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EX-32.1 - Epcylon Technologies, Inc. | v199076_ex32-1.htm |
EX-31.1 - Epcylon Technologies, Inc. | v199076_ex31-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended August 31, 2010
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____________ to ____________
Commission
File Number: 000-53770
Loto
Inc.
(Exact
Name of Registrant as Specified in its Charter)
Nevada
|
27-0156048
|
|
(State
or other jurisdiction of
|
(IRS
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
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, Former Address and Former Fiscal Year,
if
Changed Since Last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.323.405 of this
chapter) during the preceding 12 months (or shorter period that the registrant
was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer
|
¨
|
Accelerated
Filer
|
¨
|
Non-Accelerated
Filer
|
¨
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
As of
October 14, 2010, the Issuer had 55,545,926 shares of its Common Stock
outstanding.
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
||
Item
1: Financial Statements
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1
|
|
Item
2: Management’s Discussion and Analysis of Financial Condition and Results
of Operation
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9
|
|
Item
3: Quantitative and Qualitative Disclosures about Market
Risk
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14
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|
Item
4: Controls and Procedures
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14
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|
PART
II: OTHER INFORMATION
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||
Item
1: Legal Proceedings
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15
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|
Item
1A: Risk Factors
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15
|
|
Item
2: Unregistered Sales of Equity Securities and Use of
Proceeds
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15
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|
Item
3: Defaults Upon Senior Securities
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15
|
|
Item
4: Reserved
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15
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Item
5: Other Information
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15
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Item
6: Exhibits
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16
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SIGNATURES
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17
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PART
I FINANCIAL
INFORMATION
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED BALANCE SHEET
August
31, 2010 UNAUDITED
|
May
31, 2010 AUDITED
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|||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 45,651 | $ | 309,018 | ||||
Prepaid
rent
|
8,119 | 8,119 | ||||||
GST
Receivable
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42,387 | 29,827 | ||||||
TOTAL
CURRENT ASSETS
|
96,157 | 346,964 | ||||||
Capital
assets, at cost
|
31,060 | 31,060 | ||||||
Accumulated
amortization
|
(9,095 | ) | (7,332 | ) | ||||
Net
capital assets
|
21,965 | 23,728 | ||||||
TOTAL
ASSETS
|
$ | 118,122 | $ | 370,692 | ||||
LIABILITIES
and STOCKHOLDERS' (DEFICIENCY)
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accrued
liabilities (Note 3)
|
$ | 42,693 | $ | 49,505 | ||||
Standby
loan (Note 4)
|
431,522 | 425,931 | ||||||
Due
to stockholder
|
191 | 191 | ||||||
TOTAL
CURRENT LIABILITIES AND TOTAL LIABILITIES
|
474,406 | 475,627 | ||||||
STOCKHOLDERS'
(DEFICIENCY):
|
||||||||
Common
stock, par value $0.0001 (note 5)
|
||||||||
100,000,000
shares authorized
|
||||||||
54,772,963
issued and outstanding (54,572,963 at May 31, 2010)
|
5,477 | 5,457 | ||||||
Additional
paid-in capital
|
1,173,957 | 1,023,977 | ||||||
Other
comprehensive gain / (loss)
|
3,210 | (598 | ) | |||||
Deficit
accumulated during development stage
|
(1,538,928 | ) | (1,133,771 | ) | ||||
TOTAL
STOCKHOLDERS' (DEFICIENCY)
|
$ | (356,284 | ) | $ | (104,935 | ) | ||
TOTAL
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
|
$ | 118,122 | $ | 370,962 |
See notes to the
consolidated financial statements
