ESI ENTERTAINMENT SYSTEMS INC ANNOUNCES FISCAL 2011 THIRD QUARTER FINANCIAL RESULTS

BURNABY, BC, Jan. 28 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the "Company") (CNSX: ESY) reported today its financial results (unaudited) for fiscal Q3 2011 ended November 30, 2010. (All dollar amounts reported in Canadian funds)

Consolidated financial highlights for the quarter include (Q3 2011 compared to Q3 2010):

  • Revenues increased by 13% to $937,000 from $832,000

  • Gross profit increased by 145% to $488,000 from $198,000

  • Operating Expenses decreased by 19% to $664,000 from $825,000

  • Net loss decreased from $525,000 to net earnings of $250,000.

During the Third Quarter we continued to reduce direct and operating expenses whilst at the same time are working to expand the business base of ESI Integrity and grow the business of Citadel Commerce.

Despite these global financially turbulent times, which bring uncertainty to many businesses, we are pleased that the ESI group is able to keep its costs to a minimum and continue to reduce its net loss. Each of the two operating subsidiaries has closely governed expenditures while remaining focused on building its business. Growing Citadel transaction processing resulted in our gross revenues increasing by 14% over last quarter (Q2 2011); the increase in net earnings is due to a foreign exchange adjustment from prior periods

Financial Review

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)   2010 2009 % Change     2010 2009 % Change
Integrity   401 546 (27%)     1,275 1,832 (30%)
Citadel   536 286 87%     1,227      786 56%
Total Revenue 937 832 13%     2,502 2,618 (4%)

Total revenue increased by 13% to $937,000 for the three months ended November 30, 2010 from $832,000 for the three months ended November 30, 2009. 

Integrity Revenues

ESI Integrity provides software solutions for real-time auditing of transaction processing systems to businesses requiring high levels of security, integrity, and trust, including government regulated lotteries and pari-mutuel (horse tracks) organizations.

Integrity Revenues are generated from long term customer license and support contracts where it charges a fixed license fee for the use of its audit and risk management software, as well as an annual support fee. Revenue is typically earned over a two to five year period, depending on a contract's respective term.

Approximately 43% of ESI's revenues were generated by ESI Integrity during the three months ended November 30, 2010 compared to 66% for the same period in the prior year.

The decrease in revenue is due to a reduction in work plan and consulting revenues combined with the adverse effect of the weakened US dollar and Euro currencies relative to the Canadian dollar.  The majority of Integrity's revenues are contracted in US dollars or Euros. 

Citadel Revenues

Citadel revenues are generated from its on-line payment processing which include electronic cheques and paper cheques but its main focus is its Instant Bank Transfer service.  All of Citadel's services are charged on a fee per transaction charged to its merchants.

Approximately 57% of ESI's revenues were generated by Citadel during the three months ended November 30, 2010 compared to 34% for the same period in the prior year.

The increase in revenue is due to new merchants implementing Citadel's Instant Bank Transfer service as well as additional volume from existing customers.

Consolidated Gross Profit

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

    Three months ended Nov 30    Nine months ended Nov 30
               
($ 000)   2010   2009 2010   2009
Revenues   937   832 2,502   2,618
Direct Costs 449   634 1,428   1,905
Gross profit 488   198 1,074   713
Gross profit margin (%) 52%   24% 43%   27%

Product Development

All Product Development expenses are now being capitalized.

Sales, Marketing and Customer Service

Sales, marketing and customer service expenses were $50,496 and $110,915 during the three and nine months ended November 30, 2010 respectively, an increase of 28% and a decrease of 6% respectively compared to $39,423 and $117,702 for the three and nine months ended November 30, 2009. 

General and Administrative

General and administrative expenses were $600,871 and $1,947,307 during the three and nine months ended November 30, 2010 respectively, representing a decrease of 14% and 1% compared to $699,865 and $1,970,403 for the three months and nine months ended November 30, 2009. 

Amortization of Property and Equipment

Amortization expenses were $12,915 and $39,260 during the three month and nine month periods ended November 30, 2010, respectively, a decrease of 55% and 75% compared to $28,710 and $160,212 for the corresponding periods ended November 30, 2009.  The decrease in amortization expense mainly relates to very few new assets being purchased and amortization being reduced on older equipment. 

Net Earnings (Loss)

Net earnings for the three and nine month periods ended November 30, 2010 was $250,350 ($0.02 net earnings per share) and ($447,874), ($0.03 net loss per share), respectively, compared to net earnings of ($525,232), ($0.04 net loss per share) and ($1,583,032), ($0.11 net loss per share) for the prior comparative periods.  The net earnings reported during the three months ending November 30, 2010 is due to a foreign exchange adjustment from prior periods. 

Citadel Processing Accounts

Citadel processing accounts as at November 30, 2010 totaled $5.653 million compared to $5.649 million as at February 28, 2010.  These accounts are comprised of cash, which are segregated bank funds arising from the processing of deposits and payments for Citadel merchants and consumers, and accounts receivable relating to Citadel processing accounts for funds in transit from merchants and consumers.

