ESI Entertainment announces Fiscal 2009 Financial Results



    BURNABY, BC, May 29 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the
"Company") (CNSX: ESY) reported today its financial and operational results
for the fiscal year ended February 28, 2009 ("fiscal 2009"). All amounts are
in Canadian dollars unless otherwise stated.

    
    Fiscal 2009 Financial Highlights

    The highlights for ESI, on a consolidated basis, are:

    -   22% increase in consolidated revenues to $3.95 million for fiscal
        2009 from $3.25 million for fiscal 2008;

    -   87% increase in consolidated gross profit to $0.971 million for
        fiscal 2009 from $0.518 million for fiscal 2008;

    -   29% decrease in consolidated net loss before income taxes and
        non-controlling interest to a loss of $5.1 million for fiscal 2009
        from a loss of $7.2 million for fiscal 2008.
    

    Revenues from ESI Integrity have grown over the past three years. This is
due to increased sales and marketing efforts and the stronger recognition of
the ESI Integrity brand as the number of installations with government
lotteries and pari-mutuel organizations has grown on a worldwide basis.
    Citadel's revenues were reduced significantly during fiscal 2008 and 2009
consequent upon the cessation by Citadel of financial processing to the
non-domestic internet gaming merchants for US based consumers on January 17,
2007. This has had a significant material impact on the revenues for Citadel
in fiscal 2008 and 2009, since 97% of the revenues generated by Citadel in
fiscal 2007 had been generated from that market place.
    Consolidated gross profit was reduced from $13.5 million for fiscal 2007
to $518,000 for fiscal 2008 but increased to $971,022 for fiscal 2009. The
decrease in prior years was a direct result of Citadel's withdrawal from the
USA market. The increase in fiscal 2009 is due to the increase in ESI
Integrity revenue and the reduction of direct costs for Citadel. Gross profit
for ESI Integrity during fiscal 2009 increased from $1.027 million in fiscal
2008 to $1.129 million in fiscal 2009, reflecting continued growth in that
division.
    Total operating expenses decreased during fiscal 2008 and 2009 from prior
years as the company has been significantly restructured to account for the
reduction in Citadel revenues.
    The widely fluctuating trend of the past three years is not likely to
continue. ESI Integrity continues to provide reliable, profitable revenue and
has a large contracted backlog of revenue extending forward over many years.
Citadel has reduced its operational costs in order to implement its strategy
to maintain a sufficiently comprehensive base of personnel and facilities to
enable it to develop new products, access new markets and rebuild its
business.

    
    Fiscal 2009 Financial Review

    Consolidated Revenues
    ---------------------
    The following table provides a breakdown of the Company's revenues from
its two subsidiaries for the reported periods:

                                               Year ended
                                        February 28,  February 29,
    ($ 000)                                2009          2008       % change
    -------------------------------------------------------------------------
    Integrity                              3,253         2,373           37%
    -------------------------------------------------------------------------
    Citadel                                  701           875          (20%)
    -------------------------------------------------------------------------
    Total revenue                          3,954         3,248           22%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total revenue increased by 22% to $3.954 million in fiscal 2009 from
$3.248 million in fiscal 2008. The increase was entirely due to the revenue
earned by ESI Integrity.

    Consolidated Gross Profit
    -------------------------
    The following table provides a summary of the Company's gross profit for
the reported periods:

                                                          Year ended
                                                   February 28,  February 29,
    ($ 000)                                           2009          2008
    -------------------------------------------------------------------------
    Revenues                                             3,954         3,248
    Direct costs                                         2,983         2,730
    -------------------------------------------------------------------------
    Gross profit                                           971           518
    Gross profit margin                                    25%           16%
    -------------------------------------------------------------------------

    The increase in consolidated gross profit margin in fiscal 2009 was due to
the additional revenue earned within the ESI Integrity subsidiary and the
reduction of direct cost for Citadel.
    The gross profit margin by dollar and as a percentage of revenues for each
subsidiary is listed below:

                                         Year ended
                          February 28,                February 29,
    ($ 000)                  2009                        2008
    -------------------------------------------------------------------------
                                             GP%                         GP%
                                             ---                         ---

    Integrity                1,129           35%         1,027           43%
    Citadel                   (158)         (22%)         (509)         (58%)
    -------------------------------------------------------------------------
    Total gross profit         971           25%           518           16%
    -------------------------------------------------------------------------
    

    Integrity's gross profit decreased to 35% from 43% the prior fiscal
period. This was due to recognizing deferred contract costs on discontinued
contracts. Citadel's gross profit margin during fiscal 2009 was (22%),
compared to (58%) for the prior fiscal year, reflecting the significant change
to its business consequent upon the cessation of financial processing in the
USA.

    
    Product Development
    -------------------
    Product development expenses were $0.604 million in fiscal 2009, a
decrease of 51% compared to $1.24 million for the prior period. These
expenditures are principally related to software development since the Company
no longer capitalizes those costs.

    Sales, Marketing and Customer Service
    -------------------------------------
    Sales, marketing and customer service expenses were $0.741 million for
fiscal 2009, a decrease of 56% compared to $1.67 million for the prior period.
The decrease primarily related to the contraction of Citadel's sales and
marketing forces, reduced travel, and reduction of marketing activities
relating to trade shows and promotional activities.

    General and Administrative
    --------------------------
    General and administrative expenses were $3.76 million for fiscal 2009, a
decrease of 30% compared to $5.41 million for the prior period. This decrease
resulted from reductions in the financial, human resources and information
systems departments to manage the decreased activity within the Citadel
division in particular.
    Included in general and administrative expenses was non-cash stock
compensation expense of approximately $230,712 for fiscal 2009, compared to
approximately $423,588 for fiscal 2008. Stock compensation expense decreased
during fiscal 2009 as a result of minimum stock grants to the Company's
employee base.

    Amortization of Property and Equipment
    --------------------------------------
    Amortization expenses were $453,205 for fiscal 2009, a decrease of 42%
compared to $776,706 for the prior period. The decrease is accounted for by
the cut back in purchases of computer hardware and software, furniture and
fixtures and leasehold improvements, consequent on the contraction of the
Company's employee base.

    Net Loss
    --------
    Net loss for fiscal 2009 was $5.068 million ($0.36 loss per share - basic
and diluted) compared to net loss of $7.2 million ($0.42 earnings per share;
basic and diluted) for fiscal 2008. This decrease was largely driven by the
restructuring of the Citadel business unit with the reductions in staffing and
rented premises as well as the legal and auditing costs associated with the
significant reduction of that portion of the Company's business. The over all
loss is due to the lack of additional revenue expected from the Citadel
business unit.

    Capital Expenditures
    --------------------
    Capital expenditures for fiscal 2009 were $15,061 compared to $103,811 for
fiscal 2008. The decrease in capital expenditures was primarily the result of
reductions in acquisitions and consolidation of operations by Citadel.

    Citadel Processing Accounts and Liabilities
    -------------------------------------------
    
    Citadel processing accounts as at February 28, 2009 totaled $2.958
million compared to $1.53 million as at February 29, 2008. The amounts are
segregated bank funds arising from the processing of deposits and payments for
Citadel merchants and consumers. The processing account balances are also
recorded as a liability because these funds represent amounts due to consumers
and merchants. The increase in Citadel processing accounts and Citadel
processing liabilities is due to the additional processing business in the
European market as well as the timing for disbursing to our merchants.
    During fiscal 2008 approximately US$9.1 million of funds which had been
on deposit in the USA, principally Merchant funds, were seized by the United
States Department of Justice (DoJ). Throughout fiscal 2008 the Company was
engaged in negotiations with the DoJ and the US District Attorney's Office for
the Southern District of New York ("USDA"); subsequent to the end of fiscal
2008 a resolution was reached with the USDA.