1
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED STATEMENT OF
OPERATIONS
For
the Three Months Ended August 31, 2010 UNAUDITED
|
For
the Three Months Ended August 31, 2009 UNAUDITED
|
From
Inception (September 16, 2008) to August 31, 2010
UNAUDITED
|
||||||||||
REVENUE
|
$ | - | $ | - | $ | - | ||||||
EXPENSES
|
||||||||||||
General
and administrative expenses
|
399,566 | 211,083 | 1,520,636 | |||||||||
OPERATING
LOSS
|
399,566 | 211,083 | 1,520,636 | |||||||||
OTHER
EXPENSE
|
||||||||||||
Interest
Expense
|
5,591 | 345 | 18,292 | |||||||||
NET
LOSS FOR THE PERIOD
|
$ | (405,157 | ) | $ | (211,428 | ) | $ | (1,538,928 | ) | |||
NET
LOSS PER COMMON SHARE - BASIC AND FULLY DILUTED
|
$ | (0.01 | ) | $ | (0.01 | ) | ||||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND FULLY
DILUTED
|
54,662,093 | 40,000,000 |
See notes to the consolidated financial statements
2
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ (DEFICIENCY)
FROM INCEPTION (SEPTEMBER 16, 2008)
TO AUGUST 31, 2010
UNAUDITED
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
|
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 | ) | 9,112 | ||||||||||||||||||
Sale
of shares
|
15,000,000 | 1,500 | 148,500 | 150,000 | ||||||||||||||||||||
Cancellation
of Founders' shares (Note 8)
|
(1,000,000 | ) | (100 | ) | (100 | ) | ||||||||||||||||||
Sale
of shares (Note 7)
|
572,963 | 57 | 859,386 | 859,443 | ||||||||||||||||||||
Other
comprehensive gain / (loss) resulting from foreign exchange
conversions
|
(598 | ) | (598 | ) | ||||||||||||||||||||
Net
loss
|
(1,122,792 | ) | (1,122,792 | ) | ||||||||||||||||||||
BALANCE
- MAY 31, 2010
|
54,572,963 | 5,457 | 1,023,977 | (1,133,771 | ) | (598 | ) | (104,935 | ) | |||||||||||||||
Other
comprehensive gain / (loss) resulting from foreign exchange
conversions
|
3,808 | 3,808 | ||||||||||||||||||||||
Issuance
of shares to Small Cap Consulting GMBH (Note 5)
|
200,000 | 20 | 149,980 | 150,000 | ||||||||||||||||||||
Net
loss
|
(405,157 | ) | (405,157 | ) | ||||||||||||||||||||
BALANCE
- AUGUST 31, 2010
|
54,772,963 | 5,477 | 1,173,957 | (1,538,928 | ) | 3,210 | (356,284 | ) |
See notes to the consolidated financial statements
3
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED STATEMENT OF CASH
FLOWS
UNAUDITED
For the
Three
Months Ended
August
31, 2010
|
For
the Three
Months Ended
August
31, 2009
|
From
Inception
(September
16,
2008)
to
August
31, 2010
|
||||||||||
OPERATING
ACTIVITIES:
|
||||||||||||
Net
loss for the period
|
(405,157 | ) | (211,428 | ) | (1,538,928 | ) | ||||||
Adjustments
to reconcile net loss to net cash
|
||||||||||||
used in operating
activities:
|
||||||||||||
Amortization
|
1,763 | 750 | 9,095 | |||||||||
Common
stock issued for services
|
150,000 | - | 150,000 | |||||||||
Interest
expensed but not paid
|
5,591 | 345 | 5,591 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Prepaid
rent
|
- | (23,158 | ) | (8,119 | ) | |||||||
Other
current assets
|
(12,560 | ) | (4,939 | ) | (42,387 | ) | ||||||
Accrued
liabilities
|
(6,812 | ) | 12,805 | 42,693 | ||||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(267,175 | ) | (225,625 | ) | (1,382,055 | ) | ||||||
INVESTING
ACTIVITIES:
|
||||||||||||
Acquisition
of capital assets
|
- | (24,927 | ) | (31,060 | ) | |||||||
NET
CASH USED IN INVESTING ACTIVITIES
|
- | (24,927 | ) | (31,060 | ) | |||||||
FINANCING
ACTIVITIES:
|
||||||||||||
Proceeds
from loan
|
- | 100,000 | 425,931 | |||||||||
Deposit
for stock subscription
|
- | 150,000 | 150,000 | |||||||||
Issuance
(net of redemption) of common stock
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- | - | 879,434 | |||||||||
Proceeds
from stockholder loan
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- | - | 191 | |||||||||
NET
CASH PROVIDED FROM INVESTING ACTIVITIES
|
- | 250,000 | 1,455,556 | |||||||||
Effect
of exchange rates on cash
|
3,808 | (3,095 | ) | 3,210 | ||||||||
(DECREASE)
INCREASE IN CASH
|
(263,367 | ) | (3,647 | ) | 45,651 | |||||||
CASH
- BEGINNING OF PERIOD
|
309,018 | 169,203 | 0 | |||||||||
CASH
- END OF PERIOD
|
45,651 | 165,556 | 45,651 | |||||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||||||
Cash
paid during the period
|
||||||||||||
Interest
paid
|
- | - | - | |||||||||
NON
CASH FINANCING ACTIVITIES
|
||||||||||||
Deposit
applied to stock subscription
|
- | 150,000 | 150,000 |
See notes to the consolidated financial statements
4
LOTO
INC.
