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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, 2003

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 incorporation or organization)

 

(I.R.S. Employer 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |_| Yes |X| 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 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 26, 2004, being $0.08 per share: $749,180.  The number of shares of the registrant's common stock outstanding on March 26, 2004, was 11,104,608. 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

 

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TABLE OF CONTENTS

PART I.............................................................................................................................................. 3

ITEM 1.  BUSINESS.................................................................................................................... 3

ITEM 2. PROPERTIES............................................................................................................... 17

ITEM 3. LEGAL PROCEEDINGS.............................................................................................. 17

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 19

PART II...........................................................................................................................................  20

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY  AND 

RELATED STOCKHOLDER MATTERS..................................................................................  20

ITEM 6. SELECTED FINANCIAL DATA................................................................................  21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATION..............................................  22

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 

ABOUT MARKET RISK........................................................................................................... 28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................  29

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 

ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................................   57

ITEM 9A.  CONTROLS AND PROCEDURES........................................................................  58

PART III........................................................................................................................................   59

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................   59

ITEM 11.  EXECUTIVE COMPENSATION...........................................................................   60

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 

AND MANAGEMENT ............................................................................................................  62

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................  64

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES..........................................   64

PART IV.......................................................................................................................................   65

ITEMS 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 

REPORTS ON FORM 8-K......................................................................................................  65

SIGNATURES.........................................................................................................................   66

CERTIFICATIONS.................................................................................................................   67

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.......................................... 69

EXHIBIT LIST.........................................................................................................................   71

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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") is in the business of developing and operating a bingo based web portal designed to provide a variety of free 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 950,000 registered users and served over 2,000,000,000 bingo cards since its inception; the Company intends to continue to build on this subscriber base to further develop its online presence.

The Company generates revenue principally from the free website, which is supported by advertising revenue obtained by displaying advertisements on our web site and delivering advertisements to our players by email.

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, Secret Garden 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.

We intend to continue to build on the success of the existing free 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. 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. 

References in this document to "the Company," "we," "us," and "our" refer to Bingo.com, Inc. and its subsidiaries, which are described below.

Our executive offices are located at 1166 Alberni Street, Suite 1405, Vancouver, British Columbia, Canada, V6E 3Z3.  Our telephone number is (604) 694-0300. 

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History and Corporate Structure

The Company 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 use of 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.

The Company conducts its business through the Florida incorporated entity and through its wholly owned subsidiary English Bay Office Management Limited (previously Bingo.com (Canada) Enterprises Inc. ("English Bay"). English Bay 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. It subsequently changed it name to English Bay Office Management Limited on September 8, 2003.

On August 15, 2002, the Company acquired 99% of the share capital of Bingo.com (UK) plc ("Bingo UK"). Bingo UK was incorporated under the laws of England and Wales on August 18, 2000, as CellStop plc. and changed its name to Bingo.com (UK) plc. on August 5, 2002.

The Company also maintains a number of inactive wholly-owned subsidiaries.  These include

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.

The Company'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 current business strategy of the Company is to manage and grow the business with minimal overhead focusing on its major asset, the bingo.com domain name, which was acquired in 1999.

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 value of $2.00 per share) and (iii) an agreement to pay, on an ongoing basis, the Domain Name Purchase price amounting to 4% of our annual gross revenues, with a total minimum guaranteed Domain Name Purchase payment of $1,100,000 in the 

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first three years of the 99 year period ended December 31, 2098. During the year ended December 31, 2002, the agreement was amended so that the remaining Domain Name Purchase payments to the vendor are made monthly, based on 4% of the preceding months gross revenue. 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 search ability 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, 2003, the Company made payments totaling $35,556 (2002 -$12,023) related to payments based on 4% of the preceding months gross revenue as defined in the amended agreement. In 2002, the Company made payments of $184,772 relating to the final payment made in accordance with the agreement for the minimum guaranteed domain name purchase payment. T. M. Williams, the President and Chief Executive Officer of the Company is the potential beneficiary of several discretionary trusts that hold approximately 80% of the shares of Bingo, Inc.

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, 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, 2003. During the year ended December 31, 2003, over 200 million player sessions were offered to the Company's registered players. The average visitor session length was 55 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, the Company serves over 1.2 billion ads on the bingo.com website during the year ended December 31, 2003.

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

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Company will continue to establish promotional agreements with prominent websites and media content providers that have reciprocal links to bingo.com, or to display advertising.

The Company has built multiple revenue streams and believes that 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. The Company will continue to sell advertising space on the bingo.com website. The Company believes that its growing user base and stickiness will provide advertisers with an attractive platform to reach their target audience.

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.

The game of bingo is reported to be the most socially acceptable form of gaming in the world played by over 500 million people worldwide. The online casino market is well developed on the Internet whereas the online bingo market is still in its infancy. Industry experts have indicated that the online bingo market could, over time, be larger than the online casino market and grow at a faster rate. 

The Company's website bingo.com 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.

The Company believes that its future success will be dependent on a number of factors. These include focus on online bingo games, and online entertainment, and the development of a personalized community atmosphere, which will encourage lengthy site visits by users. We believe the nature of the Company's website 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, and other forms of entertainment such as chat, sweepstakes, fortune telling, and more. The free bingo games can be played for points, which are redeemable for prizes. We are able to create low-cost content through creative face-changes of the 

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standard bingo games. These 'skins' can reflect themes, corporate interests or other targeted messages.

Build multiple revenue streams

We currently generate 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 online store Walter Drake, where bingo.com users can receive discounts on purchases made at the Walter Drake site. The Company receives a commission for all purchases made on the Walter Drake site by our users. 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 and providing traditional bingo for cash to non-North American players. The Company currently earns revenues from its portal through a variety of ways, such as the following:

Advertising revenue calculations are based on click-throughs, percentage of sales transactions, or other methods depending on the details of the agreements. The majority of the Company's current revenue is calculated on a Cost Per Thousand ("CPM") 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 between 800 and 1200 new players a day are registering with www.bingo.com. There has been in excess of 35,000 unique visitors per day, with an average visitor session length of more than 55 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 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 the Company to generate premium CPM and Cost Per Click ("CPC") 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 website has inherent value as a brand name and we intend to aggressively expand our player base by promoting that name. We intend 

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to pursue online and offline marketing strategies, promotional opportunities, and strategic alliances to make bingo.com website the leading entertainment destination for bingo on the Internet.

Marketing Strategy

Our goal is for the bingo.com website 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, and e-commerce sales for the Company.

Advertising focused on promoting the bingo.com website 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.

Employees

As of December 31, 2003, the Company 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 T. M. Williams, our President, 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 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 2003, the majority of the Company's equipment was located in Canada.

Seasonality

The Company does not believe that seasonality has an effect on its traffic volumes or its revenue realization.

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., through its site Pogo, and Vivendi Universal, through its site Flipside, are large online entertainment destinations, offering games, game shows and other interactive experiences to users. 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.

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Trademarks and Intellectual Property Protection

The Company 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. The Company 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 $1,955,200 in fiscal 2001, $968,708 in fiscal 2002 and $235,491 in fiscal 2003.  As of December 31, 2003, we had an accumulated deficit of  $9,409,734, and during the year ended December 31, 2003, we provided cash of  $58,749 in operating activities (2002 - used cash of $95,275, 2001 - used cash of $646,717). Although we reduced our operating costs and our cash utilization rate significantly during the 2003 fiscal year, we will continue to incur sales and marketing and general and administrative expenses in the future. As a result, we may incur losses in the future and will need to generate higher revenues in order to achieve sustainable profitability.

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 the Company 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, 2003, 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 2004 due to a number of factors including, among others:

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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.

These risks include, but are not limited to:

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, and serving, and web server collocation. 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, 2003, we had $34,046 in cash. Although our cash flow is improving, we may need to obtain additional financing to grow our operations for the duration of 2004. The Company is constantly looking for new sources of revenue that will help fund our business.  There can be no assurances that this will be achieved.

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 debt or equity financing will be available to us on favorable terms when required, or at all. If we cannot raise funds in a timely manner, or 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.

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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 Chief Executive Officer, T. M. Williams, for the success of the business. We 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 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.

The effect of Government Legislation

During the 2003 fiscal year, the House Judiciary Committee of the US Government approved HR21 "Unlawful Internet Gambling Funding Prohibition Act". This bill creates a new crime of accepting financial instruments, such as credit cards or electronic fund transfers, for debts incurred in illegal Internet gambling. The bill enables state and federal Attorneys General to request that injunctions be issued to any party, such as financial institutions and Internet Service Providers, to assist in the prevention or restraint of illegal Internet gambling.  This bill still needs to be ratified by the Senate before it becomes passed as law. The Company does not offer any illegal Internet gambling and will therefore not be directly affected by this bill, however many of our advertisers will be affected by this bill and therefore the Company's revenue stream maybe affected.

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 on our business and results of operations.

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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 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.

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.

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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 maintain our popularity with third party Search engines then our customer base, and therefore, our advertising revenue will not continue to grow.

Due to our limited capital we do not run large advertising campaigns. We are, therefore, reliant on third party Search engines such as Google and Yahoo! to provide prospective customers with links to facilitate traffic to www.bingo.com. Historically, the Company's Website has been listed first when users have searched for the word "bingo" on many third party search engines. This ranking continues today but, given the increasing competition for rankings, including the trend towards paid rankings, there can be no guarantees that the Company's Website will continue to maintain such a ranking. The high ranking levels that the Company's Website has maintained has resulted in Bingo.com obtaining between 800 to 1200 new registrations per day which, is highly attractive to our advertisers. We believe that these search engines are important in order to facilitate broad market acceptance of our service and thus enhance our sales. We continue to look for new methods to optimize our ranking position with various Internet Search Engines, including the maintenance of reciprocal links with complementary third party sites.

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:

13

 

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.

Our future success will depend on our ability to accomplish the following:

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.

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.

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 

14

 

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 the Company 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 the Company 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. The State of California has introduced tough new laws regarding the distribution of unsolicited emails to potential customers.

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.

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.  We therefore, 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 or customers 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 

15

 

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 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 "A", due April 16, 2006. Bingo, Inc. holds this Debenture "A" in its entirety. During 2002, we issued $145,000 12% convertible Debenture "B" due July 2, 2006. Bingo, Inc. acquired $50,000 of this Debenture "B". The remaining holders of Debenture "B" are several unrelated parties. Our President and Chief Executive Officer is a potential beneficiary of several discretionary trusts that hold approximately 80% of the shares of Bingo Inc.

In addition, the Debenture "A" holders were granted warrants entitling them to purchase, for a period of three years from the issuance date of the Debenture "A", up to 12,000,000 shares of common stock of the Company at an exercise price of $0.25 per share. 7,200,000 "A" Warrants were cancelled during May 2002, in exchange for unused advertising inventory on the bingo.com website. The Debenture "B" holders were granted warrants entitling them to purchase, for a period of three years from the issuance date of the Debenture "B", up to 580,000 shares of common stock of the Company at an exercise price of $0.25 per share.

On July 23, 2003, the holder of Debenture "A", Bingo, Inc., agreed to defer the interest due and subsequent interest due until April 16, 2004, when the accrued interest will be paid in common stock of the Company at an agreed conversion price of $0.20 per share and to exercise their right to convert all the outstanding principle of Debenture "A" into common shares of the Company. The conversion of the balance of Debenture "A" & Debenture "B" (the "Debentures") and the accrued interest on Debenture "A" outstanding at December 31, 2003, into shares of common stock would have resulted in Bingo, Inc. owning an aggregate of 48% of our common stock. The conversion of the Debentures and the accrued Interest will provide the lenders with a certain level of control over matters requiring approval of our stockholders and will result in dilution to our stockholders.

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 our 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 

16

 

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.

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 11,104,608 shares of common stock, a Debenture "A" payable convertible at the option of the holder into a total of 10,000,000 shares of common stock and a Debenture "B" payable convertible at the option of the holders into a total of 966,667 shares of common stock, accrued Interest on Debenture "A" convertible into 1,783,471 share of common stock, stock purchase Warrant "A" to purchase a total of 4,800,0000 shares of common stock and stock purchase Warrant "B" to purchase a total of 580,0000 shares of common stock, and stock purchase options to acquire an aggregate of 2,000,000 shares of common stock, of which 1,457,100 were vested and exercisable as at December 31, 2003.

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. The monthly rental is approximately $2,900 per month. 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, 2003. 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 us in connection with a promissory note issued by us.  Mr. Ach alleges that on or about March 16, 2001, the Company 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. 

17

 

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. 

On October 17, 2003, we settled with Mr. Ach and the Lottery Channel, Inc., on the following terms:

(a)   The Company agreed to pay Mr. Ach the sum of $49,435.58. The amount will be repaid at a rate of $5,000 per month commencing on the earlier of:

i)             Thirty days after the date when the first United States state authorizes the sale of lottery tickets over the internet through the Lottery Channel, Inc.; or

ii)            January 1, 2004.

A final payment will be due in the amount of $4,435.58.

(b)  Games, Inc., a company affiliated to the Lottery Channel, Inc. will provide Bingo.com, Inc. with one free emailing per month to the then current email list of Games, Inc. and Games, Inc. affiliated companies and subsidiaries to promote the Bingo.com, Inc. corporate business. This email list should contain no fewer than one million email addresses obtained within six months prior to the respective emailing.

(c)  Within 30 days of the Effective date of the agreement Bingo.com, Inc. and Games, Inc. will provide the other with 468 by 60 pixels banner space for the advertising of www.lottery.com and www.bingo.com.

