OAL_Business Plan_Strategic Plan_2023-2027_final52.pdf

Department of Finance and Administration, Office of the Arkansas Lottery

Business History & Strategic Plan Fiscal Years: 2023-2027

I.

Executive Summary

The Office of the Arkansas Lottery (OAL)(DFA-OAL) is a self-supporting and revenue-producing agency of the State of Arkansas, housed in the Department of Finance and Administration’s Management Services Division (DFA). The Arkansas Constitution states that OAL’s net proceeds, through administration of the Arkansas Department of Higher Education (ADHE), will provide scholarships and grants to citizens of the State of Arkansas enrolled in public and private nonprofit two-year and four-year colleges and universities located within the state, and supplement, not supplant, non-lottery educational resources. Also included are scholarships and grants to those enrolled in approved trade schools and high school students who are concurrently enrolled in college-level course work.

The Office of the Arkansas Lottery is unique in structure when compared to other divisions of state commissions. OAL operates as non-appropriated entity that relies solely on the funding it derives from the sales of lottery tickets through the Arkansas Scholarship Lottery (ASL).

Accordingly, although OAL is a division of DFA and a state entity, it also operates in a competitive market, more specifically the consumer discretionary retail sector. DFA-OAL maintains memberships in the following lottery sector key organizations:

• Multi-State Lottery Association (MUSL), and

• North American Association of State and Provincial Lotteries (NASPL).

Through its marketing and sales of lottery tickets, OAL competes against all other consumer discretionary items, especially those related to fun and entertainment. This structure accurately categorizes OAL as a state entity engaged in the retail competitive marketplace. Thus, while OAL is subject to industry regulation (MUSL), it is also subject to legislative mandate. A proper description of OAL’s structure is “a state agency operating as a business.” Due to this unique operational structure, we are classifying this document as a “Strategic Plan” (typically used by governmental agencies) although its import is closely akin to a “Business Plan” that would normally be issued by a private ‘for profit’ entity.

Since its inception in 2009, the Arkansas Scholarship Lottery has generated $6,294,086,083 (through July 2022) in total sales revenue. Importantly over this course of time over $1,188,017,987 (through July 2022) in total net proceeds have been provided for the benefit of Arkansas students to assist them in advancing through higher education. We believe that through these results that every community in Arkansas benefits from a well-educated and professionally trained workforce. We are reminded of the saying, “A rising tide truly lifts all boats.”

OAL booked total sales revenue in FY21 of $632,579,894 (audited). Net proceeds in FY21 totaled $106,417,224 (audited). These performance metrics represented historic records in both categories since the inception of the Lottery.

OAL booked total sales revenue in FY22 of $580,234,684 (unaudited and subject to adjustment). Net proceeds in FY22 totaled $99,762,041 (unaudited and subject to adjustment).

These performance metrics represented the second-best annual performance marks since Lottery inception.

OAL has forecasted total sales revenue in FY23 of $535,360. Net proceeds in FY23 are projected to total $91,450,000. The projected ROS in FY23 is 17%

Agency History Information

Act 605 and 606 of 2009 delineated the structural, operational, and oversight aspects of the Arkansas Lottery. This enabling legislation outlined how the Lottery would operate with respect to employees, a nine-member Commission, vendors, retailers, procurements, and lottery proceeds, among other things. The Arkansas Scholarship Lottery Act of 2009, crafted by the 87th General Assembly, created an independent nine-member Arkansas Lottery Commission, to oversee the operation of the Lottery. The Act also vested the Commission with oversight authority and the power to enact and amend rules pertaining to the operation of the Lottery, as necessary. Between 2009 and 2011, the Lottery enacted Rules of Practice and Procedure, Operational Rules, Retailer Rules, Procurement/Contract/Vendor Rules, and Rules for Claims in Contract or Tort. The Lottery Act and promulgated Rules served to provide the legal framework for the Arkansas Lottery through February 2015.

In February 2015, Governor Asa Hutchinson signed Act 218 into law. This Act eliminated the nine-member Commission and its oversight functions. Act 218 provided for the creation of the Office of the Arkansas Lottery (OAL) within the Department of Finance and Administration (DFA) and gave the Governor the authority to appoint the Lottery Director. Act 218 removed certain procurement and personnel exemptions which had previously applied to the Lottery.

Beyond these changes, Act 218 did not materially change the operational aspects of the Lottery.

Prior to the adoption of Act 218, the Lottery was administered by a staff of approximately ninety-three (93) employees. OAL is currently comprised of sixty-two (62) employees; OAL is approved for sixty-seven (67) positions. The Executive Director of the Arkansas Scholarship Lottery also serves as a Director of the Department of Finance and Administration.

OAL Mission Statement

The ‘Mission Statement’ for the administration of the Arkansas Scholarship Lottery is as follows:

to Maximize Net Proceeds for the benefit of scholarships, in a responsible manner.

To comply with the mission statement, it is imperative to consider and be guided by the overarching principle of administering the Lottery (and by extension ASL) in a responsible manner. All decisions regarding the business and marketing operations of the Lottery must have the OAL mission at the precipice of all business evaluations. It is imperative that Lottery management understand and consider the nature of the products being offered through ASL, and to carefully weigh their potential effects on the citizens and communities of the State of Arkansas.

