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EX-31.1 - Epcylon Technologies, Inc. | v162925_ex31-1.htm |
EX-32.1 - Epcylon Technologies, Inc. | v162925_ex32-1.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, 2009
¨ 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: 333-159858
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)
500-7799
(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 ¨ No x
As of
October 13, 2009, the Issuer had 55,000,000 shares of its Common Stock
outstanding.
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
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Item
1: Financial Statements
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3
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Item
2: Management’s Discussion and Analysis of Financial Condition and Results
of Operation
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11
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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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15
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PART
II: OTHER INFORMATION
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Item
1: Legal Proceedings
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16
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Item
1A: Risk Factors
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16
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Item
2: Unregistered Sales of Equity Securities and Use of
Proceeds
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16
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Item
3: Defaults Upon Senior Securities
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16
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Item
4: Submission of Matters to a Vote of Security Holders
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16
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Item
5: Other Information
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16
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Item
6: Exhibits
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17
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SIGNATURES
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18
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2
PART I
FINANCIAL
INFORMATION
LOTO INC.(A Development Stage Company)CONSOLIDATED BALANCE SHEET
August
31, 2009
|
May
31, 2009
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|||||||
CURRENT
ASSETS:
|
||||||||
Cash
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$165,556 | $169,203 | ||||||
Prepaid
rent
|
23,158 | - | ||||||
Other
|
4,939 | - | ||||||
TOTAL
CURRENT ASSETS
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193,653 | 169,203 | ||||||
Fixed
assets at cost, less accumulated depreciation
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||||||||
of
$750
|
24,177 | |||||||
TOTAL
ASSETS
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$217,830 | $169,203 | ||||||
LIABILITIES
and STOCKHOLDERS' (DEFICIENCY) EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accrued
expenses
|
$22,805 | 10,000 | ||||||
Deposit
for subscription of common shares
|
300,000 | 150,000 | ||||||
Standby
loan
|
100,345 | - | ||||||
Due
to stockholder
|
91 | 91 | ||||||
CURRENT
LIABILITIES AND TOTAL LIABILITIES
|
423,241 | 160,091 | ||||||
STOCKHOLDER'S
EQUITY:
|
||||||||
Common
stock, par value $0.0001
|
||||||||
100,000,000
shares authorized
|
||||||||
40,000,000
shares issued and outstanding
|
4,000 | 4,000 | ||||||
Additional
paid-in capital
|
16,091 | 16,091 | ||||||
Other
comprehensive loss
|
(3,095 | ) | - | |||||
Deficit
accumulated during development stage
|
(222,407 | ) | (10,979 | ) | ||||
TOTAL
STOCKHOLDERS' (DEFICIENCY) EQUITY
|
(205,411 | ) | 9,112 | |||||
TOTAL
LIABILITIES AND STOCKHOLDERS'
|
||||||||
(DEFICIENCY)
EQUITY
|
$217,830 | $169,203 | ||||||
Proforma
stockholders' equity assuming the sale of common stock referred to in Note
4 had occurred by August 31, 2009
|
$94,589 | $159,112 |
See
notes to the consolidated financial statements
3
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF OPERATIONS
For
the Quarter
Ended
August
31, 2009
|
From
Inception
(September
16,
2008) to
August
31, 2009
|
|||||||
REVENUES
|
- | - | ||||||
COSTS
AND EXPENSES:
|
||||||||
General
and administrative expenses
|
211,428 | 222,407 | ||||||
NET
LOSS FOR THE PERIOD
|
211,428 | 222,407 | ||||||
Basic
earnings per share (40,000,000 shares issued and
outstanding)
|
$(0.005 | ) | $(0.005 | ) | ||||
Proforma
earnings per share assuming sale of common stock referred to in Note 4 had
occurred by August 31, 2009
|
$(0.004 | ) | $(0.004 | ) |
See
notes to the consolidated financial statements
4
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
FROM
INCEPTION (SEPTEMBER 16, 2008) TO AUGUST 31, 2009
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Deficit
Accumulated
During
Development
Stage
|
Other
Comprehensive
Loss
|
Total
|
|||||||||||||||||||
BALANCE
- SEPTEMBER 16, 2008
|
- | - | - | $ | - | $ | - | |||||||||||||||||
Capital
contribution in connection with formation of Mobilotto,
Inc.
