UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-K





x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
fiscal year ended: May
31, 2010





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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
      of other jurisdiction of
                    
                    (IRS
      Employer Identificationincorporation
      or organization)
                    
                    Number)





Suite
460, 20 Toronto Street


Toronto, Ontario, Canada M5C
2B8


(Address
of principal executive offices)





(416)
479-0880


(Registrant’s
telephone number)





Securities
registered pursuant to Section 12(b) of the Exchange Act: None





Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par
value $.0001 per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes  ̈ No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ No £




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K:  ̈





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





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter: $150,000 at November 30, 2009.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: The Issuer had 54,572,963 shares of
Common Stock, par value $.0001, outstanding as of September 10,
2010.








TABLE
OF CONTENTS





ITEM
      1: BUSINESS
                4ITEM
      1A: RISK FACTORS
                12ITEM
      1B: UNRESOLVED STAFF COMMENTS
                25ITEM
      2: PROPERTIES
                25ITEM
      3: LEGAL PROCEEDINGS
                26ITEM
      4: RESERVED
                26ITEM
      5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
                27ITEM
      6: SELECTED FINANCIAL DATA
                27ITEM
      7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                28ITEM
      7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                35ITEM
      8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                36ITEM
      9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                49ITEM
      9A: CONTROLS AND PROCEDURES
                49ITEM
      9B: OTHER INFORMATION
                50ITEM
      10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                51ITEM
      11: EXECUTIVE COMPENSATION
                56ITEM
      12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
                57ITEM
      13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
                60ITEM
      14: PRINCIPAL ACCOUNTING FEES AND SERVICES
                62ITEM
      15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
                63SIGNATURES
                65




2


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





Statements
in this Report may be “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. Forward-looking statements include, but
are not limited to, statements that express our intentions, beliefs,
expectations, strategies, predictions or any other statements relating to our
future activities or other future events or conditions. These statements are
based on current expectations, estimates and projections about our business
based, in part, on assumptions made by management. These statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may, and are likely to, differ materially from what is expressed or
forecasted in the forward-looking statements due to numerous factors, including
those described above and those risks discussed from time to time in this
Report, including the risks described under “Risk Factors,” “Management’s
Discussion and Analysis” and “Our Business.”





There are
important factors that could cause our actual results to differ materially from
those in the forward-looking statements. These factors, include, without
limitation, the following: our ability to develop our technology platform and
our products; our ability to protect our intellectual property; the risk that we
will not be able to develop our technology platform and products in the current
projected timeframe; the risk that our products will not achieve performance
standards in clinical trials; the risk that the clinical trial process will take
longer than projected; the risk that our products will not receive regulatory
approval; the risk that the regulatory review process will take longer than
projected; the risk that we will not be unsuccessful in implementing our
strategic, operating and personnel initiatives; the risk that we will not be
able to commercialize our products; any of which could impact sales, costs and
expenses and/or planned strategies. Additional information regarding factors
that could cause results to differ can be found in this Report and in our other
filings with the Securities and Exchange Commission.





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.




3


PART
I





ITEM
1:           
BUSINESS





Introduction





Our
company, Loto Inc. operates through our wholly owned subsidiary Mobilotto
Systems, Inc. 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 and designs
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. Our software has not yet been employed on a commercial scale. 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.





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.
Our assessment of the market for our product indicates that areas of opportunity
for commercialization of mobile lottery solutions currently exist in Canada,
Mexico, Asia (China), Europe (Turkey and the United Kingdom of Great Britain),
Africa, and South America. We may also pursue opportunities in the United States
at some point in the future, although during the foreseeable future, we expect
to pursue our business outside of the United States until applicable laws in the
United States permit sales of lottery tickets utilizing mobile
telecommunications devices.





Lottery
operators have a pressing need to expand into new sales channels to expand their
revenue base, provide a more secure distribution channel, and be able to
communicate directly with their players. The significant industry challenges
include cost of distribution, player convenience, geographical and player
validation, and enhanced marketing capabilities. A cumbersome current
requirement for lottery sales is the need to provide access to a lottery sales
terminal. Conventionally, lottery operators must place expensive traditional
stand-alone terminals which are limited to high geographic density areas. In
addition, in many jurisdictions the public has become skeptical of the integrity
of retail lottery ticket kiosks and their clerks. Our technology solutions
address all of these issues by providing a secure lottery application for use on
commercially available smart phones and other mobile communications devices. Our
application can be used conveniently, securely and privately at any time and in
any location within an authorized jurisdiction. Our software also permits
two-way personalized messaging capability for enhanced operator promotional
activities.





Corporate
Development





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 Loto acquired all of the issued and outstanding shares of Mobilotto
(including all of the intellectual property of the mobile lottery software
application).





In
connection with the founding of Loto and the acquisition of Mobilotto, on May
13, 2009, Loto issued 20,000,000 shares of restricted common stock to A Few
Brilliant Minds Inc. in exchange for all of the issued and outstanding shares of
Mobilotto Systems, Inc. to Loto. The sole owner of A Few Brilliant Minds Inc.,
Mr. Gino Porco, is a director of Loto. On the same date, Loto issued 20,000,000
shares of restricted common stock to Mhalka Capital Investments Ltd. in
consideration for the payment of $20,000 to Loto. Ms. Marsha Collins served as a
director of Loto from April 22, 2009 until January 26, 2010, as nominated by
Mhalka Capital Investments Ltd. On August 3, 2009, Mhalka Capital Investments
Ltd., together with 1476448 Ontario Inc., made a standby financing commitment to
our Company, under which they agreed to provide the necessary funding to our
Company of up to $1,500,000 if we are unable to obtain third-party
financing.


4





On April
19, 2010, Mhalka Capital Investments Ltd. sold 19,300,000 shares of the
Company’s common stock to 2238646 Ontario Inc. pursuant to a Stock Purchase
Agreement in which 2238646 Ontario Inc. agreed to pay the purchase price in the
form of a note in the amount of $28,950,000, which shall accrue interest at the
rate of prime rate plus 1.5%, and shall be due in three years. Mr. Randall Barrs
is the owner and sole officer and director of 2238646 Ontario Inc. Mr. Barrs is
also a director of Loto. On April 19, 2010, Mhalka Capital Investments Ltd. also
entered into a Share Tender and Cancellation Agreement, pursuant to which each
of Mhalka Capital Investments Ltd. and A Few Brilliant Minds Inc. agreed to the
cancellation of 500,000 shares of the Company’s common stock. In addition, on
April 19, 2010, Mhalka Capital Investments Ltd. transferred 200,000 shares of
its common stock and A Few Brilliant Minds Inc. transferred 100,000 shares of
its common stock in third party transactions. As of the end of the period
covered by this Report, Mhalka Capital Investments Ltd. has no stock ownership
in the Company.





A Few
Brilliant Minds Inc. and 2238646 Ontario Inc. together beneficially own
approximately 70.9% of our outstanding common stock, which gives them a
controlling interest in Loto. A Few Brilliant Minds Inc. and 2238646 Ontario
Inc. are both deemed to be promoters and control persons of Loto, as well as Mr.
Porco and Mr. Randall Barrs individually.





On April
19, 2010, in connection with Mhalka Capital Investment Ltd.’s sale of its shares
of the Company’s common stock, 2238646 Ontario Inc. entered into a Novation to
the Standby Financing Commitment with the Company pursuant to which 2238646
Ontario Inc. agreed to the remaining commitments of Mhalka Capital Investment
Ltd. thereunder. Under the terms and conditions of the financing commitment, we
may draw on the standby financing commitment in monthly tranches in accordance
with our operating requirements as set forth in our business plan as of the date
of this Report. 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 after the date of
this Report. 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.





As of the
end of the period covered by this Report, 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.




5


Current
Status of our Business





As of the
date of this Report, our mobile lottery software application has not yet been
commercially tested or utilized by any lottery operators and we have not yet
generated any revenues from our technology. We have developed working
demonstrations of our lottery application (which is operable on most Blackberry
smart phones including the Pearl, the Curve, the Bold, and 8800 series), as well
as a scratch card game which is operating on Android devices. Our current
lottery demonstration model of our software includes three of the six components
that together will constitute our full mobile lottery application. The completed
components include lottery game selection, lottery number picking and lottery
number authorization. The three components remaining to be developed include
player registration, financial settlement and player messaging functions. We
issued an RFP (request for proposal) to six qualified suppliers on August 25,
2009, indicating that we intend to develop the remaining components of our full
feature system. The purpose of this RFP is to build the various modules
necessary for lottery play on mobile cell phones, including player registration,
ticket selection, ticket registration, settlement, and direct to player
communication and marketing. After scoring, conducting due diligence, and
initial contracting, we have selected one supplier to develop our software
products. Pending final contract completion and execution, we expect the next
version of our software could be ready for commercialization approximately nine
months from the point at which Loto directs its development partner to undertake
the development activity. Loto will give such direction once it raises
sufficient funds.





During
the next twelve months, we intend to concentrate our efforts on completing the
development of our software application to its full feature commercially
deployable version, commencing the international launch of our product, and
soliciting lottery operators who are in a position to implement mobile lottery
sales solutions. We will also have to concentrate significant efforts on raising
capital to support our plans. We expect the sales cycle with each prospective
lottery operator will take between six and eighteen months, covering the period
from initiation of our sales solicitation through technical demonstrations,
testing, negotiations and closing of contracts for mobile lottery operations. We
have already commenced our initial sales and marketing program with several
lottery operators in Canada and other jurisdictions but have not yet closed any
sales. If we are successful in simultaneously completing the development of our
software and closing initial contracts with lottery operators, the minimum time
in which we believe that we could commence generating revenues would be nine
months from the date of this Report. Our current business status and the
continuing development of our software application as well as the plans for
commercial launch of our product are subject to many uncertainties that present
material risks to investors.





Over the
course of the next twelve months, or once the final commercial version of the
software has been completed, we also intend to apply for certification of our
software from the Gaming Standards Association, which is an international trade
association of gaming manufacturers, suppliers, operators and regulators and
whose stated mission is to facilitate the identification, definition,
development, promotion, and implementation of open standards to enable
innovation, education, and communication for the benefit of the entire
industry.





Our
Business Model Premises





In
developing our application, we have endeavored to assess and resolve many
problems associated with current lottery distribution methods in our target
markets, including the following:





1.
            Lottery
      operator profitability:





·
            The
      current lottery distribution systems generally have excessively high
      annual fixed infrastructure operating and capital costs, many of which can
      be avoided.





·
            The
      number of profitable sales sites are saturated, leading to stagnant and
      even declining lottery revenues.





2.
            Social
      responsibility:





·
            Our
      technology identifies the location of the mobile device at the time of the
      purchase, thereby restricting out-of-area purchases, should this function
      be activated by the lottery
operator.





·
            Winning
      ticket holders are notified
directly.





·
            The
      current lottery distribution systems generally do not identify or qualify
      players by age which our technology can do by reference to the mobile
      telephone subscription, passwords and other proprietary
      methods.





·
            Substantial
      amounts of paper are consumed and wasted through the current paper ticket
      process.




6


3.
            Fraud
      is easily perpetrated through the current distribution
    system:





·
            Paper
      tickets are negotiable instruments which can easily be separated from the
      true purchaser.





·
            There
      is no registration of a ticket with the actual purchaser of that
      ticket.





·
            There
      are generally thousands of lottery terminals per lottery operator which
      must be audited and secured on a regular
basis.





·
            There
      is a general lack of trust in the current retail store distribution
      channel.





4.
            Convenience
      and Customer Needs:





·
            There
      is an inherent inconvenience in the current model of ticket purchasing,
      including both requiring customers to line up and identifying winning
      tickets.





·
            A
      substantial percentage of tickets sold are within a day of the draw,
      indicating latency and the opportunity for greater customer
      convenience.





·
            The
      lottery operators have no ability to directly message or market to players
      in real or near time.





·
            Mobile
      communication devices are generally trusted by users, have the capacity
      for complex functionality and security, and are generally in their owners’
      possession for use for the majority of waking
  hours.





Industry
Overview





Lotteries
are generally regulated and licensed by governmental authorities in over 200
jurisdictions globally. Currently, forty-four U.S. states and four Canadian
regions operate lotteries. In 2009, lottery and instant game revenues
approximated $60 Billion in North America. According to LaFleurs 2010 World
Lottery Almanac, global lottery, instant and other game revenues approximated
$240 billion.





Although
many different types of lottery games exist worldwide, they may generally be
categorized into two main groups: instant ticket and traditional draw type
lotteries. An instant ticket game is usually played by removing a coating from a
pre-printed ticket to determine whether the ticket is a winner. With draw type
lottery games, such as the Canadian Lotto6/49, winning is based on a purchaser
matching numbers with those randomly selected by the lottery operator. Outside
of North America, various types of sports betting are also popular. All of these
game types can be simulated on mobile devices.





Operational
Overview





Our
technology can provide location-aware gaming solutions for government-sponsored
lotteries and privately operated lotteries. Our solutions include mobile
integration with existing online lottery systems, turnkey mobile gaming systems,
custom developed traditional and interactive games, as well as ongoing support,
maintenance, and management for each of our solutions.





Our
lottery application utilizes proprietary technology to locate, authorize, or
restrict game play based on the lottery license holder’s authorized
jurisdiction. When an authorized player leaves the authorized jurisdiction for a
game, new game play and additional game features may be disabled.




7


Lottery
Contract Procurement





Government
authorized lotteries in the U.S. and Canada typically operates under local
government mandated public procurement regulations. Lotteries generally select
suppliers by issuing a request for proposal, or RFP, which outlines contractual
obligations as well as products and services to be delivered. An evaluation
committee frequently comprised of key lottery staff evaluates responses based on
various criteria. These criteria usually include quality of product and/or
technical solutions, security plan and features, experience in the industry,
quality of personnel and services to be delivered, and price. We believe that
our product functionality, game content, the quality of our personnel, our
technical expertise and our demonstrated ability to help the lotteries increase
their revenues may provide us with advantages relative to the competition when
responding to government lottery RFP's. However, some lotteries still award the
contract to the qualified vendor offering the lowest price, regardless of
factors other than price. Contract awards by lottery authorities are sometimes
challenged by unsuccessful competitors, which can result in protracted legal
proceedings. Internationally, lottery authorities do not always utilize such a
formal bidding process, but rather negotiate with one or more potential
vendors.





Most
lottery contracts typically have an initial term of three to five years and
frequently include multiple renewal options, which may be exercised for
additional periods ranging from one to five years. The length of these lottery
contracts, together with their renewal options, limits the number of lottery
contracts available for bidding in any given year.





Research
and Product Development





Our
wholly-owned subsidiary, Mobilotto, commenced work on its lottery ticket sales
process on September 16, 2008. Since that date, we have developed working models
of our application ready to demonstrate operation of various lottery games
through commercially available mobile phones.





We
believe our ability to attract new lottery customers and retain existing
customers will depend in part on our ability to continue to incorporate
technological advances into, and to improve our products, systems and
communication abilities with lottery purchaser end-users of our systems. We
intend to maintain a development program focusing on systems development as well
as improvement and refinement of our present products as well as the expansion
of uses and applications.





We intend
to invest in new gaming technologies and new game delivery methods. We will
endeavor to continually improve our existing application as well as research,
innovate, and implement new solutions. Through continual development, we believe
that we can attract new players for our customers and grow our company by
attracting new lottery operators to our company and our
technologies.





Intellectual
Property





We hold
U.S. Provisional Patent 61/106,988 which has established our international
priority date as of October 21, 2008. We are proceeding with the filing of the
patent. We consider our provisional patent to be of material importance to our
business. Patents extend for varying periods of time according to the date of
patent filing or grant and the legal term of patents in the various countries
where patent protection is obtained. In the U.S., the term of a patent generally
expires 20 years from the date of filing. The actual protection afforded by a
patent, which can vary from country to country, depends upon the type of patent,
the scope of its coverage and the availability of legal remedies in the country.
We applied for additional patent protection in Canada, and we intend to apply in
other key jurisdictions as conditions warrant.





Certain
technology material to our lottery application products, processes and systems
are the subject of patent applications currently pending, in the U.S. and
certain other countries. In our business for instance, we intend to utilize our
patent-pending technology for the jurisdictional validation and distribution of
lottery tickets.





In July
2010, we received confirmation that our wave design logo as well as the phrase
“THE FUTURE OF LOTTERY IS IN YOUR HAND” has been allowed by the Canadian
Trade-marks Office. We previously applied for a U.S. Trademark from the United
States Patent and Trademark Office (the “USPTO”). This application was not
granted. We intend to re-apply for such U.S. Trademark as soon as reasonably
possible. Trademark protection continues in some countries, including the U.S.,
for as long as the mark is used and in other countries for as long as it is
registered. Registrations generally are for fixed, but renewable,
terms.





Should we
become aware of any potential infringement of our intellectual property or trade
names by competitors and other third parties, we will consider what action, if
any, to take in that regard, including, where appropriate,
litigation.


8





Production
Processes, Sources and Availability of Components





Our
mobile application process is specifically designed to produce secure lottery
game tickets for government sanctioned lotteries and promotional games, and to
specifically ensure the jurisdiction of play and rules regarding play are
complied with, along with meeting social responsibility mandates. Our
application is designed for efficient, timely, mobile and secure production of
game tickets and storage of game tickets and notification of winning ticket
results. Games are delivered consistent with and ready for play with the lottery
authority within the jurisdiction of play.





Competition





Mobile
Lottery Products:





Our
lottery gaming business competes with a variety of suppliers from various
international markets. There are numerous short message service (SMS) mobile
lottery companies that have emerged globally over the past few years. Due to
heavy regulation in Europe and North America the majority of these companies
have set their sights on less regulated emerging markets. These markets are of
significant interest to mobile lottery and gaming vendors due to their high
population density and the relatively low access to online internet services and
traditional convenience store lottery retailers.





