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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2001
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number:000-26319
BINGO.COM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 98-0206369
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1166 Alberni Street, Suite 1405
Vancouver, BC, Canada, V6E 3Z3
(604) 694-0300
-----------------------------------------
(Address of principal executive offices,
zip code, and phone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| 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 |_|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant computed by reference to the closing price
of such stock on the National Association of Securities Dealers Over the Counter
Bulletin Board market as of March 22, 2002 being $0.12 per share: $1,303,000.
The number of shares of the Registrant's common stock outstanding on March 22,
2002 was 10,854,608. The Registrant's common stock is traded on the National
Association of Securities Dealers Over-the-Counter Bulletin Board market under
the symbol BIGR.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page 1
TABLE OF CONTENTS
PART I.........................................................................3
ITEM 1. BUSINESS........................................................3
ITEM 2. PROPERTIES.....................................................27
ITEM 3. LEGAL PROCEEDINGS..............................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............28
PART II.......................................................................29
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................29
ITEM 6. SELECTED FINANCIAL DATA........................................31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.............................33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....43
PART III......................................................................44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................71
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............74
ITEM 11. EXECUTIVE COMPENSATION.........................................76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................82
PART IV.......................................................................83
ITEMS 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................................83
SIGNATURES...............................................................84
EXHIBIT LIST.............................................................85
Page 2
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS
OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. DISCUSSIONS CONTAINING
FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER
"BUSINESS," "BUSINESS - RISKS RELATED TO OUR BUSINESS," AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS
WELL AS IN THIS ANNUAL REPORT GENERALLY. WE GENERALLY USE WORDS SUCH AS
"BELIEVES," "INTENDS," "EXPECTS," "ANTICIPATES," "PLANS," AND SIMILAR
EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS FOR
MANY REASONS, INCLUDING THE RISKS DESCRIBED UNDER "BUSINESS - RISKS RELATED TO
OUR BUSINESS" AND ELSEWHERE IN THIS ANNUAL REPORT.
ITEM 1. BUSINESS
INTRODUCTION
Bingo.com, Inc. (the "Company" or "Bingo") is in the business of developing and
operating a bingo based Web portal designed to provide a variety of free games,
pay-to-play skill games, and other forms of entertainment, including an online
community, chat rooms, contests, sweepstakes, tournaments, and more. The Company
envisions becoming the preeminent bingo-based Web portal on the Internet, using
its bingo.com domain name and incorporating a variety of games and content to
attract and retain a large number of subscribers. The Company's existing Website
has attracted over 800,000 registered users; the Company intends to continue to
build on this subscriber base to further develop its online presence.
The Company generates revenue from two principal sources: the free Website,
which is supported by advertising revenue; and the skill Website, built around
the Company's patent pending BiG'r Bingo skill bingo game, which generates
revenue by charging users a small network maintenance fee to play skill based
bingo games.
The free site provides content to our players in the form of free-to-play,
multiplayer theme Bingo games, such as Astrology Bingo, Cupid Bingo, and the
like, as well as online video poker, sweepstakes and slot machines. We also
offer our registered players other forms of entertainment such as fortune
telling, chat rooms, and member profiles.
The recently launched skill site, built around the BiG'r Bingo game, offers a
game of skill, where players compete against each other to daub their squares
and be the first to call bingo. We believe that with added features such as
tournaments and handicapping, players will be compelled to play more games,
which will continue to provide revenue
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growth from this site. In BiG'r Bingo, 100% of the prize pool is paid out to
participants. When participants enter a particular game they are required to pay
a designated amount, depending on the game, into a prize pool, and it is these
funds that are paid out to the winner of the particular game.
We intend to continue to build on the success of the existing free site and the
new skill site by offering a greater depth and variety of content that we expect
will hold subscribers and allow us to generate more revenue through advertising
and network maintenance fees. We also intend to add enhanced content available
to users for a monthly subscription charge in order to further grow our revenue
base We intend to provide non-North American players with the opportunity to
play traditional bingo for cash. Finally, we intend to provide our free bingo
games, under license, to Websites which complement our business.
References in this document to "Bingo," "the Company," "we," "us," and "our"
refer to Bingo.com, Inc. and its subsidiaries, which are described below.
In August 2001 the Company underwent a complete management change whereby
Bingo's entire management team and several members of the Board of Directors
were replaced with a new management team and new Board members, led by Tarrnie
Williams, a pioneer in the Canadian software industry. The focus of the new
management team has been reducing operating costs and restructuring the business
in order to attempt to build a more stable platform from which to grow the
business.
Our new executive offices are located at 1166 Alberni Street, Suite 1405,
Vancouver, British Columbia, Canada, V6E 3Z3. Our telephone number is (604)
694-0300. Our relocation from Los Angeles, California was started in June 2001
and we completed relocating to the new offices in Vancouver in March 2002.
HISTORY AND CORPORATE STRUCTURE
Bingo was originally incorporated in the State of Florida on January 12, 1987,
under the name Progressive General Lumber Corp. ("PGLC') with an authorized
share capital of 7,500 shares of common stock with a $1.00 par value per share.
PGLC was for the most part inactive until January 1999.
On July 17, 1998, PGLC filed Articles of Amendment and increased its authorized
share capital to 50,000,000 common shares with a $0.001 par value per share. The
shares were also subject to a forward stock split by way of a stock dividend to
increase the number of then issued and outstanding shares on a 200 shares for 1
share basis.
In January 1999, management of PGLC changed and the new management filed
Articles of Amendment to the Articles of Incorporation of PGLC to amend the
Articles of Incorporation and change the name of PGLC to Bingo.com, Inc.
effective January 22, 1999. Concurrent with the name change the Company acquired
the second level domain name bingo.com and embarked on its business strategy to
become a leading online provider of bingo based games and entertainment.
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The Company conducts its business through the Florida incorporated entity and
through its wholly-owned subsidiary Bingo.com (Canada) Enterprises Inc.("Bingo
Canada"). Bingo Canada was incorporated under the laws of British Columbia,
Canada, on February 10, 1998 as 559262 B.C. Ltd. and changed its name to
Bingo.com (Canada) Enterprises Inc. on February 11, 1999.
The Company also maintains a number of inactive wholly owned subsidiaries. These
include:
o Bingo.com (Antigua), Inc., ("Bingo.com (Antigua") incorporated as an
Antigua International Business Corporation on April 7, 1999 as Star
Communications Ltd. and changed its name to Bingo.com. (Antigua), Inc.
on April 21, 1999;
o Bingo.com (Wyoming), Inc., incorporated in the State of Wyoming on
July 14, 1999;
o Bingo.com Acquisition Corp., incorporated in the State of Delaware on
January 9, 2001.
All three of the inactive subsidiaries were incorporated to facilitate the
implementation of business plans that the Company has since modified and
refocused and consequently, there is no activity in these entities.
Bingo's common shares are currently quoted on the National Association of
Securities Dealers' Over-The-Counter Bulletin Board ("OTCBB") under the symbol
BIGR. We have not been subject to any bankruptcy, receivership or other similar
proceedings.
DEVELOPMENT OF THE BUSINESS
The business strategy of the Company is built around several critical elements,
starting with the bingo.com domain name, which was acquired in 1999. In order to
diversify the traditionally advertising-focused revenue base, the Company
acquired certain rights to a unique method of playing bingo, known as the
skill-bingo inventions, and developed the skill-bingo game (now known as BiG'r
Bingo), both of which took place during the year ended December 31, 2001.
Directly tied to the acquisition of the skill-bingo inventions and development
of BiG'r Bingo is the licensing of the CrediPlay transaction processing engine,
which allows the Company to process all financial transactions on the bingo.com
portal. Finally, part of the Company's strategy is to manage and grow the
business with minimal overhead. To this end, during the year ended December 31,
2001 the Company signed several important agreements outsourcing certain labor
intensive business functions to third parties. All of these agreements are
described more fully below.
BINGO.COM DOMAIN NAME
On January 18, 1999, the Company purchased the exclusive right to use the domain
name bingo.com from a then unrelated company Bingo, Inc., an Anguilla
corporation, for (i) a $200,000 cash payment, (ii) 500,000 shares of our common
stock (at a deemed value of $2.00 per share) and (iii) an agreement to pay, on
an ongoing basis, royalties in the amount of 4% of our annual gross revenues,
with a total minimum guaranteed royalty
Page 5
payment of $1,100,000 over the 99 year period ended December 31, 2098. The value
of the bingo.com domain name was based on factors such as the relationship of
the name to our business, the ability for us to create a brand for our Website
and portal based on the name, the ease of internet browser searchability of the
domain name and the ability of visitors to our Website to remember and associate
the name with our Website and portal. We negotiated the terms of the domain name
acquisition at arms' length, and we believe the consideration we paid for the
name was reasonable.
During the year ended December 31, 2001, the Company made payments totaling
$362,000 including interest (2000 - $188,000) under the terms of this agreement.
Our current President and CEO is the potential beneficiary of several
discretionary trusts that hold approximately 80% of Bingo Inc.
SKILL-BINGO ASSET PURCHASE
Effective September 19, 2001, the Company entered into an asset purchase and
assignment agreement (the "Asset Agreement") with FYRC Inc., a British Virgin
Islands incorporated company ("FYRC"), to purchase from FYRC the worldwide
rights to all inventions related to a method for Skill-Bingo (the "Skill-Bingo
Inventions").
Under the terms of the Asset Agreement, the Company acquired the worldwide right
and title to the Skill-Bingo Inventions and the development of any and all
existing or future substitute, divisional, continuation or continuation-in-part
patent applications deriving directly or indirectly either in whole or in part
from the Skill-Bingo Inventions and any Additional Patent Applications, and
otherwise utilize the Skill-Bingo Inventions anywhere in the world, for
consideration of 4% of the Gross Revenue derived by the Company from the
Skill-Bingo inventions commencing on the date of the Agreement and ending on
December 31, 2098, with a minimum payment after five years of $200,000.
The Company made an initial payment of $5,000 on the execution of the Asset
Agreement. Regular payments are due to commence on February 15, 2002, based on
4% of the Gross Revenue as defined in the Asset Agreement derived by the Company
commencing on the date of the Asset Agreement and ending on December 31, 2001
(the "First Business Quarter"), and on the sixtieth (60th) day of each of the
following Business Quarters following the First Business Quarter, 4% of the
Gross Revenue of the Company for the immediately preceding Business Quarter.