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2010
NOTE 1 – ORGANIZATION AND BASIS OF
PRESENTATION
Organization and Business
Description
Loto Inc.
(“Loto” or the “Company”), together with its 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 Company’s 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. The mobile
lottery software application has not yet been sold to any lottery operator, 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 stockholder of Mobilotto contributed
all of the outstanding equity interest 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.
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.
These
consolidated financial statements and related notes are presented 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.
The
accompanying unaudited consolidated financial statements included herein have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 8 of Regulation S-X. They do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to financial
statements included in the 10-K report for the year ended May 31, 2010. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the results for the interim period have been made and are of a
normal, recurring nature. Operating results for the three months ended August
31, 2010 are not necessarily indicative of the results that may be expected for
any interim period or the entire year. For further information, these financial
statements and the related notes should be read in conjunction with the
Company’s audited financial statements for the year ended May 31, 2010 included
in the Company’s 10-K report.
5
NOTE 2 – 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 $1,538,928 as of August 31, 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
3– ACCRUED LIABILITIES
Accrued
expenses totalled $42,693 and included the following. Payments due for
programming work performed $4,900, accrued legal expenses $14,894, accrued audit
expenses $13,500 and consulting payable $9,399.
NOTE 4 – STANDBY
LOAN
On August
3, 2009, two shareholders, Mhalka Capital Investments Ltd. and 1476448 Ontario
Inc., made a standby financing commitment to Loto under which they agreed to
provide the necessary funding up to $1,500,000 if we are unable to obtain
third-party financing (the “Standby Loan”). 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. agreed to the remaining
commitments of Mhalka Capital Investment Ltd. under the August 3, 2009, standby
financing commitment. 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. As at August 31, 2010, $349,133 including accrued interest was drawn
and payable against this commitment.
In
addition, A Few Brilliant Minds, a related party, has advanced $82,389 including
accrued interest. This loan is subject to the same interest and repayment terms
as the other standby loans.
NOTE
5 – STOCKHOLDERS’ DEFICIENCY
On May
13, 2009 the two co-founders of Loto entered into a Founders’ Agreement with
each other and the company. Mhalka Capital Investments Limited was issued
20,000,000 shares of Loto restricted common stock in exchange for contributing
$20,000 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 became a wholly-owned
subsidiary of Loto.
6
In July
of 2010, the Company issued 200,000 shares of the Company’s common stock to a
consulting company in consideration for assistance in listing on the Berlin
Stock Exchange. The shares were valued at $0.75 per share, the effective last
sales price of the Company’s common stock.
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.
NOTE
6 – SALE OF LOTO STOCK
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.
