have to concentrate significant efforts
on raising capital to support our plans. We expect the sales cycle
with each prospective lottery operator will take between six and eighteen
months, covering the period from initiation of our sales solicitation through
technical demonstrations, testing, negotiations and closing of contracts for
mobile lottery operations. We have already commenced our initial sales and
marketing program with several lottery operators in Canada and other
jurisdictions but have not yet closed any sales. If we are successful
in simultaneously completing the development of our software and closing
initial contracts with lottery operators, the minimum time in which we
believe that we could commence generating revenues would be eight months from
the date of this Report. Our current business status and the
continuing development of our software application as well as the plans for
commercial launch of our product are subject to many uncertainties that present
material risks to investors.
Over the
course of the next twelve months, or once the final commercial version of the
software has been completed, we also intend to apply for certification of our
software from the Gaming Standards Association, which is an international trade
association of gaming manufacturers, suppliers, operators and regulators and
whose stated mission is to facilitate the identification, definition,
development, promotion, and implementation of open standards to enable
innovation, education, and communication for the benefit of the entire
industry.
6
Our
Business Model Premises
In
developing our application, we have endeavored to assess and resolve many
problems associated with current lottery distribution methods in our target
markets, including the following:
1.
|
Lottery
operator profitability:
|
||
·
|
The
current lottery distribution systems generally have excessively high
annual fixed infrastructure operating and capital costs, many of which can
be avoided.
|
||
·
|
The
number of profitable sales sites are saturated, leading to stagnant and
even declining lottery revenues.
|
||
2.
|
Social
responsibility:
|
||
·
|
Our
technology identifies the location of the mobile device at the time of the
purchase, thereby restricting out-of-area purchases, should this function
be activated by the lottery operator.
|
||
·
|
Winning
ticket holders are notified directly.
|
||
·
|
The
current lottery distribution systems generally do not identify or qualify
players by age which our technology can do by reference to the mobile
telephone subscription, passwords and other proprietary
methods.
|
||
·
|
Substantial
amounts of paper are consumed and wasted through the current paper ticket
process.
|
||
3.
|
Fraud
is easily perpetrated through the current distribution
system:
|
||
·
|
Paper
tickets are negotiable instruments which can easily be separated from the
true purchaser.
|
||
·
|
There
is no registration of a ticket with the actual purchaser of that
ticket.
|
||
·
|
There
are generally thousands of lottery terminals per lottery operator which
must be audited and secured on a regular basis.
|
||
·
|
There
is a general lack of trust in the current retail store distribution
channel.
|
||
|
4.
|
Convenience
and Customer Needs:
|
|
·
|
There
is an inherent inconvenience in the current model of ticket purchasing,
including both requiring customers to line up and identifying winning
tickets.
|
||
·
|
A
substantial percentage of tickets sold are within a day of the draw,
indicating latency and the opportunity for greater customer
convenience.
|
||
·
|
The
lottery operators have no ability to directly message or market to players
in real or near time.
|
||
·
|
Mobile
communication devices are generally trusted by users, have the capacity
for complex functionality and security, and are generally in their owners’
possession for use for the majority of waking
hours.
|
As of the
date of this Report, current laws in the United States prohibit sales of lottery
tickets utilizing mobile telecommunications devices. As such, we do
not intend to conduct business in the United States until applicable laws permit
operation of our business. If laws and regulations change or are
clarified to the extent necessary for us to conduct our business in the U.S., we
will endeavor to license our application to U.S. state lottery operators where
permitted.
7
Industry
Overview
Lotteries
are generally regulated and licensed by governmental authorities in over 200
jurisdictions globally. Currently, 44 U.S. states and 4 Canadian regions operate
lotteries. In 2008, lottery revenues exceeded $60 Billion in the U.S.
and CAD$9 Billion in Canada. The World Lottery Organization reports members from
76 countries and member revenues of approximately $180 billion.
Although
many different types of lottery games exist worldwide, they may generally be
categorized into two main groups: instant ticket and traditional draw type
lotteries. An instant ticket game is usually played by removing a coating from a
pre-printed ticket to determine whether the ticket is a winner. With draw type
lottery games, such as the Canadian Lotto6/49, winning is based on a purchaser
matching numbers with those randomly selected by the lottery
operator. Outside of North America, various types of sports betting
are also popular. All of these game types can be simulated on mobile
devices.
Operational
Overview
Our
technology can provide location-aware gaming solutions for government-sponsored
lotteries and privately operated lotteries. Our solutions include
mobile integration with existing online lottery systems, turnkey mobile gaming
systems, custom developed traditional and interactive games, as well as ongoing
support, maintenance, and management for each of our solutions.
Our
lottery application utilizes proprietary technology to locate, authorize, or
restrict game play based on the lottery license holder’s authorized
jurisdiction. When an authorized player leaves the authorized
jurisdiction for a game, new game play and additional game features may be
disabled.
Lottery
Contract Procurement
Government
authorized lotteries in the U.S. and Canada typically operates under local
government mandated public procurement regulations. Lotteries generally select
suppliers by issuing a request for proposal, or RFP, which outlines contractual
obligations as well as products and services to be delivered. An evaluation
committee frequently comprised of key lottery staff evaluates responses based on
various criteria. These criteria usually include quality of product and/or
technical solutions, security plan and features, experience in the industry,
quality of personnel and services to be delivered, and price. We believe that
our product functionality, game content, the quality of our personnel, our
technical expertise and our demonstrated ability to help the lotteries increase
their revenues may provide us with advantages relative to the competition when
responding to government lottery RFP's. However, some lotteries still award the
contract to the qualified vendor offering the lowest price, regardless of
factors other than price. Contract awards by lottery authorities are sometimes
challenged by unsuccessful competitors, which can result in protracted legal
proceedings. Internationally, lottery authorities do not always utilize such a
formal bidding process, but rather negotiate with one or more potential
vendors.
Most
lottery contracts typically have an initial term of three to five years and
frequently include multiple renewal options, which may be exercised for
additional periods ranging from one to five years. The length of
these lottery contracts, together with their renewal options, limits the number
of lottery contracts available for bidding in any given year.
Research
and Product Development
Our
wholly-owned subsidiary, Mobilotto, commenced work on its lottery ticket sales
process on September 16, 2008. Since that date, we have developed
working models of our application ready to demonstrate operation of various
lottery games through commercially available mobile phones.
We
believe our ability to attract new lottery customers and retain existing
customers will depend in part on our ability to continue to incorporate
technological advances into, and to improve our products, systems and
communication abilities with lottery purchaser end-users of our systems. We
intend to maintain a development program focusing on systems development as well
as improvement and refinement of our present products as well as the expansion
of uses and applications.
8
We intend
to invest in new gaming technologies and new game delivery
methods. We will endeavor to continually improve our existing
application as well as research, innovate, and implement new
solutions. Through continual development, we believe that we can
attract new players for our customers and grow our company by attracting new
lottery operators to our company and our technologies.
Intellectual
Property
We hold
U.S. Provisional Patent 61/106,988 which has established our international
priority date as of October 21, 2008. We are proceeding with the
prosecution of the patent. We consider our provisional patent to be
of material importance to our business. Patents extend for varying periods of
time according to the date of patent filing or grant and the legal term of
patents in the various countries where patent protection is obtained. In the
U.S., the term of a patent generally expires 20 years from the date of filing.
The actual protection afforded by a patent, which can vary from country to
country, depends upon the type of patent, the scope of its coverage and the
availability of legal remedies in the country. We applied for
additional patent protection in Canada, and we intend to apply in other key
jurisdictions during 2010.
Certain
technology material to our lottery application products, processes and systems
are the subject of patent applications currently pending, in the U.S. and
certain other countries. In our business for instance, we intend to utilize our
patent-pending technology for the jurisdictional validation and distribution of
lottery tickets.
We
previously applied for a U.S. Trademark from the United States Patent and
Trademark Office (the “USPTO”). This application was not granted. We
intend to re-apply for such U.S. Trademark as soon as reasonably possible.
Trademark protection continues in some countries, including the U.S., for as
long as the mark is used and in other countries for as long as it is
registered. Registrations generally are for fixed, but renewable,
terms.
Should we
become aware of any potential infringement of our intellectual property or trade
names by competitors and other third parties, we will consider what action, if
any, to take in that regard, including, where appropriate,
litigation.
Production
Processes, Sources and Availability of Components
Our
mobile application process is specifically designed to produce secure lottery
game tickets for government sanctioned lotteries and promotional games, and to
specifically ensure the jurisdiction of play and rules regarding play are
complied with, along with meeting social responsibility mandates. Our
application is designed for efficient, timely, mobile and secure production of
game tickets and storage of game tickets and notification of winning ticket
results. Games are delivered consistent with and ready for play with the lottery
authority within the jurisdiction of play.
Competition
Mobile
Lottery Products:
Our
lottery gaming business competes with a variety of suppliers from various
international markets. There are numerous short message service (SMS) mobile
lottery companies that have emerged globally over the past few
years. Due to heavy regulation in Europe and North America the
majority of these companies have set their sights on less regulated emerging
markets. These markets are of significant interest to mobile lottery
vendors due to their high population density and the relatively low access to
online internet services and traditional convenience store lottery
retailers.
Principal
direct competitors exist in such emerging markets as India, Mexico, China and
Europe where lottery vendors provide access to national lotteries through mobile
SMS messaging capabilities. To date the percentage of individuals who
use the mobile device sales channel for lottery has remained low. The
need to purchase prepaid cards from retailers and incompatible handsets still
remain a challenge for these vendors. Furthermore, these have an inherent
weakness as they lack security and do not identify the user’s
location.
9
Additional
competition exists within European markets as lottery regulation continues to
evolve. The market for mobile lottery is in its infancy as vendors
address both security and regulatory restrictions, however sports betting over
mobile devices is common is many European countries.
We have
engineered our mobile lottery application with both location-based technology
and superior cryptology which allows us to meet stringent government
regulations.
We are
aware of three competitors who are engaged in the business of selling lottery
tickets via mobile devices who may become dominant during the foreseeable
future:
·
|
Soreto
Games (Mexico National Lottery)
|
|
·
|
Sunloto
(China)
|
|
·
|
Veikkaus
(Finland)
|
The
existing lottery terminal manufacturers, with GTech, Scientific Games, Intralot,
Wincor, and Sagam Securite being the largest, have not publicly announced plans
to develop mobile gaming solutions.
Competitive
Advantages and Disadvantages
Technology
Advantages
1.
|
Our
technology functions as an Application and does not utilize SMS
capabilities, which facilitates the
following:
|
·
|
Controlled
end-user experience interactive graphical user interface (GUI), matched to
phone capabilities;
|
·
|
Includes
secure interface standards;
|
·
|
Enhanced
eCommerce capabilities; and
|
|
·
|
Low
cost per message.
|
2.
|
Our
product has the ability to identify the geographical location of
players. This patent-pending process limits out of region play
for purposes of controlling compliance with jurisdictional legal
requirements.
|
3.
|
Our
application has been tested on a number of different phone
types:
|
·
|
A
development plan is underway to cover most of the popular smart model
cellular telephones;
|
·
|
Current
development is underway to enable Windows Mobile platforms;
and
|
·
|
Non-smart
phones using conventional technologies have development
potential.
|
4.
|
Our
application has been built to integrate with existing on-line offerings
without duplicating processes or databases to create an efficient,
seamless mobile and on-line gaming
experience.
|
5.
|
We
believe that Phase 2 gaming (including pro-line, sports select, and
multiplayer games) could be developed and accommodated on our
system.
|
6.
|
Our
product provides the lottery operator with a non-intrusive, 2-way
communication capability which includes screen pop-ups, device start-up
screen, and survey capability, as well as enhanced personalized marketing
opportunities.
|
7.
|
We
provide full screen notification of lottery
results.
|
10
8.
|
Our
application icon resides on the mobile device and application upgrades are
automatic.
|
9.
|
Our
working demonstration models are developed and are currently operable for
assessment by lottery
operators.
|
Player
Experience Advantages:
10.
|
Our
product requires few key strokes (as the process is menu driven), which
provides for simple and easy
play.
|
11.
|
All
functionality and processes can be built onto the mobile device (full
mobile solution for player registration, PIN access, lottery purchase,
settlement, winning ticket notification, and customer
communication).
|
12.
|
Our
application has design and play concepts based on replicating, emulating
and interfacing with existing web-based lottery operator offerings for
consistency of the lottery experience using a mobile
device.
|
The
Competitive Disadvantages of Our Technology And Business
·
|
We
are a development stage Company, with no existing contracts in the lottery
business and limited resources to continue to develop our
business;
|
·
|
Our
technology exists only in demonstration mode and has not yet been tested
by any lottery operators or employed on a commercial
scale;
|
·
|
There
is uncertainty whether our software application will actually perform as
anticipated in a commercial
setting;
|
·
|
We
have only developed the software for lottery game selection, lottery
number picking and lottery number authorization components of our
system;
|
·
|
Our
system still requires the software development of the player registration,
financial settlement and player messaging
components;
|
·
|
We
will be dependent on third-party software development companies to develop
the remaining components for our full feature
system;
|
·
|
We
expect the completion of our full feature system will take a minimum of
nine months from the date of this
Report;
|
·
|
There
is no assurance that we will be able to successfully enter into agreement
with a recognized software development company or that the application
will be properly completed by the software development
company;
|
|
·
|
There
is no assurance that our product will operate in the manner for which it
is intended;
|
·
|
the
cost of development and realization of the additional components to our
software application may be greater than we
anticipate;
|
·
|
There
is no assurance that our mobile lottery software will be certified for use
by the Gaming Standards Association or lottery
operators;
|
·
|
There
is no assurance that we will be able to market and sell our mobile lottery
software system;
|
·
|
There
is no assurance that our mobile lottery software will be acceptable to
lottery operators;
|
·
|
Larger
suppliers in the lottery or software application development industries
who have more resources than we do could decide to enter the mobile
lottery business and compete more effectively for contracts with lottery
operators.
|
11
We expect
to compete in the global market on the basis of being able to provide a full
feature mobile lottery application that we have designed to include the
following components: secure player registration and authorization, number
selection, settlement, winning number notification and direct-to-customer
messaging capability for enhanced marketing opportunities. There are some
competitors who are currently offering and developing mobile lottery
applications, however, we are not aware of any who are offering solutions with
the same full feature characteristics as our product. We are not yet in a
competitive position in the global market because we have not completed the
development of all components of our full featured mobile lottery software
application. We expect to complete our full featured mobile lottery software
application within approximately nine months from the date of this Report. We
anticipate that lottery operators will make their selection of vendors and
service providers on the basis of considerations involving security, product
performance, ease of use by the lottery operator and by end-users, as well as
ongoing service support for the lottery operator and end-users. Upon completion
of our full feature mobile lottery application, we believe that we will be able
to compete globally in a manner which will be competitively attractive to
lottery operators, however, the need for continuing development of our software
application and the plans for commercial launch of our product are subject to
many uncertainties that present material risks to investors.
Employees
We
currently have five full-time employees who are dedicated to the primary
functions of proprietary technology, sales and marketing to lottery operators,
development of existing and next generation games for mobile application, and
corporate administration. These include Stephen Knight, our President and
Chief Executive Officer, Stephen Baker, our Chief Technology Officer, Drew
Deyell, our Chief Information Officer, Jeff O’Connor, our Vice President of
Sales and Marketing, and Brandice Triolet, our Director of Human Resources and
Administration. We expect to hire two additional full time employees
in the coming months. We have engaged qualified third-parties for
accounting and legal services.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
In
addition to this Report, we are also required to file periodic reports and other
information with the Securities and Exchange Commission, including quarterly
reports and annual reports which include our audited financial
statements. You may read and copy any reports, statements or other
information we file at the Commission’s public reference facility maintained by
the Commission at 100 F Street, N.E., Washington, D.C. 20549, on official
business days during the hours of 10:00am to 3:00pm. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the
Commission. Please call the Commission at 1-800-SEC-0330 for further information
on the operation of the public reference room. Our SEC filings are also
available to the public through the Commission Internet site at http\\www.sec.gov .
These filings may be inspected and copied (at prescribed rates) at the
Commission's Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549.
You may
also request a copy of our filings at no cost, by writing of telephoning us
at:
Loto
Inc.
Suite
460, 20 Toronto Street
Toronto,
Ontario, Canada M5C 2B8
Telephone:
416-479-0880
Attention:
Mr. Stephen Knight
Chief
Executive Officer, President and Chief Financial Officer
12
Item 1A.
|
Risk
Factors
|
Our
business is subject to numerous risks. We caution you that the following
important factors, among others, could cause our actual results to differ
materially from those expressed in forward-looking statements made by us or on
our behalf in filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking statements in
this and in any other public statements we make may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in the discussion below will be
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially from
those anticipated in forward-looking statements. We undertake no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further
disclosure we make in our reports filed with the SEC.
Risks
Related To Our Operations And Financial Condition
We
are a development stage company and we may never generate revenues which could
cause our business to fail.
We are a
development stage company and we have not generated any revenues as of the date
of this Report. We incurred losses of $10,979 for the fiscal year
ended May 31, 2009 since inception of our activities in Mobilotto on September
16, 2008. Through the fiscal quarter ended February 28, 2010, such
losses have increased to $821,382. We expect to operate with net losses within
the current fiscal year-ending May 31, 2010 or longer. We cannot
predict the extent of these future net losses, or when we may attain
profitability, if at all. If we are unable to generate significant
revenue or attain profitability, we will not be able to sustain operations and
will have to curtail significantly or cease operations.
We
are a development stage company with significant capital resources deficiencies
and we may not be able to raise adequate capital which could materially and
adversely affect our ability to conduct business.
As a
development stage company, we have limited capital and limited operating
resources. As of February 28, 2010, we had cash deficit of $95
(unaudited). Subsequent to such period, the Company’s cash on hand has increased
to $150,000 (unaudited), as of the date of this Report. The cash on
hand in our bank accounts will be sufficient to maintain our operations only for
approximately two months from the date of this Report. Prior to the
date of this Report, we raised $170,000.00 in initial funding and Series A
private placements of restricted common stock. The money raised in
the initial funding and our Series A private placements will not be sufficient
to meet our projected cash flow deficits from operations and will not be
sufficient to fund the continuation of the development of our technology and
products. We estimate the total costs and expenses
related to completion of a commercially deployable version of our mobile lottery
application, obtaining certification of our system by the Gaming Standards
Association (GSA) and initiating full rollout of our products to our target
markets over the next twelve months will be approximately $1,500,000, which two
of our shareholders have committed to covering. We expect to need an
additional $3,500,000 commencing 12 months from the date of this Report to
expand our operations. Even if we are able to obtain third party
financing, the terms and condition of financing could have a material adverse
affect on our business, results of operations, liquidity and financial
condition. Any investment in our shares is subject to the significant
risk that we will not be able to adequately capitalize our Company to enable us
to continue to develop and implement our business model. Even if we
are able to raise adequate capital, the cost of such capital may be burdensome
and may materially impair our ability to fully implement our business
plan.
