ESI Entertainment Systems Inc announces fiscal 2009 second quarter financial results



    BURNABY, BC, Oct. 14 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the
"Company") (TSX: ESY) reported today its financial results (unaudited) for
fiscal Q2 2009 ended August 31, 2008. (All dollar amounts reported in Canadian
funds)

    
    Consolidated financial highlights for the quarter include (Q2 2009
compared to Q2 2008):

    -   Revenue for the three months to August 31, 2008, increased from
        $682,186 to $742,294 +9% - over the comparative period in the
        prior year;

    -   Revenue for the six months to August 31, 2008 increased from
        $1,457,765 to $1,611,682 +10% - over the comparative period in the
        prior year;

    -   Gross Profit for the three months to August 31, 2008, decreased from
        $29,371 to ($59,576) (302%) - over the comparative period in the
        prior year;

    -   Gross Profit for the six months to August 31, 2008, decreased from
        $308,875 to $102,120 (67%) - over the comparative period in the
        prior year;

    -   Net loss for the three months to August 31, 2008, decreased from
        $2,641,646 to $1,546,737 (46%) - in the comparative period in the
        prior year;

    -   Net loss for the six months to August 31, 2008, decreased from
        $5,173,237 to $2,859,097 (49%) - over the comparative period in the
        prior year.
    

    We are pleased to present our results for the second quarter ended
August 31, 2008.
    The Company and its subsidiary Citadel Commerce concluded an agreement
with the USA Department of Justice in June 2008. In so doing, Citadel became
one of only two payment processors to have reached a settlement thus enabling
it to move forward to provide its services to merchants outside the USA. 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. The audit and report to the DOJ was completed successfully. The
second and final report and audit will occur in December 2009.
    The financial impact of the settlement required the Company to find
immediate funding and we were fortunate to obtain a USD $2 million loan in
June 2008. The terms of the loan require the first repayment of USD $1 million
during December 2008 thus providing the Company with six months to establish
alternative funding sources.
    The Company has focused tightly upon its best opportunities to re-ignite
the Company's growth. The best opportunity to provide significant growth is
the Company's Rapid and Instant Internet Banking service provided by Citadel.
Given this strategy, the Board decided to divest its ESI Integrity subsidiary.
The company has signed a Letter of Intent with a US-based company that intends
to acquire ESI Integrity for USD $2 million, thus allowing the Company to
repay the USD $2 million loan and again become debt free.
    While ESI Integrity has slightly decreased its resource levels, the
Company has re-structured to significantly reduce the costs of its Citadel
subsidiary. The Citadel Costa Rica office has been closed and the Citadel
Vancouver personnel have been reduced by 85% since the demise of Citadel's USA
facing business between October 2007 and January 2008. Citadel now has a key
core team that contains individuals with the ability to function well in
multiple roles and retain the experience and expertise to re-grow the Company.
A reflection of this is the promotion of Ian Franks, our Director of Finance,
who after working with the Company for many years has accepted the role of
Chief Financial Officer.
    Citadel is working on a number of corporate transactions of which two are
expected to conclude during the coming quarter. However the main thrust has
been to conclude agreements with major merchants for use of our Internet
Banking service. Many such agreements have been successfully concluded and
some merchants are beginning to use the new service; it is still too early to
state that the previous high growth rates will be achieved.
    With changes to the Company's business and the worldwide impact of the
sub-prime crisis in the USA, markets have been depressed and our share price
has been at an all time low. This has resulted in the TSX notifying the
Company that it has until January to improve its share performance or risk
delisting from the main board. Management is working to provide the renewed
revenue growth which once achieved could provide the catalyst for renewed
support of the stock and allow the Company to maintain its TSX listing. Should
this be achieved, management will seek additional funding to provide the time
to achieve profitability and renewed growth.
    The past year has required a good deal of hard work to move beyond the
set-backs brought about by the loss of Citadel's USA facing business. But this
has now been achieved and 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