BIG'R BINGO SOFTWARE DEVELOPMENT AGREEMENT
Effective May 1, 2001, Bingo Canada entered into an agreement (the "Development
Agreement") with Moshpit Entertainment Inc., a British Columbia incorporated,
wholly owned subsidiary of CYOP Systems Inc. (see below) ("Moshpit"), with
respect to the development of the Skill-Bingo game acquired by the Company from
FYRC in connection with the Skill-Bingo Inventions.
Pursuant to the Development Agreement, Bingo Canada retained Moshpit to develop
the Skill-Bingo game in the form of a computer program that incorporates design
concepts and specifications as determined by Bingo Canada and set out in the
Development
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Agreement, and that operates efficiently over the Internet, for an aggregate
consideration of CDN$300,000.
CREDIPLAY SOFTWARE LICENSE AND SUPPORT AGREEMENT
Effective September 1, 2001, Bingo Canada entered into an agreement (the
"Software Agreement") with CYOP Systems Inc., a Barbados incorporated company
("CYOP"), with respect to the grant of a license for a software program known as
CrediPlay (the "Software"), developed by CYOP. The Software is an online
financial network offering pay-for-play tournaments, and pay-per-use integrated
games, products, and services for licensed users, and which includes an
integrated credit card and financial payment processing application that permits
licensed users to access and utilize the services of credit card organizations
and collect, record, and distribute financial payments in the course of the
licensed users' business activities.
Pursuant to the Software Agreement, CYOP has granted to Bingo Canada, an
irrevocable, worldwide, perpetual license to use the Software for the support
and operation of Bingo Canada's business, and CYOP will provide services for the
operation of Bingo Canada's customer service and data center. The initial term
of the agreement is three years. The license fee payable to CYOP under the terms
of the agreement is 25% of the Network Maintenance Fees derived from the
Skill-Bingo game (as defined in the agreement) by Bingo Canada, with a minimum
monthly fee to CYOP of $60,000. The service fee payable to CYOP under the terms
of the agreement is 5% of Network Maintenance Fees received by Bingo Canada from
the Skill-Bingo game, with a minimum monthly fee to CYOP of $18,000, including
all hosting duties.
During the year ended December 31, 2001 the Company paid total license fees of
$240,000 and total service fees of $72,000 to CYOP under the terms of the
Software Agreement. Subsequent to year end, the Software Agreement was amended
to remove the monthly minimum license fees and service fees of $60,000 and
$18,000 respectively. Definitive documentation has not been completed as of the
date of this report.
SITE MANAGEMENT, MARKETING AND INTERNET ADVERTISING SERVICES AGREEMENT
Effective September 1, 2001, the Company signed an agreement (the "Management
Agreement") with NextLevel Inc., a British Columbia incorporated company
("NextLevel") with regard to the provision by NextLevel of services, software
and computer equipment to host the Company's Website on NextLevel's Web server
for access by Internet users.
Pursuant to the Management Agreement, NextLevel has acquired the right to the
use of all of the advertisements and email lists which are available for
inclusion or display in the Company's Website, and the right to retain all
advertising fees paid by third parties for advertising on the Company's Website
in consideration for which NextLevel will pay to the Company, monthly, in
arrears, a non-refundable fee, equal to 50% of all advertising fees collected by
NextLevel in the preceding month, with a minimum monthly fee payable by
NextLevel to the Company of $112,000 per month.
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During the year ended December 31, 2001 the Company invoiced NextLevel at total
of $480,000 in accordance with the Management Agreement. Subsequent to year end
Bingo gave notice of termination to NextLevel, and the Management Agreement was
terminated effective January 31, 2002. The Company intends to replace this
agreement with a new marketing and advertising agreement with CYOP, but a
definitive agreement has not been completed as of the date of this report.
WEBSITE HOSTING AND MANAGEMENT AGREEMENT
Effective September 1, 2001, the Company entered into an agreement (the "Hosting
Agreement") with NextLevel.com Inc., a Nevada incorporated company
("NextLevel.com"), a wholly owned subsidiary of NextLevel, with regard to the
provision of Website hosting services for the Company's Website.
Pursuant to the Hosting Agreement, NextLevel has been engaged to provide full
Website hosting services for the Company's Website, including the provision of a
minimum of 100 gigabytes disk space, 15 MBS of sustained bandwidth related to
the Website and site management to include systems administration on a 24/7
basis, daily site back-up with remote location back up and ongoing security
monitoring, for consideration of a fee of $12,000 per month. The Hosting
Agreement provides that the Company may increase the sustained bandwidth for an
additional fee.
The Company paid total fees of $48,000 in accordance with the Hosting Agreement.
Subsequent to year end we gave notice to NextLevel.com of our intention to
terminate the Hosting Agreement effective April 25, 2002. The Company intends to
replace this agreement with a new hosting agreement with CYOP. However, a
definitive agreement has not been completed as of the date of this report.
In evaluating the agreements described above, the Company used criteria such as:
market opportunity, competitive advantage, potential revenues and anticipated
margins. The Company's board of directors determined that the consideration for
each of these transactions was reasonable.
Mr. White and Mr. Petersen, who were directors of the Company when the Hosting
Agreement was signed, are beneficial shareholders of FYRC, and disclosed their
interest to the Company in advance of the approval of the Asset Agreement, and
abstained from approving the Asset Agreement.
Mr. White is also a director, officer and beneficial shareholder of CYOP. CYOP
is also the parent company of Moshpit. Mr. White disclosed his interest to the
Company in advance of the approval of the Software Agreement and the Development
Agreement, and abstained from approving either agreement
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Agreement, and abstained from approving the Management Agreement. Mr. White and
Mr. Peterson resigned from the Board of Directors of the Company subsequent to
year end. They also abstained from approving the cancellation of the Management
Agreement.
BUSINESS OVERVIEW
The Company aims to become the leading online provider of bingo based games and
entertainment. The Company intends to leverage the worldwide popularity of bingo
with the growth of the Internet to become the premier bingo portal.
We are in the business of developing and operating an entertainment and service
based Website designed to provide a variety of free bingo games, pay-to-play
skill bingo games, and other forms of entertainment, initially focused on the
game bingo and including chat rooms, sweepstakes, communities, and other forms
of enhanced content. We are attempting to create a value-based Website, complete
with online services and an extensive database of registered players.
The entertainment and other content provided on the bingo.com portal do not
include adult content or gambling for cash. The Company, however, intends to
offer traditional bingo for cash to non-North American players.
FREE BINGO BUSINESS
Our free bingo Website is built around a variety of free bingo games, offered to
registered players who compete against other users for the chance to win prizes.
Our primary objective is to provide Internet users a Website offering a variety
of free bingo based games and entertainment, as well as free online video poker
and free slot machines. The Company intends to continue to provide prize-based,
play-for-free games emphasizing entertainment.
The Company uses the appeal of the bingo.com domain name to sell advertising on
the free site, which is currently the Company's primary revenue source.
Advertising revenue from the bingo.com Website accounted for approximately 99%
of our revenue for the year ended December 31, 2001, including revenue earned in
accordance with the Management Agreement described above. During the year ended
December 31, 2001, over 450 million player sessions were offered to the
Company's registered players. The average visitor session length was 57 minutes
per user. The Company's Website continues to be one of the stickiest sites on
the Internet. As a result of this appeal to Web users, Bingo was able to serve
approximately one billion ads during the year ended December 31, 2001.
Although the games are free to play, players are required to register to receive
prizes and to access certain features on the site. All registration information
is stored in online databases. We intend to continue to build awareness of, and
drive traffic to, bingo.com through a marketing program consisting of various
elements such as strategic alliances and online and off-line advertising. The
Company will continue to pursue a co-branding strategy as part of its overall
plans. In addition, the Company will continue to establish
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promotional agreements with prominent Websites and media content providers that
have reciprocal links to bingo.com, or to display advertising.
We have built multiple revenue streams. We believe there is value in the ability
to direct the traffic of our membership base and their buying power, and intend
to pursue affinity arrangements with merchant partners. We will continue to sell
advertising space on the bingo.com Website. We believe that our growing user
base and stickiness will provide advertisers with an attractive platform to
reach their target audience.
SKILL BINGO BUSINESS
The Company officially launched its BiG'r Bingo game in October 2001. BiG'r
Bingo plays just like regular bingo, with one main difference. In BiG'r Bingo
all players receive an identical set of cards. Games are won by the players who
daub the numbers correctly, identify a winning bingo pattern, and call bingo the
quickest. By structuring the game in this way, we have removed all elements of
chance in the playing of the game. As a result, Bingo differentiates itself from
the online-casino industry because the element of chance is a critical component
of gambling.
In BiG'r Bingo, 100% of the prize pool is paid out to participants. We charge
each player a network maintenance fee ("NMF") to join a game. The Company
intends to license BiG'r Bingo to charitable organizations, web portals and
other groups looking to raise money through online bingo.
As part of the strategy to license BiG'r Bingo to other parties, during the year
ended December 31, 2001 the Company officially launched its affiliate program.
Under the affiliate program, web portals, publishers, media companies,
charitable organizations, and other groups looking to raise money through online
bingo will be able to share in the anticipated success of Bingo's skill games.
Partner sites will have the opportunity to earn up to 30% of total revenue
generated from every new user who joins and plays our BiG'r Bingo game. As of
the date of this report we have signed several affiliate agreements with
partners who will help generate additional revenue from the BiG'r Bingo game.
Approximately 1% of the Company's revenue was derived from the BiG'r Bingo game
during the year ended December 31, 2001. The Company expects this percentage to
increase in future years, though there can be no assurances that there will be
growth in revenue from the BiG'r Bingo game.
THE NICHE
The Company is continuing to position itself to become a leading entertainment
portal through the incorporation of bingo and technology, to create a fun and
exciting daily user experience centered around bingo and bingo-based games. We
believe the size of the worldwide community familiar with bingo, the domain name
bingo.com, and the attractive nature of the Company's product offering provides
an opportunity to build a large loyal base of daily visitors.
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The game of bingo is reported to be the most socially acceptable form of gaming
in the world. Information gathered by management indicates that the total gaming
market is estimated at $350 billion annually. The game of bingo makes up an
estimated $70 billion of this figure, ahead of casino gambling ($60 billion).
