SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and notes thereto and the interim unaudited consolidated financial statements and notes thereto, with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with other financial data included elsewhere in this prospectus/information statement. 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, which have been audited by Dohan and Company, P.A., C.P.A.'s
Page 36
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, which have been audited by Davidson and Company, independent auditors.
The independent auditors' reports appearing in the Company's Form 10K contain explanatory paragraphs that state that the Company's losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements and the selected financial data do not include any adjustments that might result from the outcome of that uncertainty.
The consolidated statement of operations data for the 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. The historical results are not necessarily indicative of results to be expected in any future period.
The unaudited consolidated statement of operations data for the periods ended September 30, 2004 and March 31, 2004, and the unaudited consolidated balance sheet data as of September 30, 2004, June 30, 2004, and March 31, 2004, are derived from our form 10QSB as filed with the Securities Exchange Commission.
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
Page 37
Nine Months Ended September 30, 2004
Nine Months Ended September 30, 2004
Consolidated Statement of Operations Data:
Revenue
$
768,699
$
615,175
Cost of revenue
164,701
152,683
Gross profit
603,998
462,492
Operating expenses
467,753
508,635
Interest and other income
11,654
78,569
Interest expense - warrant - debenture discount
259,823
84,684
Net loss
$
(135,232)
$
(209,396)
Basic and diluted net loss per share
$
(0.01)
$
(0.02)
Weighted average common shares Outstanding
18,813,622
11,104,608
September 30, 2004
Consolidated Balance Sheet Data:
Cash
$
55,993
Working capital (deficit)
(794,330)
Total assets
1,471,148
Total liabilities
918,336
Long term obligations
-
Total stockholders' equity
552,812
SUPPLEMENTARY FINANCIAL INFORMATION
Quarterly Results of Operation
The following tables present the Company's unaudited consolidated quarterly results of operations for each of our last ten 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.
Three Months Ended
September 30, 2004
June 30, 2004
March 31, 2004
Consolidated Statement of Operations Data:
Revenue
$
274,758
$ 247,752
$
246,189
Cost of revenue
64,291
53,446
46,964
Gross profit
210,647
194,306
199,225
Operating expenses
171,156
98,496
167,135
Interest and other income
(11,315)
11,595
42,341
Interest expense - warrant - debenture discount
10,211
221,383
28,228
Net Income (loss) from continuing operations
$
40,415
(137,168)
$
(38,479)
Basic and diluted net income (loss) per share
$
0.00
(0.01)
$
(0.00)
Weighted average common shares Outstanding
24,266,546
21,132,386
11,104,608
Page 38
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
Management's Discussion and Analysis of Financial Condition and Results of Operation
The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operation contains "forward looking statements." Actual results may materially differ from those projected in the forward looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be materially different from the expectations expressed in this Annual Report. The following discussion should be read in conjunction with the audited Consolidated Financial Statements and related Notes thereto included in Item 8, with "Item 6. Selected Financial Data," with the Risk Factors section of Item 1, and with the Special Note regarding forward-looking statements included elsewhere in this report.
Overview
Since 1999, the Company has been focused on the development of prize-based, play for free Internet games, with an emphasis on entertainment. The Company began to experience revenue growth from these games in fiscal 2000. The majority of the Company's revenue in fiscal 2003 and to date in 2004 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 search for additional revenue sources so that it is
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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 with sales of advertising remaining the dominant source of revenue for the Company.
The Company has reduced its Accounts Payable from $1,046,317 as of September 30, 2001 to $515,180 as of September 30, 2004. It has achieved this by working with our creditors to either settle or implement a long term payment plan which is satisfactory to both parties.
The Company has made a significant investment in the development of the Company's website, purchase of domain name, branding, marketing, and maintaining operations. As a result the Company has incurred significant losses since inception, and as of September 30, 2004, had an accumulated deficit of $9,544,966. For the quarter ended September 30, 2004, the Company became profitable for the first time in its history. Management anticipates that this trend will continue. Moving forward, the Company, after the merger with Bingo Anguilla, intends to control operating and expansion costs so as continue to operate profitably and efficiently.
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.
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
Page 40
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 fulfillment of advertising in the form of banner and button ads, email, rich media and newsletters, provided that the collection of the resulting receivable is probable.