Principal
direct competitors exist in such emerging markets as India, Mexico, China and
Europe where lottery vendors provide access to national lotteries and sports
betting through mobile SMS messaging capabilities. To date the percentage of
individuals who use the mobile device sales channel for lottery has remained
low. The need to purchase prepaid cards from retailers and incompatible handsets
still remain a challenge for these vendors. Furthermore, these have an inherent
weakness as they lack security and do not identify the user’s
location.





Additional
competition exists within European markets as lottery regulation continues to
evolve. The market for mobile lottery is in its infancy as vendors address both
security and regulatory restrictions, however sports betting over mobile devices
is common in many European countries.





We have
engineered our mobile lottery application with both location-based technology
and superior cryptology which allows us to meet stringent government
regulations.





We are
aware of three competitors who are engaged in the business of selling lottery
tickets via mobile devices who may become dominant during the foreseeable
future:





·
            Soreto
      Games (Mexico National Lottery)


·
            Sunloto
      (China)


·
            Veikkaus
      (Finland)





The
existing lottery terminal manufacturers, with GTech, Scientific Games, Intralot,
Wincor, and Sagam Securite being the largest, have not publicly announced plans
to develop mobile gaming solutions, but could develop a mobile offering. In
addition, lottery operators could contract with software development and / or
mobile software development firms to satisfy their mobile needs.





Competitive
Advantages and Disadvantages





Technology
Advantages





1.
            Our
      technology functions as an Application and does not utilize SMS
      capabilities, which facilitates the
following:





·
            Controlled
      end-user experience interactive graphical user interface (GUI), matched to
      phone capabilities;




9





·
            Includes
      secure interface standards;





·
            Enhanced
      eCommerce capabilities; and





·
            Low
      cost per message.





2.
            Our
      product has the ability to identify the geographical location of players.
      This patent-pending process limits out of region play for purposes of
      controlling compliance with jurisdictional legal
    requirements.





3.
            Our
      application has been tested on a number of different phone
      types:





·
            A
      development plan is underway to cover most of the popular smart model
      cellular telephones;





·
            Current
      development is underway to enable Windows Mobile platforms;
      and





·
            Non-smart
      phones using conventional technologies have development
      potential.





4.
            Our
      application has been built to integrate with existing on-line offerings
      without duplicating processes or databases to create an efficient,
      seamless mobile and on-line gaming
experience.





5.
            We
      believe that Phase 2 gaming (including pro-line, sports select, and
      multiplayer games) could be developed and accommodated on our
      system.





6.
            Our
      product provides the lottery operator with a non-intrusive, 2-way
      communication capability which includes screen pop-ups, device start-up
      screen, and survey capability, as well as enhanced personalized marketing
      opportunities.





7.
            We
      provide full screen notification of lottery
  results.





8.
            Our
      application icon resides on the mobile device and application upgrades are
      automatic.





9.
            Our
      working demonstration models are developed and are currently operable for
      assessment by lottery operators.





Player
Experience Advantages:





10.
            Our
      product requires few key strokes (as the process is menu driven), which
      provides for simple and easy play.





11.
            All
      functionality and processes can be built onto the mobile device (full
      mobile solution for player registration, PIN access, lottery purchase,
      settlement, winning ticket notification, and customer
      communication).





12.
            Our
      application has design and play concepts based on replicating, emulating
      and interfacing with existing web-based lottery operator offerings for
      consistency of the lottery experience using a mobile
    device.





The
Competitive Disadvantages of Our Technology And Business





·
            We
      are a development stage Company, with no existing contracts in the lottery
      business and limited resources to continue to develop our
      business;





·
            Our
      technology exists only in demonstration mode and has not yet been tested
      by any lottery operators or employed on a commercial
  scale;





·
            There
      is uncertainty whether our software application will actually perform as
      anticipated in a commercial
setting;


10


·
            We
      have only developed the software for lottery game selection, lottery
      number picking and lottery number authorization components of our
      system;





·
            Our
      system still requires the software development of the player registration,
      financial settlement and player messaging
  components;





·
            We
      will be dependent on third-party software development companies to develop
      the remaining components for our full feature
  system;





·
            We
      expect the completion of our full feature system will take approximately
      nine months from the date we instruct our development partner to develop
      the commercial product;





·
            There
      is no assurance that the application will be properly completed by the
      software development company we have
selected;





·
            There
      is no assurance that our product will operate in the manner for which it
      is intended;





·
            The
      cost of development and realization of the additional components to our
      software application may be greater than we
  anticipate;





·
            There
      is no assurance that our mobile lottery software will be certified for use
      by the Gaming Standards Association or lottery
  operators;





·
            There
      is no assurance that we will be able to market and sell our mobile lottery
      software system;





·
            There
      is no assurance that our mobile lottery software will be acceptable to
      lottery operators;





·
            Larger
      suppliers in the lottery or software application development industries
      who have more resources than we do could decide to enter the mobile
      lottery business and compete more effectively for contracts with lottery
      operators.





We expect
to compete in the global market on the basis of being able to provide a full
feature mobile lottery application that we have designed to include the
following components: secure player registration and authorization, number
selection, settlement, winning number notification and direct-to-customer
messaging capability for enhanced marketing opportunities. There are some
competitors who are currently offering and developing mobile lottery
applications, however, we are not aware of any who are offering solutions with
the same full feature characteristics as our product. We are not yet in a
competitive position in the global market because we have not completed the
development of all components of our full featured mobile lottery software
application. We expect to complete our full featured mobile lottery software
application within approximately nine months from instructing our software
development partner to commence work. We anticipate that lottery operators will
make their selection of vendors and service providers on the basis of
considerations involving security, product performance, ease of use by the
lottery operator and by end-users, as well as ongoing service support for the
lottery operator and end-users. Upon completion of our full feature mobile
lottery application, we believe that we will be able to compete globally in a
manner which will be competitively attractive to lottery operators, however, the
need for 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.





Employees





We
currently have five 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 Stephen Knight (President and Chief
Executive Officer), Stephen Baker (Chief Technology Officer), Drew Deyell (Chief
Information Officer), Jeff O’Connor (Vice President of Sales and Marketing), and
Brandice Triolet (Director of Human Resources and Administration). We expect to
hire additional full time employees in the coming year as necessities dictate.
We have engaged qualified third-parties for accounting and legal
services.


11





WHERE
YOU CAN FIND ADDITIONAL INFORMATION





In
addition to this Report, we are also required to file periodic reports and other
information with the Securities and Exchange Commission, including quarterly
reports and annual reports which include our audited financial statements. You
may read and copy any reports, statements or other information we file at the
Commission’s public reference facility maintained by the Commission at 100 F
Street, N.E., Washington, D.C. 20549, on official business days during the hours
of 10:00am to 3:00pm. You can request copies of these documents, upon payment of
a duplicating fee, by writing to the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
room. Our SEC filings are also available to the public through the Commission
Internet site at http\\www.sec.gov .
These filings may be inspected and copied (at prescribed rates) at the
Commission's Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549.





You may
also request a copy of our filings at no cost, by writing of telephoning us
at:





Loto
Inc.


Suite
460, 20 Toronto Street


Toronto,
Ontario, Canada M5C 2B8


Telephone:
416-479-0880


Attention:
Mr. Stephen Knight


Chief
Executive Officer, President and Chief Financial Officer




ITEM
1A.         RISK
FACTORS





Our
business is subject to numerous risks. We caution you that the following
important factors, among others, could cause our actual results to differ
materially from those expressed in forward-looking statements made by us or on
our behalf in filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking statements in
this and in any other public statements we make may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in the discussion below will be
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially from
those anticipated in forward-looking statements. We undertake no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further
disclosure we make in our reports filed with the SEC.





Risks
Related To Our Operations And Financial Condition





We
are a development stage company and we may never generate revenues which could
cause our business to fail.





We are a
development stage company and we have not generated any revenues as of the date
of this Report. From the inception of our activities in Mobilotto on September
16, 2008 through the fiscal year ended May 31, 2010, the Company has incurred
losses of $1,133,771. We expect to operate with net losses within the current
fiscal year-ending May 31, 2011 or longer. We cannot predict the extent of these
future net losses, or when we may attain profitability, if at all. If we are
unable to generate significant revenue or attain profitability, we will not be
able to sustain operations and will have to curtail significantly or cease
operations.


12


We
are a development stage company with significant capital resources deficiencies
and we may not be able to raise adequate capital which could materially and
adversely affect our ability to conduct business.





As a
development stage company, we have limited capital and limited operating
resources. As of the date of this Report, we had cash on hand of approximately
$110,000 (unaudited). The cash on hand in our bank accounts will be sufficient
to maintain our operations only for approximately one and a half months from the
date of this Report. Prior to the date of this Report, we raised $1,029,443 in
initial funding and Series A private placements of restricted common stock. The
money raised in the initial funding and our Series A private placements will not
be sufficient to meet our projected cash flow deficits from operations and will
not be sufficient to fund the continuation of the development of our technology
and products. Over the next twelve months, the Company will need to raise
approximately $5,000,000 to operate as planned. We estimate the total 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 an additional $3,500,000 from the date of this Report for the
next twelve months to expand our operations and marketing activities. Even if we
are able to obtain third party financing, the terms and condition of financing
could have a material adverse affect on our business, results of operations,
liquidity and financial condition. Any investment in our shares is subject to
the significant risk that we will not be able to adequately capitalize our
Company to enable us to continue to develop and implement our business model.
Even if we are able to raise adequate capital, the cost of such capital may be
burdensome and may materially impair our ability to fully implement our business
plan.





The
administrative costs of public company regulatory compliance could become
burdensome and consume a significant amount of our cash resources which could
materially and adversely affect our business.





We will
incur significant costs and expenses in connection with assuring compliance with
all laws, rules and regulations applicable to us as a public company. We
anticipate that our ongoing costs and expenses of complying with our public
reporting company obligations will be approximately $100,000 annually. Our
reporting and compliance costs and expenses may increase substantially if we are
able to deploy our business model on an international basis, which will add
significant cross-border jurisdictional complexity to our regulatory compliance
and our accounting controls and procedures. Our compliance costs and expenses
could also increase substantially if we apply for trading of our securities on a
national stock exchange which may have listing requirements that engender
additional administration and compliance costs. We have assigned a high priority
to establishing and maintaining controls, procedures, corporate compliance and
public company reporting; however, there can be no assurance that we will have
sufficient cash resources available to satisfy our public company reporting and
compliance obligations. If we are unable to cover the cost of proper
administration of our public company compliance and reporting obligations, we
could become subject to sanctions, fines and penalties, our stock could be
barred from trading in public capital markets and we may have to cease doing
business.





Our
Auditors have issued an opinion expressing uncertainty regarding our ability to
continue as a going concern. If we are not able to continue operations,
investors could lose their entire investment in our company.





We have a
history of operating losses, and may continue to incur operating losses for the
foreseeable future. This raises substantial doubts about our ability to continue
as a going concern. Our auditors issued an opinion in their audit report
expressing uncertainty about our ability to continue as a going concern. This
means that there is substantial doubt whether we can continue as an ongoing
business without additional financing and/or generating profits from our
operations. If we are unable to continue as a going concern and our Company
fails, investors in our shares could lose their entire investment.





We
operate in highly competitive industries and our success depends on our ability
to effectively compete with numerous domestic and foreign businesses. If we are
unable to compete effectively our business could fail.





We face
competition from a number of domestic and foreign businesses, some of which have
substantially greater financial resources than we do, which could adversely
affect our ability to enter into contracts with lottery operators. We operate in
a period of intense price-based competition which could adversely affect the
number and the profitability of contracts we may be able to obtain. We currently
do not have any contracts and due to competition and the nature of the lottery
industry, we do not know when or if we will be able to enter into any contracts.
Intense competition could result in pricing pressures, lower sales, reduced
margins, and lower market share. Our ability to compete successfully will depend
on a number of factors, both within and outside our control.





We expect
these factors to include the following:





·
            our
      success in designing, testing and delivering new features, including
      incorporating new technologies on a timely
  basis;


13


·
            our
      ability to address the needs of end-users and the quality of services for
      customers of the lottery operators;





·
            the
      quality, performance, reliability, features, ease of use and pricing of
      our application;





·
            successful
      implementation and expansion of our application’s
      capabilities;





·
            our
      efficiency of production, and ability to deliver the application to the
      lottery operators and to end-users;





·
            the
      rate at which commercially available smart phone equipment manufactures
      provide a technologically accessible format for incorporation of our
      solutions into their devices;





·
            the
      market acceptance of our application;
and





·
            product
      or technology introductions by our
competitors.





Our
competitive position could be damaged if one or more potential lottery operators
decide to develop their own solution or utilize a third party solution using
alternative software and hardware technologies. Our prospective lottery operator
customers may be reluctant to rely on a relatively small company such as our
company. In addition, contract awards by lottery operators are sometimes
challenged by unsuccessful bidders which can result in costly and protracted
legal proceedings that can result in delayed implementation or cancellation of
the contract. We cannot assure you that we will be able to compete successfully
against current and future competition, and the failure to do so would have a
materially adverse effect upon our business, operating results and financial
condition and our business. If we do not compete effectively, our business could
fail and investors could lose their entire investment.





The
market for mobile lottery services is in the early stages of development, and if
the market for our services does not develop as we anticipate, it will have a
material adverse effect on our business, prospects, financial condition and
results of operations.





Mobile
lottery services, in general, are in the early stages of development. Our future
revenue and profits are substantially dependent upon the widespread acceptance,
growth, and use of mobile as an effective sales and purchasing medium. Most
lotteries have generally relied upon more traditional forms of consumer sales of
tickets through a variety of third-party owned stores, and most lottery
operators have no, or only limited, experience on sales through mobile devices.
Mobile lottery services are still in an early stage of development and may not
be accepted by consumers or lottery operators for many reasons. If either the
consumers or lottery operators reject our services, the commercial utility of
our technology and services may not develop as we anticipate. If the market for
mobile lottery services does not develop as we anticipate, our business could be
materially and adversely affected.





Risks
Related To Our Intellectual Property





We
are only at the initial stage of development of our software. If we are not able
to further develop our software our business could fail.





As of the
date of this Report, our mobile lottery software application has not yet been
commercially tested or utilized by any lottery operators and we have not yet
generated any revenues from our technology. We have developed working
demonstrations of our lottery application (which is operable on most Blackberry
smart phones including the Pearl, the Curve, the Bold, and 8800 series), as well
as a scratch card game which is operating on Android devices. Our current
lottery demonstration model of our software includes three of the six components
that together will constitute our full mobile lottery application. The completed
components include lottery game selection, lottery number picking and lottery
number authorization. The three components remaining to be developed include
player registration, financial settlement and player messaging functions. We
issued an RFP (request for proposal) to six qualified suppliers on August 25,
2009, indicating that we intend to develop the remaining components of our full
feature system. The purpose of this RFP is to build the various modules
necessary for lottery play on mobile cell phones, including player registration,
ticket selection, ticket registration, settlement, and direct to player
communication and marketing. After scoring, conducting due diligence, and
initial contracting, we have selected one supplier to develop our software
products. Pending final contract completion and execution, we expect the next
version of our software could be ready for commercialization approximately nine
months from the point at which Loto directs its development partner to undertake
the development activity. Loto will give such direction once it raises
sufficient funds. There is no guarantee that our full feature mobile lottery
application will continue to be developed on a timely basis, be able to be
certified by lottery operators, third party carriers and service-providers, or
operate in the manner for which it is intended. The uncertainties related to
continuation of development and refinement of our software application present
material risks of failure which could cause a complete loss of your investment
in our Company.


14





Failure
to adequately protect our intellectual property and proprietary rights could
harm our competitive position and adversely affect our ability to conduct
business which could result in loss of your entire investment in our
Company.





Our
success is substantially dependent upon our proprietary technology, which
relates to a variety of business, security, and transactional processes
associated with our mobile lottery services technology. We expect to rely on a
combination of patent, trademark, copyright and trade secret laws to protect our
proprietary rights. Although we have filed for certain patent protection over
aspects of our technology, much of our proprietary information and processes may
not be patentable. We cannot assure you that any pending patent applications
will be issued or that their scope is broad enough to provide us with meaningful
protection. Although we will file applications for registered trademarks
covering certain of the marks we use in our business, we cannot assure you that
we will be able to secure significant protection for these marks. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our technology and/or services or to obtain and use information
that we regard as proprietary. We cannot assure you that our means of protecting
our proprietary rights will be adequate or that our competitors will not
independently develop similar technology or duplicate our services or design
around patents issued to us or our other intellectual property rights. If we are
unable to adequately protect our intellectual property and proprietary rights,
our business and our operations could be materially and adversely
affected.





We
may be subject to intellectual property claims that create uncertainty about
ownership of technology essential to our business and divert our managerial and
other resources which could have a material adverse affect on our
business.





There has
been a substantial amount of litigation in the technology industry regarding
intellectual property rights. Our success depends, in part, on our ability to
protect our intellectual property and to operate without infringing on the
intellectual property rights of others in the process. There can be no guarantee
that any of our intellectual property will be adequately safeguarded, or that it
will not be challenged by third parties. We may be subject to patent or
trademark infringement claims or other intellectual property infringement claims
that would be costly to defend and could limit our ability to use certain
critical technologies. We may also become subject to interference proceedings
conducted in the patent and trademark offices of various countries to determine
the priority of inventions.





Any
patent litigation or interference proceedings could have a negative effect on
our business by diverting resources and management attention away from other
aspects of our business and adding uncertainty as to the ownership of technology
and services that we view as proprietary and essential to our business.
Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type
of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other
interim proceedings or developments in the litigation. If investors perceive
these results to be negative, it could have an adverse effect on the trading
price of our common stock.





In
addition, a successful claim of patent or trademark infringement against us and
our failure or inability to obtain a license for the infringed or similar
technology or trademark on reasonable terms, or at all, could have a material
adverse effect on our business and the value of any investment in our Company.
Also, an adverse determination of any litigation or defense proceedings could
cause us to pay substantial damages, including treble damages if we are found to
have willfully infringed, and, also, could put our patent applications at risk
of not being issued.