The
administrative costs of public company regulatory compliance could become
burdensome and consume a significant amount of our cash resources which could
materially and adversely affect our business.
We will
incur significant costs and expenses in connection with assuring compliance with
all laws, rules and regulations applicable to us as a public
company. We anticipate that our initial costs and expenses of
complying with our public reporting company obligations will be approximately
$150,000 annually. Our reporting and compliance costs and expenses
may increase substantially if we are able to deploy our business model on an
international basis, which will add significant cross-border jurisdictional
complexity to our regulatory compliance and our accounting controls and
procedures. Our compliance costs and expenses could also increase
substantially if we apply for trading of our securities on a national stock
exchange which may have listing requirements that engender additional
administration and compliance costs. We have assigned a high priority
to establishing and maintaining controls, procedures, corporate compliance and
public company reporting, however, there can be no assurance that we will have
sufficient cash resources available to satisfy our public company reporting and
compliance obligations. If we are unable to cover the cost of proper
administration of our public company compliance and reporting obligations, we
could become subject to sanctions, fines and penalties, our stock could be
barred from trading in public capital markets and we may have to cease doing
business.
13
Our
Auditors have issued an opinion expressing uncertainty regarding our ability to
continue as a going concern. If we are not able to continue
operations, investors could lose their entire investment in our
company.
We have a
history of operating losses, and may continue to incur operating losses for the
foreseeable future. This raises substantial doubts about our ability to continue
as a going concern. Our auditors issued an opinion in their audit
report as of June 9, 2009 expressing uncertainty about our ability to continue
as a going concern. This means that there is substantial doubt whether we can
continue as an ongoing business without additional financing and/or generating
profits from our operations. If we are unable to continue as a going
concern and our Company fails, investors in our shares could lose their entire
investment.
We
operate in highly competitive industries and our success depends on our ability
to effectively compete with numerous domestic and foreign businesses. If we are
unable to compete effectively our business could fail.
We face
competition from a number of domestic and foreign businesses, some of which have
substantially greater financial resources than we do, which could adversely
affect our ability to enter into contracts with lottery operators. We
operate in a period of intense price-based competition which could adversely
affect the number and the profitability of contracts we may be able to obtain.
We currently do not have any contracts and due to competition and the nature of
the lottery industry, we do not know when or if we will be able to enter into
any contracts. Intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to
compete successfully will depend on a number of factors, both within and outside
our control.
·
|
our
success in designing, testing and delivering new features, including
incorporating new technologies on a timely basis;
|
|
·
|
our
ability to address the needs of end-users and the quality of services for
customers of the lottery operators;
|
|
·
|
the
quality, performance, reliability, features, ease of use and pricing of
our application;
|
|
·
|
successful
implementation and expansion of our application’s
capabilities;
|
|
·
|
our
efficiency of production, and ability to deliver the application to the
lottery operators and to end-users;
|
|
·
|
the
rate at which commercially available smart phone equipment manufactures
provide a technologically accessible format for incorporation of our
solutions into their devices;
|
|
·
|
the
market acceptance of our application; and
|
|
·
|
product
or technology introductions by our
competitors.
|
Our
competitive position could be damaged if one or more potential lottery operators
decide to develop their own solution or utilize a third party solution using
alternative software and hardware technologies. Our prospective
lottery operator customers may be reluctant to rely on a relatively small
company such as our company. In addition, contract awards by lottery
operators are sometimes challenged by unsuccessful bidders which can result in
costly and protracted legal proceedings that can result in delayed
implementation or cancellation of the contract. We cannot assure you
that we will be able to compete successfully against current and future
competition, and the failure to do so would have a materially adverse effect
upon our business, operating results and financial condition and our
business. If we do not compete effectively, our business could fail
and investors could lose their entire investment.
14
The
market for mobile lottery services is in the early stages of development, and if
the market for our services does not develop as we anticipate, it will have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Mobile
lottery services, in general, are in the early stages of development. Our future
revenue and profits are substantially dependent upon the widespread acceptance,
growth, and use of mobile as an effective sales and purchasing
medium. Most lotteries have generally relied upon more traditional
forms of consumer sales of tickets through a variety of third-party owned
stores, and most lottery operators have no, or only limited, experience on sales
through mobile devices. Mobile lottery services are still in an early stage of
development and may not be accepted by consumers or lottery operators for many
reasons. If either the consumers or lottery operators reject our services, the
commercial utility of our technology and services may not develop as we
anticipate. If the market for mobile lottery services does not
develop as we anticipate, our business could be materially and adversely
affected.
Risks
Related To Our Intellectual Property
We
are only at the initial stage of development of our software. If we
are not able to further develop our software our business could
fail.
As of the
date of this Report, our mobile lottery software application has not yet been
commercially tested or utilized by any lottery operators and we have not yet
generated any revenues from our technology. We have developed working
demonstrations of our lottery application (which is operable on most Blackberry
smart phones including the Pearl, the Curve, the Bold, and 8800 series), as well
as a scratch card game which is operating on Android devices. Our current
lottery demonstration model of our software includes three of the six components
that together will constitute our full mobile lottery application. The completed
components include lottery game selection, lottery number picking and lottery
number authorization. The three components remaining to be developed include
player registration, financial settlement and player messaging functions. We
issued an RFP (request for proposal) to six qualified suppliers on August 25,
2009, indicating that we intend to develop the remaining components of our full
feature system. The purpose of this RFP is to build the various modules
necessary for lottery play on mobile cell phones, including player registration,
ticket selection, ticket registration, settlement, and direct to player
communication and marketing. After scoring, conducting due diligence, and
initial contracting, we have selected one supplier to develop our software
products. Pending final contract completion and execution, we expect the next
version of our software to be ready for commercialization in approximately nine
months from the date of this Report. There is no guarantee that our full feature
mobile lottery application will continue to be developed on a timely basis, be
able to be certified by lottery operators, third party carriers and
service-providers, or operate in the manner for which it is intended. The
uncertainties related to continuation of development and refinement of our
software application present material risks of failure which could cause a
complete loss of your investment in our Company.
Failure
to adequately protect our intellectual property and proprietary rights could
harm our competitive position and adversely affect our ability to conduct
business which could result in loss of your entire investment in our
Company.
Our
success is substantially dependent upon our proprietary technology, which
relates to a variety of business, security, and transactional processes
associated with our mobile lottery services technology. We expect to
rely on a combination of patent, trademark, copyright and trade secret laws to
protect our proprietary rights. Although we have filed for certain
patent protection over aspects of our technology, much of our proprietary
information and processes may not be patentable. We cannot assure you that any
pending patent applications will be issued or that their scope is broad enough
to provide us with meaningful protection. Although we will file
applications for registered trademarks covering certain of the marks we use in
our business, we cannot assure you that we will be able to secure significant
protection for these marks. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our technology
and/or services or to obtain and use information that we regard as proprietary.
We cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop similar
technology or duplicate our services or design around patents issued to us or
our other intellectual property rights. If we are unable to adequately protect
our intellectual property and proprietary rights, our business and our
operations could be materially and adversely affected.
15
We
may be subject to intellectual property claims that create uncertainty about
ownership of technology essential to our business and divert our managerial and
other resources which could have a material adverse affect on our
business.
There has
been a substantial amount of litigation in the technology industry regarding
intellectual property rights. Our success depends, in part, on our ability to
protect our intellectual property and to operate without infringing on the
intellectual property rights of others in the process. There can be no guarantee
that any of our intellectual property will be adequately safeguarded, or that it
will not be challenged by third parties. We may be subject to patent or
trademark infringement claims or other intellectual property infringement claims
that would be costly to defend and could limit our ability to use certain
critical technologies. We may also become subject to interference
proceedings conducted in the patent and trademark offices of various countries
to determine the priority of inventions.
Any
patent litigation or interference proceedings could have a negative effect on
our business by diverting resources and management attention away from other
aspects of our business and adding uncertainty as to the ownership of technology
and services that we view as proprietary and essential to our business.
Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type
of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other
interim proceedings or developments in the litigation. If investors perceive
these results to be negative, it could have an adverse effect on the trading
price of our common stock.
In
addition, a successful claim of patent or trademark infringement against us and
our failure or inability to obtain a license for the infringed or similar
technology or trademark on reasonable terms, or at all, could have a material
adverse effect on our business and the value of any investment in our
Company. Also, an adverse determination of any litigation or defense
proceedings could cause us to pay substantial damages, including treble damages
if we are found to have willfully infringed, and, also, could put our patent
applications at risk of not being issued.
If
we are not able to respond to the rapid technological change characteristic of
our industry, our products and services may cease to be competitive and our
business could fail and cause the entire loss of your entire investment in our
Company.
The
mobile industry is characterized by rapid change in business models and
technological infrastructure, and we will need to constantly adapt to changing
markets and technologies to provide new and competitive products and services.
If we are unable to ensure that our users, lottery operators, and distribution
partners have a high-quality experience with our services, then they may become
dissatisfied and stop using our products and services. Accordingly, our future
success will depend, in part, upon our ability to develop and offer competitive
products and services. We may not, however, be able to successfully do so, and
our competitors may develop innovations that render our products and services
obsolete or uncompetitive. If we are not able to compete effectively,
our business could fail which could result in the loss of your entire investment
in our Company.
Our
technical systems are vulnerable to interruption and damage that may be costly
and time-consuming to resolve and may harm our business and reputation which
could materially and adversely affect the value of your investment in our
Company.
Our
systems and operations are vulnerable to damage or interruption from fire,
floods and other natural disasters. Furthermore, network failures, hardware
failures, software failures, power loss, telecommunications failures, break-ins,
terrorism, war or sabotage, computer viruses, penetration of our network by
unauthorized computer users and “hackers” and other similar events, and other
unanticipated problems all pose serious threats to our success. We may not have
developed or implemented adequate protections or safeguards to overcome any of
these events. We also may not have anticipated or addressed many of the
potential events that could threaten or undermine our technology network. In
addition, if a person is able to circumvent our security measures, he or she
could destroy or misappropriate valuable information or disrupt our
operations. Any of these occurrences could cause material
interruptions or delays in our business, result in the loss of data or render us
unable to provide services to our customers which could have the further result
of materially and adversely affecting the value of your investment in our
Company.
16
Our
business depends on the protection of our intellectual property and proprietary
information. If we are unable to adequately protect our intellectual
property and proprietary information our business and your investment our
Company could be materially and adversely affected.
We
believe that our success depends, in part, on protecting our intellectual
property in those countries in which we will do business. Our intellectual
property includes certain pending patents and trademarks relating to our mobile
technology and jurisdictional validation as well as proprietary or confidential
information that is not subject to patent or similar protection. Our
intellectual property protects the integrity of the games, systems, products and
services, which is a core value of the industries in which we operate. For
example, our intellectual property is designed to ensure the security of the
distribution of the lottery tickets we provide as well as simple and secure
validation of our lottery tickets sold. Competitors may independently develop
similar or superior products, software, systems or business models. In cases
where our intellectual property is not protected by an enforceable patent, such
independent development may result in a significant diminution in the value of
our intellectual property.
There can
be no assurance that we will be able to protect our intellectual property. We
expect to enter into confidentiality or license agreements with our employees,
vendors, consultants, and, to the extent legally permissible, our
customers. We intend to generally control access to, and the
distribution of, our game systems and other software documentation and other
proprietary information, as well as the designs, systems and other software
documentation and other information we license from others. Despite our efforts
to protect these proprietary rights, unauthorized parties may try to copy our
gaming technology, business models or systems, use certain of our confidential
information to develop competing products, or develop independently or otherwise
obtain and use our gaming products or technology, any of which could have a
material adverse effect on our business. Policing unauthorized use of our
technology is difficult and expensive, particularly because of the global nature
of our operations. The laws of other countries may not adequately protect our
intellectual property.
There can
be no assurance that our business activities, products and systems will not
infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against us. Any such claim and any resulting
litigation, should it occur, could subject us to significant liability for
damages and could result in invalidation of our proprietary rights, distract
management, and/or require us to enter into costly and burdensome royalty and
licensing agreements. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to us, or may not be available at all. In
the future, we may also need to file lawsuits to defend the validity of our
intellectual property rights and trade secrets, or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or unsuccessful, could result in substantial costs and diversion of
resources. If we are unable to adequately protect our intellectual
property and proprietary information, our business and your investment our
Company could be materially and adversely affected.
Risks
Related To Our Business
Our
success will depend heavily on our management. If we fail to hire and
retain qualified management and other key personnel, the implementation of our
business plan will be materially and adversely affected.
Our
performance is substantially dependent on the continued services and performance
of our executive officers and other key personnel, and our ability to retain and
motivate our officers and key employees. Our future success also depends on our
ability to identify, attract, hire, train, retain and motivate other highly
skilled technical, managerial and marketing personnel. Competition for qualified
personnel is intense, and we cannot assure you that we will be successful in
attracting and retaining such personnel. The failure to attract and retain our
officers or the necessary technical, managerial and marketing personnel could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
17
We do not have employment agreements with our key management team and employees, and should we lose the services of our management team and key employees our ability to conduct business could be materially and adversely affected.
As of the
date of this Report, we have not entered into employment agreements with any of
our officers or key employees. We are currently negotiating terms and
conditions for agreements with our officers and key employees. If we
are not able to negotiate mutually acceptable terms and conditions for
agreements and continued services to our company by officers and key employees,
the loss of the services of these persons could materially and adversely harm
our business, financial condition and results of operations.
Our
dependence on management creates risks. The loss of our experienced officers and
key employees could materially and adversely affect our ability to
professionally manage our business.
Our plan
for success is dependent, in large part, on the active participation of our
executive officers. The loss of their services would materially and adversely
affect our business and future success. We do not have key-man life
insurance in effect at the present time. Should any of our key
employees die or become incapacitated, we may not be able to replace them in a
timely or cost effective manner which could materially and adversely harm our
business, financial condition and results of operations.
We
expect that our anticipated future growth may strain our management,
administrative, operational and financial infrastructure. Failure of
our ability to reasonably manage anticipated growth could materially and
adversely affect our business.
We
anticipate that significant expansion of our present operations will be required
to capitalize on market opportunities. This expansion is expected to place a
significant strain on our management, operational and financial resources. We
expect to add a substantial number of additional key personnel in the future,
including key managerial, technical, and software development employees who will
have to be fully integrated into our operations. In order to manage our growth,
we will be required to continue to implement and improve our operational and
financial systems, to expand existing operations, to attract and retain superior
management, and to train, manage and expand our employee base. We cannot assure
you that we will be able to effectively manage the expansion of our operations,
that our systems, procedures or controls will be adequate to support our
operations or that our management will be able to successfully implement our
business plan. If we are unable to manage growth effectively, our business,
financial condition and results of operations could be materially and adversely
affected.
Providing
our products to customers outside of the United States exposes us to risks
inherent in international business which could have a material and adverse
affect on our operations.
During
the foreseeable future, we expect to pursue our business only outside of the
United States until applicable laws in the United States permit sales of lottery
tickets utilizing mobile telecommunications devices. If applicable
laws in the future permit operation of our application in the United States we
also intend to continue to pursue international business
opportunities. Accordingly, we are subject to risks and challenges
that we would otherwise not face if we conducted our business only in the United
States. The risks and challenges associated with providing our products to
customers outside the United States include: localization of our products,
including translation into foreign languages and associated expenses; laws and
business practices favoring local competitors; compliance with multiple,
conflicting and changing governmental laws and regulations; foreign currency
fluctuations; different pricing environments; different tax regimes and regional
economic and political conditions. Any of these factors, either
individually or collectively, could have a material adverse effect on our
business and results of operations.
We
will need additional funding in the future to pursue our business strategy and
expand our operations. If additional future funding is not available
to us our financial condition could be materially and adversely affected and our
business may fail.
In
addition to our current need for $1,500,000 in funding which has been committed
to be covered by two of our shareholders, we will require additional funding in
the future to expand our operations and fully implement our business strategy,
which may include the selective acquisition of businesses and
technologies. We anticipate that we will need to raise additional
amounts of up to $3,500,000 one year from the date of this
Report. There can be no assurance that additional financing
arrangements will be available in amounts or on terms acceptable to us, if at
all. Furthermore, if adequate additional funds are not available, we will be
required to delay, reduce the scope of, or eliminate material parts of the
implementation of our business strategy. If we do not obtain
additional financing in amounts and on terms acceptable to us, our business may
fail.
18
The
current economic slowdown may adversely affect our business and financial
condition in ways that we cannot predict. If the economy does not
recover during the reasonably foreseeable future our ability to conduct business
may not be viable and we may have to cease operations which could result in the
entire loss of your investment in our Company.
The
current economic slowdown may have a negative effect on our business and
financial condition. We cannot predict the effect that the economic slowdown
will have on us as it also impacts our customers, vendors and business partners.
We believe that the lottery gaming businesses are less susceptible to reductions
in consumer spending and other parts of the consumer sector. However, there can
be no assurance that the continuation or worsening of the current economic
slowdown will not negatively impact the lottery gaming businesses. If
the economy does not recover during the reasonably foreseeable future, our
ability to conduct business may not be viable and we may have to cease
operations which could result in the loss of your entire investment in our
Company.
The
current economic slowdown and general unavailability of commercial credit may
adversely affect our ability to obtain financing and could have a material
adverse effect on our ability to conduct business.
The uncertainty surrounding the future of the global credit markets has resulted in reduced access to financing and credit worldwide. Major market disruptions and the current adverse changes in global market conditions and the evolving regulatory restrictions in the United States and worldwide may adversely affect our business or impair our ability to obtain funds as needed. The current adverse market conditions may last longer than we anticipate. These recent and developing economic and governmental factors may have a material adverse effect on our results of operations, financial condition or cash flows and could cause the price of our common stock to decline significantly. If we require credit financing for any aspect of our conducting business we may not be able to obtain it on a timely basis or on reasonable terms, if at all.