Results of Operations
Quarters Ended September 30, 2004 and 2003
Revenue
Revenue increased to $274,758 for the quarter ended September 30, 2004, an increase of 16% from revenue of $236,758 for the same period in the prior year. In addition, revenue increased by 11% for the quarter ended September 30, 2004, over revenue of $247,752, for the second quarter of 2004. The Company has increased its advertising rates by approximately 10% overall at the beginning of 2004 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 $64,291 during the quarter ended September 30, 2004, an increase of $10,594 or 20% compared to costs of $53,697 for the same period in the prior year. The gross margin remained at 77% for the quarter ended September 30, 2004, compared to the third quarter of the prior year. Cost of revenue during the quarter ended September 30, 2004, has increased 20% compared to cost of revenue of $53,446 for the second quarter of 2004. The gross margin decreased from 78% for the second quarter of 2004. Cost of revenue consists primarily of commissions paid on the sale of advertising and the cost of hosting the website. The increase in cost of revenue, compared to the prior year and first quarter of 2004 is due to an increase in commission related sales.
Sales and marketing expenses
Sales and marketing expenses increased to $13,780 for the quarter ended September 30, 2004, an increase of $10,014 (266%) over expenses of $3,766 in the third quarter of 2003. In addition, sales and marketing expenses during the quarter ended September 30, 2004, increased by 59% over sales and marketing expenses of $8,646 for the second quarter of 2004. Sales and marketing expenses include principally costs for marketing, co-brand advertising and prizes for our game site. This increase for the quarter ended September 30, 2004, compared to the third
Page 41
quarter of 2003 and the second quarter of 2004 is due to an increase in advertising spend, in order to drive traffic to our site.
General and administrative expenses
General and administrative expenses consist primarily of payroll costs for the Company's accounting, administrative and technical staff, premises costs for the Company's office, legal and professional fees, and other general corporate and office expenses. General and administrative expenses increased to $135,988 for the third quarter of 2004, an increase of 8% over costs of $126,117 for the same period last year. In addition, general and administrative expenses for the quarter ended September 30, 2004, increased by 15% over general and administrative costs of $118,385 for the second quarter of 2004. General and administrative expenses have increased in comparison to the prior year and the prior quarter due to an increase in legal expenses on legal advise on merging Bingo Florida with its subsidiary in Anguilla, British West Indies, Bingo Anguilla and the filing of the Form S-4 with the Securities and Exchange Commission. In addition, the General and administrative expenses has increased due to the weakness of the United States dollar in comparison with the Canadian dollar.
Depreciation and amortization
Depreciation and amortization includes depreciation on the Company's equipment and amortization of intangible asset relating to the email list. Equipment is depreciated using the declining balance method over the useful lives of the assets, ranging from three to five years. Intangible asset - email list is amortized over five years. Depreciation and amortization decreased to $6,754 during the quarter ended September 30, 2004, a reduction of 10% over costs of $7,499 during the same quarter in the prior. The depreciation and amortization for the quarter ended September 30, 2004, increased 3% compared to depreciation and amortization costs of $6,574 for the second quarter of 2004. The changes in depreciation and amortization can be explained due to the average age of the Company's assets being older in fiscal 2004, resulting in a lower depreciation base. This decrease in depreciation is offset by the increase in amortization due to the acquisition of the intangible asset - email list during the fourth quarter of 2003. The increase in depreciation and amortization for the quarter ended September 30, 2004, compared to the second quarter of 2004 is due to acquisition of additional equipment during the third quarter of 2004.
Interest expense
Interest expense consists of accrued interest on the convertible debentures and other debt instruments, such as leases and loans. Interest expense decreased to $756 for the three months ended September 30, 2004, a decrease of 98% over interest expense of $43,429 for the same period in the prior year. In addition, interest expense for the quarter ended September 30, 2004, decreased 93% compared to interest expense of $11,602 for the second quarter of 2004. This decrease in interest expense in the quarter ended September 30, 2004, compared to the third quarter of 2003 and second quarter of 2004 is due to the conversion of Debenture "A" and the accrued interest into common stock of the Company during the second quarter of 2004 and the conversion of Debenture "B" and the accrued interest into common stock of the Company during the third quarter of 2004.
