SOURCE: ePals Corporation

ePals Corporation

April 16, 2014 05:32 ET

ePals 2013 Fourth Quarter and Year-End Results

Focus and Growth From Media Assets Supported by Rebranding as "Cricket Media"

WASHINGTON, DC--(Marketwired - Apr 16, 2014) - ePals Corporation (TSX VENTURE: SLN) ("ePals" or the "Company"), an education media company and global social learning network, today released its operating results for the fourth quarter and year ended December 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.

In a separate news release today, the Company announced that it has rebranded and will operate under the name Cricket Media effective immediately. The new brand identity reflects the Company's core business of providing award-winning educational content in multiple languages (English, Spanish and Mandarin) on a child-safe social learning network worldwide. Coinciding with the rebranding of the Company as Cricket Media, effective as of the opening of trading on Monday, April 21, 2014, the Company's voting common shares will commence trading on the TSX Venture Exchange under the new stock symbol "CKT". The Company will seek the approval of its shareholders to effect a legal name change at the Company's next annual meeting of shareholders later this year.

Conference call today at 10:00 a.m. Eastern Time

To participate in the call, please dial +1-719-325-2144 or 1-888-364-3109 approximately 10 minutes prior to the conference call, and enter passcode 5503886. A recording of the conference call will be available through April 30, 2014 by dialing +1-719-457-0820 or 1-888-203-1112 and entering the passcode 5503886.

"We have prioritized the focus of our business over the past months on our education media," stated CEO Katya Andresen. "'Cricket Media' reflects this evolution. We are leveraging our media assets under the well-respected Cricket brand and making them natively collaborative through the social networking platform we have built over the past five years. Think digital media company meets safe social networking for the kind of learning that children around the world need to work in tomorrow's economy -- digital, collaborative, global. We are unique in that this approach is global and takes advantage of the worldwide demand for cultural exchange and language learning practice."

Year-over-year Q4 Highlights

  • Total media revenue (subscriptions, licensing, commerce, sponsorship) increased 8% 
  • New sales program doubled media licensing revenue 
  • Operating expenses net of impairment decreased 16%
  • 30% of Q4 media subscriptions were digital or hybrid (digital plus print), up from 6%
  • Successful commercial launch in China of "NeuPals" joint venture

In the fourth quarter, total revenue increased to $4.7 million as ePals focused on its media revenue business lines, driving a year-over-year increase in media revenue of 8%. Media revenue, the core revenue producing business of the Company, consists of revenue from annual subscriptions, advertising, e-commerce, product sales and content licensing.

The 8% increase in media revenue for the quarter was driven primarily by increased licensing and commerce revenue for the period. The media licensing revenue more than doubled year-over-year in the fourth quarter as a result of new licensing contracts with both new and existing customers. Media licensing continues to grow significantly and will continue to be a primary point of focus for the media business. Fourth quarter commerce revenue increased 27% year-over-year due to increased sales related to consumer media products.

At the end of 2013 ePals media subscriptions had increased to approximately 429,000, 13% above the 2012 year-end. In the fourth quarter, ePals enabled digital subscribers to access its products via the platform of their choice -- IOS, Android, or browsers. This resulted in increased adoption of digital products, with 30% of subscriptions purchased in digital or hybrid (digital plus print) formats in the fourth quarter of 2013, compared to 6% in the fourth quarter of 2012. The Company's focus on offering high-quality physical and digital children's media products has allowed the business to increase its active subscribers (those who purchase both a media subscription and also some form of commerce) by 20% year-over-year.

In 2013 ePals undertook expense control and reduction initiatives to reduce non-revenue generating costs. Departmental restructurings and increased product focus have enabled the Company to eliminate a number of senior positions and in general substantially reduce fixed costs. Approximately $0.9 million in annual costs were reduced as ePals ceased its direct U.S. enterprise platform sales force in order to transition to an indirect model. The result is a more variable cost structure versus the fixed cost structure of a direct sales force. Associated cost reductions were also realized with certain related marketing costs. At December 31, 2013 the Company had reduced overall headcount by approximately 12% from Q4 2012 levels, primarily in the sales and technology areas. During 2013, the Company also started experiencing cost savings from its new three-year printing contract. Coupled with new paper sourcing, the Company expects to see savings of up to $1.5 million over the life of the contract. Due to a combination of these efforts, the Company estimates that it has eliminated approximately $3.0 million in annualized costs. Additionally, the Company continues to evaluate additional outsourcing opportunities related to technology based functions to further reduce costs.

