ePals 2012 Fourth Quarter and Year-End Results

Registered Users Increase 45%; Annual Revenue Increases 322%

Marketwired

WASHINGTON, DC--(Marketwired - Apr 29, 2013) - ePals Corporation (TSX VENTURE: SLN) ("ePals"), an education media company and the world's leading Global Learning Network, today released its operating results for the quarter and year ended December 31, 2012. Results were prepared by management in accordance with International Financial Reporting Standards ("IFRS"). All figures are in U.S. dollars unless otherwise stated. A conference call will be held today at 10:00 a.m. Eastern Time to discuss the results.

Fourth Quarter Highlights

  • 1.5M users added, 116% more than Q3 additions
  • 129% revenue increase to $4.6M
  • Growth restored to media subscription business with 44,000 new subscriptions
  • Digital subscriptions contributed 10% of aggregate, outperforming industry average of approximately 2.5%
  • Enhanced Global Community platform with features that increase engagement
  • Expanded International operations
    • China business license received, Q1 2013 pilot launch
    • Partnered with NeuSoft Publishing and launched media products in China
    • Established European presence in local languages
  • Completed $12M debenture financing

"In the fourth quarter ePals demonstrated traction with increased user growth and engagement, and set the stage for international growth through our initiatives in Europe and China," said Miles Gilburne CEO of ePals. "Further validation of the value of ePals' global learning network and platform came earlier this month with our announcement with McGraw-Hill Education. This represents our first substantial relationship with a global leader in education publishing and demonstrates the value of partnering with ePals to bring world class digital content to our expanding global community. ePals enables an attractive solution for the digital transformation of the traditional media business in education."

2012 Business Metrics (amounts in thousands except per user data)

             
    December 31, 2012   December 31, 2011   Increase (Decrease)
Registered users     11,128     7,650   45 %
Subscriptions     584     590   (1 %)
                   
Revenue   $ 15,202   $ 3,601   322 %
Average revenue per user (ARPU)   $ 1.62   $ 0.53   206 %
                   
  • Membership and Registered User Growth - During 2012, total membership in the ePals global learning network increased by 3.5 million users, or 45%, to 11.1 million, primarily through international expansion and the establishment of our media business at the end of 2011. 

    Growth in the enterprise platform business was flat in 2012 as the Company reconfigured and enhanced its enterprise product and sales channels in response to competitive conditions such as new entrants offering free solutions and the evolution of the strategies of channel partners addressing the school market. In Q1 2013 we released these enhanced enterprise products and are once again actively pursuing direct and indirect channel partners for the platform business. Market response has been positive.

International Expansion - During the fourth quarter of 2012, ePals executed on its aggressive international expansion in China and Europe.

  • China - ePals received approval and business license from the Chinese government for its joint venture with NeuEdu Co. and executed an additional agreement with Neusoft Publishing. The joint venture operates as NeuPals, and has been capitalized by its partners, ePals and NeuEdu Co., Ltd. Operations commenced in December 2012 and in April 2013 NeuPals launched its initial pilot with Chinese schools, focusing first on authentic English language learning leveraging first-person cultural exchange. NeuPals intends to begin selling language learning services on a subscription basis in China later this year.

    Further, ePals' additional agreement with Neusoft Publishing provides for the translation, distribution and sale of ePals' award winning children's media in China. The first of these products debuted at the Beijing Book Fair this year and Neusoft Publishing has begun distribution in China. 

  • ePals Europe - The Company executed initial launches of native language extensions of the ePals Global Community and focused on audience acquisition. Initial content relationships have been signed in Europe and discussions are underway with potential strategic partners and commercial sponsors for ePals Europe.

2012 Financial Review

Refer to the attached financial statements for ePals' audited consolidated financial data for the year ended December 31, 2012 and 2011.

For the year ended December 31, 2012, ePals had total revenue of $15.2 million, which is an increase of $11.6 million or 322%, compared to revenue of $3.6 million in 2011. ePals media revenue increased $12.4 million, or 726% year-over-year. Increases of 2012 revenues and expenses in the media business compared to the prior year were largely due to the acquisition of Carus late in the fourth quarter of 2011. ePals platform revenue decreased by 44% year-over-year as we de-emphasized platform subscriptions in 2H 2012 and worked to configure and enhance enterprise product and sales channels in response to competitive conditions and evolving strategies of channel partners. In Q1 2013 we released these enhanced enterprise products and are once again actively pursuing direct and indirect channel partners for the platform business. Market response has been positive to date.

