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EX-32.1 - Epcylon Technologies, Inc. | v208110_ex32-1.htm |
EX-31.1 - Epcylon Technologies, Inc. | v208110_ex31-1.htm |
UNITED
STATES
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 November 30, 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
January 10, 2011, the Issuer had 55,533,334 shares of its Common Stock
outstanding.
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
||||
Item
1: Financial Statements
|
3 | |||
Item
2: Management’s Discussion and Analysis of Financial Condition and Results
of Operation
|
10 | |||
Item
3: Quantitative and Qualitative Disclosures about Market
Risk
|
14 | |||
Item
4: Controls and Procedures
|
15 | |||
PART
II: OTHER INFORMATION
|
||||
Item
1: Legal Proceedings
|
16 | |||
Item
1A: Risk Factors
|
16 | |||
Item
2: Unregistered Sales of Equity Securities and Use of
Proceeds
|
16 | |||
Item
3: Defaults Upon Senior Securities
|
16 | |||
Item
4: Reserved
|
16 | |||
Item
5: Other Information
|
16 | |||
Item
6: Exhibits
|
17 | |||
SIGNATURES
|
18 |
2
PART
I FINANCIAL
INFORMATION
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
BALANCE SHEET
November 30,
|
|
|||||||
2010
|
May 31, 2010
|
|||||||
UNAUDITED
|
AUDITED
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 795,604 | $ | 309,018 | ||||
Prepaid
rent
|
8,119 | 8,119 | ||||||
Receivables
(Note 3)
|
87,712 | 29,827 | ||||||
TOTAL
CURRENT ASSETS
|
891,435 | 346,964 | ||||||
Capital
assets, at cost
|
31,060 | 31,060 | ||||||
Accumulated
amortization
|
(12,378 | ) | (7,332 | ) | ||||
Net
capital assets
|
18,682 | 23,728 | ||||||
TOTAL
ASSETS
|
$ | 910,117 | $ | 370,692 | ||||
LIABILITIES
and STOCKHOLDERS' EQUITY (DEFICIENCY)
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accrued
liabilities (Note 4)
|
$ | 80,031 | $ | 49,505 | ||||
Standby
loan (Note 5)
|
437,186 | 425,931 | ||||||
Due
to stockholder
|
312 | 191 | ||||||
TOTAL
CURRENT LIABILITIES AND TOTAL LIABILITIES
|
517,529 | 475,627 | ||||||
STOCKHOLDERS'
EQUITY (DEFICIENCY):
|
||||||||
Common
stock, par value $0.0001 (note 6)
|
||||||||
100,000,000
shares authorized
|
||||||||
55,533,334
issued and outstanding (54,572,963 at May 31, 2010)
|
5,553 | 5,457 | ||||||
Additional
paid-in capital
|
2,223,760 | 1,023,977 | ||||||
Other
comprehensive gain / (loss)
|
5,390 | (598 | ) | |||||
Deficit
accumulated during development stage
|
(1,842,115 | ) | (1,133,771 | ) | ||||
TOTAL
STOCKHOLDERS' EQUITY (DEFICIENCY)
|
$ | 392,588 | $ | (104,935 | ) | |||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
$ | 910,117 | $ | 370,692 |
See
notes to the consolidated financial statements
3
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF OPERATIONS
For the Three
|
For the Three
|
For the Six
|
For the Six
|
Inception (Sept.
|
||||||||||||||||
Months Ended
|
Months Ended
|
Months Ended
|
Months Ended
|
16, 2008) to Nov.