Vision and Values Statement

OAL’s vision statement for FY22-26 is to create life-changing experiences for Arkansans while supporting higher education in Arkansas.

OAL’s Values are:

• Do your best and nothing less.

• Do the right thing, always.

• Take the initiative.

• Take pride in serving Arkansans, every day.

Responsible Gambling Program

OAL Executive Management is keenly aware of the potential for abuse of the lottery games that are offered through ASL. A material component of the decision-making process when determining the direction, depth, and breadth of ASL offerings is driven by OAL’s Responsible Gambling Program (RGP). OAL is enrolled in the Responsible Gambling Certification Program offered by the National Association of State and Provincial Lotteries (NASPL), which is a responsible gambling program specifically designed for lotteries such as that operated by OAL.

Currently, OAL has achieved Level I status representing the implementation phase of the NASPL RG Program; OAL is working to achieve Level II status.

Executive management places a high threshold for the ‘responsible nature’ mandate of OAL’s Mission Statement and it is at the forefront of every decision. Management believes that this overarching guiding principle helps our employees have a clear understanding of the priorities that underly their day-to-day decisions. We also believe that this management philosophy serves to guide and inspire external third parties that support OAL’s operations.

II.

Organizational Structure

Executive Director: The Executive Director of the Arkansas Scholarship Lottery also serves in the dual capacity as a Director of the Office of the Office of the Arkansas Lottery, a division of the

Department of Finance and Administration. The Executive Director has day-to-day responsibility for directing and overseeing all aspects of OAL and the administration of ASL. The Executive Director ensures that OAL operates with integrity, security, and transparency, and that the products offered by ASL, its promotions, and activities are in keeping with the community standards of Arkansas. The OAL Executive Director is appointed by the Governor and reports to the Cabinet Secretary of the Department of Finance and Administration.

Director of Gaming: The Director of Gaming is responsible for overseeing the day-to-day operations of the OAL Gaming Division and its personnel and related vendor activity. The Director reports directly to the OAL Executive Director. The Director is responsible for directing, leading, and managing the gaming processes and deliveries for OAL, including management of the ASL game portfolio. The Gaming Division has gaming system and product development teams which support OAL business initiatives. The Gaming Division utilizes industry knowledge, technology, and architectural solutions to deliver new games, operational effectiveness, growth, and competitive advantage. The Gaming Division is responsible for the OAL product and software life cycles, development of new games, software testing and installations, product and production maintenance and support, and handling internal needs for gaming information.

Technology, product information, and other gaming services. The Gaming Division identifies opportunities and risks and manages/mitigates risks that potentially jeopardize current or future OAL business functions.

Director of Sales: The Director of Sales is responsible for overseeing the day-to-day operations of the OAL Sales Division and its personnel and related vendor activity. The Director reports directly to the OAL Executive Director. The Sales Division is comprised of the Director, two (2) Regional Managers, a Key Account Manager, and twenty (20) Marketing Sales Representatives who cover assigned territories in support of field sales of ASL products. The Sales Division sets and monitors the attainment of sales goals, engages in retail marketing sales and service, and implementation of retail promotional programs.

Director of Marketing: The Director of Marketing is responsible for overseeing the day-to-day operations of the OAL Marketing Division and its personnel and related vendor activity. The Marketing Director reports directly to the OAL Executive Director. The four-person Marketing Division is responsible for overseeing the planning, development, and implementation of marketing, advertising, and promotions functions of OAL. Each member of the division has a dedicated role: graphic specialist, publications specialist, and campaign coordinator. The division develops strategic plans and initiatives to bring consumer awareness to ASL products in a manner that enhances brand awareness and optimizes revenues. Advertising resources are allocated throughout the state using a combination of media (television, cable, radio, print, digital, and social media), point of sale materials, promotional events, and sponsorships.

Advertising is currently produced in consultation and in conjunction with OAL’s contracted advertising agency(s) and internal staff.

Chief Fiscal Officer: The Chief Fiscal Officer (CFO) is responsible for overseeing the day-to-day operations of the OAL Finance Division and the IT Support Division and its personnel and related vendor activity. The Chief Fiscal Officer reports directly to the OAL Executive Director.

The Finance Division is of OAL is comprised of two Departments: (a) Accounting, and (b) Treasury. Both Departments report to the Chief Fiscal Officer. These Departments are responsible for the recording and reporting of all OAL financial activities, the preparation of the annual budgets, all OAL disbursement activities, processing employee payroll, the collection of revenue, the withholdings of any required state and Federal taxes from winnings, performing the state and Federal tax reporting, and the collection from winners of delinquent state taxes and child support payments.

The OAL Accounting Department maintains the accounting records, records of all financial transactions, and produces the monthly financial statements and related reports to meet required deadlines, including the assurance of the timely and proper transfer of the net proceeds to the ADHE Lottery Scholarship Trust Account each month.