(d)  Within 30 days after the first United States state authorizes the sale of lottery tickets over the internet through The Lottery Channel, Inc. or its affiliate company, Games, Inc., the Company shall provide to Games, Inc., or to a Games, Inc. designated affiliate or subsidiary, banners of 468 by 60 pixels and/or buttons of 250 by 250 pixels space on www.bingo.com, enabling Games, Inc. or its designated affiliate or subsidiary to promote Games, Inc. and/or The Lottery Channel Inc.'s online sale of lottery tickets.  The total impression of the banners and buttons provided hereunder shall not exceed five percent (5%) of the total impressions available on the Company's website. This will be in effect for a period of 5 years from the Effective date of the agreement, unless otherwise agreed in writing by the parties hereto.

(e)  The Company will grant Games, Inc. an exclusive license to develop a charitable pay Bingo game to be accessed through the Company's website www.bingo.com. This charitable pay Bingo game must be conducted by a charitable organization that is officially registered and recognized as a charity in the United States and licensed by said state to provide and operate an online charity bingo game for North American players. In addition all operations and servers of the charitable organization, and/or all operations and servers of any agent of the charitable organization which has been properly and lawfully authorized by the charitable organization to conduct the charitable pay bingo game, must be located in the United States. This exclusive license to develop a charitable pay Bingo game will be for 3 years from the Effective date of the agreement or for longer period as agreed to by both parties in writing. Failure to develop and operate a charitable pay bingo game or a government pay bingo lottery game, within 3 years, all rights, obligations and responsibilities of this exclusive license shall be void and all parties shall be released from further obligations from this license.

If Games, Inc. successfully develops a charitable pay bingo game then Games, Inc. will have exclusive right to maintain access to that charitable pay bingo game through the www.bingo.com web-site for a period of ten years from the date Games, Inc. first develops the charitable pay bingo game. In exchange the Company will receive 10% of the gross revenues, as reported in Games, Inc. quarterly reports, from the charitable bingo gaming and government pay bingo 

18

 

lottery gaming for the preceding quarter, with a minimum payment of $15,000 per quarter after the first 12 months of operating period.

At the end of the ten year period, Games, Inc. will have the option three times to extend the period for 5 years per extension, in exchange for the commission increasing to 15% and a minimum payment of $22,500 per quarter. Failure to make the commission payments by Games, Inc. then Bingo.com, Inc. will be released from all obligations of the exclusive license agreement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We held our Annual Meeting of Stockholders on October 15, 2003 for the purposes of electing our directors, to ratify the appointment of Dohan and Company, CPA's, P.A.,  as our independent auditors for the 2003 fiscal year, to ratify and approve the amendment to the Convertible Debenture "A" agreement to reduce the valuation price from $0.25 per share to $0.20 per share for an extension to the payment of the interest on the Convertible Debenture "A" currently due on the 16th of April 2004, and to ratify the actions of the Company's Officers and Directors for the last year and for the period from the 2002 fiscal year end through to the date of the shareholder meeting. The Company issued a schedule 14A proxy statement to the shareholders on or about September 10, 2003.

All nominees for directors were elected, the appointment of auditors was ratified, the proposal to amend the Convertible Debenture "A" agreement to reduce the valuation price from $0.25 per share to $0.20 per share for an extension to the payment of the interest on the Convertible Debenture "A" currently due to the 16th of April 2004, was ratified, and the actions of the Company's Officers and Directors for the last year and for the period from the 2002 fiscal year end through to the date of the shareholder meeting were ratified. The voting on each matter is set forth below:

Election of the Directors of the Company.

Nominee                       For                   Against             Abstain

T. M. Williams              8,220,484          75,625                 33,500

P. A. Crossgrove          8,217,609          78,490                 33,500

Proposal to ratify the appointment of Dohan and Company, CPA's, P.A., as our independent auditors for the 2003 fiscal year.

For                          Against                         Abstain

8,233,204                        60,695                            35,710

Proposal to amend the Convertible Debenture "A" agreement to reduce the valuation price from $0.25 per share to $0.20 per share for an extension to the payment of the interest on the Convertible Debenture "A" currently due to the 16th of April 2004,.

For                          Against                         Abstain

3,885,634                       175,291                           20,260

Proposal to ratify the actions of the Company's Officers and Directors for the last year and for the period from the 2002 Fiscal year end through to the date of the shareholder meeting (October 15, 2003).

For                          Against                         Abstain

8,162,534                       122,376                           44,699

19

 

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.

Quarter Ended

High

Low

December 31, 2003

$0.08

$0.03

September 30, 2003

$0.11

$0.05

June 30, 2003

$0.09

$0.03

March 31, 2003

$0.03

$0.02

December 31, 2002

$0.05

$0.025

September 30, 2002

$0.08

$0.04

June 30, 2002

$0.13

$0.04

March 31, 2002

$0.15

$0.07

 

 On March 26, 2004, the last reported sale price of our common stock, as reported by the OTCBB, was $0.08 per share.

As of March 25, 2004, the Company believes there are approximately 3,852 shareholders (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 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

There were no sales of unregistered securities during the year ended December 31, 2003.

20

 

Securities authorized for issuance under equity compensation plans.

The Company has reserved a total of 1,895,000 common shares for issuance under its 1999 stock option plan.  The Company has granted a total of 1,800,000 (2002 - 1,800,000) stock purchase options under this plan, 600,000 (2001 - 1,700,000) of which remain outstanding at December 31, 2003.

The Company has reserved a total of 2,000,000 common shares for issuance pursuant to grants under the 2001 stock option plan.  The Company has granted a total of 1,825,000 (2002 - 1,400,000) stock options under the 2001 plan, 1,400,000 (2001 - 1,000,000) of which remain outstanding as at December 31, 2003.  850,000 of the stock options outstanding at December 31, 2003, were granted with vesting provisions as to 10% vesting at the grant date, an additional 15% vesting one year following the date of grant and an additional 2% vesting per month thereafter.

Both plans were approved in 2001 by the Company's shareholders.

Equity Compensation Plan Information




Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted average exercise price of outstanding options, warrants and rights


Number of securities remaining available for future issuance

 

(a)

(b)

(c)

Equity compensation plans approved by security holders

2,000,000

$0.47

1,895,000

Equity compensation plans not approved by security holders

0

0

0

Total

2,000,000

$0.47

1,895,000

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 years ended December 31, 2003 and 2002, and the consolidated balance sheet data as of December 31, 2003 and 2002, are derived from our audited consolidated financial statements included in Item 8 of this report, which have been audited by Dohan and Company, CPA's, P.A., independent auditors. The consolidated statement of operations data for the year ended December 31, 2001, and the consolidated balance sheet data as of December 31, 2001, 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 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 

21

 

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 years ended December 31, 1999 and December 31, 2000, and the consolidated balance sheet data as of December 31, 2001, 2000 and 1999, 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,

 

 

 

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Consolidated Statement of Operations Data:

 

 

 

 

 

Revenue

$

888,888

$

717,192

$

1,734,322

$

1,119,864

$

--

 

Cost of revenue

 

211,253

 

351,207

 

1,093,963

 

861,200

 

--

 

Gross profit

 

677,635

 

365,985

 

640,360

 

258,664

 

--

 

Operating expenses including interest

 

974,887

 

1,334,728

 

2,597,380

 

3,584,536

 

2,480,434

 

Interest and other income

 

61,761

 

35

 

1,821

 

36,880

 

125,901

 

Loss from continuing operations

 

(235,491)

 

(968,708)

 

(1,955,200)

 

(3,288,992)

 

(2,354,533)

 

Loss from discontinued operations

 

--

 

--

 

--

 

(45,899)

 

(554,107)

 

Net loss

$

(235,491)

$

(968,708)

$

(1,955,200)

$

(3,334,891)

$

(2,908,640)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

(0.02)

$

(0.09)

$

(0.19)

$

(0.33)

$

(0.31)

 

Weighted average common shares Outstanding

 

11,104,608

 

10,953,238

 

10,447,200

 

10,065,054

 

9,278,084

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

Cash

$

34,046

$

14,682

$

14,028

$

174,463

$

3,382,529

 

Working capital (deficit)

 

(1,368,002)

 

(1,299,148)

 

(1,054,578)

 

(428,256)

 

3,251,649

 

Total assets

 

1,477,173

 

1,469,185

 

2,136,890

 

2,715,258

 

4,990,371

 

Total liabilities

 

2,619,691

 

2,376,212

 

2,092,415

 

1,331,237

 

325,643

 

Long term obligations

 

1,395,000

 

1,395,000

 

1,125,974

 

377,136

 

9,494

 

Total stockholders' equity (deficit)

 

(1,142,518)

 

(907,027)

 

44,475

 

1,384,021

 

4,664,728

 

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.

22

 

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. 

The majority of the Company's revenue in 2003 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.  The Company intends to continue to diversify its revenue sources so that it is 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. 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, 2003, had an accumulated deficit of $9,409,734. The Company will continue to incur losses until revenue grows sufficiently to cover ongoing operating costs, including the costs of sales and marketing efforts. There can be no assurances that this will occur. The Company 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.

Moving forward, the Company will continue to control operating costs and look for ways to operate efficiently. The Company is working to settle old, outstanding accounts payable, so that it can move forward with a more stable financial footing.

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 2003 audited consolidated financial statements presented elsewhere in this report.  Note 2 summarize 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, and recoverability of long-lived assets, as well as the assessment as to whether there are contingent assets and liabilities 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. 

23

 

Impairment of Long-lived Assets

Management evaluates long-lived assets for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets". These assets comprise mainly property and equipment, and the bingo.com domain name. 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 value may not be recoverable, 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. 

SOURCES OF REVENUE AND REVENUE RECOGNITION

The Company 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 fulfilment 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.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN 46") an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements,". This interpretation addresses consolidation by the primary beneficiary of the entity of certain variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of "variable interests" and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after December 15, 2003. The adoption of this Interpretation will not have a material impact on the results of the Company's operations, financial position or cash flows.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities. ("SFAS 149") " SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. The adoption of SFAS 149 will not have a material impact on the Company's results of operations, financial position or cash flows.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after

24

 

June 15, 2003. The adoption of SFAS 150 will not have a material impact on the Company's financial position or results of operations.

RESULTS OF OPERATIONS
Years Ended December 31, 2003 and 2002

            Revenue

Revenue increased to $888,888 for the year ended December 31, 2003, an increase of 24% over revenue of $717,192 for the same period in the prior year. The company has increased its advertising rates by approximately 10% overall and obtained a greater number of individual advertisers, thereby providing a more diverse and increased revenue stream.

            Cost of revenue

The Company recorded cost of revenue of $211,253 during the year ended December 31, 2003, a decrease of $139,954 or 40% compared to costs of $351,207 for the same period in the prior year. The gross margin improved to 76% in 2003 from 51% in 2002.

Cost of revenue consists primarily of commissions paid on the sale of advertising, the cost of hosting the website and the domain name purchase payments. This decrease in cost of revenue in 2003 is due to the fact the Company in May 2002, cancelled the outside parties sales contracts and took over the advertising, Website hosting and ad serving itself.  This resulted in fewer people focused on selling advertising therefore less commissions and fewer barter transactions than in the prior year. In addition in the first and second quarter of 2002 the Company incurred license and service fees in connection with the licensing of the CrediPlay software that was used to operate the Company's Skill-Bingo Website. These fees ceased with the termination of the license on May 21, 2002.  However the Company did incur greater Web hosting expenses and domain name purchase payments in 2003 compared to the prior year. The increase in domain name purchase payments is due to the increase in revenue in 2003.

            Sales and marketing expenses

Sales and marketing expenses dropped to $30,941 for the year ended December 31, 2003, a 62% decrease of $50,379 over 2002 expenses of $81,320. 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. This decrease in sales and marketing expenses in 2003 compared to the prior year is due to the cancellation of outside parties sales contracts in May 2002. This resulted in fewer people focused on selling advertising. Subsequent to May 2002, the Company has taken over the advertising, Website hosting and ad serving itself. In addition the sales and marketing team changed from a combination of both salary and commission remuneration to a commission only remuneration in the third quarter of 2002. There was however an increase in additional prizes especially the introduction of the daily cash winners in the first quarter of 2003 where players can win $50 on a daily basis. This increase in prizes is intended to attract a greater number of players to the site.

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.

25

 

            General and administrative expenses

General and administrative expenses consist primarily of payroll costs for the Company's operational staff, 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 $509,272 for the year ended December 31, 2003, a reduction of 9% over costs of $561,715 for the previous year. General and administrative expenses declined from the prior year as a result of Company management making great efforts to control operating costs in order to reduce administrative and other expenses. General and administrative expenses have decreased in comparison to the prior year despite an increase in professional services fees such as accounting and legal fees, an increase in payroll costs and an increase in costs due to the weakness of the US Dollar in relation to the Canadian Dollar. These professional fees have increased due to the additional reporting requirements required by the Sarbanes-Oxley Act of 2002. The general and administrative expenses have additionally decreased in comparison to the prior year due to the Company incurring large write-offs of amounts due to the Company during the second quarter of 2002 in the cancellation of outside parties sales contracts.

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.

Depreciation and amortization

Depreciation and amortization includes depreciation of the Company's equipment, as well as amortization of the bingo.com domain name. The Company capitalized the cost of the purchase of the domain name and was amortizing the cost over five years from the date of commencement of operations. In 2002 the Company suspended the amortization of the domain name in accordance with SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets", where companies are no longer permitted to amortize indefinite life assets. Equipment is depreciated over the useful lives of the assets, ranging from three to five years. Depreciation decreased to $32,612 during the year ended December 31, 2003, a reduction over costs of 82% over costs of $177,006 during the prior year. This decrease is due to the disposal of capital assets during 2002.

