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EX-31.1 - Epcylon Technologies, Inc.v218375_ex31-1.htm
EX-32.1 - Epcylon Technologies, Inc.v218375_ex32-1.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 February 28, 2011

¨ 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 April 11, 2011, the Issuer had 55,333,334 shares of its Common Stock outstanding.
 
 
 

 
 
TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
   
     
Item 1: Financial Statements
 
1
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
9
Item 3: Quantitative and Qualitative Disclosures about Market Risk
 
14
Item 4: Controls and Procedures
 
14
     
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
 
 
 
 

 
  
PART I                                FINANCIAL INFORMATION
 
LOTO INC.
(A Development Stage Company)
 
CONSOLIDATED BALANCE SHEET
 

   
February 28, 2011
UNAUDITED
   
May 31, 2010
AUDITED
 
CURRENT ASSETS:
           
Cash
  $ 531,513     $ 309,018  
Prepaid rent
    10,836       8,119  
Receivables (Note 3)
    95,685       29,827  
                 
TOTAL CURRENT ASSETS
    638,034       346,964  
                 
Capital assets, at cost
    31,060       31,060  
Accumulated amortization
    (15,150 )     (7,332 )
Net capital assets
    15,910       23,728  
                 
TOTAL ASSETS
  $ 653,944     $ 370,692  
                 
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
               
                 
CURRENT LIABILITIES:
               
Accrued liabilities (Note 4)
  $ 86,873     $ 49,505  
Standby loan (Note 5)
    442,924       425,931  
Due to stockholder
    312       191  
                 
TOTAL CURRENT LIABILITIES AND TOTAL LIABILITIES
    530,109       475,627  
                 
STOCKHOLDERS' EQUITY (DEFICIENCY):
               
Common stock, par value $0.0001 (note 6)
               
100,000,000 shares authorized
               
55,333,334 issued and outstanding (54,572,963 at May 31, 2010)
    5,533       5,457  
Additional paid-in capital
    2,073,780       1,023,977  
Other comprehensive gain / (loss)
    10,033       (598 )
Deficit accumulated during development stage
    (1,965,511 )     (1,133,771 )
                 
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)
  $ 123,835     $ (104,935 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
  $ 653,944     $ 370,692  

See notes to the consolidated financial statements
 
 
1

 
 
LOTO INC.
(A Development Stage Company)
 
CONSOLIDATED STATEMENT OF OPERATIONS
 

   
For the Three
Months Ended
February 28,
2011 
UNAUDITED
   
For the Three
Months Ended
February 28,
2010 
UNAUDITED
   
For the Nine
Months Ended
February 28,
2011 
UNAUDITED
   
For the Nine
Months Ended
February 28,
2010 
UNAUDITED
   
Inception 
(Sept. 16, 2008) 
to 
Feb. 28, 
2011
UNAUDITED
 
                               
REVENUE
  $ -     $ -     $ -     $ -     $ -  
                                         
EXPENSES
                                       
General and administrative expenses
    267,658       236,931       964,748       806,171       2,085,818  
Cancellation of stock issued for services
    (150,000 )             (150,000 )             (150,000 )
OPERATING LOSS
    117,658       236,931       814,748       806,171       1,935,818  
                                         
OTHER EXPENSE
                                       
Interest Expense
    5,738       3,299       16,992       4,232       29,693  
                                         
NET LOSS FOR THE PERIOD
  $ (123,396 )   $ (240,230 )   $ (831,740 )   $ (810,403 )   $ (1,965,511 )
                                         
NET LOSS PER COMMON SHARE - BASIC AND FULLY DILUTED
  $ (0.00 )   $ (0.00 )   $ (0.02 )   $ (0.02 )        
                                         
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND FULLY DILUTED
    55,477,778       55,000,000       55,141,289       43,750,000          

See notes to the consolidated financial statements
 
 
2

 
 
LOTO INC.
(A Development Stage Compnay)
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY)
FROM INCEPTION (SEPTEMBER 16, 2008) TO FEBRUARY 28, 2011
UNAUDITIED
 

   
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
                                    10,631       10,631  
                                                 
Issuance of shares for Consulting services (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  
                                                 
Cancellation of shares issued for Consulting services (Note 6)
    (200,000 )     (20 )     (149,980 )                     (150,000 )
                                                 
Net loss
                            (831,740 )             (831,740 )
                                                 
