Here's some history! Hey Internet Gamblign Invstors, learn from this. Do your homework.
From Outdated URL (Invalid)
StockHouse.com Interview - September 1, 1999
By Chris Livadas
Management Interview Hot Internet Gaming Stock Draws Widespread Interest: Will Tropika Replace Starnet?
Tropika International [O.TPIL] has recently emerged as one of the most actively traded stocks on the Toronto stock exchange's over-the-counter market, known as the CDN. It appears that this stock has rapidly gained widespread interest in the microcap investment community, which merited this interview. StockHouse.com interviewed VP of Finance David Prue, who discussed future revenue projections, acquisitions, and Nasdaq-OTC:BB and European Exchange listing initiatives. .
StockHouse: Where is Tropika based?
David Prue: We have no operations in Toronto other than we're based here.
StockHouse: Please start by giving our readers a brief overview of Tropika.
David Prue: Tropika currently operates three business lines. One is what we call the Entertainment Division. The Entertainment Division currently consists of 11 Internet casinos and one Internet bingo site. Of the 11 casinos, nine of them are corporately owned and two of them are licensed to third parties and we operate them on their behalf. The bingo site is corporately owned. That was the company's first entry into Internet commerce.
The second entry is what we call the launch of our Financial Services Division. The current pinnacle of that is a company called RC Securities. RC Securities is scheduled for launch in September and will be the first online brokerage that allows you to trade on every major exchange in the world utilizing one account from a zero-tax jurisdiction. To support the financial services is a trust operation and the management team is looking to either acquire or launch an offshore bank as well to support that. That would be toward the end of this calendar year.
The E-Commerce Division is really just a catch phrase for opportunities that come our way that we like and take advantage of. Currently there are several initiatives. The one the market's aware of is code-named Zorro. Zorro is a product search engine for shopping that utilizes no database.
StockHouse: The only division in operation right now is the Entertainment Division?
David Prue: Correct.
StockHouse: What games do your casinos offer?
David Prue: The casinos offer 21 different games. They're the standard games of a land-based casino: black jack, slot machines, baccarat, craps, poker, video poker.
StockHouse: Where are your servers based?
David Prue: Our servers are based in the jurisdiction in which we're licensed, which is Dominica. They're supported by a 24-hour customer support center in Cape Town, South Africa.
StockHouse: How are your casinos rated?
David Prue: The first four that we launched - all of them since debut - have ranked in the top 20 of Internet casinos out of a variety of sites and those rankings are ranked by casino players, not by operators or any such thing. Each and every site has won an award from different gaming sites or gaming magazines. These are based on the level of customer, the speed at which they get paid and the marketing the graphics of those particular casinos. They are good sites.
StockHouse: Where do you do your banking?
David Prue: Tropika itself operates through a network of 12 subsidiaries banking throughout the world. The primary banking for the casino business is in Dominica.
StockHouse: Are we to understand that Tropika is a shareholder in the businesses, as opposed to being an operator of those casinos?
David Prue: That's correct. Our tax structure actually allows Tropika to pay no more than 2% corporate tax in Canada and part of that structure is based on the company being a shareholder in its subsidiaries. We 100% own all of our subsidiaries except for a company called Arlequin and Zorro, in which we own 70% in Arlequin and 51% in Zorro.
StockHouse: What's Arlequin do?
David Prue: Arlequin currently is dormant, it does nothing. It's a license to run a land-based lottery company in Venezuela and I'm not convinced we'll ever activate it.
StockHouse: Is Tropika domiciled in Barbados?
David Prue: One of our subsidiaries is domiciled in Barbados. The holding subsidiary, which operates the casino business through contracts, is in southern Barbados. That's where the 2% reciprocal tax arrangement is.
StockHouse: What were your FY 1999 revenues?
David Prue: Fiscal 1999 revenue in the period ended May 31 was just over $20 million Canadian versus $300,000 the previous year.
StockHouse: And earnings were ?
David Prue: Earnings were $320,000, approximately.
StockHouse: Great amount of revenue, small amount of earnings.
David Prue: That's the nature of the business. When you report casino operations, you either report gross wages and gross payouts and then your gross operating income is the handle of the house take or you simply report the house take as your top line. Dealing with Deloitte & Touche, and with our current auditor, we report the gross wages at the top line. So yeah, you're on a fairly low margin, high volume business, but we also have significant expenses for the start up of the casino businesses and RC Securities.
StockHouse: And your gross operating margins I understand are somewhere between 4.8% and 6.2%?
David Prue: That's the handle of the house take on the casino activity, yeah. Certainly under RC Securities it will be exponentially higher than that.
StockHouse: How many shares do you have outstanding?
David Prue: 72 million.
StockHouse: One of the reasons why it's topical to interview you right now is because of the Starnet situation. What prevents your company from falling into the same problems that Starnet has recently had?