|
91 | $ | 91 | |||||||||||||||||||||
Net
loss
|
- | - | - | (10,979 | ) | $ | (10,979 | ) | ||||||||||||||||
Sale
of 20,000,000 shares at $.001 per share
|
20,000,000 | 2,000 | 18,000 | $ | 20,000 | |||||||||||||||||||
Shares issued in
connection with Acquisition of Mobilito,
Inc.
|
20,000,000 | 2,000 | (2,000 | ) | $ | - | ||||||||||||||||||
BALANCE
- MAY 31, 2009
|
40,000,000 | 4,000 | 16,091 | (10,979 | ) | 0 | 9,112 | |||||||||||||||||
Net
loss
|
(211,428 | ) | (211,428 | ) | ||||||||||||||||||||
Other
comprehensive income resulting from foreign exchange
transactions
|
- | - | - | - | (3,095 | ) | (3,095 | ) | ||||||||||||||||
BALANCE
- AUGUST 31, 2009
|
40,000,000 | 4,000 | 16,091 | (222,407 | ) | (3,095 | ) | $ | (205,411 | ) |
See
notes to the consolidated financial statements
5
LOTO
INC.
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CASH FLOWS
For
the Quarter
Ended
August
31, 2009
|
From
Inception
(September
16,
2008)
to
August
31, 2009
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss for the period
|
(211,428 | ) | (222,407 | ) | ||||
Adjustments
to reconcile net loss to net cash
|
||||||||
used in operating
activities:
|
||||||||
Depreciation
|
750 | 750 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Prepaid
rent
|
(23,158 | ) | (23,158 | ) | ||||
Other
current assets
|
(4,939 | ) | (4,939 | ) | ||||
Accrued
expenses
|
12,805 | 22,805 | ||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(225,970 | ) | (226,949 | ) | ||||
INVESTING
ACTIVITIES:
|
||||||||
Acquisition
of property and equipment
|
(24,927 | ) | (24,927 | ) | ||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(24,927 | ) | (24,927 | ) | ||||
FINANCING
ACTIVITIES:
|
||||||||
Deposit
for stock subscription
|
150,000 | 300,000 | ||||||
Proceeds
from loan
|
100,345 | 100,345 | ||||||
Issuance
of common stock
|
- | 20,091 | ||||||
Proceeds
from stockholder loan
|
- | 91 | ||||||
NET
CASH PROVIDED FROM INVESTING ACTIVITIES
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250,345 | 420,527 | ||||||
Effect
of exchange rates on cash
|
(3,095 | ) | (3,095 | ) | ||||
(DECREASE)
INCREASE IN CASH
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(3,647 | ) | 165,556 | |||||
CASH
- BEGINNING OF PERIOD
|
169,203 | - | ||||||
CASH
- END OF PERIOD
|
165,556 | 165,556 |
See
notes to the consolidated financial statements
6
LOTO
INC.
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2009
NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
Comparative
Results
Comparison
with the financial results for the three months ended August 31, 2008 and
financial position as at August 31, 2008 have not been presented as the company
was not conducting any business during that period.
Organization
and Business Description
Loto Inc.
(“Loto” or the “Company”), together with our wholly owned subsidiary Mobilotto
Systems, Inc. (“Mobilotto”), are development stage companies. We have developed
a patent-pending software application that permits the secure purchase of
lottery tickets on commercially available “smart” phones and similar mobile
telecommunications devices. A smart phone is a mobile phone offering
advanced capabilities, often with personal computer-like functionality, such as
e-mail, Internet access and other applications. Our proprietary technology for
facilitating the purchase of lottery tickets addresses all elements of lottery
play, including secure player registration and authorization, number selection,
settlement, winning number notification and other direct-to-customer marketing
opportunities. We intend to operate or license our software application with
governments and other lottery operators as our primary source of revenue. We do
not intend to become a lottery operator. During the foreseeable future, we
expect to pursue our business only outside of the United States since current
laws in the United States prohibit sales of lottery tickets utilizing mobile
telecommunications devices. Our mobile lottery software application has not yet
been utilized by any lottery operators and we have not yet generated any
revenues from our technology.
