Hello and welcome to Lottery.com's First Quarter 2022 Earnings Conference Call. This is Jesse and I'll be your operator for today's call. [Operator Instructions] Now, I'd like to turn the call over to Matt Schlarb, Vice President of Investor Relations. Sir, you may now begin.

Thank you, Jesse, and good morning, everyone. We appreciate you joining us today for Lottery.com's first quarter 2022 earnings call. Statements we make during this call that are not statements of historical fact constitute forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements.

For more information, please refer to the risks, uncertainties and other factors discussed in our SEC filing.

During the call, management will also discuss certain non-GAAP measures, including EBITDA and adjusted EBITDA that we believe may be useful in evaluating Lottery.com's operating performance. These measures should not be considered in isolation or as a substitute to our financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our press release, which is available on our website at ir.lottery.com.

Joining us on today's call are Co-Founder and CEO, Tony DiMatteo; and Ryan Dickinson, our CFO and President. I would now like to turn the call over to Tony.

Thank you, Matt, and thank you to everyone for joining us today. I'll begin by covering our Q1 highlights, Ryan will cover our financial results and then I'll provide some updates on our key strategic initiatives. At the conclusion of the prepared remarks, we will open up the floor for questions.

The first quarter was a positive one for Lottery.com, as we focus on our core business.

We continue to make progress executing our LotteryLink and B2C strategic growth initiatives, produced strong year-over-year growth and generated positive adjusted EBITDA and ended the first quarter with a strong balance sheet. To provide some additional details on our strategic initiatives, I'll begin with LotteryLink.

We continue the pilot program in the first quarter with our master affiliates, who engage with their sub-affiliates, a national grocer. This program contributed to revenue growth with the sale of LotteryLink credit to our master affiliate, which it uses for promotional activities while adding new users on the Lottery.com platform with limited or no marketing spend. This particular program with the sub-affiliate brochure also demonstrated LotteryLink's ability to benefit national consumer brands and retailers. Whenever a brand or retailer refers one of its customers to us, they share in the gross profit of the new Lottery.com user that's the new user that -- excuse me, that the new Lottery.com used to generate for several years. This means that the brand or retails increase an accretive recurring revenue stream from its customers.

While we are currently generating most of our lottery games revenue from the sale of LotteryLink credit, I want to reiterate that LotteryLink is ultimately and primarily designed to drive new referred users to our B2C platform and to drive the sale of more game sales through our B2C platform by both new and returning users. This activity benefits us, as well as our LotteryLink partners, as we all share in the revenue stream generated by the new and returning referred users.

Additionally, we believe that Lottery.com's games and services are an attractive promotional tool, which allows brands and retailers to uniquely connect with their customers, offer specialized marketing campaigns and drive qualified consumers back to the brand or retailer, creating a loyalty and -- creating loyalty and commitment. With all of these benefits, we believe that LotteryLink is well suited to attract new abilities to the growing program. Since the beginning of 2022, we have added new ability to LotteryLink, including existing data customers, which are primarily digital publishers and which we anticipate will generate increased revenue and profitability as a LotteryLink affiliate than they would fully as a data customer.

Turning to another key initiative being the growth of our B2C user base, our focus during the first quarter was on conducting extensive testing on multiple media platforms to see where marketing dollars are yielding the best returns. This focus on maintaining a favorable customer acquisition costs and retaining those users to improve customer service, and ease of use on our platform are key parts of our strategy to quickly generate profitabilities from new users. It's important to note that, as a gaming company, we are required to receive authorization from leading digital advertising companies such as Google, and Meta, in order to advertise our product. In March, we finalized those approvals for our website mobile web app and iOS app. Completing testing and receiving these approvals were critical steps in the expansion of our biggest key marketing campaigns.

Additionally, the recent launch of Project Nexus, which is designed to support increased user traffic, promote user safety, and improve performance is a crucial component of these expanded marketing initiatives, and the activity we anticipate they will generate.

Our success in executing LotteryLink and our growth initiatives contributed to year-over-year revenue growth of over 280%, and adjusted EBITDA of $7 million.