Other income and expenses

Interest expense consists of accrued interest on the convertible debentures and other debt instruments, such as leases and the amortization of the Debenture discount issued with Debenture "A" and Debenture "B". Interest expense decreased to $285,087 for 2003, a decrease of $7,062 (2%) over the prior year's expense of $292,149. The decrease is attributable to the reduction in interest on capital leases due to outstanding debt on the capital leases reaching maturity.  There was an increase in interest on debentures due to issuance of Debenture "B" in the third quarter of 2002. During the year ended December 31, 2003, the company made gains of $61,468 (2002 - $45,000) from the settlement of debts with creditors. During the year the year ended December 31, 2003, the Company incurred foreign exchange losses of $58,167 due to balances held in Canadian dollars, which were affected by the weakness of the US Dollar in relation to the Canadian Dollar.

            Income taxes

No income taxes were payable in 2003 or in 2002, 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 deferred tax assets, and, accordingly, has not booked an income tax benefit at December 31, 2003 or at 2002. All losses incurred can be carried forward for seven years for Canadian income tax purposes and twenty years for United States income tax purposes.

26

 

            Loss per share and net loss

The Company ended the year with a net loss of $235,491, a loss per share of $0.02, which is a 76% improvement over the prior year's net loss and loss per share of $968,708 and $0.09, respectively. This decrease in losses is due to the Company's management continued efforts to control operating costs and to increase revenue streams.

Years Ended December 31, 2002 and 2001

Total assets decreased to $1,469,185 as of December 31, 2002, compared to $2,136,890 at in 2001. The reason for this decrease was due to large write off of accounts receivable balances due to the cancellation of outside parties sales contracts and to the disposal of capital assets during 2002. No funds were raised through the issuance of common stock in 2002. However the Company did receive a Debenture "B" for $145,000. Our cash position increased slightly to $14,682 and our working capital position decreased to a deficit of $1,299,148 from working capital deficit of $1,054,578.

Of the $828,957 of total operating expenses for the year ended December 31, 2002, $561,715 was for general and administrative expenses associated with the operations of the Company. General and administrative expenses consist primarily of payroll and consultant costs for the Company's executive staff, accounting and administrative personnel, premises costs, legal and professional fees for preparation and review of our registration statement, insurance and other general corporate and office expenses. These general and administrative expenses reduced by 64% over costs of $1,556,693 for the year ended December 31, 2001. General and administrative expenses declined from the prior year as a result of Company management making great efforts to control operating costs in order to reduce administrative and other expenses.

Sales and marketing expenses were $81,320 for the year ended December 31, 2002, and were $200,607 for the year ended December 31, 2001. Sales and marketing expenses decreased significantly in 2002 as a result of changes to the business, particularly as a result of fewer employees being focused on selling. Subsequent to May 2002, the Company has taken over the advertising, website hosting and ad serving itself.

We had a net loss of $968,708 or $0.09 per share for the year ended December 31, 2002, compared to $1,955,200 or $0.19 per share for the year ended December 31, 2001. We expect to continue to incur losses as we continue to build our operations.

LIQUIDITY AND CAPITAL RESOURCES

The Company does not yet have an adequate source of reliable, long-term revenue to fund operations.  As a result, the Company is reliant on outside sources of capital funding. There can be no assurances that the Company will, in the future, achieve a consistent and reliable revenue stream adequate to support continued operations. In addition, there are no assurances that the Company will be able to secure adequate sources of new capital funding, whether it is in the form of share capital, debt, or other financing sources. 

The Company had cash of $34,046 and a working capital deficiency of $1,368,002 at December 31, 2003. This compares to cash of $14,682 and working capital deficiency of $1,299,148 at December 31, 2002.

During the year ended December 31, 2003, the Company generated cash of $58,749 in operating activities compared to using cash of $95,275 in the prior year. The significant improvement in cash flow from operating activities in 2003 demonstrates the effectiveness of the Company's efforts to implement efficiencies in operations and reduce overall operating costs in 2003 and in 2002.

27

 

Net cash used by financing activities was $32,247 in 2003, which compares to cash provided of $373,091 in 2002. This increase in cash used is due to the issue of $150,000 of Debenture "A" and $145,000 of Debenture "B" in 2002. In addition, in 2002, our President and CEO, T.M. Williams and a company owned by him lent $151,750 to the Company. The cash used in 2003 relates to the repayment of the capital leases.

The Company used cash of $7,138 in investing activities in 2003, compared to using cash of $271,449 in the prior year. In the year ending December 31, 2003, cash of $7,138 (2002 - $84,263) was invested in the capital assets and of $nil (2002 - $184,772) was invested in the minimum guaranteed domain name purchase payments of the domain name rights in accordance with the agreement. (see Item 1 for details of agreement). The Company during the year ended December 31, 2002, acquired Bingo.com (UK) plc. for $61,440. The Company deemed it in the best interest of the Company to acquire a subsidiary registered in the United Kingdom for the purpose of establishing a company in the United Kingdom for future expansion.

Our future capital requirements will depend on a number of factors, including costs associated with development of our Web portal, the success and acceptance of our new games and the possible acquisition of complementary businesses, products and technologies.  We may not have sufficient cash on hand to conduct our operations through 2004. Although our cash flow is improving, we may need to obtain additional financing to grow our operations for the duration of 2004.

There can be no assurances that additional capital will be available when we need it on terms that we consider acceptable. The auditors' report on the Company's December 31, 2003, 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.

AUDIT COMMITTEE

The Company's audit committee is the Board of Directors. The audit committee met with the independent auditors on March 25, 2004, and approved the financials statements for the year ended December 31, 2003.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2003, the Company had not entered into or acquired financial instruments that have material market risk. The Company has no financial instruments for trading purposes, or derivative or other financial instruments with off balance sheet risk. All financial liabilities are due within the next twelve months and are classified as current liabilities in the consolidated balance sheet included in this report, except for the Debenture "B" which are due July 2006. It has been agreed with the holders of Debenture "A" that on April 16, 2004, the holdings of Debenture "A" will exercise their right to convert all the outstanding principal of Debenture "A" into common shares of the Company. The fair value of all financial instruments at December 31, 2003, is not materially different from their carrying value.

The Company is exposed to foreign currency exchange risk due to the fact that the Company has operations in Canada and the United Kingdom. To date, the Company has not entered into foreign currency contracts to hedge against foreign currency risks between the Canadian dollar, British Pound Sterling or other foreign currencies and our reporting currency, the United States dollar.

28

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SUPPLEMENTARY FINANCIAL INFORMATION

Quarterly Results of Operations

The following tables present the Company'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, 2003, included in Item 8 of this report.

 

 

 

 

Three Months Ended

 

 

 

March 31

2003

 

June 30

2003

 

September 30 2003

 

December 31, 2003

Revenue

$

174,470

$

203,947

$

236,758

$

273,713

Cost of revenue

 

49,785

 

49,201

 

53,697

 

58,570

Gross profit

 

124,685

 

154,746

 

183,061

 

215,143

Operating expenses and other (income) / expenses

 

258,862

 

203,584

 

209,443

 

241,237

Net (loss) from continuing operations

$

(134,177)

$

(48,837)

$

(26,382)

$

(26,095)

Basic and diluted net loss per share

$

(0.01)

$

(0.01)

$

(0.00)

$

(0.00)

Weighted average common shares

 

11,104,608

 

11,104,608

 

11,104,608

 

11,104,608

 

 

 

 

 

Three Months Ended

 

 

 

March 31

2002

 

June 30

2002

 

September 30 2002

 

December 31, 2002

Revenue

$

236,955

$

179,449

$

142,443

$

158,345

Cost of revenue

 

157,027

 

100,107

 

30,693

 

63,380

Gross profit

 

79,928

 

79,342

 

111,750

 

94,965

Operating expenses and other (income) / expenses

 

278,405

 

483,876

 

258,060

 

314,352

Net (loss) from continuing operations

$

(198,477)

$

(404,534)

$

(146,310)

$

(219.387)

Basic and diluted net loss per share

$

(0.02)

$

(0.04)

$

(0.01)

$

 (0.02)

Weighted average common shares

 

10,854,608

 

10,854,608

 

10,997,465

 

11,104,608

The financial statements of the Company and related schedules described under "Item 15. Financial Statements and Financial Statement Schedules," are included following this page. 

29

 

BINGO.COM, INC.

Consolidated Financial Statements

Years ended December 31, 2003, 2002 and 2001

 

Independent Auditors' Reports                                                                                                                   31

Consolidated Financial Statements

    Balance Sheets                                                                                                                                       33

    Statements of Operations                                                                                                                        34

    Statements of Stockholders' Equity (Deficit)                                                                                            35

    Statements of Cash Flows                                                                                                                      36

    Notes to Consolidated financial statements                                                                                              37

 

30

 

Dohan and Company                                            7700 North Kendall Drive, #200

Certified Public Accountants                                        Miami, Florida 33156-7578

A Professional Association                                           Telephone      (305) 274-1366

                                                                                       Facsimile        (305) 274-1368

                                                                                       Email               [email protected]

                                                                                       Internet           www.uspca.com

 

INDEPENDENT AUDITORS' REPORT

 

The Board of Directors and Stockholders

Bingo.com, Inc.

 

We have audited the accompanying consolidated balance sheet of Bingo.com, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Bingo.com, Inc. and Subsidiaries as of December 31, 2001, were audited by other auditors whose report dated March 15, 2002, except for Note 3, as to which the date is April 10, 2003, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bingo.com, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has continued to incur operating losses, has used, rather than provided, cash from operations and has an accumulated deficit of $9,409,734. These factors, and others, raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue operations is subject to its ability to secure additional capital to meet its obligations and to fund operations. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/Dohan and Company, CPA's

Miami, Florida

February 27, 2004

31

 

Davidson & Company            Chartered Accountants                A Partnership of Incorporated Professionals

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders

Bingo.com, Inc.

We have audited the accompanying restated consolidated statements of operations, stockholders equity (deficit) and cash flows of Bingo.com, Inc. and Subsidiaries for the year ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the restated consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Bingo.com, Inc. and Subsidiaries for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the financial statements, certain errors resulting in an overstatement of the debenture payable in the amount of $462,673, understatement of additional paid-in-capital in the amount of $539,036, and understatement of net loss by $76,363 as of December 31, 2001, were discovered by management of the Company subsequent to the issuance of our report on those financial statements dated March 15, 2002.  Accordingly, the accompanying 2001 financial statements have been restated to correct the errors.

 

/s/  Davidson & Company

Chartered Accountants

Vancouver, Canada

March 15, 2002, except for Note 3,

as to which the date is April 10, 2003

 

 

A Member of SC INTERNATIONAL

1200 - - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, B.C. Canada V7Y 1G6

Telephone (604) 687-0947    Fax (604) 687-6172

32

 

BINGO.COM, INC.

Consolidated Balance Sheets

 

December 31, 2003 and 2002

 

 

 

 

 

2003

 

 

 

2002

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

   Cash

 

$

34,046

 

$

14,682

 

   Accounts receivable

 

 

67,574

 

 

23,394

 

   Inventory

 

 

663

 

 

2,631

 

   Prepaid expenses

 

 

14,229

 

 

14,093

 

Total Current Assets

 

 

116,512

 

 

54,800

 

 

 

 

 

 

 

 

 

Equipment, net (Note 4)

 

 

45,247

 

 

127,469

 

 

 

 

 

 

 

 

 

Other assets

 

 

10,797

 

 

29,675

 

 

 

 

 

 

 

 

 

Domain name rights and intangible assets (Note 5)

 

 

1,304,617

 

 

1,257,241

 

 

 

 

 

 

 

 

 

Deferred tax asset, less valuation allowance of $2,905,525 (2002 - $2,792,701) (Note 10)

 

 

- 

 

 

- 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,477,173

 

$

1,469,185

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Deficit

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

   Accounts payable

 

$

617,903

 

$

597,531

 

   Accounts payable - related party (Note 11)

 

 

192,068

 

 

151,075

 

   Accrued liabilities

 

 

93,472

 

 

52,370

 

   Accrued liabilities - related party (Note 11)

 

 

365,702

 

 

209,702

 

   Unearned revenue

 

 

24,511

 

 

30,600

 

   Loan payable - related party (Note 11)

 

 

190,858

 

 

197,134

 

   Current portion of capital leases (Note 6)

 

 

- 

 

 

115,536

 

Total Current Liabilities

 

 

1,484,514

 

 

1,353,948

 

 

 

 

 

 

 

 

 

Debenture payable (Note 7)

 

 

1,395,000

 

 

1,395,000

 

Less warrants - debenture discount

 

 

(259,823)

 

 

(372,736)

 

Net debenture payable

 

 

1,135,177

 

 

1,022,264

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

2,619,691

 

 

2,376,212

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit (Note 8):

 

 

 

 

 

 

 

   Common stock, $0.001 par value, authorized

   50,000,000 shares; issued and outstanding

   11,104,608 shares 

 

 

11,105

 

 

11,105

 

   Additional paid-in capital

 

 

8,231,531

 

 

8,231,531

 

   Accumulated deficit

 

 

(9,409,734)

 

 

(9,174,243)

 

   Accumulated other comprehensive loss:

     Foreign currency translation adjustment

 

 

24,580

 

 

24,580

 

Total Stockholders' Deficit

 

 

(1,142,518)

 

 

(907,027)

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders Deficit

 

$

1,477,173

 

$

1,469,185

 

See accompanying notes to consolidated financial statements.

33

 

BINGO.COM, INC.