Our
business is subject to evolving technology. If we are unable to
upgrade our technologies responsive to changes in the industry our Company could
fail.
The
markets for all of our products and services are affected by changing
technology, new legislation and evolving industry standards. Our ability to
anticipate or respond to such changes and to develop and introduce new and
enhanced products and services on a timely basis will be a significant factor in
our ability to expand, remain competitive and attract new customers. We can give
no assurance that we will achieve the necessary technological advances or have
the financial resources needed to introduce new products or services on a timely
basis or that we will otherwise have the ability to compete effectively in the
markets. If we are unable to remain current with industry
developments and upgrade our technologies in response to changes in the
industry, the Company could fail and investors could lose their entire
investment in the Company.
Our
business competes on the basis of the security and integrity of our systems and
our mobile lottery software application. If there is a breach in our
security systems, our business and our Company could suffer materially adverse
consequences.
We
believe that our success depends, in part, on providing secure products and
systems to the lottery operators and their playing customers. Attempts to
penetrate security measures may come from various combinations of customers,
retailers, vendors, employees and others. Our ability to monitor and ensure
quality of our products is periodically reviewed and enhanced. Similarly, we
intend to regularly assess the adequacy of our security systems to protect
against security breaches and take reasonable measures to protect the integrity
of the product for end-users. There can be no assurance that our business will
not be affected by a security breach or lapse, which could have a material
adverse impact on our results of operations, business or prospects.
19
Implementation
of additions or changes in third-party hardware and software platforms used to
deliver our services may result in performance problems and may not provide
additionally anticipated functionality, which could result in material and
adverse affects on our ability to conduct business.
From time
to time, we may implement additions to or changes in the hardware and software
platforms we use for providing our services. During and after the implementation
of additions or changes, a platform may not perform as expected, which could
result in interruptions in operations, an increase in response time or an
inability to track performance metrics. In addition, in connection with
integrating with our customers, we may move their operations to our hardware and
software platforms or make other changes, any of which could result in
interruptions in those operations. Any significant interruption in our ability
to operate any of our services could have an adverse effect on our relationships
with users and clients and, as a result, on our financial results. We rely on a
combination of purchasing, licensing, internal development, and acquisitions to
develop our hardware and software platforms. Our implementation of additions to
or changes in these platforms may cost more than originally expected, may take
longer than originally expected, and may require more testing than originally
anticipated. In addition, we cannot provide assurance that additions
to or changes in these platforms will provide the additional functionality and
other benefits that were originally expected. If we are unable to
conform our technology to third-party additions or changes in hardware and
software platforms used to deliver our services, our business could be
materially and adversely affected.
We
rely on third party technology and hardware providers. A failure of service by
these providers could adversely affect our business and reputation.
We will
rely on third party providers for components of our technology platform, such as
hardware and software providers. A failure or limitation of service or available
capacity by any of these third party providers could materially and adversely
affect our business and reputation with corresponding adverse affects upon the
value of your investment in our Company.
Risks
Related to the Legal and Regulatory Environment in Which We Operate
Government
and legal regulations may require significant time, money and allocation of
Company resources. If we are unable to allocate adequate Company
resources for compliance with such regulations, our Company and our business
could be materially and adversely affected.
During
the foreseeable future, we expect to pursue our business outside of the United
States until applicable laws in the United States permit sales of lottery
tickets utilizing mobile telecommunications devices. As of the date
of this Report, current U.S. laws prohibit sales of lottery tickets utilizing
mobile telecommunications devices. Existing or future laws and regulations in
other countries may impair our ability to expand our business and introduce new
products and services, or may restrict the use of our services or the features
we offer. Changes to the existing regulatory framework in countries
where we intend to offer our services could adversely affect our business
plans.
In
addition to regulation of lottery ticket sales, the mobile telecommunications
industry faces uncertainty related to future government regulation. Due to the
rapid growth and widespread use of mobile telephones, legislatures have enacted
and may continue to enact various laws and regulations applicable to the mobile
telecommunications industry. Laws and regulations may be adopted in
the future which directly govern mobile device lottery services. The
adoption of laws or regulations could decrease the demand for our technology and
services and increase our cost of doing business or otherwise have a material
adverse effect on our business, prospects, financial condition and results of
operations.
In
addition, foreign governments may pass laws which could negatively impact our
business and/or may prosecute us for violating existing laws. Such laws
might include EU member country conforming legislation under applicable EU
Privacy and Data Protection Directives. Any costs incurred in complying with
foreign laws could negatively affect the viability of our
business.
20
Our industry is subject to strict government regulations that may limit our existing operations and have a negative impact on our ability to grow, which could be materially adverse to our business and prospects.
In the
United States and many other countries, lotteries and other forms of wagering
must be expressly authorized by law. Once authorized, such activities are
subject to extensive and evolving governmental regulation. Moreover, these
gaming regulatory requirements vary from jurisdiction to
jurisdiction. We expect to be subject to a wide range of complex
gaming laws and regulations in the jurisdictions in which we intend to operate
which could be time consuming, expensive and distracting to
management. As a result, such regulatory requirements could be
materially adverse to our business and prospects.
The
regulatory environment in any particular jurisdiction may change in the future,
and any such change could have a material adverse effect on our results of
operations, business or prospects. Moreover, there can be no assurance that the
sale of lottery services over mobile devices will be approved by additional
jurisdictions or that those jurisdictions in which these activities are
currently permitted will continue to permit such activities. Although we believe
that we plan to develop procedures and policies to comply with the requirements
of evolving laws, there can be no assurance that law enforcement or gaming
regulatory authorities will not seek to restrict our business in their
jurisdictions or institute enforcement proceedings if we are not
compliant.
Moreover,
in addition to the risk of enforcement action, we are also at risk of loss of
business reputation in the event of any potential legal or regulatory
investigation whether or not we are ultimately accused of or found to have
committed any violation.
We may be
required to obtain licenses from various jurisdictions in order to operate
certain aspects of our business and we might be subject to extensive background
investigations and suitability standards in our lottery business. Lottery
authorities generally conduct background investigations of the selected vendor
and its employees prior to and after the award of a lottery contract. Generally,
regulatory authorities have broad discretion when granting, renewing or revoking
these approvals. Lottery authorities may require the removal of any of our
employees deemed to be unsuitable and are generally empowered to disqualify us
from receiving a lottery contract or operating a lottery system as a result of
any such investigation. Our failure, or the failure of any of our key personnel
or systems in obtaining a required license or approval in one jurisdiction could
negatively impact our ability (or the ability of any of our key personnel or
systems) to obtain required licenses and approvals in other jurisdictions. The
failure to obtain a required license or approval in any jurisdiction would
decrease the geographic areas where we may operate and generate revenues,
decrease our share in the gaming marketplace and put us at a disadvantage
compared with our competitors.
Some
jurisdictions also require extensive personal and financial disclosure and
background checks from persons and entities beneficially owning a specified
percentage (typically 5% or more) of our equity securities. The failure of these
beneficial owners to submit to such background checks and provide required
disclosure could jeopardize the award of a contract to us. Additional
restrictions are often imposed by international jurisdictions.
While we are firmly committed to full compliance with all applicable laws, there can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine or suspension or revocation of any contract.
Gaming
opponents persist in their efforts to curtail legalized gaming, and particularly
internet gaming which, if successful, could limit our operations or cause us to
cease doing business.
Legalized
gaming is subject to opposition from gaming opponents. There can be no assurance
that this opposition will not succeed in preventing gaming in jurisdictions
where these activities are presently legalized, prohibited or prohibiting or
limiting the expansion of gaming where it is currently permitted. If
we cannot legally conduct business, our Company could
fail.
21
Failure
to perform under lottery contracts may result in litigation, substantial
monetary liquidated damages and contract termination which would materially and
adversely affect our business.
Our
business may subject us to contractual penalties and risks of litigation,
including due to potential allegations that we have not fully performed under
contracts or that goods or services we supply are defective in some
respect. Lottery contracts typically permit a lottery authority to
terminate the contract at any time for material failure to perform, other
specified reasons and, in many cases, for no reason at all. Lottery contracts
also frequently contain exacting implementation schedules and performance
requirements and the failure to meet these schedules and requirements may result
in substantial monetary liquidated damages, as well as possible contract
termination. Material amounts of liquidated damages could be imposed on us in
the future, which could, if imposed, have a material adverse effect on our
results of operations, business or prospects and on our ability to continue to
conduct business.
Risks
Related To Our Stock
Our
limited operating history makes evaluation of our business difficult, and may
discourage trading in our stock which could adversely affect the price of our
stock.
We
started to develop our lottery technology in 2008 and we have not yet
commercially deployed our technology. We, therefore, have limited
historical financial data related to our current business upon which to analyze
operating expenses or forecast accurately our future operating results. Our
limited operating history will make it difficult for investors to evaluate our
business and prospects which may discourage trading in our stock with potential
further adverse affect on the price of our stock.
We
will need to raise additional capital. If we are unable to raise additional
capital, our business may fail.
We will
need to raise additional capital to provide cash for our operations. Our current
working capital is not expected to be sufficient to carry out all of our plans
and to fund our operating losses until we are able to generate enough revenues
to sustain our business. The fact that we have not generated any
revenues to date may deter potential investors from providing
financing. Uncertainty regarding our ability to generate revenues may
make it difficult for us to find financing on acceptable terms. If we
are unable to obtain adequate funding, we may not be able to successfully
develop and market our products and our business will most likely
fail. To secure additional financing, we may need to borrow money or
sell more securities. Under the current circumstances, we may be
unable to secure additional financing on favorable terms, if available at
all.
The market price of our common stock may be volatile which could adversely affect the value of your investment in our common stock.
The
trading price of our common stock may be highly volatile and could be subject to
wide fluctuations in response to various factors. Some of the factors that may
cause the market price of our common stock to fluctuate include:
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fluctuations
in our quarterly financial results or the quarterly financial results of
companies perceived to be similar to
us;
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changes
in estimates of our financial results or recommendations by securities
analysts;
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failure
of any of our products to achieve or maintain market
acceptance;
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changes
in market valuations of similar
companies;
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significant
products, contracts, acquisitions or strategic alliances of our
competitors;
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success
of competing products or services;
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·
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changes
in our capital structure, such as future issuances of securities or the
incurrence of additional debt;
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regulatory
developments in Canada, United States or foreign
countries;
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litigation
involving our company, our general industry or
both;
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additions
or departures of key personnel;
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22
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·
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investors’
general perception of us; and
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changes
in general economic, industry and market
conditions.
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In
addition, if the market for technology or mobile lottery service stocks or the
stock market in general experiences a loss of investor confidence, the trading
price of our common stock could decline for reasons unrelated to our business,
financial condition or results of operations. If any of the foregoing occurs, it
could cause our stock price to fall and may expose us to class action lawsuits
that, even if unsuccessful, could be costly to defend and a distraction to
management, which could further adversely affect the value of your investment in
our common stock.
Fluctuations
in the value of foreign currencies could result in increased costs and operating
expenses which could adversely affect our business.
For our
projected international operations, the local currency will be designated as the
functional currency. Accordingly, assets and liabilities must be translated into
U.S. Dollars at year-end exchange rates, and revenues and expenses will be
translated at average exchange rates prevailing during the
year. Fluctuations in the value of other currencies in which we may
generate revenues or incur costs may be difficult to predict and could cause us
to incur currency exchange losses. Receivables and liabilities in
currencies other than the functional currency could also move adversely to us
from the date of accrual by us to the date of actual settlement of receivables
or liabilities in a currency other than the functional currency. A disparity
between the accrual and settlement amounts due to currency exchange costs could
have a material adverse affect on our business. We cannot predict the effect of
exchange rate fluctuations on our future operating results. Future
fluctuations in currency exchange rates could materially and adversely affect
our business.
Certain
governments with whom we may do business may impose restrictions over the
conversion of their currencies into U.S. dollars or other foreign
currencies. There can be no assurance that we will be able to convert
foreign revenues into U.S. dollars for repatriation and this may adversely
affect our business.
We
do not currently intend to pay dividends on our common stock and, consequently,
the ability to achieve a return on your investment in our common stock will
depend on appreciation in the price of our common stock. If our
common stock does not appreciate in value, investors could suffer losses in
their investment in our common stock.
We do not
expect to pay cash dividends on our common stock. Any future dividend payments
are within the absolute discretion of our Board of Directors and will depend on,
among other things, our results of operations, working capital requirements,
capital expenditure requirements, financial condition, contractual restrictions,
business opportunities, anticipated cash needs, provisions of applicable law and
other factors that our Board of Directors may deem relevant. We may not generate
sufficient cash from operations in the future to pay dividends on our common
stock. As a result, the success of your investment in our common
stock will depend on future appreciation in its value. The price of
our common stock may not appreciate in value or even maintain the price at which
you purchased our shares. If our common stock does not appreciate in
value, investors could suffer losses in their investment in our common
stock.
You
may experience dilution of your ownership interests due to the future issuance
of additional shares of our common stock which could be materially adverse to
the value of our common stock.
As of
that date of this Report, we have 54,000,000 shares of our common stock issued
and outstanding. We are authorized to issue up to 100,000,000 shares
of common stock. Our Board of Directors may authorize the issuance of additional
common or preferred shares under applicable state law without shareholder
approval. We may also issue additional shares of our common stock or
other securities that are convertible into or exercisable for common stock in
connection with the hiring of personnel, future acquisitions, future private
placements of our securities for capital raising purposes or for other business
purposes. Future sales of substantial amounts of our common stock, or the
perception that sales could occur, could have a material adverse effect on the
price of our common stock. If we need to raise additional capital to
expand or continue operations, it may be necessary for us to issue additional
equity or convertible debt securities. If we issue equity or
convertible debt securities, the net tangible book value per share may decrease,
the percentage ownership of our current stockholders may be diluted and such
equity securities may have rights, preferences or privileges senior or more
advantageous to our common stockholders.
23
We
anticipate that our common stock will initially be considered to be a "Penny
Stock," which will cause the trading of our stock to be subject to significant
regulations that could adversely affect the value of our common
stock.
We
anticipate that our common stock will initially be a low-priced security, or a
“penny stock” as defined under rules promulgated under the Exchange
Act. A stock is a "penny stock" if it meets one or more of the
definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the
Exchange Act. These include but are not limited to the following: (i) the stock
trades at a price less than $5.00 per share; (ii) it is not traded on a
"recognized" national exchange; (iii) it is not quoted on The NASDAQ Stock
Market, or even if so, has a price less than $5.00 per share; or (iv) is issued
by a company with net tangible assets less than $2.0 million, if in business
more than a continuous three years, or with average revenues of less than $6.0
million for the past three years. The principal result or effect of being
designated a "penny stock" is that securities broker-dealers cannot recommend
the stock but must trade in it on an unsolicited basis.
In
accordance with these rules, broker-dealers participating in transactions in
low-priced securities must first deliver a risk disclosure document which
describes the risks associated with such stocks, the broker-dealer’s duties in
selling the stock, the customer’s rights and remedies and certain market and
other information. Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer’s financial situation, investment experience and objectives.
Broker-dealers must also disclose these restrictions in writing to the customer,
obtain specific written consent from the customer, and provide monthly account
statements to the customer. The effect of these restrictions probably decreases
the willingness of broker-dealers to make a market in our common stock,
decreases liquidity of our common stock and increases transaction costs for
sales and purchases of our common stock as compared to other
securities. As a result of these effects, the trading value of our
common stock could be materially and adversely affected.
Broker-dealer
requirements may affect the trading and liquidity of our stock which could
materially and adversely affect the value of our common stock.
Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effectuating any transaction in a penny stock for the investor's
account. Moreover, Rule 15g-9 requires broker-dealers in penny
stocks to approve the account of any investor for transactions in such stocks
before selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise. These requirements could discourage interest in
trading in our common stock and could materially and adversely affect the public
trading value of our common stock.
Our
securities will be subject to sales restrictions imposed by state “Blue Sky
Laws” that will limit the States where our stock may be traded and could reduce
the public market value of our stock.
State
securities regulations may affect the transferability of our
shares. We have not registered any of our shares for sale or resale
under the securities or "blue sky" laws of any state. We do not
currently plant to register or qualify our shares for sale or resale in any
state. In many states, but not all states, shareholders can generally
make unsolicited sales of securities through registered
broker-dealers. Arkansas, Georgia, Illinois, Louisiana, New York,
North Dakota, Ohio, Oregon and Tennessee, do not permit shareholders to make
unsolicited sales of securities through broker dealers. Persons who
desire to purchase our shares in any trading market that may develop in the
future should be aware that these state regulations may limit sales and
purchases of our shares. The inability to trade or sell our common
stock in certain states could materially and adversely affect the public market
value of our stock.
24
There
is no public trading market for our common stock and there is no assurance that
the common stock will ever trade on a recognized exchange or dealers’ network
which may adversely affect the ability of our investors to sell their
shares.
Our
common stock is not listed on any exchange or quoted on any quotation service,
and there is currently no public market for our common stock. We can
provide no assurance that our common stock will ever be quoted on any quotation
service or that any market for our common stock will ever
develop. Neither we nor our selling stockholders have engaged an
underwriter for this offering, and we cannot assure you that any brokerage firm
will act as a market maker of our securities. A trading market may
not develop in the future, and if one does develop, it may not be
sustained. As a result, stockholders may be unable to liquidate their
investments, or may encounter considerable delay in selling shares of our common
stock which could also adversely affect the price of any sales of our common
stock.
If a trading market for our securities develops, it may be volatile which could make it difficult to sell shares of common stock or cause sales of common stock at a loss.
If an active trading market does develop, the market price of our common stock is likely to be highly volatile due to, among other things, the nature of our business and because we are a new public company with a limited operating history. Furthermore, even if a public market develops, the volume of trading in our common stock will presumably be limited and likely be dominated by a few individual stockholders. The limited volume, if any, will make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time.
The equity markets have recently experienced significant price and volume fluctuations that have adversely affected the market prices for many companies' securities. These fluctuations may not be directly attributable to the operating performance of these companies. Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be unable to sell their shares, or may be forced to sell shares of our common stock at a loss.
Shares eligible for future sale may adversely affect the market price of our common stock. The future sale of a substantial amount of our restricted stock in the public marketplace could reduce the price of our common stock.