Basis
of Consolidation and Development Stage Activities
These
consolidated financial statements include the accounts of Loto Inc., which was
incorporated on April 22, 2009 in the state of Nevada and its wholly-owned
subsidiary, Mobilotto Systems, Inc. which was incorporated in Ontario, Canada on
September 16, 2008. On May 13, 2009 the stockholders of Mobilotto contributed
all of the outstanding equity interests in Mobilotto to the Company in exchange
for 20,000,000 shares of the Company’s common stock. This transaction has been
accounted for as a transaction between entities under common control in
accordance with Financial Accounting Standard Board Statement 141 (“SFAS 141”).
Accordingly, the net assets were recognized in the consolidated financial
statements at their carrying amounts in the accounts of Mobilotto at the
transfer date and the results of operations of Mobilotto are included as though
the transaction had occurred at the beginning of the period.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and are
expressed in US dollars. All intercompany balances and transactions have been
eliminated.
Since
inception the Company has been engaged in organizational activities, has been
developing its business model and has not earned any revenue from operations.
Accordingly, the Company’s activities have been accounted for as those of a
“Development Stage Enterprise”, as set forth in Financial Accounting Standards
Board Statement No. 7 (SFAS 7). Among the disclosures required by SFAS 7
are that the Company’s financial statements be identified as those of a
development stage company, and that the statements of operations, stockholders’
equity and cash flows disclose activity since the date of the Company’s
inception.
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with an original maturity or
remaining maturity at the date of purchase of three months or less to be cash
equivalents.
7
Property
and Equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the expected useful
life as follows:
Computer
equipment and software
|
3
years
|
Office
furniture and equipment
|
5
years
|
Leasehold
improvements
|
term
of the lease
|
Repairs
and maintenance expenditures are charged to operating expense as incurred.
Replacements and major renewals are capitalized.
Accounting
for the Impairment or Disposal of Long-Lived Assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of the asset may not be recoverable. For assets that are to be held and
used, impairment is recognized when the estimated undiscounted cash flows
associated with the asset, or group of assets, is less than their carrying
value. If impairment exists, an adjustment is made to write the asset down to
its fair value, and a loss is recorded as the difference between the carrying
value and the fair value. Fair values are determined based on quoted market
values, discounted cash flows, or internal and external appraisals, as
applicable. Assets to be disposed of are carried at the lower of carrying value
or estimated net realizable value.
Accounting
Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
Recognition
We
recognize revenue when it is realized or realizable and earned. We consider
revenue realized or realizable when we have persuasive evidence of an
arrangement, prices are fixed or determinable, services or products are provided
to the customer, and collectability is probable and reasonably assured depending
upon the applicable revenue recognition guidance followed. The following are
specific revenue recognition policies.
Loto
expects to have contracts between the mobile network operators and/or the
lottery operators, depending upon the jurisdiction of business. Revenue from
lottery services is determined as a percentage of the amount of retail sales of
lottery tickets pursuant to the terms of the contract. This revenue will be
recognized when the lottery purchase transaction is completed and confirmed to
the mobile device.
Revenue
from the sale of a lottery system, which includes the customization of software,
is recognized on the percentage of completion method of accounting, based on the
ratio of costs incurred to estimated costs to complete.
Revenue
from the licensing of customized lottery software is recognized over the term of
license on the basis as identified in the contracts.
Revenue
derived from software maintenance on lottery software is recognized ratably over
the maintenance period.
Revenue
derived from enhancements to lottery software is recognized at the time such
enhancements are accepted by the customer.
Development
Costs
It is the
Company’s policy to expense all software and application development costs as
the Company’s future revenues and business operations are uncertain as to
quantum, timing, and realization.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
in accordance with SFAS No. 52 Foreign Currency Translation,
using the exchange rate prevailing at the balance sheet date. Revenue and
expenses accounts are translated at average exchange rates during the period.
Historical cost balances are re-measured using historical exchange rates. Gains
and losses arising on settlement of foreign currency denominated transactions or
balances are included in the determination of income. Foreign currency
transactions are primarily undertaken in Canadian dollars. The Company has not,
to the date of these financial statements, entered into derivative instruments
to offset the impact of foreign currency fluctuations.