Consolidated Statements of Operations

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

 

 

2003

 

 

 

2002

 

 

RESTATED

2001

 

 

 

 

 

 

 

 

 

Revenue

$

888,888

 

$

713,192

 

$

1,362,756

Barter revenue (Note 2)

 

- 

 

 

4,000

 

 

371,566

Total Revenue

888,888

717,192

1,734,322

 

 

 

 

 

 

 

 

 

Cost of revenue

 

211,253

 

 

351,207

 

 

1,093,963

 

 

 

 

 

 

 

 

 

Gross profit

 

677,635

 

 

365,985

 

 

640,359

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

   Depreciation and amortization

 

32,612

 

 

177,006

 

 

611,147

   General and administrative

 

509,272

 

 

561,715

 

 

1,556,693

   Selling and marketing

 

30,941

 

 

81,320

 

 

200,607

   Software and website development

 

- 

 

 

8,916

 

 

- 

Total operating expenses

 

572,825

 

 

828,957

 

 

2,368,447

 

 

 

 

 

 

 

 

 

Income (loss) before other income (expense)

 

104,810

 

 

(462,972)

 

 

(1,728,088)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

   Foreign exchange gains/ (losses)

 

(58,167)

 

 

1,909

 

 

(1,984)

   Gain on settlement of debt

 

61,468

 

 

45,000

 

 

- 

   Loss on disposal of equipment

 

(58,808)

 

 

(260,531)

 

 

(16,716)

   Interest expense

 

(285,087)

 

 

(292,149)

 

 

(210,233)

   Interest income

 

293

 

 

35

 

 

1,821

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(235,491)

 

 

(968,708)

 

 

(1, 955,200)

 

 

 

 

 

 

 

 

 

Income tax expense

 

- 

 

 

- 

 

 

 - 

 

 

 

 

 

 

 

 

 

Net loss

$

(235,491)

 

$

(968,708)

 

$

 (1, 955,200)

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment, net of income taxes

 

- 

 

 

(5,713)

 

 

35,942

 

 

 

 

 

 

 

 

 

Comprehensive loss

$

(235,491)

 

$

(974,421)

 

$

(1,919,258)

 

 

 

 

 

 

 

 

 

Net loss per common share,

basic and diluted (Note 2)

$

(0.02)

 

$

(0.09)

 

$

(0.19)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted (Note 2)

 

11,104,608

 

 

10,953,238

 

 

10,447,200

 

See accompanying notes to consolidated financial statements.

34

 

BINGO.COM, INC.

Consolidated Statements of Stockholders' Equity (Deficit)

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

Common stock

 

 

Accumulated Other Comprehensive loss

 

 

Shares

Amount

Additional paid-in capital

Accumulated  (Deficit)

Foreign currency translation adjustment

Total Stockholders' Equity (Deficit)

Balance, December 31, 2000

10,104,608

$ 10,105

$ 7,629,900

$ (6,250,335)

$ (5,649)

$ 1,384,021

 

 

 

 

 

 

 

Stock based compensation

750,000

750

39,926

- 

- 

40,676

 

 

 

 

 

 

 

Issuance of Warrant "A" 

- 

- 

539,036

- 

- 

539,036

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

   Net loss  (Restated, Note 3)

- 

- 

- 

(1,955,200)

- 

(1,955,200)

   Cumulative translation

   adjustment, net of income

   taxes 

- 

- 

- 

- 

35,942

35,942

Balance, December 31, 2001 (Restated)

10,854,608

10,855

8,208,862 

(8,205,535)

30,293

44,475

 

 

 

 

 

 

 

Stock based compensation

250,000

250

10,000

- 

- 

10,250

 

 

 

 

 

 

 

Mark-to-market of variable stock options

 - 

- 

(21,000)

- 

- 

(21,000)

 

 

 

 

 

 

 

Issuance of Warrants "B"

- 

- 

20,423

- 

- 

20,423

 

 

 

 

 

 

 

Issuance of officer stock options

- 

- 

13,246

- 

- 

13,246

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

   Net loss 

- 

- 

- 

(968,708)

- 

(968,708)

   Cumulative translation

   adjustment, net of income

   taxes 

- 

- 

- 

- 

(5,713)

(5,713)

Balance, December 31, 2002

11,104,608

11,105

8,231,531

 (9,174,243)

 24,580

 (907,027)

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

   Net loss 

- 

- 

- 

(235,491)

- 

(235,491)

Balance, December 31, 2003

11,104,608

$ 11,105

$ 8,231,531

$ (9,409,734)

$ 24,580

$ (1,142,518)

 

See accompanying notes to consolidated financial statements.

35

 

BINGO.COM, INC.

Consolidated Statements of Cash Flows

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

 

2003

 

2002

 

RESTATED

2001

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

$

(235,491)

$

 (968,708)

$

  (1,955,200)

   Adjustments to reconcile net loss to net cash

   provided / (used) by operating activities:

 

 

 

 

 

 

      Stock based compensation costs

 

- 

 

2,496

 

85,000

      Depreciation and amortization

 

32,612

 

177,006

 

611,147

      Gain on settlement of debt

 

(61,468)

 

(45,000)

 

- 

      Amortization of warrants - debenture discount

 

112,913

 

110,360

 

76,363

      Loss on disposal of equipment

 

58,808

 

260,531

 

16,716

   Changes in operating assets and liabilities:

 

 

 

 

 

 

      Accounts receivable

 

(44,180)

 

327,937

 

(82,481)

      Prepaid expenses

 

(136)

 

(4,915)

 

41,950

      Note receivable

 

-

 

-

 

31,405

      Inventory

 

1,968

 

(2,631)

 

- 

      Other assets

 

18,878

 

(2,116)

 

9,727

      Accounts payable and accrued liabilities

 

180,934

 

19,165

 

518,656

      Unearned revenue

 

(6,089)

 

30,600

 

- 

   Net cash provided / (used) by operating activities

 

58,749

 

(95,275)

 

(646,717)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

   Acquisition of equipment

 

(7,138)

 

(84,263)

 

(23,088)

   Acquisition of Skill- Bingo game

 

- 

 

- 

 

(188,348)

   Acquisition of Bingo.com (UK) plc. (Note 13)

 

- 

 

(61,440)

 

- 

   Cash acquired on purchase of subsidiary

 

- 

 

59,026

 

- 

   Payments on domain name contract payable

 

- 

 

(184,772)

 

(361,869)

   Net cash used in investing activities

 

 (7,138)

 

(271,449)

 

(573,305)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

   Issue of debenture payable

 

- 

 

295,000

 

1,100,000

   Capital lease repayments

 

(25,971)

 

(73,659)

 

(78,320)

   Proceeds from loans and notes payable

 

(6,276)

 

151,750

 

168,385 

   Repayment of loans and notes payable

 

- 

 

- 

 

(123,000)

   Net cash (used in) / provided by financing activities

 

(32,247)

 

373,091

 

1,067,065

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

- 

 

(5,713)

 

(7,478)

Net increase (decrease) in cash

 

19,364

 

654

 

(160,435)

 

 

 

 

 

 

 

Cash, beginning of year

 

14,682

 

14,028

 

174,463

Cash, end of year

$

34,046

$

14,682

$

14,028

 

 

 

 

 

 

 

Supplementary information:

 

 

 

 

 

 

   Interest paid

$

  4,774

$

  28,916

$

71,291

   Income taxes paid

$

- 

$

- 

$

- 

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

 

   Acquisition of intangible asset - to be paid in 2004

$

(49,436)

$ 

- 

$ 

- 

   Barter transactions

$

- 

$

4,000

$

371,566

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

   Value assigned on issuance of stock options

$

- 

$

(2,000)

$

(40,000)

   Issuance of common stock for services

$

- 

$

10,250

$

125,000

 

See accompanying notes to consolidated financial statements.

36

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

1.      Introduction:

      Nature of business

Bingo.com, Inc. (the "Company") was incorporated on January 12, 1987, under the laws of the State of Florida as Progressive General Lumber Corp. On January 22, 1999, the Company changed its name to Bingo.com, Inc.  The Company is in the business of providing games and entertainment based on the game of bingo through its internet portal, www.bingo.com and earns revenue from advertising placed on the portal.

Continuing operations

These consolidated financial statements have been prepared on the 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 basis is dependent upon the Company 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.  The Company has reported losses from operations for the last four years, and has an accumulated deficit of  $9,409,734 at December 31, 2003.  As of the date of these financial statements, the Company has utilized substantially all of its available funding. 

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts and settlement of the liability amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Management continues to review operations in order to identify additional strategies designed to generate cash flow, improve the Company's financial position, and enable the timely discharge of the Company's obligations.  If management is unable to identify sources of additional cash flow in the short term, it may be required to further reduce or limit operations.

2.      Summary of significant accounting policies:

(a)    Basis of presentation:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial statements include the accounts of the Company's wholly-owned subsidiaries, English Bay Office Management Limited (previously Bingo.com (Canada) Enterprises Inc.), Bingo.com (Antigua) Inc., Bingo.com (Wyoming) Inc., Bingo Acquisition Corp and the 99% owned

37

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.      Summary of significant accounting policies (Continued):

(a)    Basis of presentation: (Continued)

subsidiary, Bingo.com (UK) plc. All material intercompany balances and transactions have been eliminated in the consolidated financial statements.

(b)    Use of estimates:

The preparation of consolidated financial statements in conformity with generally accepted accounting principles of the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and recognized revenues and expenses for the reporting periods.  Significant areas requiring the use of estimates include the valuation of long-lived assets, the collectibility of accounts receivable and the valuation of future deferred tax assets.  Actual results may differ significantly from these estimates.

(c)    Revenue recognition:

(i)  Advertising revenue:

Effective September 1, 2001, the Company contracted with an internet marketing company to sell advertising on its website directly to corporate customers or through advertising agencies.  The Company received a minimum monthly fee of $112,000 in connection with this contract and the minimum fee was recognized as revenue on a monthly basis. 

This agreement was cancelled effective January 31, 2002.  Between the end of January 2002 and May 21, 2002, the Company and the internet marketing company operated under the terms of a verbal arrangement. This verbal arrangement was terminated effective May 21, 2002. Under the terms of the verbal arrangement, the internet marketing company provided website management, marketing and internet advertising services for the Company in exchange for a commission.  Advertising revenues have been recognized as the advertising campaign or impressions and clicks that were made on the website.

Since May 21, 2002, the Company has managed its own sales of advertising, website hosting and ad serving. Advertising revenues have been recognized as the advertising campaign or impressions and clicks are made on the website and when collection of the amounts are reasonably assured. Cash received in advance of the advertising campaigns or impressions and clicks are recorded under unearned revenue.

(ii)    Barter revenue:

In 2000, the Company adopted Emerging Issues Task Force No. 99-17 "Accounting for Advertising Barter Transactions".  ("EITF 99-17") EITF 99-17 provides that the Company recognize revenue and advertising expenses from barter transactions at

38

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.      Summary of significant accounting policies (Continued):

(c)      Revenue recognition: (Continued)

the fair value only when it has a historical practice of receiving or paying cash for similar transactions. The Company bartered portions of the unsold advertising impressions generated by its website for advertising in media properties owned by third parties. The Company recorded revenues and costs for such barter transactions, with no net income or loss recognized. There was no barter revenue for the year ended December 31, 2003 (2002 - $4,000 2001 - $371,566).

(d)    Foreign currency:

The consolidated financial statements are presented in United States dollars, the functional currency of the Company. The Company accounts for foreign currency transactions and translation of foreign currency financial statements under Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" ("SFAS 52"). Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities are adjusted at each balance sheet date to reflect the exchange rate at that date. Nonmonetary assets and liabilities are translated at the exchange rate on the original transaction date. Gains and losses from restatement of foreign currency monetary and non-monetary assets and liabilities are included in income. Revenues and expenses are translated at the rates of exchange prevailing on the dates such items are recognized in earnings.

During the year ended December 31, 2003, the Company determined that its subsidiaries' functional currency was changed from the local currency to the reporting currency of the Company. 

(e)    Accounts receivable:

Trade and other accounts receivable are reported at face value less any provisions for uncollectible accounts considered necessary. Accounts receivable primarily includes trade receivables from customers and Goods and Services Taxes receivable in Canada.   The Company estimates doubtful accounts on an item-to-item basis and includes over-aged accounts as part of allowance for doubtful accounts, which are generally ones that are ninety-days overdue.  Bad debt expense for the year ended December 31, 2003, was $693 (2002 - $49,063; 2001 - $128,213).

(f)      Inventory:

Inventory is stated at the lower of cost or market value. It consists of products, such as t-shirts, which are sold from our online store.

(g)    Equipment:

Equipment is recorded at cost less accumulated depreciation. Depreciation is provided for annually over the following periods :

                        Equipment and computers                    3 years

                        Furniture and fixtures                            5 years

39

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.   Summary of significant accounting policies (Continued)

(h)    Advertising:

The Company expenses the cost of advertising in the period in which the advertising space or airtime is used. Advertising costs charged to selling and marketing expenses in 2003 totaled $nil (2002 - $2,000, 2001 - $6,258). 

(i)      Stock-based compensation:

The Company accounts for its stock-based compensation arrangements with employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. As such, compensation expense under fixed term option plans is recorded at the date of grant only to the extent that the market value of the underlying stock at the date of grant exceeds the exercise price.  In accordance with SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), since the Company has continued to apply the principles of APB 25 to employee stock compensation, pro forma loss and pro forma loss per share information has been presented as if the options had been valued at their fair values.  The Company recognizes compensation expense for stock options, common stock and other equity instruments issued to non-employees for services received based upon the fair value of the services or equity instruments issued, whichever is more reliably determined.  Stock compensation expense is recognized as the stock option is earned, which is generally over the vesting period of the underlying option.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation". This statement amends SFAS 123. SFAS 148 provides alternative methods of transition for companies that voluntarily change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." ("FIN 44")  The Company adopted FIN 44, effective July 1, 2000, with respect to certain provisions applicable to new awards, option repricings, and changes in grantee status.  FIN 44 addresses practice issues related to the application of APB 25.  The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and SFAS 148 and EITF No. 96-18, "Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". The measurement date used is the earlier of either the performance commitment date or the date at which the equity instrument holder's performance is complete.