    Financial Review
    

    Total revenue increased by +9% to $742,294 for the three months ended
August 31, 2008 from $682,186 for the three months ended August 31, 2007.
    Product development expenses were $91,129 and $207,778 during the three
and six months ended August 31, 2008 respectively, a decrease of (76%) and
(76%) respectively compared to $379,807 and $854,956 for the three and six
months ended August 31, 2007. The decrease is mainly related to the reduced
software development work on ESI Integrity products and the focus on the
European and general e-commerce markets.
    Sales, marketing and customer service expenses were $211,243 and $476,843
during the three and six months ended August 31, 2008 respectively, a decrease
of (42%) and (41%) respectively compared to $366,773 and $808,456 for the
three and six months ended August 31, 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 expenses were $1,047,170 and $1,972,218 during
the three and six months ended August 31, 2008 respectively, representing a
decrease of (25%) and (20%) compared to $1,395,032 and $2,468,937 for the
three months and six months ended August 31, 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 expenses were $124,742 and $294,127 during the three month
and six month periods ended August 31, 2008, respectively, a decrease of (38%)
and (29%) compared to $201,086 and $412,702 for the corresponding periods
ended August 31, 2007. The decrease in amortization expense mainly relates to
very few new assets being purchased and amortization being reduced on older
equipment.
    Net loss for the three and six month periods ended August 31, 2008 were
$1,546,737 ($0.08 net loss per share - basic and diluted) and $2,859,097
($0.15 net loss per share - basic and diluted) compared to net loss of
$2,641,646 ($0.14 net loss per share - basic and fully diluted) and $5,173,237
($0.27 net loss per share - basic and fully diluted) for the prior comparative
periods.
    Since August 31, 2008, the Company has entered into a Letter of Intent to
divest its interest in ESI Integrity Inc. Under terms of the Letter of Intent,
ESI Integrity Inc. and all of its assets, contracts and resources will be sold
for a consideration of US $2 million. ESI Entertainment Systems Inc will use
these funds to immediately reduce its debt obligations. It is anticipated that
a formal Agreement of Purchase and Sale will be entered into during October
2008, with Closing to follow as soon thereafter as practicable. Closing of the
proposed transaction will be subject to the terms of the formal Agreement,
including due diligence, and will be subject to all relevant regulatory and
other consents and approvals.

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

    Assets

    Cash and cash equivalents                     $  1,988,543  $  3,042,463
    Accounts receivable                                815,861     1,111,215
    Prepaids and Other                                 673,410       444,575
                                                  ------------- -------------
                                                     3,477,814     4,598,253

    Citadel processing accounts                      2,619,605     1,219,205
    Property and equipment                             457,782       718,869
    Deferred contract costs                          1,177,257     1,116,461
                                                  ------------- -------------

                                                  $  7,732,458  $  7,652,788
                                                  ------------- -------------
                                                  ------------- -------------
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Liabilities
    Accounts payable and accrued liabilities      $    717,385  $    820,492
    Loan Payable                                     2,068,480             -
    Capital lease obligations                           65,784       214,715
    Deferred revenue                                 1,274,893       706,773
                                                  ------------- -------------
                                                     4,126,542     1,741,980

    Citadel processing liabilities                   2,619,605     1,530,705
    Deferred revenue                                 1,388,777     1,923,472
    Capital lease obligations                           30,684        30,684
                                                  ------------- -------------

                                                     8,165,608     5,226,841
                                                  ------------- -------------

    Shareholders' Equity
    Capital stock                                    9,963,885     9,957,959
    Warrants                                                 -         5,926
    Contributed surplus                              4,092,247     4,092,247
    Deficit                                        (14,489,282)  (11,630,185)
                                                  ------------- -------------

                                                      (433,150)    2,425,947
                                                  ------------- -------------

                                                  $  7,732,458  $  7,652,788
                                                  ------------- -------------
                                                  ------------- -------------
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    On behalf of the Board

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



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

                              Three Months Ended           Six Months Ended
                                  August 31,                  August 31,
    (unaudited)               2008          2007          2008          2007
    -------------------------------------------------------------------------


    Revenues          $    742,294  $    682,186  $  1,611,682  $  1,457,765

    Direct costs           801,870       652,815     1,509,562     1,148,890
                      ------------- ------------- ------------- -------------

    Gross profit           (59,576)       29,371       102,120       308,875
                      ------------- ------------- ------------- -------------

    Operating expenses
      Product
       development          91,129       379,807       207,778       854,956
      Sales, marketing
       and customer
       service             211,243       366,773       476,843       808,456
      General and
       administrative    1,047,170     1,395,032     1,972,218     2,468,937
      Amortization of
       property and
       equipment           124,742       201,086       294,127       412,702
                      ------------- ------------- ------------- -------------