We are proud of the way our team has focused on progress, while generating positive adjusted EBITDA in the first quarter, which is a continuation of the strong positive adjusted EBITDA we achieved in 2021.

We also ended the quarter, with a solid balance sheet, with nearly $51 million in cash and only $3.5 million in debt. The actions that we have taken to strengthen the balance sheet over the past year has provided us the necessary capital to invest in our strategic growth initiatives, and to help realize the significant market opportunity we have in front of us.

Now, I will turn the call over to Ryan to cover our financials in more detail. Ryan?

Thanks, Tony.

First quarter revenue was $21.2 million, which represents a 287% increase from the first quarter of 2021. The very strong growth was driven by the sale of LotteryLink credits to affiliates. These credits were used for services, we provide with internal resources such as prepaid promotional rewards, development services, account management, and the design and distribution of marketing materials. Gross profit was $18 million, up $15.5 million from the previous year.

As we discussed on our previous earnings calls, the primary driver was the sale of LotteryLink credits for prepaid promotional rewards that expired without being used to consumers – without being issued to consumers due to the delayed timing of an affiliate promotional programs.

As a result, we recognized the revenue, but do not have associated COGS for old credit and unused prepaid promotional rewards. This resulted in margins above the expected average for LotteryLink credit, which should be around 30% to 40%. Operating expenses in the quarter were $33.8 million. This figure includes $22.2 million of expenses related to restricted stock awards granted as non-cash stock compensation to several employees at the time of the business culmination.

For clarity on this calculation, and the accounting treatment, the expense is calculated using the share price immediately prior to the closing of the business combination, which was $14.75. The expense also began at the time of the grant, and amortized over the vesting period of the equity.

As a result, the accounting expense is significantly larger than the current value of these RFAs. These restricted stock awards are subject to a vesting schedule, and will continue to vest over the next four years.

As the RFAs set, we will continue to recognize this non-cash expense calculated on a share price of $14.75. Other personnel costs increased relative to the prior year as a result of hiring in key positions in development, marketing, compliance to support growth initiatives and public company expenses. Public company expenses drove the increases in general and administration and other professional fees versus the prior year.

We are working to bring more of these responsibilities in-house which we believe were due to the dispensers in the coming quarters. We had no interest expenses and do not expect to incur any interest expense for the remainder of the year. Net loss for the quarter totaled $15.8 million as our strong gross profit was offset by operating expenses, including the $22.2 million of noncash stock comp expense mentioned earlier. Adjusted EBITDA totaled $7.7 million in the quarter compared to negative adjusted EBITDA of $2.6 million in the first quarter of 2021. The increase was driven by the strong gross profit we generated partially offset by increased operating expenses, mainly associated with hiring of key employees to support growth initiatives and public company expenses.

Turning to our balance sheet. We maintained a strong balance sheet in the first quarter and ended Q1 with $50.8 million in cash and $3.5 million in debt. Cash declined by $11.8 million for the fourth quarter which was driven by a $14.1 million increase in accounts receivable. A large amount of these receivables are with a master affiliate which is an important client of ours.

Given some of the delays in launching some of their programs, the timing of which was outside of their control.

We have worked with them to extend the term of some of the receivables. To be clear, we have not reduced the amount we expect to receive from them just extended the timing of payment. About half of these receivables are not due until the end of Q2.

We have received some payments so far in Q2 and expect to continue to receive payments as the quarter progresses.

Now I'll turn the call back to Tony to provide an update on our strategic initiatives including LotteryLink, Project Nexus, new jurisdictions and B2C.

Thank you, Ryan. I'd like to start with the outlook for LotteryLink.