During the fourth quarter, ePals continued to develop its application programming interfaces ("APIs") to further enable third-party developers to build products on top of the ePals platform to improve product features and functionality and enhance revenue opportunities. The Company's Chinese joint venture, NeuPals, is the first customer to actively use the API's.

Through NeuPals, the Company launched enterprise services in a district of 10,000 students in the city of Shenyang. NeuPals' new products, the result of two years of planning and pilots, provide Chinese schools with curricula, media products and collaborative experiences with other schools around the world. The product line promotes cultural understanding, provides language learning practice and builds skills that meet the new innovative teaching and learning goals set by China's Ministry of Education as well as U.S. Common Core State Standards. ePals is expanding its international footprint with a launch of additional product lines for collaborative learning in China including policy managed mail utilizing ePals APIs to offer the mail service using locally deployed mail servers.

Q4 Financial Review

Total revenue for the three months ended December 31, 2013 was $4.7 million, compared to $4.6 million in the fourth quarter of 2012. Media revenue increased $0.4 million, or 8%, to $4.6 million for the fourth quarter primarily as a result of increases in licensing, up $0.2 million to $0.4 million, and commerce revenues, up $0.2 million to $1.0 million. License revenue was driven by new licensing deals with new and existing customers resulting from shifting resources from the unprofitable direct sales model. Commerce revenue was driven by an increase in sales of product and back issues to consumers as well as increased book sales. A year-over-year decrease in platform business revenue during the fourth quarter of 2013 was primarily due to a shift away from a direct sales approach in the U.S.

Operating expenses for the fourth quarter of 2013 were $9.8 million, a decrease of $8.5 million, or 47%, compared to the prior year period. The Company did not recognize any impairment losses during the fourth quarter of 2013 compared to the impairment loss of approximately $6.7 million during the fourth quarter of 2012. Excluding the impairment loss, operating expenses decreased $1.9 million, or 16%, year-over-year. This decrease was due to decreases in general and administrative, stock-based compensation and technology, research and development costs, partially offset by an increase in operations and support costs. General and administrative expenses decreased $1.2 million during the period due to lower legal costs compared to those incurred in 2012 associated with the litigation related to the acquisition of Carus Publishing Company, as well as lower personnel related costs due to decreases in bonus and recruiting expenses. Stock-based compensation decreased $0.3 million during the three months ended December 31, 2013 compared to the prior year period due to equity awards carrying lower fair value during the current year, as well as an increase in forfeitures during 2013. Technology, research and development costs, which consist of expenses related to the development and maintenance of the technology associated with the Company's platform and media business, decreased $0.2 million due primarily to headcount reductions in this area resulting from a shift of focus to products expected to generate near-term revenue. Operation and support costs increased $0.2 million due primarily to increased expenses related to development of our e-commerce offering and the distribution of our media products.

2013 Financial Review

For the year ended December 31, 2013, total revenue increased 8% to $16.4 million driven by a media revenue increase of $2.1 million, or 15% compared to the prior year, partially offset by a decrease in platform revenues. Media licensing revenue increased $0.8 million compared to the prior year driven by new licensing deals with new and existing customers resulting from shifting resources from the unprofitable direct sales model. Media subscription revenue increased $0.6 million as the Company increased its subscription base. Through a series of steps including introducing several digital editions, offering hybrid print and electronic subscriptions, and bringing on affiliates and new channels such as the ePals Global Community, the Company experienced a 13% year-over-year increase in media subscriptions. Advertising revenue increased $0.4 million compared to the prior year primarily due to new advertising relationships and increased revenue from existing relationships. The increase in commerce revenue of $0.3 million was driven by an increase in sales of product and back issues to consumers as well as increased book sales. Decreasing platform business revenue during the year ended December 31, 2013 compared to the prior year was primarily due to a shift away from a direct sales approach in the U.S.

