ESI Entertainment announces Fiscal 2013 Second Quarter Financial Results

BURNABY, BC, Oct. 30, 2012 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the "Company") (CNSX : ESY) reported today its financial results (unaudited) for fiscal Q2 2013 ended August 31, 2012. (All dollar amounts reported in Canadian funds).

Consolidated financial highlights for the quarter include (Q2 2013 compared to Q2 2012):

• Revenue decreased by 28% from $896,000 to $648,000
• Gross profit decreased by 92% from $914,000 to $74,000
• Net income decreased by 99% to $5,810 from $889,000

With the asset sale of ESI Integrity occurring in the first quarter of fiscal 2013, the second quarter results only represent the activities and operations of our Citadel business unit.  In addition, during the same period last year, the Company received approval from certain Executives, Directors and Officers to forgive the majority of the amounts owed to them by the Company for their deferred salaries and the accrued interest.  The reversal of the Salary Expense reduced the Direct Costs and General and Administration Expense for the same quarter last year, and increased the Gross Profit and Net Income.  These two factors significantly impact the current Quarter results and the comparison figures from the previous year.

The asset sale of ESI Integrity is now complete; a significant amount of the Loan Payable has been reduced, and revenue is continuing to grow within Citadel.  We are excited about the coming year. Citadel Commerce continues to closely govern expenditures while focusing on its pipeline of payment processing opportunities and new initiatives.

"Michael Meeks"
President & CEO

Selected Financial Information

		Three Months Ending		Six Months Ending
		August 31 2012	August 31 2011	August 31 2012	August 31 2011
($ 000) except for EPS
Revenue		648	895	2,388	1,838
Gross Profit		74	914	765	1,047
Total operating expenses		148	67	520	418
Net Income		6	889	1,455	521
Earnings per share
	Basic and Diluted	$0.01	$0.06	$0.10	$0.04
Total Assets		7,090	5,863	7,090	5,863
Total long-term liabilities		-	447	-	447
Cash generated from operations		1,382	(82)	1,195	(86)

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 August 31					Six months ended August 31
($ 000)		2012	2011	% Change			2012	2011	% Change
Integrity		-	346	(100%)			1,016	762	33%
Citadel		648	550	18%			1,372	1,076	27%
Total Revenue		648	896	(28%)			2,388	1,838	30%

Total revenue decreased by 28% to $648,000 for the three months ended August 31, 2012 from $896,000 for the three months ended August 31, 2011 and increased by 30% to 2,388,000 for the six months ended August 31, 2012 from $1,838,000 for the six months ended August 31, 2011.  The second quarter decrease is due to Citadel being the only active and operational business unit.  The six months ended August 31, 2012 increase in consolidated revenues is mainly due to the one time recognition of the ESI Integrity deferred revenue upon closing of the asset sale in May 2012.

Integrity Revenues

ESI Integrity provided 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.

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

The reader should note that as a consequence of the sale of the ESI Integrity business effective May 31, 2012, revenue and expense of ESI Integrity will no longer impact the results of operations for future periods.

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.

100% of ESI's revenues are now generated solely by Citadel.

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 Aug 31			Six months ended Aug 31
($ 000)		2012		2011	2012		2011
Revenues		648		896	2,388		1,838
Direct Costs		574		(18)	1,623		790
Gross profit		74		914	765		1,048
Gross profit margin (%)		11%		102%	32%		57%

With the asset sale of ESI Integrity occurring in the first quarter of fiscal 2013, the three months ended August 31, 2012 results only represent the activities and operations of the Citadel business unit.  In addition, during the same period last year, the Company received approval from certain Executives, Directors and Officers to forgive the majority of the amounts owed to them by the Company for their deferred salaries and the accrued interest.  The reversal of the Salary Expense reduced the Direct Costs for the same period last year, and increased the Gross Profit. These two factors significantly impact the current Quarter results and the comparison figures from the previous year.

Sales, Marketing and Customer Service

Sales, marketing and customer service expenses were $6,853 and $29,662 during the three and six months ended August 31, 2012 respectively, a decrease of 75% and 50% respectively, compared to $27,440 and $59,664 for the three and six months ended August 31, 2011.

General and Administrative

General and administrative expenses were $148,182 and $520,098 during the three and six months ended August 31, 2012 respectively, representing an increase of 122% and 24% compared to $66,611 and $418,277 for the three months and six months ended August 31, 2011.

