Esi Entertainment Systems Inc C.ESY

$11 cash and a $8.7 million mkt cap??

[TVLmillionaire]

BURNABY, BC, Jan. 15 /CNW/ - ESI Entertainment Systems Inc. ("ESI") (TSX: ESY) reported today its financial results for the three- and nine-month periods ended November 30, 2006. (All dollar amounts reported in Canadian funds) << Highlights for Q3: On a consolidated basis: - Revenue for the three months to November 30, 2006, increased from $4.82 million to $6.26 million, or 30%, over the comparative period in the prior year; - Gross Profit for the three months to November 30, 2006, increased from $2.19 million to $3.97 million, or 81%, over the comparative period in the prior year; - Net loss of $5,256,916 for the three months to November 30, 2006, represented a decrease of $5,343,603 from net income of $86,687 in the comparative period in the prior year; - At November 30, 2006 the Company recorded a non-cash impairment of deferred costs and assets for Citadel and Playline in the aggregate amount of $6,211,465; - Cash and cash equivalents of $11.0 million compared to $1.5 million on November 30, 2005; - UK FSA Authorizes Citadel Commerce as an e-Money Issuer >> "Although we generated improved results in the first nine months of the year, as a result of the passing of UIGEA on October 13, 2006, we have recorded a non-cash impairment charge for the deferred costs and certain assets of Citadel and Playline products" said Tony Greening, Chairman and CEO of ESI. "We are currently seeking alternatives and expanded market opportunities for the services provided by Citadel as a way to partially offset the impact of closure of the US market for our merchants." Financial Review Total revenue increased by 30% to $6.26 million for the three months ended November 30, 2006 from $4.82 million for the three months ended November 30, 2005. This increase was mainly due to the growth in Citadel revenues from its top ten merchants. Gross profit was $3.97 million and $11.04 million for the three and nine months ended November 30, 2006, respectively, compared with $2.19 million and $6.07 million for the same periods in 2005. Gross margin as a percentage of revenues was 63% compared to 45% for the same quarter in prior year, an increase of 18%. Margins increased because direct costs did not grow at the same rate as revenues but remained relatively fixed as transaction revenues grew. Product development expenses were $282,892 and $846,833 during the three and nine months ended November 30, 2006, respectively, a decrease of 7% and an increase 134%, respectively, when compared with $303,896 and $361,982 for the three and nine months ended November 30, 2005. The differences result mainly from timing of expenditures related to development upgrades to the Citadel Checks platform. Sales, marketing and customer service expenses were $748,877 and $2,418,444 during the three and nine months ended November 30, 2006, respectively; an increase of 22% and 29% for three months and nine months ended November 30, 2005 when compared to $613,570 and $1,880,124 for the three and nine months ended November 30, 2005. The increase primarily related to the expansion of Citadel's sales and marketing team, increased travel, additional marketing activities relating to trade shows and increased promotional activities to attract new customers during the nine month period. General and administrative expenses were $2,104,147 and $5,253,212 during the three and nine months ended November 30, 2006, respectively, representing an increase of 125% and 97% compared to $933,935 and $2,660,675 for the three months and nine months ended November 30, 2005. This increase resulted from an increase in the Company's administrative infrastructure required to operate a growing organization and the costs associated with being a public company. In light of the enactment of the UIGEA, and the likely negative impact of those changes on the Company's business, the Company laid off 22 employees from various departments during the quarter ended November 30, 2006 which represented 15% of the employees of the Company and 22% of the employees of Citadel. The Company will save approximately $1 million annually in staffing expenses from these layoffs. Management will be keeping the General and Administrative expenses under continuing review, in order to ensure an appropriate level of such expenditures is maintained as the business climate changes. Impairment of intangibles and capital asset expenses were $6,006,216 for three and nine months ended November 30, 2006 when compared to NIL for same periods in 2005. As a result of the enactment of the Unlawful Internet Gambling Enforcement Act of 2006 and the expected significant negative impact of this legislation on the business, an impairment of intangible and capital assets has been recorded as at November 30, 2006. The impairment was calculated based on comparing the carrying value of the assets to their recoverable value as at November 30, 2006. The recoverable amount was determined based on a value-in-use