The OAL Treasury Department assures the timely collection of revenue through the retailer settlement process. It is also responsible for the proper operation of the OAL Claim Center, including the collection of any delinquent state and Federal taxes or child support payments owed by winners. Treasury also assures the timely action of collection activities related to any delinquent retailer accounts.

The Chief Fiscal Officer has overall responsibility to assure that the Accounting and Treasury responsibilities are properly performed and that adequate internal controls exist within OAL to assure reliability of the financial data. The CFO is also responsible for the timely issuance of the financial statements each month, and for the completion of the annual OAL Annual Comprehensive Financial Report (ACFR). Additionally, the CFO is responsible for developing and submitting the annual budget for OAL in a timely manner, and in the prescribed format(s) to meet all required statutory or administrative deadlines.

The IT Support Division is responsible for the support and maintenance of the internal operating hardware and software required for the daily operations of OAL. It is also responsible for the 24/7/365 support of OAL’s internal network, including any support required to assure access by OAL users to key applications, email, voicemail, and internet or network access. The IT Support Division is also responsible for network and desktop security, backup of user files and applications, and creating, testing, and maintaining an agency disaster recovery plan.

Director of Security: The Director of Security is responsible for overseeing the day-to-day operations of the OAL Security Division and its personnel and related vendor activity. The Director of Security reports directly to the OAL Executive Director. The Security Division is comprised of two Departments: (a) Security and Compliance, and (b) Licensing. Both Departments report to the Director of Security.

The primary responsibilities of the Security Division are to plan, develop, and administer a robust security program for the facilities, personnel, computer systems, and integrity surrounding the games offered by ASL. The division is also responsible for ensuring OAL compliance with industry standards and rules for multi-state games. The Security Division administers the drawing for in-state games. The division also coordinates with and works in conjunction with state and local law enforcement agencies concerning investigations into criminal violations involving Lottery operations.

The Director of Security also supervises the OAL Licensing Department, which is responsible for accepting applications for Retail Licenses, conducting background checks, and ensuring proper books and records of the Lottery’s licensed retailers, including verification of information and change of ownership applications.

Chief Legal Counsel: The OAL Chief Legal Counsel is responsible for overseeing the day-to-day operations of the OAL Legal Division and related vendor activity. The Chief Legal Counsel reports directly to the OAL Executive Director. Chief Legal Counsel also serves as supervisor of the OAL Office Administrator/HR Liaison. Among other duties, the Legal Division is responsible for providing advice and counsel to OAL personnel on legal matters affecting OAL, drafting and revising contracts, and providing guidance with respect to those contracts. The Legal Division is also responsible for pursuing claims of debts owed to OAL, as well as providing counsel to the OAL Treasury and the OAL Credit Committee. The Legal Division also handles the administration of OAL trademark registrations, supervises OAL litigation and performs research and provides statutory interpretation of governing laws, rules, and regulations.

Additionally, the Legal Division is responsible for interpreting federal, state, and local laws and regulations to ensure agency compliance. The division is responsible for overseeing the major procurement Request for Proposals (RFPs) and qualifications, and monitoring and providing legal guidance for major procurements. The Legal Division also has responsibilities related to reviewing and monitoring of all Multistate and Regional Agreements. Finally, the Legal Division participates in the evaluation, response, and implementation of audit recommendations.

Office of Inspector General - Internal Audit: The Office of the Inspector General (OIG) provides independent internal audit functions on behalf of DFA-OAL and ASL. The Internal Auditor reports to the Director of the Office of Inspector General. By way of history, the internal audit function was performed in-house during the existence of the Lottery Commission which was abolished by Act 218 in 2015. Subsequently, the internal audit function was overseen by the Department of Finance and Administration pursuant to A.C.A. §23-115-212.

Currently, the internal audit function is performed by the Office of Inspector General by way of Governor’s Executive Order in 2021. The OAL Internal Auditor is responsible for development and implementation of a three-year, risk-based internal audit plan. The Internal Auditor’s Plan should assess internal control and compliance with regulatory and statutory requirements within the office of the Arkansas Lottery’s functional areas through both formal and informal recommendations to executive management.

In 2014, the Lottery Commission (now abolished) moved to bring the daily audits of in-state game drawings into Internal Audit’s area of prevue. As part of this function allocation, Internal

Audit was allocated two additional open positions under the control of the Executive Director of the Lottery, with one position to be full-time to cover daily draw audits and other internal audit functions, and the other position being part-time with exclusive focus on the daily draw audit responsibilities. These positions were established at a time during which OAL was utilizing ‘manual draw’ procedures which required the physical presence of a member of Internal Audit.

Beginning in 2021, OAL replaced its aging RNG machines and replaced them with RNG machines that have an automated draw function that does not require the physical presence of a member of the Internal Audit group.

III.

Major Term Contracts

INTRALOT, INC.

On August 15, 2009, ALC executed an “Online Lottery Game Services and Lottery Gaming System and Services Contract” with Intralot, Inc. (Intralot) to provide online lottery game services as well as providing a lottery gaming system and support services. The contract spanned a seven (7) year term with an option to renew up to three additional time in one-year increments or a portion thereof.