|
||||||||||||||||
November 30,
|
November 30,
|
November 30,
|
November 30,
|
30, 2010
|
||||||||||||||||
2010 UNAUDITED
|
2009 UNAUDITED
|
2010 UNAUDITED
|
2009 UNAUDITED
|
UNAUDITED
|
||||||||||||||||
REVENUE
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
EXPENSES
|
||||||||||||||||||||
General
and administrative expenses
|
297,522 | 358,164 | 697,090 | 569,239 | 1,820,391 | |||||||||||||||
OPERATING
LOSS
|
297,522 | 358,164 | 697,090 | 569,239 | 1,820,391 | |||||||||||||||
OTHER
EXPENSE
|
||||||||||||||||||||
Interest
Expense
|
5,664 | 581 | 11,254 | 934 | 21,724 | |||||||||||||||
NET
LOSS FOR THE PERIOD
|
$ | (303,186 | ) | $ | (358,745 | ) | $ | (708,344 | ) | $ | (570,173 | ) | $ | (1,842,115 | ) | |||||
NET
LOSS PER COMMON SHARE - BASIC AND FULLY DILUTED
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND FULLY
DILUTED
|
55,251,181 | 40,000,000 | 54,767,328 | 40,000,000 |
See
notes to the consolidated financial statements
4
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM
INCEPTION TO NOVEMBER 30, 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
|
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 6)
|
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
|
5,988 | 5,988 | ||||||||||||||||||||||
Issuance
of shares to Small Cap Consulting GMBH (Note 6)
|
200,000 | 20 | 149,980 | 150,000 | ||||||||||||||||||||
Sale
of shares (Note 6)
|
1,400,000 | 140 | 1,049,860 | 1,050,000 | ||||||||||||||||||||
Cancellation
of Founders' shares (Note 8)
|
(1,212,592 | ) | (121 | ) | (121 | ) | ||||||||||||||||||
Issuance
of shares to certain existing shareholders (Note 6)
|
572,963 | 57 | (57 | ) | 0 | |||||||||||||||||||
Net
loss
|
(708,344 | ) | (708,344 | ) | ||||||||||||||||||||
BALANCE
- November 30, 2010
|
55,533,334 | 5,553 | 2,223,760 | (1,842,115 | ) | 5,390 | 392,588 |
See
notes to the consolidated financial statements
5
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CASH FLOWS
UNAUDITIED
For the Six Months
Ended November 30,
2010
|
For the Six Months
Ended November 30,
2009
|
Inception (September
16, 2008) to
November 30, 2010
|
||||||||||
OPERATING
ACTIVITIES:
|
||||||||||||
Net
loss for the period
|
(708,344 | ) | (570,173 | ) | (1,842,115 | ) | ||||||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Amortization
|
5,046 | 2,774 | 12,378 | |||||||||
Common
stock issued for services
|
150,000 | - | 150,000 | |||||||||
Interest
expensed but not paid
|
11,254 | - | 11,254 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Prepaid
rent
|
- | (8,119 | ) | (8,119 | ) | |||||||
Receivables
|
(57,884 | ) | (15,684 | ) | (87,711 | ) | ||||||
Accrued
liabilities
|
30,526 | 80,426 | 80,031 | |||||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(569,402 | ) | (510,776 | ) | (1,684,282 | ) | ||||||
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
|
- | 150,927 | 425,931 | |||||||||
Deposit
for stock subscription
|
- | 100,000 | 150,000 | |||||||||
Issuance
(net of redemption) of common stock
|
1,050,000 | 150,000 | 1,929,434 | |||||||||
Proceeds
from stockholder loan
|
- | - | 191 | |||||||||
NET
CASH PROVIDED FROM INVESTING ACTIVITIES
|
1,050,000 | 400,927 | 2,505,556 | |||||||||
Effect
of exchange rates on cash
|
5,988 | (3,683 | ) | 5,390 | ||||||||
(DECREASE)
INCREASE IN CASH
|
486,586 | (138,459 | ) | 795,604 | ||||||||
CASH
- BEGINNING OF PERIOD
|
309,018 | 169,203 | 0 | |||||||||
CASH
- END OF PERIOD
|
795,604 | 30,744 | 795,604 | |||||||||
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
6
LOTO
INC.
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 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 its 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 six months ended November
30, 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.
7
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 $1,842,115 as of November 30, 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– RECEIVABLES
The
Company’s receivables as of November 30, 2010 totalled $87,712, which included
$50,739 in goods and service tax receivable as well as a receivable of $36,973
for specific development monies expended. The Company will receive a
contribution of up to 75% of monies expended to a maximum payment of $43,344
from the National Research Council of Canada Industrial Research Assistance
Program.
NOTE
4– ACCRUED LIABILITIES
As of
November 30, 2010, the Company’s accrued expenses totalled $80,031 and included
the following: payments due for programming work performed of $31,302; accrued
legal expenses of $19,687; accrued audit expenses of $3,000; accrued
communication expenses of $1,800; and consulting payable of
$24,242.
NOTE 5 – 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 funding if Loto was 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. has agreed to the remaining commitments of Mhalka Capital Investment Ltd.
Draws made 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 are 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. If Loto breaches any
of the covenants, the default rate will be 15% per annum. The standby financing
commitment expired on September 30, 2010. As at November 30, 2010, $353,715,
including accrued interest, was drawn and payable against this
commitment.
