ESI Entertainment Systems Inc. announces Fiscal 2012 Financial Results

BURNABY, BC, June 29, 2012 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the "Company") (CNSX : ESY) reported today its financial and operational results for the fiscal year ended February 29, 2012 ("fiscal 2012"). All amounts are in Canadian dollars unless otherwise stated.

Financial Highlights for the year ended February 29, 2012

The highlights for ESI, on a consolidated basis, compared to the prior year, are:

• Revenues increased by 12% to $3.810 million from $3.408 million.
  
  
• Accounts Payable and Accrued Liabilities decreased by 34% to $1.368 million from $2.085 million.
  
  
• Loss from operations decreased to $275,000 (excluding the effect of the gain on forgiveness of deferred salaries) from $1.063 million.
  
  
• Net comprehensive income before income taxes increased to $857,000 from a loss of ($711,000).

TO OUR SHAREHOLDERS

For the Year Ended February 29, 2012

Dear Shareholders:

We are pleased to present our results for the year ended February 29, 2012.

Fiscal 2012 was a very busy and productive year for the ESI group of companies as our subsidiary companies continued to operate efficiently during challenging global economic conditions.  ESI Integrity maintained its operations at a profitable level, Citadel Commerce increased its revenues and is operating profitability, and we significantly restructured and streamlined our corporate accounting processes and infrastructure in preparation for automated scalability and continued growth.

During Fiscal 2012 the Company received approval from certain Executives, Directors and Officers to forgive the majority of deferred salaries and accrued interest totaling $1.1 million, thereby significantly reducing the Company's liabilities.  In addition, subsequent to the end of Fiscal 2012 the Company concluded a binding agreement that was entered into and closed for the sale of the assets of ESI Integrity for USD$ 1.425 million in an all cash transaction.  As the ESI group is cash flow positive the net proceeds from the closing were used to reduce indebtedness to the Company's Lender further significantly reducing our liabilities.

Sadly during Fiscal 2012 the Company lost an outstanding individual and long term contributor due to the untimely passing of Anthony Greening, its Chairman and CEO.  While we have been successful in adjusting to his sudden loss, Tony's guidance, warmth, and wisdom will forever remain embedded in the fabric of the Company and our employees.

In February 2012, the Company moved to a new office and consolidated its backup data center, offsite storage locations, and corporate office into a single secure location.  With careful planning and execution we completed the move without any disrupted service to our customers. 

We are very pleased with the progress and accomplishments achieved during the last fiscal year, along with our ability to overcome many challenges, and as we focus on our pipeline of payment processing opportunities and new initiatives we are excited about the coming year. 

"Michael Meeks"
President & CEO

Selected Consolidated Financial Information

		February 29, 2012			February 28, 2011
($ 000) except for EPS
Revenue		3,810			3,408
Gross Profit		595			387
General and administration expenses		1,222			1,503
Other income and expenses		353			53
Gain on forgiveness of deferred salaries		1,121			-
Operating Income (Loss)		847			(1,063)
Comprehensive Income (Loss)		857			(711)
Earnings (loss) per share
	Basic and Diluted	0.06			(0.07)
Total Assets		7,455			5,238
Total long-term liabilities		355			519
Cash used in operations		433			776

Results of Operations

The Company's February 29, 2012 reporting is the first year using IFRS.  Figures for the year ended February 28, 2011 have been restated from those previously reported under GAAP to IFRS.  Details regarding the transition to IFRS can be found in the accompanying condensed audited consolidated financial statements (note 23) and in the section above entitled "Transition to IFRS".

Consolidated Revenues

The following table provides a breakdown of the Company's revenues from its subsidiaries for the years ended 2012 and 2011.  All amounts are in Canadian dollars unless otherwise specified:

			Years ended
($ 000)			Feb 29/12			Feb 28/11				% change
Integrity			1,491			1,642				-9%
Citadel			2,319			1,766				31%
Total revenue			3,810			3,408				12%

Total revenue increased by 12% to $3.810 million for the year ended February 29, 2012 from $3.408 million in the prior year.