On August 12, 2012, ALC executed a no-cost First Amendment to the Agreement. On January 8, 2015, OAL executed a Second Amendment to the Agreement. The Second Amendment exercises the three one-year renewals, reduces the compensation percentage from 2.45% to 2.165% and extended the contract until August 14, 2019.

On August 14, 2019, DFA-OAL renewed contracts with Intralot Inc. (“Intralot”) for its central gaming system functions. Total compensation to Intralot from inception of the relationship to August 29, 2022, totals $144,059,375.

SCIENTIFIC GAMES, INC.

The now abolished Lottery Commission (ALC) executed a new contract for an “Instant Ticket Games Service Contract” with Scientific Games International (SGI) on August 18, 2009, wherein SGI agreed to manufacture instant tickets, handle warehousing of tickets, administering the ordering process, and distribution of tickets. The contract also provided for marketing support services to the ALC for ASL games. The contract also called for an SGI subsidiary, MDI, to create and manage ALC’s player’s club at a rate of 1.5%. This percentage was later amended to 1.35% of ALC’s prize fund. The contract was for a period of seven (7) years, with an option for renewal up to three additional times in one-year increments or a portion thereof.

On June 28, 2012, ALC entered into an amended agreement (“First Amendment to the Agreement for Contractual Services for Instant Ticket Lottery Game Services”) with SGI. The amended contract became effective July 1, 2012. The amendment reduced ALC’s contracted rate from 1.92% to 1.81% of instant sales and realized a cost savings of $879,654.74 through the amended contract; ALC also received a one-time payment of $2,000,000 from SGI.

The contract with instant ticket provider Scientific Games Inc. (SGI) was amended in August 2016. The contract as amended revised the base rate of SGI’s compensation from 1.81% on total sales of instant tickets to 1.3% of sales of instant tickets. However, and importantly, the revised contract also provides that SGI would receive additional ‘bonus compensation’ of 4.5% of total sales of instant tickets exceeding $360,000,000 during each year of duration of the contract. This “contract year” begins on August 18 of each year and ends on August 17th of the following year. This means that for all sales of instant tickets during a “contract year” exceeding $360,000,000, SGI receives 4.5% as a bonus. Thus, for all sales of instant tickets above $360,000,000, SGI receives 5.8% of total sales of instant tickets sold by OAL.

Total compensation to SGI from inception of the relationship to August 29, 2022, totals $161,595,375. The current contract expires in August 2026; there are no extensions to the contract remaining. OAL is in the early stages of consideration as to desired terms and features for formal Request for Proposals (RFPs) for both the central gaming system and the instant ticket vendor contracts.

CAMELOT GROUP, INC.

Since 2015 to August 29, 2022, OAL has contracted with Camelot Group to provide commercial consulting services. The total amount paid to Camelot Group during the referenced period is $21,216,375. The current Camelot contract expires on June 30, 2023, with no extensions available under the current contract.

CJRW, INC.

Since July 2017 through July 2022, OAL has contracted with CJRW Inc. to provide advertising services that include production services and media buying services. The total amount paid to CJRW during the reference period is $36,854,780.60.

UNION PLAZA

On September 1, 2009, ALC executed a six (6) year contract with the Little Rock Union Plaza Building and the Arkansas Building Authority for a lease at the Union Plaza Building at 124 West Capitol Avenue, Little Rock, Arkansas. OAL was provided two floors for operations and administration and space on the first floor for the ASL Claims Center. The original lease expired on August 31, 2015.

On May 18, 2015, DFA-OAL executed a six (6) year contract with the Little Rock Union Plaza Building and Arkansas Building Authority for a continuation of the lease at Union Plaza Building providing the same general space as described herein above. This lease expired on August 31, 2021.

On May 7th, 2021, DFA-OAL executed a 5-year contract with the Little Rock Union Plaza Building and Arkansas Building Authority for continuation of the space provisions described herein above. The current lease became effective on September 1, 2021; the lease expires on August 31, 2026.

BANK OZK

On September 2, 2009, ALC entered into an agreement for comprehensive banking services with Bank of the Ozarks (now known as, “Bank OZK”). The contract was for a seven (7) year term, with the option for renewal up to three additional times in one-year increments.

In September of 2016, DFA-OAL executed a contract with Bank OZK to continue banking services to OAL for a period of four (4) years with an expiration date of September 2020.

In September of 2020, DFA-OAL executed a contract with Bank OZK to continue banking services to OAL for a period of two (2) years with an expiration date of September 2, 2023.

There are three (3) one (1) year extensions upon mutual consent.

*All DFA-OAL contracts reference above were executed upon approval of the Arkansas Lottery Commission prior to 2015, and by the Department of Finance and Administration thereafter.

Further, all contracts executed after the passage of Act 218 and Act 1258 (2015) were subject to review by the Legislative Oversight Subcommittee and the Arkansas Legislative Council.

IV.

Current Operations and Retail Deployment

It is imperative to understand that OAL formally operates as a division of DFA and, as such is a state agency. Additionally, however, OAL is unique among its peer agencies in that ASL is operated as a vehicle for raising proceeds for scholarships. OAL competes with all retail products that rely on consumer discretionary income. This means that OAL, while clothed as a state agency, competes daily with ‘for profit’ private corporations and entities who are not bound by the same statutory restrictions and oversight as that of OAL. Thus, executive management views OAL as a hybrid entity, unlike any other state agency.