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Interest expense - warrant - debenture discount decreased to $10,211 for the three months ended September 30, 2004, a decrease of 64% over interest expense - warrant - debenture discount of $28,228 for the same period in the prior year and a decrease of 95% over interest expense - warrant - debenture discount of $221,383 for the second quarter of 2004. This decrease is due to the write off of the unamortized portion of the Warrant - Debenture Discount, due to the conversion of Debenture "B" into shares of the Company during the third quarter of 2004. The decrease compared to the second quarter of 2004 is due to the write off of the unamortized portion of the Warrant - Debenture Discount, due to the conversion of Debenture "A" into shares of the Company and the expiration of Warrant "A" for 4,800,000 shares of the Company during the second quarter of 2004.
Net loss and net loss per common share
Net Income for the three months ended September 30, 2004, amounted to $40,415, an income of $0.00 per share, compared to a net loss of ($26,382) or ($0.00) per share for the same period in 2003 or a net loss of ($137,168), a loss of ($0.01) per share, for the second quarter of 2004. This increase in net income compared to the third quarter of the prior year is due to the increase in revenue. The increase in net income compared to the second quarter of 2004, is due to the write off of the unamortized portion of the Warrant - Debenture Discount in the second quarter of 2004. This write off was due to the conversion of Debenture "A" into shares of the Company and the expiration of Warrant "A" for 4,800,000 shares of the Company.
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.
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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.
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.
Page 44
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 convertible debentures and other debt instruments, such as leases and the amortization of the debenture discount issued with the debentures. 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 a second debenture 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.
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
Page 45
during 2002. No funds were raised through the issuance of common stock in 2002. However the Company did receive $145,000 under a debenture. 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 and cash equivalents of $55,993 and a working capital deficit of $794,330 at September 30, 2004. This compares to cash of $34,046 and working capital deficiency of $1,368,002 at December 31, 2003, and cash of $14,682 and working capital deficiency of $1,299,148 at December 31, 2002.
During the nine months ended September 30, 2004, the Company generated cash of $104,680 from operating activities compared to generated cash of $58,749 in the year ended December 31, 2003, and compared to using cash of $95,275 in the year ended December 31, 2002. The significant improvement in cash flow from operating activities in 2004 & 2003 demonstrates the effectiveness of the Company's efforts to implement efficiencies in operations and reduce overall operating costs and increase revenue streams in 2004, 2003 and in 2002.
Page 46
The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and notes thereto and the interim unaudited consolidated financial statements and notes thereto, with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with other financial data included elsewhere in this prospectus/information statement. 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, which have been audited by Dohan and Company, P.A., C.P.A.'s
Page 36
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, which have been audited by Davidson and Company, independent auditors.
The independent auditors' reports appearing in the Company's Form 10K contain explanatory paragraphs that state that the Company's losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements and the selected financial data do not include any adjustments that might result from the outcome of that uncertainty.
The consolidated statement of operations data for the 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. The historical results are not necessarily indicative of results to be expected in any future period.
The unaudited consolidated statement of operations data for the periods ended September 30, 2004 and March 31, 2004, and the unaudited consolidated balance sheet data as of September 30, 2004, June 30, 2004, and March 31, 2004, are derived from our form 10QSB as filed with the Securities Exchange Commission.
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
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Nine Months Ended September 30, 2004
Nine Months Ended September 30, 2004
Consolidated Statement of Operations Data:
Revenue
$
768,699
$
615,175
Cost of revenue
164,701
152,683
Gross profit
603,998
462,492
Operating expenses
467,753
508,635
Interest and other income
11,654
78,569
Interest expense - warrant - debenture discount
259,823
84,684
Net loss
$
(135,232)
$
(209,396)
Basic and diluted net loss per share
$
(0.01)
$
(0.02)
Weighted average common shares Outstanding
18,813,622
11,104,608
September 30, 2004
Consolidated Balance Sheet Data:
Cash
$
55,993
Working capital (deficit)
(794,330)
Total assets
1,471,148
Total liabilities
918,336
Long term obligations
-
Total stockholders' equity
552,812
SUPPLEMENTARY FINANCIAL INFORMATION
Quarterly Results of Operation
The following tables present the Company's unaudited consolidated quarterly results of operations for each of our last ten 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.
