ePals 2013 First Quarter Results

Registered Users Increase 43%

Marketwired

WASHINGTON, DC--(Marketwired - May 30, 2013) - ePals Corporation (TSX VENTURE: SLN) ("ePals"), an education media company and a leading Global Learning Network, today released its operating results for the first quarter ended March 31, 2013. 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.

First Quarter 2013 Highlights

  • 3.5M registered users added year-over-year
  • Increased interest from media and publishing companies
  • Enhanced Global Community platform launched
  • Engagement and time online increased
  • Media subscriptions increasing year-over-year
  • Multi-lingual media products launched (Mandarin and Spanish)
  • International operations expanded
    • First media products launched in China
    • First China school pilot launched with thousands of students
    • First European cooperation agreements signed
  • Streamlining organization; Katya Andresen joins ePals as CEO
  • Platform Sales model transitioned from direct to indirect
  • CAD$6.5M convertible debenture financing (to date)

"In the first part of this year, we launched an enhanced version of the Global Community and have continued to expand our user-base and increase user-engagement and time online," said Miles Gilburne Chairman & CEO of ePals. "We announced several important initiatives to drive international growth, including the launch of a language learning pilot in China, initial local language launches in Europe, and our first content partnership with a major international publisher - McGraw-Hill Education. We are making steady progress on becoming a platform of choice for content companies of all types interested in collaborative learning and global distribution."

Q1 2013 Business Metrics (amounts in thousands)

  March 31, 2013 March 31, 2012 Increase (Decrease)  
Registered users   11,484   8,035 43 %
             
Revenue $ 4,617 $ 4,589 0.6 %
             

Year-over-year, total membership in the ePals Global Learning Network increased by 3.5 million registered users, or 43%, to 11.5 million, primarily through international expansion. Year-over-year circulation of media subscriptions was higher by 11% at the end of the first quarter and renewal deals were received from both New York City public schools and K12, Inc. (NYSE: LRN) for media products. During the quarter our titles made up six of the top 15 free iPad apps for US children's magazines.

Product Enhancements - During the quarter we released enhanced versions of many of our products, including:

  • The ePals Global Community. These new features, which shipped in January 2013 have received positive response and are supporting increases in both users and engagement globally. Since launch, for example, the percentage of newly registered users becoming repeat users more than doubled.

  • Learn365™. ePals' enhanced Policy Management Control Panel for the Learn365™ product is now highly integrated with the Gmail platform and enables district administrators to better policy-manage users at the district, school and individual user levels. The Company also implemented a new channel strategy for this new generation of platform products, including a focus on distribution deals with a variety of device OEMs and a change to its reseller compensation structure to energize relationships such as Dell, which is seeing an increase in activity as a result.

  • Native Android apps (in Google Play or Kindle stores). These native apps cover six of ePals' popular brands. Two Spanish language digital editions were launched in the iTunes and Google Play stores, and in general ePals is making good progress in its efforts to providing its unique content across a wide variety of devices in the major languages and markets of the world.

Publisher Agreements

ePals delivered magazine and book content to Neusoft Publishing for localization and translation into Mandarin, with 8 translated publications complete and 17 more on the way. Digital and physical revenues from media sales and subscriptions in China are expected in 2013 and the plan is to release many of those Mandarin language products in the US and elsewhere over the next four quarters.

In April, ePals signed a multi-year agreement with McGraw-Hill Education under the terms of which ePals will develop, operate, and maintain on its platform and in its Global Community a McGraw-Hill learning community built around McGraw-Hill content. This learning community will allow teachers and students to safely connect with each other in the ePals Global Community for collaborative learning.

International Expansion - ePals continued executing on its aggressive international expansion in China and Europe.

ePals China (NeuPals)

In March 2013, ePals commenced operations of its platform and media businesses in China through NeuPals and in collaboration with Neusoft Publishing. NeuPals has launched an initial pilot of its localized, Mandarin-language version of ePals Global Community for use in Chinese classrooms and seamless connection to classrooms throughout the ePals Global Community. The pilot matches 'sister' classrooms in China with classrooms in the United States for students to focus on English language learning through ongoing exchanges and interactions around a wide variety of subjects and activities. Thousands of students are participating in the pilot program and NeuPals continues to recruit additional classrooms. Further pilots of similar size are under discussion. The Company is also working on the second phase of the country wide Mandarin-language version of ePals Global Community which will be made available by Neupals to a larger number of teachers in China through a variety of different channels. 

ePals Europe

The Company executed initial launches of native language extensions of the ePals Global Community and focused on audience acquisition. ePals signed Cooperation Agreements in Europe with 5 organizations as part of a new learning center featuring content from museums worldwide. The Company is working on future cooperation agreements and anticipates launching native-language products and services in Europe throughout 2013.

