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ePals 2013 Second Quarter Results

WASHINGTON, DC--(Marketwired - Aug 29, 2013) - ePals Corporation ( TSX VENTURE : SLN ) ("ePals"), an education media company and a leading Global Learning Network, today released its operating results for the second quarter ended June 30, 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 11:00 a.m. Eastern Time to discuss the results. To participate in the call, please dial +1-719-325-2420 or 1-888-378-0320 approximately 10 minutes prior to the conference call, and enter passcode 3903672. A recording of the conference call will be available through September 4, 2013 by dialing +1-719-457-0820 or 1-888-203-1112 and entering the passcode 3903672.

Second Quarter 2013 Highlights

  • Katya Andresen joined as ePals President & COO
  • Media subscriptions increasing year-over-year
  • 3M registered users added year-over-year
  • Expanded reach with multi-lingual media products (Mandarin and Spanish)
  • Successful China school pilot with thousands of students
  • Seven European cooperation content agreements signed
  • CAD$10M convertible debenture financing (to date)

In May, the Company hired Katya Andresen as the new President & COO. Ms. Andresen is expected to move into the role of CEO when Miles Gilburne steps down January 1, 2014. Currently Ms. Andresen is in the process of reviewing each of the Company's business lines to assess the near term opportunity for revenue growth. She has also initiated a comprehensive review of the Company's overall strategic position and its cost structures, as well as the metrics by which the Company evaluates its performance.

"I am working with a talented team at ePals finalizing top priorities and narrowing our focus to targeted revenue generating lines," said Katya Andresen, President & COO of ePals. "There is strong demand for engaging digital learning experiences around the world and ePals has a powerful technology platform and award winning content with true global reach well suited to the creation and delivery of these new learning experiences. I believe we are in excellent position to be a leader in this rapidly growing market."

Q2 2013 Key Business Metrics (amounts in thousands)

  June 30, 2013 June 30, 2012 Increase (Decrease)  
Registered users   11,935   8,943 33 %
             
Revenue1 $ 3,375 $ 2,963 14 %
             

1 Represents revenue for the three months ended June 30, 2013 and 2012

Year-over-year circulation of media subscriptions was higher by 9% at the end of the second quarter. Home subscriptions had the strongest year-over-year growth, increasing 12% compared to the prior year period.

Year-over-year, total membership in the ePals Global Learning Network increased by 3.0 million registered users, or 33%, to 11.9 million, primarily through international expansion and increased marketing efforts. Enhancements made to the overall ePals Global Community experience during 2013 are expected to enhance viral and enterprise adoption of the platform, increase teacher engagement, and provide the foundation for future sponsorship and advertising revenue.

"The second quarter showed strong growth in our content for home and school, thanks in part to digital formats for the web and tablet, as well as increased engagement levels in our Global Community. That engagement should increase further with the beginning of the new school year," explained Ms. Andresen. "As of the end of the second quarter our European operations had signed seven content partners that will allow us to introduce more localized international content."

During the second quarter of 2013, ePals formed a partnership with Toshiba related to Toshiba's Education Solutions Program, a suite of software offerings for teachers, students, administrators and parents designed to address the needs of all individuals involved in a student's education. Toshiba is the largest provider of computers in the UK Education & Business market and sees growth in the bring-your-own-devices trend in the US. As an important media partner and communication / collaboration tool in its program, this partnership will broaden the exposure of ePals offerings to the US K-12 market.

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.

In June 2013, ePals announced the development of new learning centers for publishers and the ToolsForSchool™ digital marketplace, which enables providers of curriculum, quality resources and learning activities to distribute their content to a broader audience. Using the learning centers, publishers can create communities wrapped around their content, projects and learning activities, and make these available locally or globally as desired by the publisher. ToolsForSchool™, which currently has over 2,000 products available for purchase, provides an online marketplace for teachers and publishers to sell and share content through a range of online storefronts. Publishers, including McGraw-Hill, Smithsonian Institution and others, are collaborating with ePals to distribute their content using these outlets.

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.

We have since launched multiple pilots in China around Mandarin and English language learning and cultural exchange using our platform, communities and content, and we expect to launch our first commercial product growing out of these pilots this fall.

ePals Europe

ePals European operations signed seven content partners, including McGraw-Hill Education, as of the end of the second quarter that will allow ePals to introduce more localized international content.

Additionally, ePals continued to expand its audience by making content available in multiple languages. During the second quarter, ePals Media debuted "Ladybug en espanol", the third Spanish language brand released, in both print and digital (iOS and Android) formats. Spanish language products will continue to be a major focus in the second half of 2013.

Q2 Financial Review

Refer to the attached financial statements for ePals' consolidated financial data for the three and six months ended June 30, 2013 and 2012.

For the three months ended June 30, 2013 and 2012, ePals had total revenue of $3.4 million. Media revenue increased $0.5 million, or 19% year-over-year, due primarily to an increase in subscriptions and licensing revenue, while platform revenue declined due to general market conditions and increased competitive and pricing pressures in the marketplace. For the six months ended June 30, 2013, ePals had total revenue of $8.0 million and media revenue increased $1.0 million, or 14% year-over-year for the same reasons as mentioned above.

