ESI Entertainment announces Fiscal 2012 Third Quarter Financial Results

BURNABY, BC, Feb. 13, 2012 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the "Company") (CNSX : ESY) reported today its financial results (unaudited) for fiscal Q3 2012 ending November 30, 2011. (All dollar amounts reported in Canadian funds).

Consolidated financial highlights for the quarter include (Q3 2012 compared to Q3 2011):

• Revenues increased by 17% to $1,094,000 from $937,000
  
  
• Gross profit decreased by 36%, to $310,000 from $488,000
  
  
• Operating Expenses decreased by 54% to $304,000 from $659,000
  
  
• Net comprehensive income was ($198,000) compared to $255,000.

During the three month period ending November 30, 2011, the Company has continued to grow revenues and obtain new customers.

The Third Quarter Results, particularly in relation to Gross Profit, were influenced by two factors that affect comparison with the prior comparative period.  Firstly, the temporary weakness of the Canadian Dollar against the US Dollar in November 2011 triggered an unrealized foreign exchange loss compared to a foreign exchange gain in the prior comparative period; the subsequent return of strength of the Canadian Dollar has now virtually eliminated that unrealized loss.  Secondly, in the current period the Company reclassified certain expenses from General and Administrative to Direct Costs; this has reduced the Gross Profit but has had no effect on the Net Income.  The difference in Net Income over the prior period mainly relates to the change in foreign exchange rates

Each of the two operating subsidiaries is closely governing expenditures while building its business.  ESI Integrity has continued to provide the group with a solid business foundation and Citadel's customers, revenues and transaction volumes have continued to grow.

Michael Meeks - President & CEO

Selected Financial Information
		Three months ending		Nine months ending
		November 30 2011	November 30 2010	November 30 2011	November 30 2010
($ 000) except for EPS
Revenue		1,094	937	3,213	2,502
Gross Profit		310	488	1,676	1,074
Total operating expenses		304	659	708	2,087
Net Income (Loss)		(198)	255	711	(438)
(Loss) earnings per share
	Basic and Diluted	(0.01)	0.02	0.05	(0.03)
Total Assets		7,003	6,691	7,003	6,691
Total long-term liabilities		395	520	395	520

Results of Operations

The Company's three and nine months ending November 30, 2011 reporting is using IFRS.  Figures for the three and nine months ended November 30, 2010 have been restated from those previously reported under GAAP to IFRS.  Details regarding the transition to IFRS can be found in the condensed consolidated interim financial statements (note 19) which can be found on www.sedar.com.

Consolidated Revenues

The following table provides a breakdown of the Company's total revenues from its subsidiaries for the three and nine months ending November 30, 2011 and 2010.

	Three months ending Nov 30						Nine months ending Nov 30
($ 000)		2011		2010	% change		2011		2010	% change
Integrity		351		401	(12%)		1,113		1,275	(13%)
Citadel		743		536	39%		2,100		1,227	71%
		1,094		937	17%		3,213		2,502	28%

Total revenue increased by 17% to $1,094,000 for the three months ended November 30, 2011 from $937,000 for the same period in the prior year.  Total revenue increased by 28% to $3,213,000 for the nine months ending November 30, 2011 from $2,502,000 for the nine months ending November 30, 2010.

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 32% of ESI's revenues were generated by ESI Integrity during the three months ending November 30, 2011 compared to 43% for the same period in the prior year. Approximately 35% of ESI's revenues were generated by ESI Integrity during the nine months ending November 30, 2011 compared to 51% 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 68% of ESI's revenues were generated by Citadel during the three months ended November 30, 2011 compared to 57% for the same period in the prior year.

Approximately 65% of ESI's revenues were generated by Citadel during the nine months ended November 30, 2011 compared to 49% 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 as prepared in accordance with IFRS for the three and nine months ending November 30, 2011 and 2010:

		Three months ending Nov 30				Nine months ending Nov 30
($ 000)		2011		2010		2011		2010
Revenues		1,094		937		3,213		2,502
Direct Costs		784		449		1,537		1,429
Gross profit		310		488		1,676		1,073
Gross profit margin (%)		28%		52%		52%		43%

Certain expenses have been reclassified from General and Administrative to Direct Costs, this has reduced the Gross Profit but has had no effect on the Net Income.

Product Development

All Product Development expenses for ESI Integrity are being capitalized.

