ESI Entertainment announces fiscal 2008 second quarter financial results



    BURNABY, BC, Oct. 15 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the
"Company") (TSX: ESY) reported today its financial results for fiscal Q2 2008
ended August 31, 2007. (All dollar amounts reported in Canadian funds)

    
    Financial highlights for the quarter included (Q2 2008 compared to
    Q2 2007):

    Consolidated basis:
    -   Revenue for the three months to August 31, 2007, decreased from
        $5.8 million to $0.68 million - negative 88% - over the comparative
        period in the prior year;
    -   Revenue for the six months to August 31, 2007 decreased from
        $11.3 million to $1.5 million - negative 87% - over the comparative
        period in the prior year;
    -   Gross Profit for the three months to August 31, 2007, decreased from
        $3.60 million to $0.03 million - negative 99% - over the comparative
        period in the prior year;
    -   Gross Profit for the six months to August 31, 2007, decreased from
        $7.07 million to $0.31 million - negative 96% - over the comparative
        period in the prior year;
    -   Net loss for the three months to August 31, 2007, increased to
        $2,641,646 from net earnings of $371,594 - negative 803% - in the
        comparative period in the prior year;
    -   Net loss for the six months to August 31, 2007, increased to
        $5,173,237 from net earnings of $721,254 - negative 811% - over the
        comparative period in the prior year.
    

    Our financial results were mainly driven by the decline in Citadel
Commerce Corp., our payment processing service to the on-line gaming and
e-commerce industries, due to the cessation of the financial processing
business for non-domestic internet gaming merchants for US consumers. We have
seen a significant decrease in our financial performance for the three and six
months ended August 31, 2007 compared to the three and six months ended August
31, 2006.
    "The second quarter of 2008 was a challenging quarter" said Tony Greening
Chair and Chief Executive Officer. "The Company is building on its e-Money
issuer status in the UK, intellectual property and know-how for financial
processing. We are continuing to pursue the European gaming markets as well as
the general e-commerce markets worldwide. We also launched the first
BetOnBattles game and look forward to providing another update during the
following quarters as we continue to develop new and additional markets for
our products."

    Financial Review

    Total revenue decreased by 88% to $0.68 million for the three months
ended August 31, 2007 from $5.78 million for the three months ended August 31,
2006. This decrease was mainly because of the decline in Citadel revenues due
to the cessation of the financial processing business for non-domestic
internet gaming merchants for US consumers.
    Gross profit was $0.03 million and $0.31 million for the three and
six months ended August 31, 2007 compared to $3.60 million and $7.07 million
for the same periods in 2006. Gross margin as a percentage of revenues was 4%
compared to 62% for the same quarter in prior year, a decrease of 58%. Margins
decreased because revenues dropped from payment processing business due to the
cessation of the financial processing business for non-domestic internet
gaming merchants for US consumers while direct costs of sales such as call
centre, merchant support and other operations related wages remained
relatively fixed as transaction revenues declined.
    Product development expenses were $379,807 and $854,956 during the three
and six months ended August 31, 2007 respectively, an increase of 58% and 52%
respectively compared to $240,028 and $563,940 for the three and six months
ended August 31, 2006. The increase is mainly related to additional software
development work on Citadel's new products for the European and general
e-commerce markets as well as expensing of product development costs which
were being deferred and written off in Q3 of fiscal 2007.
    Sales, marketing and customer service expenses were $366,773 and $808,456
during the three and six months ended August 31, 2007 respectively, a decrease
of 50% and 52% respectively compared to $728,396 and $1,669,567 for the three
and six months ended August 31, 2006. The decrease is primarily related to the
reduction of staff in sales and marketing and customer service due to the
cessation of the financial processing business for non-domestic internet
gaming merchants for US consumers.
    General and administrative expenses were $1,395,032 and $2,468,937 during
the three and six months ended August 31, 2007 respectively, representing a
decrease of 21% and 22% compared to $1,755,303 and $3,149,065 for the three
months and six months ended August 31, 2006. This decrease resulted from a
reduction of staff due to the cessation of the financial processing business
for non-domestic internet gaming merchants for US consumers in Q4 2007.
    Net loss for the three and six month periods ended August 31, 2007 were
$2,641,646 ($0.14 net loss per share - basic and diluted) and $5,173,237
($0.27 net loss per share - basic and diluted) compared to net income of
$371,594 ($0.02 net earnings per share - basic and fully diluted) and $721,254
($0.04 net earnings per share - basic and fully diluted) for the prior
comparative periods. The fully diluted loss per share has not been computed,
as the effect would be anti-dilutive (meaning that the loss per share would
decrease on a fully diluted basis). Therefore, in accordance with GAAP, fully
diluted loss per share is not provided. The fully diluted calculation would
have otherwise included Common Shares underlying outstanding securities, such
as options and warrants exercisable to acquire Common Shares.
    As at August 31, 2007, the Company had cash and cash equivalents of
$4,318,506, compared to $10,548,002 on August 31, 2006.