As you know the lottery market in the US presents a tremendous opportunity with over $100 billion in annual sales and only about 5% of these purchases is frontline. Even with our favorable customer acquisition costs reaching all of these potential users would require a significant amount of capital not to mention time and other resources. We believe that the affiliate model is core to our business and the most effective and efficient way to expand our user base which is why we are putting an increased focus on growing our LotteryLink program. By adding new master and subject the lease to the LotteryLink programs we gained access to their sizable customer base and through promotional programs, we can cost-effectively convert these consumers into Lottery.com users. To provide an update on the grocery promotional program, this program expanded in April following a successful pilot program and has been well completed by the grocer’s customers. Recently our partner discovered a potential contractual conflict with the regulator in that jurisdiction where the program operated. Together with our partner, we have decided to pause these LotteryLink campaigns in this jurisdiction and are in discussions with them to pivot this program to more jurisdictions given the initial success of the program.

We have spent many years building our reputation with the US state and do not want to jeopardize our or/our partner's reputation in exchange for a short-term gain. Though this particular campaign is expected to pivot to new jurisdictions it has already provided a valuable case study that we can utilize in demonstrating LotteryLink's liability for partners and brands to create recurring revenue streams through profit sharing and also engage their customers through compelling campaigns.

We have had success communicating this value proposition to new potential affiliates and sub-affiliates and look forward to activating new programs throughout 2022.

In addition to new affiliates, we have added the LotteryLink -- excuse me.

In addition to the new affiliates we have added to LotteryLink since the beginning of this year, we are currently in advanced discussions with multiple new potential LotteryLink partners from various industries, including national brands with both a retail and online presence.

Although, LotteryLink has only been in existence for a few quarters, it has been a significant contributor to our growth and we are confident in its future ability to expand our user base and brand in a capital-efficient manner.

Now for an update on Project Nexus.

We have successfully launched Phase 1 of Nexus.

As a reminder we expect Phase 1 to significantly improve capability, security and the ability to quickly implement new product updates and launch new products. These enhancements not only benefit users, but also improve our ability to scale the business and provide real-time data to LotteryLink partners, so they can optimize their marketing efforts.

We have several new affiliates prepared and poised to send us new users now that Project Nexus is operational. With regards to new jurisdictions, we are continuing to diligently work on our expansion efforts and continue to anticipate that we will receive approvals to operate in five new domestic jurisdictions by the end of 2022.

While we continue our efforts to receive the required approvals to enter these new jurisdictions, we are focusing our marketing efforts in existing states where there remains a significant total addressable market.

As we scale in jurisdiction where we currently operate, we intend to use these key studies to demonstrate to other states how we can expand their game sales and ultimately generate additional revenue for the state, as well as in educational reference [ph] environmental and other projects that many lottery contribute to.

Now moving to B2C. We began expanding our direct-to-consumer advertising campaigns in April as we've outlined during our last call. These campaigns have launched on major digital media platforms and have been focused on targeting audiences where our testing has indicated we received the highest return on investment.

As we all know jackpot sizes can have a significant impact on B2C ticket sales.

For example, in the first quarter of 2021 both Powerball and Mega Millions had very large jackpots over $1 billion, which resulted in outsized game sales. These large jackpots did not repeat to the same magnitude in the first quarter of this year, so we did not receive the same benefit.

However, when we compare 2022 gain sales to our historical results for similar jackpot sizes, our sales have increased over 50%. We believe a large driver of this strong performance is a result of new users we have added through B2C campaigns as well as new users from LotteryLink.

Importantly, since we launched our customer acquisition campaigns, our customers -- our customer acquisition costs have been trending in line with our expectations and only up a few dollars from our historical average of $4.

As we have long stated, our B2C business model is focused on leveraging our strong brand to attract new customers at favorable cost and then retaining those customers and quickly suing them profitable.

While these campaigns have only been in operation for a few weeks, we are pleased with the initial results and are optimistic that we will be able to scale them as 2022 progresses and cost effectively expand our user base. In summary, we've made progress executing on the strategic growth initiatives we set for the company and the whole team is focused on building on this momentum in 2022. We believe that the combination of our multi-pronged growth strategy focused on profitability and a strong balance sheet all combine to position us well for the future.

Now Jesse we'd like to open up the floor for questions.

Thank you, speakers. Participants, we will now begin the question-and-answer session [Operator Instructions] Speakers, our first question is from the line of Brian Dobson of Chardan Capital.

Your line is now open.