From time
to time, certain of our stockholders may be eligible to sell their shares of
common stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144 of the Securities Act of 1933, as amended, subject to
certain compliance requirements. In general, under Rule 144,
unaffiliated stockholders (or stockholders whose shares are aggregated) who have
satisfied a six month holding period may sell shares of our common stock, so
long as we have filed all required reports under Section 13 or 15(d) of the
Exchange Act during the applicable period preceding such
sale. Generally, once a period of six months has elapsed since the
date the common stock was acquired from us or from an affiliate of ours,
unaffiliated stockholders can freely sell shares of our common stock so long as
the requisite conditions of Rule 144 and other applicable rules have been
satisfied. Also generally, twelve months after acquiring shares from
us or an affiliate, unaffiliated stockholders can freely sell their shares
without any restriction or requirement that we are current in our SEC
filings. Any substantial sales of common stock pursuant to Rule 144
may have an adverse affect on the market price of our common stock.
Failure
to achieve and maintain internal controls in accordance with Sections 302 and
404(a) of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and stock price.
If we
fail to maintain adequate internal controls or fail to implement required new or
improved controls, as such control standards are modified, supplemented or
amended from time to time, we may not be able to assert that we can conclude on
an ongoing basis that we have effective internal controls over financial
reporting. Effective internal controls are necessary for us to produce reliable
financial reports and are important in the prevention of financial
fraud. If we cannot produce reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and there could be a material
adverse effect on our stock price.
25
Certain
holders of our common stock exert significant influence over our company and may
make decisions with which other stockholders may disagree that could reduce the
value of our stock.
A Few
Brilliant Minds Inc. and 2238646 Ontario Inc. together now own a total of
38,700,000 of our 54,000,000 issued and outstanding shares, which represents
71.7% of our shares. As a result, A Few Brilliant Minds Inc. and
2238646 Ontario Inc. have the ability to exert significant influence over our
business and may make decisions with which other stockholders may disagree,
including, among other things, the appointment of officers and directors,
changes in our business plan, delaying, discouraging or preventing a change of
control of Loto or a potential merger, consolidation, tender offer, takeover or
other business combination. The two shareholders are parties to an
agreement which includes certain mutual covenants, including nominating and
voting for an equal number of representatives to serve on our Board of
Directors.
Item
2.
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Financial
Information
|
Selected
Financial Data
Pursuant
to permissive authority under Regulation S-K, Rule 301, we have omitted selected
financial data.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Forward
Looking Statements
The
following discussion of the financial condition and results of operations of the
Company should be read in conjunction with the financial statements and the
related notes thereto included elsewhere in this Report. Some of the
statements contained in this Report that are not historical facts are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. However, as the Company
intends to issue “penny stock,” as such term is defined in Rule 3a51-1
promulgated under the Exchange Act, the Company is ineligible to rely on these
safe harbor provisions. We urge you to be cautious of the forward-looking
statements, that such statements, which are contained in this Report, reflect
our current beliefs with respect to future events and involve known and unknown
risks, uncertainties and other factors affecting our operations, market growth,
services, products and licenses. No assurances can be given regarding the
achievement of future results, as actual results may differ materially as a
result of the risks we face, and actual events may differ from the assumptions
underlying the statements that have been made regarding anticipated events.
Factors that may cause actual results, our performance or achievements, or
industry results, to differ materially from those contemplated by such
forward-looking statements include without limitation:
·
|
Our
ability to attract and retain management, and to integrate and maintain
technical information and management information
systems;
|
·
|
Our
ability to raise capital when needed and on acceptable terms and
conditions;
|
·
|
The
intensity of competition;
|
·
|
General
economic conditions; and
|
·
|
Changes
in government regulations.
|
The
Company disclaims any obligation to update any such factors or to announce
publicly the results of any revisions of the forward-looking statements
contained or incorporated by reference herein to reflect future events or
developments.
26
Plan
of Operation
We are a
development stage company. We are developing a patent-pending
software application which permits the secure purchase of lottery tickets on
commercially available “smart” phones and similar mobile telecommunications
devices. A smart phone is a mobile phone offering advanced
capabilities, often with personal computer-like functionality, such as e-mail,
Internet access and other applications. Our proprietary technology
for facilitating the purchase of lottery tickets through commercially available
smart phones and other mobile devices addresses all elements of lottery play,
including secure player registration and authorization, number selection,
settlement, winning number notification and other direct-to-customer marketing
opportunities. We intend to license our software application to
governments and other lottery operators as our primary source of
revenue. We do not intend to become a lottery
operator. During the foreseeable future, we expect to pursue our
business only outside of the United States because current laws in the United
States prohibit sales of lottery tickets utilizing mobile telecommunications
devices. Our business plan calls for launching our mobile lottery
application in the target markets of Canada, Mexico, South America, Asia
(China), Africa (South Africa) and Europe (Turkey and the United Kingdom of
Great Britain). We intend to pursue opportunities in the United
States as soon as applicable laws permit operation of our business.
We have developed a working demonstration model of our application which is operable on most Blackberry smart phones (including the Pearl, the Curve, the Bold, and 8800 series). Our demonstration model of the application includes several of the components of mobile lottery functionality, including lottery game selection, lottery number picking and lottery number authorization. We have designed and we plan to include player registration, financial settlement and player messaging functions in the next version of our software. We believe the next version of our application will be commercially viable and will provide a complete, fully functional and flexible mobile lottery platform for lottery operators worldwide.
As of the date of this Report, our mobile lottery software application has not yet been commercially tested or utilized by any lottery operators and we have not yet generated any revenues from our technology. We have developed working demonstrations of our lottery application (which is operable on most Blackberry smart phones including the Pearl, the Curve, the Bold, and 8800 series), as well as a scratch card game which is operating on Android devices. Our current lottery demonstration model of our software includes three of the six components that together will constitute our full mobile lottery application. The completed components include lottery game selection, lottery number picking and lottery number authorization. The three components remaining to be developed include player registration, financial settlement and player messaging functions. We issued an RFP (request for proposal) to six qualified suppliers on August 25, 2009, indicating that we intend to develop the remaining components of our full feature system. The purpose of this RFP is to build the various modules necessary for lottery play on mobile cell phones, including player registration, ticket selection, ticket registration, settlement, and direct to player communication and marketing. After scoring, conducting due diligence, and initial contracting, we have selected one supplier to develop our software products. Pending final contract completion and execution, we expect the next version of our software to be ready for commercialization in approximately nine months from the date of this Report. The continuing development of our software application and the plans for commercial launch of our product are subject to many uncertainties that present material risks to investors.
Results
of Operations
Loto was
incorporated in the state of Nevada on April 22, 2009, and our wholly-owned
subsidiary Mobilotto was incorporated in the province of Ontario in September
2008. On May 13, 2009, Loto acquired all of the issued and
outstanding shares of Mobilotto (which included all intellectual property of the
mobile lottery purchase system). We have concentrated our efforts on
developing our business strategy and obtaining financing. We have
working models ready for demonstration and we have commenced our initial sales
and marketing program. We have had early stage meetings with some
lottery operators in Canada and we are actively pursuing other opportunities in
Canada and elsewhere. Our mobile lottery software application has not
yet been utilized by any lottery operators and we have not yet derived any
revenues from our technology. There is no guarantee that we will be
able to successfully develop and launch our technology or that it will generate
sufficient revenue to sustain our operations.
Liquidity
and Capital Resources
As at
February 28, 2010 we had a cash deficit of $95. Subsequent to such period, the
Company’s cash has increased to $150,000 (unaudited) as of the date of this
Report. The cash on hand in our bank accounts will be sufficient to
maintain our operations only for approximately two months from the date of this
Report. We have also prepaid rent in the amount of $8,119 as a condition of
renting business premises, which commenced on July 1, 2009 at Suite 460, 20
Toronto Street in Toronto, Ontario. We also own fixed assets with a
cost of $24,927 which consists of general office equipment.
27
Current
liabilities include $114,510 of accrued general office and business expenses.
Also, during the second quarter of the year, the Company received an additional
deposit for subscription of common shares of $100,000. This is in addition to
the $300,000 that was received previously, although $150,000 of this balance was
converted to shares on June 9, 2009. In addition, the Company drew down an
additional $188,370 from the Standby Loan (as described below), and accrued
interest increased $3,298 in the quarter ended February 28, 2010, for an
aggregate amount outstanding of $342,595.
As a
development stage company, we have limited capital and limited operating
resources. We raised $170,000 under the terms of our co-founders’ agreements and
our Series A private placements of restricted common stock. The funds
raised in the prior private placements will not be sufficient to meet our
projected cash flow deficits from operations or to fund the development of our
technology and products.
The cash
on hand in our bank accounts will be sufficient to maintain our operations only
for approximately two months from the date of this Report. We
estimate our total overhead, costs and expenses related to completion of a
commercially deployable version of our mobile lottery application, obtaining
certification of our system by the Gaming Standards Association (GSA) and
initiating full rollout of our products to our target markets over the next
twelve months will be approximately $2,000,000. We expect to need
additional amounts of funding commencing 12 months from the date of this Report
in order to expand our operations.
Two of
our current shareholders, 2238646 Ontario Inc. and 1476448 Ontario Inc. are
parties to standby financing commitment to our Company under which they have
agreed to provide the necessary funding up to $1,500,000 if we are unable to
obtain revenues or other third-party financing (the “Standby
Loan”). This Standby Loan was originally made by Mhalka Capital
Investments Ltd. and 1476448 Ontario Inc., however, 2238646 Ontario Inc. has
replaced Mhalka Capital Investments Ltd. We may draw on the standby
financing commitment in monthly tranches in accordance with our operating
requirements as set forth in our business plan. The available standby
commitment amount will be reduced by the aggregate cash proceeds received by the
Company which are derived from the issuance of any equity securities and Company
gross revenues. Draws on the commitment amount will be made on terms
of unsecured Notes, with interest set on each Note as of the date of the draw at
prime rate plus two percent per annum. The Notes will mature and
become repayable thirty calendar days after demand at any time following the
earlier of (a) September 30, 2010 or (b) the date upon which we are in receipt
of revenues or proceeds from the sales of equity securities. We will
give the lenders customary representations and warranties regarding the good
standing of our Company and status of progress in respect of our Company
business plan prior to each draw on the commitment amount, and we will provide
certifications and covenants regarding use of proceeds of each draw, which will
be in customary forms reasonably requested by the lenders as determined by
reference to similar lenders making similar loans to similar
companies. The lenders will not be required to make any loans under
the standby financing commitment to us if we are unable to make the
representations, warranties, certifications or covenants, or if we are in breach
of any previously given representations, warranties, certifications or
covenants. If we breach any of the Notes, the default rate will be
15% per annum and the lenders may seek recourse against our company for
repayment of all of the Notes.
Management believes that without obtaining additional financing or developing an ongoing source of revenue, we will not be able to complete the development of our software and launch successfully. Although we have actively been pursuing new business opportunities, we cannot give assurance that we will succeed in this endeavor, or be able to enter into necessary agreements to pursue our business on terms favorable to us. Should we be unable to generate additional revenues or raise additional capital, we could eventually be forced to cease business activities altogether.
Results of Operations for the Three and Nine Months Ended February 28, 2010
Income
We are a
development stage company and as of February 28, 2010 there were no contracts in
place and no revenue has been received. We do not expect that revenue
will be realized until late 2010. We have concentrated our efforts on
developing our business strategy and obtaining financing. We have
working models ready for demonstration and we have commenced our initial sales
and marketing program. We have had early stage meetings with some
lottery operators in Canada and we are actively pursuing other opportunities in
Canada and elsewhere. Our mobile lottery software application has not
yet been utilized by any lottery operators and we have not yet derived any
revenues from our technology. There is no guarantee that we will be
able to successfully develop and launch our technology or that it will generate
sufficient revenue to sustain our operations.
28
Expenses
For the
three and nine months ended February 28, the Company incurred $240,230 and
$810,403 in total operating expenses.
Salaries
expense was $106,003 for the quarter and $355,484 for the nine months ended
February 28, 2010, and comprised payments to the President, the Chief Technology
Officer, the Chief Information Officer, the Director of Sales & Marketing,
and the Manager of Human Resources and Administration.
Legal
fees incurred of $37,202 and $136,024 for the three and nine month periods ended
February 28, 2010 were for the creation of all required public company filings,
internal corporate needs, and reporting conformance, as well as for trademark
and patent applications.
Marketing
expenses of $2,231 and $34,222 for the three and nine month periods ended
February 28, 2010 were incurred in the creation and printing of investor
information, product information, specific lottery operator presentations,
attendance at trade shows, and a display booth that will be used at lottery
industry trade shows.
Rent
expense of $20,464 and $54,125 for the three and nine month periods ended
February 28, 2010 is for the head office of the Company, which is located at
Suite 460, 20 Toronto Street in Toronto Ontario.
Systems
development expenses of $12,943 and $42,171 for the three and nine months ended
February 28, 2010 were incurred for the creation and scoring of the Company’s
development request for proposal which was issued in late August, and on-going
refinement of the Statement of Work and contract through to February 28,
2010.
Our
Plan of Operation for the Next Twelve Months
Our path
to revenue is based upon completing the following work plan over the next twelve
months:
1.
Completion of the patent and trademark registrations.
2.
Adherence to our Marketing Plan (see below section).
3.
Completion of the systems development to ensure we have a robust product and all
the required modules for end-to-end lottery play (including player registration,
numbers selection, authorization, settlement, and player communication /
marketing). We are in the final stages of our supplier selection, and
once a supplier is selected, programming should be completed in approximately
six to eight months thereafter.
4.
As opportunities arise, partner with game developers to be able to offer new and
varied mobile games, in addition to mobilizing existing lottery
games.
5.
Remain flexible in our business model to operate as a lottery
retailer/distributor, license the technology for use, or sell the technology for
use in a pre-defined jurisdiction, preferably in that order, as conditions deem
appropriate.
6.
Complete appropriate certifications in promising jurisdictions to become a
lottery retailer/distributor and/or supplier to specific lottery
operators.
7.
Partner with the emerging internet gaming suppliers and new lottery licensees to
mobilize their offerings.
8.
Proactive communication and presentations to prospective lottery operators of
our products, status, and understanding their needs.
29
Marketing
Plan:
Our
marketing plan is a combination of branding, lottery association participation,
communication, presentations, and meetings with lottery operators, public
messaging, and partnership initiatives with other corporate entities.
Specifically, our plan calls for:
1.
Attending and participating in lottery association events / tradeshows in order
to meet prospective clients, speak about mobile lottery opportunities, and
present the Loto and Mobilotto brands. These would include the World Lottery
Association as well as the North American Association of State & Provincial
Lotteries, among others.
2.
Review each geographical region to justify the development of mobile gaming
environment. Prioritization would be given to those countries with a
combination of material lottery revenues, a high penetration of smart phone
devices, favorable internet gaming regulations, and operators who express an
interest in our product and service.
3.
On a prioritized country basis, study the local lottery regulations, understand
global and specific country lottery issues, and contact the lottery operators
for visitation and demonstration of Loto products. Currently,
opportunities appear to be strong in Canada, Mexico, Southeast Asia, and
Europe. Also, the US may become a market for Loto should existing
restrictions on internet lottery be changed, or Loto’s geo-locational
restrictions be confirmed.
4.
While brand and product marketing will be supported by the lottery operators and
by the mobile network operators, we intend on pursuing additional local
marketing efforts including mass awareness campaigns, cause support, and seeking
specific customer input.
5.
Develop relationships with existing internet gaming companies to “mobilize”
their product offerings.
6. Once
Loto’s product is developed and contracts in place, generate incremental sales
through direct to customer marketing through their mobile devices.
7. Engage
foreign agents in selected jurisdictions to assist in lottery operator meetings
and general business development
Working
Capital
While we
do not have in-place working capital to fund normal business activities, we are
actively seeking financing for $1,500,000 with requirements for an additional
$3,500,000 after the next 12 month period.
Contractual
Obligations and Other Commercial Commitments
The sole
on-going commitment we have is for the rental of our head office, which runs to
the end of February 2011 at a rate that approximates $7,500 per
month.
Warrants
As of
February 28, 2010, we had no outstanding warrants.
Common
Stock
As of
February 28, 2010, there were 55,000,000 shares issued and outstanding, of which
44,000,000 are restricted from trading. There was also $250,000 in
subscriptions received but not yet issued for an additional 166,667
shares.