OAL currently maintains a retail distribution channel that includes 1,989 licensed lottery retailers. OAL currently deploys a total of 2,092 retail Photon® counter terminals (clerk operated) and 211 ticket vending machines (TVMs); 85 of the TVMs are special Dream-Touch® machines specially designed for deployment in Walmart stores. OAL does not currently distribute ASL products directly through digital purchases. Beginning in March 2020, OAL began a pilot program with Jackpocket Inc. to offer sales of ASL lottery games through a mobile app, however, a physical lottery ticket generated from a licensed lottery retailer was required. This pilot program served as proof of concept that the consumer market desired such a purchase option. OAL is seeking to amend its Operational Rules and Retailer Rules to allow qualified licensed retailers to contract with registered financial couriers; importantly, all sales will be conducted through and captured on the counter terminals of licensed retailers in the form of a physical ticket. This is an important distinction from digital play of lottery games, which is commonly referred to as ‘i-Lottery’ and is considered a second distribution channel requiring authorization.

V.

SWOT Analysis

OAL executive management applies SWOT Analysis in establishing priorities and direction.

SWOT Analysis is a process whereby the agency’s strengths, weaknesses, opportunities, and threats are an underlying component to all business decisions made by the agency.

Material strengths identified by OAL executive management are as follows:

• Monopoly status: Games offered by OAL through ASL are currently the only lottery games permitted for sales within the borders of the State of Arkansas.

• History: ASL games have now been offered in the State of Arkansas for thirteen years and have a loyal following of customers.

• Unique Entertainment Proposition: ASL lottery games are a unique form of entertainment for customers.

• Purpose: The fact that all net proceeds generated from the sale of ASL games by OAL are provided to an important single source: scholarships for higher education of Arkansas students. Through this commitment to advancing education to Arkansas residents, it is broadly understood that the quality of life, opportunities for employment, and a rising average household income will benefit the state at large, local communities, and its citizenry.

Material weaknesses identified by OAL executive management are as follows:

• Limited Distribution Channels: Currently, OAL is authorized to distribute ASL lottery games through a single distribution channel, which is brick-and-mortar retail establishments. Increasingly, the retail landscape is shifting towards digital distribution whereby consumers can place and receive orders through engagement with the internet. Increasingly, state lotteries are implementing secondary distribution channels that allow consumers to conduct lottery transactions in a touchless environment that does not require them to leave home.

• Staffing Deficiencies: DFA-OAL staffing has been reduced from an average of 83 employees to 62 employees (approved for 67). To continue to provide premium service to ASL customers, it will be necessary to increase staffing levels. Additionally, with increased sales comes attendant increased business and security risks. These considerations also include a need for additional staffing to ensure that catastrophic failures do not occur.

• Retail Equipment Deficiencies: Currently, OAL has retailer terminals and TVMs that are early-generation forms of equipment. By example, the Photon terminals deployed throughout the retail channel are previous generation technology. By further example, the TVMs deployed throughout retail are two generations old. As customers travel to other states and experience the newer technology available, OAL will be further pressured to update equipment. Updated equipment purchased at OAL expense (outside of contract) will necessarily serve as an expense that will reduce net proceeds.

• Contract Deficiencies: OAL is currently laboring under a set of vendor contracts that include significant deficiencies both as to value-add (Intralot) and bonus compensation (SGI). Additionally, the SGI contract as renewed in 2019 provided SGI with an exclusive right to provide instant tickets for sale through ASL games.

o The decisions made by OAL executive management are impacted by the following:

the central gaming system contract with Intralot was executed in 2019 and does not provide at vendor expense for the immediate deployment of technology and/or equipment developed mid-contract. Likewise, the Intralot contract does not provide for, at vendor expense, the periodic refreshing of retail equipment. OAL is effectively ‘locked in’ to the terms of this contract without consideration for the technological and equipment advancements that logically occur over a seven (7) year term.

the instant ticket contract executed with SGI in 2019 provides for a 4.5% ‘bonus payment’ for all sales of instant tickets that exceed $360,000,000 during the ‘contract period’ (August 18th)(Note: un-aligned with OAL’s fiscal year). It is incumbent upon OAL executive management to ensure that appropriate margins are achieved to drive ROS. Margins drive ROS which is an equivalent metric to return on investment (ROI) in the private corporate sector. Thus, once sales of instant tickets exceed $360,000,000, executive management must balance top-line sales with a keen eye on delivering normalized ROS. Such should not be the case, as the interest of the vendor (SGI) should be fully aligned with the interest of the client

(OAL).

• This bonus payment is in addition to the 1.3% payment on all sales of instant tickets during the contract period. Thus, once sales of instant tickets exceed $360M, SGI receives 5.8% on the sales of instant tickets. Further clouding this deficiency is the fact that the SGI bonus period runs until August 18th of each year, thereby affecting two fiscal years, annually. The bonus payment above the threshold was not a component of the original contract with SGI executed in 2009, however the 1.3% initial rate is lower than the original 1.81% rate inclusive in the 2009 contract.