While the online casino market has reached $1.2 billion in 2000 and is predicted
to grow at a rate of 30% per year, the online bingo market is still in its
infancy. Industry experts have indicated that the online bingo market could, in
fact, be larger than the online casino market and grow at a faster rate.
Bingo has broader appeal in the marketplace, is less regulated, and is typically
classed as a minor form of gambling. We believe that a significant percentage of
American bingo players are between the ages of 18 and 44, and that Baby Boomers
are playing bingo more than ever. The Baby Boomer generation is considered to
have the most disposable income and the highest ability to access the Internet.
We believe that bingo is well suited for online entertainment content, and that
online games are a compelling entertainment medium for a mass user audience.
There is appeal in providing players with an opportunity to win prizes and cash
while allowing them to access entertaining content according to their own
schedule from their own location. We intend to lead the way using the popularity
of bingo games, the accessibility of the Internet and the rate of growth for
entertainment based game sites.
We believe our future success will be dependent on a number of factors. These
include focus on online bingo games, skill-based bingo games, and online
entertainment, and the development of a personalized community atmosphere, which
will enable the site to enjoy lengthy visits. We believe the nature of the
Company's content and our player base will allow the Company to establish a
large detailed database of registered players, which is a distinguishing factor
to attracting online advertisers.
The Company intends to promote the Bingo.com brand name by building a network of
affiliations with prominent companies, both online and off.
BUSINESS STRATEGY
Our objective is to become the premier online destination for Web-based bingo
entertainment and a leading entertainment destination on the Internet. The
Company is pursuing this objective through the following strategies:
CONTINUE TO ENHANCE CONTENT
Registered players are provided with a variety of free games, skill games (BiG'r
Bingo), and other forms of entertainment such as chat, sweepstakes, member
search, and more. The free Bingo games can be played for points, which are
redeemable for prizes. BiG'r Bingo is played for the chance to win a cash pool.
We are able to create low-cost content through creative face-changes of the
standard bingo games. These `skins' can reflect themes, corporate interests or
other targeted messages.
BUILD MULTIPLE REVENUE STREAMS
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We currently generate revenue from a variety of sources, including network
maintenance fees from the BiG'r Bingo game, advertising revenue from selling
advertising on the free bingo site, and through other initiatives such as
co-branding and affiliates. An example of this is the search engine
FindWhat.com, which is currently offered on the bingo.com site. We receive a fee
for each time this search engine is used by our users and a search result is
clicked on. We expect to continue to offer similar sorts of arrangements with
the goal of building a diversified revenue base. There are also other methods of
broadening our revenue base that we intend to pursue. Some of these include
offering a premium service, via subscription, on our free site; traditional
bingo for cash to non-North American players; and the licensing of our games to
Websites which complement our growth strategies. Bingo currently earns revenues
from its portal through a variety of ways, such as the following:
o Banner and button advertisements on our bingo.com sites;
o Pop-ups, which are interstitial ads that appear as a separate window
on top of content;
o Superstitials; which are interstitial commercials that seamlessly load
while a visitor is surfing the site;
o Sponsorships of email newsletters or parts of our sites;
o Network maintenance fees; and,
o Third-Party referral arrangements such as that with FindWhat.com.
Advertising revenue calculations are based on click-throughs, percentage of
sales transactions, or other methods depending on the details of the agreements.
Most of the Company's current revenue is calculated on a CPM (Cost Per Thousand)
basis.
EXPAND REGISTERED USER DATABASE
We have demonstrated the ability to attract and keep a large subscriber base. It
is our intention to continue the growth of our database through expansion of our
co-branding strategy and through strategic partnerships with affinity groups and
penetration of traditional bingo venues by use of targeted promotions with
suppliers of goods and services to such venues.
Entertainment and game sites have become increasingly popular and are showing
strong growth rates. The Company's Website traffic reports indicate that an
average of 800 new players a day are registering with www.bingo.com. There has
been in excess of 40,000 unique visitors per day, 8 million hits per day, and an
average visitor session length of more than 57 minutes. The Company is becoming
the premier online destination for Web-based bingo entertainment and a leading
entertainment destination on the Internet.
LEVERAGE LICENSED USERS AND ALLIANCES
We are confident that the variety of games and entertainment available on our
Website will encourage many visitors to come, stay, play and revisit often. In
the process of providing a one-stop entertainment arena for bingo lovers, we are
creating a value based
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Website which is backed by an extensive database of registered players and their
buying preferences. We believe the value of this demographic data has enabled
Bingo to generate premium CPM and CPC (Cost Per Click) rates for the sale of its
advertising inventory.
EXTEND AND ENHANCE THE VALUE OF THE BRAND NAME
We believe that establishing a readily recognizable brand name is critical to
attracting a larger player base and deriving additional revenue. We believe that
bingo.com has inherent value as a brand name and we intend to aggressively
expand our player base by promoting that name. We intend to pursue online and
offline marketing strategies, promotional opportunities, and strategic alliances
to make bingo.com the leading entertainment destination on the Internet.
WAGERING BUSINESS
Bingo.com (Antigua) was originally set up to develop an on-line bingo game and a
for-cash Internet gaming business. The International Bingo Wagering game was
launched on July 28, 1999. The game accepted a wager only from permitted
jurisdictions and was the first revenue generating product in the marketplace.
On April 16, 1999, Bingo.com (Antigua) was granted a license to operate an
offshore virtual casino wagering business, effective April 30, 1999. The license
was granted under the authority and jurisdiction of the Antigua and Barbuda Free
Trade and Processing Zone in accordance with Statutory Instruments 1997 No.
20-Virtual Casino Wagering and Sports Book Wagering Regulations, made by the
Minister under Section 27 of the Free Trade and Processing Zone Act No. 12 of
1994. Bingo.com (Antigua) paid a license fee of $100,000 to the Barbuda Free
Trade and Processing Zone on April 16, 1999 and began to offer a live version of
the Bingo.com bingo game on July 28, 1999.
Although the initial business plan established the viability of operating an
on-line bingo game, accepting wagers from certain jurisdiction, changes in the
marketplace indicated that it was not in the best interest of the shareholders
or the Company to continue to pursue this strategy. The wagering business was
discontinued in 1999 and we wrote off the cost of the license and other assets
during the 1999 fiscal year and allowed the license to expire in April 2000. The
Company no longer operates any wager-based business.
As of December 31, 2000, we recorded a loss from discontinued operations of
approximately $46,000 related to discontinuing our Antigua based gaming
operation, compared to the loss of $554,000 recorded in 1999.
MARKETING STRATEGY
Our goal is for bingo.com to become the most recognized bingo and entertainment
destination site on the Internet. We intend to build an Internet community
consisting of a dedicated and loyal user base that we believe will support our
ability to generate advertising revenues, network maintenance fees and
e-commerce sales for the Company.
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Advertising focused on promoting bingo.com within North America and in targeted
international markets through strategic partnerships, co-branding and other
promotional activities with a variety of companies is contemplated. This
strategy is intended to further develop the growing database of registered
players.
We also use our database of registered users to send targeted emails and other
advertisements in order to encourage our subscribers to play. We offer special
promotions and other offerings that bring additional users to our site such as
the use of our email list to promote special events.
We have recently launched a BiG'r Bingo affiliate program that we expect will
drive additional traffic to our BiG'r Bingo site. Affiliates are provided with a
link to our game in return for a share of the network maintenance fees earned
from their users that play BiG'r Bingo. One of the features of the BiG'r Bingo
game and the CrediPlay software that facilitates the backend processing is the
ability to track users to identify the site from which they originate. This is
an important selling feature for our affiliates. As of the date of this report
we have signed up six affiliates who are driving traffic to our site, and we
intend to continue to expand this program.
EMPLOYEES
As of December 31, 2001, Bingo had six full-time employees, not including
temporary personnel, consultants, and independent contractors. The Company
retains consultants to provide special expertise in developing strategy,
marketing, software and technologies and outsources its development resources.
None of our employees is represented by a labor union, and we believe that our
relationship with our employees is good.
We are substantially dependent upon the continued services and performance of
Tarrnie Williams, our President and Chief Executive Officer and Chairman of our
Board. The loss of the services of this key individual would have a material
adverse effect on our business, financial condition and results of operations
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We are in the business of developing and operating a bingo based Web portal
designed to provide a variety of free games, pay-to play skill games, and intend
to provide traditional bingo for cash games for residents outside of North
America, and other forms of entertainment on the Internet. At the end of fiscal
2001, the majority of the Company's long-lived assets are located in Canada, in
the prior two fiscal years they were located in the USA.
SEASONALITY
The company does not believe that seasonality has an affect on its traffic
volumes or its revenue realization.
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COMPETITION
The Company faces competition primarily from other companies that target the
entertainment segment of the market. Lycos, Inc., through its site Gamesville,
Electronic Arts Inc., though its site Pogo, and Vivendi Universal, though its
site Flipside, are large online entertainment destinations, offering games, game
shows and other interactive experiences to users. We also face competition in
the emerging skill-games market from companies such as WorldWinner.com, which
offers games of checkers and chess for money, similar to our BiG'r Bingo game,
and eUniverse, Inc.'s site, SkillJam, which offers an extensive array of
pay-to-play skill games. We also may face competition from companies such as
Disney, which are contemplating entering the skill-games sector. We will
continue to compete with these large sites as well as many other smaller
offerings, and there can be no assurances that we will be successful in
attracting users from these sites.
TRADEMARKS AND INTELLECTUAL PROPERTY PROTECTION
Bingo will continue to consider the need to apply for trademark registration and
protection for its games, logo and various phrases in Canada and the United
States. At this time the Company has applied for a patent for its BiG'r Bingo
game and the method of playing Skill-Bingo in Canada and the USA. Bingo has not
submitted any other applications for trademark registration. In the event that
we determine that we have created an asset whose value can be protected, we will
attempt to protect our proprietary asset by applying for patents, copyrights or
trademarks. In addition, we intend to rely on trade secret laws and
non-disclosure and confidentiality agreements with our employees and
consultants, who have access to its proprietary technology, to protect our
technologies.
RISK FACTORS
Our business is subject to a number of risks due to the nature and the present
state of development of our business. An investment in our securities is
speculative in nature and involves a high degree of risk. You should read
carefully and consider the following risk factors.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES AND EXPECT FUTURE
LOSSES, AND THERE CAN BE NO ASSURANCES THAT WE WILL ACHIEVE PROFITABILITY, WHICH
MAKES OUR ABILITY TO CONTINUE AS A GOING CONCERN QUESTIONABLE.