BALANCE - February 28, 2011
    55,333,334       5,533       2,073,780       (1,965,511 )     10,033       123,835  

See notes to the consolidated financial statements
 
 
3

 
 
LOTO INC.
(A Development Stage Company)
 
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITIED
 
 
   
For the 
Nine Months
Ended 
February,
2011
   
For the
 Nine Months
Ended 
February 28,
2010
   
Inception 
September 16, 
2008 
to 
February 28, 
2011
 
                   
OPERATING ACTIVITIES:
                 
Net loss for the period
    (831,740 )     (810,403 )     (1,965,511 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Amortization
    7,818       4,797       15,150  
Common stock issued for services
    150,000       -       150,000  
Cancellation of Common stock issued for services
    (150,000 )             (150,000 )
Interest expensed but not paid
    16,993       -       16,993  
Changes in operating assets and liabilities:
                       
Prepaid rent
    (2,717 )     (8,119 )     (10,836 )
Receivables
    (65,858 )     (23,277 )     (95,685 )
Accrued liabilities
    37,368       104,510       86,873  
                         
NET CASH USED IN OPERATING ACTIVITIES
    (838,136 )     (732,492 )     (1,953,016 )
                         
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
    -       342,595       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       592,595       2,505,556  
                         
Effect of exchange rates on cash
    10,631       (4,474 )     10,033  
                         
(DECREASE) INCREASE IN CASH
    222,495       (169,298 )     531,513  
                         
CASH - BEGINNING OF PERIOD
    309,018       169,203       0  
                         
CASH - END OF PERIOD
    531,513       (95 )     531,513  
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                       
Cash paid during the period
                       
Interest paid
    -       -       -  
                         
NON CASH FINANCING ACTIVITIES
                       
Deposit applied to stock subscription
    -       150,000       -  

See notes to the consolidated financial statements
 
 
4

 
 
LOTO INC.
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2011

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 nine months ended February 28, 2011 are not necessarily indicative of the results that may be expected for any interim period or the entire year. For further information, these financial statements and the related notes should be read in conjunction with the Company’s audited financial statements for the year ended May 31, 2010 included in the Company’s 10-K report.
 
 
5

 
 
NOTE 2 – GOING CONCERN

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated any revenues since inception, has an accumulated loss of $1,965,511 as of February 28, 2011 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
 
Receivables totalled $95,685 and included $68,224 in goods & service tax receivable as well as a receivable of $27,461 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
 
Accrued expenses totalled $86,873 and included the following: payments due for consulting $54,848, programming fees $10,530; listing fees $5,600; legal expenses $4,291; audit expenses $3,000; communication expenses $1,909; and other payables $6,695.
 
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 September 30, 2010 the standby financing commitment expired pursuant to its terms. 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 on demand.  If Loto breaches any of the covenants, the default rate will be 15% per annum.  The Standby Financing Commitment expired on September 30, 2010 and no demand for repayment has been received.  As of February 28, 2011, $358,357 including accrued interest was drawn and payable against this commitment.

In addition, A Few Brilliant Minds, a related party, has advanced $84,567 including accrued interest. This loan is subject to the same interest and repayment terms as the other standby loans.
 
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.
 
 
6

 
 
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.

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 Frankfurt Stock Exchange.  The shares were valued at $0.75 per share, the effective last sales price of the Company’s common stock. On February 3, 2011, the consulting company agreed to return the 200,000 shares to the Company as a result of its inability to perform all of the services contracted.

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 October and November 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.

Effective November 30, 2010 pursuant to an agreement to cancel common shares (see Note 8) two founding shareholders cancelled a total of 1,212,592 common shares.

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 thereunder.  In connection therewith, two of the Company’s shareholders, A Few Brilliant Minds Inc. and 2238646 Ontario Inc., have each entered into an agreement with the Company, the Tender And Cancellation Agreement Re Company Private Placements, 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.
 
 
7

 
 
NOTE 9 – COMMITMENTS
  
The Company is obligated under a lease for office space. The minimum payments due are as follows:
 
2011 - 42,364
2012 – 72,624
2013 – 66,572
 
 
 
 
 
 
 
 
8

 

 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OFOPERATIONS

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, Africa, and Europe.
 