8
Income
Taxes
Income
tax expense is based on pre-tax financial accounting income. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets,
including tax loss and credit carryforwards, and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred income tax
expense represents the change during the period in the deferred tax assets and
deferred tax liabilities. The components of the deferred tax assets and
liabilities are individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Basic
and Diluted Net (Loss) Per Common Share (“EPS”)
Basic net
(loss) per share is computed by dividing the net (loss) attributable to the
common stockholders by the weighted average number of common shares outstanding
during the reporting period. Diluted net income per common share includes the
potential dilution that could occur upon exercise of warrants or conversion of
debt to acquire common stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect on
net income per common share.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and accrued expenses. The fair
value of these financial instruments approximates their carrying values due to
their short maturities.
Recent
Accounting Pronouncements
Business
Combinations (SFAS 141R) requires most identifiable assets, liabilities,
non-controlling interests and goodwill acquired in a business combination to be
recorded at “full fair value”. Under SFAS 141R, all business combinations will
be accounted for under the acquisition method. Significant changes, among
others, from current guidance resulting from SFAS 141R include the requirement
that contingent assets and liabilities and contingent consideration shall be
recorded at the estimated fair value as at the acquisition date, with any
subsequent changes to fair value charged or credited to earnings. Further,
acquisition related costs will be expensed rather than treated as part of the
acquisition. SFAS is effective for periods beginning on or after December 15,
2008.
Non-Controlling
Interests in Consolidated Financial Statements (FAS 160) requires the ownership
interests in subsidiaries held by other parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position. FAS 160 is effective for fiscal years and interim periods within those
fiscal years, beginning on or after December 15, 2008.
The
Hierarchy of Generally Accepted Accounting Principles (SFAS 162) identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of non-government entities
that are presently in conformity with U.S. GAAP.
We do not
expect the adoption of any recent accounting pronouncements to have a material
effect on the financial statements of the Company.
NOTE
3 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The
Company has not generated any revenues since inception, has an accumulated
loss of $222,407 as of August 31, 2009 and is unlikely to generate earnings in
the immediate or foreseeable future. The continuation of the Company as a going
concern is dependent upon, among other things, the continued financial support
from its shareholders, the ability of the Company to obtain necessary equity or
debt financing and the attainment of profitable operations. These factors,
among others, raise substantial doubt regarding the Company’s ability to
continue as a going concern. There is no assurance that the Company will be able
to generate revenues in the future. These financial statements do not give any
effect to any adjustments that would be necessary should the Company be unable
to continue as a going concern.
9
NOTE
4 – DEPOSIT FOR SUBSCRIPTION TO COMMON STOCK
As of May
31, 2009, Loto had received subscriptions for private placements pending for the
sale of an aggregate of 15,000,000 shares of restricted common stock to six
accredited investors at a purchase price of $0.01 per share for an aggregate
purchase price of $150,000. The subscriptions were accepted and closed on
June 9, 2009. On August 31, 2009, Loto received a private
placement subscription of $150,000 from one investor to issue 100,000
shares at a purchase price of $1.50 per share. The August private
placement is anticipated to close by late October.
NOTE
5 – STANDBY LOAN
Two
current shareholders, Mhalka Capital Investments Ltd. and 1476448 Ontario Inc.,
have made a standby financing commitment to the Company under which they will
provide the necessary funding up to $1,500,000 if we are unable to obtain
third-party financing (the “Standby Loan”). Loto may draw on the standby
financing commitment in accordance with our operating requirements as set forth
in our business plan. The available standby commitment amount will be
reduced by the aggregate cash proceeds received by the Company, which are
derived from the issuance of any equity securities and Company gross revenues.
Draws on the commitment amount 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 we are 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 borrowed
amounts, the default rate will be 15% per annum and the lenders may seek
recourse against our Company for repayment of all of the amounts.
NOTE
6 - LITIGATION
The
Company is not aware of any legal actions against it. From time to time in
the future, we may be involved in litigation relating to claims arising out of
our operations in the normal course of business.