We have incurred significant net losses and negative cash flow from operations
since our inception. We incurred net losses of $2,909,000 in fiscal 1999,
$3,335,000 in fiscal 2000 and $1,879,000 in fiscal 2001. As of December 31,
2001, we had an accumulated deficit of $8,129,000, and during the year ended
December 31, 2001 we used cash of $647,000 in operating activities (2000 -
$2,655,000). Although we reduced our operating costs and our cash utilization
rate significantly during the 2001 fiscal year, we expect to continue to
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incur sales and marketing and general and administrative expenses in the future.
As a result, we expect to incur losses for the foreseeable future and will need
to generate significantly higher revenues in order to achieve profitability. If
we achieve profitability, we may not be able to sustain it.
Our financial statements have been prepared on a going concern basis, which
presumes the realization of assets and the settlement of liabilities in the
normal course of operations. The application of the going concern principle is
dependent upon Bingo achieving profitable operations to generate sufficient cash
flows to fund continued operations, or, in the absence of adequate cash flows
from operations, obtaining additional financing. If the Company is unable to
achieve profitable operations or obtain additional financing, we may be required
to reduce or to limit operations, or cease operations altogether. The auditors'
report on the December 31, 2001 consolidated financial statements contains an
explanatory paragraph that states that the Company has suffered losses and
negative cash flows from operations that raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
We may not be able to generate sufficient revenue to entirely support our
operations in fiscal 2002 due to a number of factors including, among others:
o the cost of promoting and marketing our bingo portal;
o the general demand for online advertising has decreased, as have
advertising rates, which will impact our advertising revenue;
o the start-up cost associated with developing our software and
technologies, installing equipment and expanding our facilities;
o the costs associated with hiring and retaining experienced management
and staff for our operations.
Consequently, in the foreseeable future, we believe that we will continue to
incur net losses, and we may never be profitable.
WE ARE SUBJECT TO RISKS AND CHALLENGES FREQUENTLY ENCOUNTERED BY EARLY STAGE
COMPANIES ENGAGED IN EARLY STAGE ENTERPRISES AND INTERNET COMMERCE.
We face risks, uncertainties, expenses and difficulties frequently encountered
by companies in their early stages of development that may be using new and
unproven business models, particularly companies engaged in Internet commerce
and skill-based gaming. These risks include, but are not limited to:
o our revenue forecasts may be incorrect because of our limited
experience selling our products and services;
o our ability to generate revenues will depend on selling advertising on
a Website focused on bingo entertainment, a newly developed business
concept currently with only limited market acceptance;
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o our ability to generate revenue is also dependent on encouraging new
and existing users to play a new skill-based bingo game for money; the
skill-based game currently has very limited market acceptance;
o we may not be able to convert a significant number of players from our
existing user base, which are accustomed to playing free games, to our
pay site;
o if we do convert a significant number of users to our pay site, there
can be no assurances that they will enjoy BiG'r Bingo and continue to
play;
o new users may not want to pay to play bingo on the internet or they
may not enjoy our BiG'r Bingo game;
o Skill-based gaming is an emerging business. Like many of our
competitors, we have limited experience in this sector and may not be
able to apply our existing experience to this new business;
o as our business grows and the expectations of our customers increase,
we must develop and upgrade our infrastructure, including internal
controls, transaction processing capacity, data storage and retrieval
systems and Website to remain competitive. We may not have the capital
resources to do so;
o we compete with a number of larger competitors with greater financial,
capital, technical, marketing and human resources and experience than
us;
o we may not be able to continue to offer new and exciting content that
is attractive and compelling to existing users;
o our business is dependent upon the Internet for commerce and growth.
The Internet is still a relatively unproven business medium and has
received negative publicity in recent years;
o general economic conditions could change and adversely affect our
business;
o we intend to rely upon strategic relationships to build market
awareness and to bring visitors to our portal and players to the
online bingo games. These relationships may not be successful;
o our business is subject to regulatory risks, which may increase the
cost of operating our businesses or prohibit us from conducting our
business altogether;
o skill-gaming is an emerging business and the regulations surrounding
these type of games are not clear. We may be forced to curtail our
pay-to-play games in the event that legislation changes; and
o we depend upon key personnel and management to fully develop our
businesses.
Due to our brief operating history, we have not generated sufficient data to
permit meaningful period-to-period comparisons of our operating results. Our
quarterly operating results have varied significantly in the past and will
likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating
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results to date are not meaningful and should not be relied upon as indicators
of our future performance. In addition, it is difficult to fully evaluate our
business and our prospects. We cannot assure you that we will attract users,
advertisers, consumers or network affiliates, or generate significant revenues
or operating margins in the future.
WE ARE SUBSTANTIALLY DEPENDENT ON THIRD PARTIES FOR MOST ASPECTS OF OUR
BUSINESS.
We have chosen to pursue a strategy whereby we have outsourced many of our
mission-critical business functions, including Website hosting, advertising
sales and serving, BiG'r Bingo backend transaction processing, Web server
collocation, and network maintenance fee collection. Most of these functions are
performed by a limited number of small companies. As a result, we face increased
risk that our business could be interrupted by the failure of any one of our key
vendors or suppliers, and such an interruption could have a material impact on
our financial position and results of operations.
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE TO OPERATE OUR BUSINESS.
We have not yet achieved profitable operations or secured a long-term source of
consistent and reliable revenue. As of December 31, 2001 we had approximately
$14,000 in cash and cash equivalents. We do not have sufficient cash and cash
equivalents on hand to conduct our operations through the first quarter of 2002,
and are substantially dependent on continued funding from our President and CEO
to continue operations. Although our cash flow is improving, we will need to
obtain additional financing to support our operations for the duration of 2002.
If we successfully raise additional funds through the issuance of debt, we will
be required to service that debt and are likely to become subject to restrictive
covenants and other restrictions contained in the instruments governing that
debt, which may limit our operational flexibility. If we raise additional funds
through the issuance of equity securities, then those securities may have
rights, preferences or privileges senior to the rights of holders of our common
stock, and holders of our common stock will experience dilution.
We cannot be certain that such additional financing will be available to us on
favorable terms when required, or at all. If we cannot raise funds in a timely
manner on acceptable terms, we may not be able to promote our brand, develop or
enhance our products and services, take advantage of future opportunities or
respond to competitive pressures or unexpected requirements, and we may be
required to reduce or limit operations.
IF OUR KEY PERSONNEL LEAVE THE COMPANY, OUR ABILITY TO SUCCEED WILL BE ADVERSELY
AFFECTED
The future success of the Company will depend on certain key management,
marketing, sales and technical personnel. We are currently dependent on our
President and CEO, Tarrnie Williams, for the success of the business. From time
to time, we will also rely upon consultants and advisors who are not employees.
The loss of key personnel could have a material adverse effect on our
operations. We do not maintain key-man life insurance on any of our key
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personnel. The inability to attract, retain and motivate highly skilled
personnel required for expansion of operations and development of technologies
could adversely affect our business, financial condition and results of
operations. We cannot assure you that we will be able to retain our existing
personnel or attract additional, qualified persons when required and on
acceptable terms.
WE HAVE CAPACITY CONSTRAINTS AND SYSTEM DEVELOPMENT RISKS THAT COULD DAMAGE OUR
CUSTOMER RELATIONS OR INHIBIT OUR POSSIBLE GROWTH, AND WE MAY NEED TO EXPAND OUR
MANAGEMENT SYSTEMS AND CONTROLS QUICKLY, WHICH MAY INCREASE OUR COST OF
OPERATIONS
Our success and our ability to provide high quality customer service largely
depends on the efficient and uninterrupted operation of our computer and
communications systems and the computers and communication systems of our third
party vendors in order to accommodate any significant numbers or increases in
the numbers of consumers and advertisers using our service. Our success also
depends upon our and our vendors' abilities to rapidly expand
transaction-processing systems and network infrastructure without any systems
interruptions in order to accommodate any significant increases in use of our
service.
We and our service providers may experience periodic systems interruptions and
infrastructure failures, which we believe will cause customer dissatisfaction
and may adversely affect our results of operations. Limitations of technology
infrastructure may prevent us from maximizing our business opportunities.
We cannot assure you that our and our vendors' data repositories, financial
systems and other technology resources will be secure from security breaches or
sabotage, especially as technology changes and becomes more sophisticated. In
addition, many of our and our vendors' software systems are custom-developed and
we and our vendors rely on employees and certain third-party contractors to
develop and maintain these systems. If certain of these employees or contractors
become unavailable, we and our vendors may experience difficulty in improving
and maintaining these systems. Furthermore, we expect that we and our vendors
may continue to be required to manage multiple relationships with various
software and equipment vendors whose technologies may not be compatible, as well
as relationships with other third parties to maintain and enhance their
technology infrastructures. Failure to achieve or maintain high capacity data
transmission and security without system downtime and to achieve improvements in
their transaction processing systems and network infrastructure could have a
materially adverse effect our business and results of operations.
INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR WEBSITE,
WHICH MAY ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUE
Concerns over the security of transactions conducted on the Internet and the
privacy of consumers may also inhibit the growth of the Internet and other
online services generally, and online commerce in particular. Failure to prevent
security breaches could significantly harm our business and results of
operations. We cannot be certain that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not result
in a compromise or breach of the algorithms used to protect
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our transaction data. Anyone who is able to circumvent our or our vendors'
security measures could misappropriate proprietary information, cause
interruptions in our operations or damage our brand and reputation. We may be
required to incur significant costs to protect against security breaches or to
alleviate problems caused by breaches. Any well-publicized compromise of
security could deter people from using the Internet to conduct transactions that
involve transmitting confidential information or downloading sensitive
materials, which would have a material adverse effect on our business.
WE FACE THE RISK OF SYSTEM FAILURES, WHICH WOULD DISRUPT OUR OPERATIONS
A disaster could severely damage our business and results of operations because
our services could be interrupted for an indeterminate length of time. Our
operations depend upon our ability to maintain and protect our computer systems.