calculation, using cash flow projections prepared by management. Estimated future cash flows were discounted using a rate reflecting the uncertainty inherent in the continuing operations and the time value of money. Cash flow projections were based on management's estimates of expected cash flows from ongoing operations. Net losses for the three and nine month periods ended November 30, 2006 were $5,256,916 ($0.28 loss per share - basic; $0.27 loss per share - fully diluted) and $4,535,662 ($0.25 less per share - basic; $0.23 less per share fully diluted) compared to net earnings of $86,687 ($0.01 earnings per share - basic; $0.01 earnings per share - fully diluted) and $493,547 ($0.04 earnings per share - basic; $0.03 earnings per share fully diluted) for the prior comparative periods. Cash and cash equivalents totaled $11.0 million and the working capital position was $9.7 million at the end of the current quarter. Management's Discussion and Analysis for the above noted information is located on the SEDAR website at www.sedar.com. Subsequent Events The Company is a plaintiff (and defendant by counterclaim) in litigation with one of its former employees. No amount has been recorded in the current financials. Company can not reasonably estimate the gain or loss from this litigation at this time. 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 results of numerous factors discussed more fully in the Company's Annual Information Form and elsewhere. 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. About ESI Entertainment Systems Inc. ESI Entertainment Systems Inc. ("ESI") (TSX: ESY) provides products and services to the international gaming industry 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 markets. << ESI Entertainment Systems Inc. Consolidated Balance Sheets (expressed in Canadian dollars) (unaudited) November 30, February 28, Mon Jan 15 22:37:26 2007 -GMT- pnac (nCNWorxia) = 1 22:37 results ESY.TO =2 2006 2006 ------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $10,988,753 $ 2,498,268 Accounts receivable 1,556,837 717,324 Prepaids 866,510 485,982 ------------ ------------ 13,412,100 3,701,574 Citadel processing accounts 33,902,491 33,805,751 Deferred share issue costs - 936,987 Deferred contract costs 477,421 537,822 Deferred start-up costs - 2,675,695 Property and equipment 1,553,669 1,973,586 Capitalized development costs - 1,477,731 ------------ ------------ $49,345,681 $45,109,146 ------------ ------------ ------------ ------------ ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities Accounts payable and accrued liabilities $ 2,940,720 $ 2,213,787 Loan payable - 1,000,000 Capital lease obligations 346,377 258,631 Software license obligation 39,587 114,286 Deferred revenue 380,610 564,239 ------------ ------------ 3,707,294 4,150,943 Citadel processing liabilities 33,902,491 33,805,751 Deferred revenue 1,428,385 687,895 Software license obligation - 5,247 Capital lease obligations 328,543 486,058 Future income tax liabilities - 258,500 ------------ ------------ 39,366,713 39,394,394 ------------ ------------ Shareholders' Equity Capital stock 13,700,702 5,089,990 Warrants 84,634 5,926 Contributed surplus 168,237 57,779 (Deficit) Retained earnings (3,974,605) 561,057 ------------ ------------ 9,978,968 5,714,752 ------------ ------------ $49,345,681 $45,109,146 ------------ ------------ ------------ ------------ ------------------------------------------------------------------------- ------------------------------------------------------------------------- Contingencies and commitments On behalf of the Board ------------------- Director --------------- Director ESI Entertainment Systems Inc. Consolidated Statements of Earnings and Retained Earnings (expressed in Canadian dollars, except shares and per share amounts) Three Months Nine Months Ended November 30, Ended November 30, (unaudited) 2006 2005 2006 2005 ------------------------------------------------------------------------- Revenues $ 6,256,549 $ 4,815,936 $17,537,387 $13,032,282 Direct costs 2,290,053 2,626,293 6,500,573 6,966,746 ------------ ------------ ------------ ------------ Gross profit 3,966,496 2,189,643 11,036,814 6,065,536 ------------ ------------ ------------ ------------ Operating expenses Product development 282,892 303,896 846,833 361,982 Sales, marketing and customer service 748,877 613,570 2,418,444 1,880,124 General and administrative 2,104,147 933,935 5,253,212 2,660,675 Amortization of property and equipment 235,620 227,577 677,652 443,729 ------------ ------------ ------------ ------------ 3,371,536 2,078,978 9,196,141 5,346,510 ------------ ------------ ------------ ------------ Earnings before under noted items 594,960 110,665 1,840,673 719,026 Other expenses (income) Impairment of intangibles and other assets 6,211,465 - 6,211,465 - Foreign exchange loss (gain) (233,012) 6,163 (69,804) 47,362 Interest income (105,482) (35,363) (391,485) (106,090) Interest expense 19,944 9,323 106,354 27,969 ------------ ------------ ------------ ------------ (Loss) Earnings before income taxes and non-controlling interest (5,297,955) 130,542 (4,015,857) 749,785 ------------ ------------ ------------ ------------ (Recovery of) Provision for income taxes Current 13,961 - 45,805 - Future (55,000) 45,442 474,000 261,000 ------------ ------------ ------------ ------------ (41,039) 45,442 519,805 261,000 ------------ ------------ ------------ ------------ (Loss) Earnings before non-controlling interest (5,256,916) 85,100 (4,535,662) 488,785 Non-controlling interest - (1,587) - (4,762) ------------ ------------ ------------ ------------ Net (loss) earnings $(5,256,916) $ 86,687 $(4,535,662) $ 493,547 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (Loss) Earnings per share Basic $ (0.28) $ 0.01 $ (0.25) $ 0.04 Diluted (0.27) 0.01 (0.23) 0.03 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings (deficit), beginning of period $ 1,282,311 $ (295,590) $ 561,057 $ (675,779) Excess of consideration paid over ascribed value for shares repurchased - - - (26,671) Net (loss) earnings (5,256,916) 86,687 (4,535,662) 493,547 ------------ ------------ ------------ ------------ Deficit, end of period $(3,974,605) $ (208,903) $(3,974,605) $ (208,903) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ESI Entertainment Systems Inc. Consolidated Statements of Cash Flows (expressed in Canadian dollars, except shares and per share amounts) Three Months Nine Months Ended November 30, Ended November 30, (unaudited) 2006 2005 2006 2005 ------------------------------------------------------------------------- Cas Mon Jan 15 22:37:26 2007 -GMT- pnac (nCNWorxia) = 2 22:37 results ESY.TO =3 h flows provided by (used in) Operating activities Net earnings $(5,256,916) $ 86,692 $(4,535,662) $ 493,547 Items not affecting cash: Stock-based compensation 27,764 15,265 110,976 15,265 Amortization of property and equipment 235,620 227,569 677,652 443,729 Impairment of intangibles and other assets 6,211,465 - 6,211,465 - Non-controlling interest in results of subsidiary - (1,587) - (4,762) Future income taxes (55,000) 45,442 474,000 261,000 Net changes in non-cash operating items: Accounts receivable (643,986) (80,539) (839,513) 419,100 Inventory 32,002 - (205,250) - Prepaids (324,510) 867,050 (380,528) 149,596 Accounts payable and accrued liabilities 558,374 141,006 726,934 21,662 Deferred revenue 333,820 (78,344) 556,861 155,228 Deferred contract costs 65,219 (4,866) 60,401 (130,154) ------------ ------------ ------------ ------------ 1,183,852 1,217,688 2,857,336 1,824,211 ------------ ------------ ------------ ------------ Investing activities Acquisition of property and equipment (112,888) (61,601) (314,418) (590,874) Capitalized development cost (258,727) (217,039) (398,685) (600,490) Acquisition of Riptide Technologies Inc., net of acquisition costs incurred (683,827) (683,827) Deferred start up cost (259,991) (387,064) (1,253,151) (1,127,479) ------------ ------------ ------------ ------------ (631,606) (1,349,531) (1,966,254) (3,002,670) ------------ ------------ ------------ ------------ Financing activities Loan payable - - (1,000,000) - Capital lease payments (82,234) (113,451) (214,039) (113,451) Software license obligation (29,261) 147,117 (79,946) (78,552) Repurchase of common shares - - - (42,600) Issuance of common shares, net of issue costs - - 8,893,388 9,375 ------------ ------------ ------------ ------------ (111,495) 33,666 7,599,403 (225,228) ------------ ------------ ------------ ------------ Increase in cash and cash equivalents 440,751 (98,177) 8,490,485 (1,403,687) Cash and cash equivalents, beginning of period 10,548,002 1,589,666 2,498,268 2,895,176 ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $10,988,753 $ 1,491,489 $10,988,753 $ 1,491,489 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------------------------------------------------------------------- ------------------------------------------------------------------------- Non-cash investing and financing transactions not included in cash flows Conversion of preferred shares into common shares $ - $ - $ 2,706,941 $ - Share issue costs incurred in prior fiscal year - - 936,987 - Future income tax on share issue costs - - 732,500 - Fair value of options exercised - - 519 - Agents' warrants included in share issue costs - - 78,708 - Cash and cash equivalents comprises Cash $ 8,478,645 $ 1,491,489 $ 8,478,645 $ 1,491,489 Cash equivalents 2,510,108 - 2,510,108 - ------------ ------------ ------------ ------------ $10,988,753 $ 1,491,489 $10,988,753 $ 1,491,489 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Supplemental information Interest received $ 144,457 $ 39,211 $ 367,011 $ 109,937 Interest paid 19,944 27,971 106,354 46,617 Income taxes paid 50,763 - 50,763 - >> For further information: ESI Entertainment Systems Inc., Mark Bains, C.A., Chief Financial Officer, Telephone: [phone], email: [e-mail], Web: www.esi.ca; Investor Relations, David Feick, The Equicom Group, Telephone: [phone], [e-mail] Mon Jan 15 22:37:26 2007 -GMT- pnac (nCNWorxia) = 3 22:37 JMHO TIA