Hi, good morning. Thanks for taking my question.

Hi, Brian.

So I guess starting off on marketing dollars. I guess, what are your expected returns on direct-to-consumer marketing dollars? You had mentioned that your acquisition costs are rising by a few dollars per head. I guess how are you thinking about returns that deployed marketing dollars at this point?

Yes.

So B2C historically sales in Q1 are 50% above ticket sales for similar jac-up sizes as Tony mentioned. Measuring over the last 12 months, our annual gross profit per user has been around – it's trending around a little higher than $35 and our retention rate is about 80%. The LTV for the last 12 months is about $175 [ph].

So it's got only scaling up a little bit a couple of dollars from our original $4. We believe the return on that is still pretty powerful with that level of LTV.

Okay. Thanks. And I guess as you continue to commit marketing dollars, I guess when do you expect to see ramping direct-to-consumer sales? Is this – I guess how long will it take for these marketing efforts to take hold between call it deployment of cash and new consumers showing up at the door? How long is that process?

Yes. Well we're seeing some of it now.

As we said, it's comparatively to a similar jackpot sizes we're already seeing some of that happen. But on a larger scale, we believe, we will start to see some of that trickle in on this quarter. And then moving forward, I believe it will continue to grow. The additional launch of Nexus is certainly going to help on that.

As we've kind of discussed before the scalability of Nexus and the ability for us to scale that product allows us to really push the marketing envelope and have a scalability available for that inflective user base.

All right. I guess and turning over to LotteryLink, you had mentioned suspending an initial campaign there. I guess can you give us a little bit more color on the reasoning? You mentioned a potential jurisdictional risk?

Yes, the jurisdiction that we were in there was a contractual conflict that they had with the state lottery of that jurisdiction.

As a result they wanted to slow down and a pause in that jurisdiction and kind of pivot to the other jurisdictions that we have originally been discussing.

Okay. And I guess can you give us a little bit more color on what that conflict was? And are you confident you will run into the same issue in other jurisdictions?

It was unique to this particular customer. It was a essentially exclusivity contract that they already had in place.

So that's not a common thing that I think we'll run up against, but it wasn't particular.

Okay. Excellent. And then the quarter benefited from expired LotteryLink credits. Do you expect such expired credits to continue to benefit revenues and earnings in the 2Q or for the balance of the year, or are we seeing call it the tail end of that?

Q2 will definitely see more of those being used than what we've seen in the past, as being issued out. And we have a really good relationship with the affiliates of this business with. And I believe that even though this particular campaign has had a pause and is delaying a few things, they have plenty of things now, certainly, not with Nexus launching. They have some type of capabilities. There are several affiliates that they've had ready employees that have been waiting for our scalability and availability of that capability and that will help here now that Nexus is up.

Yes. I guess, given the size of the expired LotteryLink credits, do you think that that consumer will return and purchase additional fresh credits going forward?

Yes.

And then can you just give us a little bit more color on the new notes receivable?

I’m sorry, say that again?

Could you just give us a little bit more color on notes receivable.

You mentioned that you had extended the receivables deadline for one of your key consumers a little bit about the reasoning of that and your confidence level in being credit levels?

Yes, yes.

As mentioned earlier, some of the delays in launching some of the programs were kind of outside of the control. And in the spirit of this partnership we are working with them to extend what that timing of the same it looks like.

Got it. All right. Well, I think that does it for us. Thanks very much.

One thing, I'll just note on our last couple two is that about half of the receivables that are there are not due until the end of the quarter.

So the extension that we're providing is for the other half.

And I guess what is your confidence since you belong being able to collect the ones that were not extended upon?

We're confident that there's not going to be a issue.

Okay. Thanks very much.

Thank you participants. I'll now turn the call back over to Lottery.com's panel for closing remarks.

Thank you again everyone for joining today's call.

As you've heard, we are pushing ahead with many exciting marketing and other initiatives and a focus on profitable growth. We look forward to updating you on our progress in our next earnings call. Thank you.

This concludes today's conference call. Thank you all for joining.

You may now disconnect.