    Liquidity and Capital Resources

    ESI has historically financed its operations through the sale of equity
and through cash generated by its operations.
    During fiscal 2009, cash used in operating activities was ($4.467)
million compared to ($7.046) million during fiscal 2008, a decrease of $2.579
million from the prior period. Non-cash operating items in fiscal 2009 were
lower than in fiscal 2008, principally as a result of less provision being
taken for assets being amortized.
    Cash provided by financing activities totaled $2.349 million during
fiscal 2009 compared to cash used by financing activities of $0.361 million in
fiscal 2008. The financing activities in fiscal 2009 include the Company's
US$2 million loan obtained in June 2008.
    Overall, the net cash used in fiscal 2009 was $2.133 million compared to
net cash used of $6.411 million in fiscal 2008.

    
    Consolidated Financial Statements
    ---------------------------------
    NOTE TO READER: The following financial statements are extracted from the
complete audited financial statements of the Company which have been filed
together with the Management's Discussion and Analysis and Annual Information
Form with the Company's documents on www.sedar.com to which the reader is
referred.


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


    Consolidated Balance Sheets
    (expressed in Canadian dollars)
                                                 February 28,    February 29,
    Years Ended                                         2009            2008
    -------------------------------------------------------------------------

    Assets

    Cash and cash equivalents                  $     909,785   $   3,042,463
    Accounts receivable                            1,100,023       1,111,215
    Prepaids and other                               106,513         444,575
                                                -------------   -------------
                                                -------------   -------------
                                                   2,116,321       4,598,253

    Citadel processing accounts (Note 4)           2,958,565       1,219,205
    Property and equipment (Note 5)                  280,725         718,869
    Deferred contract costs                          696,234       1,116,461
                                                -------------   -------------

                                               $   6,051,845   $   7,652,788
                                                -------------   -------------
                                                -------------   -------------

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

    Liabilities

    Accounts payable and accrued liabilities   $   1,049,700   $     820,492
    Loan Payable (Note 14)                         2,564,704               -
    Capital lease obligations                         30,684         214,715
    Deferred revenue                                 535,667         706,773
                                                -------------   -------------
                                                   4,180,755       1,741,980

    Citadel processing liabilities (Note 4)        2,958,565       1,530,705
    Deferred revenue                               1,324,392       1,923,472
    Capital lease obligations                              -          30,684
                                                -------------   -------------

                                                   8,463,712       5,226,841
                                                -------------   -------------

    Shareholders' Equity (Deficiency)
    Capital stock (Note 8)                         9,957,959       9,957,959
    Warrants (Note 9)                                      -           5,926
    Contributed surplus (Note 10)                  4,328,885       4,092,247
    Deficit                                      (16,698,711)    (11,630,185)
                                                -------------   -------------

                                                  (2,411,867)      2,425,947
                                                -------------   -------------

                                               $   6,051,845   $   7,652,788
                                                -------------   -------------
                                                -------------   -------------

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



    Consolidated Statements of Operations and Comprehensive Loss and Deficit
    (expressed in Canadian dollars)

                                                 February 28,    February 29,
    Years Ended                                         2009            2008
    -------------------------------------------------------------------------

    Revenues (Note 7)                          $   3,954,820   $   3,248,630

    Direct costs                                   2,983,798       2,730,208
                                                -------------   -------------
    Gross profit                                     971,022         518,422
                                                -------------   -------------

    Operating expenses
      Product development                            604,070       1,241,378
      Sales, marketing and customer service          741,212       1,671,003
      General and administrative                   3,761,514       5,410,952
      Amortization of property and equipment         453,205         776,706
      Cost recovery (Note 1)                               -      (2,055,430)
                                                -------------   -------------
                                                   5,560,001       7,044,609
                                                -------------   -------------
    Loss before under noted items                 (4,588,979)     (6,526,187)