15





If
we are not able to respond to the rapid technological change characteristic of
our industry, our products and services may cease to be competitive and our
business could fail and cause the entire loss of your entire investment in our
Company.





The
mobile industry is characterized by rapid change in business models and
technological infrastructure, and we will need to constantly adapt to changing
markets and technologies to provide new and competitive products and services.
If we are unable to ensure that our users, lottery operators, and distribution
partners have a high-quality experience with our services, then they may become
dissatisfied and stop using our products and services. Accordingly, our future
success will depend, in part, upon our ability to develop and offer competitive
products and services. We may not, however, be able to successfully do so, and
our competitors may develop innovations that render our products and services
obsolete or uncompetitive. If we are not able to compete effectively, our
business could fail which could result in the loss of your entire investment in
our Company.





Our
technical systems are vulnerable to interruption and damage that may be costly
and time-consuming to resolve and may harm our business and reputation which
could materially and adversely affect the value of your investment in our
Company.





Our
systems and operations are vulnerable to damage or interruption from fire,
floods and other natural disasters. Furthermore, network failures, hardware
failures, software failures, power loss, telecommunications failures, break-ins,
terrorism, war or sabotage, computer viruses, penetration of our network by
unauthorized computer users and “hackers” and other similar events, and other
unanticipated problems all pose serious threats to our success. We may not have
developed or implemented adequate protections or safeguards to overcome any of
these events. We also may not have anticipated or addressed many of the
potential events that could threaten or undermine our technology network. In
addition, if a person is able to circumvent our security measures, he or she
could destroy or misappropriate valuable information or disrupt our operations.
Any of these occurrences could cause material interruptions or delays in our
business, result in the loss of data or render us unable to provide services to
our customers which could have the further result of materially and adversely
affecting the value of your investment in our Company.





Our
business depends on the protection of our intellectual property and proprietary
information. If we are unable to adequately protect our intellectual property
and proprietary information our business and your investment our Company could
be materially and adversely affected.





We
believe that our success depends, in part, on protecting our intellectual
property in those countries in which we will do business. Our intellectual
property includes certain pending patents and trademarks relating to our mobile
technology and jurisdictional validation as well as proprietary or confidential
information that is not subject to patent or similar protection. Our
intellectual property protects the integrity of the games, systems, products and
services, which is a core value of the industries in which we operate. For
example, our intellectual property is designed to ensure the security of the
distribution of the lottery tickets we provide as well as simple and secure
validation of our lottery tickets sold. Competitors may independently develop
similar or superior products, software, systems or business models. In cases
where our intellectual property is not protected by an enforceable patent, such
independent development may result in a significant diminution in the value of
our intellectual property.





There can
be no assurance that we will be able to protect our intellectual property. We
expect to enter into confidentiality or license agreements with our employees,
vendors, consultants, and, to the extent legally permissible, our customers. We
intend to generally control access to, and the distribution of, our game systems
and other software documentation and other proprietary information, as well as
the designs, systems and other software documentation and other information we
license from others. Despite our efforts to protect these proprietary rights,
unauthorized parties may try to copy our gaming technology, business models or
systems, use certain of our confidential information to develop competing
products, or develop independently or otherwise obtain and use our gaming
products or technology, any of which could have a material adverse effect on our
business. Policing unauthorized use of our technology is difficult and
expensive, particularly because of the global nature of our operations. The laws
of other countries may not adequately protect our intellectual
property.


16


There can
be no assurance that our business activities, products and systems will not
infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against us. Any such claim and any resulting
litigation, should it occur, could subject us to significant liability for
damages and could result in invalidation of our proprietary rights, distract
management, and/or require us to enter into costly and burdensome royalty and
licensing agreements. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to us, or may not be available at all. In
the future, we may also need to file lawsuits to defend the validity of our
intellectual property rights and trade secrets, or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or unsuccessful, could result in substantial costs and diversion of resources.
If we are unable to adequately protect our intellectual property and proprietary
information, our business and your investment our Company could be materially
and adversely affected.





Risks
Related To Our Business





Our
success will depend heavily on our management. If we fail to hire and retain
qualified management and other key personnel, the implementation of our business
plan will be materially and adversely affected.





Our
performance is substantially dependent on the continued services and performance
of our executive officers and other key personnel, and our ability to retain and
motivate our officers and key employees. Our future success also depends on our
ability to identify, attract, hire, train, retain and motivate other highly
skilled technical, managerial and marketing personnel. Competition for qualified
personnel is intense, and we cannot assure you that we will be successful in
attracting and retaining such personnel. The failure to attract and retain our
officers or the necessary technical, managerial and marketing personnel could
have a material adverse effect on our business, prospects, financial condition
and results of operations.





We
do not have employment agreements with our key management team and employees,
and should we lose the services of our management team and key employees our
ability to conduct business could be materially and adversely
affected.





As of the
date of this Report, we have not entered into employment agreements with any of
our officers or key employees. We are currently negotiating terms and conditions
for agreements with our officers and key employees. If we are not able to
negotiate mutually acceptable terms and conditions for agreements and continued
services to our company by officers and key employees, the loss of the services
of these persons could materially and adversely harm our business, financial
condition and results of operations.





Our
dependence on management and directors creates risks. The loss of our
experienced officers, key employees, or directors could materially and adversely
affect our ability to professionally manage our business.





Our plan
for success is dependent, in large part, on the active participation of our
executive officers and board of directors. The loss of their services would
materially and adversely affect our business and future success. We do not have
key-man life insurance in effect at the present time. Should any of our key
employees die or become incapacitated, we may not be able to replace them in a
timely or cost effective manner which could materially and adversely harm our
business, financial condition and results of operations.





We
expect that our anticipated future growth may strain our management,
administrative, operational and financial infrastructure. Failure of our ability
to reasonably manage anticipated growth could materially and adversely affect
our business.





We
anticipate that significant expansion of our present operations will be required
to capitalize on market opportunities. This expansion is expected to place a
significant strain on our management, operational and financial resources. We
expect to add a substantial number of additional key personnel in the future,
including key managerial, technical, and software development employees who will
have to be fully integrated into our operations. In order to manage our growth,
we will be required to continue to implement and improve our operational and
financial systems, to expand existing operations, to attract and retain superior
management, and to train, manage and expand our employee base. We cannot assure
you that we will be able to effectively manage the expansion of our operations,
that our systems, procedures or controls will be adequate to support our
operations or that our management will be able to successfully implement our
business plan. If we are unable to manage growth effectively, our business,
financial condition and results of operations could be materially and adversely
affected.


17





Providing
our products to customers outside of the United States exposes us to risks
inherent in international business which could have a material and adverse
affect on our operations.





For the
foreseeable future, we expect to pursue business outside of the United States.
Accordingly, we are subject to risks and challenges that we would otherwise not
face if we conducted our business only in the United States. The risks and
challenges associated with providing our products to customers outside the
United States include: localization of our products, including translation into
foreign languages and associated expenses; laws and business practices favoring
local competitors; compliance with multiple, conflicting and changing
governmental laws and regulations; foreign currency fluctuations; different
pricing environments; different tax regimes and regional economic and political
conditions. Any of these factors, either individually or collectively, could
have a material adverse effect on our business and results of
operations.





We
will need additional funding in the future to pursue our business strategy and
expand our operations. If additional future funding is not available to us our
financial condition could be materially and adversely affected and our business
may fail.





Over the
next twelve months, the Company will need to raise approximately $5,000,000 to
operate as planned. We estimate the total 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 an additional $3,500,000 from the date of this Report for the next
twelve months to expand our operations and marketing activities. There can be no
assurance that additional financing arrangements will be available in amounts or
on terms acceptable to us, if at all. Furthermore, if adequate additional funds
are not available, we will be required to delay, reduce the scope of, or
eliminate material parts of the implementation of our business strategy. If we
do not obtain additional financing in amounts and on terms acceptable to us, our
business may fail.





The
current economic slowdown may adversely affect our business and financial
condition in ways that we cannot predict. If the economy does not recover during
the reasonably foreseeable future our ability to conduct business may not be
viable and we may have to cease operations which could result in the entire loss
of your investment in our Company.





The
current economic slowdown may have a negative effect on our business and
financial condition. We cannot predict the effect that the economic slowdown
will have on us as it also impacts our customers, vendors and business partners.
We believe that the lottery gaming businesses are less susceptible to reductions
in consumer spending and other parts of the consumer sector. However, there can
be no assurance that the continuation or worsening of the current economic
slowdown will not negatively impact the lottery gaming businesses. If the
economy does not recover during the reasonably foreseeable future, our ability
to conduct business may not be viable and we may have to cease operations which
could result in the loss of your entire investment in our Company.





The
current economic slowdown and general unavailability of commercial credit may
adversely affect our ability to obtain financing and could have a material
adverse effect on our ability to conduct business.





The
uncertainty surrounding the future of the global credit markets has resulted in
reduced access to financing and credit worldwide. Major market disruptions and
the current adverse changes in global market conditions and the evolving
regulatory restrictions in the United States and worldwide may adversely affect
our business or impair our ability to obtain funds as needed. The current
adverse market conditions may last longer than we anticipate. These recent and
developing economic and governmental factors may have a material adverse effect
on our results of operations, financial condition or cash flows and could cause
the price of our common stock to decline significantly. If we require credit
financing for any aspect of our conducting business we may not be able to obtain
it on a timely basis or on reasonable terms, if at all.


18





Our
business is subject to evolving technology. If we are unable to upgrade our
technologies responsive to changes in the industry our Company could
fail.





The
markets for all of our products and services are affected by changing
technology, new legislation and evolving industry standards. Our ability to
anticipate or respond to such changes and to develop and introduce new and
enhanced products and services on a timely basis will be a significant factor in
our ability to expand, remain competitive and attract new customers. We can give
no assurance that we will achieve the necessary technological advances or have
the financial resources needed to introduce new products or services on a timely
basis or that we will otherwise have the ability to compete effectively in the
markets. If we are unable to remain current with industry developments and
upgrade our technologies in response to changes in the industry, the Company
could fail and investors could lose their entire investment in the
Company.





Our
business competes on the basis of the security and integrity of our systems and
our mobile lottery software application. If there is a breach in our security
systems, our business and our Company could suffer materially adverse
consequences.





We
believe that our success depends, in part, on providing secure products and
systems to the lottery operators and their playing customers. Attempts to
penetrate security measures may come from various combinations of customers,
retailers, vendors, employees and others. Our ability to monitor and ensure
quality of our products is periodically reviewed and enhanced. Similarly, we
intend to regularly assess the adequacy of our security systems to protect
against security breaches and take reasonable measures to protect the integrity
of the product for end-users. There can be no assurance that our business will
not be affected by a security breach or lapse, which could have a material
adverse impact on our results of operations, business or prospects.





Implementation
of additions or changes in third-party hardware and software platforms used to
deliver our services may result in performance problems and may not provide
additionally anticipated functionality, which could result in material and
adverse affects on our ability to conduct business.





From time
to time, we may implement additions to or changes in the hardware and software
platforms we use for providing our services. During and after the implementation
of additions or changes, a platform may not perform as expected, which could
result in interruptions in operations, an increase in response time or an
inability to track performance metrics. In addition, in connection with
integrating with our customers, we may move their operations to our hardware and
software platforms or make other changes, any of which could result in
interruptions in those operations. Any significant interruption in our ability
to operate any of our services could have an adverse effect on our relationships
with users and clients and, as a result, on our financial results. We rely on a
combination of purchasing, licensing, internal development, and acquisitions to
develop our hardware and software platforms. Our implementation of additions to
or changes in these platforms may cost more than originally expected, may take
longer than originally expected, and may require more testing than originally
anticipated. In addition, we cannot provide assurance that additions to or
changes in these platforms will provide the additional functionality and other
benefits that were originally expected. If we are unable to conform our
technology to third-party additions or changes in hardware and software
platforms used to deliver our services, our business could be materially and
adversely affected.





We
rely on third party technology and hardware providers. A failure of service by
these providers could adversely affect our business and reputation.





We will
rely on third party providers for components of our technology platform, such as
hardware and software providers. A failure or limitation of service or available
capacity by any of these third party providers could materially and adversely
affect our business and reputation with corresponding adverse affects upon the
value of your investment in our Company.


19





Risks
Related to the Legal and Regulatory Environment in Which We Operate





Government
and legal regulations may require significant time, money and allocation of
Company resources. If we are unable to allocate adequate Company resources for
compliance with such regulations, our Company and our business could be
materially and adversely affected.





During
the foreseeable future, we expect to pursue our business outside of the United
States until applicable laws in the United States permit sales of lottery
tickets utilizing mobile telecommunications devices. As of the date of this
Report, current U.S. laws prohibit sales of lottery tickets utilizing mobile
telecommunications devices. Existing or future laws and regulations in other
countries may impair our ability to expand our business and introduce new
products and services, or may restrict the use of our services or the features
we offer. Changes to the existing regulatory framework in countries where we
intend to offer our services could adversely affect our business
plans.





In
addition to regulation of lottery ticket sales, the mobile telecommunications
industry faces uncertainty related to future government regulation. Due to the
rapid growth and widespread use of mobile telephones, legislatures have enacted
and may continue to enact various laws and regulations applicable to the mobile
telecommunications industry. Laws and regulations may be adopted in the future
which directly govern mobile device lottery services. The adoption of laws or
regulations could decrease the demand for our technology and services and
increase our cost of doing business or otherwise have a material adverse effect
on our business, prospects, financial condition and results of
operations.





In
addition, foreign governments may pass laws which could negatively impact our
business and/or may prosecute us for violating existing laws. Such laws might
include EU member country conforming legislation under applicable EU Privacy and
Data Protection Directives. Any costs incurred in complying with foreign laws
could negatively affect the viability of our business.





Our
industry is subject to strict government regulations that may limit our existing
operations and have a negative impact on our ability to grow, which could be
materially adverse to our business and prospects.





In the
United States and many other countries, lotteries and other forms of wagering
must be expressly authorized by law. Once authorized, such activities are
subject to extensive and evolving governmental regulation. Moreover, these
gaming regulatory requirements vary from jurisdiction to jurisdiction. We expect
to be subject to a wide range of complex gaming laws and regulations in the
jurisdictions in which we intend to operate which could be time consuming,
expensive and distracting to management. As a result, such regulatory
requirements could be materially adverse to our business and
prospects.





The
regulatory environment in any particular jurisdiction may change in the future,
and any such change could have a material adverse effect on our results of
operations, business or prospects. Moreover, there can be no assurance that the
sale of lottery services over mobile devices will be approved by additional
jurisdictions or that those jurisdictions in which these activities are
currently permitted will continue to permit such activities. Although we believe
that we plan to develop procedures and policies to comply with the requirements
of evolving laws, there can be no assurance that law enforcement or gaming
regulatory authorities will not seek to restrict our business in their
jurisdictions or institute enforcement proceedings if we are not
compliant.





Moreover,
in addition to the risk of enforcement action, we are also at risk of loss of
business reputation in the event of any potential legal or regulatory
investigation whether or not we are ultimately accused of or found to have
committed any violation.





We may be
required to obtain licenses from various jurisdictions in order to operate
certain aspects of our business and we might be subject to extensive background
investigations and suitability standards in our lottery business. Lottery
authorities generally conduct background investigations of the selected vendor
and its employees prior to and after the award of a lottery contract. Generally,
regulatory authorities have broad discretion when granting, renewing or revoking
these approvals. Lottery authorities may require the removal of any of our
employees deemed to be unsuitable and are generally empowered to disqualify us
from receiving a lottery contract or operating a lottery system as a result of
any such investigation. Our failure, or the failure of any of our key personnel
or systems in obtaining a required license or approval in one jurisdiction could
negatively impact our ability (or the ability of any of our key personnel or
systems) to obtain required licenses and approvals in other jurisdictions. The
failure to obtain a required license or approval in any jurisdiction would
decrease the geographic areas where we may operate and generate revenues,
decrease our share in the gaming marketplace and put us at a disadvantage
compared with our competitors.


20





Some
jurisdictions also require extensive personal and financial disclosure and
background checks from persons and entities beneficially owning a specified
percentage (typically 5% or more) of our equity securities. The failure of these
beneficial owners to submit to such background checks and provide required
disclosure could jeopardize the award of a contract to us. Additional
restrictions are often imposed by international jurisdictions.





While we
are firmly committed to full compliance with all applicable laws, there can be
no assurance that such steps will prevent the violation of one or more laws or
regulations, or that a violation by us or an employee will not result in the
imposition of a monetary fine or suspension or revocation of any
contract.





Gaming
opponents persist in their efforts to curtail legalized gaming, and particularly
internet gaming which, if successful, could limit our operations or cause us to
cease doing business.





Legalized
gaming is subject to opposition from gaming opponents. There can be no assurance
that this opposition will not succeed in preventing gaming in jurisdictions
where these activities are presently legalized, prohibited or prohibiting or
limiting the expansion of gaming where it is currently permitted. If we cannot
legally conduct business, our Company could fail.





Failure
to perform under lottery contracts may result in litigation, substantial
monetary liquidated damages and contract termination which would materially and
adversely affect our business.





Our
business may subject us to contractual penalties and risks of litigation,
including due to potential allegations that we have not fully performed under
contracts or that goods or services we supply are defective in some respect.
Lottery contracts typically permit a lottery authority to terminate the contract
at any time for material failure to perform, other specified reasons and, in
many cases, for no reason at all. Lottery contracts also frequently contain
exacting implementation schedules and performance requirements and the failure
to meet these schedules and requirements may result in substantial monetary
liquidated damages, as well as possible contract termination. Material amounts
of liquidated damages could be imposed on us in the future, which could, if
imposed, have a material adverse effect on our results of operations, business
or prospects and on our ability to continue to conduct business.





