ESI Entertainment announces fiscal 2009 third quarter financial results



    BURNABY, BC, Jan. 14 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the
"Company") (TSX: ESY) reported today its financial results for fiscal Q3 2009
ended November 30, 2008. (All dollar amounts reported in Canadian funds)

    
    Financial Highlights for the Three and Nine Months ended November 30,
    2008

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

    -   Revenue for the three months to November 30, 2008, increased from
        $761,688 to $1,196,471 +57% - over the comparative period in the
        prior year;
    -   Revenue for the nine months to November 30, 2008 increased from
        $2,219,453 to $2,808,153 +27% - over the comparative period in the
        prior year;
    -   Gross Profit for the three months to November 30, 2008, increased
        from $64,176 to $619,634 +865% - over the comparative period in the
        prior year;
    -   Gross Profit for the nine months to November 30, 2008, increased from
        $373,051 to $721,754 +93% - over the comparative period in the prior
        year;
    -   Net loss for the three months to November 30, 2008, decreased from
        $2,250,752 to $1,106,477 (51%) - in the comparative period in the
        prior year;
    -   Net loss for the nine months to November 30, 2008, decreased from
        $7,423,989 to $3,965,574 (47%) - over the comparative period in the
        prior year;
    

    In September 2008 Citadel was audited by FTI Consulting to provide
assurance to the USA Department of Justice (DOJ) that it is adhering to the
terms of the agreement signed in June 2008. The audit and report to the DOJ
were completed successfully and the second and final report and audit will
occur in December 2009. Citadel remains one of only two payment processors to
have reached a settlement thus removing any future overhang from its past
business of providing services to USA consumers.
    The terms of the USD $2 million loan obtained in June 2008 requires the
first repayment of USD $1 million to be made during December 2008. The company
has used the additional time provided by the loan to progress the growth of
its Citadel and Integrity subsidiaries while continuing to pursue divestiture
and investment transactions. A planned divestiture of the ESI Integrity
division, which would have enabled us to repay the entire loan, did not
conclude during the Third Quarter as a consequence of the worldwide economic
downturn; as a result the Company was unable to meet its first installment
repayment obligation on December 11, 2008. While the loan has not yet been
repaid, the Lender has been kept apprised of the situation and has indicated
that it wishes us to continue to work towards Closing of a divestiture which
will enable the loan to be repaid.
    During the past several months both Integrity and Citadel have been
subject to due diligence studies by potential acquirers and investors and this
work is continuing. Management is optimistic that one or more potential
transactions will conclude during the fourth quarter of FY09 allowing us to
repay the loan.
    The Company will also soon downgrade its large eMoney Authorisation with
the UK Financial Services Authority to a small eMoney Exemption. The myCitadel
eMoney wallet is not a key part of the Company's strategy for future growth
and the large eMoney FSA Authorisation is therefore no longer needed. This
releases the deposit held to underwrite consumer deposits in myCitadel. The
Company will maintain its UK Money Services Business Registration.
    We are also continuing to review the expenses and grow the revenues in
the subsidiaries. ESI Integrity has slightly decreased its resource levels,
increased its revenues and built a strong funnel of business for 2009.
    Citadel Commerce has re-structured to significantly reduce its costs
while retaining a core team of individuals with the ability to function well
in multiple roles and retain the experience and expertise to re-grow the
Company.
    The statements show that Citadel has not only reduced costs but is now
achieving notable growth in its revenues driven mainly by the accelerating
adoption of its Instant Internet Banking service. Many major merchants have
signed agreements to use this service and have been integrating to the Citadel
servers. Much of this work is now complete and is reflected in the growth of
Citadel's revenues as the merchants begin to switch transactions to our
service. Management believes that it is reasonable to expect this growth to
continue.
    The general conservatism in the markets is holding our share price to an
all time low. We are not unique in this situation and the TSX has responded by
extending to April 2009 the time for us to meet continued listing
qualifications. Given the progress to-date, the company is working positively
to achieve this objective.
    The possibility of a successful renewal now exists. The Board and
employees remain committed to bringing the Company through the final stages of
the turnaround and will do everything possible to create a successful outcome.

