Description

Summary:

Potential event-driven trading alpha on the short side and possible hedge to any long SPAC sector exposure. 

TDAC appears to be a SPAC nearing the end of its life that has lobbed a hail mary by announcing the lottery.com LOI. It is run by the fellow who put together the Triterras deal. He joined after TDAC failed to complete its original merger target objective and the company was coming up on its liquidation date. While it is unclear what lottery.com’s financial profile looks like, there are signs it is a tough business that it may not hold investor interest post-merger, if it ever reaches that point.

One should be extremely cautious shorting in this environment, of course.

TDAC History:

IPO on May 29, 2018; formed to target O&G acquisition in Russia

TDAC was due to terminate by the end of 2020 due to 18 mo. SPAC liquidation term (w/ 3 month extension)

Marat Rosenberg of Netfin/Triterras infamy was not previously part of management but joins as chairman in November 2020

TDAC concurrently or near concurrently announces LOI with lottery.com in November 2020

Proxy filed in November 2020 to vote to extend liquidation date to March 1 with an option to further extend to June 1; approved in December

Lottery.com:

In a nutshell, lottery.com allows customers to use their credit card to play the lottery through an app, without leaving their couch. Customers appear to be those who won’t/can’t walk to the corner convenience store, or who live in another state or country but want to play a specific game not available locally. Powerball and Mega Millions appear to be the most popular products, likely due to the sometimes gargantuan prizes. 

There is a patchwork of laws that regulate cross-jurisdiction lotteries. While we reside in a state not yet covered by lottery.com, we had someone test the product in a participating state. The fees were fairly steep for individual tickets (e.g., 50% upcharge), but %-wise were reduced for bulk purchases (e.g., 11% upcharge on 10 tickets). The iOS app itself looks poorly designed, and an Android version was only released recently. The app is so absurdly poor, it takes you to a website to pay for the tickets, instead of having an integrated payment function.

On the back end, lottery.com will purchase the physical ticket for you and put it in a safe: “A Lottery.com employee will purchase tickets on your behalf, which you can then view in your app, and protect them under stringent guidelines.” The obvious attraction of the product is to notify you and to keep your tickets organized.

The company claims 279% topline growth from 2016 - 2019, but has otherwise been mysterious about financials. Based on estimated web traffic, it would seem possible to game this growth rate based on cycles of interest in specific lotteries. The oldest reviews on the Apple store are from 2016, so it is likely 2019 shows a big % growth off a tiny base while they were getting started. 

There has been a spike in lottery.com visits, but chances are these are SPAC tourists doing their “DD,” as can be seen from referring sites:

Gross margins are likely to be excellent, but the fixed overhead costs are unclear.

The narrative risk is that they throw a “conquer the world” hockey stick at investors that has nothing to do with their existing business and has everything to do with managing online gambling worldwide. Then, everyone forgets that online gambling is well covered by regional operators and sophisticated, extremely-well funded competitors. If this is the best they can muster, we might be ok, but anything could cause a stock to break out these days: https://www.globenewswire.com/news-release/2021/02/08/2171329/0/en/Lottery-com-Enters-MOU-with-MSL-to-Offer-U-S-Lottery-Products-in-Ukraine.html

Neither SPAC management nor lottery.com have responded to inquiries. 

Shareholder and Trading Dynamics:

Top holders include the original Russian founders and current executives/directors, and a gaggle of passive hedge funds who invest in SPAC IPOs. Despite $5 mm+ ADTV, decent float on paper (though with many non-trading holders), and no options, chances are this stock is easy to push around on non-fundamental factors. It seems likely that whoever is trading this is relatively value-insensitive, almost certainly not value-oriented and is mostly trading this with the SPAC tide.

Where the event catalysts come in is if the deal either breaks, or it is announced/approved/closes.

The implications of a deal break are obvious and limited by the cash in trust, but the probability may be low, since they are desperate to get a deal done to earn their performance shares. Yet, it wouldn’t be the first time - cue LHC+Chuck E Cheese, ALGR+TGIF, LACQ+Gateway Casino, etc. If too many redemptions shut down the deal, they can't arrange a PIPE or post-deSPAC lottery.com ends up being worthless, however, obviously SPAC management does not make money, so it’s not a done deal until we see what lottery.com’s financials look like.

The more likely path is that they do announce a binding merger agreement, or some more complicated deal. Then it gets interesting. It could trade anywhere based on whatever narrative they post, but if in fact lottery.com is an ugly business, then there is a reasonable chance lottery.com loses its audience post-announcement or post-merger, assuming there is no magical introduction of an AI, meat substitute, or EV/AV angle. 

Shorting ahead of a de-SPAC was always treacherous in the event one could have their shares redeemed, but redemption rates have been amazingly low due to the SPAC tide. Redemptions are low in the current environment, yet certain stocks then proceed to trade down post-merger when investors suddenly wake up to the reality of what they own. Cue: ETWO - low growth e-supply chain rollup with troubled AmberRoad, SFT - huge used car execution risk, LOTZ – basically a worse SFT. 

And, the benefit of investing post-deSPAC is that shares can can break the cash in trust value, which many did consistently before 2020’s SPAC-mania. 

Of course, trading dynamics around the SPAC merger close can be strange and sometimes have the qualities of a squeeze. We believe the phenomena is less strange when there are not that many redemptions and SI is low. That said, it is usually very hard to tell what the real float and SI of a SPAC is, no matter what your terminal may say. On the other hand, days to cover appear to be still low, but have been increasing noticeably in recent weeks. 

And, we cannot forget retail risk today:

https://www.reddit.com/r/spac/comments/l9lw7o/tdacwallstreetbets/ 

https://www.reddit.com/r/SPACs/comments/k6k90r/tdac_lotterycom_preliminary_dd/

Why/How/When to Short?

As usual, much of the thesis is circumstantial and based on conjecture, so short at your own risk and for your own reasons.

One reason to short would be to offset SPAC sector risk on the long side as a relative value hedge.

Another approach would be to adjust position sizes around the possible sequence of events as TDAC marches toward whatever finale lays ahead of it. It likely won’t be an easy ride, but for those willing to trade the position, it could be profitable. It probably pays to be unconcentrated on the short side currently and to run for the hills if SI continues to rise.

The safest way to trade this, and how we will approach it, would be to take no/small position until after the prospective merger close. This event horizon has been the point of best risk/reward with our other SPAC short trades. Another signal to size up the position could be if the indicated value is < $1B. Our work suggests non-unicorns tend to receive worse treatment in the markets, perhaps due to a signaling issue.

As usual, our timing will be terrible. Posting this while time allows and while the work is fresh.

Risks:

Anything can float these days

Lottery.com is actually a really good business

Lottery.com is a lousy business, but investors are fooled anyway

lottery.com was just a placeholder to get past the annual meeting extension and TDAC announces a better target or a complex combo merger

Headline risk: new states/countries, new app, new partnership, anything really

Even less profit potential pre-deSPAC than usual short vs. unlimited loss potential

Technicals, technicals, technicals

Catalyst

Deal break

Deal announcement

Deal close