Risks
Related To Our Stock





Our
limited operating history makes evaluation of our business difficult, and may
discourage trading in our stock which could adversely affect the price of our
stock.





We
started to develop our lottery technology in 2008 and we have not yet
commercially deployed our technology. We, therefore, have limited historical
financial data related to our current business upon which to analyze operating
expenses or forecast accurately our future operating results. Our limited
operating history will make it difficult for investors to evaluate our business
and prospects which may discourage trading in our stock with potential further
adverse affect on the price of our stock.


21





We
will need to raise additional capital. If we are unable to raise additional
capital, our business may fail.





We will
need to raise additional capital to provide cash for our operations. Our current
working capital is not expected to be sufficient to carry out all of our plans
and to fund our operating losses until we are able to generate enough revenues
to sustain our business. The fact that we have not generated any revenues to
date may deter potential investors from providing financing. Uncertainty
regarding our ability to generate revenues may make it difficult for us to find
financing on acceptable terms. If we are unable to obtain adequate funding, we
may not be able to successfully develop and market our products and our business
will most likely fail. To secure additional financing, we may need to borrow
money or sell more securities. Under the current circumstances, we may be unable
to secure additional financing on favorable terms, if available at
all.





The
market price of our common stock may be volatile which could adversely affect
the value of your investment in our common stock.





The
trading price of our common stock may be highly volatile and could be subject to
wide fluctuations in response to various factors. Some of the factors that may
cause the market price of our common stock to fluctuate include:





·
            fluctuations
      in our quarterly financial results or the quarterly financial results of
      companies perceived to be similar to
us;





·
            changes
      in estimates of our financial results or recommendations by securities
      analysts;





·
            failure
      of any of our products to achieve or maintain market
      acceptance;





·
            changes
      in market valuations of similar
companies;





·
            significant
      products, contracts, acquisitions or strategic alliances of our
      competitors;





·
            success
      of competing products or services;





·
            changes
      in our capital structure, such as future issuances of securities or the
      incurrence of additional debt;





·
            regulatory
      developments in Canada, United States or foreign
  countries;





·
            litigation
      involving our company, our general industry or
  both;





·
            additions
      or departures of key personnel;





·
            investors’
      general perception of us; and





·
            changes
      in general economic, industry and market
  conditions.





In
addition, if the market for technology or mobile lottery service stocks or the
stock market in general experiences a loss of investor confidence, the trading
price of our common stock could decline for reasons unrelated to our business,
financial condition or results of operations. If any of the foregoing occurs, it
could cause our stock price to fall and may expose us to class action lawsuits
that, even if unsuccessful, could be costly to defend and a distraction to
management, which could further adversely affect the value of your investment in
our common stock.





Fluctuations
in the value of foreign currencies could result in increased costs and operating
expenses which could adversely affect our business.





For our
projected international operations, the local currency will be designated as the
functional currency. Accordingly, assets and liabilities must be translated into
U.S. Dollars at year-end exchange rates, and revenues and expenses will be
translated at average exchange rates prevailing during the year. Fluctuations in
the value of other currencies in which we may generate revenues or incur costs
may be difficult to predict and could cause us to incur currency exchange
losses. Receivables and liabilities in currencies other than the functional
currency could also move adversely to us from the date of accrual by us to the
date of actual settlement of receivables or liabilities in a currency other than
the functional currency. A disparity between the accrual and settlement amounts
due to currency exchange costs could have a material adverse affect on our
business. We cannot predict the effect of exchange rate fluctuations on our
future operating results. Future fluctuations in currency exchange rates could
materially and adversely affect our business.


22





Certain
governments with whom we may do business may impose restrictions over the
conversion of their currencies into U.S. dollars or other foreign currencies.
There can be no assurance that we will be able to convert foreign revenues into
U.S. dollars for repatriation and this may adversely affect our
business.





We
do not currently intend to pay dividends on our common stock and, consequently,
the ability to achieve a return on your investment in our common stock will
depend on appreciation in the price of our common stock. If our common stock
does not appreciate in value, investors could suffer losses in their investment
in our common stock.





We do not
expect to pay cash dividends on our common stock. Any future dividend payments
are within the absolute discretion of our Board of Directors and will depend on,
among other things, our results of operations, working capital requirements,
capital expenditure requirements, financial condition, contractual restrictions,
business opportunities, anticipated cash needs, provisions of applicable law and
other factors that our Board of Directors may deem relevant. We may not generate
sufficient cash from operations in the future to pay dividends on our common
stock. As a result, the success of your investment in our common stock will
depend on future appreciation in its value. The price of our common stock may
not appreciate in value or even maintain the price at which you purchased our
shares. If our common stock does not appreciate in value, investors could suffer
losses in their investment in our common stock.





You
may experience dilution of your ownership interests due to the future issuance
of additional shares of our common stock which could be materially adverse to
the value of our common stock.





As of
that date of this Report, we have 54,572,963 shares of our common stock issued
and outstanding. We are authorized to issue up to 100,000,000 shares of common
stock. Our Board of Directors may authorize the issuance of additional common or
preferred shares under applicable state law without shareholder approval. We may
also issue additional shares of our common stock or other securities that are
convertible into or exercisable for common stock in connection with the hiring
of personnel, future acquisitions, future private placements of our securities
for capital raising purposes or for other business purposes. Future sales of
substantial amounts of our common stock, or the perception that sales could
occur, could have a material adverse effect on the price of our common stock. If
we need to raise additional capital to expand or continue operations, it may be
necessary for us to issue additional equity or convertible debt securities. If
we issue equity or convertible debt securities, the net tangible book value per
share may decrease, the percentage ownership of our current stockholders may be
diluted and such equity securities may have rights, preferences or privileges
senior or more advantageous to our common stockholders.





We
anticipate that our common stock will initially be considered to be a "Penny
Stock," which will cause the trading of our stock to be subject to significant
regulations that could adversely affect the value of our common
stock.





We
anticipate that our common stock will initially be a low-priced security, or a
“penny stock” as defined under rules promulgated under the Exchange Act. A stock
is a "penny stock" if it meets one or more of the definitions in Rules 15g-2
through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include
but are not limited to the following: (i) the stock trades at a price less than
$5.00 per share; (ii) it is not traded on a "recognized" national exchange;
(iii) it is not quoted on The NASDAQ Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company with net tangible
assets less than $2.0 million, if in business more than a continuous three
years, or with average revenues of less than $6.0 million for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in it
on an unsolicited basis.


23





In
accordance with these rules, broker-dealers participating in transactions in
low-priced securities must first deliver a risk disclosure document which
describes the risks associated with such stocks, the broker-dealer’s duties in
selling the stock, the customer’s rights and remedies and certain market and
other information. Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer’s financial situation, investment experience and objectives.
Broker-dealers must also disclose these restrictions in writing to the customer,
obtain specific written consent from the customer, and provide monthly account
statements to the customer. The effect of these restrictions probably decreases
the willingness of broker-dealers to make a market in our common stock,
decreases liquidity of our common stock and increases transaction costs for
sales and purchases of our common stock as compared to other securities. As a
result of these effects, the trading value of our common stock could be
materially and adversely affected.





Broker-dealer
requirements may affect the trading and liquidity of our stock which could
materially and adversely affect the value of our common stock.





Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effectuating any transaction in a penny stock for the investor's
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise. These
requirements could discourage interest in trading in our common stock and could
materially and adversely affect the public trading value of our common
stock.





Our
securities will be subject to sales restrictions imposed by state “Blue Sky
Laws” that will limit the States where our stock may be traded and could reduce
the public market value of our stock.





State
securities regulations may affect the transferability of our shares. We have not
registered any of our shares for sale or resale under the securities or "blue
sky" laws of any state. We do not currently plant to register or qualify our
shares for sale or resale in any state. In many states, but not all states,
shareholders can generally make unsolicited sales of securities through
registered broker-dealers. Arkansas, Georgia, Illinois, Louisiana, New York,
North Dakota, Ohio, Oregon and Tennessee, do not permit shareholders to make
unsolicited sales of securities through broker dealers. Persons who desire to
purchase our shares in any trading market that may develop in the future should
be aware that these state regulations may limit sales and purchases of our
shares. The inability to trade or sell our common stock in certain states could
materially and adversely affect the public market value of our
stock.





If
a trading market for our securities develops, it may be volatile which could
make it difficult to sell shares of common stock or cause sales of common stock
at a loss.





If an
active trading market does develop, the market price of our common stock is
likely to be highly volatile due to, among other things, the nature of our
business and because we are a new public company with a limited operating
history. Furthermore, even if a public market develops, the volume of trading in
our common stock will presumably be limited and likely be dominated by a few
individual stockholders. The limited volume, if any, will make the price of our
common stock subject to manipulation by one or more stockholders and will
significantly limit the number of shares that one can purchase or sell in a
short period of time.





The
equity markets have recently experienced significant price and volume
fluctuations that have adversely affected the market prices for many companies'
securities. These fluctuations may not be directly attributable to the operating
performance of these companies. Any such fluctuations may adversely affect the
market price of our common stock, regardless of our actual operating
performance. As a result, stockholders may be unable to sell their shares, or
may be forced to sell shares of our common stock at a loss.


24





Shares
eligible for future sale may adversely affect the market price of our common
stock. The future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.





From time
to time, certain of our stockholders may be eligible to sell their shares of
common stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144 of the Securities Act of 1933, as amended, subject to
certain compliance requirements. In general, under Rule 144, unaffiliated
stockholders (or stockholders whose shares are aggregated) who have satisfied a
six month holding period may sell shares of our common stock, so long as we have
filed all required reports under Section 13 or 15(d) of the Exchange Act during
the applicable period preceding such sale. Generally, once a period of six
months has elapsed since the date the common stock was acquired from us or from
an affiliate of ours, unaffiliated stockholders can freely sell shares of our
common stock so long as the requisite conditions of Rule 144 and other
applicable rules have been satisfied. Also generally, twelve months after
acquiring shares from us or an affiliate, unaffiliated stockholders can freely
sell their shares without any restriction or requirement that we are current in
our SEC filings. Any substantial sales of common stock pursuant to Rule 144 may
have an adverse affect on the market price of our common stock.





Failure
to achieve and maintain internal controls in accordance with Sections 302 and
404(a) of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and stock price.





If we
fail to maintain adequate internal controls or fail to implement required new or
improved controls, as such control standards are modified, supplemented or
amended from time to time, we may not be able to assert that we can conclude on
an ongoing basis that we have effective internal controls over financial
reporting. Effective internal controls are necessary for us to produce reliable
financial reports and are important in the prevention of financial fraud. If we
cannot produce reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and there could be a material adverse effect on
our stock price.





Certain
holders of our common stock exert significant influence over our company and may
make decisions with which other stockholders may disagree that could reduce the
value of our stock.





A Few
Brilliant Minds Inc. and 2238646 Ontario Inc. together now own a total of
38,700,000 of our 54,572,963 issued and outstanding shares, which represents
70.9% of our shares. As a result, A Few Brilliant Minds Inc. and 2238646 Ontario
Inc. have the ability to exert significant influence over our business and may
make decisions with which other stockholders may disagree, including, among
other things, the appointment of officers and directors, changes in our business
plan, delaying, discouraging or preventing a change of control of Loto or a
potential merger, consolidation, tender offer, takeover or other business
combination. The two shareholders are parties to an agreement which includes
certain mutual covenants, including nominating and voting for an equal number of
representatives to serve on our Board of Directors.





ITEM
1B:UNRESOLVED STAFF
COMMENTS





Pursuant
to permissive authority, we have omitted Unresolved Staff Comments.





ITEM
2:PROPERTIES





Our
principal executive offices are located at Suite 460, 20 Toronto Street,
Toronto, Ontario, M5C 2B8. We have a sub-lease in effect until February 2011 for
2,950 square foot location, with a cost of approximately $7,000.00 per month,
which commenced in July 2009. We believe that this property is adequate for our
current and immediately foreseeable operating needs. At the present time, we do
not own any real estate. We do not have any policies regarding investments in
real estate, securities or other forms of property.


25





ITEM
3:            LEGAL
PROCEEDINGS





We are
not aware of any pending or threatened litigation against us that we expect will
have a material adverse effect on our business, financial condition, liquidity,
or operating results. We cannot assure you that we will not be adversely
affected in the future by legal proceedings.





ITEM
4:RESERVED





Not
Applicable.


26


PART
II





ITEM
      5:
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market
Information





Our
common stock trades on the over-the-counter bulletin board quotation system
(OTCBB) under the symbol “LOTI”. The following table shows the range of high and
low bids per share of our Common Stock as reported by the Over-the-Counter
Bulletin Board for the fiscal year periods indicated. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not necessarily represent actual transactions. The
Company’s shares traded on the Over-the-Counter Bulletin Board only once during
the quarter ended May 31, 2010, at a price of $2.50 per share, and have not
traded on the Over-the-Counter Bulletin Board during any other
quarter.





2010High
                            
                            
                            Low4th
      Quarter ended May 31
                            
                            $
                            2.50
                            
                            
                            
                            2.50





Holders





As of the
date of this Report there are 54,572,963 shares of common stock issued and
outstanding.





As of the
date of this Report there are 22 holders of record of our common stock in
certificate form, exclusive of those brokerage firms and/or clearing houses
holding our Common Stock in street name for their clientele (with each such
brokerage house and/or clearing house being considered as one
holder).





Dividend
Policy





We have
not paid any dividends to the holders of our common stock and we do not expect
to pay any such dividends in the foreseeable future as we expect to retain our
future earnings for use in the operation and expansion of our
business.





Securities
Authorized for Issuance Under Equity Compensation Plans





At the
present time, we have no securities authorized for issuance under equity
compensation plans.





ITEM
6:            SELECTED
FINANCIAL DATA





Pursuant
to permissive authority under Regulation S-K, Rule 301, we have omitted Selected
Financial Data.


27





ITEM 7:
            MANAGEMENT'S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
      OPERATIONS




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. Factors that may
cause actual results, our performance or achievements, or industry results, to
differ materially from those contemplated by such forward-looking statements
include without limitation:





·
            Our
      ability to attract and retain management, and to integrate and maintain
      technical information and management information
  systems;


·
            Our
      ability to raise capital when needed and on acceptable terms and
      conditions;


·
            The
      intensity of competition;


·
            General
      economic conditions; and


·
            Changes
      in government regulations.





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.





Plan
of Operation





We are a
development stage company. We are developing a patent-pending software
application which permits the secure purchase of lottery tickets on commercially
available “smart” phones and similar mobile telecommunications devices. A smart
phone is a mobile phone offering advanced capabilities, often with personal
computer-like functionality, such as e-mail, Internet access and other
applications. Our proprietary technology for facilitating the purchase of
lottery tickets through commercially available smart phones and other mobile
devices addresses all elements of lottery play, including secure player
registration and authorization, number selection, settlement, winning number
notification and other direct-to-customer marketing opportunities. We intend to
license our software application to governments and other lottery operators as
our primary source of revenue. We do not intend to become a lottery operator.
During the foreseeable future, we expect to pursue our business outside of the
United States. Our business plan calls for launching our mobile lottery
application in the target markets of Canada, Mexico, South America, Asia
(China), Africa, and Europe (Turkey and the United Kingdom of Great
Britain).


28





We have
developed a working demonstration model of our application which is operable on
most Blackberry smart phones (including the Pearl, the Curve, the Bold, and 8800
series). Our demonstration model of the application includes several of the
components of mobile lottery functionality, including lottery game selection,
lottery number picking and lottery number authorization. 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.





As of the
date of this Report, our mobile lottery software application has not yet been
commercially tested or utilized by any lottery operators and we have not yet
generated any revenues from our technology. We have developed working
demonstrations of our lottery application (which is operable on most Blackberry
smart phones including the Pearl, the Curve, the Bold, and 8800 series), as well
as a scratch card game which is operating on Android devices. Our current
lottery demonstration model of our software includes three of the six components
that together will constitute our full mobile lottery application. The completed
components include lottery game selection, lottery number picking and lottery
number authorization. The three components remaining to be developed include
player registration, financial settlement and player messaging functions. We
issued an RFP (request for proposal) to six qualified suppliers on August 25,
2009, indicating that we intend to develop the remaining components of our full
feature system. The purpose of this RFP is to build the various modules
necessary for lottery play on mobile cell phones, including player registration,
ticket selection, ticket registration, settlement, and direct to player
communication and marketing. After scoring, conducting due diligence, and
initial contracting, we have selected one supplier to develop our software
products. Pending final contract completion and execution, we expect the next
version of our software could be ready for commercialization approximately nine
months from the point at which Loto directs its development partner to undertake
the development activity. Loto will give such direction once it raises
sufficient funds. 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.





Employees





We
currently have five 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 Stephen Knight (President and Chief
Executive Officer), Stephen Baker (Chief Technology Officer), Drew Deyell (Chief
Information Officer), Jeff O’Connor (Vice President of Sales and Marketing), and
Brandice Triolet (Director of Human Resources and Administration).  We
expect to hire additional full time employees in the coming year as necessities
dictate.  We have engaged qualified third-parties for accounting and
legal services.





Results
of Operations





Loto was
incorporated in the state of Nevada on April 22, 2009, and our wholly-owned
subsidiary Mobilotto was incorporated in the province of Ontario in September
2008.  On May 13, 2009, Loto acquired all of the issued and
outstanding shares of Mobilotto (which included all intellectual property of the
mobile lottery purchase system).  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.





Liquidity
and Capital Resources





As of May
31, 2010, the Company had cash of $309,018.  The current cash on hand
in our bank accounts will be sufficient to maintain our operations for
approximately one and a half months from the date of this Report. We have also
prepaid rent in the amount of $8,119 as a condition of renting business
premises, which commenced on July 1, 2009 at Suite 460, 20 Toronto Street in
Toronto, Ontario.  We also own fixed assets with a cost of $31,060
which consists of computer equipment, office furniture and equipment and
leasehold improvements.