    
    "Anthony Greening"                      "Michael Meeks"
    ------------------                      ---------------
    Chairman & CEO                          President


    Results of Operations

    Consolidated Revenues

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

                Three months ended November 30  Nine months ended November 30
                ------------------------------  -----------------------------

    ($ 000)           2008      2007  % Change      2008      2007  % Change
    -------------------------------------------------------------------------
    Integrity        1,022       685       49%     2,388     1,744       37%
    Citadel            174        77      126%       420       476      (12%)
    -------------------------------------------------------------------------
    Total Revenue    1,196       762       57%     2,808     2,220       26%

    Approximately 85% of ESI's revenues were generated by ESI Integrity during
the three months ended November 30, 2008 compared to 90% for the same period
in the prior year.

    Consolidated Gross Profit

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

                                            Three months         Nine months
                                            ended Nov 30        ended Nov 30
                                            ------------        ------------

    ($ 000)                               2008      2007      2008      2007
    -------------------------------------------------------------------------
    Revenues                             1,196       762     2,808     2,220
    Direct Costs                           577       698     2,086     1,846
    -------------------------------------------------------------------------
    Gross profit                           619        64       722       374
    Gross profit margin (%)                52%        8%       26%       17%
    -------------------------------------------------------------------------
    

    Product Development

    Product development expenses were $59,986 and $267,764 during the three
and nine months ended November 30, 2008 respectively, a decrease of 76% and
76% respectively compared to $253,197 and $1,108,153 for the three and nine
months ended November 30, 2007. The decrease is mainly related to the reduced
software development work on ESI Integrity products and the reduced
development needed on Citadel to focus on the European and general e-commerce
markets as our Rapid Bank Transfer and Instant Bank Transfer products have
matured and require little on-going development.

    Sales, Marketing and Customer Service

    Sales, marketing and customer service expenses were $181,946 and $658,789
during the three and nine months ended November 30, 2008 respectively, a
decrease of 64% and 50% respectively compared to $503,545 and $1,312,001 for
the three and nine months ended November 30, 2007. 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

    General and administrative expenses were $985,757 and $2,957,975 during
the three and nine months ended November 30, 2008 respectively, representing a
decrease of 37% and 27% compared to $1,571,751 and $4,040,688 for the three
months and nine months ended November 30, 2007. 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.

    Amortization of Property and Equipment

    Amortization expenses were $85,186 and $379,313 during the three month
and nine month periods ended November 30, 2008, respectively, a decrease of
54% and 36% compared to $184,821 and $597,523 for the corresponding periods
ended November 30, 2007. The decrease in amortization expense mainly relates
to very few new assets being purchased and amortization being reduced on older
equipment.

    Net Loss

    Net loss for the three and nine month periods ended November 30, 2008
were $1,106,477 ($0.07 net loss per share - basic and diluted) and $3,965,574
($0.28 net loss per share - basic and diluted) compared to net loss of
$2,250,752 ($0.13 net loss per share - basic and fully diluted) and $7,423,939
($0.41 net loss per share- basic and fully diluted) for the prior comparative
periods.
    The Company has incurred significant operating losses and net utilization
of cash in operations in all prior periods. Accordingly, the Company will
require continued financial support from its shareholders and creditors and/or
new debt or equity financing until it is able to generate sufficient cash flow
from operations on a sustained basis.
    As at November 30, 2008, the Company had cash and cash equivalents of
$887,278, compared to $2,194,883 on November 30, 2007.
    During the second quarter of fiscal 2009, the company secured a US $2
million dollar loan bearing interest at the rate of 6% per annum and repayable
in two equal installments with the first due on December 11, 2008 and the
second due on June 11, 2009; the loan is secured by first ranking fixed
charges on the entire issued share capital of two of the Company's principal
subsidiaries, ESI Integrity Inc. and Citadel Commerce UK Limited. The Company
had planned to retire the entire Loan before the date for the payment of the
first installment, and had entered into a Letter of Intent for the divestiture
of the ESI Integrity division which, it was anticipated, would generate the
necessary funds for this purpose.
    However, as a consequence of the worldwide economic downturn the proposed
purchaser withdrew and that proposed divestiture did not proceed. As a result,
the Company was unable to meet its obligation for repayment of US$1 million on
December 11, 2008. The Company is working closely with the Lender, and is
presently working on a new proposed divestiture of the ESI Integrity division
which will enable it to retire the Loan; there is not yet any binding
agreement for the proposed divestiture, and accordingly there can be no
assurance that it will be completed or that the Loan will be repaid.