Significant Opportunities identified by OAL executive management are as follows:

• Arkansas LOTTO: Consistent with proper administration of the ASL game portfolio, OAL executive management keenly recognizes the enhanced margins delivered by draw games as opposed to instant tickets (aka, ‘scratch offs’ or ‘scratchers’). The financial metrics of the multi-state games (Powerball, Mega Millions, Lucky for Life) are not controllable by OAL, but rather are at the decision of certain states who make up the ‘managing consortium’ of each game. Recognizing the significance of controlling draw games margins at some level, OAL executive management began considering the development of a draw game that would produce life-changing jackpots, and which would be available only to citizens and visitors who are physically present within the borders of the State of Arkansas. Upon extensive research and review, Arkansas LOTTO was created with an anticipated launch date of September 18, 2022, and with an initial draw date of September 21, 2022.

• OAL-branded Mobile App: OAL has utilized a vendor-provided mobile application for limited purposes of allowing customers to enter the Second Chance Drawing, as well as the Points for Prizes program where customers can enter non-winning tickets for a second chance to win and/or obtain points that are redeemable for merchandise.

Historically, this limited mobile app (provided by SGI) has been branded ‘Player’s Club.’

Upon review by OAL executive management, it was determined that consumer sentiment in the lottery sector was moving towards enhanced mobile applications that allow users to check their tickets for wins via mobile app. Furthermore, due to the move by consumers towards digital engagement it was also determined that the mobile application should be branded as the Arkansas Scholarship Lottery mobile app. These changes are being targeted for implementation during Q2FY23.

• Secondary Digital Distribution Channel: The retail landscape has diametrically changed at a pace heretofore unimaginable. The primary driver this explosive change in how retail products are sold and delivered to consumers is predicated on the events associated with the pandemic event that took place in 2020-2022, and which continues to indirectly impact the retail channels.

o The lottery sector is no stranger to the precipitous changes occurring in the retail distribution channels. Whereas prior to the pandemic event only state lotteries with decades of experience and size of substantial scale had moved into the secondary digital distribution channel (i-Lottery), the post-pandemic environment has seen a bevvy of states of all ages and size moving into the digital age. This move allows for touchless purchase and playing of lottery games, as well as the immediate online cashing of prizes of $500 and under (in Arkansas) into the consumers virtual online wallet. In the immediate term, prizes exceeding $500 still require cashing at a lottery claims center so that the tax/child-support scrub can be conducted.

o Currently, of the 46 U.S. lotteries currently operating 11 (+ District of Columbia) have launched an iLottery digital platform for play. There are approximately 7 other lotteries ‘in queue’ for deployment, and the line for deployment by external vendors will assuredly grow. To remain competitive and current with consumer demand, it will be necessary for the Arkansas General Assembly to strongly consider authorizing OAL to develop, deploy and administer a secondary digital distribution channel.

• Expiring Vendor Contracts 2026: The expiration of the current vendor contracts in FY26 is an opportunity for DFA-OAL and OAL executive management to correct a current ‘weakness.’ More specifically, DFA-OAL and OAL executive management should take the opportunity to ensure that the upcoming round of multi-year (term) vendor contracts are more carefully tailored to ensure that both parties are aligned with both specific financial goals and overarching business considerations, including but not limited to OAL’s RGP.

Significant Threats identified by OAL executive management are as follows:

• Changes in MUSL Games: Powerball® is engaged in discussions with entities that would allow the game to be sold in certain international markets. The effects of a move towards international expansion are unknown at this time; however, international expansion could result in a change in domestic player sentiment which could negatively impact sales. Also, The Mega Millions® Board of Directors have discussed certain game changes, as well as an increase in price per play. Changes in game matrices or an increase in per-play price could negatively impact sales.

• Restrictive Legislation: A persistent denial for the deployment of a secondary digital distribution channel will serve to impede DFA-OAL’s ability to faithfully administer its mandated mission of maximizing net proceeds in a responsible manner for the benefit of scholarships. Lottery is no different than any other entity who competes in the retail sector. Touchless, digital solutions are overtaking the retail landscape and it will be necessary for OAL executive management to consider pursuing all reasonable and responsible paths for generation of revenue that benefits net proceeds for the funding of scholarships.

o Another form of restrictive legislation that could serve to impair the operational and financial performance of the Lottery is legislation that requires OAL to focus on a single financial metric, namely ROS. The percentage mandated would be pre-determined without concern for economic conditions, the overall vagaries of operating an entity over time, and the natural phenomenon of ordinary business cycles.

During each legislative session since the inception of the Lottery, external groups supported by certain legislative members have attempted to pass legislation intended to mandate a pre-determined percentage of ROS calculated on total sales.

A small portion of peer lotteries have seen similar mandates imposed, and with one exception they have been subsequently removed due to the erosive nature of artificially focusing on the single financial metric of

ROS.