29


Current
liabilities as of May 31, 2010 included $49,505 of accrued legal, programming
and general office expenses.
 
 As a
development stage company, we have limited capital and limited operating
resources. We raised $1,029,443 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.
 
 The cash
on hand in our bank accounts will be sufficient to maintain our operations for
approximately one and a half months from the date of this Report.  We
estimate our total overhead, costs and expenses related to completion of a
commercially deployable version of our mobile lottery application, obtaining
certification of our system by the Gaming Standards Association (GSA), repayment
of amounts due under our Standby Loan Agreements and initiating full rollout of
our products to our target markets over the next twelve months will be
approximately $5,000,000.  We expect to need additional amounts of
funding commencing one month from the date of this Report in order to expand our
operations.
 
 Two of
our current shareholders, 2238646 Ontario Inc. and 1476448 Ontario Inc. are
parties to standby financing commitment to our Company under which they have
agreed to provide the necessary funding up to $1,500,000 if we are unable to
obtain revenues or other third-party financing (the “Standby
Loan”).  This Standby Loan was originally made by Mhalka Capital
Investments Ltd. and 1476448 Ontario Inc., however, 2238646 Ontario Inc. has
replaced Mhalka Capital Investments Ltd.  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.
 
 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 Twelve Months Ended May 31, 2010 and the period from
inception (September 16, 2008) to May 31, 2009
 
 Income
 
 We are a
development stage company and as of May 31, 2010 and May 31, 2009 there were no
contracts in place and no revenue has been received.  We do not expect
that revenue will be realized until late 2011.  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.
  30
  Expenses
 
 For the
twelve months ended May 31, 2010, the Company incurred $12,701 in interest
expense and $1,110,091 in total operating expenses.  For the period
from inception (September 16, 2008) to May 31, 2009 the Company incurred $10,979
in operating expenses that related primarily to legal and audit
costs.
 
 Salaries
expense was $485,266 for the twelve months ended May 31, 2010, and comprised
payments to the President, the Chief Technology Officer, the Chief Information
Officer, the Director of Sales & Marketing, and the Manager of Human
Resources and Administration.
 
 Legal
fees incurred of $210,685 for the twelve month periods ended May 31, 2010 were
for the creation of all required public company filings, internal corporate
needs, and reporting conformance, as well as for trademark and patent
applications.
 
 Marketing,
travel and investor relations expenses of $120,243 for the twelve month periods
ended May 31, 2010 were incurred in the creation and printing of investor
information, product information, specific lottery operator presentations,
attendance at trade shows, and a display booth that will be used at lottery
industry trade shows.
 
 Rent
expense of $75,752 for the twelve month periods ended May 31, 2010 is for the
head office of the Company, which is located at Suite 460, 20 Toronto Street in
Toronto Ontario.
 
 Systems
development expenses of $54,908 for the twelve months ended May 31, 2010 were
incurred for the creation and scoring of the Company’s development request for
proposal which was issued in late August of 2009, and on-going refinement of the
Statement of Work and contract through to May 31, 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.
 
 2.   Adherence
to our Marketing Plan (see below section).
 
 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).  Our supplier has been selected.  Pending final
contract completion and execution, we expect the next version of our software
could be ready for commercialization approximately nine months from the point at
which Loto directs its development partner to undertake the development
activity.  Loto will give such direction once it raises sufficient
funds.
 
 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/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.   Proactive
communication and presentations to prospective lottery operators of our
products, status, and understanding their needs.
  31
 
 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 mobile gaming
environment.  Prioritization would be given to those countries with a
combination of material lottery revenues, a high penetration of smart phone
devices, favorable internet gaming regulations, and operators who express an
interest in our product and service.
 
 3.   On
a prioritized country basis, study the local lottery regulations, understand
global and specific country lottery issues, and contact the lottery operators
for visitation and demonstration of Loto products.  Currently,
opportunities appear to be strong in Canada, Mexico, Southeast Asia, and
Europe.  Also, the US 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.
 
 7.   Engage
foreign agents in selected jurisdictions to assist in lottery operator meetings
and general business development
 
 Working
Capital
 
 While we
do not have in-place working capital to fund normal business activities, we are
actively seeking financing in the amount of $5,000,000.
 
 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 $7,500 per
month.
 
 Warrants
 
 As of May
31, 2010, we had no outstanding warrants.
 
 Common
Stock
 
 As of May
31, 2010, there were 54,572,963 shares issued and outstanding, of which
43,572,963 are restricted from trading.
  32
 
 Significant
Business Challenges
 
 In
addition to the challenge of raising adequate capital in order to fully deploy
our business plan, the significant business challenges that our management
expects to encounter over the next year and beyond, as well as the known trends,
demands, uncertainties that may affect our Company’s financial condition include
the following matters:
 
 ·
              We
      have not yet completed the software development of all components
      constituting our full feature mobile lottery application and our financial
      condition would be materially and adversely affected if we are not able to
      complete our software development;
 
 ·
              Since
      there has not yet been any commercial utilization of our application it
      will be more difficult for us to close sales of our untested product with
      prospective lottery operator customers of our Company and we may not able
      to derive any revenues from our
product;
 
 ·
              If
      our product does not perform as anticipated, we may be unable to obtain
      any contracts with lottery operators, or if we are able to enter into
      contracts but the product is not performing, we could become subject to
      litigation, which in either case could adversely affect our financial
      condition;
 
 ·
              Our
      patent application is currently pending and if the patent is not granted
      we may not be able to fully protect our intellectual property which could
      adversely affect our ability to benefit from our
    technology;
 
 ·
              If
      our pending patent is granted, the costs of enforcing our patent and other
      intellectual property rights may be disproportionate to any potential
      revenues, or we may be required to defend allegations from third parties
      alleging infringement of their rights, which in either case could
      adversely affect our financial
condition;
 
 ·
              We
      rely on a small management team and a small group of employees who may not
      be able to be fully responsive to all aspects of operating our business,
      and if we increase our personnel the additional administrative and
      overhead costs could be burdensome, which in either case could adversely
      affect our financial condition;
 
 ·
              The
      international focus of our business model implicates higher costs and
      expenses than domestic companies, including foreign language translation,
      compliance with local laws, business practices favoring local competitors,
      compliance with multiple, conflicting and changing governmental laws and
      regulations as well as changing governments, any of which could adversely
      affect our financial condition;
 
 ·
              We
      expect intensifying competition in our target markets which could force us
      to lower our pricing, reduce our margins, lower our market share and
      reduce expectations of
profitability;
 
 ·
              Foreign
      competitors who are not subject to U.S. anti-corruption laws and
      regulations may engage in illegal and unfair business practices with which
      we cannot compete that could impair our ability to obtain contracts from
      lottery operators in our target foreign
markets;
 
 ·
              Our
      financial results could be damaged if prospective lottery operator
      customers decide to develop their own mobile lottery solution or utilize a
      third party solution using alternative software and hardware
      technologies;
 
 ·
              The
      market for mobile lottery services is still in the early stages of
      development, and if the market for our services does not develop as we
      anticipate, it will have an adverse effect on our financial
      condition;
 
 ·
              Our
      business is subject to evolving technology and if we are unable to upgrade
      our technologies responsive to changes in the industry our financial
      condition could be adversely
affected;
  33
 
 ·
              We
      will rely on third party technology and hardware providers and if there is
      a failure of the products or services rendered by these providers our
      financial condition could be adversely
affected;
 
 ·
              Implementation
      of additions or changes in third-party hardware and software platforms
      used to deliver our services to our customers and end-users may result in
      performance problems which could adversely affect our financial
      condition;
 
 ·
              There
      has not yet been adoption of international standards applicable to mobile
      lottery solutions and as such we may have to change or modify our
      application to conform to disparate standards which could adversely affect
      our financial condition;
 
 ·
              If
      we are able to enter into contracts with international lottery operators,
      we will be subject foreign currency exchange risks, different pricing
      environments; different tax regimes and regional economic and political
      conditions.  Any of these factors, either individually or
      collectively, could have a material adverse effect on our business and
      results of operations; and
 
 ·
              Gaming
      opponents persist in their efforts to curtail legalized gaming which, if
      successful, could limit our operations or cause us to cease doing
      business.
 
 Publicly
Reporting Company Considerations
 
 We will
face several material challenges of operating as a publicly reporting company
and we expect to incur significant costs and expenses applicable to us as a
public company.  We anticipate that our ongoing costs and expenses of
complying with our public reporting company obligations will be approximately
$100,000 annually which we expect to pay for out of proceeds from our financing
efforts during the next twelve months from the date of this
Report.  Subsequent to the next twelve month reporting and compliance
period, we expect to pay for our publicly reporting company compliance and
reporting costs from our revenues.  We must structure, establish,
maintain and operate our Company under corporate policies designed to ensure
compliance with all required public company laws, rules, regulations, including,
without limitation, the Securities Act of 1933, the Securities Act of 1934, the
Sarbanes-Oxley Act of 2002, the Foreign Corrupt Practices Act and the respective
rules and regulations promulgated thereunder.  Some of our more
significant challenges of being a publicly reporting company will include the
following:
 
 ·
              We
      will have to carefully prepare and file in the format mandated by the SEC
      all periodic filings required by the Securities Exchange Act of 1934
      (Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and interim
      reports of material significant events on Form 8-K), as well as insider
      reporting compliance for all officers and director under Section 16 of the
      Securities Exchange Act of 1934 on Forms 3, 4 and
  5;
 
 ·
              In
      addition to auditing our annual financial statements and maintaining our
      books and records in accordance with the requirements of the Securities
      Act of 1934, we will have to prepare and submit our accounting controls
      and procedures for audit in compliance with Section 404 of the
      Sarbanes-Oxley Act of 2002, which requires increased corporate
      responsibility and accountability;
 
 ·
              We
      will have to assure that our Board committee charters, corporate
      governance principles, Board committee minutes are properly drafted and
      maintained;
 
 ·
              We
      will have to carefully analyze and assess all disclosures in all forms of
      public communications, including periodic SEC filings, press releases,
      website postings, and investor conferences to assure legal
      compliance;
 
 ·
              We
      will have assure corporate and SEC legal compliance with respect to proxy
      statements and information statements circulated for our annual
      shareholder meetings, shareholder solicitations and other shareholder
      information events;
 
 ·
              We
      will have to assure securities law compliance for all equity-based
      employee benefit plans, including registration statements and prospectus
      distribution procedures;
  34
 
 ·
              We
      will have to continuously analyze the specific impact on our Company of
      all significant SEC initiatives, policies, proposals and developments, as
      well as assess the rules of Public Company Accounting Oversight Committee
      on governance procedures of Company and our audit
    committee;
 
 ·
              We
      will have to comply with the specific listing requirements of a stock
      exchange if we qualify and apply for such
  listing;
 
 ·
              We
      expect that being a public company will increase our director and officer
      liability-insurance costs;
 
 ·
              We
      will have to engage and interface with a Transfer Agent regarding issuance
      and trading of our common stock, which may include Rule 144 stock transfer
      compliance matters; and
 
 ·
              We
      will incur additional costs for legal services as a function of our needs
      to seek guidance on securities law disclosure questions and evolving
      compliance standards.
 
 In
addition to the foregoing, our reporting and compliance costs and expenses may
increase substantially if we are able to deploy our business model on an
international basis, which will add significant cross-border jurisdictional
complexity to our regulatory compliance program and our accounting controls and
procedures.  We have assigned a high priority to corporate compliance
and our public company reporting obligations, however, there can be no assurance
that we will have sufficient cash resources available to satisfy our public
company reporting and compliance obligations.  If we are unable to
cover the cost of proper administration of our public company compliance and
reporting obligations, we could become subject to sanctions, fines and
penalties, our stock could be barred from trading in public capital markets and
we may have to cease operations.
 
 Our
actual results may differ from our projections if there are material changes in
any of the factors or assumptions upon which we have based our
projections.  Such factors and assumptions, include, without
limitation, the development of our proprietary technology platform and our
products, the timing of such development, market acceptance of our products,
protection of our intellectual property, our success in implementing our
strategic, operating and personnel initiatives and our ability to commercialize
our products, any of which could impact sales, costs and expenses and/or planned
strategies and timing.  As a result, it is possible that we may
require significantly more capital resources to meet our capital
needs.
 
 Off-Balance
Sheet Arrangements
 
 None.
 
 ITEM 7A:
              QUANITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 We did
not have any operations which implicated market risk as of the end of the latest
fiscal year.  We expect that our planned operations will engender
market risk, particularly with respect to foreign currency exchange rate
risk.  We intend to implement an analysis and assessment program which
will on a regular basis determine exposures of Loto to such risks.  We
expect to report the results of all such quantitative and qualitative risk
assessments prior to entering into any material agreements, and on a regular
monthly and annual basis to our audit committee so that responsive risk
management measures can be discussed and actions taken to the extent reasonably
feasible. Inflationary factors in the future, such as increases in overhead
costs, may adversely affect our operating results.  A high rate of
inflation in the future may have an adverse effect on our ability to manage
selling, general and administrative expenses as a percentage of net revenues if
our revenues do not increase with these increased costs.
  35
 
 ITEM 8:
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
 
 Report
      of Independent Certified Public Accountants
                37Consolidated
      Balance Sheets
                38Consolidated
      Statement of Operations
                39Consolidated
      Statements of Stockholders’ Equity From Inception
                40Consolidated
      Statement of Cash Flows
                41Notes
      to Consolidated Financial Statements
                42
  36
  Paritz & Company,
      P.A.
                        certified
      public accountants
                      15
      Warren Street, Suite 25
                        Hackensack,
      New Jersey 07601
                        (201)
      342-7753
                        Fax:
      (201) 342-7598
                        Email:
      paritz@paritz.com
  Board of
Directors
 Loto,
Inc.
 (A
Development Stage Company)
 Toronto,
Ontario, Canada
 
 We have
audited the accompanying consolidated balance sheet of Loto, Inc. (A Development
Stage Company) (the “Company”) as of May 31, 2010 and the related consolidated
statements of operations, changes in stockholders’ (deficiency) equity and cash
flows for the year then ended and for the period from inception (September 16,
2008) to May 31, 2009 and May 31, 2010.  These financial statements
are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
 We
conducted our audit in accordance with standards on the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audit provides a reasonable basis for our opinion.
 
 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
and as of May 31, 2010 has an accumulated loss of $1,133,771 and a stockholders’
deficiency of $104,935, 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.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Loto, Inc. (A Development Stage
Company) as of May 31, 2010, and the results of its operations and its cash
flows for the year then ended and for the period from inception (September 16,
2008) to May 31, 2009 and May 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
 
 /s/
Paritz & Company, P.A.
 
 Hackensack,
New Jersey
 August
17, 2010
 37
 LOTO
INC.
 (A
Development Stage Company)
 
 CONSOLIDATED
BALANCE SHEET
  
 
 May 31, 2010
                                        
                                        
                                        May 31, 2009CURRENT
      ASSETS:Cash
                                        
                                        $
                                        309,018
                                        
                                        
                                        $
                                        169,203Prepaid
      rent
                                        
                                        
                                        8,119
                                        
                                        
                                        
                                        -GST
      Receivable
                                        
                                        
                                        29,827
                                        
                                        
                                        
                                        -TOTAL
      CURRENT ASSETS
                                        
                                        
                                        346,964
                                        
                                        
                                        
                                        169,203Capital
      assets, at cost
                                        
                                        
                                        31,060
                                        
                                        
                                        
                                        -Accumulated
      amortization
                                        
                                        
                                        (7,332
                                        )
                                        
                                        
                                        -Net
      capital assets (Note 4)
                                        
                                        
                                        23,728
                                        
                                        
                                        
                                        0TOTAL
      ASSETS
                                        
                                        $
                                        370,692
                                        
                                        
                                        $
                                        169,203LIABILITIES
      and STOCKHOLDERS' (DEFICIENCY) EQUITYCURRENT
      LIABILITIES:Accrued
      liabilities (Note 5)
                                        
                                        $
                                        49,505
                                        
                                        
                                        $
                                        10,000Deposit
      for subscription of common shares
                                        
                                        
                                        0
                                        
                                        
                                        
                                        150,000Standby
      loan (Note 6)
                                        
                                        
                                        425,931
                                        
                                        
                                        
                                        -Due
      to stockholder
                                        
                                        
                                        191
                                        
                                        
                                        
                                        91CURRENT
      LIABILITIES AND TOTAL LIABILITIES
                                        
                                        
                                        475,627
                                        
                                        
                                        
                                        160,091STOCKHOLDERS'
      (DEFICIENCY) EQUITY:Common
      stock, par value $0.0001 (note 7) 100,000,000 shares authorized 54,572,963
      issued and outstanding (2009-40,000,000)
                                        
                                        
                                        5,457
                                        
                                        
                                        
                                        4,000Additional
      paid-in capital
                                        
                                        
                                        1,023,977
                                        
                                        
                                        
                                        16,091Other
      comprehensive loss
                                        
                                        
                                        (598
                                        )
                                        
                                        
                                        -Deficit
      accumulated during development stage
                                        
                                        
                                        (1,133,771
                                        )
                                        
                                        
                                        (10,979
                                        )TOTAL
      STOCKHOLDERS' (DEFICIENCY) EQUITY
                                        
                                        $
                                        (104,935
                                        )
                                        
                                        $
                                        9,112TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                                        
                                        $
                                        370,692
                                        
                                        
                                        $
                                        169,203
 
 
 See
notes to the consolidated financial statements
  38
 
 LOTO
INC.
 (A
Development Stage Company)
 
 CONSOLIDATED
STATEMENT OF OPERATIONS
  
 For the TwelveMonths
                                EndedMay31, 2010
                              
                              
                              From Inception
                                (September 16,2008)
                                to May 31,2009
                              
                              
                              From Inception
                                (September 16,2008)
                                to May 31,2010REVENUE
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -EXPENSESGeneral
      and administrative expenses
                              