In
addition, A Few Brilliant Minds, a related party, has advanced $83,471 through
November 30, 2010, including accrued interest. This loan is subject to the same
interest and repayment terms as the other standby loans.
The
Company has received no notice for repayment of the Standby Loan.
NOTE
6 – STOCKHOLDERS’ EQUITY (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.
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
such amendment in the accompanying statement of stockholders’
equity.
In July
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.
8
Between
August 2009 and May 2010, the Company 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, the Board of Directors determined that it was
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.
During
the six months ended November 30, 2010, the Company sold 1,400,000 shares of
common stock at a price of $0.75 per share for a total purchase price of
$1,050,000.
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
total, A Few Brilliant Minds Inc. and 2238646 Ontario Inc. have cancelled
2,212,592 common shares.
9
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).
10
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 on the
demonstrations include player registration, financial settlement and player
messaging functions.
We are
currently in the final stages of hiring appropriate internal resources and
selecting external vendors in order to complete the development of the core
lottery product.
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
November 30, 2010, the Company had total Assets of $910,117, including total
current assets of $891,435. This represented a significant increase
from May 31, 2010, at which time the Company’s total assets were $370,692,
including total current assets of $346,964. The increase is attributed to the
sale of 1,400,000 shares of common stock for gross proceeds of $1,050,000. The
Company’s total liabilities increased slightly, from $475,627 at May 31, 2010 to
$517,529 at November 30, 2010. The Company’s current liabilities as
of November 30, 2010 included $437,186 in standby loans payable and accrued
expenses totaling $80,031 for accrued legal, audit, consulting, communication
and programming expenses.
Liquidity
and Capital Resources
As of
November 30, 2010, the Company had $795,604 in cash. As a development stage
company, we have limited capital and limited operating resources. During the
six-month period, we raised $1,050,000 under the terms of our co-founders’
agreements and our Series A private placements of restricted common
stock.
We
estimate that the cash currently in the Company’s bank accounts will be
sufficient to further the development of our application and to maintain our
operations for approximately five months from the date of this Report. We expect
to need additional amounts of funding commencing five 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 $4,000,000.
Three of
our current shareholders are parties to a standby financing commitment with our
Company under which they have loaned the Company $437,186 including interest. On
September 30, 2010, the Standby Loan expired pursuant to its terms. After such
date, the shareholders may require the repayment of loans made there under upon
thirty days notice. As of the date of this filing, the Company has
not received a notice or demand for the repayment of the Standby
Loans.
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 Six Months Ended November 30, 2010 and November
30, 2009
Income
We are a
development stage company and as of November 30, 2010 there were no contracts in
place and no revenue has been earned. We do not expect that revenue
will be realized until mid to late 2011. We have concentrated our
efforts on developing our business strategy, defining our product, building
demonstration games, direct marketing to lottery operators, and obtaining
financing. We have working models ready for demonstration and we
continue to market our product and capabilities nationally and
internationally. 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.
11
Expenses
During
the three months ended November 30, 2010, we incurred $297,522 in total
operating expenses. This was a decrease from the period ended
November 30, 2009, during which we incurred total operating expenses of
$358,164.
During
the three months ended November 30, 2010, salary expense was $100,317, and
comprised payments to the President and CFO, the Chief Information Officer, the
Vice President of Sales & Marketing, the Development Director, our Director
of Human Resources and Administration, and our Creative
Director. Salary expense for the three months ended November 30, 2009
was $133,751. The decrease was due to the departure of the Director of Sales
& Marketing which was partially offset by the addition of the Development
Director.
Legal and
accounting fees of $57,131 were incurred for the three months ended
November 30, 2010, for the creation of all required public company filings,
quarterly statement reviews, internal corporate needs, and reporting
conformance, as well as for trademark and patent applications. This
was an increase from the three months ended November 30, 2009, in which legal
and accounting fees of $52,520 were incurred.
Marketing
expenses of $2,416 for the three months ended November 30, 2010 were incurred in
the creation and printing of investor information and product
information. Marketing expenses of $19,753 for the three months ended
November 30, 2009 were incurred in the creation and printing of investor
information and product information and a display booth that is used at lottery
industry trade shows.
During
the three months ended November 30, 2010, rent and office expenses of
$23,460 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 November 30, 2009 rent and office expenses were
$35,507.
Systems
development expenses of $56,155 for the three months ended November 30, 2010
were incurred for the creation, modification, and maintenance of game
demonstrations, as well as final scoping of the development work. Systems
development expenses of $30,854 for the three months ended November 30, 2009
were incurred for the creation, modification, and maintenance of game
demonstrations.