Our systems and operations are vulnerable to damage or interruption from fire,
floods, earthquakes, hurricanes, power loss, telecommunications failures,
break-ins, sabotage and similar events. The occurrence of a natural disaster or
unanticipated problems at our principal business headquarters or at a
third-party facility could cause interruptions or delays in our business, loss
of data or render us unable to provide our services. In addition, failure of a
third-party facility to provide the data communications capacity required by us,
as a result of human error, natural disaster or other operational disruptions,
could cause interruptions in our service. The occurrence of any or all of these
events could adversely affect our reputation, brand and business.
WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS
Our services operate in part by making Internet services and content available
to our users. This creates the potential for claims to be made against us,
either directly or through contractual indemnification provisions with third
parties. These claims might, for example, be made for defamation, negligence,
copyright, trademark or patent infringement, personal injury, invasion of
privacy or other legal theories. Any claims could result in costly litigation
and be time consuming to defend, divert management's attention and resources,
cause delays in releasing new or upgrading existing services or require us to
enter into royalty or licensing agreements.
Litigation regarding intellectual property rights is common in the Internet and
software industries. We expect that Internet technologies and software products
and services may be increasingly subject to third-party infringement claims as
the number of competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. There can be no assurance that
our services do not or will not in the future infringe the intellectual property
rights of third parties. Royalty or licensing agreements, if required, may not
be available on acceptable terms, if at all. A successful claim of infringement
against us and our failure or inability to license the infringed or similar
technology could adversely affect our business.
Page 20
Our success and ability to compete are substantially dependent upon our
technology and data resources, which we intend to protect through a combination
of patent, copyright, trade secret and/or trademark law. We currently have no
patents or trademarks issued to date on our technology and there can be no
assurances that we will be successful in securing them when necessary.
WE MAY NOT BE ABLE TO PROTECT OUR INTERNET DOMAIN NAME, WHICH IS IMPORTANT TO
OUR BRANDING STRATEGY
Our Internet domain name, www.bingo.com, is an extremely important part of our
business. Governmental agencies and their designees generally regulate the
acquisition and maintenance of domain names. The regulation of domain names in
the United States and in foreign countries may be subject to change. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names in all
countries in which we conduct business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.
Third parties have acquired domain names that include "bingo" or variations
thereof both in the United States and elsewhere, which may result in an erosion
of our user base.
IF WE ARE UNABLE TO DEVELOP RELATIONSHIPS WITH A NETWORK OF AFFILIATES, OUR WEB
PORTAL MAY NEVER ACHIEVE MARKET ACCEPTANCE OR GENERATE SUFFICIENT ADVERTISING
REVENUES
We believe that our future success in penetrating our target markets depends in
part on our ability to further develop and maintain relationships with
affiliates. These affiliates provide their users with the bingo.com links on
their sites or direct their traffic to the bingo.com Web portal. We believe
these relationships are important in order to facilitate broad market acceptance
of our service and enhance our sales. Our future ability to attract consumers to
our bingo site may be dependent upon the growth of our network of affiliates,
which is in the early stages of development. If we are unable to obtain
agreements or arrangements for traffic on commercially acceptable terms or to
establish a relationship with a network of affiliates, our business may not be
successful.
OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS WILL VARY DEPENDING ON A NUMBER
OF FACTORS, MOST OF WHICH ARE OUT OF OUR CONTROL
We anticipate that our operating results will vary widely depending on a number
of factors, some of which are beyond our control. These factors are likely to
include, but not be limited to:
o demand for our online services by registered users, advertisers and
consumers, including the number of searches performed by registered
users, consumers and the rate at which they click-through to paid
search listing advertisements;
o prices paid by advertisers using our service, which fluctuate with the
changing market;
Page 21
o costs of attracting consumers to our website, including costs of
receiving exposure on third-party Websites and advertising costs;
o costs related to forming strategic relationships;
o loss of strategic relationships;
o our ability to significantly increase our distribution channels;
o competition from companies offering same or similar products and
services and from companies with much deeper financial, technical,
marketing and human resources;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
o costs and delays in introducing new services and improvements to
existing services;
o changes in the growth rate of Internet usage and acceptance by
consumers of electronic commerce;
o technical difficulties, system failures or Internet downtime;
o government regulations related to our business, to skill-games and to
the Internet;
o our ability to upgrade and develop our information technology systems
and infrastructure;
o general economic conditions, as well as those specific to the Internet
and related industries.
Because we have a limited operating history, it is difficult to accurately
forecast the revenues that will be generated from our current and proposed
future product offerings.
RISKS RELATED TO OUR INDUSTRY
IF WE ARE UNABLE TO MEET THE CHANGING NEEDS OF OUR INDUSTRY, OUR ABILITY TO
COMPETE WILL BE ADVERSELY AFFECTED
We operate in an intensely competitive industry. To remain competitive, we must
be capable of enhancing and improving the functionality and features of our
online services. The Internet portal, the online advertising industry and the
Internet gaming industry are rapidly changing. If competitors introduce new
products and services embodying new technologies, or if new industry standards
and practices emerge, our existing services, technology and systems may become
obsolete. There can be no assurances that we will be successful in responding
quickly, cost effectively and adequately to new developments or that funds will
be available to respond at all. Any failure by us to respond effectively would
significantly harm our business, operating results and financial condition.
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Our future success will depend on our ability to accomplish the following:
o license and develop leading technologies useful in our business;
o develop and enhance our existing products and services;
o develop new services and technologies that address the increasingly
sophisticated and varied needs of prospective consumers; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
Developing Internet services and other proprietary technology entails
significant technical and business risks, as well as substantial costs. We may
use new technologies ineffectively, or we may fail to adapt our services,
transaction processing systems and network infrastructure to user requirements
or emerging industry standards. If our operations face material delays in
introducing new services, products and enhancements, our users may forego the
use of our services and use those of our competitors. These factors could have a
material adverse effect on our financial position and results of operations.
RISKS ASSOCIATED WITH THE INTERNET AND INTERNET GAMES
Consumer use of the Internet as a medium for commerce is a recent phenomenon and
is subject to a high level of uncertainty. While the number of Internet users
has been rising, the Internet infrastructure may not expand fast enough to meet
the increased levels of demand. If use of the Internet as a medium for commerce
does not continue to grow or grows at a slower rate than we anticipate, the
number of registered users of our site would be lower than expected and our
business would be harmed.
IF OUR WEB PORTAL IS UNABLE TO ACHIEVE AND MAINTAIN A CRITICAL MASS OF
REGISTERED USERS, ADVERTISERS AND CONSUMERS, WE MAY BE UNABLE TO SELL
ADVERTISING OR TO GENERATE REVENUE
The success of our Web portal is dependent upon achieving significant market
acceptance of our site by registered users, advertisers and consumers. Internet
advertising in general is at an early stage of development and most potential
advertisers have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. Our competitors and potential competitors may offer more
cost-effective advertising solutions, which could damage our business. In
addition, our Website may not achieve significant acceptance by registered users
and consumers. Failure to achieve and maintain a critical mass of registered
users; advertisers and consumers would seriously harm our business.
Page 23
OUR BUSINESS MAY BE SUBJECT TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
THAT MAY INCREASE THE COSTS OF OPERATING OUR WEB PORTAL, LIMIT OUR ABILITY TO
SELL ADVERTISING, OR INTERFERE WITH FUTURE OPERATIONS OF THE COMPANY
There are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. Due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted, covering
issues such as user privacy, defamation, pricing, taxation, content regulation,
quality of products and services, and intellectual property ownership and
infringement. Such legislation could expose Bingo to substantial liability as
well as dampen the growth in use of the Internet, decrease the acceptance of the
Internet as a communications and commercial medium, or require Bingo to incur
significant expenses in complying with any new regulations. The European Union
has adopted privacy and copyright directives that may impose additional burdens
and costs on international operations. In addition, several telecommunications
carriers, including America's Carriers' Telecommunications Association, are
seeking to have telecommunications over the Internet regulated by the Federal
Communications Commission, or FCC, in the same manner as other
telecommunications services.
Because the growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage have
begun to experience interruptions in phone services, some local telephone
carriers have petitioned the FCC to regulate the Internet and to impose access
fees. Increased regulation or the imposition of access fees could substantially
increase the costs of communicating on the Web, potentially decreasing the
demand for our service.
A number of proposals have been made at the federal, state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce and could adversely affect us.
We are also subject to new laws such as the Digital Millennium Copyright Act,
which is intended to reduce the liability of online service providers for
listing or linking to third-party Websites that include materials that infringe
copyrights. Also, the Children's Online Protection Act and the Children's Online
Privacy Act will restrict the distribution of certain materials deemed harmful
to children and impose additional restrictions on the ability of online services
to collect user information from minors. Furthermore, the Protection of Children
from Sexual Predators Act mandates that electronic communication service
providers report facts or circumstances from which a violation of child
pornography laws is apparent. Although this will not have a direct impact on our
business, we may incur additional costs to service our existing customers or to
work with our affiliates.
We are also subject to the current uncertainty surrounding skill-gaming and the
applicability of gambling legislation to pay-for-play skill-based games.
Although legal opinions have been obtained in both Canada and the US that lead
us to believe that our BiG'r Bingo game is not considered gambling in the
majority of jurisdictions in North America, there is still considerable risk
that this interpretation could be challenged. In
Page 24
addition, laws could change to clarify the rules and regulations surrounding
pay-for-play skill-based games. There can be no assurances that these changes
will be favorable for the Company. We may be forced to cease certain operations
as a result of potential changes in legislation, and it is impossible to predict
what these changes may be.
In addition, because legislation and other regulations relating to online games
vary by jurisdiction, from state to state and from country to country, it is
difficult for us to ensure that our players are accessing our portal from a
jurisdiction where it is legal to play our games. Although we believe we have
adequate controls in place, we cannot ensure that we will not be subject to
enforcement actions as a result of this uncertainty and difficulty in
controlling access.
We are constantly reviewing various pieces of legislation, and cannot currently
predict the effect, if any, that this legislation will have on our business.
There can be no assurances that this legislation will not impose significant
additional costs on our business or subject the company to additional
liabilities. Moreover, the applicability to the Internet of existing laws
governing issues such as gambling, property ownership, copyright, defamation,
obscenity and personal privacy is uncertain. The Company may be subject to
claims that our services violate such laws. Any new legislation or regulation in
Canada, the United States or abroad or the application of existing laws and
regulations to the Internet could damage our business.