NOTE
7 – PAR VALUE OF SHARES
On June
4, 2009, Loto amended its certificate of incorporation to change its par value
from $.001 per share to $.0001 per share. Retroactive effect has been given
to the above in the accompanying statement of stockholders’ equity.
10
ITEM
2.
|
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Special Note Regarding
Forward-Looking Statements
This
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, and in conjunction with our
year end consolidated financial statements as of May 31, 2009. In addition,
please refer to the risk factors included in the Registration Statement filed by
the Company on August 5, 2009 and declared effective on August 12, 2009. This
Report contains certain forward-looking statements and the Company's future
operating results could differ materially from those discussed herein. Certain
statements contained in this Report, including, without limitation, statements
containing the words "believes", "anticipates," "expects" and the like,
constitute "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"). 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. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, readers are cautioned not
to place undue reliance on 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,
except as required by the Exchange Act. 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 assumptions or conditions.
This
Report does not contain a comparison to the three months ended August 31, 2008,
since the company was not conducting any business during that
period.
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. The status of the final commercial grade operating system is in
the initial stages of development and certification; however, we have developed
a working demonstration capability with limited functionality, which is operable
on most Blackberry models of smart phones (including the Pearl, the Curve, the
Bold, and 8800 series), and we use this for demonstration purposes. We have
designed and we plan to include player registration, financial settlement and
player messaging functions in the next version of our software. We believe the
next version of our application will be commercially viable and will provide a
complete, fully functional and flexible mobile lottery platform for lottery
operators worldwide.
11
Our
proprietary technology for facilitating the purchase of lottery tickets through
commercially available smart phones and other mobile devices addresses all
elements of lottery play, including secure player registration and
authorization, number selection, settlement, winning number notification and
other direct-to-customer marketing opportunities. We intend to license our
software application to governments and other lottery operators as our primary
source of revenue. We do not intend to become a lottery operator. During the
foreseeable future, we expect to pursue our business only outside of the United
States since current laws in the United States prohibit sales of lottery tickets
utilizing mobile telecommunications devices. Our business plan calls for
launching our mobile lottery application in the target markets of Canada,
Mexico, South America, Asia (China), Africa (South Africa) and Europe (Turkey
and the United Kingdom).
Our
mobile lottery software application has not yet been tested on a commercial
scale or utilized by any lottery operators and we have not yet derived any
revenues from our technology. There is uncertainty whether our software
application will actually perform as anticipated in a commercial setting. In
order to commercially deploy our mobile lottery software application we must
develop the player registration, player settlement and player messaging
components of our system. We issued an RFP (request for proposal) to six
qualified suppliers in late August, 2009, indicating that we intend to solicit
for bids to a number of recognized software development companies to develop the
remaining components of our full feature system. 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.
Liquidity
and Capital Resources
As at
August 31, 2009 we had $165,556 of cash available. We have also prepaid rent in
the amount of $23,158 as a condition of renting business premises, which
commenced on July 1, 2009 at Suite 460, 20 Toronto Street in Toronto, Ontario.
Fixed assets with a cost of $24,927 were also purchased in the quarter and
consist of general office equipment.
Current
liabilities are comprised of three categories. There are $22,805 of general
office and business expenses. During the first quarter of the year, the Company
received a deposit for a subscription for common shares equal to $150,000
which has not yet closed. This is in addition to the $150,000 that was
received and closed during our previous fiscal year. In addition, we drew
down $100,000 from our Standby Loan (as described below) in August.
As a
development stage company, we have limited capital and limited operating
resources. We raised $170,000 under the terms of our co-founders’ agreements and
our Series A private placements of restricted common stock. The funds raised in
the prior private placements will not be sufficient to meet our projected cash
flow deficits from operations or to fund the development of our technology and
products.
We expect
that the cash on hand in our accounts will be sufficient to maintain our
operations only for approximately two months from the date of this Report. We
estimate our total overhead, costs and expenses related to completion of a
commercially deployable version of our mobile lottery application, obtaining
certification of our system by the Gaming Standards Association (GSA) and
initiating full rollout of our products to our target markets over the next
twelve months will be approximately $1,500,000. We expect to need additional
amounts of funding commencing 12 months from the date of this Report in order to
expand our operations.