 
 
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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 and sports betting 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 that 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 have hired appropriate internal resources and have selected two external vendors in order to complete the development of the core SMS and application 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 February 28, 2011, the Company had total assets of $653,944, including total current assets of $638,034.  This represents 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 proceeds of $1,050,000 from the sale of shares of common stock in October and November 2010. The Company’s total liabilities increased from $475,627 at May 31, 2010 to $530,109 at February 28, 2011.  The Company’s current liabilities included $442,924 in standby loans payable and accrued expenses totaling $86,873 primarily related to accrued legal, audit, consulting, communication, listing fees, and programming payables.

Liquidity and Capital Resources

As of February 28, 2011, the Company had $531,513 in cash. As a development stage company, we have limited capital and limited operating resources. During the nine-month period ended February 28, 2011, we raised $1,050,000 under the terms of 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 two months from the date of this Report. We expect to need additional amounts of funding commencing 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, 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 $2,000,000.

Three of our current shareholders are parties to a standby financing commitment with our Company under which they have loaned the Company $442,924 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.
 
 
 
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Management believes that without obtaining additional financing or developing an ongoing source of revenue, we will not be able to complete the development of our software and launch successfully. Although we have actively been pursuing new business opportunities, we cannot give assurance that we will succeed in this endeavor, or be able to enter into necessary agreements to pursue our business on terms favorable to us. Should we be unable to generate additional revenues or raise additional capital, we could eventually be forced to cease business activities altogether.

Results of Operations for the Three Months Ended February 28, 2011 and February 28, 2010

Income

We are a development stage company and as of February 28, 2011 there were no revenue-producing contracts in place and no revenue has been earned.  We do not expect that revenue will be realized until 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 operator and we have not yet derived any revenues from our technology.  There is no guarantee that we will be able to successfully develop and launch our technology or that it will generate sufficient revenue to sustain our operations.

Expenses
 
During the three months ended February 28, 2011, we incurred $123,396 in total operating expenses.  This was a decrease from the period ended February 28, 2010, during which we incurred total operating expenses of $240,230.

During the three months ended February 28, 2011, salary expense was $97,263, and comprised payments to the President and CFO, the Vice President of Sales & Marketing, our Director of Human Resources and Administration, our US advisor, and one of our founders.  Salary expense for the three months ended February 28, 2010 was $77,152. The Increase was due to the addition of our founder and US advisor.

Legal and accounting fees of $18,612 were incurred for the three months ended February 28, 2011, 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 significant decline from the three months ended February 28, 2010, in which legal and accounting fees of $38,950 were incurred.

Marketing expenses of $1,563 for the three months ended February 28, 2011 were incurred in the creation and printing of investor information and product information.  Marketing expenses of $2,231 for the three months ended February 28, 2010 were incurred for the printing of investor information and press releases.

During the three months ended February 28, 2011, rent and office expenses of $19,407 were incurred for the head office of the Company. The head office was relocated in February and the Company signed a new 33 month lease. During the three months ended February 28, 2010 rent and office expenses were $25,324.

Systems development expenses of $74,936 for the three months ended February 28, 2011 were incurred for the creation, modification, and maintenance of game demonstrations, as well as scoping and development of the core gaming systems. We also completed the work on the geo-location module, which commenced last year.  Systems development expenses of $39,894 for the three months ended February 28, 2010 were incurred for the creation, modification, and maintenance of initial game demonstrations.

Consulting expense was a net credit of ($140,095). Consulting fees for the quarter totaled $9,005 that was incurred for the completion of a Canadian lottery operator request for information. The Company also reversed a $150,000 non cash expense for the issuance of 200,000 shares of the Company’s common stock that were issued inconsideration for assistance in listing on the Frankfurt Stock Exchange. Not all of the services contracted were fulfilled and the shares were returned for cancellation. During the three months ended February 28, 2010, consulting fees were $1,900.
 
 
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Filing fees totaled $21,953 in the quarter and related primarily to the Company’s efforts to be listed on the Frankfurt Exchange. During the three months ended February 28, 2010, listing fees were $1,335.

Interest expense accrued on the Standby Loans was $5,738 for the three months ended February 28, 2011, which was an increase from $3,299 for the three months ended February 28, 2010 due to the higher balance in borrowings.

Results of Operations for the Nine Months Ended February 28, 2011 and February 28, 2010

During the nine months ended February 28, 2011, we incurred $831,740 in total operating expenses.  This was a slight increase from the period ended February 28, 2010, during which we incurred total operating expenses of $810,403.

During the nine months ended February 28, 2011, salary expense was $330,818, 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, one of our founders, and our US advisor.  Salary expense for the nine months ended February 28, 2010 was $314,882.