Three Months Ended
September 30, 2004
June 30, 2004
March 31, 2004
Consolidated Statement of Operations Data:
Revenue
$
274,758
$ 247,752
$
246,189
Cost of revenue
64,291
53,446
46,964
Gross profit
210,647
194,306
199,225
Operating expenses
171,156
98,496
167,135
Interest and other income
(11,315)
11,595
42,341
Interest expense - warrant - debenture discount
10,211
221,383
28,228
Net Income (loss) from continuing operations
$
40,415
(137,168)
$
(38,479)
Basic and diluted net income (loss) per share
$
0.00
(0.01)
$
(0.00)
Weighted average common shares Outstanding
24,266,546
21,132,386
11,104,608
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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
Management's Discussion and Analysis of Financial Condition and Results of Operation
The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operation contains "forward looking statements." Actual results may materially differ from those projected in the forward looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be materially different from the expectations expressed in this Annual Report. The following discussion should be read in conjunction with the audited Consolidated Financial Statements and related Notes thereto included in Item 8, with "Item 6. Selected Financial Data," with the Risk Factors section of Item 1, and with the Special Note regarding forward-looking statements included elsewhere in this report.
Overview
Since 1999, the Company has been focused on the development of prize-based, play for free Internet games, with an emphasis on entertainment. The Company began to experience revenue growth from these games in fiscal 2000. The majority of the Company's revenue in fiscal 2003 and to date in 2004 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 search for additional revenue sources so that it is
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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 with sales of advertising remaining the dominant source of revenue for the Company.
The Company has reduced its Accounts Payable from $1,046,317 as of September 30, 2001 to $515,180 as of September 30, 2004. It has achieved this by working with our creditors to either settle or implement a long term payment plan which is satisfactory to both parties.
The Company has made a significant investment in the development of the Company's website, purchase of domain name, branding, marketing, and maintaining operations. As a result the Company has incurred significant losses since inception, and as of September 30, 2004, had an accumulated deficit of $9,544,966. For the quarter ended September 30, 2004, the Company became profitable for the first time in its history. Management anticipates that this trend will continue. Moving forward, the Company, after the merger with Bingo Anguilla, intends to control operating and expansion costs so as continue to operate profitably and efficiently.
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.
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
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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 fulfillment of advertising in the form of banner and button ads, email, rich media and newsletters, provided that the collection of the resulting receivable is probable.
Results of Operations
Quarters Ended September 30, 2004 and 2003
Revenue
Revenue increased to $274,758 for the quarter ended September 30, 2004, an increase of 16% from revenue of $236,758 for the same period in the prior year. In addition, revenue increased by 11% for the quarter ended September 30, 2004, over revenue of $247,752, for the second quarter of 2004. The Company has increased its advertising rates by approximately 10% overall at the beginning of 2004 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 $64,291 during the quarter ended September 30, 2004, an increase of $10,594 or 20% compared to costs of $53,697 for the same period in the prior year. The gross margin remained at 77% for the quarter ended September 30, 2004, compared to the third quarter of the prior year. Cost of revenue during the quarter ended September 30, 2004, has increased 20% compared to cost of revenue of $53,446 for the second quarter of 2004. The gross margin decreased from 78% for the second quarter of 2004. Cost of revenue consists primarily of commissions paid on the sale of advertising and the cost of hosting the website. The increase in cost of revenue, compared to the prior year and first quarter of 2004 is due to an increase in commission related sales.
Sales and marketing expenses
Sales and marketing expenses increased to $13,780 for the quarter ended September 30, 2004, an increase of $10,014 (266%) over expenses of $3,766 in the third quarter of 2003. In addition, sales and marketing expenses during the quarter ended September 30, 2004, increased by 59% over sales and marketing expenses of $8,646 for the second quarter of 2004. Sales and marketing expenses include principally costs for marketing, co-brand advertising and prizes for our game site. This increase for the quarter ended September 30, 2004, compared to the third
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quarter of 2003 and the second quarter of 2004 is due to an increase in advertising spend, in order to drive traffic to our site.
General and administrative expenses
General and administrative expenses consist primarily of payroll costs for the Company's accounting, administrative and technical staff, premises costs for the Company's office, legal and professional fees, and other general corporate and office expenses. General and administrative expenses increased to $135,988 for the third quarter of 2004, an increase of 8% over costs of $126,117 for the same period last year. In addition, general and administrative expenses for the quarter ended September 30, 2004, increased by 15% over general and administrative costs of $118,385 for the second quarter of 2004. General and administrative expenses have increased in comparison to the prior year and the prior quarter due to an increase in legal expenses on legal advise on merging Bingo Florida with its subsidiary in Anguilla, British West Indies, Bingo Anguilla and the filing of the Form S-4 with the Securities and Exchange Commission. In addition, the General and administrative expenses has increased due to the weakness of the United States dollar in comparison with the Canadian dollar.