40

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.   Summary of significant accounting policies (Continued):

(i)      Stock-based compensation: (Continued)

Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with the measurement provisions of SFAS 123 and SFAS 148, the Company's net loss and basic loss per share would have been adjusted as follows:

 

 

2003

 

2002

 

RESTATED

2001

Net loss for the period - as reported

$

(235,491)

$

(968,708)

$

(1,955,200)

Add:   Total stock-based compensation expense included in net loss, as reported determined under APB 25, net of related tax effects

 

-  

$

13,245

$

- 

Deduct:   Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects

 

(5,771)

$

(29,651)

$

(159,873)

Net loss for the period - pro forma

$

(241,262)

$

(985,114)

$

(2,115,073)

Basic net loss per share - as reported

$

(0.02)

$

(0.09)

$

(0.19)

Basic net loss per share - pro forma

$

(0.02)

$

(0.09)

$

(0.20)

Weighted average fair value of

   options granted during the year

$

0.01

$

0.03

$

0.18

 

 

 

 

 

 

 

 

The fair value of each option grant has been estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

2003

 

2002

 

2001

Expected dividend yield

 

- 

 

- 

 

- 

Expected stock price volatility

 

158 - 174%

 

163 - 188%

 

184 - 188%

Risk-free interest rate

 

1.21 - 1.28%

 

1.7 - 1.8%

 

2.5 - 3.7%

Expected life of options

 

5 years

 

5 years

 

5 years

Block discount applied

 

40%

 

40%

 

- 

(j)      Impairment of long-lived assets and long-lived assets to be disposed of:

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets" ("SFAS 142"). During the years presented, the only long-lived assets reported on the Company's consolidated balance sheet are equipment, intangible assets and domain name rights.  These provisions require that long-lived assets and certain identifiable recorded intangibles be reviewed

41

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.   Summary of significant accounting policies (Continued):

(j)      Impairment of long-lived assets and long-lived assets to be disposed of: (Continued)

for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.

(k)    Comprehensive income:

Comprehensive income consists of net loss and foreign currency translation adjustments that are separately presented in the consolidated statements of stockholders' equity (deficit). 

(l)      Income taxes:

The Company follows the asset and liability method of accounting for income taxes.  Under this method, current income taxes are recognized for the estimated income taxes payable for the current period.  Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as the benefit of losses available to be carried forward to future years for tax purposes.

Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered and settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.  A valuation allowance is recorded for deferred tax assets when it is not more likely than not that such future tax assets will be realized.

(m)     Net loss per share:

Basic net loss per share is computed using the weighted average number of common shares outstanding during the periods.  Diluted net loss per share is computed using the weighted average number of common shares and potentially dilutive common stock equivalents, including stock options and warrants and convertible debt, outstanding during the period. As the Company has a net loss in each of the periods presented, basic and diluted net loss per share is the same, as any exercise of the share purchase options or conversion of the convertible debenture outstanding would be anti-dilutive. At December 31, 2003, a total of 20,130,138 (2002 - 19,046,667 & 2001 - 24,440,000) potentially dilutive instruments were excluded from the determination of dilutive loss per share.

42

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.   Summary of significant accounting policies (Continued):

(n)    Domain name and intangible assets:

The Company has capitalized the cost of the purchase of the domain name Bingo.com and was amortizing the cost over five years from the date of commencement of operations. In 2002, the Company suspended the amortization of the domain name cost in accordance with SFAS 142, where companies are no longer required to amortize indefinite life assets but instead test the indefinite intangible asset for impairment at least annually.  The capitalized amount is based on the net present value of the minimum payments permitted under the terms of the purchase agreement. The domain name was tested for impairment by comparing the future cash flows of the domain name with its carrying value. The Company determined that no impairment existed for the years presented.

The Company capitalized the cost of the email list as an intangible asset and is amortizing the cost over the life of the contract (i.e. five years).

(o)    Business combinations:

In June, 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS 142.  SFAS  141 states that all business combinations should be accounted for using the purchase method of accounting. 

(p)    New accounting pronouncements

In January 2003, the FASB issued FASB Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN 46") an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements,". This interpretation addresses consolidation by the primary beneficiary of the entity of certain variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of "variable interests" and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after December 15, 2003. The adoption of this interpretation will not have a material impact on the Company's results of operations, financial position or cash flows.

43

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.   Summary of significant accounting policies (Continued):

(p)  New Accounting Pronouncements (Continued)

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." ("SFAS 149") SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. The adoption of SFAS 149 will not have a material impact on the Company's results of operations, financial position or cash flows.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." ("SFAS 150") SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 will not have a material impact on the Company's financial position or results of operations.

(q) Financial instruments:

(i)  Fair values:

The fair value of cash, accounts receivable, accounts payable, accrued liabilities, unearned revenue and amounts due to related parties approximates their financial statement carrying amounts due to the short-term maturities of these instruments. 

The financial statement carrying amount of the debentures payable reflects the market value to the Company for the debt.

(ii)  Foreign currency risk:

The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations.  The Company has not entered into any forward exchange contracts or other derivative instrument to hedge against foreign exchange risk.

44

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

2.   Summary of significant accounting policies (Continued):

(r)     Reclassification

Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.

3.   Prior period adjustment for 2001

Debenture "A"

On April 16, 2001, the Company received a loan from, and issued a secured convertible Debenture "A" 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").

A current director and officer of the Company, is the potential beneficiary of various discretionary trusts that hold approximately 80% of the shares of Bingo, Inc.

The Lenders received a total of 12,000,000 common stock purchase warrants, with an exercise price of $0.25 per share, of which 7,200,000 warrants were surrendered for cancellation by the debenture holder during the year ended December 31, 2002, in exchange for unused advertising inventory on the bingo.com website. The common stock purchase warrants issued in connection with the Debenture "A" are exercisable for a period of three years from the date of the Debenture "A" and therefore expire April 16, 2004.  As of the date of this report, 4,800,000 warrants remain outstanding under this Debenture "A".

The Company did not account for the value of the warrants upon issuance of the Debenture "A" in accordance with APB Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". Using the Black-Scholes option pricing model, the warrants have an estimated value of $898,394, using the following assumptions: no annual dividend, volatility of 137%, risk-free interest rate of 5.17% and a term of three years. Due to the illiquidity of the Company's shares, a block discount of 40% ($359,357) was applied to this value providing a warrant debenture discount of $539,036, which will be amortized to interest expense over five years.

The total effect of the issuance of the warrants relating to Debenture "A" was to increase interest expense by $107,807 for the year ended December 31, 2003. (2002 - $107,807, 2001 - $76,363).

The Company has restated the year ended December 31, 2001, presented in the December 31, 2003, consolidated statements of operations to reflect additional interest expense for the full discounted value of the warrants in the amount of $539,036.

The total effect of the restatement was to increase interest expense by $76,363, increase debenture discount by $462,673 and additional paid-in capital by $539,036 for the year ended December 31, 2001, increasing the net loss for the year from $1,878,837 to $1,955,200 and accumulated net deficit from $8,129,172 to $8,205,535.

45

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

3.   Prior period adjustment for 2001: (Continued)

The interest expense and additional paid-in capital accounts for year ended December 31, 2001, statement of operations, statement of changes in stockholders' equity (Deficit) and statement of cash flows have been restated for the effects of the adjustments.

The effects on the statement of operations for the year ending December 31, 2001, were as follows:

 

 

As Reported

 

Adjustment

 

As Restated

Revenue

$

1,362,756

$

- 

$

1,362,756

Barter revenue

 

371,566

 

- 

 

371,566

Cost of revenue

 

1,093,963

 

- 

 

1,093,963

Gross profit

 

640,359

 

- 

 

640,359

Operating expenses:

 

 

 

 

 

 

   Depreciation and amortization

 

611,147

 

-  

 

611,147

   General and administrative

 

1,556,693

 

- 

 

1,556,693

    Selling and marketing

 

200,607

 

- 

 

200,607

Total operating expenses

 

2,368,447

 

- 

 

2,368,447

Loss before interest and Income taxes

 

(1,728,088)

 

- 

 

(1,728,088)

Other income (expense):

 

 

 

 

 

 

   Foreign exchange losses

 

(1,984)

 

- 

 

(1,984)

   Loss on disposal of equipment

 

(16,716)

 

- 

 

(16,716)

   Interest expense

 

(133,870)

 

(76,363)

 

(210,233)

    Interest income

 

1,821

 

- 

 

1,821

Loss before income taxes

 

(1,878,837)

 

(76,363)

 

(1,955,200)

Income tax expense

 

-      

 

- 

 

- 

Loss for the year

$

(1,878,837)

$

(76,363)

$

 (1,955,200)

Net loss per common share,

   Basic and diluted

$

(0.18)

$

(0.01)

$

(0.19)

4.  Equipment:

2003

 

Cost

 

Accumulated depreciation

 

Net book

Value

 

 

 

 

 

 

 

Equipment and computers

$

215,517

$

175,115

$

40,402

Furniture and fixtures

 

6,323

 

1,478

 

4,845

 

$

221,840

$

176,593

$

45,247

 

 

 

 

 

 

 

2002

 

Cost

 

Accumulated depreciation

 

Net book

Value

 

 

 

 

 

 

 

Equipment and computers

$

601,233

$

479,562

$

121,671

Furniture and fixtures

 

6,103

 

305

 

5,798

 

$

607,336

$

479,867

$

127,469

46

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

5.  Domain name rights and intangible asset:

The rights to use the domain name bingo.com were acquired in January of 1999 for a cash payment of $200,000 and the issuance of 500,000 shares of common stock of the Company at a value of $2.00 per share. The agreement was signed with Bingo, Inc., an unrelated party at the date of signing of the agreement. Under the terms of the agreement, the Company is required to make quarterly domain name purchase payments to the vendor based on 4% of annual gross revenue (as defined in the agreement), with total minimum payments of $1,100,000 in the first three years, including the initial cash payment, required over the 99 year period ended December 31, 2098. These minimum payments commitments were completed on June 30, 2002. During the year ended December 31, 2002, the agreement was amended so that the remaining domain name purchase payments to the vendor are made monthly, based on 4% of the preceding month's gross revenue. During the year ended December 31, 2003, expense payments of $35,556 (2002 - $12,023) was paid in accordance with the amended agreement.  During the year ended December 31, 2002, $184,772 related to the final payment for the minimum guaranteed domain name purchase payment was paid.

Domain name rights have been capitalized on the balance sheet based on the present value of the future minimum royalty payments. In 2002, the Company suspended the amortization of the domain name in accordance with SFAS  142, where companies are no longer permitted to amortize indefinite life assets.

The intangible asset consists of an email list of Games, Inc. The Company has capitalized the cost of the legal settlement with Roger Ach, the Lottery Channel Inc. and Games, Inc.

2003

 

Cost

 

Accumulated amortization

 

Net book

Value

 

 

 

 

 

 

 

Domain name rights

$

1,934,500

$

677,259

$

1,257,241

Intangible assets - email list

 

49,436

 

2,060

 

47,376

 

$

1,983,936

$

679,319

$

1,304,617

 

 

 

 

 

 

 

2002

 

Cost

 

Accumulated amortization

 

Net book

Value

 

 

 

 

 

 

 

Domain name rights

$

1,934,500

$

677,259

$

1,257,241

 

47

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

6.   Capital lease obligations:

Future minimum lease payments under capital leases for software and website equipment are as follows:

 

 

2003

 

2002

Year ending December 31,

 

 

 

 

2003

$

- 

$

117,042

2004

 

- 

 

- 

Future minimum lease payments

 

- 

 

117,042

Less: amount representing interest

 

- 

 

(1,506)

Balance of obligation

 

- 

 

115,536

Less: due within one year

 

- 

 

(115,536)

Long-term obligation under capital leases

$

- 

$

- 

7.   Debenture payable:

Debenture "A"

On April 16, 2001, the Company received a loan and issued a secured convertible Debenture "A" for $1,250,000. Bingo, Inc has subsequently acquired Debenture "A" in its entirety. Under the terms of the Debenture "A" interest shall accrue on the outstanding principal amount of Debenture "A" at the rate of 12% per annum from the issuance 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.

The Company has the option to pay all accrued interest in cash, common stock of the Company, or a combination of both cash and common stock. 

On July 23, 2003, the Company and the holders of Debenture "A", Bingo, Inc., agreed to defer the interest due and subsequent interest due until April 16, 2004, when the accrued interest will be paid in common stock of the Company at an agreed conversion price of $0.20 per share (previously $0.25 per share). The accrued interest on Debenture "A" as at December 31, 2003, is $356,694 (December 31, 2002 - $206,694). This is included under "Accrued liabilities - related party".

Bingo, Inc. has the right, but not the obligation, to elect to convert any or all of the outstanding principal amount of the Debenture "A" 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 "A". It has been agreed between Bingo, Inc. and the Company that on April 16, 2004, Bingo, Inc. will exercise their right to convert all the outstanding principal of Debenture "A" into shares of the Company. The common stock that would be issued upon conversion of the Debenture "A" will be subject to certain resale restrictions, as defined in Rule 144 of the Securities and Exchange Act of 1933 (the "Exchange Act").  The Debenture "A" is secured by all assets of the Company.

48

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

7.   Debenture payable: (Continued)

Debenture "B"

On July 2, 2002, the Company issued a convertible debenture for $145,000 of which $50,000 was received from Bingo, Inc. Under the terms of Debenture "B", interest accrues on the outstanding principal amount of Debenture "B" at the rate of 12% per annum through July 2, 2004, 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 July 2, 2006. All principal, accrued but unpaid interest and any other amounts due, are due and payable at maturity on July 2, 2006. The accrued interest on Debenture "B" as of December 31, 2003, is $26,124 (December 31, 2002 - $8,724) of which, $9,008 (2002- $3,008) is recorded in accrued liabilities - related party and the remainder $17,116 (2002 - $5,716) under accrued liabilities.