                              
                              1,110,091
                              
                              
                              
                              10,979
                              
                              
                              
                              1,121,070OPERATING
      LOSS
                              
                              
                              1,110,091
                              
                              
                              
                              10,979
                              
                              
                              
                              1,121,070OTHER
      EXPENSEInterest
      Expense
                              
                              
                              12,701
                              
                              
                              
                              
                              
                              
                              
                              12,701NET
      LOSS FOR THE PERIOD
                              
                              $
                              (1,122,792
                              )
                              
                              $
                              (10,979
                              )
                              
                              $
                              (1,133,771
                              )NET
      LOSS PER COMMON SHARE - BASIC AND FULLY DILUTED
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.00
                              )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND FULLY
      DILUTED
                              
                              
                              54,516,638
                              
                              
                              
                              40,000,000
 
 See
notes to the consolidated financial statements
  39
 
 LOTO
INC.
 (A
Development Stage Company)
 
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
 FROM
INCEPTION (SEPTEMBER 16, 2008) TO MAY 31, 2010
  
 Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Additional
                                        Paid-In
                                        Capital
                                      
                                      
                                      Deficit
                                        Accumulated
                                        During
                                        Development
                                        Stage
                                      
                                      
                                      Other
                                        Comprehensive
                                        Loss
                                      
                                      
                                      TotalBALANCE
      - SEPTEMBER 16, 2008Capital contribution
      in connection with formation of
      Mobilotto, Inc.
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      91
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      91Net
      loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (10,979
                                      )
                                      
                                      
                                      
                                      
                                      
                                      (10,979
                                      )Sale
      of 20,000,000 shares
                                      
                                      
                                      20,000,000
                                      
                                      
                                      
                                      2,000
                                      
                                      
                                      
                                      18,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      20,000Shares issued in
      connection with Acquisition of Mobilitto,
      Inc.
                                      
                                      
                                      20,000,000
                                      
                                      
                                      
                                      2,000
                                      
                                      
                                      
                                      (2,000
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0BALANCE
      - MAY 31, 2009
                                      
                                      
                                      40,000,000
                                      
                                      
                                      
                                      4,000
                                      
                                      
                                      
                                      16,091
                                      
                                      
                                      
                                      (10,979
                                      )
                                      
                                      
                                      0
                                      
                                      
                                      
                                      9,112Sale
      of shares
                                      
                                      
                                      15,000,000
                                      
                                      
                                      
                                      1,500
                                      
                                      
                                      
                                      148,500
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      150,000Cancellation
      of Founders' shares (Note 11)
                                      
                                      
                                      (1,000,000
                                      )
                                      
                                      
                                      (100
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (100
                                      )Sale
      of  shares (Note 11)
                                      
                                      
                                      572,963
                                      
                                      
                                      
                                      57
                                      
                                      
                                      
                                      859,386
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      859,443Other
      comprehensive loss resulting from foreign exchange
      transactions
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (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
                                      )
 
 
 See
notes to the consolidated financial statements
  40
 
 LOTO
INC.
 (A
Development Stage Company)
 
 CONSOLIDATED
STATEMENT OF CASH FLOWS
  
 For the Twelve
                                      MonthsEnded May
                                      31, 2010
                                    
                                    
                                    For the PeriodEnded
                                      May 31,2009
                                    
                                    
                                    From Inception
                                      (September 16,
                                      2008)to May 31,
                                      2010OPERATING
      ACTIVITIES:Net
      loss for the period
                                    
                                    
                                    (1,122,792
                                    )
                                    
                                    
                                    (10,979
                                    )
                                    
                                    
                                    (1,133,771
                                    )Adjustments to reconcile net
      loss to net cash used in operating
      activities:Amortization
                                    
                                    
                                    7,332
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    7,332Changes
      in operating assets and liabilities:Prepaid
      rent
                                    
                                    
                                    (8,119
                                    )
                                    
                                    
                                    0
                                    
                                    
                                    
                                    (8,119
                                    )Other
      current assets
                                    
                                    
                                    (29,827
                                    )
                                    
                                    
                                    0
                                    
                                    
                                    
                                    (29,827
                                    )Accrued
      liabilities
                                    
                                    
                                    39,505
                                    
                                    
                                    
                                    10,000
                                    
                                    
                                    
                                    49,505NET
      CASH USED IN OPERATING ACTIVITIES
                                    
                                    
                                    (1,113,901
                                    )
                                    
                                    
                                    (979
                                    )
                                    
                                    
                                    (1,114,880
                                    )INVESTING
      ACTIVITIES:Acquisition
      of capital assets
                                    
                                    
                                    (31,060
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (31,060
                                    )NET
      CASH USED IN INVESTING ACTIVITIES
                                    
                                    
                                    (31,060
                                    )
                                    
                                    
                                    0
                                    
                                    
                                    
                                    (31,060
                                    )FINANCING
      ACTIVITIES:Deposit
      for stock subscription
                                    
                                    
                                    0
                                    
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    150,000Proceeds
      from loan
                                    
                                    
                                    425,931
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    425,931Issuance
      (net of redemption) of common stock
                                    
                                    
                                    859,343
                                    
                                    
                                    
                                    20,091
                                    
                                    
                                    
                                    879,434Proceeds
      from stockholder loan
                                    
                                    
                                    100
                                    
                                    
                                    
                                    91
                                    
                                    
                                    
                                    191NET
      CASH PROVIDED FROM INVESTING ACTIVITIES
                                    
                                    
                                    1,285,374
                                    
                                    
                                    
                                    170,182
                                    
                                    
                                    
                                    1,455,556Effect
      of exchange rates on cash
                                    
                                    
                                    (598
                                    )
                                    
                                    
                                    0
                                    
                                    
                                    
                                    (598
                                    )INCREASE
      IN CASH
                                    
                                    
                                    139,815
                                    
                                    
                                    
                                    169,203
                                    
                                    
                                    
                                    309,018CASH
      - BEGINNING OF PERIOD
                                    
                                    
                                    169,203
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0CASH
      - END OF PERIOD
                                    
                                    
                                    309,018
                                    
                                    
                                    
                                    169,203
                                    
                                    
                                    
                                    309,018SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the yearInterest
      paid
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0NON
      CASH FINANCING ACTIVITIESDeposit
      applied to stock subscription
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
 
 
 See
notes to the consolidated financial statements
  41
 
 LOTO
INC.
 (A
Development Stage Company)
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 MAY
31, 2010
 
 NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
 
 Organization
and Business Description
 
 Loto Inc.
(“Loto” or the “Company”), together with its wholly-owned subsidiary Mobilotto
systems, Inc. (“Mobilotto”), are development stage companies. The Company is
developing a patent-pending software application that permits the secure
purchase of lottery tickets on commercially available “smart” phones and similar
mobile telecommunications devices.  A smart phone is a mobile phone
offering advanced capabilities, often with personal computer-like functionality,
such as e-mail, Internet access and other applications. Proprietary technology
for facilitating the purchase of lottery tickets addresses all elements of
lottery play, including secure player registration and authorization, number
selection, settlement, winning number notification and other direct-to-customer
marketing opportunities. It is the 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 utilized by 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 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 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.
 
 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.
  42
  Since
inception the Company has been engaged in organizational activities, has been
developing its business model and software, and marketing it’s 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.
 
 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.
 
 Capital
Assets
 
 Capital
assets are stated at cost less accumulated amortization. Amortization is
calculated on a straight-line basis over the expected useful life as
follows:
 
 Computer
      equipment
                3
      yearsOffice
      furniture and equipment
                5
      yearsLeasehold
      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 generally accepted
accounting principles 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
 
 From
inception, the company has not recognized any revenue.
  43
  Revenue
is recognized when it is realized or realizable and earned. Revenue is realized
or realizable when there is 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 lottery operators and / or mobile network
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
incurred, 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
using the exchange rate prevailing at the balance sheet date. Revenue and
expense 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.
 
 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 carry-forwards, 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.
  44
 
 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 liabilities. The fair
value of these financial instruments approximates their carrying values due to
their short maturities.
 
 Stock-Based
Compensation
 
 The
Company records expense for stock-based compensation to directors, employees,
and consultants using the fair value method. Occasionally, the Company may issue
shares of stock and stock warrants in exchange for services. The Company values
the issuance of shares based on the fair value of its stock on the date of
issuance. The Company values the warrants it issues using the Black-Scholes
model.
  Recent
Accounting Pronouncements
  We do not
expect the adoption of any recent accounting pronouncements to have a material
effect on the financial statements.
 
 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 $1,133,771 and a stockholders’ deficiency of $104,935 as of May 31, 2010, and
is unlikely to generate earnings in the immediate or foreseeable future. The
continuation of the Company as a going concern is dependent upon, among other
things, the continued financial support from its shareholders, the ability of
the Company to obtain necessary equity or debt financing, and the attainment of
profitable operations. These factors, among others, raise substantial doubt
regarding the Company’s ability to continue as a going concern. There is no
assurance that the Company will be able to generate revenues in the future.
These financial statements do not give any effect to any adjustments that would
be necessary should the Company be unable to continue as a going
concern.
  45
 
 NOTE
4 – CAPITAL ASSETS
  Capital
assets consist of the following:
  AccumulatedCost
                      
                      
                      Amortization
                      
                      
                      Net
                      
                      
                      2009Leasehold
      improvements
                      
                      $
                      3,500
                      
                      
                      $
                      1,712
                      
                      
                      $
                      1,788
                      
                      
                      $
                      NILComputer
      equipment
                      
                      $
                      18,950
                      
                      
                      $
                      4,144
                      
                      
                      $
                      14,806
                      
                      
                      $
                      NILOffice
      furniture and equipment
                      
                      $
                      8,610
                      
                      
                      $
                      1,476
                      
                      
                      $
                      7,134
                      
                      
                      $
                      NILTotal
                      
                      $
                      31,060
                      
                      
                      $
                      7,332
                      
                      
                      $
                      23,728
                      
                      
                      $
                      NIL
 
 Total
amortization expense for the year ended May 31, 2010 was $7,332 (2009 -
$NIL)
  NOTE
5– ACCRUED LIABILITIES
  Accrued
liabilities totalled $49,505 (2009 - $10,000) and included the following.
Payments due for programming work performed $4,000, accrued legal expenses
$43,152 (2009- $10,000) and general and administration payables
$2,353.
 
 NOTE
6 – 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 the necessary funding up to $1,500,000 if the Company is unable to
obtain third-party financing (the “Standby Loan”). On April 19, 2010, 2238646
Ontario Inc. entered into a Novation to the Standby Financing Commitment with
the Company pursuant to which 2238646 Ontario Inc. has agreed to the remaining
commitments of Mhalka Capital Investment Ltd. under the August 3, 2009, standby
financing commitment.  Loto may draw on the standby financing commitment in
accordance with operating requirements as set forth in the 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 the Company is in receipt of revenues or proceeds from the sales of equity
securities. Loto has given 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 covenants, the default rate will be 15%
per annum. As at May 31, 2010, $344,610 including accrued interest was drawn and
payable against this commitment.
  46
 
 In
addition, A Few Brilliant Minds, a related party, has advanced $81,321 including
accrued interest. This loan is subject to the same interest and repayment terms
as the other standby loans.
  NOTE
7 – STOCKHOLDERS’ DEFICIENCY
  On May
13, 2009 the two co-founders of Loto entered into a Founders’ Agreement with
each other and the company. Mhalka Capital Investments Limited was issued
20,000,000 shares of Loto restricted common stock in exchange for contributing
$20,000 to Loto. On the same date, A Few Brilliant Minds Inc. was issued
20,000,000 shares of Loto restricted common stock in exchange for all of the
equity interests of Mobilotto Systems, Inc. which became a wholly owned
subsidiary of Loto.
 
 On June
4, 2009, Loto amended its certificate of incorporation to change its par value
from $.001 per share to $.0001 per share. Retroactive effect has been given to
the above in the accompanying statement of stockholders’ equity. On November 30,
2009, the Company issued 15,000,000 shares. A cash consideration of $150,000 was
received by the Company in the prior year and was recorded as a deposit for
subscription of common shares. On April 19, 2010, two of the shareholders of
Loto, A Few Brilliant Minds Inc. and Mhalka Capital Investments Ltd., each
agreed to tender 500,000 shares of the Company’s common stock for cancellation.
See Note 11. On May 31, 2010, the Company issued 572,963 common shares for a
total cash consideration of $859,443.
 
 NOTE
8 - LITIGATION
 
 From time
to time in the future, the Company may be involved in litigation relating to
claims arising out of operations in the normal course of business.
 
 NOTE
9 – COMMITMENTS
 
 The
Company is obligated under a lease agreement to lease the premises at 20 Toronto
Street in Toronto Ontario until February 28, 2011 at an annual rental
approximating $87,000.
 
 NOTE
10 – 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.
  47
  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
11 – 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 investors.  In connection therewith, two of
the Company’s shareholders, 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
anticipation of the sale of common stock, two shareholders each cancelled
500,000 common shares even though there is no assurance that the Company will be
able to sell its common stock.
  48
 
 ITEM 9:
              CHANGES IN AND DISAGREEMENTS
      WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 We have
not had any changes in or disagreements with our accountants regarding
accounting and financial disclosure.
 
 ITEM 9A:
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 In
connection with the preparation of this annual report on Form 10-K, an
evaluation was carried out by our management, with the participation of the
Chief Executive Officer / Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 ("Exchange Act")) as of May 31, 2010.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports filed or submitted under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SEC rules and forms and that such information is accumulated and
communicated to management, including the Chief Executive Officer / Chief
Financial Officer, to allow timely decisions regarding required
disclosures.
 
 Based on
that evaluation, our management concluded, as of the end of the period covered
by this report, that our disclosure controls and procedures were effective in
recording, processing, summarizing, and reporting information required to be
disclosed, within the time periods specified in the SEC's rules and
forms.
 
 Management's Report on
Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process, under the supervision of the Chief Executive Officer / Chief
Financial Officer, designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our 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 reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 
 •
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of the financial statements in accordance with generally
      accepted accounting principles, and that 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 acquisition, use, or disposition of our 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.
 
 Our
management conducted an assessment of the effectiveness of our internal control
over financial reporting as of May 31, 2010, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
 
 Accordingly, based on our assessment we
have concluded that, as of May 31, 2010 our internal controls over financial
reporting were effective based on those criteria outlined under the Securities
Exchange Act.Our Chief Executive Officer/ Chief Financial Officer
hasevaluated the effectiveness of our
disclosure controls and the timeliness of our regulatory filingsand believesthat our disclosure controls and
procedures were effective based on the required evaluation as of the date of
this Report.
  49
 
 This
Report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Report on Form 10-K.
 
 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 May 31, 2010 that has materially affected or is
reasonably likely to materially affect the Company’s internal control over
financial reporting.
 
 ITEM 9B:
              OTHER
      INFORMATION
 
 Not
Applicable.
  50
 
 PART
III
 
 ITEM 10:
              DIRECTORS, EXECUTIVE OFFICERS,
      PROMOTERS AND CORPORATE
GOVERNANCE
 
 MANAGEMENT
AND CERTAIN SECURITY HOLDERS
 
 Directors,
Executive Officers, Promoters and Control Persons
 
 The
following table presents information with respect to our officers, directors and
significant employees as of September 13, 2010:
 
 Name
                    
                    Age
                    
                    PositionStephen
      Knight
                    
                    52
                    
                    President,
      Chief Executive Officer and Chief
                      Financial
      Officer, DirectorGino
      Porco
                    
                    42
                    
                    DirectorTrevor
      Eyton
                    
                    75
                    
                    DirectorDonald
      Ziraldo
                    
                    61
                    
                    DirectorTodd
      Halpern
                    
                    50
                    
                    DirectorRandy
      Barrs
                    
                    61
                    
                    DirectorAlan
      Ralph
                    
                    65
                    
                    Director
 
 Biographical
Information Regarding Officers and Directors
 
 Stephen Knight.Mr.
Knight has served as Loto’s President and Chief Executive Officer since May 13,
2009.  From October 2008 to May 12, 2009, Mr. Knight was President and
CEO of Mobilotto Systems, Inc.  From December 2007 through September
2008, Mr. Knight was engaged in marketing consulting for major brands in the
United States and Canada.  From November 1998 through December 2007,
Mr. Knight served as Senior Vice President of Credit & Loyalty Management as
well as an officer for Hudson’s Bay Company.  Mr. Knight was appointed
Chief Financial Officer of Loto on June 3, 2009.  Mr. Knight was
appointed as a Director of the Company on April 19, 2010.
 
 Gino Porco.Mr.
Porco is a Co-Founder of Loto Inc. and he has served as a Director of the
Company since May 13, 2009. Mr. Porco has overseen the development of our
technology initiatives from planning stage through development and performance
testing. Mr. Porco has supervised multiple development teams working on both
network development and infrastructure and device applications and technologies,
driving our various core offerings.  Since 2002, Mr. Porco has been
President of Envenia Networks, which designs and implements best-of-breed,
carrier-class voice networking solutions.  Mr. Porco has consulted on
various telecommunication projects, lending expertise to the development of Sky
Voice, Digital World, Power Telephone, Carrier and Compu-call communication, as
well as various Internet projects since its rise to prominence in the late
1990’s.  Mr. Porco is the sole officer, director and shareholder of A
Few Brilliant Minds Inc., an Ontario corporation which owns approximately 35.5%
of our issued and outstanding shares as of the date of this Report.
 
 Trevor Eyton.Mr.
Trevor Eyton has served as a Director of the Company since January 26,
2010.  Appointed to Canada’s Senate in 1990, Mr. Eyton served on three
committees- Banking, Trade and Commerce, Transport and Communications and
Scrutiny of Regulations, where he was the Joint Chair.  Mr. Eyton
retired from the Canadian Senate in 2009.  A lawyer by training, Mr.
Eyton served as President and Chief Executive Officer of Brascan (now Brookfield
Asset Management Inc.) from 1979 until 1990, and as Chairman and Senior Chairman
from 1990 until 1998.  Mr. Eyton has served on the board of directors
of other corporations, including Coca-Cola Enterprises Inc. (where he served as
a director from 1998-2007) and on the boards of numerous charitable
organizations.
 