    
    ESI Entertainment Systems Inc.
    Consolidated Balance Sheets
    (expressed in Canadian dollars)

                                                   November 30,  February 29,
                                                          2008          2008
                                                    (unaudited)     (audited)
    -------------------------------------------------------------------------

    Assets

    Cash and cash equivalents                     $    887,278  $  3,042,463
    Accounts receivable                              1,023,009     1,111,215
    Prepaids and Other                                 419,306       444,575
                                                  ------------- -------------
                                                     2,329,593     4,598,253

    Citadel processing accounts (Note 3)             3,029,648     1,219,205
    Property and equipment (Note 4)                    371,973       718,869
    Deferred contract costs                          1,240,948     1,116,461
                                                  ------------- -------------

                                                  $  6,972,162  $  7,652,788
                                                  ------------- -------------
                                                  ------------- -------------

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

    Liabilities

    Accounts payable and accrued liabilities      $    787,893  $    820,492
    Loan Payable (Note 9)                            2,461,868             -
    Capital lease obligations                           58,138       214,715
    Deferred revenue                                   889,621       706,773
                                                  ------------- -------------
                                                     4,197,520     1,741,980

    Citadel processing liabilities (Note 3)          3,029,648     1,530,705
    Deferred revenue                                 1,284,621     1,923,472
    Capital lease obligations                                -        30,684
                                                  ------------- -------------

                                                     8,511,789     5,226,841
                                                  ------------- -------------

    Shareholders' Equity (Deficit)

    Capital stock (Note 5)                           9,957,959     9,957,959
    Warrants (Note 6)                                        -         5,926
    Contributed surplus                              4,098,173     4,092,247
    (Deficit)                                      (15,595,759)  (11,630,185)
                                                  ------------- -------------

                                                    (1,539,627)    2,425,947
                                                  ------------- -------------

                                                  $  6,972,162  $  7,652,788
                                                  ------------- -------------
                                                  ------------- -------------

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


    On behalf of the Board

        "Tony Greening"  Director              "Michael Meeks"  Director
      -------------------                    ------------------
         Tony Greening                          Michael Meeks


    ESI Entertainment Systems Inc.
    Consolidated Statements of Operations and Comprehensive Loss and Deficit
    (expressed in Canadian dollars)

                              Three Months Ended           Nine Months Ended
                                     November 30,                November 30,
    (unaudited)               2008          2007          2008          2007
    -------------------------------------------------------------------------

    Revenues          $  1,196,471  $    761,688  $  2,808,153  $  2,219,453

    Direct costs           576,837       697,512     2,086,399     1,846,402
                      ------------- ------------- ------------- -------------

    Gross profit           619,634        64,176       721,754       373,051
                      ------------- ------------- ------------- -------------

    Operating expenses
      Product
       development          59,986       253,197       267,764     1,108,153
      Sales, marketing
       and customer
       service             181,946       503,545       658,789     1,312,001
      General and
       administrative      985,757     1,571,751     2,957,975     4,040,688
      Amortization of
       property and
       equipment            85,186       184,821       379,313       597,523
                      ------------- ------------- ------------- -------------

                         1,312,875     2,513,314     4,263,841     7,058,365
                      ------------- ------------- ------------- -------------

    Earnings before
     under noted items    (693,241)   (2,449,138)   (3,542,087)   (6,685,314)

    Other expenses (income)
      Foreign exchange
       loss (gain)         369,369      (162,612)      375,252       938,300
      Interest income       (6,574)      (43,094)      (34,779)     (268,868)
      Interest expense      43,619        (4,354)       74,485        40,508
                      ------------- ------------- ------------- -------------