Operating expenses for the year ended December 31, 2013 were $39.3 million, a decrease of $2.3 million or 5% from the prior year period. This change was primarily due to decreases in expenses related to impairment losses, acquisition investigation and general and administrative expenses, partially offset by changes in the fair value of acquisition consideration, increased operations and support expenses and higher marketing and promotion costs. Acquisition investigation expenses, which represent legal, audit and tax fees related to business acquisitions and joint ventures that the Company is considering and/or negotiating, decreased for the year ended December 31, 2013 compared to the prior year primarily due to legal work in 2012 relating to the negotiation of agreements for our joint venture in China and because of several business acquisitions that were being contemplated to accelerate the launch of the Company's European initiatives. General and administrative expenses decreased $1.2 million due primarily to the reduction in legal and bonus expenses. The Company recorded a $0.3 million loss for the year ended December 31, 2013 for the change in the estimated fair value of the share consideration related to the acquisition of Carus Publishing Company in 2011, compared to a gain of $2.2 million that was recorded in 2012. Operation and support expenses increased $1.7 million during the year ended December 31, 2013 compared to the prior year period primarily due to additional costs incurred to support expansion of international operations in China and increased costs related to the functionality and support of the ePals Global Community. Marketing and promotion expenses increased $1.9 million during the year ended December 31, 2013 compared to the prior year due to a larger investment in online marketing acquisition efforts and expenses related to new marketing initiatives for the media portion of our business.

Additionally, the Company did not recognize any impairment losses during the year ended December 31, 2013 compared to the impairment loss of approximately $6.7 million during the year ended December 31, 2012.

The net loss for the year ended December 31, 2013 was $22.5 million, or ($0.12) per share, compared to a net loss of $26.8 million, or ($0.20) per share for the year ended December 31, 2012. In addition to the factors discussed above, increases in gains associated with the fair value of the Company's derivatives and foreign currency exchange contributed to the lower net loss in 2013. These increased gains were offset by increased interest expense during 2013 related to the debentures issued in 2013. 

At December 31, 2013 ePals had $3.6 million in cash and cash equivalents. In the fourth quarter of 2013, the Company closed multiple tranches of a non-brokered private placement and issued approximately 109 million units of the Company ("Units") at a price of CAD$0.075 per Unit for gross proceeds of approximately CAD$8.2 million. Each Unit consisted of one common share of the Company and one-third of one common share purchase warrant ("Warrant"). Subsequent to year-end, the Company has raised an additional $3.7 million through a combination of private placements and borrowings under its revolving credit facility. The Company intends to use the net proceeds for general corporate purposes and working capital.

As of April 15, 2014, ePals had a total of 344,145,116 common shares outstanding, of which 108,308,886 are voting common shares and 235,836,230 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 twelve months ended December 31, 2013, together with the related management's discussion & analysis, will be filed at www.sedar.com on April 16, 2014.

About ePals Corporation

ePals Corporation, operating under the brand Cricket Media is an education media company that provides award-winning content on a safe and secure learning network for children, families and teachers across the world. Cricket Media's 14 popular media brands for toddlers to teens include Babybug, Ladybug, Cricket® and Cobblestone® with multiple language editions and apps in English, Spanish and Chinese. The Company's innovative web-based K12 tools for school and home include the ePals community and virtual classroom for global collaboration as well as In2Books®, a Common Core eMentoring program that builds reading, writing and critical thinking skills. Cricket Media serves approximately one million classrooms and millions of teachers, students and parents in over 200 countries and territories through its platform and NeuPals, its joint venture with China's leading IT services company Neusoft. Cricket Media also licenses its content and platform to top publishing and educational companies worldwide. For more information, please visit www.Cricketmag.com, www.ePals.com and www.In2Books.com.