    Other expenses (income)
      Impairment of intangibles and other
       assets (Notes 1 and 2)                              -          57,192
      Foreign exchange loss                          383,641         837,685
      Interest income                                (41,536)       (297,751)
      Interest expense                               128,913          49,845
                                                -------------   -------------
    Loss before income taxes                      (5,059,997)     (7,173,158)
                                                -------------   -------------

    Provision for income taxes (Note 12)               8,529          27,243
                                                -------------   -------------
    Net loss and comprehensive loss            $  (5,068,526)  $  (7,200,401)
                                                -------------   -------------
                                                -------------   -------------
    Loss per share
      Basic and diluted                        $       (0.36)  $       (0.42)

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

    Deficit, beginning of year                 $ (11,630,185)  $  (4,429,784)

    Net loss                                      (5,068,526)     (7,200,401)
                                                -------------   -------------
    Deficit and accumulated other
     comprehensive deficit, end of year        $ (16,698,711)  $ (11,630,185)
    -------------------------------------------------------------------------

    Weighted average basic and diluted
     common shares outstanding                No. 14,234,727  No. 17,410,636




    Consolidated Statements of Cash Flows
    (expressed in Canadian dollars)

                                                 February 28,    February 29,
    Years Ended                                         2009            2008
    -------------------------------------------------------------------------

    Cash flows provided by (used in)

      Operating activities
        Net loss                               $  (5,068,526)  $  (7,200,401)
        Items not affecting cash:
          Stock-based compensation (Note 11)         230,712         423,588
          Amortization of property and
           equipment                                 453,205         776,706
          Impairment of intangibles and other
           assets (Notes 1 and 2)                          -          57,192

        Net changes in non-cash operating items
          Accounts receivable                         11,192        (460,152)
          Prepaids and other                         338,062         (65,047)
          Accounts payable and accrued
           liabilities                               229,208        (479,564)
          Allowance for bad debts (Note 1)          (311,500)       (496,000)
          Deferred revenue                          (770,186)      1,010,801
          Deferred contract costs                    420,227        (613,865)
                                                -------------   -------------

                                                  (4,467,606)     (7,046,742)
                                                -------------   -------------
      Investing activities
        Restricted cash                                    -       1,100,903
        Acquisition of property and equipment        (15,061)       (103,811)
                                                -------------   -------------

                                                     (15,061)        997,092
                                                -------------   -------------

      Financing activities
        Capital lease payments                      (214,715)       (348,671)
        Software license obligation                        -          (9,917)
        Cancellation of common share costs                 -          (3,000)
        Loan payable                               2,564,704               -
                                                -------------   -------------

                                                   2,349,989        (361,588)
                                                -------------   -------------

    Decrease in cash and cash equivalents         (2,132,678)     (6,411,238)

    Cash and cash equivalents, beginning
     of year                                       3,042,463       9,453,701
                                                -------------   -------------

    Cash and cash equivalents, end of year     $     909,785   $   3,042,463
                                                -------------   -------------
                                                -------------   -------------

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

    Cash and cash equivalents comprises
      Cash                                     $     909,785   $   3,042,354
      Cash equivalents                                     -             109
                                                -------------   -------------

                                               $     909,785   $   3,042,463
                                                -------------   -------------
                                                -------------   -------------

    Supplemental information
      Interest received                        $      41,536   $      71,977
      Interest paid                            $     128,913   $      25,432
      Income taxes paid                        $       8,529   $      27,243

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


    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. 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.

    
    About ESI Entertainment Systems Inc.
    ------------------------------------
    
    ESI Entertainment Systems Inc ("ESI") (CNSX: ESY) is an idea generation
and software development company. We develop concepts, create prototypes,
establish partnerships and validate potential markets. When we have proven a
product and its opportunities we create subsidiaries with a dedicated team,
infrastructure, and resources to allow it to focus on building and selling the
product to its market niche. Our team of experienced and dedicated people have
led us to be revolutionary market leaders in many industries, including
e-commerce payment technologies, hardware based input devices, real time
auditing systems, transaction processing systems, graphical 3D displays,
e-commerce web services, and payment fraud and risk mitigation.





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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