If the Legislature were to pass legislation mandating an artificial and pre-determined ROS, then the operational decisions of executive management would become linear and single focused. Top line growth and the natural course of periodic business cycles would be stunted. The net effect would be a reduction in total sales, which would result in a reduction of overall net proceeds. Only the artificial and pre-determined ROS metric would rise.

• Economic Erosion: A major consideration in the near, intermediate, and long-term regarding forecasting is the considerable threat of continued economic erosion. While media pundits vary in their assessment and blame, OAL executive management must rely on cogent and unbiased economic data as well as data derived from observing and assessing OAL’s business performance and market penetration.

o Currently, an unprecedented 16 straight weeks of inflation above 5.8% has been reported by the United States Department of Labor. And, while inflationary pressure is a concern, an overall lack of gross domestic production (GDP) remains clouded. If, in fact, GDP continues to drift downward alongside inflation, then the U.S. economy will suffer from stagflation for only the second time in history. Stagflation will impair real wages via a rising cost of living (COL) metric which would likely negatively weigh against sales performance for ASL lottery games.

• Increased Costs: Broad Inflation (a defined term by the DOL) serves to raise costs across all sectors of the economy. Lottery is no exception to this general rule. As costs rise for OAL suppliers and vendors, this will be passed along to OAL. Rising costs to OAL serves to a reduce net proceeds. Reduced net proceeds to meet the scholarship requirements of Arkansas students seeking higher education will necessarily serve to impact the operational and financial decisions undertaken by OAL executive management.

Importantly, while OAL can work to minimize known costs (and forecast unknown costs that are reasonably predictable---aka, worst case scenario forecasting), management cannot control an increase in costs associated with broad inflation.

• Limited Vendor Roster: Currently, there are only three vendors offering central gaming system services: Intralot, SGI, and IGT. During the initial round of contract negotiations in 2009, IGT elected to forego participation in the bidding process. This reduced the available potential vendor pool to only two candidates: Intralot and SGI. The results of the bidding process resulted in Intralot receiving the CGS contract, with SGI receiving the Instant Ticket contract. There is no indication that the pool of vendors will increase beyond the current three vendors prior to the RFP bidding process scheduled for FY25.

A lack of competition serves to erode the ability for Lottery to utilize negotiation leverage. This is a weakness that permeates the entire lottery sector and is not unique to DFA-OAL.

o Regarding instant tickets, there are only three (3) vendors: SGI, IGT, and Pollard Banknote.

Currently, SGI serves as the exclusive vendor for instant tickets.

• Other forms of Gaming as Competition: At inception of the Lottery in 2009, Arkansas had two para-mutual racing venues (Southland Park and Oaklawn Park). Since that time, Arkansas law has been amended via Amendment 100 to allow for the granting of a limited number of casino licenses. Now, in August 2022, Arkansas has authorized the operation of four casino’s (Saracen Casino Resort, Cherokee Casino Resort, Southland Casino Resort, and Oaklawn Casino Resort). Further, during the 2022 General Assembly, these four entities received authorization to engage in sports betting, off-site betting, and the use of betting via digital mobile application.

o While lottery games are a unique form of gambling entertainment that do not require the same commitment of money or time as a casino, the fact remains that consumer discretionary dollars are finite. By extension, this means that the competition for consumer spend on gambling options has increased competition since the formation of the Lottery in 2009.

• Pandemic Events: The pandemic event of 2020-2022 served to underscore the need for OAL executive management to consider the operational and financial threats associated a pandemic event. While OAL was able to operate in traditional fashion throughout the recent pandemic, it would be misguided to believe that such would always be the case.

OAL maintains a business continuity and disaster recovery plan (BCP-DR Plan) to ensure that a plan for continued operations exists, including events causing a reduction in operational capacity.

o OAL executive management also views the secondary digital channel discussed in this strategic plan as a sound and proper method for business continuity purposes. More specifically, a digital channel would allow OAL to continue to distribute ASL lottery games during a pandemic event for a contactless consumer playing experience.

• Acts of Nature: The pandemic event of 2020-2022 noted herein above served as a strong reminder that the future is uncertain and through no fault of OAL executive management cataclysmic world events may occur that cand adversely effect the performance, both operational and financial, of ASL. This is true of acts of nature, such as tornados, floods, snow and ice, EMP, or other unpredictable events that would impede or prevent OAL from continuing to distribute ASL lottery games. The duration of any such impediment is entirely dependent upon the event. OAL maintains and practice tests BCP-DR Plan at least twice, annually.

• Private Lobbying Activities: OAL, as a state agency, is prohibited from employing a lobbyist to advocate on its behalf to members of the Arkansas General Assembly. This means that OAL is under threat of unilateral lobbying activities designed to benefit external parties who either compete with OAL, currently engage in business with OAL or those entities who desire to engage in business with OAL. OAL is not permitted to make political donations nor lobby members of the General Assembly, which necessarily means that the flow of information and influence rests almost entirely with external parties and their lobbyists.

• Legislative Elimination of ASL: OAL executive management is aware that certain members of the General Assembly do not support OAL’s mission of maximizing net proceeds in a responsible manner for benefit of scholarships that is conducted through the sale of ASL lottery games. Should members of the General Assembly harboring such a philosophy become the majority, it is possible that efforts to abolish the Lottery through support for a Constitutional Amendment could occur.

