LottoGopher (LTTGF): Leveraging the Online Lottery Opportunity

OTC:LTTGF
CSE:LOTO.CN

Company Background

As the name implies, LottoGopher is a lottery messenger or “gopher” service that allows users to order state lottery tickets online using a debit card, credit card or digital payment mechanism. LottoGopher (LTTGF) (LOTO.CN) provides a legally compliant way to purchase lottery tickets online and strives to be the leading website offering this service. Towards this goal, the company recently secured the web domain lotteryticketsonline.com to help drive traffic to lottogopher.com. Currently, the company’s service is available exclusively in the state of California, but LottoGopher targets expansion into additional states over time, earmarking those with high per capita lottery spending such as New York and Massachusetts, among others. Massachusetts residents have the highest per capita spending on lottery tickets at $734.85 per annum, followed by Rhode Island at $513.75, Delaware at $420.82, New York at $398.77 and West Virginia at $359.78, according to a report by LendEDU.

LottoGopher believes it offers a disruptive technology option that will appeal to consumers, reflecting greater convenience of purchasing online, using a credit card and eliminating the risk of losing a winning ticket, among other benefits.

LottoGopher does not participate in any of the lottery prizes. Customers purchase lottery tickets at face value, as the company also does not impose a markup on the ticket price. Rather, its business model is to offer its services on a subscription basis. California residents can purchase a monthly subscription for $12 or an annual one for $99. Customers can select their lottery numbers themselves or use an automated, random-number generator. To process payments, the company has entered into agreements with third-party credit card companies, including Visa, MasterCard and American Express, and is also integrating payment processing solutions such as NetCents payment to enable digital solutions, including Bitcoin and Ethereum. Bitcoin and Ethereum are encrypted digital currencies. NetCents is a technology company with software solutions for ecommerce.

The company’s target market is millennials, a demographic that is accustomed to ordering items online. Integrating with payment solutions that accept digital currencies is a key part of this strategy. Given the monthly and annual subscription fees, the service is aimed at people who purchase multiple lottery tickets on a recurring basis. LottoGopher seeks to make it convenient for its target demographic to order Powerball, Mega Millions and SuperLotto Plus tickets. These tickets generated $1.3 billion in the state of California in fiscal year (FY) 2015-16, as illustrated above. As the company continues to enhance its service, it has registered increased momentum in member acquisition over the past few months, according to management.

Eliminating the Risk of Losing a Winning Ticket

LottoGopher members can play individually with a single ticket or in groups to pool winnings from California lotteries. LottoGopher offers memberships that allow California residents to order multiple tickets from various state lotteries. LottoGopher also provides player strategies, lottery statistics, jackpot alerts and lottery news, among other features.

Once a customer purchases a ticket online, a LottoGopher.com employee visits a retailer to buy the physical ticket. LottoGopher.com does not mail tickets to its customers and believes this eliminates the risk of losing a winning ticket. This feature is important given that more than $2 billion in annual lottery winnings are unclaimed each year, according to CNN. While most of the unclaimed winning tickets are for small prizes, some are worth thousands of dollars. Using LottoGopher, customers can track their numbers and ticket history on their personal user dashboard. These features simplify the process of keeping records of tickets and winnings.

Marketing Campaign Underway

The LottoGopher management team is adept at marketing and the company is conducting a broad promotional campaign that includes media coverage, influencer and digital marketing, sponsorships and endorsements with sports teams and celebrities. On June 1, 2017, LottoGopher announced that it had entered into a sponsorship agreement with California’s Anaheim Ducks hockey team. During the recent NHL playoffs , the company offered promotional giveaways to hockey fans. LottoGopher is also launching an extensive digital marketing campaign targeting Californians and intends to partner with influencers in order to drive traffic and increase conversion rates. For example, it has entered into a one-year contract with Scott Disick of Kardashian fame who has nearly 20 million followers on his Instagram.

Among the highest profile endorsements, Kevin Harrington joined LottoGopher’s board in June of 2017. He was an original shark on ABC’s Shark Tank and “has launched over 500 products generating more than $5 billion in sales worldwide,” according to his website. LottoGopher granted him 621,469 incentive stock options in connection with the affiliation. The company also just announced William Shatner as its official spokesperson. The actor has made a video discussing LottoGopher and notes that for residents outside the state of California, “We’ll get to you soon.” In fact, the company is laying the groundwork for its contemplated expansion into additional states. It has retained a consultant to advise and assist with the due diligence process.

Lottery – History and Background

Lotteries are extremely important to states as a means of supplementing their tax base revenue and thereby augmenting state budgets. According to the North American Association of State and Provincial Lotteries (NASPL), the country’s first modern lottery was the New Hampshire Sweepstakes. Its debut tickets were sold on March 12, 1964. In 1987, the Multi-State Lottery Association was established with six initial members and its first game, Lotto*America, was introduced in 1988. Four years later, Lotto*America was replaced with Powerball, which remains popular today.

The California lottery was created by Proposition 37, which was passed with 58% approval on November 6, 1984. The mission of the state’s Lottery Act was to supplement funding for public schools and colleges. Initially, the Lottery Act mandated that 34% of lottery ticket sales be earmarked towards the state’s education budget. In April 2010, the state Legislature passed Assembly Bill 142, which requires that 87% of lottery ticket sales be returned to the public in the form of prizes and contributions to education. Bill 142 gives the state lottery greater flexibility than it had previously to pay a higher percentage of revenue in prizes, but only if the money allocated to public schools and colleges increases as well.