Operating expenses for the three months ended June 30, 2013 were $9.8 million, an increase of $2.7 million or 37% from the prior year period. The largest increase was in technology, development & operational support which increased by $1.2 million or 44%. This increase was due primarily to additional expenditures to support expansion of our international operations in Europe and China, increased costs related to the functionality and support of our Global Community and increase in revenue sharing expenses from an increase in media advertising revenue. Comparing the three months ended June 30, 2013 to same period in 2012, sales & marketing expenses increased by approximately $0.8 million due to higher agency commissions from the subscription sales of our publications by third parties, a larger investment in online marketing acquisition efforts and increased expenses related to new marketing initiatives for the media portion of our business. Operating expenses for the six months ended June 30, 2013 were $19.6 million, an increase of $4.0 million or 26% from the prior year period, while sales & marketing expenses increased by approximately $1.1 million.

The reduction in ePals' share price from March 31, 2013 to June 30, 2013 resulted in a $0.7 million gain from the change in the fair value of derivatives related to the conversion feature in our debentures for the three months ended June 30, 2013.

The net loss for the three months ended June 30, 2013 was $6.0 million, or ($0.04) per share, compared to a net loss of $4.2 million, or ($0.03) per share for the three months ended June 30, 2012. The net loss for the six months ended June 30, 2013 was $9.4 million, or ($0.06) per share, compared to a net loss of $8.1 million, or ($0.06) per share for the six months ended June 30, 2012. In addition to the drivers previously discussed, these increases in net loss year-over-year are primarily due to increased interest expense, partially offset by gains from the change in fair value of our derivatives in 2013.

As of August 20, 2013, ePals had a total of 163,975,095 common shares outstanding, of which 97,827,251 are voting common shares and 66,147,844 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 three and six months ended June 30, 2013, together with the related management's discussion & analysis, is filed at www.sedar.com on August 29, 2013.

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®, a common core eMentoring program that builds reading, writing and critical thinking skills; and popular children's media brands including Cricket® and Cobblestone®. ePals customers and partners include the International Baccalaureate, Microsoft Corporation, Dell Inc., 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. Corporate information is available at www.corp.epals.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  
Condensed Consolidated Interim Statements of Financial Position  
June 30, 2013 and December 31, 2012  
           
  (Unaudited)
June 30, 2013
    December 31, 2012  
           
Assets  
               
Current assets              
  Cash & cash equivalents $ 737,104     $ 3,948,499  
  Accounts receivable, net of allowance for doubtful accounts   871,107       1,581,300  
  Inventory   497,667       417,702  
  Other current assets   779,133       875,618  
    Total current assets   2,885,011       6,823,119  
               
Property and equipment, net   601,901       516,575  
Investment in NeuPals   1,029,398       1,164,523  
Goodwill   14,419,953       14,419,953  
Other intangible assets, net   8,011,161       8,016,615  
Restricted cash   75,663       75,663  
Other assets   63,503       84,519  
               
    Total assets $ 27,086,590     $ 31,100,967  
               
Liabilities and Stockholders' Equity (Deficit)  
               
Current liabilities              
  Accounts payable and accrued expenses $ 7,170,069     $ 6,951,523  
  Acquisition consideration liabilities, current   182,390       182,390  
  Deferred revenue, current   4,187,736       6,185,628  
  Bank line-of-credit   1,500,000       1,500,000  
  Notes payable to related parties   1,500,000       -  
  Finance lease obligations, current   79,921       72,789  
  Other current liabilities   31,656       24,719  
    Total current liabilities   14,651,772       14,917,049  
               
Secured convertible debentures   15,591,412       11,117,161  
Deferred revenue, less current portion   848,134       917,881  
Finance lease obligations, less current portion   138,745       32,554  
Acquisition consideration liabilities, less current   122,911       122,911  
Other liabilities   11,440       11,440  
               
    Total liabilities   31,364,414       27,118,996  
               
Commitments and contingencies              
               
Stockholders' equity (deficit)              
  Share capital   95,061,061       94,609,838  
  Additional paid-in capital   5,963,926       5,312,802  
  Accumulated deficit   (103,686,499 )     (94,295,643 )
  Unvested voting common stock   (1,876 )     (3,752 )
  Accumulated other comprehensive loss   (122,388 )     (149,226 )
  Less: Treasury stock (719,998 shares)   (1,492,048 )     (1,492,048 )
               
    Total stockholders' equity (deficit)   (4,277,824 )     3,981,971  
               
    Total liabilities and stockholders' equity (deficit) $ 27,086,590     $ 31,100,967  
                   
                   
                   
ePals Corporation  
Condensed Consolidated Interim Statements of Comprehensive Loss  
Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)  
   