Depreciation and amortization
Depreciation and amortization includes depreciation on the Company's equipment and amortization of intangible asset relating to the email list. Equipment is depreciated using the declining balance method over the useful lives of the assets, ranging from three to five years. Intangible asset - email list is amortized over five years. Depreciation and amortization decreased to $6,754 during the quarter ended September 30, 2004, a reduction of 10% over costs of $7,499 during the same quarter in the prior. The depreciation and amortization for the quarter ended September 30, 2004, increased 3% compared to depreciation and amortization costs of $6,574 for the second quarter of 2004. The changes in depreciation and amortization can be explained due to the average age of the Company's assets being older in fiscal 2004, resulting in a lower depreciation base. This decrease in depreciation is offset by the increase in amortization due to the acquisition of the intangible asset - email list during the fourth quarter of 2003. The increase in depreciation and amortization for the quarter ended September 30, 2004, compared to the second quarter of 2004 is due to acquisition of additional equipment during the third quarter of 2004.
Interest expense
Interest expense consists of accrued interest on the convertible debentures and other debt instruments, such as leases and loans. Interest expense decreased to $756 for the three months ended September 30, 2004, a decrease of 98% over interest expense of $43,429 for the same period in the prior year. In addition, interest expense for the quarter ended September 30, 2004, decreased 93% compared to interest expense of $11,602 for the second quarter of 2004. This decrease in interest expense in the quarter ended September 30, 2004, compared to the third quarter of 2003 and second quarter of 2004 is due to the conversion of Debenture "A" and the accrued interest into common stock of the Company during the second quarter of 2004 and the conversion of Debenture "B" and the accrued interest into common stock of the Company during the third quarter of 2004.
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Interest expense - warrant - debenture discount decreased to $10,211 for the three months ended September 30, 2004, a decrease of 64% over interest expense - warrant - debenture discount of $28,228 for the same period in the prior year and a decrease of 95% over interest expense - warrant - debenture discount of $221,383 for the second quarter of 2004. This decrease is due to the write off of the unamortized portion of the Warrant - Debenture Discount, due to the conversion of Debenture "B" into shares of the Company during the third quarter of 2004. The decrease compared to the second quarter of 2004 is due to the write off of the unamortized portion of the Warrant - Debenture Discount, due to the conversion of Debenture "A" into shares of the Company and the expiration of Warrant "A" for 4,800,000 shares of the Company during the second quarter of 2004.
Net loss and net loss per common share
Net Income for the three months ended September 30, 2004, amounted to $40,415, an income of $0.00 per share, compared to a net loss of ($26,382) or ($0.00) per share for the same period in 2003 or a net loss of ($137,168), a loss of ($0.01) per share, for the second quarter of 2004. This increase in net income compared to the third quarter of the prior year is due to the increase in revenue. The increase in net income compared to the second quarter of 2004, is due to the write off of the unamortized portion of the Warrant - Debenture Discount in the second quarter of 2004. This write off was due to the conversion of Debenture "A" into shares of the Company and the expiration of Warrant "A" for 4,800,000 shares of the Company.
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.
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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.
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.
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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 convertible debentures and other debt instruments, such as leases and the amortization of the debenture discount issued with the debentures. 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 a second debenture 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.
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
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during 2002. No funds were raised through the issuance of common stock in 2002. However the Company did receive $145,000 under a debenture. 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 and cash equivalents of $55,993 and a working capital deficit of $794,330 at September 30, 2004. This compares to cash of $34,046 and working capital deficiency of $1,368,002 at December 31, 2003, and cash of $14,682 and working capital deficiency of $1,299,148 at December 31, 2002.
During the nine months ended September 30, 2004, the Company generated cash of $104,680 from operating activities compared to generated cash of $58,749 in the year ended December 31, 2003, and compared to using cash of $95,275 in the year ended December 31, 2002. The significant improvement in cash flow from operating activities in 2004 & 2003 demonstrates the effectiveness of the Company's efforts to implement efficiencies in operations and reduce overall operating costs and increase revenue streams in 2004, 2003 and in 2002.
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