Due to the global nature of the Internet, it is possible that the governments of
other states and foreign countries might attempt to regulate its transmissions
or prosecute the Company for violations of their laws. The Company might
unintentionally violate such laws. Such laws may be modified, or new laws may be
enacted, in the future. Any such development could damage our business in a
material way.
We cannot predict what new laws will be enacted or how courts will interpret
both existing and new laws. As a result, we are uncertain about how new laws or
the application of existing laws may affect our business. In addition, our
business may be indirectly affected by our suppliers who may be subject to such
legislation. Increased regulation of the Internet may decrease the growth in the
use of the Internet or hamper the development of Internet commerce and online
entertainment, which could decrease the demand for our services, increase our
cost of doing business or otherwise have a material adverse effect on our
business, results of operations and financial condition.
RISKS ASSOCIATED WITH OUR COMMON STOCK
WE ARE INDEBTED TO TWO LENDERS, WHICH MAY LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF KEY TRANSACTIONS, INCLUDING CHANGES OF CONTROL
During 2001, we issued a $1,250,000 12% secured convertible debenture, due April
16, 2006, to two companies, Redruth Ventures Inc. and Bingo Inc. $1,100,000 had
been advanced as of December 31, 2001. Our President and CEO is a potential
beneficiary of several discretionary trusts that hold approximately 80% of Bingo
Inc. In addition, as part of the transaction, these lenders were granted a stock
purchase warrant entitling them
Page 25
to purchase up to 12,000,000 shares of common stock of the Company at an
exercise price of $0.25 per share. As a secured debt holder, these lenders'
interests may differ from the interests of our Company or our stockholders. Our
current operations do not generate cash from which the debenture can be repaid.
If we are unable to repay the debenture when it becomes due, the lenders may be
able to sell or otherwise realize against our assets in preference to other
creditors and to our stockholders or negotiate terms to extend the due date of
the debenture that are unfavorable to us.
The lenders may also convert the debenture at their option into shares of common
stock at a conversion price of $0.125 per share. The accrued interest may also
be paid in shares of common stock, valued at $0.25 per share, at the option of
the Company when the interest becomes payable, in April 2003. The conversion of
the balance of the debenture outstanding at December 31, 2001 into shares of
common stock would have resulted in these two investors owning an aggregate of
approximately 45% of our common stock. The conversion of the debenture would
provide the lenders with a certain level of control over matters requiring
approval of our stockholders and may result in dilution to our stockholders. In
addition, the investors may exercise their warrants, which would increase each
of the foregoing risks.
OUR SHARES ARE CONSIDERED PENNY STOCK AND ARE SUBJECT TO THE PENNY STOCK RULES,
WHICH MAY ADVERSELY AFFECT YOUR ABILITY TO SELL YOUR SHARES
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales
practice and disclosure requirements on certain brokers-dealers who engage in
certain transactions involving Penny Stock. Subject to certain exceptions, a
Penny Stock generally includes any non-NASDAQ equity security that has a market
price of less than $5.00 per share. We anticipate that our shares are deemed to
be Penny Stock for the purposes of the Exchange Act. The additional sales
practice and disclosure requirements imposed upon brokers-dealers may discourage
broker-dealers from effecting transactions in our shares, which could severely
limit the market liquidity of your shares and impede the sale of our shares in
the secondary market.
Under the Penny Stock regulations, a broker-dealer selling Penny Stock to anyone
other than an established customer or Accredited Investor (generally, an
individual with net worth in excess of $1,000,000 or an annual income exceeding
$200,000, or $300,000 together with his or her spouse) must make a special
suitability determination for the purchaser and must receive the purchaser's
written consent to the transaction prior to sale, unless the broker-dealer or
the transaction is otherwise exempt. In addition, the Penny Stock regulations
require the broker-dealer to deliver, prior to any transaction involving a Penny
Stock, a disclosure schedule prepared by the Commission relating to the Penny
Stock market, unless the broker-dealer or the transaction is otherwise exempt. A
broker-dealer is also required to disclose commissions payable to the
broker-dealer and the registered representative and current quotations for the
securities. Finally, a broker-dealer is required to send monthly statements
disclosing recent price information with respect to the Penny Stock held in a
customer's account and information with respect to the limited market in Penny
Stocks.
Page 26
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock could decline. As of the date of this report, we have
outstanding 10,854,608 shares of common stock, a debenture payable convertible
at the option of the holder into a total of 8,800,000 shares of common stock,
stock purchase warrants to purchase a total of 12,000,0000 shares of common
stock and stock purchase options to acquire an aggregate of 2,380,000 shares of
common stock, of which 2,151,000 were vested and exercisable. The majority of
the shares of our common stock outstanding are freely tradeable in the public
market. All shares acquired upon exercise of options are also freely tradeable
in the public market.
Holders of such warrants and options are likely to exercise them when, in all
likelihood, we could obtain additional capital on terms more favorable than
those provided by the options and warrants. Further, while our warrants and
options are outstanding, our ability to obtain additional financing on favorable
terms may be adversely affected.
WE HAVE NOT DECLARED DIVIDENDS AND MAY NEVER DECLARE DIVIDENDS, WHICH MAY AFFECT
THE VALUE OF YOUR SHARES
We have never declared or paid any dividends on our common stock and do not
expect to pay any dividends in the near future.
ITEM 2. PROPERTIES.
Our primary administrative, sales and marketing facility is located in leased
space in Vancouver, British Columbia. This facility occupies approximately 2,000
square feet. We entered into a sublease arrangement on March 1, 2002 with a term
of 43 months and ending September 29, 2005. We believe that these facilities
will be adequate to meet our requirements for the foreseeable future and that
suitable additional space will be available if needed
Other than described above, neither we nor any of our subsidiaries presently own
or lease any other property or real estate.
ITEM 3. LEGAL PROCEEDINGS.
Other than described below, the Company is not currently a party to any legal
proceeding, and was not a party to any other legal proceeding during the fiscal
year ended December 31, 2001. Management of the Company is currently not aware
of any other legal proceedings proposed to be initiated against the Company.
However, from time to time, the Company may become subject to claims and
litigation generally associated with any business venture.
On July 6, 2001, Roger W. Ach, II, filed a complaint in the Court of Common
Pleas, Hamilton County, Ohio against the Company in connection with a promissory
note issued by the Company. Mr. Ach alleges that on or about March 16, 2001 the
Company
Page 27
borrowed the sum of $45,000 and executed and delivered to him a promissory note
and that the Company owes him the amount of the Note together with interest from
March 16, 2001 at the rate of prime plus 1%. Mr. Ach demands judgment against
the Company in the sum of $45,000, plus interest and costs.
On October 5, 2001, the Company filed an Answer, Counterclaim and third party
complaint in defense of the proceedings commenced, among other things, denying
the allegation that any moneys are due to Mr. Ach and counterclaiming against
him and bringing a third party complaint against the Lottery Channel, Inc. for
payment of outstanding invoices of $39,168 plus interest, costs and attorney
fees.
The Company believes that Mr. Ach's complaint is without merit and intends to
vigorously defend these proceedings and believes it is not likely to produce an
outcome which would have a material adverse effect on the Company's consolidated
financial position or results of operations.
Subsequent to the year ended December 31, 2001 the Company and Mr. Ach agreed to
defer the complaint and counterclaim for 90 days in an attempt to effect
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 2001 to a vote of
security holders.
Page 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is currently quoted on the National Association of Securities
Dealers OTC Bulletin Board (the "OTCBB") under the symbol BIGR. On March 19,
1997, the Company's common stock was approved for trading on the OTCBB under the
symbol PGLB. In January 1999, when we changed our name to Bingo.com, Inc., our
OTCBB symbol was changed to BIGG. On July 26, 1999, we changed our trading
symbol from BIGG to BIGR. There were no trades of our securities on the OTCBB
prior to the first quarter 1999. The bid quotations set forth below, reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
reflect actual transactions.
FISCAL 2000 HIGH LOW
----------- ------ ------
First Quarter $2.688 $1.250
Second Quarter $1.750 $0.688
Third Quarter $1.734 $0.531
Fourth Quarter $1.438 $0.219
FISCAL 2001
-----------
First Quarter $0.47 $0.13
Second Quarter $0.72 $0.08
Third Quarter $0.22 $0.52
Fourth Quarter $0.29 $0.11
On March 22, 2002, the last reported sales price of our common stock, as
reported by the OTCBB, was $0.12 per share.
As of December 31, 2001, the Company believes there are approximately 118
shareholders of record (including nominees and brokers holding street accounts)
of the Company's shares of common stock.
Other than described above, the Company's shares of common stock are not and
have not been listed or quoted on any other exchange or quotation system.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock since our
inception, and our Board of Directors currently intends to retain all earnings
for use in the
Page 29
business for the foreseeable future. Any future payment of dividends will depend
upon our results of operations, financial condition, cash requirements and other
factors deemed relevant by our Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On April 16, 2001, the Company received a loan from and issued a secured
convertible debenture to Redruth Ventures Inc., a British Virgin Islands
corporation for $750,000, and to Bingo, Inc., an Anguilla corporation for
$500,000 (collectively, "the Lenders").
Under the terms of the debenture interest shall accrue on the outstanding
principal amount of the debenture at a fixed rate of 12% per annum from the
drawdown date through April 16, 2003, at which time the interest will become
payable. Thereafter, interest shall accrue and be payable on the first business
day of each succeeding quarter through and including April 16, 2006. All
principal, accrued but unpaid interest and any other amounts owing are due and
payable at maturity on April 16, 2006.
The Company has the option to pay all accrued interest on the Accrued Interest
Payment Date, and shall pay all other interest thereafter accrued, in cash,
common stock of the Company, or a combination of both cash and common stock. Any
amounts remaining unpaid on the debentures on the maturity date, whether
principal, interest or other amounts due, shall be paid in full in cash on such
date. Any common stock of the Company delivered to the Lenders in payment of the
debentures will be valued at $0.25 per share.
The Lenders received a total of 12,000,000 common stock purchase warrants at an
exercise price of $0.25 per share exercisable for a period of three years from
the date of the debenture agreement in exchange for the loans. The Lenders have
the right, but not the obligation, to elect to convert any or all of the
outstanding principal amount of the debenture into shares of the Company's
common stock at a conversion price of $0.125 per share until the third
anniversary date of the debenture. The debenture is secured by all assets of the
Company.