 Donald Ziraldo.Mr.
Donald Ziraldo has served as a Director of the Company since January 26,
2010.  From 1975 until 2006, Mr. Ziraldo was the President of
Inniskillin Wines Inc.  Mr. Ziraldo is currently Chairman, Vineland
Research and Innovation Center; a member of the Board of Directors, Shaftsbury
Films, and a member of the Board of Directors, Canassat
Pharmaceuticals.
  51
  Todd Halpern.Mr.
Todd Halpern has served as a Director of the Company since July 13,
2010.  Mr. Halpern is currently president of Halpern
Enterprises.  He and his family have been in the business of importing
fine wines and spirits into Canada for over 57 years.  Mr. Halpern has
served on the board of directors of the Toronto General Hospital since
2005.  He is the Board Champion of the Krembil Neuroscience Centre’s
Krembil Discovery Tower and Krembil Neuro Program.  Mr. Halpern is
also the Chair of the Grand Cru Culinary Wine Festival, which benefits research
at the University Health Network.
 
 Randy Barrs.Mr.
Randy Barrs has served as a Director of the Company since January 26,
2010.  Mr. Barrs is an attorney in Toronto, Canada.  Mr.
Barrs is the sole officer, director and shareholder of 2238646 Ontario Inc., an
Ontario corporation which owns approximately 35.4% of our issued and outstanding
shares as of the date of this Report.
 
 Alan Ralph.Mr.
Alan Ralph has served as a Director of the Company since March 1,
2010.  Mr. Ralph
is a Chartered Accountant and for over 30 years was an Audit Partner with
Deloitte & Touche LLP, until 2007. Mr. Ralph served as the Chair of the St.
Catharines Transit Commission for eleven years, as President of the St.
Catharines Golf & Country Club for five years and has served as a director
for various Boards and Associations in the Niagara area. Mr. Ralph is currently
a director/finance chair with Vineland Research and Innovation Centre. Mr Ralph
is an independent consultant to winery investors and owners as well as to
several other small business enterprises.
 Term
of Office
 
 All of
our directors are appointed for a one-year term to hold office until the next
annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
elected or appointed to serve until the next Board of Directors meeting
following the annual meeting of stockholders.  Our executive officers
are appointed by our Board of Directors and hold office until removed by the
Board.
 
 At the
present time, two of our stockholders, 2238646 Ontario Inc. and A Few Brilliant
Minds Inc. have agreed as co-founders of the company that the Board shall be
composed of an equal number of persons nominated by each
founder.  Each founder: (i) shall accept such nominations as exclusive
and binding as and when made; and (ii) shall vote only for such persons
nominated by the founders, respectively, so that the Board at all times consists
of an equal number of representatives of each founder.  If for any
reason at any time the Board is not composed of an equal number of persons
nominated by each founder, no actions may be taken by the other founder’s
representatives other than duly appointing or duly electing a nominee of the
other founder then having the right to equalize representation on the Board with
such founder’s nominees.
 
 Significant
Employees
 
 At the
present time, we have no key employees other than our officers and
directors.
 
 Family
Relationships
 
 There are
no family relationships between or among the directors, executive officers or
persons nominated or chosen by us to become directors or executive
officers.
  52
 
 Founders,
Promoters and Control Persons
 
 The
founders and their respective affiliates of our Company are construed to be
Promoters and Control Persons of our Company since inception:
 
 Current
Promoters and Control Persons
 
 NAME
                
                POSITIONA
      Few Brilliant Minds Inc. (1)
                
                Founder
      of Loto, Stockholder, Promoter and Control Person2238646
      Ontario Inc. (2)
                
                Stockholder,
      Promoter and Control PersonGino
      Porco (1)
                
                Director
      and PromoterRandall
      Barrs (2)
                
                Director
      and Promoter
 
 (1) Gino
Porco, Director and co-founder of our Company, has sole voting and dispositive
control over the Loto shares owned by A Few Brilliant Minds Inc.
 
 (2)
Randall Barrs, Director of our Company, has sole voting and dispositive control
over the Loto shares owned by 2238646 Ontario Inc.
 
 Former
Promoters and Control Persons
 
 Mhalka
      Capital Investments Ltd. (1)
                
                Founder
      of Loto, Former Stockholder, Former Promoter and Former Control
      PersonMarsha
      Collins (1)
                
                Former
      Director, Treasurer & Secretary and Former
  Promoter
 
 (1) On
April 19, 2010, Mhalka Capital Investment Ltd. sold its shares of the Company’s
common stock to 2238646 Ontario Inc.  Mr. Randall Barrs, a director of
the Company, is the sole officer, director and shareholder of 2238646 Ontario
Inc.  The voting and dispositive control over the shares of Loto
formerly owned by Mhalka Capital Investments Ltd. was exercised by Perpetum
Finance Inc.  The directors of Perpetum Finance Inc. are Peter Luis O.
Gross, Kim Fessler, Roelant L.M. Siemer and Sylvia Fahm.  Mr. Peter
Gross had sole signatory authority and sole voting and dispositive control over
the Loto shares owned by Mhalka Capital Investments Ltd., and the other three
directors had authority when signing together to exercise voting and dispositive
control over the Loto shares owned by Mhalka Capital Investments
Ltd.  Marsha Collins, a former Director of the Company, is a
contingent beneficiary of a trust which is the sole owner of Mhalka Capital
Investments Ltd.  Ms. Collins did not have any voting control or power
of disposition over any of the shares which were owned by Mhalka Capital
Investments Ltd. or the trust.  At the present time, neither Mhalka
Capital Investments Ltd. nor Marsha Collins owns any shares of Loto’s common
stock.
 
 Involvement
in Certain Legal Proceedings
 
 To the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present director (or person nominated to become
director), executive officer, founder, promoter or control person: (1) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses); (3) being subject to any order, judgment or decree,
not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his or her involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction (in
a civil action), the SEC or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.
  53
  Section
16 (a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Exchange Act requires that the executive officers and directors,
and persons who beneficially own more than 10% of the equity securities of
reporting companies, file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on our review of the copies
of such forms we received, we believe that during the year ended May 31, 2010,
all such filing requirements applicable to our Company were complied with,
except that reports were filed late by the following persons:
  Name
                    
                    Number of
                      Late Reports
                    
                    Transactions
                      Not Timely
                      Reported
                    
                    Known Failures to
                      File a Required
                      Form2238646
      Ontario Inc.
                    
                    1
                    
                    1
                    
                    1Trevor
      Eyton
                    
                    2
                    
                    2
                    
                    0Donald
      Ziraldo
                    
                    1
                    
                    1
                    
                    0Jason
      Randall Barrs
                    
                    1
                    
                    1
                    
                    0Alan
      Ralph
                    
                    1
                    
                    1
                    
                    0Mhalka
      Capital Investments Ltd.
                    
                    1
                    
                    1
                    
                    0A
      Few Brilliant Minds Inc.
                    
                    1
                    
                    1
                    
                    0
 
 Code
of Ethics
 
 We have
adopted a corporate code of ethics. We believe our code of ethics is reasonably
designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports;
comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.  To
the knowledge of the Company, there have been no reported violations of the Code
of Ethics.  In the event of any future amendments to, or waivers from,
the provisions of the Code of Ethics, we intend to describe on our Internet
website, http://investor.mobilotto.com,
within four business days following the date of a waiver or a substantive
amendment, the date of the waiver or amendment, the nature of the amendment or
waiver, and the name of the person to whom the waiver was granted.
 
 Whistleblower
Procedures Policy
 
 In
accordance with the requirements of Section 301 of the Sarbanes-Oxley Act of
2002, the Board of Directors of the Company has adopted a Whistleblower
Procedures Policy, stating that all employees of the Company and its
subsidiaries are strongly encouraged to report any evidence of financial
irregularities which they may become aware of, including those with respect to
internal controls, accounting or auditing matters.  Under the
Whistleblower Procedures Policy, the management of the Company shall promptly
and periodically communicate to all employees with access to accounting, payroll
and financial information the means by which they may report any such
irregularities.  In the event an employee is uncomfortable for any
reason reporting irregularities to his or her supervisor or other management of
the Company, employees may report directly to any member of the Board of
Directors of the Company.  The identity of any employee reporting
under these procedures will be maintained as confidential at the request of the
employee, or may be made on an anonymous basis.  Notice must be
provided to all of the Company’s employees with access to accounting, payroll
and financial information in respect of these procedures.
 
 Board
Committees
 
 Audit
Committee
 
 Our audit
committee consists of Alan Ralph, Donald Ziraldo and Stephen
Knight.  Our audit committee is responsible for: (1) selection and
oversight of our independent accountant; (2) establishing procedures for the
receipt, retention and treatment of complaints regarding accounting, internal
controls and auditing matters; (3) establishing procedures for the confidential,
anonymous submission by our employees of concerns regarding accounting and
auditing matters; (4) engaging outside advisors; and (5) funding for the outside
auditors and any outside advisors engagement by the audit
committee.
  54
  Audit
Committee Financial Expert
 
 Alan
Ralph is the audit committee’s financial expert.  The Company’s Board
of Directors has determined that Mr. Ralph’s education and experience qualify
him for such position.  The Board of Directors has analyzed the
independence of each of the Company’s directors and has determined that Mr.
Ralph is one of the Company’s four independent directors under the rules of the
NASDAQ Stock Market LLC, including the definition of “independent director”
under Section 5605(a)(2) of the NASDAQ Manual.
 
 Disclosure
Committee
 
 Disclosure
committee functions are performed by our entire board of directors.
 
 Director
Nominations
 
 There
have been no changes in the year ended May 31, 2010 to the procedures by which
security holders may recommend nominees to our board of
directors.
  55
 
 ITEM 11:
              EXECUTIVE
      COMPENSATION
 
 Executive
Compensation
 
 The
following table sets forth compensation for each of the past two fiscal years
with respect to each person who served as Chief Executive Officer of the Company
and each of the four most highly-compensated executive officers of the Company
who earned a total annual salary and bonuses that exceeded $100,000 in any of
the two preceding fiscal years.
 
 Summary
Compensation Table
 
 Name
      and Principal
                        Position
                      
                      Year
      (1)(2)
                      
                      Salary
      ($)
                      
                      Stock
      Awards
                        ($)
                      TotalStephen
      Knight, Chief Executive Officer and
                      
                      2010
                      
                      $
                      149,525
                      
                      NIL
                      
                      $
                      149,525Chief
      Financial Officer
                      
                      2009
                      
                      NIL
                      
                      NIL
                      
                      NIL
 
 (1)
              No
      officers earned over $100,000 in any of the two preceding fiscal years,
      other than as set forth above.
 (2)
              The
      Company’s fiscal year ends May 31st.
 
 During
the fiscal year ended May 31, 2009, neither Loto nor its subsidiary Mobilotto
paid any cash compensation to our Chief Executive Officer, Stephen Knight, or
any of our other executive officers.
 
 Loto was
incorporated on April 22, 2009 and Mobilotto was incorporated on September 16,
2008.
 
 Employment
Agreements
 
 The
Company currently has no employment agreements with its executive officers or
other employees.
 
 Director
Compensation
 
 Name
                              
                              Salary
      ($)
                              
                              Option
                                Awards
      ($)
                              
                              All
      other
                                Compensation
                                ($)
                              
                              Total
      ($)Gino
      Porco
                              
                              NIL
                              
                              NIL
                              
                              NIL
                              
                              NILTrevor
      Eyton
                              
                              NIL
                              
                              NIL
                              (1)
                              NIL
                              
                              NILDonald
      Ziraldo
                              
                              NIL
                              
                              NIL
                              (1)
                              NIL
                              
                              NILTodd
      Halpern
                              
                              NIL
                              
                              NIL
                              
                              NIL
                              
                              NILRandall
      Barrs
                              
                              NIL
                              
                              NIL
                              (1)
                              NIL
                              
                              NILAlan
      Ralph
                              
                              NIL
                              
                              NIL
                              (1)
                              NIL
                              
                              NIL
 
 (1) The
cash value of option awards granted to certain directors as of April 19, 2010
was deemed to be $0.
 
 From the
inception of Loto on April 22, 2009 and Mobilotto on September 16, 2008 through
the fiscal year ended May 31, 2009, no compensation was paid by the Company to
its directors. For the year ended May 31, 2010 the directors were awarded the
following options. No cash compensation was paid to the directors.
 
 Trevor
Eyton was granted compensation arrangements which provide that he may elect
compensation in either cash or in options of the Company as follows: in calendar
year one, $75,000 if election for cash or options to purchase 250,000 shares at
option exercise price of $1.00 per share if election for options; calendar year
two, $150,000 if election for cash or options to purchase 300,000 shares at
option exercise price of $1.00 per share if election for options.  Mr.
Eyton may elect compensation either in cash or in options of the Company to be
issued 12 months after the date of hereof with respect to calendar year one and
24 months after the date hereof with respect to calendar year two.  In
the event Mr. Eyton selects options in lieu of cash, all such options shall be
fully vested and exercisable upon the respective date of grant and Mr. Eyton may
exercise all such options following the date of issuance thereof until
expiration thirty-six months from the date hereof.  If Mr. Eyton
elects to receive all of his compensation in options, he will have the right to
acquire up to an aggregate of 550,000 shares of Company common stock upon
exercise of such options.
  56
  Donald
Ziraldo was granted options to purchase 1,300,000 shares of the Company’s common
stock at a purchase price of $1.50 per share.  The options will vest
on April 19, 2011, and Mr. Ziraldo may exercise up to 650,000 such options on
April 19, 2011 and a further 650,000 options on April 19, 2012.  The
right to exercise all of the options will expire and terminate on April 19,
2013.
 
 Randall
Barrs was granted options to purchase 450,000 shares of the Company’s common
stock at a purchase price of $1.50 per share.  The options will vest
on April 19, 2011 and Mr. Barrs may exercise up to 225,000 such options on April
19, 2011 and 225,000 options on April 19, 2012.  The right to exercise
all of the options will expire and terminate on April 19, 2013.
 
 Alan
Ralph was granted options to purchase 150,000 shares of the Company’s common
stock at a purchase price of $1.50 per share.  The options will vest
on April 19, 2011 and Mr. Ralph may exercise up to 75,000 such options on April
19, 2011 and 75,000 options on April 19, 2012.  The right to exercise
all of the options will expire and terminate on April 19, 2013.
 
 Outstanding
Equity Awards at Fiscal Year-End (1)
 
 Name
      and Position
                  
                  Number
      of
                    Securities
                    Underlying
                    Unexercised
                    Options
      (#)
                    Exercisable
                  
                  
                  Number
      of
                    Securities
                    Underlying
                    Unexercised
                    Options
      (#)
                    Unexercisable
                  
                  
                  Option
      Exercise
                    Price
                  
                  
                  Option
      Expiration
                    DateStephen
      Knight, Chief Executive Officer and Chief Financial
Officer
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aGino
      Porco, Director
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aTrevor
      Eyton, Director
                  
                  
                  0
                  
                  
                  
                  550,000
                  
                  
                  $
                  1.00
                  
                  
                  April 19, 2013Donald
      Ziraldo, Director
                  
                  
                  0
                  
                  
                  
                  1,300,000
                  
                  
                  $
                  1.50
                  
                  
                  April
      19, 2013Randall
      Barrs, Director
                  
                  
                  0
                  
                  
                  
                  450,000
                  
                  
                  $
                  1.50
                  
                  
                  April
      19, 2013Alan
      Ralph, Director
                  
                  
                  0
                  
                  
                  
                  150,000
                  
                  
                  $
                  1.50
                  
                  
                  April
      19, 2013
 
 (1)
All of the stock option grants set forth on this table were made on April 19,
2010.
 
 ITEM
      12:
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
 
 The
following table sets forth the number of shares of common stock beneficially
owned as of August 31, 2010 by (i) those persons or groups known to us to
beneficially own more than 5% of our common stock; (ii) each director; (iii)
each executive officer; and (iv) all directors and executive officers as a
group. Except as indicated below, each of the stockholders listed below
possesses sole voting and investment power with respect to their
shares.  The percentage of ownership set forth below reflects each
holder’s ownership interest in the 54,572,963 shares of Loto’s common stock
issued and outstanding as of August 31, 2010.
  57
  Amount and Nature
of
 Beneficial
Ownership
 
 Name
      and Address of Beneficial Owner
                  
                  Shares
                  
                  
                  Options/
                    Warrants
      (1)
                  
                  
                  Total
      (1)
                  
                  
                  Percentage
      of
                    Shares
                    Outstanding
      (1)Five
      Percent StockholdersA
      Few Brilliant Minds Inc. (1)
                  
                  
                  19,400,000
                  
                  
                  
                  0
                  
                  
                  
                  19,400,000
                  
                  
                  
                  35.5
                  %2238646
      Ontario Inc. (2)
                  
                  
                  19,300,000
                  
                  
                  
                  0
                  
                  
                  
                  19,300,000
                  
                  
                  
                  35.4
                  %Executive
      Officers and DirectorsStephen
      Knight
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0.00
                  %Gino
      Porco through A Few Brilliant Minds Inc. (1)
                  
                  
                  19,400,000
                  
                  
                  
                  0
                  
                  
                  
                  19,400,000
                  
                  
                  
                  35.5
                  %Trevor
      Eyton (3)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0.00
                  %Donald
      Ziraldo (4)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0.00
                  %Randall
      Barrs, personally and through 2238646 Ontario Inc. (5)
                  
                  
                  19,300,000
                  
                  
                  
                  0
                  
                  
                  
                  19,300,000
                  
                  
                  
                  35.4
                  %Alan
      Ralph (6)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0.00
                  %Todd
      Halpern
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0.00
                  %All
      officers and directors as a group (7 persons)
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  38,700,000
                  
                  
                  
                  70.9
                  %
 
 For each
individual or entity listed above, the mailing address is: c/o Loto Inc., Suite
460, 20 Toronto Street, Toronto, Ontario, Canada M5C 2B8, except as otherwise
indicated below.
 