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; partnerships; and ePals' strategy, prospects and success in pursuing domestic or international markets for the platform or media businesses; 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; 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.

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

Refer to the notes of ePals Condensed Consolidated Interim Financial Report for the three and twelve months ended December 31, 2013 filed at www.sedar.com on April 16, 2014 as these notes are an integral part of these financial statements.

   
ePals Corporation  
Consolidated Statements of Financial Position  
December 31, 2013 and 2012  
             
    December 31, 2013     December 31, 2012  
                 
Assets                
                 
Current assets                
  Cash & cash equivalents   $ 3,641,985     $ 3,948,499  
  Accounts receivable, net of allowance for doubtful accounts     1,265,834       1,581,300  
  Inventory     538,163       417,702  
  Other current assets     1,139,455       875,618  
    Total current assets     6,585,437       6,823,119  
                 
Property and equipment, net     449,208       502,025  
Investment in NeuPals     811,929       1,164,523  
Goodwill     14,419,953       14,419,953  
Other intangible assets, net     7,876,341       8,031,165  
Restricted cash     75,966       75,663  
Other assets     63,503       84,519  
                 
    Total assets   $ 30,282,337     $ 31,100,967  
                 
Liabilities and Stockholders' Equity                
                 
Current liabilities                
  Accounts payable and accrued expenses   $ 6,929,566     $ 6,951,523  
  Acquisition consideration liabilities, current     584,178       182,390  
  Deferred revenue, current     6,422,165       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     65,716       72,789  
  Other current liabilities     90,795       24,719  
    Total current liabilities     17,092,420       14,917,049  
                 
Secured convertible debentures     18,399,596       11,117,161  
Deferred revenue, less current portion     851,854       917,881  
Finance lease obligations, less current portion     117,507       32,554  
Acquisition consideration liabilities, less current     -       122,911  
Other liabilities     11,440       11,440  
                 
    Total liabilities     36,472,817       27,118,996  
                 
Commitments and contingencies                
                 
Stockholders' equity (deficit)                
  Share capital     104,912,731       94,609,838  
  Additional paid-in capital     7,352,232       5,312,802  
  Accumulated deficit     (116,809,681 )     (94,295,643 )
  Unvested voting common stock     (1,876 )     (3,752 )
  Accumulated other comprehensive loss     (151,838 )     (149,226 )
  Less: Treasury stock (719,998 shares)     (1,492,048 )     (1,492,048 )
                 
    Total stockholders' equity (deficit)     (6,190,480 )     3,981,971  
                 
    Total liabilities and stockholders' equity (deficit)   $ 30,282,337     $ 31,100,967  
                     
   
ePals Corporation  
Consolidated Statements of Comprehensive Loss  
Years Ended December 31, 2013 and 2012  
             
    Year Ended December 31,  
    2013     2012  
                 
Revenue   $ 16,412,256     $ 15,201,910  
                 
Operating expenses:                
  Cost of sales   $ 10,671,488       9,934,572  
  Technology, research & development costs     5,350,347       4,831,631  
  Operations and support expenses     4,939,259       3,280,187  
  General and administrative expenses     6,153,711       7,358,876  
  Marketing and promotion expenses     8,603,246       6,728,407  
  Stock-based compensation     1,490,826       1,753,397  
  Depreciation & amortization     1,305,768       1,552,530  
  Loss on investment in NeuPals     352,594       60,477  
  Acquisition investigation expenses     -       1,279,128  
  Financing transaction costs     137,238       300,225  
  Change in estimated fair value of acquisition share consideration     278,877       (2,204,107 )
  Impairment of goodwill and intangible assets     -       6,671,355  
Total operating expenses     39,283,354       41,546,678  
                 
Loss from operations     (22,871,098 )     (26,344,768 )
                 
Other income (expense):                
  Gain from change in fair value of derivatives     3,130,000       -  
  Interest expense, net     (3,444,090 )     (521,617 )
  Other income     6,400       9,600  
  Net foreign currency exchange gains     664,750       36,103  
                 