With the asset sale of ESI Integrity occurring in the first quarter of fiscal 2013, the second quarter results only represent the activities and operations of our Citadel business unit.  In addition, during the same period last year, the Company received approval from certain Executives, Directors and Officers to forgive the majority of the amounts owed to them by the Company for their deferred salaries and the accrued interest.  The reversal of the Salary Expense reduced the General and Administration Expense for the same quarter last year.  These two factors significantly impact the current Quarter results and the comparison figures from the previous year.

Amortization of Property and Equipment

Amortization expenses were $6,016 and $22,453 during the three month and six month periods ended August 31, 2012, respectively, a decrease of 73% and 46% compared to $22,086 and $41,578 for the corresponding periods ended August 31, 2011.  The decrease in amortization expense mainly relates to very few new assets being purchased and amortization being reduced on older equipment and the disposal of all the Integrity Property and Equipment in May 2012.

Net Income/Loss

Net income for the three months ended August 31, 2012 was $5,810 ($0.01 net earnings per share) and for the six months ended August 31, 2012 was $1,455,025 ($0.10 net earnings per share),  respectively, compared to net income of $889,159 ($0.06 net earnings per share) and $521,192 ($0.04 net earnings per share) for the prior comparative periods.

Citadel Processing Accounts

Citadel processing accounts as at August 31, 2012 totaled $6.8 million compared to $6.3 million as at February 29, 2012.  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 and six month ended August 31, 2012, cash flow generated in operating activities was $1,382,605 and $1,195,226 respectively, compared to cash used in operating activities of $81,925 and $86,208 during the comparative periods ended August 31, 2011, respectively.

Cash used in financing activities totaled $1,487,782 and $1,498,366 during the three months and six months ended August 31, 2012 respectively. These activities related mainly to the loan payable.  Cash used in financing activities for the comparative periods for the three and six months ending August 31, 2011, were $9,975 and $371,756 respectively.

As at August 31, 2012, the Company had cash and cash equivalents of $82,541, compared to $318,794 on August 31, 2011.

For the three month period ending August 31, 2012 the Company incurred a loss from operations of $35,179 with a decrease of operating cash flow of $109,120.  In addition, the Company has incurred 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 financial statements (unaudited) 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.

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ESI ENTERTAINMENT SYSTEMS INC.
Condensed Consolidated Interim Statements of Financial Position
As at August 31, 2012 and February 29, 2012
(Unaudited - expressed in Canadian dollars)

							August  31, 2012		February 29, 2012
Assets
Current
	Cash and cash equivalents					$	82,541	$	231,570
	Accounts receivable						28,638		173,695
	Prepaids and other						63,797		133,410
	Citadel processing accounts						6,847,774		6,340,666
	Deferred contract costs						-		114,495
							7,022,750		6,993,836
Non-current
	Capitalized Development Costs						-		127,940
	Property and equipment						67,885		116,509
	Deferred contract costs						-		216,263
Total Assets						$	7,090,635	$	7,454,548
Liabilities
Current
	Accounts payable and accrued liabilities					$	1,317,288	$	1,368,350
	Loan Payable						815,225		2,145,232
	Citadel Processing Liabilities						7,881,570		7,542,821
	Deferred Revenue						-		426,162
							10,014,083		11,482,565
Non-current
	Deferred Revenue						-		354,818
Total Liabilities						$	10,014,083	$	11,837,383
Shareholder's deficit
	Share Capital					$	9,957,959	$	9,957,959
	Contributed Surplus						4,595,230		4,590,868
	Other Comprehensive Income (Loss)						454,520		362,048
	Deficit						(17,931,157)		(19,293,710)
Total deficit							(2,923,448)		(4,382,835)
Total liabilities and shareholders' deficit						$	7,090,635	$	7,454,548

ESI ENTERTAINMENT SYSTEMS INC.
Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)
For The Three and Six Months Ending August 31, 2012 and 2011.
(Unaudited - expressed in Canadian dollars)