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  
                                 
Revenue   $ 3,375,003     $ 2,963,198     $ 7,992,061     $ 7,551,813  
                                 
Less: Operating expenses (income):                                
  Technology, development & operational support     3,781,045       2,629,773       8,019,010       5,704,747  
  General and administrative expenses     2,229,326       2,205,659       4,166,029       3,966,141  
  Sales & marketing     2,840,381       2,061,220       5,491,404       4,350,113  
  Stock-based compensation     469,757       574,093       1,109,123       923,300  
  Depreciation & amortization     333,855       389,430       649,750       770,714  
  Loss on investment in NeuPals     106,856       -       135,125       -  
  Acquisition investigation expenses     2,756       70,757       26,296       407,419  
  Transaction costs related to debentures     7,820       -       26,055       -  
  Change in estimated fair value of acquisition consideration     -       (813,669 )     -       (512,240 )
Total operating expenses     9,771,796       7,117,263       19,622,792       15,610,194  
                                 
Loss from operations     (6,396,793 )     (4,154,065 )     (11,630,731 )     (8,058,381 )
                                 
Other income (expense):                                
  Gain from change in fair value of derivatives     748,000       -       3,027,000       -  
  Interest expense, net     (860,355 )     (15,017 )     (1,414,919 )     (39,207 )
  Net foreign currency exchange gains (losses)     492,574       (8,322 )     627,794       (8,808 )
                                 
Net loss     (6,016,574 )     (4,177,404 )     (9,390,856 )     (8,106,396 )
                                 
Other comprehensive income (loss):                                
  Items that may be subsequently reclassfied into net income/loss                                
    Foreign currency translation     (7,928 )     (1,986 )     26,838       (3,572 )
                                 
Total comprehensive loss   $ (6,024,502 )   $ (4,179,390 )   $ (9,364,018 )   $ (8,109,968 )
                                 
                                 
Net loss per common share:                                
Basic and diluted   $ (0.04 )   $ (0.03 )   $ (0.06 )   $ (0.06 )
                                 
Weighted average number of common shares:                                
Basic and diluted     162,459,389       135,025,910       161,766,452       125,757,770  
                                 
                                 
                                 

 

ePals Corporation  
Consolidated Statements of Cash Flows  
Six Months Ended June 30, 2013 and 2012 (Unaudited)  
     
  Six Months Ended
June 30,
 
  2013     2012  
Cash flows from operating activities:              
Net loss $ (9,390,856 )   $ (8,106,396 )
Adjustments to reconcile net loss to net cash used in operating activities:              
  Gain from change in fair value of derivatives   (3,027,000 )     -  
  Depreciation and amortization   649,750       770,714  
  Stock-based compensation   1,109,123       923,300  
  Bad debt expense   25,198       293,479  
  Loss on investment in NeuPals   135,125       -  
  Amortization of financing costs from debentures   862,316       -  
  Net foreign currency exchange (gains) losses   (627,794 )     8,808  
  Restricted share vesting   1,876       3,217  
  Change in estimated fair value of acquisition consideration   -       (512,240 )
  Increase in restricted cash   -       189  
  Changes in operating assets and liabilities:              
    Accounts receivable   684,995       (72,279 )
    Inventory   (79,964 )     (77,619 )
    Other current assets   96,485       86,148  
    Accounts payable and accrued expenses   187,049       (1,453,405 )
    Deferred revenue   (2,067,639 )     (2,370,864 )
    Other   5,514       5,186  
      Total adjustments   (2,044,966 )     (2,395,366 )
               
      Net cash used in operating activities   (11,435,822 )     (10,501,762 )
               
Cash flows from investing activities:              
  Cash paid for acquisition of Carus Publishing Company   -       (1,500,000 )
  Purchases of equipment   (326,525 )     (156,574 )
  Increase in other intangible assets   (249,196 )     (268,907 )
  Increase in other assets   21,016       -  
               
      Net cash used in investing activities   (554,705 )     (1,925,481 )
               
Cash flows from financing activities:              
  Proceeds from secured convertible debentures, net of expenses   7,162,336       -  
  Proceeds from notes payable to related parties   1,500,000       -  
  Proceeds from private placement, net of expenses   -       9,228,798  
  Payments on finance lease obligations   (40,830 )     (80,247 )
  Proceeds from finance lease financing   163,742       63,510  
  Proceeds from exercise of stock options   -       13,059  
               
      Net cash provided by financing activities   8,785,248       9,225,120  
               
Decrease in cash & cash equivalents   (3,205,279 )     (3,202,123 )
               
Effect of exchange rates on cash   (6,116 )     1,722  
               
Cash & cash equivalents at the beginning of the period   3,948,499       6,895,829  
Cash & cash equivalents at the end of the period $ 737,104     $ 3,695,428  
               
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 $ 451,801     $ 33,924  
Cash paid for income taxes   24,193       16,441  

Refer to the notes of ePals Condensed Consolidated Interim Financial Report for the three and six months ended June 30, 2013 as these notes are an integral part of these financial statements.