30
Significant
Business Challenges
In
addition to the challenge of raising adequate capital in order to fully deploy
our business plan, the significant business challenges that our management
expects to encounter over the next year and beyond, as well as the known trends,
demands, uncertainties that may affect our Company’s financial condition include
the following matters:
|
·
|
We
have not yet completed the software development of all components
constituting our full feature mobile lottery application and our financial
condition would be materially and adversely affected if we are not able to
complete our software development;
|
|
·
|
Since
there has not yet been any commercial utilization of our application it
will be more difficult for us to close sales of our untested product with
prospective lottery operator customers of our Company and we may not able
to derive any revenues from our
product;
|
|
·
|
If
our product does not perform as anticipated, we may be unable to obtain
any contracts with lottery operators, or if we are able to enter into
contracts but the product is not performing, we could become subject to
litigation, which in either case could adversely affect our financial
condition;
|
|
·
|
Our
patent application is currently pending and if the patent is not granted
we may not be able to fully protect our intellectual property which could
adversely affect our ability to benefit from our
technology;
|
|
·
|
If
our pending patent is granted, the costs of enforcing our patent and other
intellectual property rights may be disproportionate to any potential
revenues, or we may be required to defend allegations from third parties
alleging infringement of their rights, which in either case could
adversely affect our financial
condition;
|
|
·
|
We
rely on a small management team and a small group of employees who may not
be able to be fully responsive to all aspects of operating our business,
and if we increase our personnel the additional administrative and
overhead costs could be burdensome, which in either case could adversely
affect our financial condition;
|
|
·
|
The
international focus of our business model implicates higher costs and
expenses than domestic companies, including foreign language translation,
compliance with local laws, business practices favoring local competitors,
compliance with multiple, conflicting and changing governmental laws and
regulations as well as changing governments, any of which could adversely
affect our financial condition;
|
|
·
|
We
expect intensifying competition in our target markets which could force us
to lower our pricing, reduce our margins, lower our market share and
reduce expectations of
profitability;
|
|
·
|
The
current international economic slowdown and credit freeze may continue
without resolution which could adversely affect the financial condition of
prospective customers and end-users, thus diminishing the prospects for
sales and impairing our own financial
condition;
|
|
·
|
Foreign
competitors who are not subject to U.S. anti-corruption laws and
regulations may engage in illegal and unfair business practices with which
we cannot compete that could impair our ability to obtain contracts from
lottery operators in our target foreign
markets;
|
|
·
|
Our
financial results could be damaged if prospective lottery operator
customers decide to develop their own mobile lottery solution or utilize a
third party solution using alternative software and hardware
technologies;
|
|
·
|
The
market for mobile lottery services is still in the early stages of
development, and if the market for our services does not develop as we
anticipate, it will have an adverse effect on our financial
condition;
|
|
·
|
Our
business is subject to evolving technology and if we are unable to upgrade
our technologies responsive to changes in the industry our financial
condition could be adversely
affected;
|
|
·
|
We
will rely on third party technology and hardware providers and if there is
a failure of the products or services rendered by these providers our
financial condition could be adversely
affected;
|
31
|
·
|
Implementation
of additions or changes in third-party hardware and software platforms
used to deliver our services to our customers and end-users may result in
performance problems which could adversely affect our financial
condition;
|
|
·
|
There
has not yet been adoption of international standards applicable to mobile
lottery solutions and as such we may have to change or modify our
application to conform to disparate standards which could adversely affect
our financial condition;
|
|
·
|
If
we are able to enter into contracts with international lottery operators,
we will be subject foreign currency exchange risks, different pricing
environments; different tax regimes and regional economic and political
conditions. Any of these factors, either individually or
collectively, could have a material adverse effect on our business and
results of operations; and
|
|
·
|
Gaming
opponents persist in their efforts to curtail legalized gaming which, if
successful, could limit our operations or cause us to cease doing
business.
|
Publicly
Reporting Company Considerations
We will
face several material challenges of operating as a publicly reporting company
and we expect to incur significant costs and expenses applicable to us as a
public company. We anticipate that our initial costs and expenses of
complying with our public reporting company obligations will be approximately
$150,000 annually which we expect to pay for out of proceeds from our financing
efforts during the next first twelve months from the date of this
Report. Subsequent to the next twelve month reporting and compliance
period, we expect to pay for our publicly reporting company compliance and
reporting costs from our revenues. We must structure, establish,
maintain and operate our Company under corporate policies designed to ensure
compliance with all required public company laws, rules, regulations, including,
without limitation, the Securities Act of 1933, the Securities Act of 1934, the
Sarbanes-Oxley Act of 2002, the Foreign Corrupt Practices Act and the respective
rules and regulations promulgated thereunder. Some of our more
significant challenges of becoming a publicly reporting company will include the
following:
|
·
|
We
will have to carefully prepare and file in the format mandated by the SEC
all periodic filings required by the Securities Exchange Act of 1934
(Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and interim
reports of material significant events on Form 8-K), as well as insider
reporting compliance for all officers and director under Section 16 of the
Securities Exchange Act of 1934 on Forms 3, 4 and
5;
|
|
·
|
In
addition to auditing our annual financial statements and maintaining our
books and records in accordance with the requirements of the Securities
Act of 1934, we will have to prepare and submit our accounting controls
and procedures for audit in compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, which requires increased corporate
responsibility and accountability;
|
|
·
|
We
will have to assure that our Board committee charters, corporate
governance principles, Board committee minutes are properly drafted and
maintained;
|
|
·
|
We
will have to carefully analyze and assess all disclosures in all forms of
public communications, including periodic SEC filings, press releases,
website postings, and investor conferences to assure legal
compliance;
|
|
·
|
We
will have assure corporate and SEC legal compliance with respect to proxy
statements and information statements circulated for our annual
shareholder meetings, shareholder solicitations and other shareholder
information events;
|
|
·
|
We
will have to assure securities law compliance for all equity-based
employee benefit plans, including registration statements and prospectus
distribution procedures;
|
32
|
·
|
We
will have to continuously analyze the specific impact on our Company of
all significant SEC initiatives, policies, proposals and developments, as
well as assess the rules of Public Company Accounting Oversight Committee
on governance procedures of Company and our audit
committee;
|
|
·
|
We
will have to comply with the specific listing requirements of a stock
exchange if we qualify and apply for such
listing;
|
|
·
|
We
expect that being a public company will increase our director and officer
liability-insurance costs;
|
|
·
|
We
will have to engage and interface with a Transfer Agent regarding issuance
and trading of our common stock, which may include Rule 144 stock transfer
compliance matters; and
|
|
·
|
We
expect that our costs for legal services will increase as a function of
our needs to seek guidance on securities law disclosure questions and
evolving compliance standards.
|
In
addition to the foregoing, our reporting and compliance costs and expenses may
increase substantially if we are able to deploy our business model on an
international basis, which will add significant cross-border jurisdictional
complexity to our regulatory compliance program and our accounting controls and
procedures. We have assigned a high priority to corporate compliance and
our public company reporting obligations, however, there can be no assurance
that we will have sufficient cash resources available to satisfy our public
company reporting and compliance obligations. If we are unable to cover
the cost of proper administration of our public company compliance and reporting
obligations, we could become subject to sanctions, fines and penalties, our
stock could be barred from trading in public capital markets and we may have to
cease operations.
Our
actual results may differ from our projections if there are material changes in
any of the factors or assumptions upon which we have based our
projections. Such factors and assumptions, include, without limitation,
the development of our proprietary technology platform and our products, the
timing of such development, market acceptance of our products, protection of our
intellectual property, our success in implementing our strategic, operating and
personnel initiatives and our ability to commercialize our products, any of
which could impact sales, costs and expenses and/or planned strategies and
timing. As a result, it is possible that we may require significantly more
capital resources to meet our capital needs.
Off-Balance
Sheet Arrangements
None.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did
not have any operations which implicated market risk as of the end of the latest
fiscal year. We expect that our planned operations will engender market
risk, particularly with respect to foreign currency exchange rate risk. We
intend to implement an analysis and assessment program which will on a regular
basis determine exposures of Loto to such risks. We expect to report the
results of all such quantitative and qualitative risk assessments prior to
entering into any material agreements, and on a regular monthly and annual basis
to our audit committee so that responsive risk management measures can be
discussed and actions taken to the extent reasonably feasible.
Inflationary factors in the future, such as increases in overhead costs, may
adversely affect our operating results. A high rate of inflation in the
future may have an adverse effect on our ability to manage selling, general and
administrative expenses as a percentage of net revenues if our revenues do not
increase with these increased costs.
Item 3.
|
Properties
|
Our
principal executive offices are located at Suite 460, 20 Toronto Street,
Toronto, Ontario, M5C 2B8. We have a sub-lease in effect until February
2011 for 2,950 square foot location, with a cost of approximately $7,000.00 per
month, which commenced in July 2009. We believe that this property is adequate
for our current and immediately foreseeable operating needs. At the
present time, we do not own any real estate. We do not have any policies
regarding investments in real estate, securities or other forms of
property.
33
Item 4.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The
following table sets forth the number of shares of common stock beneficially
owned as of April 19, 2010 by (i) those persons or groups known to us to
beneficially own more than 5% of our common stock; (ii) each director; (iii)
each executive officer; and (iv) all directors and executive officers as a
group. Except as indicated below, each of the stockholders listed below
possesses sole voting and investment power with respect to their shares.
The percentage of ownership set forth below reflects each holder’s ownership
interest in the 54,000,000 shares of Loto’s common stock issued and outstanding
as of April 19, 2010.
Name of Beneficial Owner
|
Common Stock
Beneficially Owned
|
Percentage of
Common Stock
|
||||||
A
Few Brilliant Minds Inc. (1)
|
19,400,000
|
35.9
|
%
|
|||||
2238646
Ontario Inc. (2)
|
19,300,000
|
35.7
|
%
|
|||||
Stephen
Knight
|
0
|
0
|
%
|
|||||
Steve
Baker
|
0
|
0
|
%
|
|||||
Gino
Porco through A Few Brilliant Minds Inc. (1)
|
19,400,000
|
35.9
|
%
|
|||||
Trevor
Eyton (3)
|
550,000
|
1.0
|
%
|
|||||
Donald
Ziraldo (4)
|
1,300,000
|
2.4
|
%
|
|||||
Randall
Barrs, personally and through 2238646 Ontario Inc. (5)
|
19,750,000
|
36.3
|
%
|
|||||
Alan
Ralph (6)
|
150,000
|
0.3
|
%
|
|||||
All
officers and directors as a group (7 persons) (1,
2, 3, 4, 5, 6,)
|
41,150,000
|
72.9
|
%
|
For each
individual or entity listed above, the mailing address is: c/o Loto Inc., Suite
460, 20 Toronto Street, Toronto, Ontario, Canada M5C 2B8, except as otherwise
indicated below.
(1) Gino
Porco, Director and co-founder, has sole voting and dispositive control over the
Loto shares owned by A Few Brilliant Minds Inc., an Ontario corporation which is
located at c/o Loto Inc., Suite 460, 20 Toronto Street, Toronto, Ontario, Canada
M5C 2B8. For purposes of comprehensive disclosure, the 19,400,000 shares
owned by Mr. Porco are indicated twice in the table above, once in his own name
and once in the name of A Few Brilliant Minds Inc.
(2)
Randall Barrs, director, has sole voting and dispositive control over the Loto
shares owned by 2238646 Ontario Inc., an Ontario corporation located at 23
Bedford Road, Toronto, Ontario M5R 2J9, Canada. Mr. Barrs is the sole
officer, director and shareholder of 2238646 Ontario Inc. For purposes of
comprehensive disclosure, the 19,300,000 shares owned by Mr. Barrs are indicated
twice in the table above, once in his own name and once in the name of his
Ontario corporation.
(3)
Trevor Eyton in his capacity as a director of the Company has been granted
compensation arrangements which provide that he may elect compensation in either
cash or in options of the Company as follows: in Calendar Year One, $75,000 if
election for Cash or 250,000 Shares at option exercise price of $1.00 per share
if election for Options; Calendar Year Two $150,000 if election for Cash or
300,000 Shares at option exercise price of $1.00 per share if election for
Options. Mr. Eyton may elect compensation either in cash or in options of
the Company to be issued 12 months after the date of hereof with respect to
Calendar year one and 24 months after the date hereof with respect to calendar
year two. In the event Mr. Eyton selects options in lieu of cash, all such
options shall be fully vested and exercisable upon the respective date of grant
and Mr. Eyton may exercise all such options following the date of issuance
thereof until expiration thirty-six months from the date hereof. If Mr.
Eyton elects to receive all of his compensation in options, he will have the
right to acquire up to an aggregate of 550,000 shares of Company common stock
upon exercise of such options.
(4)
Donald Ziraldo in his capacity as a director of the Company has been granted
options to purchase 1,300,000 shares of the Company’s common stock at a purchase
price of $1.50 per share. The options will vest 12 months on April 19,
2011, and Mr. Ziraldo may exercise up to 650,000 such options on April 19, 2011
and a further 650,000 options on April 19, 2012. The right to exercise all
of the options will expire and terminate on April 19, 2013.
(5)
Randall Barrs in his capacity as a director of the Company has been granted
options to purchase 450,000 shares of the Company’s common stock at a purchase
price of $1.50 per share. The options will vest on April 19, 2011 and Mr.
Barrs may exercise up to 225,000 such options on April 19, 2011 and 225,000
options on April 19, 2012. The right to exercise all of the options will
expire and terminate on April 19, 2013.
34
(6) Alan
Ralph in his capacity as a director of the Company has been granted options to
purchase 150,000 shares of the Company’s common stock at a purchase price of
$1.50 per share. The options will vest on April 19, 2011 and Mr. Ralph may
exercise up to 75,000 such options on April 19, 2011 and 75,000 options on April
19, 2012. The right to exercise all of the options will expire and
terminate on April 19, 2013.
Potential
Changes in Control
At the
present time, there are no arrangements known to Loto, including any pledge by
any person of securities of Loto, the operation of which may at a subsequent
date result in a change in control of Loto.
Stock
Option Plan Information
To date,
Loto has not adopted a Stock Option Plan. Loto may adopt an option plan in
the future.
Adverse
Interests
The
Company is not aware of any material proceeding to which any director, officer,
or affiliate of the Company, or any owner of record or beneficially of more than
five percent of any class of the Company’s voting securities, or security holder
is a party adverse to the Company or has a material interest adverse to the
Company.
Item 5.
|
Directors
and Executive Officers
|
Directors
and Executive Officers
The
following table presents information with respect to our officers, directors and
significant employees as of April 21, 2010.
NAME
|
AGE
|
POSITION
|
||
Stephen
Knight
|
51
|
President,
Chief Executive Officer and Chief Financial Officer,
Director
|
||
Steve
Baker
|
59
|
Chief
Technology Officer
|
||
Gino
Porco
|
42
|
Director
|
||
Trevor
Eyton
|
75
|
Director
|
||
Donald
Ziraldo
|
61
|
Director
|
||
Randy
Barrs
|
61
|
Director
|
||
Alan
Ralph
|
65
|
Director
|
Stephen Knight. Mr.
Knight has served as Loto’s President and Chief Executive Officer since May 13,
2009. From October 2008 to May 12, 2009, Mr. Knight was President and CEO
of Mobilotto Systems, Inc. From December 2007 through September 2008, Mr.
Knight was engaged in marketing consulting for major brands in the United States
and Canada. From November 1998 through December 2007, Mr. Knight served as
Senior Vice President of Credit & Loyalty Management as well as an officer
for Hudson’s Bay Company. Mr. Knight was appointed Chief Financial Officer
of Loto on June 3, 2009. Mr. Knight was appointed as a Director of the
Company on April 19, 2010.
Steve Baker. Mr. Steve
Baker has served as the Company’s Chief Technology Officer since January 26,
2010. From May 2003 until January of 2009, Mr. Baker was the Vice
President of Infrastructure Delivery Services at the Ontario Lottery and Gaming
Corporation, where he supervised day to day operation of the organization’s data
center and responsibility for the organization’s
infrastructure.
35
Gino Porco. Mr. Porco is
a Co-Founder of Loto Inc. and he has served as a Director of the Company since
May 13, 2009. Mr. Porco has overseen the development of our technology
initiatives from planning stage through development and performance testing. Mr.
Porco has supervised multiple development teams working on both network
development and infrastructure and device applications and technologies, driving
our various core offerings. Since 2002, Mr. Porco has been President of
Envenia Networks, which designs and implements best-of-breed, carrier-class
voice networking solutions. Mr. Porco has consulted on various
telecommunication projects, lending expertise to the development of Sky Voice,
Digital World, Power Telephone, Carrier and Compu-call communication, as well as
various Internet projects since its rise to prominence in the late 1990’s.
Mr. Porco is the sole officer, director and shareholder of A Few Brilliant Minds
Inc., an Ontario corporation which owns approximately 35.9% of our issued and
outstanding shares as of the date of this Report.
Trevor Eyton. Mr. Trevor
Eyton has served as a Director of the Company since January 26, 2010.
Appointed to Canada’s Senate in 1990, Mr. Eyton served on three committees-
Banking, Trade and Commerce, Transport and Communications and Scrutiny of
Regulations, where he was the Joint Chair. Mr. Eyton retired from the
Canadian Senate in 2009. A lawyer by training, Mr. Eyton served as
President and Chief Executive Officer of Brascan (now Brookfield Asset
Management Inc.) from 1979 until 1990, and as Chairman and Senior Chairman from
1990 until 1998. Mr. Eyton has served on the board of directors of other
corporations, including Coca-Cola Enterprises Inc. (where he served as a
director from 1998-2007) and on the boards of numerous charitable
organizations.
Donald Ziraldo. Mr.
Donald Ziraldo has served as a Director of the Company since January 26,
2010. From 1975 until 2006, Mr. Ziraldo was the President of Inniskillin
Wines Inc. Mr. Ziraldo is currently Chairman, Vineland Research and
Innovation Center; a member of the Board of Directors, Shaftsbury Films, and a
member of the Board of Directors, Canassat Pharmaceuticals.
Randy Barrs. Mr. Randy
Barrs has served as a Director of the Company since January 26, 2010. Mr.
Barrs is an attorney in Toronto, Canada. Mr. Barrs is the sole officer,
director and shareholder of 2238646 Ontario Inc., an Ontario corporation which
owns approximately 35.7% of our issued and outstanding shares as of the date of
this Report.
Alan Ralph. Mr. Alan
Ralph has served as a Director of the Company since March 1, 2010. Mr.
Ralph is a Chartered Accountant and a former member of the Deloitte & Touche
National Committee for Audit and Assurance Services in Canada. Retired
since 2007, Mr. Ralph has over 30 years of experience as a Partner at Deloitte
& Touche LLP. As Director of Audit and Assurance, Mr. Ralph was
responsible for approximately 20 partners and associated partners, as well as
over 150 professional staff located in the firm’s Windsor, London, Kitchener,
Hamilton and Niagara offices. Mr. Ralph served as the Chair of the St.
Catharines Transit Commission for eleven years. He served as the President
of the St. Catharines Golf & Country Club for five years. Mr. Ralph
has also served as a director on various Boards and Associations including the
Niagara Regional Development Corporation, St. Catharines Chamber of Commerce,
St. Catharines Downtown Association, St. Catharines Promotion Task Force, the
Niagara District CA Association and the Vineland Research and Innovation
Center. Mr. Ralph served as the Interim Chief Financial Officer of Niagara
Vintners Incorporated until 2008. He now serves as an independent
consultant to winery investors and owners as well as several other small
business enterprises.
Term
of Office
All of
our directors are appointed for a one-year term to hold office until the next
annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
elected or appointed to serve until the next Board of Directors meeting
following the annual meeting of stockholders. Our executive officers are
appointed by our Board of Directors and hold office until removed by the
Board.
36
At the
present time, two of our stockholders, 2238646 Ontario Inc. and A Few Brilliant
Minds Inc. have agreed as co-founders of the company that the Board shall be
composed of an equal number of persons nominated by each founder. Each
founder: (i) shall accept such nominations as exclusive and binding as and when
made; and (ii) shall vote only for such persons nominated by the founders,
respectively, so that the Board at all times consists of an equal number of
representatives of each founder. If for any reason at any time the Board
is not composed of an equal number of persons nominated by each founder, no
actions may be taken by the other founder’s representatives other than duly
appointing or duly electing a nominee of the other founder then having the right
to equalize representation on the Board with such founder’s
nominees.
Significant
Employees
At the
present time, we have no key employees other than our officers and
directors.
Family
Relationships
There are
no family relationships between or among the directors, executive officers or
persons nominated or chosen by us to become directors or executive
officers.