The Company has the option to pay all accrued interest in cash, common stock of the Company, or a combination of both cash and common stock. Any amounts remaining unpaid on the Debenture "B" at 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 holders of Debenture "B" in payment of Debenture "B" will be valued at $0.25 per share.

The holders of the Debenture "B" have the right, but not the obligation, to elect to convert all, or part, of the outstanding principal amount of Debenture "B" into shares of the Company's common stock at a conversion price of $0.15 per share until the third anniversary date of the Debenture "B". The common stock that would be issued upon conversion of Debenture "B" will be subject to certain resale restrictions, as defined in Rule 144 of the Securities and Exchange Act of 1933 ("The Exchange Act").

The holders of the Debenture "B" received a total of 580,000 common stock purchase warrants with an exercise price of $0.25 per share. The common stock purchase warrants issued in connection with the Debenture "B" are exercisable for a period of three years from the date of Debenture "B". Using the Black-Scholes model, the warrants have an estimated value of $34,038, using the following assumptions: no annual dividend, volatility of 161%, risk-free interest rate of 1.72% and a term of three years. Due to the illiquidity of the Company's shares, a block discount of 40% ($13,615) was applied to this value providing a warrant debenture discount of $20,423. The estimated discounted value of the warrants will be amortized to interest expense over four years.

Bingo, Inc. has the potential to become the largest single shareholder and a majority shareholder in the Company should Bingo, Inc. elect to convert any or all of the principal amount of Debenture "A" and its share of Debenture "B" into shares of the Company's common stock, or if the Company elects to repay the principal amount outstanding, and any accrued interest, in shares of the Company's common stock pursuant to the terms of Debenture "A" and Debenture "B".

49

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

8.      Stockholders' equity (deficit):

The holders of common stock are entitled to one vote for each share held.  There are no restrictions that limit the Company' ability to pay dividends on its common stock.  The Company has not declared any dividends since incorporation.  The Company's common stock has a par value of $0.001 per common stock.

(a)            Common stock issuances:

There were no Common stock issuances during the year ended December 31, 2003. The Company issued 250,000 shares of common stock during the year ended December 31, 2002, and 750,000 shares of common stock during the year ended December 31, 2001, to the former Chief Executive of the Company under the terms of a revised employment agreement. 

 (b)             Stock option plans:

(i)  1999 stock option plan:

The Company has reserved a total of 1,895,000 common shares for issuance under its 1999 stock option plan.  The plan provides for the granting of non-qualified stock options to directors, officers, eligible employees and contractors of the Company. The Board of Directors determines the terms of the options granted, including the number of options granted, the exercise price and their vesting schedule.

The Company has granted a total of 1,800,000 (2002 - 1,800,000) stock purchase options under this plan, 600,000 (2002 - 1,700,000) of which remain outstanding at December 31, 2003. Subsequent to year-ended, December 31, 2003, an additional 50,000 options with an exercise price of $0.08 were granted to employees of the company.

(ii)  2001 stock option plan:

During the year ended December 31, 2001, the Company's Board of Directors adopted the 2001 stock option plan. The Company has reserved a total of 2,000,000 common shares for issuance under the 2001 stock option plan.  The plan provides for the granting of incentive and non-qualified stock options to directors, officers, eligible employees and contractors of the Company. The Board of Directors determines the terms of the options granted, including the number of options granted, the exercise price and their vesting schedule.    

The Company has granted a total of 1,825,000 (2002 - 1,400,000) stock purchase options under the 2001 plan, 1,400,000 (2002 - 1,000,000) of which remain outstanding as at December 31, 2003.  Of the options outstanding at December 31, 2003, a total of 850,000 were issued where 10% vests at the grant date, 15% one year following the grant date and 2% per month starting 13 months after the grant date.  A total of 307,100 (2002 - 108,000) of these common stock purchase options had vested at December 31, 2003. Subsequent to the year ended December 31, 2003, an additional 550,000 options were granted with an exercise price of $0.08 to employees of the company. These options vests 10% at the grant 

50

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

8.      Stockholders' equity (deficit): (Continued)

date, 15% one year following the grant date and 2% per month starting 13 months after the grant date.

A summary of stock option activity for the stock option plans for the years ended December 31, 2003, 2002 and 2001 are as follows:

 

 

Number of shares

 

Weighted average exercise price

Options outstanding, December 31, 2000

 

1,510,000

$

0.95

 

 

 

 

 

Granted (including repriced options)

 

940,000

 

0.30

Exercised

 

- 

 

- 

Cancelled/forfeited or repriced

 

(10,000)

 

0.88

Outstanding, December 31, 2001

 

2,440,000

 

0.70

 

 

 

 

 

Granted (including repriced options)

 

735,000

 

0.05

Exercised

 

- 

 

- 

Cancelled/forfeited or repriced

 

(475,000)

 

0.30

Outstanding, December 31, 2002

 

2,700,000

 

0.59

 

 

 

 

 

Granted (including repriced options)

 

425,000

 

0.05

Exercised

 

- 

 

- 

Cancelled/forfeited or repriced

 

(1,125,000)

 

0.60

Outstanding, December 31, 2003

 

2,000,000

$

0.47

The following table summarizes information concerning outstanding and exercisable stock options at December 31, 2003:

Range of exercise prices per share

Number outstanding

Number exercisable

Expiry date

$

0.05

300,000

300,000

April 25, 2008

 

0.05

125,000

12,500

January 12, 2008

 

0.05

570,000

210,900

July 12, 2007

 

0.15

150,000

150,000

September 21, 2006

 

0.30

300,000

300,000

September 21, 2006

 

0.30

155,000

83,700

October 15, 2006

 

0.76 to 3.00

400,000

400,000

December 1, 2004

 

 

2,000,000

1,457,100

 

During the years ended December 31, 2003, 2002 and 2001, the Company did not recorded non-cash compensation expense relating to the issuance of common stock purchase options to certain employees, officers, and directors of the Company in accordance with FASB 123.  During the year ended December 31, 2003, the company recorded non-cash compensation expense of $nil (2002 -$13,246, 2001 -$nil) relating to issuing stock options to a consultant of the Company.

51

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

8.      Stockholders' equity (deficit): (Continued)

During the year ended December 31, 2003, the Company recorded a non-cash reduction of compensation expense totaling $nil (2002 - $21,000, 2001 - $nil) in connection with common stock purchase options that were repriced in 2001.

(c)      Warrants:

Warrant "A"

During 2001, the Company issued a total of 12,000,000 stock purchase warrants in connection with the Debenture "A" financing described in note 7.  Each warrant allows the holder to purchase 1 common share at a price of $0.25 per share for a three year period from the date of issuance.  The warrants expire on April 16, 2004.  Using the Black-Scholes option pricing model, the warrants have an estimated value of $539,036, using the following assumptions: no annual dividend, volatility of 137%, risk-free interest rate of 5.17% and a term of three years. Due to the illiquidity of the Company's shares, a block discount of 40% ($359,357) was applied to this value providing a warrant debenture discount of $539,036.

As of the date of this report, none of the Warrants have been exercised, and with the surrender for cancellation of 7,200,000 warrants issued, there remains 4,800,000 Warrants outstanding under this debenture.

Warrant "B"

During 2002, the Company issued a total of 580,000 stock purchase warrants in connection with the Debenture "B" financing described in note 7.  Each warrant allows the holder to purchase 1 common share at a price of $0.25 per share for a three year period from the date of issuance.  The warrants expire on July 2, 2005. Using the Black-Scholes model, the warrants have an estimated value of $34,038, using the following assumptions: no annual dividend, volatility of 161%, risk-free interest rate of 1.72% and a term of three years. Due to the illiquidity of the Company's shares, a block discount of 40% ($13,615) was applied to this value providing a warrant debenture discount of $20,423.

9.   Commitments:

The Company leases office facilities in Vancouver, British Columbia, Canada under an operating lease agreement that expires on September 29, 2005.  Minimum lease payments under this operating lease are approximately as follows:

 

 

 

2004

$

34,800

2005

 

26,100

 

 

 

The Company paid rent expense totaling $30,508 for the year ended December 31, 2003 (2002 - $22,683  2001 -$67,437). 

52

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

10. Income taxes:

There was no income tax benefit attributable to losses from United States of America operations for the years ended December 31, 2003, 2002 and 2001, and differed from the amounts computed by applying the United States of America federal income tax rate of 34 percent to pretax losses from operations as a result of the following:

 

 

2003

 

2002

 

RESTATED

2001

Computed "expected" tax benefit

$

80,067

$

329,360

$

668,162

Increase (reduction) in income taxes resulting from Income taxes in a other tax jurisdictions

 

6,520

 

20,156

 

60,467

Other

 

(49,211)

 

7,930

 

(79,200)

Change in taxation rates in other tax jurisdictions

 

(84,520)

 

(78,691)

 

(8,972)

Change in exchange rates

 

159,967

 

9,215

 

(31,667)

Change in valuation allowance

 

(112,823)

 

(287,970)

 

(608,789)

 

$

-   

$

- 

$

- 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and future tax liabilities at December 31, 2003 and 2002 are presented below:

 

 

2003

 

2002

Deferred tax assets:

 

 

 

 

   Net operating loss carry forwards

$

2,905,525

$

2,792,701

 

 

 

 

 

   Valuation Allowance

 

(2,905,525)

 

(2,792,701)

 

$

- 

$

- 

 

The valuation allowance for deferred tax assets as of December 31, 2003 and 2002, was $2,905,525 and $2,792,701, respectively.  The net change in the total valuation allowance for the years ended December 31, 2003 and 2002, was an increase of $112,823 and $287,970, respectively.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible. 

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in assessing the realizability of deferred tax assets.  In order to fully realize the deferred tax asset attributable to net operating loss carryforwards, the Company will need to generate future taxable income of approximately $6,500,000 in the United States of America and approximately $2,200,000 in Canada prior to the expiration of the net operating loss carryforwards. These net operating loss carryforwards begin expiring in 2006 in Canada and 2019 in the United States of America.

53

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

11. Related party transactions:

The Company has received total loans of $147,458 (2002 - $154,626) from a current director and officer during the year ended December 31, 2003. This loan of $147,458 for the year ended December 31, 2003, (2002 - $121,931) has no fixed repayment terms and is non-interest bearing. For the year ending December 31, 2003, the loan included $nil (2002 -$32,695) relating to half of the purchase price for the acquisition of Bingo.com (UK) plc.

The Company received a loan for $43,400 (2002 - $42,508) from a company owned by a current director and officer of the Company. Interest accrues on the outstanding amount at the rate of 7% per annum and is included balance of the loan.

In addition the Company has a liability for $192,068 (2002 - $151,075) to a company owned by a current director and officer of the Company for payment of services rendered and expenses incurred by the current director and officer of the Company.

On April 16, 2001, the Company issued a $500,000 face amount of secured convertible Debenture "A" to Bingo Inc. (note 7), an Anguilla corporation.  Effective May 21, 2002, Bingo Inc. acquired $750,000 of the Debenture "A" from an unrelated party. On July 2, 2002, Bingo Inc. acquired a $50,000 convertible Debenture "B".  A current director and officer of the Company, is the potential beneficiary of various discretionary trusts that hold approximately 80% of the shares of Bingo Inc. However the director did not hold an office in the Company at the time Debenture "A" agreement was entered into by the Company in 2001. The Company has accrued interest payable to Bingo, Inc. of $356,694 (2002 - $206,694) on Debenture "A" and $9,008 (2002 - $3,008) on Debenture "B".

In addition Bingo, Inc. was issued a total of 4,800,000 common stock purchase warrants in connection with the Debenture "A" and 200,000 common stock purchase warrants in connection with the Debenture "B".  These warrants are exercisable at a price of $0.25 per share for a period of three years from the dates of issuance of each of the Debenture "A" and Debenture "B". 

Payments made to Bingo, Inc. in relation to the Domain name purchase payment totaled $35,556 during the year ended December 31, 2003 (2002 - $196,795).

12.      Segmented information:

The Company operates in one reportable business segment, the business of providing games and entertainment based on the game of bingo through its internet portal, bingo.com, supported mainly by selling advertising on the website.  The revenue for the three years ended December 31, 2003, has been derived primarily from advertising business in the United States of America.

54

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

12.      Segmented information: (Continued)

Concentrations

      Major customers

The Company has concentrations with respect to the volume of business conducted with several major customers.  For the year ended December 31, 2003, the Company made sales of $115,050 and $254,000 to two customers, which were in excess of 10% of total sales. For the year ended December 31, 2002, the Company made sales of $84,000, $75,248, and $112,000 to three customers, which were in excess of 10% of total sales. For the year ended December 31, 2001, the Company made sales of $229,844 and $475,389 to two customers, which were in excess of 10% of total sales for 2001. These customers to whom sales represent more than 10% of the total sales for the last three years represent multiple advertising customers who advertise on the Company's website.

      Credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.  The Company places its cash with high quality financial institutions and limits the amount of credit exposure with any one institution.  The Company has concentrations of credit risk with respect to accounts receivable, as large amounts of its accounts receivable are concentrated geographically in the United States and the United Kingdom amongst a small number of customers.  As of December 31, 2003, two customers totalling $37,747, and $10,572 accounted for total accounts receivable greater than 10%.  At December 31, 2002, six customers totalling $5,991, $3,458, $3,113, $3,000, $2,937, and $2,662 accounted for total accounts receivable greater than 10%.  The Company controls credit risk through monitoring procedures and receiving prepayments of cash for services rendered.  The Company performs credit evaluations of its customers but generally does not require collateral to support accounts receivable.