Two of
our current shareholders, Mhalka Capital Investments Ltd. and 1476448 Ontario
Inc., have made a standby financing commitment to our Company under which they
will provide the necessary funding up to $1,500,000 if we are unable to obtain
third-party financing (the “Standby Loan”). We may draw on the standby financing
commitment in monthly tranches in accordance with our operating requirements as
set forth in our business plan. The available standby commitment amount
will be reduced by the aggregate cash proceeds received by the Company which are
derived from the issuance of any equity securities and Company gross revenues.
Draws on the commitment amount will be made on terms of unsecured Notes, with
interest set on each Note as of the date of the draw at prime rate plus two
percent per annum. The Notes will mature and become repayable thirty calendar
days after demand at any time following the earlier of (a) September 30, 2010 or
(b) the date upon which we are in receipt of revenues or proceeds from the sales
of equity securities. We will give the lenders customary representations and
warranties regarding the good standing of our Company and status of progress in
respect of our Company business plan prior to each draw on the commitment
amount, and we will provide certifications and covenants regarding use of
proceeds of each draw, which will be in customary forms reasonably requested by
the lenders as determined by reference to similar lenders making similar loans
to similar companies. The lenders will not be required to make any loans under
the standby financing commitment to us if we are unable to make the
representations, warranties, certifications or covenants, or if we are in breach
of any previously given representations, warranties, certifications or
covenants. If we breach any of the Notes, the default rate will be 15% per annum
and the lenders may seek recourse against our company for repayment of all of
the Notes.
12
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, 2009
Income
We are a
development stage company and as of August 31, 2009 there were no contracts in
place and no revenue has been received. We do not expect that revenue will be
realized until the middle of 2010. We have concentrated our efforts on
developing our business strategy and obtaining financing. We have working models
ready for demonstration and we have commenced our initial sales and marketing
program. We have had early stage meetings with some lottery operators in Canada
and we are actively pursuing other opportunities in Canada and elsewhere. Our
mobile lottery software application has not yet been utilized by any lottery
operators and we have not yet derived any revenues from our technology. There is
no guarantee that we will be able to successfully develop and launch our
technology or that it will generate sufficient revenue to sustain our
operations.
Expenses
For the
three months ended August 31, 2009, we incurred $211,428 in operating
expenses.
Salaries
expense was $103,979 for the quarter and comprised payments to the President,
the Chief Information Officer, the Vice President of Sales & Marketing, the
Director of Sales & Marketing, and an administrative assistant.
Legal
fees incurred were for the creation of all required public company filings and
reporting conformance, as well as for trademark and patent
applications.
Marketing
expenses were incurred in the creation and printing of investor information
kits, product information kits, and a display booth that will be used at
upcoming lottery industry trade shows.
Rent
expense is for the head office of the company, which is located at Suite 460, 20
Toronto Street in Toronto Ontario.
Systems
development expenses were incurred for the creation and maintenance of the
company’s website, as well as for the creation and scoring of the company’s
development request for proposal which was issued in late August.
Our
Plan of Operation for the Next Twelve Months
Our path
to revenue is based upon completing the following 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). The RFP selection is underway, and once a supplier is
selected, we anticipate that programming should be completed in approximately
seven to ten months thereafter.
4. As
opportunities arise, partner with game developers to be able to offer new and
varied mobile games, in addition to mobilizing existing lottery
games.
5. Remain
flexible in our business model to operate as a lottery retailer, 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 and/or supplier to specific lottery operators.
7.
Partner with the emerging internet gaming suppliers and new lottery licensees to
mobilize their offerings.
8.
Proactive communication with prospective lottery operators of our products,
status, and understanding of their needs.
13
Marketing
Plan:
Our
marketing plan is a combination of branding, lottery association participation,
communication and meetings with lottery operators, public messaging, and
partnership initiatives with other corporate entities. Specifically, our plan
calls for:
1.
Attending and participating in lottery association events / tradeshows in order
to meet prospective clients, speak about mobile lottery opportunities, and
present the Loto and Mobilotto brands. These would include the World Lottery
Association as well as the North American Association of State & Provincial
Lotteries, among others.
