ESI Entertainment Systems Inc announces fiscal 2009 first quarter financial results



    BURNABY, BC, July 15 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the
"Company") (TSX: ESY) reported today its financial results (unaudited) for
fiscal Q1 2009 ended May 31, 2008. (All dollar amounts reported in Canadian
funds)

    
    Consolidated financial highlights for the quarter include (Q1 2009
compared to Q1 2008):

    -   Revenues increased 12% to $869,000 from $776,000

    -   Gross profit decreased by 42% to $161,000 from $280,000

    -   Net loss before income taxes decreased by 48% to $1.3 million from
        net loss before taxes of $2.5 million
    

    Our financial results were mainly driven by efforts being made during the
First Quarter to resolve outstanding issues with the United States Department
of Justice ("DoJ") whilst at the same time working to expand the business base
of ESI Integrity and rebuild the business of Citadel Commerce.
    "The first quarter of fiscal 2009 presented our Management team with many
challenges which have begun to bear fruit," said Tony Greening, Chair and
Chief Executive Officer. "The issues with the DoJ were finally resolved by
approval of a Deferred Prosecution Agreement which was approved on June 5,
2008, just a few days after the end of the First Quarter; this has enabled the
Company to direct its whole attention to building and developing its business.
The Company has a solid foundation to build from with a Financial Services
Authority e-Money issuer status in UK, intellectual property and know-how for
financial processing. We are continuing to build the client base of ESI
Integrity, and also are continuing to pursue the general e-commerce markets
worldwide to rebuild the business of Citadel Commerce."

    Financial Review

    Total revenue increased by 12% to $869,000 for the three months ended May
31, 2008 from $776,000 for the three months ended May 31, 2007.
    Gross profit was $161,000 for the first quarter of fiscal 2009 compared
to $280,000 for the first quarter of fiscal 2008, a decrease of $118,000, or
42%.
    Product development expenses were $117,000 during the three months ended
May 31, 2008, a decrease of 75% compared to $475,000 for the three months
ended May 31, 2007. The decrease is the result of reduction in software
development work on Citadel's software.
    Sales, marketing and customer service expenses were $266,000 during the
three months ended May 31, 2008, a decrease of 40% compared to $442,000 for
the three months ended May 31, 2007. The decrease is primarily the result of
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 $925,000 during the three months
ended May 31, 2008 a decrease of 7.5% compared to $1.1 million for the three
months ended May 31, 2007. This decrease reflects reductions in general staff
overheads and reduction in amortization costs on equipment.
    Net loss for the quarter ended May 31, 2008 was $1.3 million ($0.07 net
loss per share - basic) compared to $2.5 million for the quarter ended May 31,
2007 ($0.13 net earnings per share- basic and diluted). Net loss for the
current quarter included a foreign exchange loss of $5,700 compared to
$742,000 in the same period of fiscal 2008. 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).
    Cash and cash equivalents totaled $1.5 million at the end of the current
quarter.
    Subsequent to the end of the quarter, the company secured a two million
dollar loan bearing interest at the rate of 6% per annum and repayable in two
instalments 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.



    
    Consolidated Balance Sheets
    (expressed in Canadian dollars)
    (unaudited)                                         May 31,  February 29,
                                                          2008          2008
    -------------------------------------------------------------------------

    Assets
    Current
      Cash and cash equivalents                   $  1,470,232  $  3,042,463
      Accounts receivable                              888,375     1,111,215
      Prepaids                                         577,191       444,575
                                                  ------------- -------------
                                                     2,935,798     4,598,253

    Citadel processing accounts                      2,025,117     1,219,205
    Property and equipment (Note 4)                    549,484       718,869
    Deferred contract costs                          1,212,032     1,116,461
                                                  ------------- -------------
                                                  $  6,722,431  $  7,652,788
                                                  ------------- -------------
                                                  ------------- -------------

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

    Liabilities
    Current
      Accounts payable and accrued liabilities         756,115  $    820,492
      Capital lease obligations                        120,828       214,715
      Deferred revenue                                 660,168       706,773
                                                  ------------- -------------
                                                     1,537,111     1,741,980