      Equipment

At the end of fiscal 2003 and fiscal 2002, the majority of the Company's equipment was located in Canada. 

13. Business acquisitions:

All business acquisitions have been accounted for using the purchase method. The Company's consolidated results of operations include the operating results of the acquired company (Bingo.com (UK) plc.) from its acquisition date of August 15, 2002. Acquired assets and liabilities were recorded at their estimated fair market value at the acquisition date and the aggregate purchase price plus the cost directly attributable to the acquisitions has been allocated to the assets and liability acquired.

55

 

BINGO.COM, INC.

Notes to Consolidated Financial Statements

 

Years ended December 31, 2003, 2002 and 2001 (Restated)

 

 

13. Business acquisitions: (Continued)

On August 15, 2002, (note 11) ("the Effective Date"), the Company, in a related party transaction, acquired from a director and officer of the Company, 99% of the share capital of Bingo.com (UK) plc. for $61,440.

The balance sheet of Bingo.com (UK) plc. as at August 15, 2002, included the following amounts:

 

 

 

Current assets

$

59,026

Current liabilities

 

(777)

 

 

 

 

56

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On March 26, 2003, the Board of Directors of Bingo.com, Inc. (the "Company") approved the appointment of Dohan and Company, CPA's, P.A. ("Dohan") of Miami, Florida, as our new independent auditors effective March 27, 2003, and the termination of Davidson & Company ("Davidson") as the principal accountant engaged to audit the Company's financial statements.  The change in the Company's certifying accountant was due to the Company requiring a United States registered accountant is needed to audit our financial statements.  During the year ended December 31, 2001, and from the date of appointment of Davidson as the Company's independent accountant on August 7, 2001, and through the date of this report, (i) there were no "reportable events," as defined in Item 304(a)(1)(v) of Regulation S-K, and (ii) we did not, and nobody on our behalf has, consulted Dohan regarding any of the accounting and auditing matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

The report of Davidson on our financial statements for the year ended December 31, 2001, did not contain an adverse opinion or disclaimer of opinion nor was it qualified or modified as to uncertainty, audit scope or accounting principles, except that the report contained an explanatory paragraph regarding our ability to continue as a going concern. The change of Davidson was effective as of March 27, 2003, and was approved by our directors, and was not due to any disagreement between us and Davidson.

During the year ended December 31, 2001, and from the date of appointment of Davidson as the Company's independent accountant on August 7, 2001, and the subsequent interim periods preceding Davidson's dismissal, there were no disagreements with Davidson on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreements, if not resolved to the satisfaction of Davidson's, would have caused Davidson to make reference to the subject matter of the disagreement in connection with its report.  We have authorized Davidson to respond fully to any subject matter with respect to our financial statements. 

We have not been advised by Davidson of any of the following:

a)         lack of internal controls necessary for us to develop reliable financial statements;

b)         any information that has come to the attention of our independent accountants that has lead them to no longer rely on management's representations or that has made them unwilling to be associated with the financial statements prepared by management;

c)         any need to expand significantly the scope of their audit or information that has come to their attention during the fiscal years prior to and preceding the change in independent accountants that, if further investigated, would:

(i)            materially impact the fairness or reliability of the previously issued independent accountants' report or the financial statements issued or covering such period; or

(ii)        cause Davidson to become unwilling to rely on management's representations or that has made them unwilling to be associated with our financial statements, or due to the dismissal of Davidson or any other reason, Davidson did not so expand the scope of the audit or conduct such further investigation; or

57

 

d)         any information that has come to the attention of Davidson that has lead them to conclude that such information materially impacts the fairness or reliability of the audit reports or the financial statements issued covering the two fiscal years prior to and preceding the change in the independent accountants (including information that, unless resolved, to the satisfaction of such independent accountant, would prevent it from rendering an unqualified audit report on those financial statements ) and due to the dismissal of Davidson or any other reason, any issue has not been resolved to such independent accountants satisfaction prior to the dismissal of Davidson.

The Company provided Davidson with a copy of the letter addressed to the Securities and Exchange Commission ("Commission"). prior to filing it with the Commission. The Company requested that Davidson furnish the Company with a letter to the Commission stating whether Davidson agrees with the foregoing disclosure.

ITEM 9A.  CONTROLS AND PROCEDURES

(a)            Management's responsibility

It is management's responsibility for establishing and maintaining adequate internal control over financial reporting of the Company.

(b)            Evaluation of disclosure controls and procedures.

The management of the Company including the Chief Executive Officer and the Chief Financial Officer evaluated the disclosure controls and procedures of the Company within 90 days prior to the date of this report, and found them to be operating efficiently and effectively to ensure that information required to be disclosed by the Company under the general rules and regulations promulgated under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified by rules of the SEC. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the management of the Company, including its principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure.

(c)            Changes in internal controls.

There were no significant changes in the internal controls of the Company or other factors that could significantly affect the Company's internal controls during the year ended December 31, 2003, and to the date of filing this annual report.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers as of the date of this Report are as follows: 

Name
Age
Position

T. M. Williams

64

President and Chief Executive Officer and Chairman of our Board of Directors

P. A. Crossgrove

66

Director

H. W. Bromley

34

Chief Financial Officer

T. M. Williams has served as our President and Chief Executive Officer and Chairman since August 20, 2001.  Since 1984, Mr. Williams has served as a principal of Tarpen Research Corporation, a private consulting firm, and since 1993, he has been an Adjunct Professor, Faculty of Commerce and Business Administration at the University of British Columbia.  From 1988 to 1991, he was President and Chief Executive Officer of Distinctive Software, Inc. in Vancouver, BC, and, upon the acquisition of that company by Electronic Arts Inc., North America's largest developer of entertainment software, he became President and Chief Executive Officer of Electronic Arts (Canada) Inc., where he continued until 1993. Since 1993, Mr. Williams has also been the Managing Partner of CEG, AVC and PEG Partnerships, created to invest in entertainment software worldwide.  Mr. Williams is a director of YM Biosciences, Inc. (a biotechnology company) and CellStop International Limited (a security manufacturing company).

P. A. Crossgrove has served as one of our Directors since September 2001. Mr. Crossgrove is currently the Chairman of Masonite International Corp. (previously Premdor Inc.) (a door manufacturing company), a position he has held since June 1997. From 1994 to 1997, he was the President and Chief Executive Officer of Southern Africa Minerals (an investment holding company). Mr. Crossgrove was also the President and Chief Executive Officer of Itco Properties Ltd. (a real estate development and management company) from 1982 to 1992 and Vice-Chairman of Placer Dome Inc. (a mining company) in 1993 and 1994. Mr. Crossgrove is a director of a number of other Canadian and U.S. public companies, including: QLT Inc. (a biotechnology and pharmaceutical company), American Barrick Gold Corp. (a mining company), Dundee ReIT (a Real Estate Income Trust) and Philex Gold Inc. (a gold mining company). In May 2003, he was granted the Order of Canada.

H. W. Bromley, has served as our Chief Financial Officer since July 2002. From 2000 to 2001, Mr. Bromley was a Director and the Group Financial Officer for Agroceres & Co. Ltd. From 1995 -1999, he was an employee of Ernst & Young working in South Africa and in the United States of America. Mr. Bromley has in addition worked for CitiBank, Unilever PLC and Gerrard. Mr. Bromley is a Chartered Accountant.

COMPOSITION OF OUR BOARD OF DIRECTORS

We currently have two directors. All directors currently hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. Our officers are appointed annually by the Board of Directors and hold office until their successors are appointed and qualified. Pursuant to the Company's by-laws, the number of directors shall be increased or decreased from time to time by resolution of the Board of Directors or the shareholders. There are no family relationships between any of the officers and directors of the Company.

59

 

COMMITTEES OF OUR BOARD OF DIRECTORS

We currently do not have any committees of our Board of Directors. The full Board of Directors fulfills the role of the Audit Committee.

BOARD OF DIRECTORS MEETINGS

The Company's Board of Directors met in person once during the last fiscal year on March 24, 2003, and it regularly approves all actions required by consent resolutions.

DIRECTOR COMPENSATION

Directors currently do not receive cash compensation for their services as members of the Board of Directors, although members are reimbursed for expenses in connection with attendance at Board of Directors meetings and specific Company business meetings.  Directors are eligible to participate in our stock option plans. Option grants to directors are at the discretion of the Board of Directors. 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

The Company's officers, directors and greater than ten percent beneficial owners filed in a timely manner in accordance with Section 16(a) filing requirements.

ITEM 11. EXECUTIVE COMPENSATION

The following table describes the compensation the Company paid to our Chief Executive Officer (the "Named Executive Officer").

SUMMARY COMPENSATION TABLE

 

 

Annual Compensation

Long-term Compensation

 

Name and Principal Position

Year

Salary

Bonus

Other Annual

Compensation

Restricted Stock Awards

Securities Underlying Options /

All Other

Compensation

 

 

$

$

$

$

SARs  (#)

$

T.M. Williams -

2003

21,169

- 

- 

- 

150,000

- 

President and 

2002

43,531

- 

- 

- 

- 

- 

CEO (1)

2001

80,000

- 

- 

- 

150,000

- 

 

(1)   All of the compensation paid to the Named Executive Officer is paid to T.M. Williams (Row), Ltd. for the services of Mr. T. M. Williams.  See additional discussion in Employment Arrangements section of Item 11 of this report.

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OPTION GRANTS IN THE LAST FISCAL YEAR

During the fiscal year ended December 31, 2003, the Company granted to Mr. Williams and Mr. Crossgrove stock options to purchase a total of 150,000 shares each of common stock of the Company at an exercise price of $0.05 per share until April 25, 2008.  No stock options were exercised by any our executive officers during the fiscal year ended December 31, 2003.

STOCK OPTION PLANS

Our 1999 Stock Option Plan has a total of 1,895,000 shares of our common stock reserved for issuance upon exercises of options under the plan. As of December 31, 2003, options to purchase a total 600,000 shares remained outstanding at exercise prices ranging from $0.15 to $0.75 per share. Options to purchase 1,295,000 shares remained available for future grant under the 1999 Stock Option Plan. Subsequent to year ended December 31, 2003 an additional 50,000 options with an exercise price of $0.08 was granted to employees of the company.

Our 2001 Stock Option Plan has a total of 2,000,000 shares of our common stock reserved for issuance upon exercises of options under the plan. As of December 31, 2003, options to purchase a total 1,400,000 shares remained outstanding with exercise prices ranging from $0.05 to $0.30 per share. Options to purchase 600,000 shares remained available for future grant under the 2001 Stock Option Plan as at December 31, 2003. Subsequent to year ended December 31, 2003 an additional 550,000 options with an exercise price of $0.08 was granted to employees of the company.

Our Board of Directors administers the 1999 Stock Option Plan and the 2001 Stock Option Plan (collectively, the "Stock Option Plans"). Our Board is authorized to construe and interpret the provisions of the Stock Option Plans, to select employees, directors and consultants to whom options will be granted, to determine the terms and conditions of options and, with the consent of the grantee, to amend the terms of any outstanding options.

The 1999 Stock Option Plan may be granted to employees and to such other persons who are not employees as determined by the 1999 Stock Option Plan administrator (the "Administrator").  In determining the number of shares of the Company's Common Stock subject to each option granted under the 1999 Stock Option Plan, consideration is given to the present and potential contribution by such person to the success of the Company.  The exercise price is determined by the Administrator, provided that the exercise price for any covered employee (as that term is defined for the purposes of Section 162(m) (3) of the Internal Revenue Code of 1986 as amended (the "Code"), may not be less than the fair market value per share of the Common Stock at the date of grant by the Administrator.  Each option is for a term not in excess of ten years except in the case of the death of an optionee, in which case the option is exercisable for a maximum of twelve months thereafter, or in the case of an optionee ceasing to be a participant under the 1999 Stock Option Plan for any reason other than cause or death, in which case the option is exercisable for a maximum of 30 days thereafter.  The 1999 Stock Option Plan does not provide for the granting of financial assistance, whether by way of a loan, guarantee or otherwise, by the Company in connection with any purchase of shares of Common Stock from the Company.

The 2001 Stock Option Plan provides for the granting to our employees of incentive stock options and the granting to our employees, directors and consultants of non-qualified stock options. Our Board determines the terms and provisions of each option granted under the Stock Option Plans, including the exercise price, vesting schedule, repurchase provisions, rights of first refusal and form of payment.  In the case of incentive options, the exercise price cannot be less than 100% (or 110%, in the case of incentive options granted to any grantee who owns stock representing more than 10% of the combined voting power of the Company or any of our parent or subsidiary corporations) of the fair market value of our common stock on the date the option is granted.  The 

61

 

exercise price of non-qualified stock options shall not be less than 85% of the fair market value of our common stock. The exercise price of options intended to qualify as performance-based compensation for purposes of Code Section 162(m) shall not be less than 100% of the fair market value of the stock. The aggregate fair market value of the common stock with respect to any incentive stock options that are exercisable for the first time by an eligible employee in any calendar year may not exceed $100,000.

The term of options under the Stock Option Plans will be determined by our Board; however, the term of an incentive stock option may not be for more than ten years (or five years in the case of incentive stock options granted to any grantee who owns stock representing more than 10% of the combined voting power of the Company or any of our parent or subsidiary corporations). Where the award agreement permits the exercise of an option for a period of time following the recipient's termination of service with us, disability or death, that option will terminate to the extent not exercised or purchased on the last day of the specified period or the last day of the original term of the option, whichever occurs first.