Sales, Marketing and Customer Service

Sales, marketing and customer service expenses were $27,440 and $84,664 during the three and nine months ended November 30, 2011 respectively, a decrease of 5% and 24% respectively compared to $29,035 and $110,915 for the three and nine months ended November 30, 2010. The decrease in cost is primarily related to the reduction of travel expenses associated with the activity in sales, marketing and customer service

General and Administrative

General and administrative expenses were $303,642 and $707,879 during the three and nine months ended November 30, 2011 respectively, a decrease of 217% and 295% respectively compared to $659,422 and $2,087,304 for the three months and nine months ended November 30, 2010.  This reduction is due to reclassification of certain expenses to Direct Costs and to the reversal of the salary expenses relating to the forgiveness of the majority of deferred salaries and accrued interest by certain Executives, Directors and Officers for a total of $ 1.1 million during the period ending August 31, 2011

Depreciation of Property and Equipment and Capitalized Development Costs

Depreciation expenses were $16,296 and $48,213 during the three month and nine month periods ended November 30, 2011, respectively, an increase of 78% and 81% compared to $12,915 and $39,260 for the corresponding periods ended November 30, 2010.  The depreciation being reduced on older equipment is offset by depreciation being recorded on newly incurred capitalized development costs.

Net Income

Net income for the three and nine month periods ended November 30, 2011 was ($198,000) ($0.01 loss per share) and $710,795 ($0.05 earning per share), respectively, compared to $255,210 ($0.02 earning per share) and ($437,696) ($0.03 loss per share) for the prior comparative periods.  This change is due to the reversal of the salary expenses relating to the forgiveness of the majority of deferred salaries and accrued interest by certain Executives, Directors and Officers and fluctuating Foreign Exchange rates.

Citadel Processing Accounts and Liabilities

Citadel processing accounts as at November 30, 2011 totaled $5.75 million compared to $4.28 million as at February 28, 2011.  The accounts are comprised of cash and accounts receivables arising from the processing of deposits and payments for Citadel merchants and consumers.

Liquidity and Capital Resources

ESI has historically financed its operations through the sale of equity and through cash generated by its operations.

During the three month period ended November 30, 2011, cash provided in operating activities was $114,122 and during the nine months ended November 30, 2011, cash provided in operating activities was $358,806. During the three month period ended November 30, 2010, cash used in operating activities was $94,383 and during the nine months ended November 30, 2010, cash used in operating activities was $101,803.

Cash used in financing activities totaled $135,358 and $476,439 during the three and nine months ended November 30, 2011 respectively. These activities relate mainly to the changes in Citadels processing assets. Cash used by financing activities for the three months ending November 30, 2010 was $62,332 and for the nine months ending November 30, 2010, cash provided by financing activities was $10,853. These activities related mainly to the loan payable.

Certain employees have voluntarily deferred part of their compensation. The unpaid deferred amounts are being accrued without interest and are recorded in the Company's financial statements.  The salary deferrals are payable upon termination or when the Company's economic conditions have strengthened to accommodate for the repayment

As at November 30, 2011, the Company had cash and cash equivalents of $151,182 compared to $101,411 on November 30, 2010.

During the three months ending November 30, 2011, the increase in cash totaled $37,680 compared to $6,617 for the quarter ended November 30, 2010. During the nine months ending November 30, 2011, the increase in cash totaled $133,440 compared to $12,203 for the nine months ending November 30, 2010

The Company has incurred significant operating losses and net utilization of cash in operations in 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.

Consolidated Financial Statements (Unaudited)

NOTE TO READER: The following  unaudited financial statements are extracted from the complete financial statements of the Company which have been filed with the Management's Discussion and Analysis. The Company's documents can be found on www.sedar.com to which the reader is referred.

ESI ENTERTAINMENT SYSTEMS INC. Condensed Consolidated Interim Statements of Financial Position As at November 30, 2011, February 28, 2011, and March 1, 2010 (Unaudited - expressed in Canadian dollars)
			November 30, 2011			February 28, 2011			March 1, 2010
Assets
	Cash and cash equivalents	$	151,182		$	17,742		$	89,208
	Accounts receivable		341,224			210,160			361,745
	Prepaids and other		148,725			66,912			65,658
	Citadel processing accounts		5,753,915			4,277,252			4,937,401
Current Assets		$	6,395,046		$	4,572,066		$	5,454,012
	Capitalized Development Costs		136,033			160,255			47,532
	Property and equipment		110,915			123,002			170,499
	Deferred contract costs		360,664			382,682			550,362
Total Assets		$	7,002,658		$	5,238,005		$	6,222,405
Liabilities
	Accounts payable and accrued liabilities	$	1,319,580		$	2,085,038		$	1,516,110
	Loan Payable		2,245,985			2,081,567			2,174,733
	Citadel Processing Liabilities		7,109,826			5,321,142			5,649,239
	Deferred Revenue		482,260			485,367			582,230
Current Liabilities		$	11,157,651		$	9,973,114		$	9,922,312
	Deferred Revenue		394,958			519,494			913,605
Total Liabilities		$	11,552,609		$	10,492,608		$	10,835,917
Shareholders' Equity (Deficiency)
	Share Capital	$	9,957,959		$	9,957,959		$	9,957,959
	Contributed Surplus		4,592,947			4,575,772			4,506,304
	Other Comprehensive Income (Loss)		(64,457)			23,318			-
	Deficit		(19,036,400)			(19,811,652)			(19,077,775)
Total Equity		$	(4,549,951)		$	(5,254,603)		$	(4,613,512)
Total liabilities and equity		$	7,002,658		$	5,238,005		$	6,222,405

