US Ban on Online Gambling Costs Canadian Firm

Though ESI does not operate any gaming web sites per se, it is seen by the US Justice Department as promoting illegal gambling by supplying services and products for gambling operators and bettors through the company's three subsidiaries:

1) Citadel Commerce Corp., a payment processing provider for the online gaming industry.

2) ESI Integrity Inc., which sells real-time audit, fraud & risk-management software to government-controlled lotteries, pari-mutuel organizations, etc.

3) PlayLine Inc., which sells turn-key gaming systems to traditional land gambling venues including casinos, bars and cruise ships.

ESI went public last March, floating 3.33 million shares at $3 each, generating $10 million. At the outset, the business prospects looked promising. Revenues for the year ending February ‘06 increased 70% to $18.5 million. Net earnings leaped by 30% to $1.3 million. The number of ESI employees, nearly all in the Vancouver suburb of Burnaby, had even peaked to 160.

Almost 80% of the firm's revenues were generated by Citadel Commerce, which facilitated electronic payments for over 625,000 clients, most of whom reside in the US.

At first, ESI executives adopted a wait-and-see approach, though it was becoming increasingly evident that Citadel's business model would be seriously pressured by the Unlawful Internet Gambling Enforcement Act. Shortly afterwards, the company announced it was laying off 22 employees.

FBI agents then arrested Canadians John Lefebvre and Stephen Lawrence, co-founders of London-based electronic payment processor NETeller Inc., for conspiring to promote unlawful gambling. In view of the arrests, that same day ESI announced that Citadel would no longer provide financial processing services to foreign online gambling merchants for US players.

Last week, ESI announced it had cut its workforce once again by an additional 35%, leaving 80 employees. The company's share value has dropped from its initial offering price of $3 to 58 cents on the Toronto Stock Exchange.