If a third party acquires the Company through the purchase of all or substantially all of our assets, a merger or other business combination, except as otherwise provided in an individual award agreement, all unexercised options will terminate unless assumed by the successor corporation.

EMPLOYMENT ARRANGEMENTS

The Company entered into a management consulting agreement with T.M. Williams (Row), Ltd., an Anguilla incorporated company and Mr. Williams dated August 20, 2001, (the "Williams Agreement"), amended February 28, 2002, in connection with the provision of services by Mr. Williams as President and Chief Executive Officer of the Company.

The term of the amended Williams Agreement is for a period of one year, unless terminated sooner by any of the parties under the terms and conditions contained in the amended Williams Agreement. If the amended Williams Agreement is not terminated by any of the parties, the term may be renewed for a further one year period at the option of T.M. Williams (Row), Ltd., on substantially the same terms and conditions, by giving three months notice in writing to the Company. The agreement was renewed for a further one year period on August 1, 2004, on substantially the same terms and conditions. The Company will pay to T.M. Williams (Row), Ltd., 10% of the operating profit of the Company, as defined in the amendment, to a maximum of $25,000 per month, in arrears, during the duration of the amended Williams Agreement, as consideration for the provision of the services of Mr. Williams as President and Chief Executive Officer of the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to us with respect to beneficial ownership of our common stock as of March 26, 2004, by:

-     each person known by us to beneficially own 5% or more of our outstanding common stock;

-     each of our directors;

-     each of the Named Executive Officers; and

-     all of our directors and Named Executive Officers as a group.

In general, a person is deemed to be a "beneficial owner" of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or direct the 

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disposition of such security. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or debentures held by that person that are currently exercisable or convertible or exercisable or convertible within 60 days of March 26, 2004, are deemed outstanding.

Percentage of beneficial ownership is based upon 11,104,608 shares of common stock outstanding at March 26, 2004. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name.  Except as otherwise indicated, the address of each of the persons in this table is as follows: c/o Bingo.com, Inc., 1166 Alberni Street, Suite 1405, Vancouver, British Columbia, V6E 3Z3.

Name and Address of Beneficial Owner

Number of Shares Beneficially Owned

 

Percent of Class

T. M. Williams

203 Shakespeare Tower

The Barbican

London, England, EC2Y 8DR

1,739,858

(1)

13%

 

 

 

 

Peter Crossgrove

3769 Escarpment Road

Caledon, ON

Canada, L0N 1C0

300,000

(2)

2%

 

 

 

 

All directors and Named Executive Officers as a group (2 persons)

2,039,858

 

15%

 

 

 

 

Bingo Inc. P.O. Box 727, Landsome Road

The Valley,

Anguilla, B.W.I.

17,593,517

(3)

56%

 

(1)     Includes 150,000 shares of common stock that may be issued upon the exercise of 150,000 stock purchase options with an exercise price of $0.30 per share and 150,000 shares of common stock that may be issued upon the exercise of 150,000 stock purchase options with an exercise price of $0.05 per share.  Also includes 1,439,858 shares held directly by Mr. Williams.  Mr. Williams is the potential beneficiary of certain discretionary trusts that hold approximately 80% of the shares of Bingo Inc.  If 80% of the shares of common stock beneficially owned by Bingo Inc. are included here, Mr. William's beneficial ownership changes to 15,814,672 shares, representing 50% of the Class.

(2)     Includes 150,000 shares of common stock that may be issued upon the exercise of 150,000 stock purchase options with an exercise price of $0.30 per share and 150,000 shares of common stock that may be issued upon the exercise of 150,000 stock purchase options with an exercise price of $0.05 per share.

(3)     Includes 300,000 shares held directly by Bingo, Inc. In addition total shares beneficially owned   includes the shares of our common stock, which could be issued upon the conversion of the Debenture "A" (10,000,000 shares), Debenture "B" (333,333 shares) and the accrued interest on Debenture "A" (1,960,184 shares) outstanding at March 26, 2004.  The accrued interest on Debenture "A" will be converted into shares at $0.20 on April 16, 2004. The total shares beneficially owned, also includes the shares that could be issued upon the exercise of stock purchase warrants to purchase a total of 4,800,000 shares of common stock of the Company.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has received total loans of $147,458 (2002 - $154,626) from T. M. Williams the President and Chief Executive Officer during the year ended December 31, 2003, was used to fund working capital requirements. This loan is non-interest bearing and has no fixed terms of repayment.

The Company has a loan for $43,400 (2002 - $42,508) from a company owned by T. M. Williams, the President and Chief Executive Officer of the Company. The loan is secured over certain assets that the funds were used to acquire. Interest shall accrue on the outstanding amount at a fixed rate of 7% per annum.

In addition the Company has a liability for $193,585 (2002 $151,075) to a company owned by T. M. Williams, the President and Chief Executive Officer of the Company for payment of services rendered and expenses incurred by T. M. Williams on behalf of the Company.

On April 16, 2001, the Company issued $500,000 face amount of a secured convertible Debenture "A" to Bingo Inc., an Anguilla corporation. Effective May 21, 2002, Bingo Inc. acquired $750,000 of the Debenture "A" from an unrelated party. On July 2, 2002, Bingo Inc. acquired a $50,000 convertible Debenture "B". T.M. Williams, our President and Chief Executive Officer, is the potential beneficiary of various discretionary trusts that hold approximately 80% of the shares of Bingo Inc. However T. M. Williams was not a director or officer of the Company at the time the Debenture "A" was entered into by the Company in 2001. The Company has accrued interest payable to Bingo, Inc. of $356,694 (2002 - - $206,694) on Debenture "A" and $9,008 (2002 - $3,008) on Debenture "B". Effective April 16, 2004, the outstanding interest on Debenture "A" will be converted to share capital at a conversion price of $0.20 per share.

In addition Bingo, Inc. was issued a total of 4,800,000 common stock purchase warrants in connection with the Debenture "A" and 200,000 common stock purchase warrants in connection with the Debenture "B".  These warrants are exercisable at a price of $0.25 per share for a period of three years from the dates of issuance of each of the Debenture "A" and Debenture "B". 

Payments made to Bingo, Inc. in relation to the Domain name purchase payment totaled $35,556 during the year ended December 31, 2003 (2002 - $196,795), related to payments based on the continuing 4% of the proceeding months gross revenue as defined in the amended agreement, of which $3,823 (2002 - $6,327) was due at December 31, 2003.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

During the year ended December 31, 2003 the Company incurred audit fees of $47,762 (2002 - $22,000) from the principal accountant - Dohan and Company, CPA's, P.A.

64

 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this Form 10-K:

(1) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following audited financial statements of the Company are included in Item 8, together with notes thereto:

Consolidated Financial Statements:

Balance Sheets 

Statements of Operations       

Statements of Stockholders' Equity (Deficit)

Statements of Cash Flows  

All financial statement schedules are omitted because they are not required, they are not applicable or information appears included in the financial statements or notes thereto.

(2) EXHIBITS

The exhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.  Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K has been identified.

(3) REPORTS ON FORM 8-K

Form 8-K filed on October 16, 2003, reporting on the events and outcome of the business conducted at the Company's Annual General Meeting held October 15, 2003.

65

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BINGO.COM, INC.

 

By:                   /s/  T. M. Williams   

                   T. M. Williams

                   President and Chief Executive Officer

 

                   Date:      March 26, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:

Signature

Title

Date

By:       /s/  T. M. Williams                               President and Chief                                  March 26, 2004

T. M. Williams                                  Executive Officer and

Director (Principal

Executive Officer)

By:       /s/  P. A. Crossgrove                           Director                                                       March 26, 2004

P. A. Crossgrove

 

By:       /s/  H. W. Bromley                               Chief Financial Officer                              March 26, 2004

H. W. Bromley                                  (Principal Financial and

Principal Accounting Officer)                                   

 

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EXHIBIT 31.1

 CERTIFICATIONS

I, T. M. Williams, certify that:

1.    I have reviewed this annual report on Form 10-K of Bingo.com, Inc.;

 

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Bingo.com, Inc. as of, and for, the periods presented in this annual report;

 

4.   Bingo.com, Inc.'s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Bingo.com, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of Bingo.com, Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of as of December 31, 2003, covered by this annual report based on such evaluation; and

(d)    Disclosed in this report any change Bingo.com, Inc.'s internal control over financial reporting that occurred during Bingo.com, Inc.'s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Bingo.com, Inc.'s internal control over financial reporting; and

 

5.    Bingo.com, Inc.'s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Bingo.com, Inc.'s auditors and the audit committee of Bingo.com, Inc.'s board of directors (or persons performing the equivalent functions):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Bingo.com, Inc.'s ability to record, process, summarize and report financial information; and

(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Signed :  /S/ T. M.  Williams                                                      Date : March 26, 2004

T. M. Williams, Chairman of the Board,

Chief Executive Officer, President and Secretary

(Principal Executive Officer)

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EXHIBIT 31.2

 CERTIFICATIONS

I, H. W. Bromley, certify that:

1.   I have reviewed this annual report on Form 10-K of Bingo.com, Inc.;

 

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Bingo.com, Inc. as of, and for, the periods presented in this annual report;

 

4.   Bingo.com, Inc.'s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Bingo.com, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     Evaluated the effectiveness of Bingo.com, Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of as of December 31, 2003, covered by this annual report based on such evaluation; and

(d)     Disclosed in this report any change Bingo.com, Inc.'s internal control over financial reporting that occurred during Bingo.com, Inc.'s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Bingo.com, Inc.'s internal control over financial reporting; and

 

5.    Bingo.com, Inc.'s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Bingo.com, Inc.'s auditors and the audit committee of Bingo.com, Inc.'s board of directors (or persons performing the equivalent functions):

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Bingo.com, Inc.'s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Signed :  /S/ H. W. Bromley                                                      Date : March 26, 2004

H.W. Bromley,

Chief Financial Officer

(Principal Accounting Officer)

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EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Bingo.com, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, T. M. Williams, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

a)      The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

b)     The information contained in this Report fairly presents, in all material respects, the financial condition and results of  operations of the Company.

 

 

                                                                        /S/ T.M. Williams          

                                                            T. M. Williams

                                                            President and Chief Executive Officer

                                                            March 26, 2004

 

A signed original of this written statement required by Section 906 has been provided to Bingo.com, Inc. and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Bingo.com, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, H. W. Bromley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

a)      The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

b)      The information contained in this Report fairly presents, in all material respects, the financial condition and results of  operations of the Company.

 

 

 

 

                                                                        /S/ H. W. Bromley         

                                                            H. W. Bromley

                                                            Chief Financial Officer

                                                            March 26, 2004

 

A signed original of this written statement required by Section 906 has been provided to Bingo.com, Inc. and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT LIST

The following instruments are included as exhibits to this Report.  Exhibits incorporated by reference are so indicated.

Exhibit Number

Description

4.1

$1,250,000.00 Secured Convertible Debenture between the Company, Redruth Ventures Inc, and Bingo, Inc. dated April 16, 2001. (b)

4.2

Common Stock Purchase Warrant between the Company and Redruth Ventures Inc. a British Virgin Islands corporation dated April 16, 2001. (b)

4.3

Common Stock Purchase Warrant between the Company and Bingo, Inc. dated April 16, 2001. (b)

4.4

Convertible Debenture between the Company and unrelated parties dated July 2, 2002. (d)

4.5

Common Stock Purchase Warrant between the Company and unrelated parties dated July 2, 2002. (d)

10.2

Asset Purchase Agreement by and between Bingo, Inc. and Progressive Lumber, Corp. dated January 18, 1999. (a)

10.24

Amended Consulting Agreement dated February 28, 2002, between the Company, T.M. Williams (Row), Ltd., and T.M. Williams. (c)

10.26

The Purchase and Sale Agreement Between Redruth Ventures Inc. and Bingo.com, Inc. dated May 21, 2002. (c)

10.27

Consulting agreement dated July 2, 2002, between the Company, Bromley Accounting Services Ltd and Mr. H. W. Bromley. (c)

10.28

Share Purchase agreement between T.M. Williams and Bingo.com, Inc. for the purchase of shares in Bingo.com (UK) plc. dated August 15, 2002. (d)

10.29

Amendment of Asset Purchase Agreement dated July 1, 2002. (e)

10.30

Amendment to the restated convertible debenture originally dated April 16, 2001 and restated as at May 21, 2002 dated July 23, 2003. (f)

10.31

Settlement agreement between and among Roger Ach, Bingo.com, Inc., the Lottery Channel, Inc. a/k/a Gamebanc corporation and Games, Inc. and agreement for cross promotion dated October 17, 2003. (g)

31.1

Certificate of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-15(e) and 15d -15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated March 26, 2004.

31.2

Certificate of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-15(e) and 15d -15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated March 26, 2004.

32.1

Certification from the Chief Executive Officer of Bingo.com, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 26, 2004.

32.2

Certification from the Chief Financial Officer of Bingo.com, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 26, 2004.

 

(a) Previously filed with the Registrant's registration statement on Form 10 on June 9, 1999.

(b) Previously filed with the Company's quarterly report on Form 10-Q for the period ended June 30, 2001, on June 25, 2001.

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EXHIBIT LIST (CONTINUED)

 

(c) Previously filed with the Company's quarterly report on Form 10-Q for the period ended June 30, 2002, on August 14, 2002.

(d) Previously filed with the Company's quarterly report on Form 10-Q for the period ended September 30, 2002, on November 14, 2002.

(e) Previously filed with the Company's year end report on Form 10-K/A for the year ended December 31, 2002, on May 8, 2003.

(f) ) Previously filed with the Company's quarterly report on Form 10-Q for the period ended June 30, 2003, on August 14, 2003.

(g) ) Previously filed with the Company's quarterly report on Form 10-Q for the period ended September 30, 2003, on November 12, 2003.

72