To All:
I spent an hour on the phone with John Orton this afternoon. He was kind enough to give of his time and although I am hesitant to post our discussions as my notes might not be complete and I could attribute something to him that he did not say, I believe he would like it if some of the issues that have been brought up on this thread are addressed and answered. I believe that many of the complaints issued by the members on this thread, myself included, put management in a tough position. Many times when they try to be forthcoming with information we read so much into it that they are not sure how to respond next time or if they should respond. I venture to say that this probably happens more with small cap companies than with the larger cap companies. The reason for this is that with the small cap company every internal decision affect the bottom line and each of us have our own way of thinking as to what ought to be done and none of us has all the facts in front of us when we make our statements concerning how and why they are doing things. The large cap companies simply do not cater to the individual investor as much and every internal operation is not examined as the decisions that are small for the large cap companies are big for the small cap companies. Every decision by BNGO could affect per share earnings by a penny. To affect INTC's earnings by a penny takes a much larger decision.
I hope that John will contact me directly if I have misunderstood any of our conversation so that I may post an immediate retraction and correction of the information. I don't pretend to speak for the company in any way, but am sharing information that I gleaned from the conversation and hopefully it will provide some insight to those of you who have questions and are concerned about the current situation. There are things he stated that I did not fully understand and therefore some of this may include my conjecture and I will state if I did not fully comprehend the area he was discussing.
Anyway, here are some notes:
The five halls under construction. In the Nov conference call, John mentioned that five halls were under construction. Two of those have been scrapped as not workable. The other three are as follows:
North Augusta - BNGO will not operate this hall, but will put VGM's in the hall and the proximity of the hall to other BNGO operated VGM's will have an overall positive impact on the VGM side of BNGO's business. The goal is to bring more people to the area and obtain more business overall.
Charleston - they are doubling the size of the current hall as it is not big enough to accommodate the crowds on some occasions. This building will house not only the bingo side of the operation, but also some corporate office space and storage space. This will save approximately $5,000 per month in office rentals and more on storage space rentals.
Columbia - my notes are sketchy on this one, but I think it was a new hall. Not sure, don't quote me on that.
John stated that the company is looking at 10-15 halls. He apologizes if this irritated some of you. He stated that he was trying to be forthcoming with the information and stated it that way as not all halls looked at are purchased. The fact is he stated this to provide a range. So if he stated he was looking at 19 halls and then only 10 deals were closed, we would be disappointed, so he gave a range. Fact is, they are looking at 19 with a probability of closing deals on half that number. Still with the 14 they have, the four they have announced and half of the 19, you are looking at the possibility of 28 to 30 by mid-year. Without the immediacy of purchasing VGM business's this is achievable and possible.
The other thing that many of you are obviously missing is that you don't walk in and buy a business. We have been involved in the purchase and sale of businesses in my office and the due diligence takes 6 months or better on average. The fact that deals are not being closed does not meet deals are not being worked on. The fact that proper due diligence takes time is something out of the company's hands. Not only do they have to examine the business they are buying, they have to get proper licensing and regulatory approval. Sometimes the lag time between filing all the required paperwork and the issuance of the licenses is a couple of months. Everyone needs to relax. This is not the quick buck you and I were all looking for, but this appears to be a solid growth company.
A quick note on the closed halls. They were losing money. Period. They are now losing less money by being closed and with the possibility of sub-letting the space they could break even or make money. On one TX hall I believe John said they were losing $10,000 per month and now are making $10,000 per month by the sub-lease. Those numbers might be wrong, but the fact is they turned a non-performing asset into a performing asset.