NOTE
7 – STOCK OPTION GRANTS
On April
19, 2010, the Company granted 1,900,000 options to three members of the
Company’s Board of Directors at an exercise price of $1.50 per share. The
options will vest on April 19, 2011, and 950,000 options may be exercised on
April 19, 2011 and a further 950,000 options may be exercised on April 19,
2012. The right to exercise all of the options will expire and terminate on
April 19, 2013. The Company has determined that the options were issued at fair
value and as such no expense has been recorded.
On April
19, 2010 a director of the Company was granted compensation arrangements which
provide that he may elect compensation in either cash or in options of the
Company as follows: in 2010, $75,000 if election for cash or 250,000 shares at
the option exercise price of $1.00 per share if election for options; in 2011
$150,000 if election for cash or 300,000 shares at the option exercise price of
$1.00 per share if election for options. The director may elect
compensation either in cash or in options with respect to 2010 on April 19, 2011
and April 19, 2012 with respect to 2011. In the event options are selected
all such options shall be fully vested and exercisable upon the respective date
of grant and may be exercised until expiration on April 19, 2013. The
Company has determined that the options were issued at fair value and as such no
expense has been recorded.
NOTE
8 – CONTINGENT CANCELLATION OF SHARES OF COMMON STOCK
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 there under. 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, dated as of
April 19, 2010, pursuant to which they have each 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. In
anticipation of the sale of common stock, A Few Brilliant Minds Inc. and 2238646
Ontario Inc. both cancelled 500,000 common shares even though there is no
assurance that the Company will be able to sell its common stock.
NOTE
9 – SUBSEQUENT EVENT
Sales
of Shares of Common Stock
Between
August 2009 and May 2010, we sold an aggregate of 572,963 shares of our
restricted common stock in a private placement with thirteen accredited
investors at a purchase price of $1.50 per share for an aggregate purchase price
of $859,443. On September 1, 2010, we determined that it is in the
Company’s best interests to sell additional shares at a purchase price of $.75
per share, and to modify the sales price paid by previous investors to reflect a
new sales price of $0.75 per share. The aggregate number of shares sold and
issued pursuant to previous sales of our common stock was correspondingly
increased by 572,963 shares, with no additional proceeds associated with such
transaction.
7
In
addition, on September 22, 2010, the Company sold an additional 200,000 shares
of the Company’s common stock for a purchase price of $150,000.
Standby
Loan
The
drawdown period for the Standby Loan terminated as of September 30,
2010.
8
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Special
Note Regarding 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. Our performance or
achievements, or industry results, may differ materially from those contemplated
by such forward-looking statements.
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.
Unless
otherwise provided in this Report, references to the "Company," “Loto,” the
"Registrant," the "Issuer," "we," "us," and "our" refer to Loto
Inc.
Critical
Accounting Policies and Estimates
The
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, accrued expenses, financing operations, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different conditions.
Overview
Our
company, Loto, operates through our wholly owned subsidiary Mobilotto Systems,
Inc. (“Mobilotto”). 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).
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 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 outside of the
United States. Our business plan calls for launching our mobile lottery
application in the target markets of Canada, Mexico, South America, Asia
(China), Africa, and Europe (Turkey and the United Kingdom of Great
Britain).
9
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 could be ready for commercialization approximately nine
months from the point at which Loto directs its development partner to undertake
the development activity. Loto will give such direction once it raises
sufficient funds. 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.
Assets
and Liabilities
As of
August 31, 2010, the Company had total Assets of $118,122, including total
current assets of $96,157. This represented a decline from May 31, 2010, at
which time the Company’s total assets were $370,692, including total current
assets of $346,964. The Company’s total liabilities declined slightly, from
$475,627 at May 31, 2010 to $474,406 at August 31, 2010. The Company’s current
liabilities as of August 31, 2010 included $42,693 of accrued legal, audit,
consulting and programming expenses.
Liquidity
and Capital Resources
As of
August 31, 2010, the Company had $45,651 in cash. As a development stage
company, we have limited capital and limited operating resources. As of August
31, 2010, we raised $1,029,434 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. On September 22, 2010 we sold 200,000 shares of restricted common
stock in a private placement for $150,000.