Net loss     (22,514,038 )     (26,820,682 )
                 
Other comprehensive income (loss):                
  Items that may be subsequently reclassfied into net income/loss                
    Foreign currency translation     (2,612 )     (42,618 )
                 
Total comprehensive loss   $ (22,516,650 )   $ (26,863,300 )
                 
                 
Net loss per common share:                
Basic and diluted   $ (0.12 )   $ (0.20 )
                 
Weighted average number of common shares:                
Basic and diluted     186,869,411       135,797,002  
                 
   
ePals Corporation  
Consolidated Statements of Cash Flows  
Years Ended December 31, 2013 and 2012  
   
    2013     2012  
Cash flows from operating activities:                
  Net loss   $ (22,514,038 )   $ (26,820,682 )
  Adjustments to reconcile net loss to net cash used in operating activities:                
    Depreciation and amortization     1,305,768       1,552,530  
    Stock-based compensation     1,490,826       1,753,397  
    Write off of patent costs     -       6,561  
    Change in acquisition consideration liability     278,877       (2,204,107 )
    Impairment of goodwill and intangible assets     -       6,671,355  
    Loss on investment in NeuPals     352,594       60,477  
    Bad debt expense and write-off of accounts receivable     14,512       331,604  
    Net foreign currency translation (gains) losses     (664,750 )     (36,103 )
    Increase in restricted cash     303       404  
    Gain from change in fair value of derivatives     (3,130,000 )     -  
    Amortization of financing costs     1,949,160       593,675  
    Restricted share vesting     1,876       3,217  
    Changes in operating assets and liabilities:                
      Accounts receivable     557,632       (793,210 )
      Inventory     (120,460 )     (51,266 )
      Other current assets     (263,837 )     (67,712 )
      Accounts payable and accrued expenses     (53,453 )     633,036  
      Deferred revenue     170,511       (791,454 )
      Other     952       (260,261 )
        Total adjustments     1,890,511       7,402,143  
                       
        Net cash used in operating activities     (20,623,527 )     (19,418,539 )
                 
Cash flows from investing activities:                
  Cash used for business acquisitions, net of cash acquired     -       (1,525,000 )
  Investment in NeuPals     -       (1,225,000 )
  Purchase of equipment     (383,952 )     (305,047 )
  Increase in other intangible assets     (717,074 )     (545,076 )
  Decrease in other assets     21,016       -  
                 
        Net cash used in investing activities     (1,080,010 )     (3,600,123 )
                 
Cash flows from financing activities:                
  Proceeds from private placement transactions, net of expenses     7,536,729       9,228,798  
  Proceeds from debentures, net of expenses     9,282,672       10,805,600  
  Proceeds from notes payable from related parties     6,500,000       1,500,000  
  Payments of notes payable to related parties     (2,000,000 )     (1,500,000 )
  Proceeds from exercise of stock options     -       54,516  
  Proceeds from exercise of warrants     -       40,960  
  Payments on finance lease obligations     (78,342 )     (113,706 )
  Proceeds from finance lease financing     163,742       63,510  
                 
        Net cash provided by financing activities     21,404,801       20,079,678  
                 
(Decrease) increase in cash & cash equivalents     (298,736 )     (2,938,984 )
Effect of exchange rates on cash     (7,778 )     (8,346 )
Cash & cash equivalents at the beginning of the year     3,948,499       6,895,829  
Cash & cash equivalents at the end of the year   $ 3,641,985     $ 3,948,499  
                 
 
ePals Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2013 and 2012
     
    2013   2012
Non-cash financing activities:            
Issuance of common shares to former shareholders of Carus   $ -   $ 6,663,779
Issuance of common shares to consultants for payment of services     -     23,500
Issuance of common shares to repay credit facility from insider     3,000,000     109,349
Issuance of warrants to brokers for payment of services     -     64,406
Issuance of warrants in connection with private placement     189,491     -
Supplemental disclosures of cash flow information:            
Cash paid for interest   $ 864,875   $ 79,894
Cash paid for income taxes     48,208     21,979
             

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