Operating expenses for 2012 were $41.5 million, which was an increase of $20.4 million or 96% from 2011. A total of $18.8 million of the $20.4 million increase is attributable to the addition of the media subscriptions sales business. The main expense categories contributing to the increase were technology, development & operational support (increase of $7.1 million and 121%), impairment of goodwill and intangible assets (increase of $6.7 million and 100%), sales & marketing (increase of $7.0 million and 222%) and general & administrative (increase of $4.5 million and 99%).

In addition to the increase from the media subscription sales business which contributed $5.7 million of the $7.1 million increase, technology, development & operational support expenses were also affected by increased staffing to develop and support ePals' expanding international busines, media business products and enterprise products. ePals recorded a $4.6 million impairment loss on goodwill and a $2.0 million impairment loss on other intangibles during 2012. A total of $4.9 million of the $7.0 million increase in sales & marketing expenses was due to the addition of the media subscription sales business while the remaining increase was primarily related to additional staffing in marketing, business development and education media, new marketing initiatives for the media portion of our business, and additional investment in marketing activities. The addition of the media subscription sales business accounted for $2.4 million of the $4.5 million increase in general & administrative expenses for the year ended December 31, 2012, with the remaining increase due primarily to additional salary and related costs, including new senior positions in the accounting and international departments, a discretionary management bonus pool, increased accounting consultants for the integration of businesses acquired in 2011 and higher fees for legal, audit, tax, corporate insurance, and other professional fees associated with ePals' public corporate structure. 

The net loss for the year ended December 31, 2012 was $26.8 million, or ($0.20) per share, compared to a net loss of $17.8 million, or ($0.35) per share for the year ended December 31, 2011. The difference in net loss between 2012 and 2011 was primarily due to the $6.7 million impairment of goodwill and intangible assets.

Q4 2012 Financial Review
The following table is a summary of ePals' unaudited consolidated financial data for the quarters ended December 31, 2012 and 2011:

             

(unaudited)
  Three months ended
December 31,
       
Q4 2012 Financial Highlights   2012   2011   Increase (Decrease)  
%
(dollars in thousands, except share and per share data)                              
Revenue   $ 4,609     $ 2,009     $ 2,600     129 %
Operating expenses:                              
  Technology, development & operational support     4,291       1,872       2,419     129 %
  General & administrative     2,810       1,555       1,255     81 %
  Sales & marketing     2,681       1,396       1,285     92 %
  Stock-based compensation     586       682       (96 )   (14 %)
  Depreciation & amortization     384       187       197     105 %
  Acquisition investigation expenses     115       1,119       (1,004 )   (90 %)
  Change in estimated FV of acquisition share consideration     422       -       422     100 %
  Impairment of goodwill and intangible assets     6,671       -       6,671     100 %
  Transaction costs related to debentures     300       -       300     100 %
  Loss on investment in NeuPals     61       -       61     100 %
Total operating expenses     18,321       6,811       11,510     169 %
Loss from operations     (13,712 )     (4,802 )     8,910     186 %
Other income (expense)     (402 )     (19 )     383     2016 %
Net loss   $ (14,114 )   $ (4,821 )   $ 9,293     193 %
Basic and diluted net loss per share   $ (0.09 )   $ (0.04 )              
Weighted average shares outstanding--Basic     149,031,029       116,123,674                
                               

Total fourth quarter revenues increased $2.6 million or 129% compared to the same period a year ago. Fourth quarter 2012 media revenues increased by $2.9 million or 209% while platform revenue decreased by $0.3 million or 49%. Increases of fourth quarter 2012 revenues and expenses in the media business compared to the prior year was due to the acquisition of Carus late in the fourth quarter of 2011. 

The main expense categories contributing to higher operating expenses during the fourth quarter of 2012 compared to the prior-year quarter were the impairment of goodwill and intangible assets (increase of $6.7 million and 100%) and technology, development & operational support (increase of $2.4 million and 129%). The increase in technology, development & operational support expenses from the addition of the media subscription sales business was $1.5 million. The remaining increase in technology, development & operational support expenses was mostly due to additional staffing to support expansion of ePals international operations. In accordance with IAS 36, Impairment of Assets, ePals performed its annual testing of goodwill and other intangibles during the fourth quarter of 2012 and recorded a $4.6 million impairment loss on goodwill and a $2.0 impairment loss on other intangibles during the period. 