Drawdowns of principal under the debenture are scheduled as follows:
April 16, 2001 $ 250,000
May 1, 2001 250,000
June 1, 2001 250,000
July 1, 2001 150,000
October 1, 2001 100,000
January 1, 2002 100,000
April 1, 2002 100,000
July 1, 2002 50,000
As of the date of this report, a total of $1,100,000 had been received under the
terms of this debenture, as the January 1, 2002 payment was received before year
end. The debenture was issued without registration under the Securities Act in
reliance upon Regulation S.
Page 30
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto included in
Item 8, with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with other financial data included
elsewhere in this Form 10-K. The consolidated statement of operations data for
the year ended December 31, 2001 and the year ended December 31, 1999, and the
consolidated balance sheet data as of December 31, 2001 and 1999 are derived
from our audited consolidated financial statements included in Item 8 of this
report, which have been audited by Davidson and Company, independent auditors.
The consolidated statement of operations data for the year ended December 31,
2000, and the consolidated balance sheet data as of December 31, 2000 are
derived from our audited consolidated financial statements included in Item 8 of
this report, which have been audited by Grant Thornton, independent auditors.
The independent auditors' reports appearing elsewhere in this document contain
explanatory paragraphs that state that the Company's losses and negative cash
flows from operations raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements and the selected financial
data do not include any adjustments that might result from the outcome of that
uncertainty.
The consolidated statement of operations data for the year ended December 31,
1998 and the consolidated balance sheet data as of December 31, 1999 and 1998
are derived from audited consolidated financial statements not included in this
report. The historical results are not necessarily indicative of results to be
expected in any future period.
Year Ended December 31,
------------------------------------------------------------
2001 2000 1999 1998
------------ ------------ ------------ ------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue $ 1,734,322 $ 1,119,864 $ -- $ --
Cost of revenue 1,093,963 861,200 -- --
------------ ------------ ------------ ------------
Gross profit (loss) 640,359 258,664 -- --
Operating expenses 2,521,017 3,584,536 2,480,434 1,904
Interest and other income 1,821 36,880 125,901 100
------------ ------------ ------------ ------------
Loss from continuing operations (1,878,837) (3,288,992) (2,354,533) (1,804)
Loss from discontinued operations -- (45,899) (554,107) --
------------ ------------ ------------ ------------
Net loss $ (1,878,837) $ (3,334,891) $ (2,908,640) $ (1,804)
============ ============ ============ ============
Basic and diluted loss per share $ (0.18) $ (0.33) $ (0.31) $ (0.01)
------------ ------------ ------------ ------------
Weighted average common shares
outstanding 10,447,200 10,065,054 9,278,084 1,000,000
============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 14,028 $ 174,463 $ 3,382,529 $ 157,600
Working capital (deficit) (1,054,578) (428,256) 3,251,649 (1,804)
Total assets 2,136,890 2,715,258 4,990,371 157,600
Total liabilities 2,555,088 1,331,237 325,643 159,404
Long term obligations 1,125,974 377,136 9,494 --
Total stockholders' equity (deficit) (418,198) 1,384,021 4,664,728 (1,804)
------------ ------------ ------------ ------------
Page 31
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS
The following tables present Bingo's unaudited consolidated quarterly results of
operations for each of our last eight quarters. This data has been derived from
unaudited consolidated financial statements that have been prepared on the same
basis as the annual audited consolidated financial statements and, in our
opinion, include all normal recurring adjustments necessary for the fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 2001 included in Item 8 of this report.
Three Months Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------ ------------ ------------- ------------
Revenue $ 582,803 $ 475,064 $ 333,603 $ 342,852
Cost of revenue 463,890 243,960 143,573 242,540
------------ ------------ ------------ ------------
Gross profit 118,913 231,104 190,030 100,312
Operating expenses and other
income/expenses 880,896 654,090 583,306 400,904
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (761,983) $ (422,986) $ (393,276) $ (300,592)
============ ============ ============ ============
Basic and diluted loss per share (0.08) (0.04) (0.04) (0.02)
------------ ------------ ------------ ------------
Weighted average common shares 10,104,608 10,104,608 10,756,190 10,804,357
============ ============ ============ ============
Three Months Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
------------ ------------ ------------- ------------
Revenue $ 4,280 $ 57,588 $ 544,416 $ 513,580
Cost of revenue 44,884 115,644 274,726 425,946
------------ ------------ ------------ ------------
Gross profit (loss) (40,604) (58,056) 269,690 87,634
Operating expenses and other
income/expenses 453,919 1,064,321 1,358,200 671,216
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (494,523) $ (1,122,377) $ (1,088,510) $ (583,582)
============ ============ ============ ============
Basic and diluted loss per share (0.05) (0.12) (0.11) (0.05)
------------ ------------ ------------ ------------
Weighted average common shares 9,987,168 10,035,068 10,069,842 10,065,054
============ ============ ============ ============
Page 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operation contains "forward looking
statements." Actual results may materially differ from those projected in the
forward looking statements as a result of certain risks and uncertainties set
forth in this report. Although management believes that the assumptions made and
expectations reflected in the forward looking statements are reasonable, there
is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be materially different from the
expectations expressed in this Annual Report. The following discussion should be
read in conjunction with the audited Consolidated Financial Statements and
related Notes thereto included in Item 8, with "Item 6. Selected Financial
Data," with the Risk Factors section of Item 1, and with the Special Note
regarding forward-looking statements included elsewhere in this report.
OVERVIEW
Since 1999, the Company has been focused on the development of prize-based, play
for free Internet games, with an emphasis on entertainment. The Company began to
experience revenue growth from these games in fiscal 2000. During the latter
half of 2001, the Company began to channel its efforts into the development of a
skill-based, pay-for-play Internet bingo game, know as BiG'r Bingo. BiG'r Bingo
generates revenue from a network maintenance fee that will be charged to all
players for each game played. The new Skill-Bingo game began operating and
generating revenue on October 26, 2001.
The majority of the Company's revenue in 2001 was derived from the sale of
Internet advertising. The Company expects that such sales will continue to
contribute a significant portion of the revenue for the foreseeable future.
Bingo intends to continue to diversify its revenue sources so that it less
dependent on a single revenue stream. However, until other sources of reliable
revenue can be achieved, the Company continues to be subject to the Internet
advertising market. That market has experienced a general decline in the latter
half of 2001 and into 2002. Sales of advertising remain the dominant source of
revenue for the Company. There can be no assurances that the Company will be
successful in diversifying its revenue base.
The Company has incurred significant losses since inception, and as of December
31, 2001 had an accumulated deficit of $8,129,000. Bingo will continue to incur
losses until its BiG'r Bingo game achieves sufficient market penetration and
revenue grows. There can be no assurances that either will occur. Bingo has made
a significant investment in the development of the Company's website, purchase
of domain name, branding, marketing, and maintaining operations. The Company
expects to continue to incur costs in order to build the business. There can be
no assurances that the costs invested in building the business will result in
profitable operations.
Page 33
During the year ended December 31, 2001 the Company underwent a significant
restructuring of the business, in order to streamline operations and reduce
operating costs. As part of this restructuring, management of the Company
changed. In August 2001, Tarrnie Williams, a pioneer in the Canadian software
industry, took over as President and CEO. Mr. Williams then began the process of
rebuilding the business to take advantage of new revenue opportunities with a
new game (BiG'r Bingo) and a new management team.
In an effort to reduce operating costs, the Company relocated its headquarters
to Vancouver, British Columbia, from Los Angeles, California. This move has
resulted in a significant reduction in operating costs. The Company now operates
out of leased space in Vancouver, with a small staff and has outsourced many
labor intensive functions to third parties. Moving forward, the Company will
continue to control operating costs and look for ways to operate efficiently
without hiring a significant number of additional employees. The Company is
working to settle old, outstanding accounts payable, so that it can move forward
with a more stable financial footing.
As part of the strategy embarked upon by the new management team, the Company
entered into a number of significant agreements during the year ended December
31, 2001. These agreements are described more fully in "Item 1. Business" above.
The purpose of these agreements is to set in place an appropriate infrastructure
on which to build what we hope will be the preeminent Web portal built around
the game of bingo, incorporating a variety of bingo-based entertainment and
offering a variety of goods and services to registered members.
As of the date of this report, the Company has utilized substantially all of its
available funding. The Company's continuation as a going concern will depend on
its ability to generate sufficient cash flow from operations to cover operating
costs, or to raise additional capital. No assurance can be given that the
Company will be able to generate adequate cash flow to fund ongoing operating
costs or to raise additional funds. In the absence of sufficient cash flow, the
Company may be required to limit operations.
CRITICAL ACCOUNTING POLICIES
The following discussion of critical accounting policies is intended to
supplement the summary of Significant Accounting Policies presented as Note 2 to
our 2001 audited consolidated financial statements presented elsewhere in this
report. Note 2 summarizes the accounting policies and methods used in the
preparation of our consolidated financial statements. The policies discussed
below were selected because they require the more significant judgments and
estimates in the preparation and presentation of our financial statements. On an
ongoing basis, the Company evaluates these judgments and estimates, including
whether there are any uncertainties as to compliance with the revenue
recognition criteria described below, bad debts exposure and recoverability of
long-lived assets, as well as the assessment as to whether there are contingent
assets and liabilities
Page 34
that should be recognized or disclosed for the consolidated financial statements
to fairly present the information required to be set forth therein. The Company
bases its estimates on historical experience, as well as other events and
assumptions that are believed to be reasonable at the time. Actual results could
differ from these estimates under different conditions.
Revenue Recognition
Revenue from the sale of advertising is recognized as the service is delivered
on the Website, as the advertising campaign or the impressions and clicks are
made on the Website. Revenue from advertising campaigns that span a number of
months is recognized equally over the term of the campaign. Effective September
1, 2001, Bingo contracted all advertising services to a third party, NextLevel
(see details in Item 1), for a minimum monthly fee of $112,000. As of September
1, 2001, Bingo does not sell any advertising directly. NextLevel bears all risk
associated with credit and collection for the sales from September 1, 2001
forward. From that date, advertising revenue is recognized based on the
NextLevel agreement, and the monthly fee is invoiced at the end of each month.
Invoiced amounts are generally collected between 60 and 90 days after invoicing.