								Three Months Ended August 31,							Six Months Ended August 31,
								2012			2011				2012		2011
Continuing Operations
	Revenues						$	647,615		$	895,878			$	2,388,476	$	1,838,739
	Direct Costs							573,624			(18,291)				1,623,308		790,898
Gross Profit								73,991			914,169				765,168		1,047,841
General and administration expenses								148,182			66,611				520,098		418,277
Income (loss) before under noted items								(74,191)			847,558				245,070		629,564
Other expenses (income)
	Foreign exchange (gain) loss							(1,646)			(160,973)				95,725		(22,850)
	Tax expense							(28,133)			(562)				(28,133)		(562)
	Other Income							(35,094)			-				(64,271)		-
	Interest  income							(1)			-				(2,029)		(10)
	Interest expense							16,778			31,505				49,330		62,770
	(Gain) Loss on asset sale							9,084			-				(1,168,105)		-
Income (loss) for period attributable to equity holders								(35,179)			977,588				1,362,553		590,216
Other comprehensive income
Foreign currency translation gain (loss)								40,989			(88,429)				92,472		(69,024)
Total Comprehensive income for the period attributable to equity holders							$	5,810		$	889,159			$	1,455,025	$	521,192
Basic and diluted income per share							$	0.01		$	0.06			$	0.10	$	0.04

ESI ENTERTAINMENT SYSTEMS INC.
Condensed Consolidated Interim Statements of Changes in Equity
(Unaudited - expressed in Canadian dollars)

	Number of shares		Share capital		Contributed Surplus		Foreign Currency Cumulative Translation Reserve		Deficit		Total equity
Balance, February 28, 2011	14,234,727	$	9,957,959	$	4,575,773	$	352,213	$	(20,140,548)	$	(5,254,603)
Share-based compensation	-		-		15,095				-		15,095
Foreign currency translation differences for foreign operations	-		-		-		9,835		-		9,835
Profit from continuing operations attributable to the equity holders	-		-		-		-		846,838		846,838
Balance, February 29, 2012	14,234,727	$	9,957,959	$	4,590,868	$	362,048	$	(19,293,710)	$	(4,382,835)
Share-based compensation	-		-		4,362		-		-		4,362
Foreign currency translation differences for foreign operations	-		-		-		92,472		-		92,472
Profit from continuing operations attributable to the equity holders	-		-		-		-		1,362,553		1,362,553
Balance, August 31, 2012	14,234,727	$	9,957,959	$	4,595,230	$	454,520	$	(17,931,157)	$	(2,923,448)

ESI ENTERTAINMENT SYSTEMS INC.
Condensed Consolidated Interim Statements of Cash Flows
For the Three and Six Months Ending August 31, 2012 and 2011.
(Unaudited - expressed in Canadian dollars)

			Three Months Ending August 31				Six Months Ending August  31
			2012		2011		2012		2011
Cash provided by (used for) the following activities
Operating activities
Income for the period		$	5,810	$	889,159	$	1,455,025	$	521,192
Add (deduct)
	Depreciation		6,016		22,086		22,453		41,578
	Stock-based compensation		980		(29,416)		4,362		(9,414)
			12,806		881,829		1,481,840		553,356
Changes in non-cash working capital:
	Accounts receivable		1,534,214		(98,994)		145,057		28,455
	Prepaids		21,059		20,106		69,613		(3,507)
	Accounts payable and accrued liabilities		(185,474)		(715,515)		(51,062)		(538,322)
	Deferred revenue		-		(179,608)		(780,980)		(140,726)
	Deferred contract costs		-		10,317		330,758		14,536
Cash flow (used in) from operations			1,382,605		(81,925)		1,195,226		(86,208)
Investment activities
	Capitalized development costs		-		8,182		127,940		24,792
	Acquisition of property and equipment		(3,943)		(4,179)		26,171		(9,606)
Cash from (used in) investing activities			(3,943)		4,003		154,111		15,186
Financing activities
	Loan payable		(1,376,756)		20,880		(1,330,007)		45,335
	Change in Citadel processing liabilities		323,537		361,161		338,749		721,620
	Change in Citadel processing assets		(434,563)		(392,016)		(507,108)		(395,199)
Cash from (used in) financing activities			(1,487,782)		(9,975)		(1,498,366)		371,756
Increase (decrease) in cash and cash equivalents			(109,120)		(87,897)		(149,029)		300,734
Cash and cash equivalents, beginning of period			191,661		406,373		231,570		17,742
Cash and cash equivalents, end of period		$	82,541	$	318,476	$	82,541	$	318,476

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.

SOURCE: ESI Entertainment Systems Inc.

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