David Prue: I will gladly comment on that and there will be all kinds of caveats. First of all, the extent of knowledge that I have with Starnet [SNMM] is what I read in the newspaper and it would appear to me that the Starnet difficulty has little if anything to do with Internet gaming, or certainly Internet casinos.
The big question appears to be: Where were the gaming servers? It appears that they were in British Columbia. To put a server, which is the point of where the bet occurs, anywhere in Canada or the United States is clearly against the law. There are other issues there, pornography, etc., but as it relates to Internet gaming that's it. Now money laundering is a big issue as well.
StockHouse: What preventative measures have you taken to avoid any money laundering?
David Prue: Those are pretty comprehensive actually. We hired Deloitte & Touche, one of the top experts in the world on money laundering, to assist us to put together the anti-money laundering program. Would you like me to detail it?
StockHouse: How about a quick outline?
David Prue: The number one favorite money laundering scheme currently is credit cards. In the Soviet Union, they'll have 100 credit cards and they'll put $5,000 on each card. They'll come to us and want to buy a casino that we license so that they own 50% of the casino. They'll then go in and lose $100,000 a week to themselves. The net effect is they pick up 50 cents on the dollar in an offshore jurisdiction. In order to combat that, every license application has to clear an RCMP and Interpol background check. That tends to eliminate the number of applicants in a real hurry.
The other is the actual operation of the casino. We limit the amount of purchases on any one credit card to $2,000 in a one week period and given the relatively low volume, or low dollar value involved, it doesn't warrant the money laundering process at that level. So that's a wall that we put up.
We also track all accounts geographically and our system runs a check to make sure that we don't all of a sudden open 30 accounts in one geographical area of Russia or Colombia or some other jurisdiction. It's very important to us.
StockHouse: How do you avoid getting involved with different ethnic mobsters, whether Chinese, Japanese or Russian, in any future subsidiaries?
David Prue: Difficult question. The only answer I can give you is that everybody that works for us and anybody that we do business with on a close basis again must clear an RCMP and Interpol background check. We go to Deloitte & Touche and gather the information and they do the full check for us. There's no way to guard completely, but as soon as you say to somebody they've got to clear an RCMP and Interpol background check - if there's a problem, we don't hear from them again. That has happened on many occasions.
StockHouse: Let's say someone's charging on their credit card and wants a wire transfer. How does that work?
David Prue: Again part of the money laundering process is that when you purchase off a credit card - if you purchase $1,000 - when you cash out, if it's less than $1,000 it's fully refunded to the credit card. If it's more than $1,000 we refund the purchase amount to the credit card and then we send a wire transfer for the balance. The wire transfer must go to the address entered into the gaming system and the name of the beneficiary that is on the credit card. So if you have somebody that's entering fictitious information, that wire transfer itself is going to get rejected because the name on the card would not match the name on the account.
StockHouse: Is that done automatically?
David Prue: It is. Actually, we created another service we provide called Signature Credit Card Fraud, which I think currently has 40 Internet casino clients. It's a free service. They all key in suspect cards and/or e-mail addresses and/or names and we routinely run each player against that database looking for those similar trends. Generally, when somebody's conducting that kind of activity, they do it so blatantly that it stands out on an exception report and/or they've done the same thing at 20 other casinos. We generally catch them but not always.
StockHouse: How do you get business and how do you get the Internet gamblers?
David Prue: Throughout the industry are a variety of things. We do 100% Internet marketing and we do it by directories and ads.
StockHouse: How do you avoid children playing?
David Prue: It's a difficult thing. In fact, we do our best but we can't really avoid it. The only solution is that somebody has to lie on the web site and say they're old enough. If Johnny gets daddy's credit card The most you can lose is $2,000 a week. Johnny loses $2,000 a week on dad's credit card. When dad gets the bill, if he calls us, we simply reverse it. We have no interest in damaging a family. We're not out any money. All we do is simply reverse the charge. Then, nobody from that address can ever enter our casinos again. But we will automatically reverse the charge.
StockHouse: How many times have you actually done that?
David Prue: About half a dozen, I think.
StockHouse: What's your average pay out?
David Prue: The random number generated, which is what determines that is, for all intents and purposes, locked in at 95%. There's no game that we pay less than 95%. Blackjack is 98-%, slot machines 95%. It's pretty much as high as you can go and still earn your living in the business. I think Atlantic City slot machines, for example, are 87-% and ours are 95%.
StockHouse: Are the numbers of wagers increasing from your regulars or are they about the same? I know you have your $2,000 limit.
David Prue: We've had to increase that limit - originally it was $1,000. We've had to increase it based on demand from our gamblers. All that happens is that if they've gambled that much and lost it all, they just go to another casino. The average wager is not increasing. The average quantity of time on the casinos is not increasing. What's increased is the actual number of clients.
StockHouse: Tropika grew from $300,000 to $20 million in the space of a year. What happened in your last quarter?
David Prue: Last quarter was about $10 million.
StockHouse: What are you projecting for the next four quarters?