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 39% of ESI's revenues were generated by ESI Integrity during the year ended February 29, 2012 compared to 48% 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 weakening 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 61% of ESI's revenues were generated by Citadel during the year ended February 29, 2012 compared to 52% 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 years ended:

($ 000)			Feb 29/12	Feb 28/11
Revenues			3,810	3,408
Direct Costs			3,215	3,021
Gross profit			595	387
Gross profit margin (%)			16%	11%

The increase of Gross Profit for the year ended February 29, 2012, compared to the prior year, is primarily attributable to the increase revenue generated from Citadel.

General and Administrative

General and administrative expenses were $1.222 million for the year ended February 29, 2012, a decrease of 19% compared to $1.504 million for the prior year. This reduction is due to the Company's ongoing efforts to minimize its operating expenses.

Amortization

Amortization expenses were $83,000 during the year ended February 29, 2012, an increase of 36% compared to $53,000 during the prior year.  The amortization being reduced on older equipment is offset by amortization being recorded on newly incurred capitalized product development costs.

Net comprehensive income (loss)

Net comprehensive income for the year ended February 29, 2012 was $857,000 ($0.06 earnings per share) compared to a loss of ($711,000) ($0.07 loss per share) for the prior year. The increase in Net Earnings is primarily attributable to the gain on forgiveness of deferred salaries and the foreign exchange income earned on Citadel transactions.

Citadel Processing Accounts

Citadel processing accounts as at February 29, 2012 totaled $6.341 million compared to $4.277 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 year ended February 29, 2012, cash used in operating activities was $433,000 compared to $776,000 used during the prior year.

Cash used in investing activates totaled $44,000 during the year ended February 29, 2012 compared to $116,000 used in the prior year.  The change is due to the reduction in capitalized development costs in Integrity.

Cash from financing activities totaled $222,000 during the year ended February 29, 2012 compared to $239,000 during the prior year.  The change is due to the revaluing of the loan payable and the change in Citadel processing amounts.

Overall, the increase in cash totaled $214,000 for the year ended February 29, 2012 compared to a decrease of $71,000 for the prior year.

For the year ended February 29, 2012 the Company incurred a net loss from operations of $275,000 (excluding the effect of forgiveness of deferred salaries) and operating cash used in operations of $433,000.  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.

Related Party Transactions

During the year ended February 29, 2012, the Company received approval from certain Executives, Directors and Officers to forgive the majority of amounts owed to them by the Company for their deferred salaries along with the interest accrued on the unpaid amounts for a total of $1.1 million.

Subsequent Events

During May 2012, ESI entered into negotiations to sell substantially all of the assets and undertaking of its ESI Integrity Systems Inc. subsidiary to Spectra Systems Corporation.  Those negotiations were concluded on June 5, 2012, when a binding Agreement was entered into and closed for sale of the assets for USD$ 1.425 million in an all cash transaction which was made retroactively effective so that Spectra took over the ESI Integrity business from commencement of business on June 1, 2012, and thus the ESI Integrity business was disposed of effective at the close of business on May 31, 2012.

Under terms of the agreement Spectra Systems Corporation has acquired substantially all of the assets of ESI Integrity, including the name "ESI Integrity", contracts and resources for USD$ 1.425 million, of which USD$ 1.225M was paid in cash upon closing; the balance of USD$ 200K will be held in escrow for three months pending any post-closing adjustments.  Spectra has also hired all of the former ESI Integrity employees.