Interest
expense accrued on the Standby Loans was $5,664 for the three months ended
November 30, 2010, which was an increase from $581 for the three months ended
November 30, 2009 due to higher borrowing.
During
the six months ended November 30, 2010, we incurred $697,090 in total operating
expenses. This was an increase from the period ended November 30,
2009, during which we incurred total operating expenses of
$569,239.
During
the six months ended November 30, 2010, salary expense was $218,555, and
comprised payments to the President and CFO, the Chief Information Officer, the
Director of Development, the Vice President of Sales & Marketing, our
Director of Human Resources and Administration, and our Creative
Director. Salary expense for the six months ended November 30, 2009
was $237,731.
Legal and
accounting fees of $85,482 were incurred for the six months ended November
30, 2010, for the creation of all required public company filings, quarterly
statement reviews, internal corporate needs, and reporting conformance, as well
as for trademark and patent applications. This was a decline from the
six months ended November 30, 2009, in which legal and accounting fees of
$102,822 were incurred.
Consulting
expense for the six months ended November 30, 2010 totaled $177,552 and included
a $150,000 non cash expense for the issuance of 200,000 shares of the Company’s
common stock in consideration for assistance in listing on the Frankfurt Stock
Exchange. There were no consulting expenses during the six months ended
November 30, 2009.
Marketing
expenses of $5,475 for the six months ended November 30, 2010 were incurred in
the creation and printing of investor information, product information, specific
lottery operator presentations and RFP’s. Marketing expenses of
$31,991for six three months ended November 30, 2009 were incurred in the
creation and printing of investor information and product information and a
display booth that is used at lottery industry trade shows.
12
During
the six months ended November 30, 2010, rent and office expenses of
$50,774 were incurred for the head office of the company, which is located
at Suite 460, 20 Toronto Street in Toronto Ontario. During the six
months ended November 30, 2009 rent and office expenses were
$54,671.
Systems
development expenses of $90,363 for the six months ended November 30, 2010 were
incurred for the creation, modification, and maintenance of game demonstrations,
as well as the final scoping of the development work. Systems development
expenses of $40,978 for the six months ended November 30, 2009 were incurred for
the creation, modification, and maintenance of game demonstrations.
Interest
expense accrued on the Standby Loans was $11,254 for the six months ended
November 30, 2010, which was an increase from $934 for the six months ended
November 30, 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.
13
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.
Working
Capital
We have
working capital in-place to fund systems development work and normal business
activities for approximately five months. We will continue to
actively seek 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
November 30, 2010, we had no outstanding warrants.
Common
Stock
As of
November 30, 2010, the Company had 55,533,334 shares issued and outstanding, of
which 44,533,334 were restricted from trading.
Employees
As at
November 30, 2010 we had six 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 our President, Chief
Executive Officer and CFO, our Chief Technology Officer, our Director of
Development, our Vice President of Sales and Marketing, our Director of Human
Resources and Administration, and our Creative Director.
We expect
to hire additional full time employees in the coming year as necessities
dictate.
We have
engaged consultants for accounting and legal services.
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
None
Item
3. Qualitative and Quantitative Disclosure About Market
Risk
Not
applicable
14
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:
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·
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Pertain
to the maintenance of records that in all reasonable detail accurately and
fairly reflect the transactions and dispositions of the Company’s
assets;
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|
·
|
Provide
reasonable assurance of the completeness and authorization for checks to
be issued;
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|
·
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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
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|
·
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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.
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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 November 30, 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 November 30, 2010 that has materially affected or is
reasonably likely to materially affect the Company’s internal control over
financial reporting.
15
PART
II.
|
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.
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RISK
FACTORS
|
Not
Applicable.
ITEM
2:
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS
|
Between
August 2009 and May 2010, the Company 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, the Board of Directors determined that it was
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.
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.
ITEM
5:
|
OTHER
INFORMATION
|
Not
Applicable.
16
ITEM
6.
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EXHIBITS
|
|
Exhibit
|
Description
|
|
Exhibit
31.1
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Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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|
Exhibit
32.1
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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.
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17
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.
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|||
By:
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/s/
Stephen Knight
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||
Name:
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Stephen
Knight
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||
Title:
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Chief
Executive Officer,
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||
Principal
Financial Officer and
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|||
Chief
Accounting Officer
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Dated: January
13, 2011
18