Founders,
Promoters and Control Persons
The
founders and their respective affiliates of our Company are construed to be
Promoters and Control Persons of our Company since inception:
Current
Promoters and Control Persons
NAME
|
POSITION
|
|
A
Few Brilliant Minds Inc.(1)
|
Founder
of Loto, Stockholder, Promoter and Control Person
|
|
2238646
Ontario Inc. (2)
|
Stockholder,
Promoter and Control Person
|
|
Gino
Porco (1)
|
Director
and Promoter
|
|
Randall
Barrs (2)
|
Director
and Promoter
|
(1) Gino
Porco, Director and co-founder of our Company, has sole voting and dispositive
control over the Loto shares owned by A Few Brilliant Minds Inc.
(2)
Randall Barrs, Director of our Company, has sole voting and dispositive control
over the Loto shares owned by 2238646 Ontario Inc.
Former
Promoters and Control Persons
Mhalka
Capital Investments Ltd. (1)
|
Founder
of Loto, Former Stockholder, Former Promoter and Former Control
Person
|
|
Marsha
Collins (1)
|
Former
Director, Treasurer & Secretary and Former
Promoter
|
(1) On
April 19, 2010, Mhalka Capital Investment Ltd. sold its shares of the Company’s
common stock to 2238646 Ontario Inc. Mr. Randall Barrs, a director of the
Company, is the sole officer, director and shareholder of 2238646 Ontario
Inc. The voting and dispositive control over the shares of Loto formerly
owned by Mhalka Capital Investments Ltd. was exercised by Perpetum Finance
Inc. The directors of Perpetum Finance Inc. are Peter Luis O. Gross, Kim
Fessler, Roelant L.M. Siemer and Sylvia Fahm. Mr. Peter Gross had
sole signatory authority and sole voting and dispositive control over the Loto
shares owned by Mhalka Capital Investments Ltd., and the other three directors
had authority when signing together to exercise voting and dispositive control
over the Loto shares owned by Mhalka Capital Investments Ltd. Marsha
Collins, a former Director of the Company, is a contingent beneficiary of a
trust which is the sole owner of Mhalka Capital Investments Ltd. Ms.
Collins did not have any voting control or power of disposition over any of the
shares which were owned by Mhalka Capital Investments Ltd. or the trust.
At the present time, neither Mhalka Capital Investments Ltd. nor Marsha Collins
owns any shares of Loto’s common stock.
37
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present director (or person nominated to become
director), executive officer, founder, promoter or control person: (1) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses); (3) being subject to any order, judgment or decree,
not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his or her involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction (in
a civil action), the SEC or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.
Item 6.
|
Executive
Compensation
|
Summary
Compensation Table
During
the fiscal year ended May 31, 2009, neither Loto nor its subsidiary Mobilotto
paid any cash compensation to our Chief Executive Officer, Stephen Knight, or
any of our other executive officers. Loto is currently negotiating compensation
arrangements with its executive officers and expects to enter into agreements
with them in the foreseeable future.
The
Company had no executive officers whose total annual salary and bonus exceeded
$100,000. Loto was incorporated on April 22, 2009 and Mobilotto was
incorporated on September 16, 2008.
Director
Compensation
From the
inception of Loto on April 22, 2009 and Mobilotto on September 16, 2008 through
the fiscal year ended May 31, 2009, no compensation was paid by the Company to
its directors.
Employment
Agreements
The
Company currently has no employment agreements with its executive officers or
other employees.
Outstanding
Equity Awards at Fiscal Year-End
During
the fiscal year ended May 31, 2009, neither Loto nor Mobilotto paid any stock,
options or other equity awards to any officer, director, employee or other
person. No stock, options or other equity awards are anticipated to be
issued by Mobilotto. Subsequent to the fiscal year ended May 31, 2009,
Loto paid options to certain members of the Company’s Board of
Directors.
38
Item 7.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
In
connection with the founding of Loto and the acquisition of Mobilotto, on May
13, 2009, Loto issued 20,000,000 shares of restricted common stock to A Few
Brilliant Minds Inc. in exchange for all of the issued and outstanding shares of
Mobilotto Systems, Inc. to Loto. The sole owner of A Few Brilliant Minds Inc.,
Mr. Gino Porco, is a director of Loto. On the same date, Loto issued 20,000,000
shares of restricted common stock to Mhalka Capital Investments Ltd. in
consideration for the payment of $20,000.00 to Loto. Ms. Marsha Collins served
as a director of Loto from April 22, 2009 until January 26, 2010, as nominated
by Mhalka Capital Investments Ltd. Mr. Porco and Ms. Collins, as the sole
directors of Loto and as representatives of the sole shareholders of Loto as of
the date of the foregoing transactions, ratified and approved the transactions
pursuant to the terms and conditions of the Founders’ Agreement by and among A
Few Brilliant Minds Inc., Mhalka Capital Investments Ltd. and Loto. Except as
otherwise disclosed herein, since the beginning of the last fiscal year, neither
Loto nor Mobilotto entered into any other transactions, nor are there any
currently proposed transactions, in which Loto or Mobilotto was, or is, to be a
participant and in which any related person had or will have a direct or
indirect material interest.
On April
19, 2010, Mhalka Capital Investments Ltd. sold 19,300,000 shares of the
Company’s common stock to 2238646 Ontario Inc. pursuant to a Stock Purchase
Agreement in which 2238646 Ontario Inc. agreed to pay the purchase price in the
form of a note in the amount of $28,950,000, which shall accrue interest at the
rate of prime rate plus 1.5%, and shall be due in three years. Mr. Randall Barrs
is the owner and sole officer and director of 2238646 Ontario Inc. Mr. Barrs is
also a director of Loto. On April 19, 2010, Mhalka Capital Investments Ltd. also
entered into a Share Tender and Cancellation Agreement, pursuant to which each
of Mhalka Capital Investments Ltd. and A Few Brilliant Minds Inc. agreed to the
cancellation of 500,000 shares of the Company’s common stock. In addition, On
April 19, 2010, Mhalka Capital Investments Ltd. transferred 200,000 shares of
its common stock and A Few Brilliant Minds Inc. transferred 100,000 shares of
its common stock in third party transactions. As of April 19, 2010 Mhalka
Capital Investments Ltd. has no stock ownership in the Company.
A Few
Brilliant Minds Inc. and 2238646 Ontario Inc. together beneficially own
approximately 71.7% of our outstanding common stock, which gives them a
controlling interest in Loto. A Few Brilliant Minds Inc. and 2238646 Ontario
Inc. are both deemed to be promoters and control persons of Loto, as well as Mr.
Porco and Mr. Randall Barrs individually. Mr. Porco does not receive and has not
received any compensation, as a designated director serving on the Board of
Directors of Loto Inc. pursuant to the nomination of A Few Brilliant Minds Inc.
Ms. Collins did not receive any compensation in her capacity as an officer of
the Company. On April 19, 2010, Mr. Randall Barrs was issued stock options as
compensation for his services as a director. He was issued options to purchase
450,000 shares of the Company’s common stock, at a purchase price of $1.50 per
share. The options will vest twelve months after the date of issuance. Mr. Barrs
may exercise up to 225,000 such options upon such vesting date and 225,000
further options twenty-four months from the date of issuance. The options will
terminate upon the expiration of thirty-six months from the date of
issuance.
On August
3, 2009, Mhalka Capital Investments Ltd., together with 1476448 Ontario Inc.,
made a standby financing commitment to our Company, under which they agreed to
provide the necessary funding to our Company of up to $1,500,000 if we are
unable to obtain third-party financing. Ms. Marsha Collins served as a director
of Loto as nominated by Mhalka Capital Investments Ltd. from April 22, 2009 to
January 26, 2010. Ms. Marsha Collins recused herself from deliberations and
voting in respect of the Loto Board of Directors assessment and decision to
enter into the financing commitment agreement with Mhalka Capital Investments
Ltd. Mr. Gino Porco, acting in his capacity as the sole voting member of the
Board of Directors of Loto with respect to review and assessment of the
financing commitment agreement, determined that the financing commitment
agreement is fair and reasonable, and approved the financing commitment
agreement.
39
On April
19, 2010, Mhalka Capital Investment Ltd. sold its shares of the Company’s common
stock to 2238646 Ontario Inc., who entered into a Novation to the Standby
Financing Commitment with the Company pursuant to which 2238646 Ontario Inc.
agreed to the remaining commitments of Mhalka Capital Investment Ltd.
thereunder. Under the terms and conditions of the financing commitment, we
may draw on the standby financing commitment in monthly tranches in accordance
with our operating requirements as set forth in our business plan as of the date
of this Report. The available standby commitment amount will be reduced by
the aggregate cash proceeds received by the Company which are derived from the
issuance of any equity securities and Company gross revenues after the date of
this Report. Draws on the commitment amount will be made on terms of
unsecured Notes, with interest set on each Note as of the date of the draw at
prime rate plus two percent per annum. The Notes will mature and become
repayable thirty calendar days after demand at any time following the earlier of
(a) September 30, 2010 or (b) the date upon which we are in receipt of revenues
or proceeds from the sales of equity securities. We will give the lenders
customary representations and warranties regarding the good standing of our
Company and status of progress in respect of our Company business plan prior to
each draw on the commitment amount, and we will provide certifications and
covenants regarding use of proceeds of each draw, which will be in customary
forms reasonably requested by the lenders as determined by reference to similar
lenders making similar loans to similar companies. The lenders will not be
required to make any loans under the standby financing commitment to us if we
are unable to make the representations, warranties, certifications or covenants,
or if we are in breach of any previously given representations, warranties,
certifications or covenants. If we breach any of the Notes, the default
rate will be 15% per annum and the lenders may seek recourse against our company
for repayment of all of the Notes.
During
the past five years, none of the following occurred with respect to any founder,
promoter or control person: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities; and (4) being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended or
vacated.
BOARD
COMMITTEES; DIRECTOR INDEPENDENCE
Currently,
all actions that would otherwise be performed by standing committees of the
Board of Directors are performed by the entire Board, except for our audit
committee, which handles the hiring of our independent public accountants and
the oversight of the independent auditor relationship, the review of our
significant accounting policies and our internal controls. The sole member
of our audit committee is Alan Ralph.
The Board
of Directors has analyzed the independence of each director and has determined
that three of Loto’s five directors, Alan Ralph, Donald Ziraldo and Trevor
Eyton, are independent under the rules of the NASDAQ Stock Market LLC. The
Board of Directors has determined that each of Loto’s directors has
relationships that would cause him and her not to be an “independent director”
under the specific criteria of Section 5605(a)(2) of the NASDAQ
Manual.
Item 8.
|
Legal
Proceedings
|
We are
not aware of any pending or threatened litigation against us that we expect will
have a material adverse effect on our business, financial condition, liquidity,
or operating results. We cannot assure you that we will not be adversely
affected in the future by legal proceedings.
Item 9.
|
Market
Price of Registrant’s Common Equity and Related Shareholder
Matters
|
Market
Information
The
Company’s common stock is authorized for quotation on the Over the Counter
Bulletin Board under the symbol LOTI. To date, no trading has occurred on
the Over the Counter Bulletin Board.
Holders
As of the
date of this Report there are 54,000,000 shares of common stock issued and
outstanding.
As of the
date of this Report there are 11 holders of record of our common
stock.
40
Dividend
Policy
We have
not paid any dividends to the holders of our common stock and we do not expect
to pay any such dividends in the foreseeable future as we expect to retain our
future earnings for use in the operation and expansion of our
business.
Securities
Authorized for Issuance Under Equity Compensation Plans
At the
present time, we have no securities authorized for issuance under equity
compensation plans.
Item 10.
|
Recent
Sales of Unregistered Securities
|
On May
13, 2009 the two co-founders of Loto entered into a Founders’ Agreement with
each other and the company. Mhalka Capital Investments Ltd. was issued
20,000,000 shares of Loto restricted common stock in exchange for contributing
$20,000.00 to Loto. On the same date, A Few Brilliant Minds Inc. was issued
20,000,000 shares of Loto restricted common stock in exchange for all of the
equity interests of Mobilotto Systems, Inc. which is now a wholly owned
subsidiary of Loto. The sole owner of A Few Brilliant Minds Inc. is Mr. Gino
Porco, a director of Loto. Ms. Marsha Collins served as a director of Loto from
April 22, 2009 to January 26, 2010 as nominated by Mhalka Capital Investments
Ltd. Loto issued the shares of restricted common stock in the co-founder
transactions in reliance on the exemption from securities registration under
Section 4(2) of the U.S. Securities Act of 1933, as amended, and Regulation S
promulgated thereunder.
Mhalka
Capital Investments Ltd. no longer owns these shares. On April 19, 2010,
Mhalka Capital Investments Ltd. agreed to the cancellation of 500,000 shares and
transferred 200,000 shares to another party. On April 19, 2010, Mhalka
Capital Investments Ltd. sold 19,300,000 shares of the Company’s common stock to
2238646 Ontario Inc. pursuant to a Stock Purchase Agreement in which 2238646
Ontario Inc. agreed to pay the purchase price in the form of a note in the
amount of $28,950,000, which shall accrue interest at the rate of prime rate
plus 1.5%, and shall be due in three years. Mr. Randall Barrs is the owner
and sole officer and director of 2238646 Ontario Inc. Mr. Barrs is also a
director of Loto.
On June
9, 2009, we sold an aggregate of 15,000,000 shares of our restricted common
stock in a Series A private placement with six accredited investors at a
purchase price of $0.01 per share for an aggregate purchase price of
$150,000. These issuances were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended. With respect to five of the six
investors, we also relied upon the exemption from registration provided by
Regulation S.
Item 11.
|
Description
of Registrant’s Securities to be
Registered
|
Our
authorized capital stock consists of 100,000,000 shares of common stock at a par
value of $0.0001 per share. As of the date of this Report, there were
54,000,000 shares of our common stock issued and outstanding.
Holders
of our common stock are entitled to one vote for each share on all matters
submitted to a stockholder vote. Two shareholders, A Few Brilliant Minds Inc.
and 2238646 Ontario Inc., collectively own 38,700,000 shares of our common stock
and together control 71.7% of our outstanding common stock. Pursuant to
the Founders’ Agreement between A Few Brilliant Minds Inc. and 2238646 Ontario
Inc. (the “Founders’ Agreement”), each of these two co-founding stockholders has
agreed to jointly nominate and vote for an equal number of their respective
nominees directors to our Board of Directors. Holders of our common stock
do not have cumulative voting rights. Therefore, the two holders of a majority
of our shares can elect all of the directors. Holders of our common stock
representing a majority of the voting issued and outstanding shares, as
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of our stockholders. A vote by the holders of a majority of our
outstanding shares is required to effectuate certain fundamental corporate
changes such as liquidation, merger or an amendment to our Articles of
Incorporation.
41
The
Founders’ Agreement also contains both a “Right of First Refusal” and “Tag Along
Rights.” The Right of First Refusal generally provides that if either
A Few Brilliant Minds Inc. or 2238646 Ontario Inc. receives a third-party offer
to purchase its shares of our common stock, the other party shall have a first
right to purchase such shares on the offered terms. The Tag Along Rights
provide that if either A Few Brilliant Minds Inc. or 2238646 Ontario Inc.
accepts an offer to sell its securities, the other party may also sell a
proportionate amount of its shares of our common stock on the offered
terms. Certain exceptions apply to both the Right of First Refusal and the
Tag Along Rights with respect to permitted transfers made to the Founder’s
estate, trust, family partnership or an affiliate of the Founder or transfers
made for regulatory or tax compliance purposes. Any transferee of Founder stock
must agree to the same terms, conditions and restrictions on transfer as set
forth in the Founders’ Agreement, including the provisions governing the Right
of First Refusal and Tag Along Rights. The Founders’ Agreement also
contains provisions indemnifying 2238646 Ontario Inc. and the Company in respect
of the Mobilotto shares, the intellectual property and business plan contributed
to the Company by A Few Brilliant Minds Inc.
Limitation
on the liabilities of Directors
Section
Four of the additional articles of our Articles of Incorporation provide that a
director of Loto shall not be personally liable to Loto or its stockholders for
monetary damages for breach of fiduciary duty as a director, with limited
enumerated exceptions providing that this shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
Loto or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under the
Nevada Revised Statutes; or (iv) for any transaction from which the director
derived an improper personal benefit. The Articles of Incorporation also
provide that if the Nevada Revised Statutes are hereafter amended to permit
further elimination or limitation of the personal liability of directors, then
the liability of a director of Loto shall be eliminated or limited to the
fullest extent permitted by the Nevada Revised Statutes as so amended. Any
repeal or modification of this Article by the stockholders of Loto or otherwise
shall not adversely affect any right or protection of a director of Loto
existing at the time of such repeal or modification. These provisions may
limit the ability of our stockholders to recover damages against our directors
through legal proceeding or otherwise.
Nevada
Anti-Takeover Laws
Nevada
Revised Statutes sections 78.378 to 78.379 provide state regulation over the
acquisition of a controlling interest in certain Nevada corporations unless the
articles of incorporation or bylaws of the corporation provide that the
provisions of these sections do not apply. The statute creates a number of
restrictions on the ability of a person or entity to acquire control of a Nevada
company by setting down certain rules of conduct and voting restrictions in any
acquisition attempt, among other things. The statute is limited to corporations
that are organized in the state of Nevada and that have 200 or more
stockholders, at least 100 of whom are stockholders of record and residents of
the State of Nevada; and does business in the State of Nevada directly or
through an affiliated corporation. Our Articles of Incorporation state that
these provisions will not apply.
Item 12.
|
Indemnification
of Directors and Officers.
|
As
permitted by Section 78.7502 of the Nevada Revised Statutes, Article VIII of the
Company’s Bylaws indemnifies any officer, director or control person of the
Company from liability, thereby making the Company responsible for any expenses
or damages incurred by such officer, director or control person in any action
brought against them based on their conduct in such capacity, provided they did
not engage in fraud or criminal activity.
We expect
that each member of the Company’s board of directors and each officer of the
Company (each such individual, an “Indemnitee”) will enter into an
indemnification agreement (the “Indemnification Agreement”) with the Company,
pursuant to which the Company will indemnify Indemnitee for, and hold Indemnitee
harmless from and against, any Losses or Expenses (as such terms are defined in
the Indemnification Agreement) at any time incurred by or assessed against
Indemnitee arising out of or in connection with the service of Indemnitee as a
director, advisory director, Board Committee member, officer, employee or agent
of the Company or an Affiliate, whether the basis of such proceeding is alleged
action in an official capacity or in any other capacity while serving as an
Officer or Director of the Company or of an Affiliate, to the fullest extent
permitted by law.