Consolidated Financial Statements

NOTE TO READER: The following financial statements are extracted from the complete audited 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. Consolidated Statements of Financial Position As at February 29, 2012, February 28, 2011, and March 1, 2010 (Expressed in Canadian dollars)
			February 29, 2012		February 28, 2011		March 1, 2010
Assets
Current
	Cash and cash equivalents	$	231,570	$	17,742	$	89,208
	Accounts receivable		173,695		210,160		361,745
	Prepaids and other		133,410		66,912		65,658
	Citadel processing accounts		6,340,666		4,277,252		4,937,401
	Deferred contract costs		114,495		130,540		172,931
			6,993,836		4,702,606		5,626,943
Non-current
	Capitalized development costs		127,940		160,255		47,532
	Property and equipment		116,509		123,002		170,499
	Deferred contract costs		216,263		252,142		377,431
Total assets			7,454,548		5,238,005		6,222,405
Liabilities
Current
	Accounts payable and accrued liabilities	$	1,368,350	$	2,085,038	$	1,516,110
	Loan payable		2,145,232		2,081,567		2,174,733
	Citadel processing liabilities		7,542,821		5,321,142		5,649,239
	Deferred revenue		426,162		485,367		582,230
			11,482,565		9,973,114		9,922,312
Non-current
	Deferred revenue		354,818		519,494		913,605
Total Liabilities			11,837,383		10,492,608		10,835,917
Shareholders' deficit
	Share capital		9,957,959		9,957,959		9,957,959
	Contributed surplus		4,590,868		4,575,773		4,506,304
	Accumulated other comprehensive income		362,048		352,213		-
	Deficit		(19,293,710)		(20,140,548)		(19,077,775)
Total deficit			(4,382,835)		(5,254,603)		(4,613,512)
Total liabilities and shareholders' deficit			7,454,548		5,238,005		6,222,405

ESI ENTERTAINMENT SYSTEMS INC. Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) For the year ended February 29, 2012 (Expressed in Canadian dollars)
		For the year ended February 29 & 28
			2012		2011
Continuing operations
	Revenues	$	3,809,582	$	3,408,325
	Direct costs		3,214,989		3,021,379
Gross profit			594,593		386,946
General and administration expenses			1,222,195		1,503,665
Loss before other income and expenses			(627,602)		(1,116,719)
	Foreign exchange gain		459,676		229,505
	Other income		33,718		62,685
	Finance Income		285		3,044
	Finance expense		(140,791)		(241,288)
	Gain on forgiveness of deferred salaries		1,121,552		-
Income (loss) for the year attributable to equity holders			846,838		(1,062,773)
Other comprehensive income
Foreign currency translation gain			9,835		352,213
Total comprehensive income (loss) for the year attributable to the equity holders			856,673		(710,560)
Basic and diluted income (loss) per share			0.06		(0.07)

ESI ENTERTAINMENT SYSTEMS INC. Consolidated Statements of Cash Flows For the year ended February 29, 2012 (Expressed in Canadian dollars)
		For the year ended February 29 & 28
			2012		2011
Cash flows provided by (used for) the following activities
Operating activities
Income (loss) for the year		$	856,673	$	(710,560)
Add (deduct)
	Depreciation		83,198		53,281
	Other		28		(2,566)
	Foreign exchange gain		(469,511)		(581,718)
	Stock-based compensation		15,095		69,469
			485,483		(1,172,094)
Changes in non-cash working capital:
	Accounts receivable		36,465		151,585
	Prepaids		(66,498)		(1,254)
	Accounts payable and accrued liabilities		(716,688)		568,928
	Deferred revenue		(223,881)		(490,974)
	Deferred contract costs		51,924		167,680
Cash used in operations			(433,195)		(776,129)
Investment activities
	Capitalized development costs		(167)		(112,723)
	Purchase of property and equipment		(44,251)		(3,218)
Cash used in investing activities			(44,418)		(115,941)
Financing activities
	Loan payable		63,665		(93,166)
	Change in Citadel processing liabilities		2,221,679		(328,097)
	Change in Citadel processing assets		(2,063,414)		660,149
Cash from financing activities			221,930		238,886
Net effect of translation of foreign denominated assets and liabilities			469,511		581,718
Increase (decrease) in cash and cash equivalents			213,828		(71,466)
Cash and cash equivalents, beginning of year			17,742		89,208
Cash and cash equivalents, end of year			$ 231,570	$	17,742

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 and CEO
Telephone: [phone]
email: [email protected]
Web: www.esi.ca