California lottery sales for FY 2015-16 reached about $6.3 billion, as illustrated in the figure above. This represents an increase of nearly 15% compared to $5.5 billion registered in the prior fiscal year. Of that, more than $1.5 billion was earmarked for the state’s public schools, representing a record high in California lottery history. It also marked the 16th consecutive year that the lottery generated more than $1 billion to California school jurisdictions.

Despite the importance of lottery revenue, few states offer an online ticket purchase option. According to Forbes, the New York lottery division and the Illinois governor’s office contacted the Department of Justice (DOJ) in 2009 requesting that it review its position on the online transmission of lottery transaction data across state lines. New York and Illinois claimed that their interest in selling lottery tickets online was impeded by the DOJ’s broad interpretation of the Wire Act of 1961.

In 2011, the DOJ clarified its position, indicating that it believed the Wire Act was limited to sports betting and that lotteries operating online would not be in violation. As a result, Illinois became the first state to offer online lottery ticket sales in 2012. However, currently few states actually sell tickets online. In May of 2015, for example, after allowing online tickets sales briefly, the Minnesota legislature passed an amendment to its state lottery law prohibiting the sale of instant win lottery tickets over the internet. Other states have indicated that they are considering offering the online feature and several states allow subscription sales of draw games over the internet. Political concerns about protecting minors, as well as about enabling people with gambling addictions to purchase lottery tickets from the convenience of their living rooms and phones may be factors deterring some states from providing online ticketing.

Lotteries are highly regulated. The U.S. Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) prohibits the acceptance by a business of a wager by means of the internet where such wager is prohibited by any applicable law. Violations of UIGEA carry the risk of serious criminal and civil sanctions. There have also been various bills proposed recently to restrict or prohibit interactive gaming and lottery sales. However, LottoGopher has been reviewed by regulatory agencies and the company has indicated that it is in compliance with regulations because it is viewed as a messenger service and not as a gaming company.

With little competition in the online space from the states themselves and with a regulatory-compliant business model, LottoGopher has also aligned itself with another big player in the online lottery space, Gibraltar-based Lottoland. Privately-held Lottoland was established in May 2013 and has more than four million registered players, according to its website. It holds a 20% stake in LottoGopher.

Company Still in Early Stages

LottoGopher is still in the early stage of its development. Most of the initiatives discussed here have been implemented in 2017. At this point, LottoGopher has only recently begun to generate revenue and recorded CAD$15,694 in the six months ended June 30, 2017. With minimal revenue, the company has funded its operations primarily through equity financings and expects that to continue in the near-term until cash flow from operations builds. In 1H 2017, the company experienced cash outflows of $1.5 million from operating activities. During this period, LottoGopher completed the private placement for gross proceeds of $3.5 million.

As noted, the company has indicated that subscriber growth has climbed recently as the company’s marketing efforts have ramped, including the Anaheim Ducks sponsorship, Scott Disick endorsement, Kevin Harrington affiliation and William Shatner role. However, it could take longer than the company expects to grow its revenue base, which is a risk that potential investors face. Originally public on the Toronto exchange through a reverse take-over, on July 26, 2017, the company’s shares also began trading on the OTCQB market under the symbol LTTGF.

Management: CEO Has an Entrepreneurial and Marketing Background

LottoGopher’s CEO and President James Morel is a marketing savvy executive who has built and sold companies in the past. He has more than 25 years of experience creating and growing consumer and B2B brands. For example, prior to LottoGopher, he founded 1-800 Postcards, a New York City based promotional printing company that he sold in 2000. He also produced reality television shows including Star Dates for the E! Network and founded a chain of laser tattoo removal clinics branded Dr. TATTOFF. The company’s CFO Alnesh Mohan has over 20 years of accounting, auditing, and tax experience.

The Online Lottery Opportunity

All but seven states – Alabama, Alaska, Hawaii, Mississippi, Nevada, Utah, and Wyoming – have legalized some form of lottery. Currently, 44 domestic jurisdictions offer instant game lotteries and 46 offer draw lotteries. An instant lottery game is generally played by removing a scratch-off protective coating from a preprinted ticket to uncover a potential prize. Draw lottery games, such as Powerball and Mega Millions, are based on a random selection of a series of numbers. Prizes for these games typically are based on the number of winners who share the prize pool, although set prizes are sometimes offered, as well. Multi state lotteries such as Powerball and Mega Millions are becoming more popular, reflecting their sizable jackpots and relatively low ticket prices.

It is difficult to assess the size of the online ticket messenger market, as it is early days and LottoGopher has not yet established a track record. However, the overall domestic lottery market represents revenue of nearly $67 billion, according to LendEDU, with $42.27 billion of that allocated for prizes (and another $3.18 billion for administration, with the balance used to supplement state budgets). Most of the states that offer lottery do not offer online sales, as noted. At the same time, the company’s target market – millennials – rely on the internet for much of their purchasing activity.

Residents in Massachusetts, Rhode Island, Delaware, New York and other states average several hundred dollars per person in annual spending on lottery tickets. Presumably, LottoGopher’s target market of recurring players spend more than the average and might find the $12 monthly or $99 annual fee appealing, given the convenience of purchasing online. With LottoGopher’s partner Lottoland achieving over four million paid memberships in four short years, it would seem that the market opportunity could be significant, although it may take a while for LottoGopher to ramp, depending on how quickly it executes its expansion and the competitive landscape.

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