42
Item 13.
|
Financial Statements and
Supplementary Data
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Loto
Inc. Consolidated Financial Statements
|
F-1
|
|
Report
of Certified Public Accountants Paritz & Company, P.A. on the
Consolidated Financial Statements of Loto Inc., dated as of June 9,
2009
|
F-2
|
|
Consolidated
Balance Sheet as of May 31, 2009
|
F-3
|
|
Consolidated
Statement of Operations from inception (September 16, 2008) through the
fiscal year-ended May 31, 2009
|
F-4
|
|
Consolidated
Statement of Stockholders’ Equity from inception (September 16, 2008)
through the fiscal year-ended May 31, 2009
|
F-5
|
|
Consolidated
Statement of Cash Flows from inception (September 16, 2008) through the
fiscal year-ended May 31, 2009
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
Financial
Statements for the Period ended February 28, 2010
|
F-11
|
|
Consolidated
Balance Sheet as of February 28, 2010
|
F-11
|
|
Consolidated
Statement of Operations from inception (September 16, 2008) through
February 28, 2010
|
F-12
|
|
Consolidated
Statement of Stockholders’ Equity from inception (September 16, 2008)
through the fiscal year-ended February 28, 2010
|
F-13
|
|
Consolidated
Statement of Cash Flows from inception (September 16, 2008) through the
fiscal year-ended February 28, 2010
|
F-14
|
|
Notes
to Consolidated Financial Statements
|
F-15
|
F-1
Paritz & Company,
P.A
|
15
Warren Street, Suite 25
Hackensack,
New Jersey 07601
(201)
342-7753
Fax: (201)
342-7598
E-Mail: PARITZ@paritz.com
|
|
Certified
Public Accountants
|
Board of
Directors
Loto
Inc.
(A
Development Stage Company)
Mississauga,
Ontario, Canada
We have
audited the accompanying consolidated balance sheet of Loto Inc. (A Development
Stage Company) (the “Company”) as of May 31, 2009 and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for the
period from inception (September 16, 2008) to May 31, 2009. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The
Company has not generated any revenues since inception, has an accumulated loss
of $10,979 as of May 31, 2009 and is unlikely to generate earnings in the
immediate or foreseeable future. The continuation of the Company as a going
concern is dependent upon, among other things, the continued financial support
from its shareholders, the ability of the Company to obtain necessary equity or
debt financing and the attainment of profitable operations. These factors,
among others, raise substantial doubt regarding the Company’s ability to
continue as a going concern. There is no assurance that the Company will be able
to generate revenues in the future. These financial statements do not give any
effect to any adjustments that would be necessary should the Company be unable
to continue as a going concern.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Loto Inc. (A Development
Stage Company) as of May 31, 2009, and the results of its operations and its
cash flows for the period from inception (September 16, 2008) to May 31, 2009,
in conformity with accounting principles generally accepted in the United States
of America.
Paritz
& Company, P.A.
Hackensack,
New Jersey
June 9,
2009
F-2
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
BALANCE SHEET
MAY 31,
2009
ASSETS
|
||||
CURRENT
ASSETS:
|
||||
Cash
|
$ | 169,203 | ||
TOTAL
CURRENT ASSETS AND TOTAL ASSETS
|
$ | 169,203 | ||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||
CURRENT
LIABILITIES:
|
||||
Accrued
expenses
|
$ | 10,000 | ||
Deposit
for subscription to common stock
|
150,000 | |||
Due
to stockholder
|
91 | |||
TOTAL
CURRENT LIABILITIES AND TOTAL LIABILITIES
|
160,091 | |||
STOCKHOLDERS’
EQUITY:
|
||||
Common
stock, par value $.0001,
|
||||
100,000,000
shares authorized
|
||||
40,000,000
shares issued and outstanding
|
4,000 | |||
Additional
paid-in capital
|
16,091 | |||
Deficit
accumulated during development stage
|
(10,979 | ) | ||
TOTAL
STOCKHOLDERS’ EQUITY
|
9,112 | |||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 169,203 | ||
Proforma
stockholders’ equity assuming the sale of common stock referred to in Note
4 had occurred by May 31, 2009
|
$ | 159,112 |
See notes
to consolidated financial statements
F-3
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF OPERATIONS
FROM
INCEPTION (SEPTEMBER 16, 2008) TO MAY 31, 2009
REVENUES
|
$
|
-
|
||
COSTS
AND EXPENSES:
|
||||
General
and administrative expenses
|
10,979
|
|||
NET
LOSS
|
$
|
(10,979
|
)
|
|
Basic
and diluted loss per common share
|
$
|
-
|
||
Basic
and diluted average common shares outstanding
|
40,000,000
|
|||
Proforma
loss per common share assuming sale of common stock referred to in Note 4
had occurred by May 31, 2009
|
$
|
-
|
See notes
to consolidated financial statements
F-4
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
FROM
INCEPTION (SEPTEMBER 16, 2008) TO MAY 31, 2009
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Deficit
Accumulated
During
Development
Stage
|
Total
|
||||||||||||||||
BALANCE
– SEPTEMBER 16, 2008
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||||
Capital
contribution in connection with formation of Mobilotto,
Inc.
|
-
|
-
|
91
|
-
|
91
|
|||||||||||||||
Net
loss
|
-
|
-
|
(10,979
|
)
|
(10,979
|
)
|
||||||||||||||
Sale
of 20,000,000 shares at $.001 per share
|
20,000,000
|
2,000
|
18,000
|
-
|
20,000
|
|||||||||||||||
Shares
issued in connection with Acquisition of Mobilotto, Inc.
|
20,000,000
|
2,000
|
(2,000
|
)
|
-
|
-
|
||||||||||||||
BALANCE
– MAY 31, 2009
|
40,000,000
|
$
|
4,000
|
$
|
16,091
|
$
|
(10,979
|
)
|
$
|
9,112
|
See notes
to consolidated financial statements
F-5
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CASH FLOWS
FROM
INCEPTION (SEPTEMBER 16, 2008) TO MAY 31, 2009
OPERATING
ACTIVITIES:
|
||||
Net
loss
|
$
|
(10,979
|
)
|
|
Change
in operating assets and liabilities:
|
||||
Accrued
expenses
|
10,000
|
|||
NET
CASH USED IN OPERATING ACTIVITIES
|
(979
|
)
|
||
INVESTING
ACTIVITIES:
|
||||
Sale
of common stock
|
20,091
|
|||
Deposit
for stock subscription
|
150,000
|
|||
Loan
from stockholder
|
91
|
|||
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
170,182
|
|||
INCREASE
IN CASH AND CASH – END OF PERIOD
|
$
|
169,203
|
See notes
to consolidated financial statements
F-6
LOTO
INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31,
2009
NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
and Business Description
Loto Inc.
(“Loto” or the “Company”), together with our wholly owned subsidiary Mobilotto
Systems, Inc. (“Mobilotto”), are development stage companies. We have
developed a patent-pending software application that permits the secure purchase
of lottery tickets on commercially available “smart” phones and similar mobile
telecommunications devices. A smart phone is a mobile phone offering
advanced capabilities, often with personal computer-like functionality, such as
e-mail, Internet access and other applications. Our proprietary
technology for facilitating the purchase of lottery tickets addresses all
elements of lottery play, including secure player registration and
authorization, number selection, settlement, winning number notification and
other direct-to-customer marketing opportunities. We intend to
operate or license our software application with governments and other lottery
operators as our primary source of revenue. We do not intend to
become a lottery operator. During the foreseeable future, we expect
to pursue our business only outside of the United States since current laws in
the United States prohibit sales of lottery tickets utilizing mobile
telecommunications devices. We intend to pursue opportunities in the
United States as soon as applicable laws permit operation of our business. Our
mobile lottery software application has not yet been utilized by any lottery
operators and we have not yet generated any revenues from our
technology.
Basis
of Consolidation and Development Stage Activities
These
consolidated financial statements include the accounts of Loto Inc. which was
incorporated on April 22, 2009 in the state of Nevada and its wholly-owned
subsidiary, Mobilotto Systems, Inc which was incorporated in Ontario, Canada on
September 16, 2008. On May 13, 2009 the stockholders of
Mobilotto contributed all of the outstanding equity interests in Mobilotto to
the Company in exchange for 20,000,000 shares of the Company’s common
stock. This transaction has been accounted for as a transaction
between entities under common control in accordance with Financial Accounting
Standard Board Statement 141 (“SFAS 141”). Accordingly, the net assets were
recognized in the consolidated financial statements at their carrying amounts in
the accounts of Mobilotto at the transfer date and the results of operations of
Mobilotto are included as though the transaction had occurred at the beginning
of the period.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and are
expressed in US dollars. All intercompany balances and transactions
have been eliminated.
Since
inception the Company has been engaged in organizational activities, has been
developing its business model and has not earned any revenue from
operations. Accordingly, the Company’s activities have been accounted
for as those of a “Development Stage Enterprise”, as set forth in Financial
Accounting Standards Board Statement No. 7 (“SFAS 7”). Among
the disclosures required by SFAS 7 are that the Company’s financial statements
be identified as those of a development stage company, and that the statements
of operations, stockholders’ equity and cash flows disclose activity since the
date of the Company’s inception.
F-7
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with an original maturity or
remaining maturity at the date of purchase of three months or less to be cash
equivalents.
Property
and Equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight line basis over the expected useful
life as follows:
Computer equipment and software
|
3 years
|
|
Office furniture and equipment
|
5 years
|
|
Leasehold improvements
|
term of the lease
|
Repairs
and maintenance expenditures are charged to operating expense as
incurred. Replacements and major renewals are
capitalized.
Accounting
for the Impairment or Disposal of Long-Lived Assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of the asset may not be recoverable. For assets that are to be
held and used, impairment is recognized when the estimated undiscounted cash
flows associated with the asset, or group of assets, is less than their carrying
value. If impairment exists, an adjustment is made to write the asset
down to its fair value, and a loss is recorded as the difference between the
carrying value and the fair value. Fair values are determined based
on quoted market values, discounted cash flows, or internal and external
appraisals, as applicable. Assets to be disposed of are carried at
the lower of carrying value or estimated net realizable value.
Accounting
Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Revenue
Recognition
We
recognize revenue when it is realized or realizable and earned. We consider
revenue realized or realizable when we have persuasive evidence of an
arrangement, prices are fixed or determinable, services or products are provided
to the customer, and collectability is probable and reasonably assured depending
upon the applicable revenue recognition guidance followed. The
following are specific revenue recognition policies.
Loto
expects to have contracts between the mobile network operators and/or the
lottery operators, depending upon the jurisdiction of
business. Revenue from lottery services is determined as a percentage
of the amount of retail sales of lottery tickets pursuant to the terms of the
contract. This revenue will be recognized when the lottery purchase
transaction is completed and confirmed to the mobile device.
F-8
Revenue
from the sale of a lottery system, which includes the customization of software,
is recognized on the percentage of completion method of accounting, based on the
ratio of costs incurred to estimated costs to complete.
Revenue
from the licensing of customized lottery software is recognized over the term of
license on the basis as identified in the contracts.
Revenue
derived from software maintenance on lottery software is recognized ratably over
the maintenance period.
Revenue
derived from enhancements to lottery software is recognized at the time such
enhancements are accepted by the customer.
Development
Costs
It is the
Company’s policy to expense all software and application development costs as
the Company’s future revenues and business operations are uncertain as to
quantum, timing, and realization.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
in accordance with SFAS No. 52 Foreign Currency Translation,
using the exchange rate prevailing at the balance sheet date. Revenue and
expenses accounts are translated at average exchange rates during the
period. Historical cost balances are re-measured using historical
exchange rates. Gains and losses arising on settlement of foreign currency
denominated transactions or balances are included in the determination of
income. Foreign currency transactions are primarily undertaken in
Canadian dollars. The Company has not to the date of these financial
statements, entered into derivative instruments to offset the impact of foreign
currency fluctuations.
Income
Taxes
Income
tax expense is based on pre-tax financial accounting income. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change
during the period in the deferred tax assets and deferred tax liabilities. The
components of the deferred tax assets and liabilities are individually
classified as current and non-current based on their characteristics. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Basic
and Diluted Net (Loss) Per Common Share (“EPS”)
Basic net
(loss) per share is computed by dividing the net (loss) attributable to the
common stockholders by the weighted average number of common shares outstanding
during the reporting period. Diluted net income per common share
includes the potential dilution that could occur upon exercise of warrants or
conversion of debt to acquire common stock. The computation of Diluted EPS does
not assume exercise or conversion of securities that would have an anti-dilutive
effect on net income per common share.
The
Company’s financial instruments include cash and accrued
expenses. The fair value of these financial instruments approximates
their carrying values due to their short maturities.
F-9
Recent
Accounting Pronouncements
Business
Combinations (SFAS 141R) requires most identifiable assets, liabilities,
non-controlling interests and goodwill acquired in a business combination to be
recorded at “full fair value”. Under SFAS 141R, all business
combinations will be accounted for under the acquisition
method. Significant changes, among others, from current guidance
resulting from SFAS 141R include the requirement that contingent assets and
liabilities and contingent consideration shall be recorded at the estimated fair
value as at the acquisition date, with any subsequent changes to fair value
charged or credited to earnings. Further, acquisition related costs
will be expensed rather than treated as part of the acquisition. SFAS
is effective for periods beginning on or after December 15, 2008.
Non-Controlling
Interests in Consolidated Financial Statements (FAS 160) requires the
ownership interests in subsidiaries held by other parties other than the parent
be clearly identified, labeled, and presented in the consolidated statement of
financial position. FAS 160 is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15,
2008.
The
Hierarchy of Generally Accepted Accounting Principles (SFAS 162) identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of non-government entities
that are presently in conformity with U.S. GAAP.
We do not
expect the adoption of any recent accounting pronouncements to have a material
effect on the financial statements of the Company.
NOTE
3 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The
Company has not generated any revenues since inception, has an accumulated loss
of $10,979 as of May 31, 2009 and is unlikely to generate earnings in the
immediate or foreseeable future. The continuation of the Company as a going
concern is dependent upon, among other things, the continued financial support
from its shareholders, the ability of the Company to obtain necessary equity or
debt financing and the attainment of profitable operations. These
factors, among others, raise substantial doubt regarding the Company’s ability
to continue as a going concern. There is no assurance that the Company will be
able to generate revenues in the future. These financial statements do not give
any effect to any adjustments that would be necessary should the Company be
unable to continue as a going concern.
NOTE
4 – DEPOSIT FOR SUBSCRIPTION TO COMMON STOCK
Loto has
received subscriptions for private placements pending for the sale of an
aggregate of 15,000,000 shares of restricted common stock to six accredited
investors at a purchase price of U.S. $0.01 per share for an aggregate purchase
price of U.S. $150,000. The private placement is anticipated to close
by mid-June.
NOTE
5 - LITIGATION
The
Company is not aware of any legal actions against it. From time to
time in the future, we may be involved in litigation relating to claims arising
out of our operations in the normal course of business.
NOTE
6 – SUBSEQUENT EVENT
On June
4, 2009, Loto amended its certificate of incorporation to change its par value
from $.001 per share to $.0001 per share. Retroactive effect has been
given to the above in the accompanying statement of stockholders’
equity.
F-10
(A
Development Stage Company)
CONSOLIDATED
BALANCE SHEET
February 28, 2010
|
May 31, 2009
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$
|
(95
|
)
|
$
|
169,203
|
|||
Prepaid
rent
|
8,119
|
-
|
||||||
Employee
advance
|
2,857
|
-
|
||||||
GST
Receivable
|
20,420
|
-
|
||||||
TOTAL
CURRENT ASSETS
|
31,301
|
169,203
|
||||||
Capital
assets, at cost
|
24,927
|
-
|
||||||
Accumulated
amortization
|
(4,797
|
)
|
-
|
|||||
Net
capital assets
|
20,130
|
0
|
||||||
TOTAL
ASSETS
|
$
|
51,431
|
$
|
169,203
|
||||
LIABILITIES
and STOCKHOLDERS' (DEFICIENCY) EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accrued
liabilities
|
$
|
114,510
|
$
|
10,000
|
||||
Deposit
for subscription of common shares
|
250,000
|
150,000
|
||||||
Standby
loan
|
342,595
|
-
|
||||||
Due
to stockholder
|
91
|
91
|
||||||
CURRENT
LIABILITIES AND TOTAL LIABILITIES
|
707,196
|
160,091
|
||||||
STOCKHOLDER'S
EQUITY:
|
||||||||
Common
stock, par value $0.0001
|
||||||||
100,000,000
shares authorized
|
||||||||
55,000,000
shares issued and outstanding
|
5,500
|
|||||||
40,000,000
shares issued and outstanding
|
4,000
|
|||||||
Additional
paid-in capital
|
164,591
|
16,091
|
||||||
Other
comprehensive loss
|
(4,474
|
)
|
-
|
|||||
Deficit
accumulated during development stage
|
(821,382
|
)
|
(10,979
|
)
|
||||
TOTAL
STOCKHOLDERS' (DEFICIENCY) EQUITY
|
$
|
(655,765
|
)
|
$
|
9,112
|
|||
TOTAL
LIABILITIES AND STOCKHOLDERS'
|
||||||||
(DEFICIENCY)
EQUITY
|
$
|
51,431
|
$
|
169,203
|
||||
Proforma
stockholders' equity (deficiency) assuming the sale of common stock
referred to in Note 4 had occurred by February 28, 2010
|
$
|
(405,765
|
)
|
$
|
159,112
|
See notes to the consolidated
financial statements
F-11
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF OPERATIONS
For the Nine Months
Ended February 28,
2010
|
For the Three Months
Ended February 28,
2010
|
From Inception
(September 16, 2008)
to February 28, 2010
|
||||||||||
REVENUES
|
-
|
-
|
-
|
|||||||||
COSTS
AND EXPENSES:
|
||||||||||||
General
and administrative expenses
|
810,403
|
240,230
|
821,382
|
|||||||||
NET
LOSS FOR THE PERIOD
|
810,403
|
240,230
|
821,382
|
|||||||||
Basic
earnings per share (55,000,000 shares issued and
outstanding)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
|||
Proforma
earnings per share assuming sale of common stock referred to in Note 4 had
occurred by February 28, 2010
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
See
notes to the consolidated financial statements
F-12
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
FROM
INCEPTION (SEPTEMBER 16, 2008) TO FEBRUARY 28, 2010
Shares
|
Amount
|
Additional
Paid-In Capital
|
Deficit
Accumulated
During
Development
Stage
|
Other
Comprehensive
Loss
|
Total
|
|||||||||||||||||||
BALANCE
- SEPTEMBER 16, 2008
|
||||||||||||||||||||||||
Capital
contribution in connection with formation of Mobilotto,
Inc.