Approximately $1.0 million of the increase in sales and marketing expenses during the fourth quarter of 2012 was from the addition of the media subscription sales business. The remaining increase was due to a larger investment in online marketing acquisition efforts and higher consulting expenses from new marketing initiatives for the media portion of ePals business. Approximately $0.7 million of the increase in general & administrative expenses during the fourth quarter of 2012 was from the addition of the media subscription sales business. The remaining increase was due primarily to the 2012 accrual of a discretionary management bonus pool, recruiting fees, and legal expenses.

The net loss for the fourth quarter of 2012 was $14.1 million, or ($0.09) per share, compared to a net loss of $4.8 million, or ($0.04) per share, for the fourth quarter of 2011. The difference in net loss for the quarter between 2012 and 2011 was primarily due to the $6.7 million impairment of goodwill and intangible assets.

As of April 15, 2013, ePals had a total of 161,591,707 common shares outstanding, of which 100,979,253 are voting common shares and 60,612,454 are restricted voting common shares. 

Important factors, including those discussed in ePals' regulatory filings (www.sedar.com), could cause actual results to differ from ePals' expectations and those differences may be material. ePals' audited financial statements for the year ended December 31, 2012, together with the related management's discussion & analysis, is filed at www.sedar.com on April 29, 2012.

Conference Call Today (10:00 a.m. EDT)

A conference call to discuss the results is scheduled to take place today at 10:00 a.m. Eastern Daylight Time. Speaking on the call will be Chairman & CEO Miles Gilburne, President Ed Fish, and CFO Aric Holsinger.

To participate in the call, please dial +1-719-457-2689 or 1-888-510-1765 approximately 10 minutes prior to the conference call, and enter passcode 2907765. A recording of the conference call will be available by dialing +1-719-457-0820 or 1-888-203-1112 and entering the passcode 2907765. The call will also be available on ePals' website at www.corp.ePals.com for replay.

About ePals Corporation
ePals Corporation (TSX VENTURE: SLN) is an education media company and the leading Global Learning Network. Focused on the K-12 market, ePals offers elementary and secondary school administrators, teachers, students and parents worldwide a safe and secure platform for building educational communities, providing quality digital content and facilitating collaboration for effective 21st century learning. ePals' award-winning products include: the ePals Global Community®; Learn365; In2Books®; and popular children's educational publishing brands including Cricket® and Cobblestone®. ePals customers and partners include the International Baccalaureate, Microsoft Corporation, Dell Inc., McGraw Hill Education, National Geographic and leading school districts across the United States and globally. ePals serves approximately 1 million classrooms and reaches millions of teachers, students and parents in approximately 200 countries and territories. Visit www.epals.com. For In2Books, visit www.In2Books.com.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in this press release constitute forward-looking information within the meaning of applicable securities laws, including statements with respect to customers, ventures such as ePals China and Europe ("ePals Ventures"); partnerships; ePals' strategy, prospects and success in pursuing domestic or international markets for the platform or media businesses, and the composition of its leadership teams to be established in connection therewith; and ePals' anticipated plans to increase its subscription base, ARPU, and media and platform businesses. These statements relate to future events or future performance. Often, but not always, forward-looking information can be identified by the use of words such as "plans", "expects", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates", or "believes" or variations (including negative variations) of such words and phrases, or statements formed in the future tense or indicating that certain actions, events or results "may", "could", "would", "might" or "will" (or other variations of the forgoing) be taken, occur, be achieved, or come to pass. Forward-looking information is necessarily based upon a number of assumptions and factors that, while considered reasonable, are subject to known and unknown risks, uncertainties, and other factors which may cause the actual results and future events to differ materially from those expressed or implied by such forward-looking information. Those assumptions and factors are based on information currently available to ePals. Such material factors and assumptions include, but are not limited to: ePals' ability to execute on its business plan, including the successful launch of ePals' Ventures; the acceptance of ePals' products and services by customers globally; that ePals affiliated entities will be able to secure distribution partners for sale of ePals' products and services; ePals' subjective assessment of the likelihood of success of a sales lead or opportunity; that sales will be completed at or above ePals' estimated margins; that the demand for webhosting and secure email communication, as well as education media related products domestically, in Europe and in China will continue to grow; that the demand for ePals' products and services globally will develop and grow; the receipt of all requisite regulatory approvals throughout venture territories for the sale of ePals' products and services; the availability of additional financing, if and when required and market conditions generally. Although ePals has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. The forward-looking information contained in this press release is made as of the date hereof and ePals is not obligated to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Because of the risks, uncertainties and assumptions contained herein, investors should not place undue reliance on forward-looking information. The foregoing statements expressly qualify any forward-looking information contained herein.