.

ESI ENTERTAINMENT SYSTEMS INC. Condensed Consolidated Interim Statements of Loss and Comprehensive Loss For The Three and Nine months ended November 30, 2011 and 2010 (Unaudited - expressed in Canadian dollars)
			Three months ended November 30,				Nine months ended November 30,
			2011		2010		2011		2010
Continuing Operations
	Revenues	$	1,094,334	$	936,842	$	3,213,185	$	2,502,136
	Direct Costs		783,856		448,585		1,537,422		1,428,597
Gross Profit			310,478		488,257		1,675,763		1,073,539
General and administration expenses			303,642		659,422		707,879		2,087,304
Income (loss) before under noted items			6,836		(171,165)		967,884		(1,013,765)
Other expenses (income)
	Foreign exchange (gain) loss		175,983		(397,698)		97,456		(584,357)
	Tax expense		-		-		(564)		-
	Other income		-		(83,978)		-		(83,978)
	Interest  income		-		(57)		(10)		(746)
	Interest expense		32,979		55,358		95,750		157,288
Income (loss) for period attributable to equity holders			(202,126)		255,210		775,252		(501,972)
Other comprehensive income (loss)
	Foreign currency translation gain (loss)		4,567		-		(64,457)		64,276
Total Comprehensive income (loss) for the period attributable to equity holders		$	(197,559)	$	255,210	$	710,795	$	(437,696)
Basic and diluted earnings (loss) per share			(0.01)		0.02		0.05		(0.03)

ESI ENTERTAINMENT SYSTEMS INC. Condensed Consolidated Interim Statements of Cash Flows For The Three and Nine months ended November 30, 2011 and 2010 (Unaudited - expressed in Canadian dollars)
Cash provided by (used for) the following activities			Three months ending November 30,				Nine months ending November 30,
			2011		2010		2011		2010
Operating activities
Income (Loss) for the period		$	(202,126)	$	255,210	$	775,252	$	(437,696)
Add (deduct)
	Depreciation		16,296		12,915		48,213		39,260
	Stock-based compensation		3,068		(4,860)		17,175		(10,178)
			(182,762)		263,265		840,640		(408,614)
Changes in non-cash working capital:
	Accounts receivable		35,319		262,045		(166,548)		60,976
	Prepaids		(45,580)		40,411		(81,813)		2,109
	Accounts payable and accrued liabilities		84,502		(471,581)		(845,460)		589,507
	Deferred revenue		(13,083)		(42,506)		(127,643)		(268,372)
	Deferred contract costs		7,482		42,749		22,018		126,197
Cash flow (used in) from operations			(114,122)		94,383		(358,806)		101,803
Investment activities
	Capitalized development costs		(8,092)		(25,434)		24,222		(97,235)
	Acquisition of property and equipment		(8,415)		-		(8,415)		(3,218)
Cash from (used in) investing activities			16,444		(25,434)		15,807		(100,453)
Financing activities
	Loan payable		119,083		(62,332)		164,418		10,853
	Change in Citadel processing liabilities		1,081,464		-		1,788,684		-
	Change in Citadel processing assets		(1,065,189)		-		(1,476,663)		-
Cash from (used in) financing activities			135,358		(62,332)		476,439		10,853
Increase (decrease) in cash and cash equivalents			37,680		6,617		133,440		12,203
Cash and cash equivalents, beginning of period			113,502		94,794		17,742		89,208
Cash and cash equivalents, end of period		$	151,182	$	101,411	$	151,182	$	101,411

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. The Canadian National Stock Exchange does not accept responsibility for this press release.

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, ecommerce 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.

 

 

ESI Entertainment Systems Inc.
Michael Meeks
President & CEO
Telephone: [phone]
email: [email protected]
Web: www.esi.ca