|
91
|
91
|
||||||||||||||||||||||
Net
loss
|
(10,979
|
)
|
(10,979
|
)
|
||||||||||||||||||||
Sale
of 20,000,000 shares at $.0001 per share
|
20,000,000
|
2,000
|
18,000
|
20,000
|
||||||||||||||||||||
Shares
issued in connection with Acquisition of Mobilitto, Inc.
|
20,000,000
|
2,000
|
(2,000
|
)
|
0
|
|||||||||||||||||||
BALANCE
- MAY 31, 2009
|
40,000,000
|
4,000
|
16,091
|
(10,979
|
)
|
0
|
9,112
|
|||||||||||||||||
Sale
of 15,000,000 shares at $.0001 per share
|
15,000,000
|
1,500
|
148,500
|
150,000
|
||||||||||||||||||||
Net
loss
|
(211,428
|
)
|
(211,428
|
)
|
||||||||||||||||||||
Other
comprehensive income resulting from foreign exchange
transactions
|
(3,095
|
)
|
(3,095
|
)
|
||||||||||||||||||||
BALANCE
- AUGUST 31, 2009
|
55,000,000
|
5,500
|
164,591
|
(222,407
|
)
|
(3,095
|
)
|
(55,411
|
)
|
|||||||||||||||
Net
loss
|
(358,745
|
)
|
(358,745
|
)
|
||||||||||||||||||||
Other
comprehensive income resulting from foreign exchange
transactions
|
(588
|
)
|
(588
|
)
|
||||||||||||||||||||
BALANCE
- NOVEMBER 30, 2009
|
55,000,000
|
5,500
|
164,591
|
(581,152
|
)
|
(3,683
|
)
|
(414,744
|
)
|
|||||||||||||||
Net
loss
|
(240,230
|
)
|
(240,230
|
)
|
||||||||||||||||||||
Other
comprehensive income resulting from foreign exchange
transactions
|
(791
|
)
|
(791
|
)
|
||||||||||||||||||||
BALANCE
- FEBRUARY 28, 2010
|
55,000,000
|
5,500
|
164,591
|
(821,382
|
)
|
(4,474
|
)
|
(655,765
|
)
|
See
notes to the consolidated financial statements
F-13
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CASH FLOWS
For the Nine Months
Ended February 28,
2010
|
For the Three Months
Ended February 28, 2010
|
From Inception
(September 16, 2008)
To February 28, 2010
|
||||||||||
OPERATING
ACTIVITIES:
|
||||||||||||
Net
loss for the period
|
(810,403
|
)
|
(240,230
|
)
|
(821,382
|
)
|
||||||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Amortization
|
4,797
|
2,022
|
4,797
|
|||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Prepaid
rent
|
(8,119
|
)
|
0
|
(8,119
|
)
|
|||||||
Employee
advance
|
(2,857
|
)
|
0
|
(2,857
|
)
|
|||||||
Other
current assets
|
(20,420
|
)
|
(7,593
|
)
|
(20,420
|
)
|
||||||
Accrued
liabilities
|
104,510
|
24,085
|
114,510
|
|||||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(732,492
|
)
|
(221,716
|
)
|
(733,471
|
)
|
||||||
INVESTING
ACTIVITIES:
|
||||||||||||
Acquisition
of capital assets
|
(24,927
|
)
|
-
|
(24,927
|
)
|
|||||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(24,927
|
)
|
0
|
(24,927
|
)
|
|||||||
FINANCING
ACTIVITIES:
|
||||||||||||
Deposit
for stock subscription
|
100,000
|
0
|
250,000
|
|||||||||
Proceeds
from loan
|
342,595
|
191,668
|
342,595
|
|||||||||
Issuance
of common stock
|
150,000
|
-
|
170,091
|
|||||||||
Proceeds
from stockholder loan
|
-
|
-
|
91
|
|||||||||
NET
CASH PROVIDED FROM INVESTING ACTIVITIES
|
592,595
|
191,668
|
762,777
|
|||||||||
Effect
of exchange rates on cash
|
(4,474
|
)
|
(791
|
)
|
(4,474
|
)
|
||||||
(DECREASE)
INCREASE IN CASH
|
(169,298
|
)
|
(30,839
|
)
|
(95
|
)
|
||||||
CASH
- BEGINNING OF PERIOD
|
169,203
|
30,744
|
0
|
|||||||||
CASH
- END OF PERIOD
|
(95
|
)
|
(95
|
)
|
(95
|
)
|
F-14
LOTO
INC.
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2010
NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
Comparative
Results
Comparison
with the financial results for the three and nine months ended February 28, 2009
and financial position as at February 28, 2009 have not been presented as the
company was not conducting any business during that period.
Organization
and Business Description
Loto Inc.
(“Loto” or the “Company”), together with it’s wholly owned subsidiary Mobilotto
systems, Inc. (“Mobilotto”), are development stage companies. The Company is
developing a patent-pending software application that permits the secure
purchase of lottery tickets on commercially available “smart” phones and similar
mobile telecommunications devices. A smart phone is a mobile phone offering
advanced capabilities, often with personal computer-like functionality, such as
e-mail, Internet access and other applications. Proprietary technology for
facilitating the purchase of lottery tickets addresses all elements of lottery
play, including secure player registration and authorization, number selection,
settlement, winning number notification and other direct-to-customer marketing
opportunities. It is the intention to operate or license software applications
with governments and other lottery operators as the primary source of revenue.
There is no intention to become a lottery operator. During the foreseeable
future, the Company expects to pursue business only outside of the United States
since current laws in the United States prohibit sales of lottery tickets
utilizing mobile telecommunications devices. The mobile lottery software
application has not yet been utilized by any lottery operators, and no revenues
have yet been generated from the technology.
Basis
of Consolidation and Development Stage Activities
These
consolidated financial statements include the accounts of Loto Inc., which was
incorporated on April 22, 2009 in the state of Nevada and its wholly-owned
subsidiary, Mobilotto Systems, Inc., which was incorporated in Ontario, Canada
on September 16, 2008. On May 13, 2009 the stockholders of Mobilotto contributed
all of the outstanding equity interests in Mobilotto to the Company in exchange
for 20,000,000 shares of the Company’s common stock. This transaction has been
accounted for as a transaction between entities under common control in
accordance with authoritative guidance issued by the Financial Accounting
Standards Board. Accordingly, the net assets were recognized in the consolidated
financial statements at their carrying amounts in the accounts of Mobilotto at
the transfer date and the results of operations of Mobilotto are included as
though the transaction had occurred at the beginning of the period.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and are
expressed in US dollars. All intercompany balances and transactions have been
eliminated.
Since
inception the Company has been engaged in organizational activities, has been
developing its business model and software, and marketing it’s product to
lottery operators, but has not earned any revenue from operations. Accordingly,
the Company’s activities have been accounted for as those of a “Development
Stage Enterprise”, as set forth in authoritative guidance issued by the
Financial Accounting Standards Board. Among the disclosures required are that
the Company’s financial statements be identified as those of a development stage
company, and that the statements of operations, stockholders’ equity and cash
flows disclose activity since the date of the Company’s
inception.
F-15
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with an original maturity or
remaining maturity at the date of purchase of three months or less to be cash
equivalents.
Capital
Assets
Capital
assets are stated at cost less accumulated amortization. Amortization is
calculated on a straight-line basis over the expected useful life as
follows:
Computer
equipment and software
|
3
years
|
Office
furniture and equipment
|
5
years
|
Leasehold
improvements
|
term
of the lease
|
Repairs
and maintenance expenditures are charged to operating expense as incurred.
Replacements and major renewals are capitalized.
Accounting
for the Impairment or Disposal of Long-Lived Assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of the asset may not be recoverable. For assets that are to be held and
used, impairment is recognized when the estimated undiscounted cash flows
associated with the asset, or group of assets, is less than their carrying
value. If impairment exists, an adjustment is made to write the asset down to
its fair value, and a loss is recorded as the difference between the carrying
value and the fair value. Fair values are determined based on quoted market
values, discounted cash flows, or internal and external appraisals, as
applicable. Assets to be disposed of are carried at the lower of carrying value
or estimated net realizable value.
Accounting
Estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
Recognition
Revenue
is recognized when it is realized or realizable and earned. Revenue is realized
or realizable when there is persuasive evidence of an arrangement, prices are
fixed or determinable, services or products are provided to the customer, and
collectability is probable and reasonably assured depending upon the applicable
revenue recognition guidance followed. The following are specific revenue
recognition policies.
Loto expects to have
contracts between the mobile network operators and/or the lottery operators,
depending upon the jurisdiction of business. Revenue from lottery services is
determined as a percentage of the amount of retail sales of lottery tickets
pursuant to the terms of the contract. This revenue will be recognized when the
lottery purchase transaction is completed and confirmed to the mobile
device.
Revenue
from the sale of a lottery system, which includes the customization of software,
is recognized on the percentage of completion method of accounting, based on the
ratio of costs incurred to estimated costs to complete.
F-16
Revenue
from the licensing of customized lottery software is recognized over the term of
license on the basis as identified in the contracts.
Revenue
derived from software maintenance on lottery software is recognized ratably over
the maintenance period.
Revenue
derived from enhancements to lottery software is recognized at the time such
enhancements are accepted by the customer.
Development
Costs
It is the
Company’s policy to expense all software and application development costs as
incurred, as the Company’s future revenues and business operations are uncertain
as to quantum, timing, and realization.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
using the applicable historical exchange rate. Revenue and expenses accounts are
translated at average exchange rates during the period. Historical cost balances
are re-measured using historical exchange rates. Gains and losses arising on
settlement of foreign currency denominated transactions or balances are included
in the determination of income. Foreign currency transactions are primarily
undertaken in Canadian dollars. The Company has not, to the date of these
financial statements, entered into derivative instruments to offset the impact
of foreign currency fluctuations.
Income
Taxes
Income
tax expense is based on pre-tax financial accounting income. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets, including
tax loss and credit carry-forwards, and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred income tax
expense represents the change during the period in the deferred tax assets and
deferred tax liabilities. The components of the deferred tax assets and
liabilities are individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Basic
and Diluted Net (Loss) Per Common Share (“EPS”)
Basic net
(loss) per share is computed by dividing the net loss attributable to the common
stockholders by the weighted average number of common shares outstanding during
the reporting period. Diluted net income per common share includes the potential
dilution that could occur upon exercise of warrants or conversion of debt to
acquire common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect on net income
per common share.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and accrued liabilities. The fair
value of these financial instruments approximates their carrying values due to
their short maturities.
F-17
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The
Company has not generated any revenues since inception, has an accumulated loss
of $821,382 as of February 28, 2010 and is unlikely to generate earnings in the
immediate or foreseeable future. The continuation of the Company as a going
concern is dependent upon, among other things, the continued financial support
from its shareholders, the ability of the Company to obtain necessary equity or
debt financing, and the attainment of profitable operations. These factors,
among others, raise substantial doubt regarding the Company’s ability to
continue as a going concern. There is no assurance that the Company will be able
to generate revenues in the future. These financial statements do not give any
effect to any adjustments that would be necessary should the Company be unable
to continue as a going concern.
NOTE
4 – DEPOSIT FOR SUBSCRIPTION TO COMMON STOCK
As of May
31, 2009, Loto had received subscriptions for private placements pending for the
sale of an aggregate of 15,000,000 shares of restricted common stock to six
accredited investors at a purchase price of $0.01 per share for an aggregate
purchase price of $150,000. The subscriptions were accepted and closed on June
9, 2009. On August 31, 2009, Loto received a private placement subscription of
$150,000 from one investor to issue 100,000 shares at a purchase price of $1.50
per share. On October 7, 2009, Loto received an additional private placement
subscription of $100,000 from one investor to issue 66,667 shares at a purchase
price of $1.50 per share. These private placements are anticipated to close by
late April 2010.
NOTE
5 – STANDBY LOAN
Two
current shareholders, Mhalka Capital Investments Ltd. and 1476448 Ontario Inc.,
have made a standby financing commitment to the Company under which they will
provide the necessary funding up to $1,500,000 if we are unable to obtain
third-party financing (the “Standby Loan”). Loto may draw on the standby
financing commitment in accordance with operating requirements as set forth in
the business plan. The available standby commitment amount will be reduced by
the aggregate cash proceeds received by the Company, which are derived from the
issuance of any equity securities and Company gross revenues. Draws on the
commitment amount are subject to interest as of the date of the draw at prime
rate plus two percent per annum. These amounts become repayable thirty calendar
days after demand at any time following the earlier of (a) September 30, 2010 or
(b) the date upon which the Company is in receipt of revenues or proceeds from
the sales of equity securities. Loto will give the lenders customary
representations and warranties regarding the good standing of the Company and
status of progress in respect of the business plan prior to each draw on the
commitment amount, and Loto will provide certifications and covenants regarding
use of the proceeds of each draw, which will be in customary forms reasonably
requested by the lenders as determined by reference to similar lenders making
similar loans to similar companies. The lenders will not be required to make any
loans under the standby financing commitment to Loto if the Company is unable to
make the representations, warranties, certifications or covenants, or if Loto is
in breach of any previously given representations, warranties, certifications or
covenants. If Loto breaches any of the covenants, the default rate will be 15%
per annum and the lenders may seek recourse against the Company for repayment of
all of the amounts.
NOTE
6 - LITIGATION
The
Company is not aware of any legal actions against it. From time to time in the
future, the Company may be involved in litigation relating to claims arising out
of operations in the normal course of business.
NOTE
7 – PAR VALUE OF SHARES
On June
4, 2009, Loto amended its certificate of incorporation to change its par value
from $.001 per share to $.0001 per share. Retroactive effect has been given to
the above in the accompanying statement of stockholders’
equity.
F-18
NOTE
8 – COMMITMENTS
The
Company is obligated under a lease agreement to lease the premises at 20 Toronto
Street in Toronto Ontario until February 28, 2011 at an annual rental
approximating $87,000.
F-19
Item
14.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
We have
not had any changes in or disagreements with our accountants regarding
accounting and financial disclosure.
Item
15.
|
Financial
Statements and Exhibits
|
(a) Financial
Statements
1.
|
Financial
Statements for the period from inception (September 16, 2008) to May 31,
2009.
|
2.
|
Financial
Statements for the nine month period ended February 28,
2010.
|
(b) Exhibit
List
Exhibit
|
Description
|
|
Exhibit No.
|
Description of Exhibits
|
|
Exhibit
3.1
|
Articles
of Incorporation of the Company, incorporated by reference to Exhibit 3.1
to the Company’s Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on June 10, 2009.
|
|
Exhibit
3.2
|
Bylaws
of the Company, incorporated by reference to Exhibit 3.2 to the Company’s
Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on June 10, 2009.
|
|
Exhibit
3.3
|
Amendment
to the Articles of Incorporation of the Company, incorporated by reference
to Exhibit 3.3 to the Company’s Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on June 10,
2009.
|
|
Exhibit
10.1
|
Founders’
Agreement, by and between the Company, A Few Brilliant Minds Inc. and
Mhalka Capital Investments Ltd., dated as of May 13, 2009; incorporated by
reference to Exhibit 10.1 to the Company’s Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on June 10,
2009.
|
|
Exhibit
10.2
|
Form
of Subscription Agreement, by and between the Company and the Series A
Financing Subscribers (Regulation S Subscribers), incorporated by
reference to Exhibit 10.2 to the Company’s Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on June 10,
2009.
|
|
Exhibit
10.3
|
Form
of Subscription Agreement, by and between the Company and the Series A
Financing Subscribers (Section 4(2) Subscribers), incorporated by
reference to Exhibit 10.3 to the Company’s Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on June 10,
2009.
|
|
Exhibit
10.4
|
Form
of Registration Rights Agreement, by and between the Company and the
Series A Financing Subscribers, incorporated by reference to Exhibit 10.4
to the Company’s Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on June 10, 2009.
|
|
Exhibit 10.5
|
Standby
Commitment Letter, by and between the Company, Mhalka Capital Investments
Ltd. and 1476448 Ontario Inc., dated as of August 3, 2009, incorporated by
reference to Exhibit 10.5 to Amendment No. 2 to the Company’s Registration
Statement on Form S-1/A, filed with the Securities and Exchange Commission
on August 5, 2009.
|
|
Exhibit
10.6
|
Share
Tender and Cancellation Agreement, dated as of April 19, 2010, by and
between the Company, A Few Brilliant Minds Inc. and Mhalka Capital
Investments Ltd.
|
|
Exhibit
10.7
|
Financing
Tender and Cancellation Agreement, dated as of April 19, 2010, by and
between the Company, A Few Brilliant Minds Inc. and 2238646 Ontario
Inc.
|
|
Exhibit
10.8
|
Novation
to Founders’ Agreement, dated as of April 19, 2010, by and between the
Company, A Few Brilliant Minds Inc., Mhalka Capital Investments Ltd. and
2238646 Ontario
Inc.
|
43
Exhibit
10.9
|
Novation
to Standby Commitment Letter, dated as of April 19, 2010, by and between
the Company, Mhalka Capital Investments Ltd., 2238646 Ontario Inc. and
1476448 Ontario Inc.
|
Exhibit
10.10
|
Stock
Purchase Agreement, dated as of April 19, 2010, by and between Mhalka
Capital Investments Ltd. and 2238646 Ontario Inc.
|
Exhibit
10.11
|
Promissory
Note, dated as of April 19, 2010, issued by 2238646 Ontario
Inc.
|
Item 9.01:
Financial
Statements and Exhibits.
Financial
Statements
Those
financial statements contained in Item 13, above are incorporated into this Item
by reference thereto.
Exhibits
Those
Exhibits contained in Item 15, above are incorporated into this Item by
reference thereto.
# # #
44
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
LOTO
INC.
|
|||
By:
|
/s/ Stephen Knight
|
||
Name: Stephen
Knight
|
|||
Title:
Chief Executive Officer,
|
|||
Principal
Financial Officer and
|
|||
Chief
Accounting Officer
|
Date: April
21, 2010
45