The cash
now in the Company’s bank accounts will be sufficient to maintain our operations
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), repayment of amounts due under our
Standby Loan Agreements and initiating full rollout of our products to our
target markets over the next twelve months will be approximately $5,000,000. We
expect to need additional amounts of funding commencing one month 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 a standby financing commitment with our Company under which they
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. replaced Mhalka Capital Investments
Ltd. The drawdown period for the Standby Loan terminated as of
September 30, 2010. After such date, 2238646 Ontario Inc. and 1476448
Ontario Inc. may require the repayment of loans made thereunder upon thirty days
notice. As of the date of this filing, the Company has received no notice or
demand for the repayment of the Standby Loan.
10
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 Months Ended August 31, 2010 and August 31,
2009
Income
We are a
development stage company and as of August 31, 2010 there were no contracts in
place and no revenue has been received. We do not expect that revenue
will be realized until mid-2011. We have concentrated our efforts on
developing our business strategy, defining our product, building demonstration
games, 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.
Expenses
During
the three months ended August 31, 2010, we incurred $405,157 in total operating
expenses. This was an increase from the period ended August 31, 2009, during
which we incurred expenses of $211,428 in total operating expenses. Since the
Company’s inception on September 16, 2008, expenses have totaled
$1,538,928.
During
the three months ended August 31, 2010, salaries expense was $127,637 for the
quarter, and comprised payments to the President, the Chief Technology Officer,
the Chief Information Officer, the Director of Sales & Marketing, and an
administrative assistant. During the three months ended August 31, 2009,
salaries expense was $103,979, and comprised payments to the President, the
Chief Information Officer and the Director of Sales &
Marketing.
In July
2010, the Company issued 200,000 shares of the Company’s common stock in
consideration for assistance in listing on the Berlin Stock Exchange. This
$150,000 non-cash expense was recognized at $0.75 per share.
Legal and
accounting fees of $28,351 were incurred for the three months ended August 31,
2010, for the creation of all required public company filings, audited financial
statements, internal corporate needs, and reporting conformance, as well as for
trademark and patent applications. This was a decline from the three months
ended August 31, 2009, in which legal and accounting fees of $50,302 were
incurred.
Marketing
expenses of $4,277 for the three months ended August 31, 2010 were incurred in
the creation and printing of investor information, product information, specific
lottery operator presentations and RFP’s. Marketing expenses of $12,238 for
the three months ended August 31, 2009 were incurred in the creation and
printing of investor information and product information.
During
the three months ended August 31, 2010, rent and office expenses of $27,315 were
incurred for the head office of the company, which is located at Suite 460, 20
Toronto Street in Toronto Ontario. During the three months ended August 31,
2009 rent and office expenses were $17,164.
Systems
development expenses of $34,207 for the three months ended August 31, 2010 were
incurred for the creation, modification, and maintenance of game demonstrations,
as well as furtherance of defining the carrier-grade product that has yet to be
built. Systems development expenses of $10,124 for the three months ended
August 31, 2009 were incurred for the creation, modification, and maintenance of
game demonstrations.
11
Interest
expense accrued on the Standby Loans was $5,591 for the three months ended
August 31, 2010, which was an increase from $345 for the three months ended
August 31, 2009.
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 section below).
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).
4. As
opportunities arise, partner with existing suppliers of games to lottery
operators in order to mobilize 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. Proactively
communicate and present our product and brand to prospective lottery operators,
and understand their needs for new sources of revenue.
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 a 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 U.S. 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.
12
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.
Working
Capital
We do not
have in-place working capital to fund normal business activities. During the
period covered by this Report, we had the ability to draw on the Standby Loan.
We are actively seeking additional financing.
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 $8,200 per
month.
Warrants
As of
August 31, 2010, we had no outstanding warrants.
Common
Stock
As of
August 31, 2010, there were 54,772,963 shares issued and outstanding, of which
43,772,963 were restricted from trading.