    Earnings before income
     taxes and non-
     controlling
     interest           (1,099,655)   (2,239,078)   (3,957,045)   (7,395,254)
                      ------------- ------------- ------------- -------------

    Provision for
     income taxes
      Current                6,822        11,674         8,529        28,735
      Future                     -             -             -             -
                      ------------- ------------- ------------- -------------

                             6,822        11,674         8,529        28,735
                      ------------- ------------- ------------- -------------

    Net loss and
     comprehensive
     loss             $ (1,106,477) $ (2,250,752) $ (3,965,574) $ (7,423,989)
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------

    Earnings per share
      Basic           $      (0.07) $      (0.13) $      (0.28) $      (0.41)
      Diluted                (0.07)        (0.13)        (0.28)        (0.41)

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

    Deficit, beginning
     of  period       $(14,489,282) $ (9,603,021) $(11,630,185) $ (4,429,784)

    Net loss            (1,106,477)   (2,250,752)   (3,965,574)   (7,423,989)
                      ------------- ------------- ------------- -------------

    Deficit, end
     of period        $(15,595,759) $(11,853,773) $(15,595,759) $(11,853,773)
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------


    ESI Entertainment Systems Inc.
    Consolidated Statements of Cash Flows
    (expressed in Canadian dollars)

                              Three Months Ended           Nine Months Ended
                                     November 30,                November 30,
    (unaudited)               2008          2007          2008          2007
    -------------------------------------------------------------------------

    Cash flows provided
     by (used in)

      Operating
       activities
        Net earnings  $ (1,106,477) $ (2,250,752) $ (3,965,574) $ (7,423,989)
        Items not
         affecting cash:
          Stock-based
           compensation
           (Note 7)              -        53,517             -       231,687
          Amortization
           of property
           and equipment    85,186       184,821       379,313       597,523
          Impairment of
           intangible
           assets                -             -       (34,746)            -
          Future income
           taxes             6,822             -         8,529             -

        Net changes in
         non-cash
         operating
         items:
          Accounts
           receivable     (207,148)     (154,636)       88,206      (539,207)
          Prepaids         254,104        88,593        25,269        15,216
          Allowance
           for bad
           debts                 -       272,888      (310,608)     (534,612)
          Accounts
           payable and
           accrued
           liabilities     463,896       (57,173)      (32,599)     (537.503)
          Deferred
           revenue        (495,627)      (30,622)     (463,095)      739,050
          Deferred
           contract
           costs           (63,691)     (132,296)     (124,487)     (536,404)
                      ------------- ------------- ------------- -------------
                        (1,062,935)   (2,025,660)   (4,429,792)   (7,988,239)
                      ------------- ------------- ------------- -------------

      Investing
       activities
        Acquisition of
         property and
         equipment               -        (6,745)            -      (101,010)
        Restricted cash          -             -             -     1,100,903
                      ------------- ------------- ------------- -------------
                                 -        (6,745)            -       999,893
                      ------------- ------------- ------------- -------------

      Financing
       activities
        Loan payable             -             -     2,461,868             -
        Capital lease
         payments          (38,330)      (88,218)     (187,261)     (257,555)
        Software license
         obligation              -             -             -        (9,917)
        Share
         cancellation
         costs                   -        (3,000)            -        (3,000)
                      ------------- ------------- ------------- -------------

                           (38,330)      (91,218)    2,274,607      (270,472)
                      ------------- ------------- ------------- -------------

    Increase in cash
     and cash
     equivalents        (1,101,265)   (2,123,623)   (2,155,185)   (7,258,818)

    Cash and cash
     equivalents,
     beginning of
     period              1,988,543     4,318,506     3,042,463     9,453,701
                      ------------- ------------- ------------- -------------

    Cash and cash
     equivalents, end
     of  period       $    887,278  $  2,194,883  $    887,278  $  2,194,883
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------

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

    Supplemental
     information
    Interest
     received         $      6,574  $     43,094  $     34,779  $    160,279
    Interest paid           43,619        16,096        74,485        68,790
    


    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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