Consolidated Balance Sheets
(expressed in Canadian dollars)















November 30,
2010
(unaudited)










February 28,
2010
(audited)
                           
                           
Assets                          
                           
Cash and cash equivalents
Accounts receivable
Prepaids
Citadel processing accounts (Note 3)















$


101,411
1,012,604
63,549
4,810,097












$


89,208
1,073,580
65,658
4,937,401
              5,987,661           6,165,847
                           
Property and equipment (Note 4)
Deferred contract costs
Capitalized development costs












143,640
424,165
135,584










170,499
550,362
47,532
                           
            $ 6,691,050         $ 6,934,240
                           
                           
Liabilities                          
                           
Accounts payable and accrued liabilities (Note 8)
Loan Payable (Note 9)
Deferred revenue
Citadel processing liabilities















$


2,686,187
2,185,586
478,711
5,653,200












$


2,227,945
2,174,733
582,230
5,649,239
              11,003,684           10,634,147
                           
Deferred revenue             748,752           913,605
                           
              11,752,436           11,547,752
                           
Shareholders' Equity (Deficit)                          
                           
Capital stock (Note 5)
Contributed surplus
(Deficit)












9,957,959
4,467,539
(19,486,884)










9,957,959
4,467,539
(19,039,010)
                           
              (5,061,386)           (4,613,512)
                           
            $ 6,691,050         $ 6,934,240
                           
                   

On behalf of the Board

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

These unaudited financial statements have not been reviewed by the Company's auditors.

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

    

        Three Months Ended November 30,         Nine Months Ended November 30,
(unaudited)       2010       2009       2010       2009
                                 
Revenues     $ 936,842     $ 832,284     $ 2,502,136     $ 2,618,546
                                 
Direct costs       448,585       633,693       1,428,597       1,905,219
                                 
Gross profit       488,257       198,591       1,073,539       713,327
                                 
Operating expenses
      Product development
      Sales, marketing and customer service
      General and administrative
      Amortization of property and equipment








 
 
 
 
 
 
-
50,496
600,871
12,915








 
 
 
 
 
 
56,794
39,423
699,865
28,710








 
 
 
 
 
 
-
110,915
1,947,307
39,260








 
 
 
 
 
 
179,682
117,702
1,970,403
160,212
                                 
        664,282       824,792       2,097,482       2,427,999
                                 
(Loss) Earnings before under noted items       (176,025)       (626,201)       (1,023,943)       (1,714,672)
                                 
Other expenses (income)
      Foreign exchange loss (gain)
    Other Income
      Interest income
      Interest expense








 
 
 
 
 
 
(397,698)
(83,978)
(57)
55,358








 
 
 
 
 
 
(143,733)
-
(640)
43,404








 
 
 
 
 
 
(648,633)
(83,978)
(746)
157,288








 
 
 
 
 
 
(240,407)
-
(20,840)
129,607
                                 
                                 
Net (Loss) Earnings     $ 250,350     $ (525,232)     $ (447,874)     $ (1,583,032)
                                 
(Loss) Earnings per share
      Basic


 
$
 
0.02


 
$
 
(0.04)


 
$
 
(0.03)


 
$
 
(0.11)
                                 
                                 
Deficit, beginning of period     $ (19,737,234)     $ (17,756,511)     $ (19,039,010)     $ (16,698,711)
                                 
Net (Loss) Earnings       250,350       (525,232)       (447,874)       (1,583,032)
                                 
Deficit, end of period     $ (19,486,884)     $ (18,281,743)     $ (19,486,884)     $ (18,281,743)
                                 

These unaudited financial statements have not been reviewed by the Company's auditors.

Consolidated Statements of Cash Flows
(expressed in Canadian dollars)

        Three Months Ended November 30,        Nine Months Ended November 30, 
(unaudited)       2009       2010       2010       2009
                                 
Cash flows provided by (used in)                                
                                 
Operating activities                                
  Net earnings     $ 250,350     $ (525,232)     $ (447,874)     $ (1,583,032)
  Items not affecting cash:                                
    Amortization of property and equipment       12,915       28,710       39,260       160,212
                                     
  Net changes in non-cash operating items:                                
    Accounts receivable       262,045       146,013       60,976       709,816  
    Prepaids       40,411       (64,990)       2,109       (130,270)
    Accounts payable and accrued liabilities       (471,581)       483,128       589,507       512,590
    Deferred revenue       (42,506)       (72,334)       (268,372)       (135,733)
    Deferred contract costs       42,749       36,967       126,197       100,411
        94,413       32,262       101,803       (366,006)
                                 
Investing activities                                
  Capitalized development costs       (25,434)       -       (97,235)       -
  Acquisition of property and equipment       -       (9,685)       (3,218)       (4,483)
        (25,434)       (9,685)       (100,453)       (4,483)
                                 
Financing activities                                
  Loan payable       (62,362)       (47,472)       10,853       (403,068)
  Capital lease payments       -       (4,515)       -       (30,684)
        (62,362)       (51,987)       10,853       (433,752)
                                 
Decrease in cash and cash equivalents       6,617       (29,410)       12,203       (804,241)
                                 
Cash and cash equivalents, beginning  of period       94,794       134,954       89,208       909,785
                                 
Cash and cash equivalents, end of  period     $ 101,411     $ 105,544     $ 101,411     $ 105,544
                                 
Supplemental information                                
  Interest received     $ 57     $ 640     $ 746     $ 20,840
  Interest paid       55,358       43,404       157,288       129,607

                                       

These unaudited financial statements have not been reviewed by the Company's auditors.

About ESI Entertainment Systems Inc.

ESI Entertainment Systems Inc (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. Since formation in 1999 ESI Entertainment Systems Inc has created three independently operated and controlled subsidiaries based on validated and proven products: Citadel Commerce Corp., ESI Integrity Inc., and PlayLine Inc.  PlayLine Inc. is presently dormant.

Forward looking Statements

This news release may contain 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 Canadian National Stock Exchange does not accept responsibility for this press release.

SOURCE ESI Entertainment Systems Inc.

For further information:

ESI Entertainment Systems Inc.
Tony Greening
Chief Executive Officer
Telephone: (604) 299-6922 - ext 298
email: tgreening@esi.ca
Web: www.esi.ca

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ESI Entertainment Systems Inc.

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