 (1) Gino
Porco, Director and co-founder, has sole voting and dispositive control over the
Loto shares owned by A Few Brilliant Minds Inc., an Ontario corporation which is
located at c/o Loto Inc., Suite 460, 20 Toronto Street, Toronto, Ontario, Canada
M5C 2B8.  For purposes of comprehensive disclosure, the 19,400,000
shares owned by Mr. Porco are indicated twice in the table above, once in his
own name and once in the name of A Few Brilliant Minds Inc.
 
 (2)
Randall Barrs, director, has sole voting and dispositive control over the Loto
shares owned by 2238646 Ontario Inc., an Ontario corporation located at 23
Bedford Road, Toronto, Ontario M5R 2J9, Canada.  Mr. Barrs is the sole
officer, director and shareholder of 2238646 Ontario Inc.  For
purposes of comprehensive disclosure, the 19,300,000 shares owned by Mr. Barrs
are indicated twice in the table above, once in his own name and once in the
name of his Ontario corporation.
 
 (3)
Trevor Eyton in his capacity as a director of the Company has been granted
compensation arrangements which provide that he may elect compensation in either
cash or in options of the Company as follows: in calendar year one, $75,000 if
election for cash or options to purchase 250,000 shares at option exercise price
of $1.00 per share if election for options; calendar year two, $150,000 if
election for cash or options to purchase 300,000 shares at option exercise price
of $1.00 per share if election for options.  Mr. Eyton may elect
compensation either in cash or in options of the Company to be issued 12 months
after the date of hereof with respect to calendar year one and 24 months after
the date hereof with respect to calendar year two.  In the event Mr.
Eyton selects options in lieu of cash, all such options shall be fully vested
and exercisable upon the respective date of grant and Mr. Eyton may exercise all
such options following the date of issuance thereof until expiration thirty-six
months from the date hereof.  If Mr. Eyton elects to receive all of
his compensation in options, he will have the right to acquire up to an
aggregate of 550,000 shares of Company common stock upon exercise of such
options.
 
 (4)
Donald Ziraldo in his capacity as a director of the Company has been granted
options to purchase 1,300,000 shares of the Company’s common stock at a purchase
price of $1.50 per share.  The options will vest on April 19, 2011,
and Mr. Ziraldo may exercise up to 650,000 such options on April 19, 2011 and a
further 650,000 options on April 19, 2012.  The right to exercise all
of the options will expire and terminate on April 19, 2013.
 
 (5)
Randall Barrs in his capacity as a director of the Company has been granted
options to purchase 450,000 shares of the Company’s common stock at a purchase
price of $1.50 per share.  The options will vest on April 19, 2011 and
Mr. Barrs may exercise up to 225,000 such options on April 19, 2011 and 225,000
options on April 19, 2012.  The right to exercise all of the options
will expire and terminate on April 19, 2013.
  58
  (6) Alan
Ralph in his capacity as a director of the Company has been granted options to
purchase 150,000 shares of the Company’s common stock at a purchase price of
$1.50 per share.  The options will vest on April 19, 2011 and Mr.
Ralph may exercise up to 75,000 such options on April 19, 2011 and 75,000
options on April 19, 2012.  The right to exercise all of the options
will expire and terminate on April 19, 2013.
 
 Potential
Changes in Control
 
 At the
present time, there are no arrangements known to Loto, including any pledge by
any person of securities of Loto, the operation of which may at a subsequent
date result in a change in control of Loto.
 
 Stock
Option Plan Information
 
 To date,
Loto has not adopted a Stock Option Plan.  Loto may adopt an option
plan in the future.
 
 Adverse
Interests
 
 The
Company is not aware of any material proceeding to which any director, officer,
or affiliate of the Company, or any owner of record or beneficially of more than
five percent of any class of the Company’s voting securities, or security holder
is a party adverse to the Company or has a material interest adverse to the
Company.
  59
 
 ITEM
      13:
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
 
 TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
 
 In
connection with the founding of Loto and the acquisition of Mobilotto, on May
13, 2009, Loto issued 20,000,000 shares of restricted common stock to A Few
Brilliant Minds Inc. in exchange for all of the issued and outstanding shares of
Mobilotto Systems, Inc. to Loto.  The sole owner of A Few Brilliant
Minds Inc., Mr. Gino Porco, is a director of Loto.  On the same date,
Loto issued 20,000,000 shares of restricted common stock to Mhalka Capital
Investments Ltd. in consideration for the payment of $20,000.00 to
Loto.  Ms. Marsha Collins served as a director of Loto from April 22,
2009 until January 26, 2010, as nominated by Mhalka Capital Investments
Ltd.  Mr. Porco and Ms. Collins, as the sole directors of Loto and as
representatives of the sole shareholders of Loto as of the date of the foregoing
transactions, ratified and approved the transactions pursuant to the terms and
conditions of the Founders’ Agreement by and among A Few Brilliant Minds Inc.,
Mhalka Capital Investments Ltd. and Loto.  Except as otherwise
disclosed herein, since the beginning of the last fiscal year, neither Loto nor
Mobilotto entered into any other transactions, nor are there any currently
proposed transactions, in which Loto or Mobilotto was, or is, to be a
participant and in which any related person had or will have a direct or
indirect material interest.
 
 On April
19, 2010, Mhalka Capital Investments Ltd. sold 19,300,000 shares of the
Company’s common stock to 2238646 Ontario Inc. pursuant to a Stock Purchase
Agreement in which 2238646 Ontario Inc. agreed to pay the purchase price in the
form of a note in the amount of $28,950,000, which shall accrue interest at the
rate of prime rate plus 1.5%, and shall be due in three years.  Mr.
Randall Barrs is the owner and sole officer and director of 2238646 Ontario
Inc.  Mr. Barrs is also a director of Loto.  On April 19,
2010, Mhalka Capital Investments Ltd. also entered into a Share Tender and
Cancellation Agreement, pursuant to which each of Mhalka Capital Investments
Ltd. and A Few Brilliant Minds Inc. agreed to the cancellation of 500,000 shares
of the Company’s common stock.  In addition, On April 19, 2010, Mhalka
Capital Investments Ltd. transferred 200,000 shares of its common stock and A
Few Brilliant Minds Inc. transferred 100,000 shares of its common stock in third
party transactions.  As of April 19, 2010 Mhalka Capital Investments
Ltd. has no stock ownership in the Company.
 
 A Few
Brilliant Minds Inc. and 2238646 Ontario Inc. together beneficially own
approximately 70.9% of our outstanding common stock, which gives them a
controlling interest in Loto.  A Few Brilliant Minds Inc. and 2238646
Ontario Inc. are both deemed to be promoters and control persons of Loto, as
well as Mr. Porco and Mr. Randall Barrs individually.  Mr. Porco does
not receive and has not received any compensation, as a designated director
serving on the Board of Directors of Loto Inc. pursuant to the nomination of A
Few Brilliant Minds Inc.  Ms. Collins did not receive any compensation
in her capacity as an officer of the Company.  On April 19, 2010, Mr.
Randall Barrs was issued stock options as compensation for his services as a
director.  He was issued options to purchase 450,000 shares of the
Company’s common stock, at a purchase price of $1.50 per share.  The
options will vest twelve months after the date of issuance.  Mr. Barrs
may exercise up to 225,000 such options upon such vesting date and 225,000
further options twenty-four months from the date of issuance.  The
options will terminate upon the expiration of thirty-six months from the date of
issuance.
 
 On August
3, 2009, Mhalka Capital Investments Ltd., together with 1476448 Ontario Inc.,
made a standby financing commitment to our Company, under which they agreed to
provide the necessary funding to our Company of up to $1,500,000 if we are
unable to obtain third-party financing.  Ms. Marsha Collins served as
a director of Loto as nominated by Mhalka Capital Investments Ltd. from April
22, 2009 to January 26, 2010.  Ms. Marsha Collins recused herself from
deliberations and voting in respect of the Loto Board of Directors assessment
and decision to enter into the financing commitment agreement with Mhalka
Capital Investments Ltd.  Mr. Gino Porco, acting in his capacity as
the sole voting member of the Board of Directors of Loto with respect to review
and assessment of the financing commitment agreement, determined that the
financing commitment agreement is fair and reasonable, and approved the
financing commitment agreement.
  60
  On April
19, 2010, Mhalka Capital Investment Ltd. sold its shares of the Company’s common
stock to 2238646 Ontario Inc., who entered into a Novation to the Standby
Financing Commitment with the Company pursuant to which 2238646 Ontario Inc.
agreed to the remaining commitments of Mhalka Capital Investment Ltd.
thereunder.  Under the terms and conditions of the financing
commitment, we may draw on the standby financing commitment in monthly tranches
in accordance with our operating requirements as set forth in our business plan
as of the date of this Report.  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 after the date of this Report.  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.
 
 During
the past five years, none of the following occurred with respect to any founder,
promoter or control person: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities; and (4) being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended or
vacated.
 
 BOARD
COMMITTEES; DIRECTOR INDEPENDENCE
 
 Currently,
all actions that would otherwise be performed by standing committees of the
Board of Directors are performed by the entire Board, except for our audit
committee, which handles the hiring of our independent public accountants and
the oversight of the independent auditor relationship, the review of our
significant accounting policies and our internal controls.  Our audit
committee consists of Alan Ralph, Donald Ziraldo and Stephen
Knight.
 
 The Board
of Directors has analyzed the independence of each director and has determined
that four of Loto’s seven directors, Alan Ralph, Donald Ziraldo, Todd Halpern,
and Trevor Eyton, are independent under the rules of the NASDAQ Stock Market
LLC, including the definition of “independent director” under Section 5605(a)(2)
of the NASDAQ Manual.
  61
 
 ITEM 14:
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
 
 Audit
Fees
 
 The
aggregate fees of Paritz & Company, P.A. for professional services rendered
for the audit of the Company's annual financial statements for the year ended
May 31, 2010, totaled $6,018.  The aggregate fees of Paritz &
Company, P.A for professional services rendered for the audit of the Company's
annual financial statements for the year ended May 31, 2009, totaled
$7,500.
 
 Audit-Related
Fees
 
 The
aggregate fees billed by Paritz & Company, P.A. for audit related services
for the year ended May 31, 2010, and which are not disclosed in “Audit Fees”
above, were $NIL. The aggregate fees billed by Paritz & Company, P.A for
audit related services for the period from inception (September 16, 2008) to May
31, 2009, and which are not disclosed in “Audit Fees” above, were
$NIL.
 
 Tax
Fees
 
 The
aggregate fees billed by Paritz & Company, P.A for tax compliance for the
year ended May 31, 2010, were $NIL.  The aggregate fees billed by
Paritz & Company, P.A for tax compliance for the period from inception
(September 16, 2008) to May 31, 2009, were $650.
 
 All
Other Fees
 
 The
aggregate fees billed for services other than those described above, for the
year ended May 31, 2010, were $NIL.  The aggregate fees billed for
services other than those described above, for the period from inception
(September 16, 2008) to May 31, 2009, were $NIL.
 
 Audit
Committee Pre-Approval Policies
 
 Our Board
of Directors reviewed the audit and non-audit services rendered by Paritz &
Company, P.A during the periods set forth above and concluded that such services
were compatible with maintaining the auditors’ independence. All audit and
non-audit services performed by our independent accountants are pre-approved by
our Board of Directors to assure that such services do not impair the auditors’
independence from us.
  62
 
 PART IV
 
 ITEM
      15:
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
 
 Financial
Statements
 
 Financial
Statements for the period from inception (September 16, 2008) to May 31,
2010.
 
 Exhibit
      No.
                    
                    Description
      of ExhibitsExhibit
      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
      10.6
                    
                    Share
      Tender and Cancellation Agreement, dated as of April 19, 2010, by and
      between the Company, A Few Brilliant Minds Inc. and Mhalka Capital
      Investments Ltd., incorporated by reference to Exhibit 10.6 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 22, 2010.Exhibit
      10.7
                    
                    Financing
      Tender and Cancellation Agreement, dated as of April 19, 2010, by and
      between the Company, A Few Brilliant Minds Inc. and 2238646 Ontario Inc.,
      incorporated by reference to Exhibit 10.7 to the Company’s Current Report
      on Form 8-K filed with the Securities and Exchange Commission on April 22,
      2010.
  63
 
 Exhibit
      10.8
                
                Novation
      to Founders’ Agreement, dated as of April 19, 2010, by and between the
      Company, A Few Brilliant Minds Inc., Mhalka Capital Investments Ltd. and
      2238646 Ontario Inc., incorporated by reference to Exhibit 10.8 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 22, 2010.Exhibit
      10.9
                
                Novation
      to Standby Commitment Letter, dated as of April 19, 2010, by and between
      the Company, Mhalka Capital Investments Ltd., 2238646 Ontario Inc. and
      1476448 Ontario Inc., incorporated by reference to Exhibit 10.9 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 22, 2010.Exhibit
      10.10
                
                Stock
      Purchase Agreement, dated as of April 19, 2010, by and between Mhalka
      Capital Investments Ltd. and 2238646 Ontario Inc., incorporated by
      reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on April 22,
      2010.Exhibit
      10.11
                
                Promissory
      Note, dated as of April 19, 2010, issued by 2238646 Ontario Inc.,
      incorporated by reference to Exhibit 10.11 to the Company’s Current Report
      on Form 8-K filed with the Securities and Exchange Commission on April 22,
      2010.Exhibit
      14.1
                
                Loto
      Inc. Code of Ethics, incorporated by reference to Exhibit 14.1 to the
      Company’s Registration Statement on Form S-1, filed with the Securities
      and Exchange Commission on June 10, 2009.Exhibit
      21
                
                List
      of Subsidiaries.Exhibit
      31.1
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.Exhibit
      31.2
                
                Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.
  64
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 LOTO
      INC.By:
                    /s/
      Stephen
      KnightName:
                    Stephen
      KnightTitle:
                    President,
      Chief Executive Officer
                      and
      Chief Financial Officer
                      (Principal
      Executive Officer,
                      Principal
      Financial Officer and
                      Principal
      Accounting
Officer)
 
 Dated:   September
13, 2010
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
 
 /s/ Stephen
      KnightName:
                          Stephen
      KnightTitle:
                          Director,
      President, Chief Executive Officer
                            and
      Chief Financial Officer (Principal
                            Executive
      Officer, Principal Financial
                            Officer
      and Principal Accounting Officer)Dated:
                          September
      13, 2010/s/ Gino
      PorcoName:
                          Gino
      PorcoTitle:
                          DirectorDated:
                          September
      13, 2010/s/ Trevor
      EytonName:
                          Trevor
      EytonTitle:
                          DirectorDated:
                          September
      13,
2010
 
 /s/ Donald
      ZiraldoName:
                                    Donald
      ZiraldoTitle:
                                    DirectorDated:
                                    September
      13, 2010/s/ Randy
      BarrsName:
                                    Randy
      BarrsTitle:
                                    DirectorDated:
                                    September
      13, 2010/s/ Alan
      RalphName:
                                    Alan
      RalphTitle:
                                    DirectorDated:
                                    September
      13, 2010/s/ Todd
      HalpernName:
                                    Todd
      HalpernTitle:
                                    DirectorDated:
                                    September
      13,
2010
  65
  Exhibit
Index
 
 Exhibit
      No.
                    
                    Description
      of ExhibitsExhibit
      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
      10.6
                    
                    Share
      Tender and Cancellation Agreement, dated as of April 19, 2010, by and
      between the Company, A Few Brilliant Minds Inc. and Mhalka Capital
      Investments Ltd., incorporated by reference to Exhibit 10.6 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 22, 2010.Exhibit
      10.7
                    
                    Financing
      Tender and Cancellation Agreement, dated as of April 19, 2010, by and
      between the Company, A Few Brilliant Minds Inc. and 2238646 Ontario Inc.,
      incorporated by reference to Exhibit 10.7 to the Company’s Current Report
      on Form 8-K filed with the Securities and Exchange Commission on April 22,
      2010.Exhibit
      10.8
                    
                    Novation
      to Founders’ Agreement, dated as of April 19, 2010, by and between the
      Company, A Few Brilliant Minds Inc., Mhalka Capital Investments Ltd. and
      2238646 Ontario Inc., incorporated by reference to Exhibit 10.8 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 22, 2010.Exhibit
      10.9
                    
                    Novation
      to Standby Commitment Letter, dated as of April 19, 2010, by and between
      the Company, Mhalka Capital Investments Ltd., 2238646 Ontario Inc. and
      1476448 Ontario Inc., incorporated by reference to Exhibit 10.9 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 22,
2010.
  66
 
 Exhibit
      10.10
                  
                  Stock
      Purchase Agreement, dated as of April 19, 2010, by and between Mhalka
      Capital Investments Ltd. and 2238646 Ontario Inc., incorporated by
      reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on April 22,
      2010.Exhibit
      10.11
                  
                  Promissory
      Note, dated as of April 19, 2010, issued by 2238646 Ontario Inc.,
      incorporated by reference to Exhibit 10.11 to the Company’s Current Report
      on Form 8-K filed with the Securities and Exchange Commission on April 22,
      2010.Exhibit
      14.1
                  
                  Loto
      Inc. Code of Ethics, incorporated by reference to Exhibit 14.1 to the
      Company’s Registration Statement on Form S-1, filed with the Securities
      and Exchange Commission on June 10, 2009.Exhibit
      21
                  
                  List
      of Subsidiaries.Exhibit
      31.1
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.Exhibit
      32.1
                  
                  Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.
  67