   
ePals Corporation  
Consolidated Statements of Financial Position  
December 31, 2012 and 2011  
   
             
    December 31, 2012     December 31, 2011  
             
Assets            
                 
Current assets                
  Cash & cash equivalents   $ 3,948,499     $ 6,895,829  
  Accounts receivable, net of allowance for doubtful accounts     1,581,300       1,119,694  
  Inventory     417,702       366,436  
  Other current assets     875,618       698,557  
    Total current assets     6,823,119       9,080,516  
                 
Property and equipment, net     516,575       585,325  
Investment in NeuPals     1,164,523       -  
Goodwill     14,419,953       19,142,054  
Other intangible assets, net     8,016,615       10,685,685  
Restricted cash     75,663       75,259  
Other assets     84,519       144,748  
                 
    Total assets   $ 31,100,967     $ 39,713,587  
                 
Liabilities and Stockholders' Equity                
                 
Current liabilities                
  Accounts payable and accrued expenses   $ 6,951,523     $ 6,340,603  
  Acquisition consideration liabilities, current     182,390       10,822,313  
  Deferred revenue, current     6,185,628       6,664,697  
  Bank line-of-credit     1,500,000       1,500,000  
  Finance lease obligations, current     72,789       55,147  
  Other current liabilities     24,719       50,444  
    Total current liabilities     14,917,049       25,433,204  
                 
Secured convertible debentures     11,117,161       -  
Deferred revenue, less current portion     917,881       1,230,266  
Finance lease obligations, less current portion     32,554       55,804  
Acquisition consideration liabilities, less current     122,911       -  
Other liabilities     11,440       24,948  
                 
    Total liabilities     27,118,996       26,744,222  
                 
Commitments and contingencies                
                 
Stockholders' equity                
  Share capital     95,487,807       78,098,272  
  Additional paid-in capital     4,434,833       3,951,679  
  Accumulated deficit     (94,295,643 )     (67,474,961 )
  Unvested voting common stock     (3,752 )     (6,969 )
  Accumulated other comprehensive loss     (149,226 )     (106,608 )
  Less: Treasury stock (719,998 shares)     (1,492,048 )     (1,492,048 )
                 
    Total stockholders' equity     3,981,971       12,969,365  
                 
    Total liabilities and stockholders' equity   $ 31,100,967     $ 39,713,587  
                     
 
   
ePals Corporation
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 2012 and 2011
 
             
             
    2012     2011  
                 
Revenue   $ 15,201,910     $ 3,600,790  
                 
Operating expenses:                
  Technology, development & operational support     (13,057,399 )     (5,911,732 )
  General & administrative     (8,942,113 )     (4,489,341 )
  Sales & marketing     (10,134,161 )     (3,151,092 )
  Stock-based compensation     (1,753,397 )     (1,436,359 )
  Depreciation & amortization     (1,552,530 )     (338,792 )
  Acquisition investigation expenses     (1,279,128 )     (1,243,029 )
  Change in estimated fair value of acquisition consideration     2,204,107       -  
  Impairment of goodwill and intangible assets     (6,671,355 )     -  
  Transaction costs related to debentures     (300,225 )     -  
  Loss on investment in NeuPals     (60,477 )     -  
  Merger transaction costs     -       (4,583,458 )
Total operating expenses     (41,546,678 )     (21,153,803 )
                 
Loss from operations     (26,344,768 )     (17,553,013 )
                 
Other income (expense):                
  Interest expense, net     (521,617 )     (155,603 )
  Other income     9,600       -  
  Net foreign currency exchange gains (losses)     36,103       (84,247 )
                 