There is collection risk associated with these amounts because NextLevel may not
sell enough advertising to cover the monthly fee. There is no risk of loss on
the NextLevel amounts because there are minimal costs associated with this
contract. Prior to signing the NextLevel agreement Bingo did experience losses
on sales of advertising, amounting to approximately 12% of advertising revenue,
net of barter transactions.
Network maintenance fee revenue is recognized when the game is actually played,
which is when the revenue is earned. 100% of the revenue is recognized, and the
licensing and service fees owed to CYOP, as described more fully in Item 1, are
recognized as a cost of revenue. Network maintenance fees are invoiced on a
monthly basis, and invoiced amounts are collected between 60 and 90 days after
invoicing. There is a low collection risk on the network maintenance fee amounts
because the funds are held in trust for us by CYOP.
Impairment of Long-lived Assets
Management evaluates long-lived assets for impairment in accordance with
Statement of Financial Accounting Standard 121, "Accounting For the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." These assets
comprise mainly property and equipment, and the bingo.com domain name and the
Skill Bingo patent. The impairment review is performed by the Company whenever
events and circumstances indicate that the assets may be impaired. In performing
this review, we estimate the future net cash flows from the assets and compare
this amount to the carrying value. If this review indicates the carrying amount
may not be recoverable,
Page 35
impairment losses are measured and recognized based on the difference between
the estimated discounted cash flows over the remaining life of the assets and
the assets' carrying value. Changes in our future net cash flow estimates may
impact our assessment as to whether a particular long-lived asset has been
impaired. We have not recorded an impairment loss in fiscal 2001.
SOURCES OF REVENUE AND REVENUE RECOGNITION
Bingo generates the majority of its revenue from the sale of advertising on its
website. We recognize as revenues the amount paid to us upon the delivery and
fulfillment of advertising in the form of banner and button ads, email, rich
media and newsletters, provided that the collection of the resulting receivable
is probable. Accounts receivable are recorded net of advertising commissions.
Effective September 1, 2001, the Company has contracted NextLevel to manage the
sales of advertising on the bingo.com Website. Under the terms of the agreement,
NextLevel pays Bingo 50% of all advertising revenue generated from the Company's
Website, subject to a minimum monthly fee of $112,000. This revenue is
recognized on a monthly basis, in accordance with the contract terms. This
contract has been terminated effective January 31, 2002. The Company expects to
replace the NextLevel agreement with a new Website advertising and ad serving
agreement with CYOP during the first half of 2002, but a definitive agreement
has not been completed as of the date of this report. In the mean time, the
Company is collecting 50% of the advertising revenue generated by our Web
portal.
In fiscal 2000, the Company adopted EITF No. 99-17 "Accounting for Advertising
Barter Transactions". EITF 99-17 provides that the Company recognize revenue and
advertising expenses from barter transactions at the fair value only when it has
a historical practice of receiving or paying cash for similar transactions.
Bingo barters portions of the unsold advertising impressions generated by its
website in exchange for advertising in media properties owned by third parties.
The Company records revenues and costs for such barter transactions at the
market value of the advertising exchanged, with no net income or loss
recognized. Barter revenue totaled $372,000 for the year ended December 31, 2001
and $334,000 for the year ended December 31, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 2001, the Financial Accounting Standards Board ("FASB") approved the
issuance of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 addresses the accounting
for all purchased intangible assets, but not the accounting for internally
developed intangible assets. Goodwill will no longer be amortized but will be
reviewed for impairment in accordance with SFAS No. 142. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001.
Page 36
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" that supersedes SFAS No. 121 "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 144 is required to be adopted effective January 1, 2002.
The adoption of these new pronouncements is not expected to have a material
effect on the Company's consolidated financial position or results of
operations.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUE
Revenue increased to $1,734,000 for the year ended December 31, 2001, an
increase of 55% over revenue of $1,120,000 for the same period in the prior
year. Revenue for the three months ended December 31, 2001 decreased to
$343,000, a drop of 33% over revenue of $514,000 for the same period in 2000.
The reduction in revenue for the fourth quarter of 2001 can be explained
generally by the downturn in the North American economy and the erosion of the
market for Internet advertising. The increase in revenue for the 2001 fiscal
year can be explained by the fact that the Company had a full year of operations
in 2001 compared to only a partial year in 2000. 2000 was the first year that
the business began to be built.
COST OF REVENUE
Bingo recorded cost of revenue of $1,094,000 during the year ended December 31,
2001, an increase of $233,000 or 27% compared to costs of $861,000 for the same
period in the prior year. The gross margin improved to 37% in 2001 from 23% in
2000. For the fourth quarter of 2001, cost of revenue decreased to $243,000, a
change of $183,000 or 43% compared to costs of $426,000 for the same period in
the prior year. The gross margin on sales increased to 29% during the quarter
ended December 31, 2001, compared to a margin of 17% during the same period in
the prior year.
Cost of revenue consists primarily of commissions paid on the sale of
advertising and the market value of advertising exchanged in barter transactions
(see above). The Company incurred higher commission costs in 2000 compared to
2001. In the fourth quarter of 2001 the cost of revenue was comprised mainly of
fees associated with agreements described above that became effective September
1, 2001. More specifically, the Company incurred license and service fees of
$78,000 per month in connection with the licensing of the CrediPlay software,
and Website management and hosting fees of $12,000 per month (see Item 1 for a
detailed discussion of these agreements) starting in September 2001.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses dropped to $201,000 for the year ended December 31,
2001, a decrease of $535,000 over 2000 expenses of $736,000. Sales and marketing
expenses include principally costs for marketing, co-brand advertising and
keyword buys for our game site. The balance of marketing and advertising
expenses consists of payroll, consultant, and travel costs. All of these amounts
decreased significantly in 2001 as a result of changes to the business.
NextLevel performed sales activities for the Company starting in late August. In
addition, at the beginning of the 2001 year, sales of advertising were
outsourced to Cox Interactive Sales, who charged a flat 25% commission on all
sales.
We expect to continue to incur sales and marketing expenses to further our
efforts to increase traffic to our Web portal. These costs will include
commissions, salaries, advertising, and other promotional expenses intended to
increase our subscriber base and improve revenue. There can be no assurances
that these expenditures will result in increased traffic or significant new
revenue sources.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of payroll costs for the
Company's executive staff, accounting and administrative personnel, premises
costs for the Company's office, legal and professional fees, insurance and other
general corporate and office expenses. General and administrative expenses
decreased to $1,575,000 for the year ended December 31, 2001, a reduction of 21%
over costs of $1,989,000 for the previous year. General and administrative
expenses declined from the prior year as a result of changes to the business,
including moving the Company's offices from California to Vancouver, and lower
executive payroll. Company management also made greater efforts to control
operating costs in order to reduce administrative and other expenses.
We expect that our recent move to Vancouver will result in lower overall general
and administrative expenses. However, we expect to continue to incur general and
administrative expenses to support the business, and there can be no assurances
that the Company will be able to generate sufficient revenue to cover these
expenses.
WEBSITE DEVELOPMENT EXPENSES
Website development expenses are the costs associated with developing content
for and the maintenance of the Company's Website and planning costs associated
with the new BiG'r Bingo game. There were no costs incurred during fiscal 2001,
while expenses totaled $268,000 for the year ended December 31, 2000. The
Company completed a software development agreement during the third quarter of
2001 in connection with the
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BiG'r Bingo game (see details in Item 1). Under the terms of the agreement, the
Company paid CDN$300,000 to a third party for the development by of the BiG'r
Bingo game in accordance with the Company's requirements. The full amount of
these costs has been capitalized to Website development costs, included in fixed
assets on the financial statements as at December 31, 2001.
The Company adopted EITF 00-2 "Accounting for Web Site Development Costs" and
development costs incurred subsequent to June 30, 2000 associated with the
Company's Web Site were recorded in accordance with EITF 00-2.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes depreciation of the Company's fixed
assets, as well as amortization of the bingo.com domain name and the BiG'r Bingo
development costs. The Company capitalized the cost of the purchase of the
domain name and is amortizing the cost over five years from the date of
commencement of operations. Fixed assets are depreciated using the declining
balance method over the useful lives of the assets, ranging from three to five
years. Depreciation and amortization increased to $611,000 during the year ended
December 31, 2001, from $536,000 during the prior year. The change in
depreciation and amortization can be explained by the fact that the domain name
rights were amortized for a longer period of time in fiscal 2001, as well as by
the acquisition of the BiG'r Bingo game in 2001.
INTEREST EXPENSE
Interest expense consists of accrued interest on the convertible debentures and
other debt instruments, such as leases. Interest expense increased to $134,000
for 2001, an increase of $86,000 over the prior year's expense of $48,000. The
increase is attributable to interest on the debenture in 2001. The Company began
drawing down the convertible debenture in April 2001, and interest began
accruing on the drawdown amounts at the rate of 12% per annum, commencing on the
drawdown date. The interest is payable in 2003. There was no such debenture in
the prior year.
INCOME TAXES
No income taxes were payable in 2001 or in 2000, as a result of the operating
loss recorded during those years. Based on a number of factors, including the
lack of a history of profits, management believes that there is sufficient
uncertainty regarding the realization of future tax assets, and, accordingly,
has not booked an income tax benefit at December 31, 2001 or at 2000. All losses
incurred can be carried forward for seven years for Canadian income tax
purposes.
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LOSS PER SHARE AND NET LOSS
The Company ended the year with a net loss of $1,879,000, a loss per share of
$0.18, which is a 44% improvement over the prior year's net loss and loss per
share of $3,335,000 and $0.33, respectively. For the quarter ended December 31,
2001 the net loss was $301,000, a loss per share of $0.02, a significant
decrease from the 2000 net loss of $584,000, a $0.05 loss per share. The
reduction in the net loss and loss per share in 2001 is a result of the
Company's efforts to cut spending and improve the overall financial performance.
YEARS ENDED DECEMBER 31, 2000 AND 1999
The year ended December 31, 2000 was our first year of generating revenue.
Our early strategy was to develop an online gaming operation with an initial
focus on bingo. Due to adverse changes in North American gaming laws, in August
1999 our Board, with the intention of protecting our shareholders, decided to
prohibit the Company from engaging in gaming operations in jurisdictions with
laws that prohibit online gaming. From August 1999 to December 31, 1999, we
revised our business plan and focused on the alternative of developing our prize
based, play for free games with an emphasis on entertainment. In December 1999
we launched