    Citadel processing liabilities (Note 3)          2,025,117     1,530,705
    Deferred revenue                                 2,015,932     1,923,472
    Capital lease obligations                           30,684        30,684
                                                  ------------- -------------
                                                     5,608,844     5,226,841
                                                  ------------- -------------
    Shareholders' Equity
    Capital stock (Note 5)                           9,963,885     9,957,959
    Warrants (Note 6)                                        -         5,926
    Contributed surplus                              4,092,247     4,092,247
    (Deficit)                                      (12,942,545)  (11,630,185)
                                                  ------------- -------------
                                                     1,113,587     2,425,947
                                                  ------------- -------------
                                                  $  6,722,431  $  7,652,788
                                                  ------------- -------------
                                                  ------------- -------------

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


    Consolidated Statements of Operations and Comprehensive
    Income (Deficit) Retained Earnings
    (expressed in Canadian dollars)
    (unaudited)
                                                   Three Months Ended May 31,
                                                          2008          2007
    -------------------------------------------------------------------------

    Revenues (Note 4)                             $    869,388  $    775,580

    Direct costs                                       707,692       496,075
                                                  ------------- -------------

    Gross profit                                       161,696       279,505
                                                  ------------- -------------

    Operating expenses
      Product development                              116,649       475,148
      Sales, marketing and customer service            265,599       441,682
      General and administrative                       925,048     1,073,907
      Amortization of property and equipment           169,385       211,616
                                                  ------------- -------------
                                                     1,476,681     2,202,353
                                                  ------------- -------------
    (Loss) Earnings before under noted items        (1,314,985)   (1,922,848)

    Other expenses (income)
      Foreign exchange (gain) loss                       5,760       742,038
      Interest income                                  (14,950)     (156,941)
      Interest expense                                   6,565        23,645
                                                  ------------- -------------
    Net (loss) earnings                           $ (1,312,360) $ (2,531,590)
                                                  ------------- -------------
                                                  ------------- -------------
    (Loss) Earnings per share
      Basic                                       $      (0.07) $      (0.13)
      Diluted                                            (0.07)        (0.13)

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

    Retained earnings (deficit),
     beginning of period                          $(11,630,185) $ (4,429,784)

    Net (loss) earnings                             (1,312,360)   (2,531,590)
                                                  ------------- -------------
    (Deficit) retained earnings, end of period    $(12,942,545) $ (6,961,374)
                                                  ------------- -------------
                                                  ------------- -------------

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



    Consolidated Statements of Cash Flows
    (expressed in Canadian dollars)
    (unaudited)                                    Three Months Ended May 31,
                                                          2008          2007
    -------------------------------------------------------------------------

    Cash flows provided by (used in)

      Operating activities
        Net (loss) earnings                       $ (1,312,360) $ (2,531,591)
        Items not affecting cash:
          Stock-based compensation (Note 7)                  -        75,216
          Amortization of property and equipment       169,385       211,616

        Net changes in non-cash operating items
          Accounts receivable                          221,946       (18,156)
          Prepaids                                    (132,616)      (29,512)
          Accounts payable and accrued liabilities     (64,377)     (297,630)
          Allowance for bad debts                     (310,608)     (807,500)
          Deferred revenue                              45,857       728,291
          Deferred contract costs                      (95,571)     (192,537)
                                                  ------------- -------------

                                                    (1,478,344)   (2,861,803)
                                                  ------------- -------------
        Investing activities
          Acquisition of property and equipment              -       (75,374)
          Restricted cash                                    -     1,100,903
                                                  ------------- -------------

                                                             -     1,025,529
                                                  ------------- -------------
        Financing activities
          Capital lease payments                       (93,887)      (83,300)
          Software license obligation                        -        (9,917)
                                                  ------------- -------------

                                                       (93,887)      (93,217)
                                                  ------------- -------------
    Increase (decrease) in cash and cash
     equivalents                                    (1,572,231)   (1,929,491)

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

    Cash and cash equivalents, end of period      $  1,470,232  $  7,524,210
                                                  ------------- -------------
                                                  ------------- -------------

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

    Supplemental information
      Interest received                           $     14,950  $     73,968
      Interest paid                                      6,565        31,477

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

    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.

    %SEDAR: 00023260E




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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ESI Entertainment Systems Inc.

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