Organization

ePals recently announced that Katya Andresen was joining the Company as President and COO and will formally take over the CEO post at the start of next year after fully transitioning into the Company. Ms. Andresen was previously COO at Network for Good. Full press release here: http://www.corp.epals.com/press-releases/katya-andresen-to-join-epals.php. With over 20 years of experience in online community development, the software services business, social media marketing, management operations and journalism, Ms Andresen has a proven track record of driving significant revenue growth around online communities and builing scalable businesses.

Q1 2013 Financial Review

Refer to the attached financial statements for ePals' consolidated financial data for the quarters ended March 31, 2013 and 2012.

For the quarters ended March 31, 2013 and 2012, ePals had total revenue of $4.6 million. ePals media revenue increased $0.5 million, or 11% year-over-year, while platform revenue declined as the Company moved to a new generation of products and began focusing on a new set of channel partners. Market response has been positive to date, with new sales activity in North America expected in the second half of 2013 and 2014.

Operating expenses for the quarter ended March 31, 2013 were $9.8 million, an increase of $1.4 million or 16% from the prior-year quarter. The largest increase was in technology, development & operational support which increased by $1.2 million or 38%. This increase was due primarily to additional expenditures to support expansion of the Company's international operations, increased consulting and staffing expenses, and expenses for the new ePals Media digital and Spanish language departments. Comparing Q1 2013 to Q1 2012, sales & marketing expenses increased by approximately $400,000 due to higher agency commissions, a larger investment in online marketing acquisition efforts and higher consulting expenses for marketing based on new marketing initiatives for the media portion of the business.

The reduction in ePals' share price from December 31, 2012 to March 31, 2013 resulted in a $2.3 million gain from the change in the fair value of derivatives related to the conversion feature in the Company's debentures. 

The net loss for the quarter ended March 31, 2013 was $3.4 million, or ($0.02) per share, compared to a net loss of $3.9 million, or ($0.03) per share for the quarter ended March 31, 2011.

As of May 15, 2013, ePals had a total of 162,693,550 common shares outstanding, of which 101,578,452 are voting common shares and 61,115,098 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' financial statements for the first quarter ended March 31, 2013, together with the related management's discussion & analysis, is filed at www.sedar.com on May 30, 2013.

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, Ed Fish, and CFO Aric Holsinger.

To participate in the call, please dial +1-719-325-2376 or 1-888-455-2296 approximately 10 minutes prior to the conference call, and enter passcode 5833106. A recording of the conference call will be available by dialing +1-719-457-0820 or 1-888-203-1112 and entering the passcode 5833106.

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.corp.epals.com for corporate information.

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  
Condensed Consolidated Interim Statements of Financial Position  
March 31, 2013 and December 31, 2012  
             
             
             
    (Unaudited)
March 31,
2013
    December 31,
2012
 
                 
Assets                
                 
Current assets                
  Cash & cash equivalents   $ 2,265,155     $ 3,948,499  
  Accounts receivable, net of allowance for doubtful accounts     976,204       1,581,300  
  Inventory     434,527       417,702  
  Other current assets     902,108       875,618  
    Total current assets     4,577,994       6,823,119  
                 
Property and equipment, net     647,271       516,575  
Investment in NeuPals     1,136,254       1,164,523  
Goodwill     14,419,953       14,419,953  
Other intangible assets, net     8,054,005       8,016,615  
Restricted cash     75,663       75,663  
Other assets     87,631       84,519  
                 
    Total assets   $ 28,998,771     $ 31,100,967  
                 
Liabilities and Stockholders' Equity                
                 
Current liabilities                
  Accounts payable and accrued expenses   $ 7,392,224     $ 6,951,523  
  Acquisition consideration liabilities, current     182,390       182,390  
  Deferred revenue, current     4,621,460       6,185,628  
  Bank line-of-credit     1,500,000       1,500,000  
  Notes payable to related parties     800,000       -  
  Finance lease obligations, current     85,957       72,789  
  Other current liabilities     13,485       24,719  
    Total current liabilities     14,595,516       14,917,049  
                 
Secured convertible debentures     11,802,795       11,117,161  
Deferred revenue, less current portion     1,024,137       917,881  
Finance lease obligations, less current portion     160,820       32,554  
Acquisition consideration liabilities, less current     122,911       122,911  
Other liabilities     11,440       11,440  
                 
    Total liabilities     27,717,619       27,118,996  
                 
Commitments and contingencies                
                 
Stockholders' equity                
  Share capital     96,780,242       96,365,773  
  Additional paid-in capital     3,779,219       3,556,867  
  Accumulated deficit     (97,669,925 )     (94,295,643 )
  Unvested voting common stock     (1,876 )     (3,752 )
  Accumulated other comprehensive loss     (114,460 )     (149,226 )
  Less: Treasury stock (719,998 shares)     (1,492,048 )     (1,492,048 )
                 