VI.

Key Arkansas Economic Variables

Responsibly maximizing financial performance of the Arkansas Lottery is dependent upon an understanding of key economic variables that serve as financial gates. Strategic business goals are premised upon key economic variables and guide all decision making.

Demographics:

• For the period of CY2022:

o The State of Arkansas reported a population of 3.05M

The population for the age category 18+ is 1.993M

The “underage” population is 1.057M The population for females is 1.037M The population for males is 2.013M

Income:

• For the period of CY2022:

o The State of Arkansas reported the following data The per capita personal income for Arkansas citizens is $27,724 The mean household income for Arkansas citizens is $69,357

Unemployment statistics:

The unemployment rate reported by the State of Arkansas is 3.3%

Source.1

VII.

Financial History by Game Type

MULTI-STATE DRAW GAMES

History of Multi-State Games (MUSL) Draw Games offered in Arkansas:

Powerball®:

Powerball is a $2 multi-state jackpot draw game. Powerball® has an add-on feature (Power Play®) that is available for an additional $1 per play. Power Play multiplies non-jackpot winning prizes up to five-times. Powerball drawings are conducted on Mondays, Wednesdays, and Saturdays at 11:59 p.m. CT. Importantly, Powerball sales have fluctuated from one fiscal year to the next, as large jackpots cannot be forecasted. The Powerball® Board of Directors are engaged in discussions with certain international entities that could materially change the nature of this game.

ALC began offering Powerball in October 2009. Since inception of membership in the Powerball selling group.

Mega Millions® Mega Millions® is a $2 multi-state jackpot game. Mega Millions® has an add-on feature (Megaplier®) that is available for $1 per play. Megaplier® multiplies non-jackpot winning prizes up to five-times. Mega Millions® drawings are conducted on Tuesday and Friday nights at 11:00 p.m. ET. Importantly, Mega Millions® sales have fluctuated from one fiscal year to the next, as large jackpots cannot be forecasted. The Mega Millions® Board of Directors have discussed certain game changes, as well as an increase in price per play.

1 World Population Review, State Rankings, 2022

ALC began offering Mega Millions in January 2010. Since inception of membership in the Mega Millions selling group.

Decades for Dollars® (withdrawn from market) ALC began offering Decades for Dollars on May 2011. ALC’s membership in this game was withdrawn in October 2014 due to concerns about game management. Georgia and Kentucky simultaneously withdrew from the game, as well.

Monopoly Millionaires’ Club® (withdrawn from market) ALC began offering the Monopoly Millionaires’ Club game in on October 2014. ALC’s membership in this game was withdrawn on December 2014, due to an underfunded jackpot.

Lucky for Life® OAL began offering Lucky for Life in January 2015. Since inception of membership in the Lucky for Life selling group. Lucky for Life converted to a seven-day per week game in FY21, which proved to be beneficial from a revenue perspective.

IN-STATE DRAW/TERMINAL-GENERATED GAMES

History of In-State Draw Games offered only in Arkansas:

Natural State Jackpot® Currently, OAL offers a single traditional ‘in state’ draw game, Natural State Jackpot (“NSJ”). NSJ was launched in August 2012 and currently rolls six days per week. NSJ is a five-number draw game with a matrix designed for a jackpot between $250k-$450k.

The starting jackpot amount for NSJ is $50k and increases by $5k every draw until the jackpot exceeds $150k, whereafter draws increase in increments of $10k. To be sure, there have been smaller winning jackpots well below the anticipated threshold of $250k, and there has been a winning jackpot as high as $520k (which exceeded statistical expectations). Executive management continues to evaluate the benefits of offering an add-on feature, as well as an additional drawing day.

Arkansas LOTTO® New draw game Launch on September 18, 2022, with an initial drawing date of September 21, 2022. LOTTO (aka, Arkansas LOTTO) is a draw game that was designed by OAL for availability only within the borders of Arkansas. This ‘in-state’ draw game is designed around the traditional lotto games (6 numbers + bonus number) and is intended to fill a gap in the ASL game portfolio, as identified by Camelot.

Consumer research conducted by OAL through an independent testing entity on behalf of OAL revealed a desire among customers and potential customers for a second draw game. This research revealed that primary among consumers was the desire for OAL to launch a draw game with higher jackpots. The second highest ranking feature among focus group participants was the desire for a second ‘sold only in Arkansas’ draw game.

LOTTO is a six-number draw game with a bonus number feature. The game is designed to offer a starting jackpot of $250,000 and contains a para-mutuel feature that adds additional funds to the jackpot based on sales of the game.

Forecasted revenue for LOTTO during FY23 is $ 9,000,000 for a partial fiscal year, in market. It is anticipated that revenue generated from LOTTO will taper somewhat post-launch, which will provide executive management with more clarity as to expected revenue and net proceeds lift in subsequent years.

OAL executive management believe that the Arkansas marketplace will support both in-state draw games, however this the impact each game will have on total revenue and net proceeds remains to be seen.