                         1,474,284     2,342,698     2,950,966     4,545,051
                      ------------- ------------- ------------- -------------

    Earnings before
     under noted items  (1,533,860)   (2,313,327)    2,848,846    (4,236,176)

    Other expenses
     (income)
      Foreign exchange
       loss (gain)             123       358,874         5,883     1,100,912
      Interest income      (13,254)      (68,833)      (28,205)     (225,774)
      Interest expense      24,301        21,217        30,866        44,862
                      ------------- ------------- ------------- -------------

    Earnings before
     income taxes and
     non-controlling
     interest           (1,545,030)   (2,624,585)   (2,857,390)   (5,156,176)
                      ------------- ------------- ------------- -------------

    Provision for
     income taxes
      Current                1,707        17,061         1,707        17,061
                      ------------- ------------- ------------- -------------

                             1,707        17,061         1,707        17,061
                      ------------- ------------- ------------- -------------

    Net loss and
     comprehensive
     loss             $ (1,546,737) $ (2,641,646) $ (2,859,097) $ (5,173,237)
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------

    Loss per share
      Basic           $      (0.08) $      (0.14) $      (0.15) $      (0.27)
      Diluted                (0.08)        (0.14)        (0.15)        (0.27)

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


    Retained earnings
     (deficit),
     beginning of
     period           $(11,630,185) $ (6,961,375) $(11,630,185) $ (4,429,784)

    Net loss            (1,546,737)   (2,641,646)   (2,859,097)   (5,173,237)
                      ------------- ------------- ------------- -------------

    Retained earnings
     (deficit), end
     of period        $(13,176,923) $ (9,603,021) $(14,489,282) $ (9,603,021)
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------



    Consolidated Statements of Cash Flows
    (expressed in Canadian dollars)

                              Three Months Ended           Six Months Ended
                                  August 31,                  August 31,
    (unaudited)               2008          2007          2008          2007
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash flows provided by (used in)

    Operating activities
      Net Loss        $ (1,546,737) $ (2,641,646) $ (2,859,098) $ (5,173,237)
      Items not
       affecting cash:
        Stock-based
         compensation            -       102,954             -       178,170
        Amortization
         of property
         and equipment     124,742       201,086       294,127       412,702
        Impairment of
         intangibles
         and other
         assets            (34,746)            -       (34,746)            -
        Future income
         taxes               1,707             -         1,707             -

      Net changes in
       non-cash
       operating items:
        Accounts
         receivable         72,514      (366,415)      294,462      (384,571)
        Prepaids           (96,219)      (43,865)     (228,835)      (73,377)
        Allowance for
         bad debts               -             -      (310,608)     (807,500)
        Accounts payable
         and accrued
         liabilities       (38,730)     (182,700)     (103,107)     (480,330)
        Deferred
         revenue           (12,430)       41,381        33,425       769,672
        Deferred
         contract
         costs              34,775      (211,571)      (60,796)     (404,108)
                      ------------- ------------- ------------- -------------
                        (1,495,124)   (3,100,776)   (2,973,469)   (5,962,579)
                      ------------- ------------- ------------- -------------

    Investing activities
      Acquisition of
       property and
       equipment                 -       (18,891)            -       (94,265)
      Restricted cash            -             -             -     1,100,903
                      ------------- ------------- ------------- -------------
                                 -       (18,891)            -     1,006,638
                      ------------- ------------- ------------- -------------

    Financing activities
      Loan payable       2,068,480             -     2,068,480             -
      Capital lease
       payments            (55,044)      (86,037)     (148,931)     (169,337)
      Software license
       obligation                -             -             -        (9,917)
                      ------------- ------------- ------------- -------------
                         2,013,436       (86,037)    1,919,549      (179,254)
                      ------------- ------------- ------------- -------------

    Increase (Decrease)
     in cash and cash
     equivalents           518,311    (3,205,704)   (1,053,920)   (5,135,195)

    Cash and cash
     equivalents,
     beginning of
     period              1,470,232     7,524,210     3,042,463     9,453,701
                      ------------- ------------- ------------- -------------

    Cash and cash
     equivalents,
     end of period    $  1,988,543  $  4,318,506  $  1,988,543  $  4,318,506
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Supplemental
     information
      Interest
       received       $     13,254  $     43,217  $     28,204  $    117,185
      Interest
       paid                 24,301        21,217        30,515        52,694



    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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