    Total stockholders' equity     1,281,152       3,981,971  
                     
    Total liabilities and stockholders' equity   $ 28,998,771     $ 31,100,967  
                     
                     
                     
   
ePals Corporation
Condensed Consolidated Interim Statements of Comprehensive Loss
Three Months Ended March 31, 2013 and 2012 (Unaudited)
 
       
       
    Three Months Ended
March 31,
 
    2013     2012  
                 
Revenue   $ 4,617,058     $ 4,588,615  
                 
Less: Operating expenses:                
    Technology, development & operational support     4,237,965       3,074,974  
    General & administrative expenses     1,936,703       1,760,482  
    Sales & marketing     2,651,023       2,288,893  
    Stock-based compensation     639,366       349,207  
    Depreciation & amortization     315,895       381,284  
    Loss on investment in NeuPals     28,269       -  
    Acquisition investigation expenses     23,540       336,662  
    Transaction costs related to debentures     18,235       -  
    Change in estimated fair value of acquisition share consideration     -       301,429  
Total operating expenses     9,850,996       8,492,931  
                 
Loss from operations     (5,233,938 )     (3,904,316 )
                 
Other income (expense):                
  Gain (loss) from change in fair value of derivatives     2,279,000       -  
  Interest expense, net     (554,564 )     (24,190 )
  Net foreign currency exchange gains (losses)     135,220       (486 )
                 
Net loss     (3,374,282 )     (3,928,992 )
                 
Other comprehensive income (loss):                
  Items that may be subsequently reclassified into net loss/income                
    Foreign currency translation     34,766       (1,586 )
                 
Total comprehensive loss   $ (3,339,516 )   $ (3,930,578 )
                 
                 
Net loss per common share:                
Basic & diluted   $ (0.02 )   $ (0.03 )
                 
Weighted average number of common shares:                
Basic & diluted     161,065,817       116,490,803  
                 
                 
                 
ePals Corporation  
Consolidated Statements of Cash Flows  
Three Months Ended March 31, 2013 and 2012 (Unaudited)  
   
    Three Months Ended
March 31,
 
    2013     2012  
Cash flows from operating activities:                
Net loss   $ (3,374,282 )   $ (3,928,992 )
Adjustments to reconcile net loss to net cash used in operating activities:                
  (Gain) loss from change in fair value of derivatives     (2,279,000 )     -  
  Depreciation and amortization     315,895       381,284  
  Stock-based compensation     639,366       349,207  
  Bad debt expense     60,956       115,341  
  Loss on investment in NeuPals     28,269       -  
  Amortization of financing costs from debentures     362,744       -  
  Net foreign currency exchange (gains) losses     (135,220 )     486  
  Restricted share vesting     1,876       3,217  
  Change in estimated fair value of acquisition share consideration     -       301,429  
  Increase in restricted cash     -       75  
  Changes in operating assets and liabilities:                
    Accounts receivable     544,140       (220,011 )
    Inventory     (16,825 )     (16,943 )
    Other current assets     (26,490 )     (78,031 )
    Accounts payable and accrued expenses     409,204       (572,187 )
    Deferred revenue     (1,457,912 )     (1,801,013 )
    Other     38,584       187,318  
      Total adjustments     (1,514,413 )     (1,349,828 )
                     
      Net cash used in operating activities     (4,888,695 )     (5,278,820 )
                 
Cash flows from investing activities:                
  Cash paid for acquisition of Carus Publishing Company     -       (512,058 )
  Purchases of equipment     (239,848 )     (43,802 )
  Increase in other intangible assets     (244,133 )     (132,950 )
  Increase in other assets     (3,112 )     -  
                   
      Net cash used in investing activities     (487,094 )     (688,810 )
                 
Cash flows from financing activities:                
  Proceeds from secured convertible debentures, net of expenses     2,763,480       -  
  Proceeds from notes payable to related parties     800,000       -  
  Payments on capital lease obligations     (20,779 )     (10,178 )
  Proceeds from capital lease financing     163,742       38,832  
  Proceeds from exercise of stock options     -       13,059  
                   
      Net cash provided by financing activities     3,706,443       41,713  
                   
Decrease in cash & cash equivalents     (1,669,346 )     (5,925,917 )
                   
Effect of exchange rates on cash     (13,998 )     (1,282 )
                   
Cash & cash equivalents at the beginning of the period     3,948,499       6,895,829  
Cash & cash equivalents at the end of the period   $ 2,265,155     $ 968,630  
                 
Non-cash financing activities:                
Issuance of common shares to consultants for payment of services   $ -     $ 23,500  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 12,961     $ 19,716  
Cash paid for income taxes     20,222       12,161  
                 
                 
                 
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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