During
the period covered by this Report we had 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 (President and Chief Executive Officer), Stephen Baker (Chief
Technology Officer), Drew Deyell (Chief Information Officer), Jeff O’Connor
(Vice President of Sales and Marketing), and Brandice Triolet (Director of Human
Resources and Administration). In late September, Drew Deyell
resigned, and his duties are now handled by Shahzad Muhammad (Director of
Technology Development).
We expect
to hire additional full time employees in the coming year as necessities
dictate.
Off-Balance
Sheet Arrangements
There are
no off balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on our financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
Subsequent
Events
Between
August 2009 and May 2010, we sold an aggregate of 572,963 shares of our
restricted common stock in a private placement to thirteen accredited investors
at a purchase price of $1.50 per share for an aggregate purchase price of
$859,443. These issuances were exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended and the exemption from registration
provided by Regulation S. On September 1, 2010, we determined that it is in
the Company’s best interests to sell additional shares at a purchase price of
$0.75 per share, and to modify the sales price paid by previous investors to
reflect a new sales price of $0.75 per share. The aggregate number of shares
sold and issued pursuant to previous sales of our common stock was
correspondingly increased by 572,963 shares, with no additional proceeds
associated with such transaction.
13
In
addition, on September 22, 2010, the Company sold an additional 200,000 shares
of the Company’s common stock for a purchase price of $150,000, which were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, and the exemption from registration provided by Regulation
S.
Item
3. Qualitative and Quantitative Disclosure About Market
Risk
Not
applicable
Item
4. Controls and Procedures
Management's
Report on Internal Control Over Financial Reporting
Management
of our company is responsible for establishing and maintaining adequate internal
control over financial reporting. Our company's internal control over financial
reporting is a process, under the supervision of the Chief Executive Officer and
Chief Financial Officer, designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's
financial statements for external purposes in accordance with United States
generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that:
·
|
Pertain
to the maintenance of records that in all reasonable detail accurately and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
·
|
Provide
reasonable assurance of the completeness and authorization for checks to
be issued;
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements in accordance with generally
acceptable accounting principles, and that the receipts and expenditures
are being made only in accordance with authorizations of management and
the Board of Directors; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use, or disposition of the Company’s assets
that could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
As of the
end of the period covered by this report, the Company carried out, under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) in ensuring that information required to be disclosed by
the Company in its reports is recorded, processed, summarized and reported
within the required time periods. Based on their evaluation of the
Company’s disclosure controls and procedures as of August 31, 2010, the
Company’s Chief Executive Officer and Chief Financial Officer has concluded
that, as of that date, the Company’s controls and procedures were effective for
the purposes described above.
Changes
in Internal Control over Financial Reporting
There was
no change in the Company’s internal control over financial reporting (as defined
in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)
during the quarter ended August 31, 2010 that has materially affected or is
reasonably likely to materially affect the Company’s internal control over
financial reporting.
14
OTHER
INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
The
Company is not, and has not been during the period covered by this Quarterly
Report, a party to any legal proceedings.
ITEM
1A.
|
RISK
FACTORS
|
Not
Applicable.
ITEM
2:
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
In July of 2010, the Company
issued 200,000 shares of the Company’s common stock to
a consulting company in consideration for assistance in listing on the Berlin
Stock Exchange. This issuance was exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and the exemption from registration
provided by Regulation S.
ITEM
3:
|
DEFAULTS
UPON SENIOR SECURITIES
|
Not
Applicable.
ITEM
4:
|
RESERVED
|
Not
Applicable.
OTHER
INFORMATION
|
Not
Applicable.
15
ITEM
6.
|
EXHIBITS
|
Description
|
|
Exhibit
31.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
Exhibit
32.1
|
Certification
of the Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
16
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 thereunto
duly authorized.
LOTO
INC.
|
|||
By:
|
/s/
Stephen Knight
|
||
Name:
|
Stephen
Knight
|
||
Title:
|
Chief
Executive Officer,
Principal
Financial Officer and
Chief
Accounting Officer
|
Dated: October
20, 2010
17