David Prue: I'm going to answer that generally because that information is not in the marketplace. I would expect a quarter over quarter growth in the 80% range for the next two, possibly three quarters, until the casinos begin to plateau.
StockHouse: At what point do these casinos plateau?
David Prue: We use a conservative figure. We say that they plateau at about $6 million gross wagering per month. That is low because there are currently Internet casinos, by our calculations, doing about $11 million a month.
StockHouse: But you have 9, 10 casinos there. So you're talking about a peak that would be about $60 million per month for your ...
David Prue: Yes, gross wagering, that's correct. That's after they're ramped up and we estimate, we're not sure yet, we estimate that at this stage in the game that takes anywhere from 8 to 12 months. It takes a while to get there. We launched two casinos in May, two in June, two in July, so we've got 6 in there that are still very new.
StockHouse: How many more do you plan?
David Prue: We currently at this point have no plans to do anymore because we're focused entirely on the Financial Services. We can, at any point, go back and crank out these casinos very cheaply and if necessary we can produce four of them in parallel every 59 days. We could do it but at this point we don't see the point. We're focused. The core business of the company is intended to shift from game to financial services.
StockHouse: Your financial services - RC Securities, where will that be based and where will you be banking?
David Prue: It is based in Anguilla, which most people never heard of. It's one of the better and lesser known jurisdictions.
StockHouse: Is that just north of Barbados?
David Prue: No, it's at the opposite end of the chain. You'll find it on a map. I get confused down there too. Between Dominica and the other places.
StockHouse: You plan to be fully operational by the end of September?
David Prue: That's correct. We currently have office space that's under renovation. The communications are in, the server is on back order, and we're progressing on schedule. The banking will in fact be done - I'm not prepared to indicate the name because we haven't executed the arrangements - but it will be done in Europe and RC Securities is a facilitator of trades. The actual stock will be held with the executing broker, who is also the settling broker and the custodial broker which is one of the largest and oldest firms doing that in Europe. That will give the client the comfort to know that they're dealing with a reasonable organization here, not just a start up RC Securities.
StockHouse: Back to your financials: It seems that your next quarter will be almost what Tropika produced in the fiscal year 1999.
David Prue: It's looking that way.
StockHouse: And then another 80% on top of that means that Tropika's first six months should be somewhere around 50% higher than all of fiscal year '99?
David Prue: Yes, that's the target.
StockHouse: There's been quite a bit of activities in your stocks since the Starnet situation happened. Are a lot of investors switching brands?
David Prue: I hate to go into that category. I'm not so sure about that. It may well be the case. I'm not the market side of the company expert. I would be surprised - we've certainly done our best to distance ourselves.
StockHouse: What sort of regulatory supervision or other supervision are you under?
David Prue: Well, when you think about the Internet, it's none. The fact is that the license we hold from Dominica requires us to conduct ourselves in a particular manner. Basically, the gaming industry is a cowboy industry with no regulation. So, when we decided to enter it as our first entry, that's why we took the steps of having Deloitte & Touche and the anti-money laundering programs, RCMP and Interpol background checks on all of the management teams and directors. There's not much you can do except to attempt to establish your own credibility
StockHouse: With 72 million shares out, that's quite a few shares. Do you plan a roll back?
David Prue: Absolutely not. That's quite a few shares by Canadian standards, but not so much by Americans and definitely not by Europeans. The European shareholders I speak to would be very pleased with 100 to 120 million shares outstanding.
StockHouse: What percentage of your company is institutionally owned?
David Prue: I'm afraid I can't answer that - there's been so much volatility. I would guess that probably at 10%, maybe 20%.
StockHouse: With 50 million or more shares flying around, that's quite a few shares.
David Prue: Well there's another 25 million or so locked up with insiders, etc. It is, and I have a very simple, perhaps naive approach to outstanding shares and that is: Had we not had the liquidity that we have in the marketplace from a large float, many of these institutional investors either wouldn't have invested or won't invest in the future. They don't care about buying, they care about the ability to sell. A large float gives us a relatively high volume of activity on a daily basis.
StockHouse: You're trading strictly on the Canadian Dealing Network right now?
David Prue: Currently, that is correct.
StockHouse: How are you going to attract the US investors?
David Prue: We have filed an OTC bulletin board application in May. I take it the SEC is very backed up. We just got a request for additional information I think this week, perhaps late last week. We will satisfy that and we're looking at other avenues that I simply can't comment on.
StockHouse: Such as the Toronto stock exchange?
David Prue: Actually, I can comment on that and tell you at this point Toronto would seem kind of futile for us. It's a long process and depending on our stock value, we could well get rolled into the micro cap in Vancouver, anyways, as part of the overall consolidation and adjustment. We have been for some time looking at exchanges in London, for example, and Frankfurt and Berlin and Luxembourg. There's no real requirement for us to be on a Canadian exchange except that we're concerned about maintaining RRSP eligibility for our shareholders.
StockHouse: Thank you very much.