The bingo gaming business is interesting and has some quirks. First of all, you need 250 to 300 people to break even on a night. The pay-out is $8,000 for a game (Class B game I think) and each person spends about $40 average to play. This means you need 200 to cover the pay-out and then you haven't covered your payroll and other costs. If you don't meet the number, you pay up the difference. In the fourth quarter the rules were changed by the state or a regulatory agency, I am not sure which, and instead of costing $2.50 to play and a potential prize of $10,000 they changed the rules to $5.00 to play and $8,000 maximum pay-out. This made many bingo players angry and they stayed away from the games for a while. This cost the company in extra charitable expenses as they had to make up the difference. Each hall was on average down $20,000 to $25,000 so this cost the company around $200,000 to $250,000 in extra expense for the fourth quarter. However, the crowds have returned and are playing again. You cannot keep a bingo lover away from their game! As I understand it, the company is obligated to pay for the prize and the help. In return they receive the rental income and the miscellaneous income from selling bingo daubers etc. If the take is not enough to cover their expenses they lose money on that session. I guess the charities receive anything above and beyond the expense coverage. Not sure about that or how the charity makes money, but they do or they wouldn't sign up. Maybe a discussion of the economics of a bingo hall operation will be the subject of a Q&A in the future. (hint .hint.)
Another interesting thing is that a schedule that works in one location won't necessarily work in another. This means you try a schedule and if you are losing money you change the schedule and try again. Once you try enough schedules and times you can then determine if the hall will make it or not. Sometimes they will shut the hall down for a while and then re-open it with a different schedule. To notify us of this decision would be ludicrous. They have a business to run and are running it. Once they determine that a hall will not be profitable, they will shut it down and sub-let it. I venture to say that this will happen more often with company built halls that don't have a track record than with purchased halls. However, as noted it might be profitable to buy out a competitor and close the hall. This is not bad business. This is the consolidation of an industry.
Further, in December when the governor was threatening a shut-down of games of chance, as opposed to the skill VGM games, the company took a defensive posture and shut down their machines that were keno style play. I don't know if this was until the governor backed down or they could get them re-worked to offer only the skill games, but they were out of commission for a while. This cost the company again, around $200,000. This hurts the bottom line, but I believe were it my company that it was the best course of action to take at the time to ensure the machines were not confiscated. Further, and this is my opinion, it let the legislature know that AB&G was not going to do anything that was against the law and it kept there bargaining posture solid with the legislators. Smart move long term, my opinion.
The company also had another 50,000 to 100,000 in extra travel and lobbying expenses as well as expenses incurred in the pooling acquisitions to date. Seems reasonable.
Unfortunately, those added expenditures leave us $500,000 to $600,000 short for fourth quarter. Also, unfortunately, plugging these numbers into my 4th quarter estimate gives me a fourth quarter of $.08 per share using 7.2 million weighted shares outstanding which is a number JTO calculated the other day. So in my revised estimation the annual figure will be $.41 per share. Currently there are 9.287 million shares outstanding.
The infamous cash question:
Ended third quarter with 1.7 million. Brought in 11.4 million from the warrant call. Now have $11 million. Where did the cash go??? This company is normally cash flow positive each quarter. However, the fourth quarter had some consumption in that there were 300 VGM licenses paid. That is $4,000 times 300 or $1.2 million. There was $500,000 in construction costs between Columbia, Charleston and North Augusta. There was about $50,000 in costs to close down the halls they shut down. Add in the extra costs incurred in the 4th quarter and you come very close to where the cash went. Issued resolved.
Tod noted that the bill to ban VGM was sponsored by 26 legislators or something like that. I asked John about that and he indicated that part of parliamentary procedure requires that if you wish to propose changes or modifications to the bill, you must be on it as a sponsor so frequently the big bills are sponsored by those that oppose the bill. Mims remains confident that there are only 23 votes in the Senate not the 26 that Tod has suggested.
I wanted to get into a discussion about average take from bingo halls, and sub-letting and the other numbers, but we simply did not have the time. In my opinion, right now I do not have enough information to come up with a solid estimate of earnings this year. In my opinion they will be anywhere from what John has stated to $.50 to $.55 per share. My numbers figure that things go well, acquisitions remain on schedule, sub-letting occurs etc. These are nothing more than guesses and I will not do any further calculations till I can get some better direction as to what the numbers might be. That will come in time.
All in all, it appears to me that the current management is running a tight ship and they are on top of all aspects of the business that they can control. I rate Bingo still an undervalued stock. If you wish to sell my your shares, please do so.
Just my humble opinion. Take it for what it is worth.
-Scott |