2. Review
each geographical region to justify the development of mobile gaming
environment. Prioritization would be given to those countries with a combination
of material lottery revenues, a high penetration of smart phone devices,
favorable internet gaming regulations, and other operators who express a strong
interest.
3. On a
prioritized country basis, study the local lottery regulations, understand
global and specific country lottery issues, and contact the lottery operators
for visitation and demonstration of Loto products. Currently, opportunities
appear to be strong in Canada, Mexico, Southeast Asia, and Europe. Also, the US
may become a market for Loto should existing restrictions on internet lotteries
be changed.
4. While
brand and product marketing will be supported by the lottery operators and also
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
in-place working capital to fund normal business activities for the next two
months. While we are seeking financing for a further $2,500,000, we have an
additional $1,400,000 in the Standby Loan that can be drawn down to satisfy
short-term cash commitments.
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 $2,500 plus utilities per
month.
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.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
Applicable.
14
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Management's
Report on Internal Control Over Financial Reporting
The
Management of our company is responsible for establishing and maintaining
adequate internal controls 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 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, 2009, the Company’s Chief
Executive Officer and Chief Financial Officer have 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, 2009 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.
|
RISK
FACTORS
|
Not
Applicable.
ITEM
2:
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
On June
9, 2009, we sold an aggregate of 15,000,000 shares of our restricted common
stock in a Series A private placement with six accredited investors at a
purchase price of $0.01 per share for an aggregate purchase price of $150,000.
These issuances were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. With respect to five of the six investors,
we also relied upon the exemption from registration provided by Regulation
S.
ITEM
3:
|
DEFAULTS
UPON SENIOR SECURITIES
|
Not
Applicable.
ITEM
4:
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
On June
3, 2009, the Company amended its certificate of incorporation by unanimous
consent of the owners of record of the Company’s issued and outstanding shares
of common stock. This amendment changed the par value of the Company’s shares of
common stock from $.001 per share to $.0001 per share.
ITEM
5:
|
OTHER
INFORMATION
|
Not
Applicable.
16
ITEM
6.
|
EXHIBITS
|
Exhibit
|
Description
|
Exhibit
3.1
|
Articles
of Incorporation of the Company, incorporated by reference to Exhibit 3.1
to the Company’s Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on June 10, 2009.
|
Exhibit
3.2
|
Bylaws
of the Company, incorporated by reference to Exhibit 3.2 to the Company’s
Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on June 10, 2009.
|
Exhibit
3.3
|
Amendment
to the Articles of Incorporation of the Company, incorporated by reference
to Exhibit 3.3 to the Company’s Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on June 10,
2009.
|
Exhibit
10.1
|
Founders’
Agreement, by and between the Company, A Few Brilliant Minds Inc. and
Mhalka Capital Investments Ltd., dated as of May 13, 2009; incorporated by
reference to Exhibit 10.1 to the Company’s Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on June 10,
2009.
|
Exhibit
10.2
|
Form
of Subscription Agreement, by and between the Company and the Series A
Financing Subscribers (Regulation S Subscribers), incorporated by
reference to Exhibit 10.2 to the Company’s Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on June 10,
2009.
|
Exhibit
10.3
|
Form
of Subscription Agreement, by and between the Company and the Series A
Financing Subscribers (Section 4(2) Subscribers), incorporated by
reference to Exhibit 10.3 to the Company’s Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on June 10,
2009.
|
Exhibit
10.4
|
Form
of Registration Rights Agreement, by and between the Company and the
Series A Financing Subscribers, incorporated by reference to Exhibit 10.4
to the Company’s Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on June 10, 2009.
|
Exhibit
10.5
|
Standby
Commitment Letter, by and between the Company, Mhalka Capital Investments
Ltd. and 1476448 Ontario Inc., dated as of August 3, 2009, incorporated by
reference to Exhibit 10.5 to Amendment No. 2 to the Company’s Registration
Statement on Form S-1/A, filed with the Securities and Exchange Commission
on August 5, 2009.
|
Exhibit
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.
|
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.
By:
|
/s/
Stephen Knight
|
|||
Name:
|
Stephen
Knight
|
|||
Title:
|
Chief
Executive Officer,
Principal
Financial Officer and
Chief
Accounting Officer
|
|||
Dated:
|
October
15, 2009
|
18