    
    ESI Entertainment Systems Inc.

    Consolidated Balance Sheets
    (expressed in Canadian dollars)
    (unaudited)                                       August 31, February 28,
                                                           2007         2007
    -------------------------------------------------------------------------

    Assets
    Current
      Cash and cash equivalents                     $ 4,318,506  $ 9,453,701
      Accounts receivable                               942,862      558,291
      Prepaids                                          546,287      472,910
                                                    ------------ ------------

                                                      5,807,655   10,484,902
    Restricted cash                                           -    1,100,903
    Citadel processing accounts                      13,678,418   16,075,768
    Property and equipment                            1,073,327    1,391,764
    Deferred contract costs                             906,704      502,596
                                                    ------------ ------------

                                                    $21,466,104  $29,555,933
                                                    ------------ ------------
                                                    ------------ ------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities
    Current
      Accounts payable and accrued liabilities      $   757,218  $ 1,237,547
      Capital lease obligations                         179,334      348,671
      Software license obligation                             -        9,917
      Deferred revenue                                  561,389      539,198
                                                    ------------ ------------

                                                      1,497,941    2,135,333
    Citadel processing liabilities                   13,678,418   16,883,268
    Deferred revenue                                  1,827,728    1,080,247
    Capital lease obligations                           245,399      245,399
                                                    ------------ ------------

                                                     17,249,486   20,344,247
                                                    ------------ ------------

    Shareholders' Equity
    Capital stock                                    13,305,409   13,226,702
    Warrants                                              5,926       84,634
    Contributed surplus                                 508,304      330,134
    (Deficit)                                        (9,603,021)  (4,429,784)
                                                    ------------ ------------

                                                      4,216,618    9,211,686
                                                    ------------ ------------

                                                    $21,466,104  $29,555,933
                                                    ------------ ------------
                                                    ------------ ------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    ESI Entertainment Systems Inc.

    Consolidated Statements of Operations and (Deficit) Retained Earnings
    (expressed in Canadian dollars)

                               Three Months Ended          Six Months Ended
                                    August 31,                 August 31,
    (unaudited)                  2007         2006         2007         2006
    -------------------------------------------------------------------------

    Revenues              $   682,186  $ 5,783,906  $ 1,457,765  $11,282,279

    Direct costs              652,815    2,176,344    1,148,890    4,211,961
                          ------------ ------------ ------------ ------------

    Gross profit               29,371    3,607,562      308,875    7,070,318
                          ------------ ------------ ------------ ------------

    Operating expenses
      Product development     379,807      240,028      854,956      563,940
      Sales, marketing and
       customer service       366,773      728,396      808,456    1,669,567
      General and
       administrative       1,395,032    1,755,303    2,468,937    3,149,065
      Amortization of
       property and
       equipment              201,086      223,702      412,702      442,032
                          ------------ ------------ ------------ ------------

                            2,342,698    2,947,429    4,545,051    5,824,604
                          ------------ ------------ ------------ ------------

    Earnings before
     under noted items     (2,313,327)     660,133   (4,236,176)   1,245,714

    Other expenses (income)
      Foreign exchange
       loss (gain)            358,874       28,221    1,100,912      163,208
      Interest income         (68,833)    (153,205)    (225,774)    (285,883)
      Interest expense         21,217       43,798       44,862       86,410
                          ------------ ------------ ------------ ------------

    Earnings before income
     taxes and non-
     controlling interest  (2,624,585)     741,319   (5,156,176)   1,281,979
                          ------------ ------------ ------------ ------------

    Provision for
     income taxes
      Current                  17,061       31,725       17,061       31,725
      Future                        -      338,000            -      529,000
                          ------------ ------------ ------------ ------------

                               17,061      369,725       17,061      560,725
                          ------------ ------------ ------------ ------------

    Net earnings          $(2,641,646) $   371,594  $(5,173,237) $   721,254
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Earnings per share
      Basic               $     (0.14) $      0.02  $     (0.27) $      0.04
      Diluted                   (0.14)        0.02        (0.27)        0.04

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Retained earnings
     (deficit),
     beginning of period  $(6,961,375) $   910,717  $(4,429,784) $   561,057

    Net earnings           (2,641,646)     371,594   (5,173,237)     721,254
                         ------------ ------------ ------------ ------------

    Retained earnings
     (deficit), end
     of period            $(9,603,021) $ 1,282,311  $(9,603,021) $  1,282,311
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    ESI Entertainment Systems Inc.

