At the microcap end of the market an operational pivot is tough to approach from an analytical perspective. The switching of focus for a company's management can mean many different things, but most of the time it boils down to two overarching points: either that management has been unable to effectively grow a company in one space and is having a go at another or that management has identified an opportunity that it views as superior to its current operational focus, and it is moving to take advantage of said opportunity.
The former category is not a great investment option; the latter can be.
Because it's often difficult to identify which column a company falls into immediately post pivot, markets will generally lean toward caution. This means that potentially promising companies remain under the radar.
Here's an example of a company that just pivoted, and brought an industry veteran and guru on board in the process with a critical attempt to identify into which of the two above mentioned categories the pivoting company falls.
The company is Bingo Nation Inc. (BLTO, Financial).
As a brief overview of the company's background, Bingo Nation changed its name from Nexgen Applied Solutions Inc in November 2016. Management remained in place post-pivot, and the Nexgen CEO, Robert Coleridge, remained in place as both a board member and CEO of the newly named Bingo Nation.
As announced at the time, the name change marked the beginning of a new operational phase for the company, one that bears little resemblance to the operational focus of Nexgen. The new focus is tribal gaming and specifically a bingo-type game aimed at the popularization of cross-tribal border gaming.
The first thing we've got to do, then, is identify whether there's an immediate opportunity of which the company can take advantage. If there is, then there's potential justification for the pivot, and some suggestion that this pivot falls into the more favorable of the two above discussed categories.
In this instance, it seems that there may be such an opportunity.
The focus, as mentioned, is tribal gaming. This is one of those industries that falls under the radar of most mainstream investors, but that it is under the radar is far from representative of its size or growth potential. Indian reservation gaming is the tribal version of the mainstream gaming and casino industry in the U.S. Indian tribes govern the industry internally and operations aren’t required to pay state specific taxes.
It's an insular industry and one that generally stands in the shadow of its mainstream, federally governed U.S. counterpart. With that said, however, it's massive. As per the most recent estimates, the tribal gaming industry generated $26.5 billion in revenue from 425 facilities, run by 233 tribes in 28 states. Based on these numbers, Indian reservation gaming generates more than Atlantic City, New Jersey, and Las Vegas combined.
So where's the opportunity?
Well, Bingo Nation is trying to bring a Powerball-type lottery to the tribal gaming space. The structural laws of the space make it difficult to implement any sort of cross-border gaming initiatives as operators are only allowed to take cash from players within their own borders.
Bingo Nation has created what it calls the Bingo Nation Network Authority (BNNA) in an attempt to overcome this border issue. The BNNA will serve as a central entity through which numerous tribes can operate a cross-border bingo gaming initiative. Basically, each tribe installs Bingo Nation kiosks within its borders. The BNNA markets its game nationally (removing the necessity of the individual tribes to do so, which may fall outside of tribal regulations) and broadcasts a weekly draw that designates certain kiosk-issued tickets as winners. The payout derives from the takings, and the remainder of the takings are split between the tribes and the company.
This is a big opportunity and one that is yet to be filled. In that box, Bingo Nation puts a tick.
The company has also just brought an industry veteran on board, the above-mentioned tribal gaming guru, a guy called David Matheson. He served as CEO of one of the space's biggest casinos (the Coeur d' Alene Casino & Resort Hotel in Worley, Idaho) and also served as an adviser to President George H.W. Bush in the early 1990s, serving as a link between the Bush administration and the casino and gaming side of Indian tribal community.
Again, that's a box tick.
It's not all good, however. As we have said, this is a critical look at the company, and there's plenty to criticize.
First, this is a space that others have tried, and failed, to take advantage of. Back in 1995 the Coeur d' Alene tribe (the tribe that the above-mentioned Matheson comes from) tried to bring a Powerball type game to the Indian space but failed by falling foul of the cross-border sale regulations. There have been plenty more failed attempts since. Sure, Bingo Nation is selling its tickets via kiosks, but it's important to recognize that this is just a novel approach to an existing problem. It may work, and Matheson's presence is strongly supportive of such, but nothing is guaranteed.
Second, there's no cash in the bank, and cash is going to be required if management is going to execute on its strategy effectively. Cash requires equity issue (more often than not), and equity issue is dilutive. Regardless of management's ability to execute, therefore, early stage investors need to consider that their holdings are likely going to diminish (proportionately) before they grow in value.
Third, there's the potential for legal concerns. The previous attempts to bring this sort of thing to the tribal space have seemingly overcome tribal regulations but have subsequently fallen foul of legal challenges. While there looks to be no concerns initially in the kiosk model that Bingo Nation is trying to roll out, there's a chance something may materialize. If it does, Bingo Nation may have to allocate capital toward legal expenses, which could both inhibit its potential to expand and increase the necessity to dilute shareholders.
Finally, as of Dec. 31, 2016, the company had recorded $469,370 in convertible notes payable. These are convertible for 0.1 cents per share and aren’t subject to forward or reverse stock splits. That's more than 469 million shares waiting to convert, which add a real dilution concern to the picture.
So what's the conclusion?
Well, there are risks – of that there's no doubt. The primary of these risks is dilution, based both in potential equity issue raises and the convertible notes. There's also real opportunity here, though. If the company's approach can establish the cross-border model it is targeting, there's a strong market waiting to buy the tickets it is offering.
The bottom line, then, is we think this falls within the positive of the two pivot drivers, and that the operational shift represents management's attempt to capitalize on an opportunity that exists.
Disclosure: The author has no positions in any of the stocks mentioned in this article, and does not intend to buy or sell any discussed stocks for the next 30 days.
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