Net loss     (26,820,682 )     (17,792,863 )
                 
Other comprehensive income (loss):                
  Foreign currency translation     (42,618 )     (9,899 )
                 
Total comprehensive loss   $ (26,863,300 )   $ (17,802,762 )
                 
                 
Net loss per common share:                
Basic & diluted   $ (0.20 )   $ (0.35 )
                 
Weighted average number of common shares:                
Basic & diluted     135,797,002       51,445,747  
                 
ePals Corporation  
Consolidated Statements of Cash Flows  
Years Ended December 31, 2012 and 2011  
   
    2012     2011  
Cash flows from operating activities:                
  Net loss   $ (26,820,682 )   $ (17,792,863 )
  Adjustments to reconcile net loss to net cash used in operating activities:                
    Depreciation and amortization     1,552,530       338,792  
    Stock-based compensation     1,753,397       1,436,359  
    Write off of patent costs     6,561       77,132  
    Change in estimated fair value of acquisition consideration     (2,204,107 )     -  
    Impairment of goodwill and intangible assets     6,671,355       -  
    Loss on investment in NeuPals     60,477       -  
    Bad debt expense and write-off of accounts receivable     331,604       41,211  
    Increase in restricted cash     404       761  
    Non-cash Merger transaction costs     -       3,265,671  
    Amortization of financing costs from October 2012 Debentures     593,675       -  
    Changes in operating assets and liabilities:                
      Accounts receivable     (793,210 )     (330,779 )
      Inventory     (51,266 )     (18,957 )
      Other current assets     (67,712 )     559,014  
      Accounts payable and accrued expenses     633,036       1,048,612  
      Deferred revenue     (791,454 )     (1,851,748 )
      Other     (293,147 )     300,156  
        Total adjustments     7,402,143       4,866,224  
                 
        Net cash used in operating activities     (19,418,539 )     (12,926,639 )
                 
Cash flows from investing activities:                
  Cash used for business acquisitions, net of cash acquired     (1,525,000 )     (2,834,546 )
  Investment in NeuPals     (1,225,000 )     -  
  Purchase of equipment     (305,047 )     (413,254 )
  Increase in other intangible assets     (545,076 )     (167,043 )
  Decrease in other assets     -       (60,923 )
  Proceeds from Merger     -       125,173  
                 
        Net cash used in investing activities     (3,600,123 )     (3,350,593 )
                 
Cash flows from financing activities:                
  Proceeds from April 2012 Private Placement, net of expenses     9,228,798       -  
  Proceeds from October 2012 Debentures, net of expenses     10,805,600       -  
  Proceeds from notes payable from related parties     1,500,000       -  
  Repayment of notes payable from related parties     (1,500,000 )     -  
  Proceeds from exercise of stock options     54,516       81,823  
  Proceeds from exercise of warrants     40,960       1,597  
  Payments on finance lease obligations     (113,706 )     (121,294 )
  Proceeds from finance lease financing     63,510       99,709  
  Proceeds from July 2011 private placement, net of expenses     -       21,221,637  
  Proceeds from convertible notes payable, net of expenses     -       3,240,985  
  Payment of principal on bank line-of-credit     -       (2,999,074 )
  Proceeds from issuance of Series C preferred stock, net     -       1,435,972  
  Payments to unaccredited investors to retire shares     -       (238,538 )
  Proceeds from issuance of common stock     -       316,299  
  Payment of note payable to related party     -       (90,170 )
                 
        Net cash provided by financing activities     20,079,678       22,948,946  
                 
                 
(Decrease) increase in cash & cash equivalents     (2,938,984 )     6,671,714  
Effect of exchange rates on cash     (8,346 )     (85,034 )
Cash & cash equivalents at the beginning of the year     6,895,829       309,149  
Cash & cash equivalents at the end of the year   $ 3,948,499     $ 6,895,829  
                 
Contact:
FOR FURTHER INFORMATION PLEASE CONTACT:

Chief Financial Officer
Aric Holsinger
ePals Corporation
Phone: (703) 885-3400
aholsinger@corp.epals.com

Investor Relations
Cory Pala
E.vestor
Phone: (416) 657-2400
cpala@corp.epals.com

SVP, Marketing & Corporate Communications
Will Jarred
ePals Corporation
Phone: (703) 885-3400
wjarred@corp.epals.com
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