    Consolidated Statements of Cash Flows
    (expressed in Canadian dollars)

                               Three Months Ended          Six Months Ended
                                    August 31,                 August 31,
    (unaudited)                  2007         2006         2007         2006
    -------------------------------------------------------------------------

    Cash flows provided
     by (used in)

      Operating activities
        Net earnings      $(2,641,646) $   371,594  $(5,173,237) $   721,254
        Items not
         affecting cash:
          Stock-based
           compensation
           (Note 8)           102,954       64,267      178,170       83,212
          Amortization of
           property and
           equipment          201,086      223,702      412,702      442,032
          Future income
           taxes                    -      338,000            -      529,000

        Net changes in
         non-cash
         operating items:
          Accounts
           receivable        (366,415)      12,229     (384,571)    (195,527)
          Inventory                 -     (237,252)           -     (237,252)
          Prepaids            (43,865)      11,265      (73,377)     (56,018)
          Allowance for
           bad debts                -            -     (807,500)
          Accounts payable
           and accrued
           liabilities       (182,700)      33,474     (480,330)     168,560
          Deferred revenue     41,381      (40,422)     769,672      223,041
          Deferred contract
           costs             (211,571)      44,730     (404,108)      (4,818)
                          ------------ ------------ ------------ ------------

                           (3,100,776)     821,587   (5,962,579)   1,673,484
                          ------------ ------------ ------------ ------------

      Investing activities
        Acquisition of
         property and
         equipment            (18,891)    (134,511)     (94,265)    (201,530)
        Capitalized
         development cost           -      (78,044)           -     (139,958)
        Restricted cash             -            -    1,100,903            -
        Deferred start up
         cost                       -     (519,649)           -     (993,160)
                          ------------ ------------ ------------ ------------

                              (18,891)    (732,204)   1,006,638   (1,334,648)
                          ------------ ------------ ------------ ------------

      Financing activities
        Loan payable                -            -            -   (1,000,000)
        Capital lease
         payments             (86,037)     (66,883)    (169,337)    (131,805)
        Software license
         obligation                 -      (29,305)      (9,917)     (50,685)
        Issuance of common
         shares, net of
         issue costs                -      (14,564)           -    8,893,388
                          ------------ ------------ ------------ ------------

                              (86,037)    (110,752)    (179,254)   7,710,898
                          ------------ ------------ ------------ ------------

    Increase in cash and
     cash equivalents      (3,205,704)     (21,369)  (5,135,195)   8,049,734

    Cash and cash
     equivalents,
     beginning of period    7,524,210   10,569,371    9,453,701    2,498,268
                          ------------ ------------ ------------ ------------

    Cash and cash
     equivalents, end of
     period               $ 4,318,506  $10,548,002  $ 4,318,506  $10,548,002
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Non-cash investing
     and financing
     transactions not
     included in cash
     flows
      Conversion of
       preferred shares
       into common shares  $        -  $         -  $         -  $ 2,706,941
      Share issue costs
       incurred in prior
       fiscal year                  -            -            -      936,987
      Future income tax on
       share issue costs            -       10,000            -      732,500
      Fair value of
       options exercised            -          259            -          519
      Agents' warrants
       included in share
       issue costs                  -            -            -       78,708

    Cash and cash
     equivalents comprises
      Cash                                          $ 1,516,582  $ 3,037,894
      Cash equivalents                                2,801,924    7,510,108

                                                    $ 4,318,506  $10,548,002

    Supplemental
     information
      Interest received   $    43,217  $   111,481  $   117,185  $   222,554
      Interest paid            21,217       43,798       52,694       86,410
      Income taxes paid             -            -            -            -

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    About ESI Entertainment Systems Inc.

    ESI Entertainment Systems Inc. ("ESI") (TSX: ESY) provides products and
services to the international gaming and e-commerce industries through its
three principal subsidiaries, Citadel Commerce Corp., ESI Integrity Inc. and
PlayLine Inc. ESI's products and services, which primarily consist of payment
processing, transaction monitoring and turnkey gaming platforms, are deployed
in the on-line and land based gaming and e-commerce markets.

    Forward-looking Statements

    This news release contains forward-looking statements concerning ESI
Entertainment Systems Inc, which statements can be identified by the use of
forward-looking terminology such as "expect", "proposed", "may", "plan",
"intend", "will", "would" or the negative thereof or any other variations
thereon or comparable terminology referring to future events or results.
Forward-looking statements are statements about the future and are inherently
uncertain, and the actual events or results could be materially different than
those anticipated in those forward-looking statements as a result of numerous
factors discussed more fully in the Company's Final Prospectus dated March 22,
2006, Annual Information Form and elsewhere in other filings on www.sedar.com.
These risks include risks related to revenue growth, operating results,
industry growth, changes in regulation and legislation, products, technology,
financing, competition, personnel and other factors affecting the Company and
its business, any of which could cause actual events or results to vary
materially from ESI's anticipated future results. Forward-looking statements
are based on beliefs, opinions and expectations of ESI's management at the
time they are made, and ESI does not assume any obligation to update its
forward-looking statements if those beliefs, opinions or expectations, or
other circumstances should change.

    The Toronto Stock Exchange does not accept responsibility for this press
    release.





For further information:

For further information: ESI Entertainment Systems Inc., Tony Greening,
Chief Executive Officer, Telephone: (604) 299-6922, email: tgreening@esi.ca,
Web: www.esi.ca

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