Legal and accounting fees of $104,095 were incurred for the nine months ended February 28, 2011, 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 significant decline from the nine months ended February 28, 2010, in which legal and accounting fees of $141,772 were incurred.

Consulting expense for the nine months ended February 28, 2011 totaled $22,457 which included amounts for financial statement preparation, submission of our Canadian lottery operator request for information, scoping of a sports betting platform, and also included the reversal of a $150,000 non cash expense that had been recorded in the first quarter. During the nine months ended February 28, 2010, consulting fees were $1,900.

Marketing expenses of $10,837 for the nine months ended February 28, 2011 were incurred in the creation and printing of investor information, product information, specific lottery operator presentations and RFP preparations.  Marketing expenses of $34,222 for nine months ended February 28, 2010 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 nine months ended February 28, 2011, rent and office expenses of $70,182 were incurred for the head office of the Company. The head office was relocated in February and the Company signed a new 33 month lease. During the nine months ended February 28, 2010 rent and office expenses were 79,904.

Systems development expenses of $165,299 for the nine months ended February 28, 2011 were incurred for the creation, modification, and maintenance of game demonstrations, as well as the final scoping and commencement of development on our core game systems.  Systems development expenses of $80,872 for the nine months ended February 28, 2010 were incurred for the creation, modification, and maintenance of game demonstrations.

Filing fees totaled $29,685 for the nine months ended February 28, 2011 and included expenses related primarily to the Company’s efforts to be listed on the Frankfurt Exchange. During the nine months ended February 28, 2010, listing fees were $4,640.

Interest expense accrued on the Standby Loans was $16,992 for the nine months ended February 28, 2011, which was an increase from $4,232 for the nine months ended February 28, 2010.

Our Plan of Operation for the Next Twelve Months

Our path to revenue is based upon completing the following work plan over the next twelve months:

1.        Completion of the patent and trademark registrations.
 
 
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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, Africa, Mexico, Asia, and Europe.  Also, the U.S. may become a market for Loto should existing restrictions on internet lottery be changed, or Loto’s geo-locational restrictions be confirmed.

4. While brand and product marketing will be supported by the lottery operators and by the mobile network operators, we intend on pursuing additional local marketing efforts including mass awareness campaigns, cause support, and seeking specific customer input.

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 two months from the date of this Report.  We will continue to actively seek additional financing.
 
 
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Contractual Obligations and Other Commercial Commitments
 
The sole on-going commitment we have is for the rental of our head office. The Company relocated in February 2011 and entered into a 33 month lease. The monthly expense starting March 2011 is $5,502.  The total lease commitment is $181,566.

Warrants

As of February 28, 2011, we had no outstanding warrants.
 
Common Stock

As of February 28, 2011, there were 55,333,334 shares issued and outstanding, of which 44,333,334 were restricted from trading.  

Employees

As at February 28, 2011 we had seven 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, one of our founders, 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, legal, and other part-time and occasional 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

Item 4.    Controls and Procedures

Management's Report on Internal Control Over Financial Reporting

Management of our company is responsible for establishing and maintaining adequate internal control over financial reporting. Our company's internal control over financial reporting is a process, under the supervision of the Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

·
Pertain to the maintenance of records that in all reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
 
 
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·
Provide reasonable assurance of the completeness and authorization for checks to be issued;

·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally acceptable accounting principles, and that the receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and

·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

As of the end of the period covered by this report, the Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) in ensuring that information required to be disclosed by the Company in its reports is recorded, processed, summarized and reported within the required time periods. Based on their evaluation of the Company’s disclosure controls and procedures as of February 28, 2011, 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 February 28, 2011 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.






 
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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
 
Not Applicable.

ITEM 3: 
DEFAULTS UPON SENIOR SECURITIES

Not Applicable.
 
ITEM 4: 
RESERVED
 
Not Applicable.
 
ITEM 5: 
OTHER INFORMATION

Not Applicable.


 
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ITEM 6.  
EXHIBITS
   
Exhibit
Description
   
Exhibit 31.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 32.1
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



 
  
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
LOTO INC.
 
       
       
 
By: 
/s/ Stephen Knight
 
   
Name:    
Stephen Knight
 
   
Title:
Chief Executive Officer,
Principal Financial Officer and
Chief Accounting Officer
 


Dated:  April 14, 2011
 

 

 
 
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