November 27, 2013 06:00 ET

ePals 2013 Third Quarter Results

WASHINGTON, DC--(Marketwired - Nov 27, 2013) - ePals Corporation (TSX VENTURE: SLN) ("ePals"), an education media company and a leading Global Learning Network, today released its operating results for the third quarter and nine months ended September 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.

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Third Quarter 2013 Highlights

  • Revenue increased 23% year-over-year
  • Media revenue increased 26% year-over-year lead by a licensing revenue increase of over 200%
  • 20% of media subscriptions added during the quarter were digital or hybrid (digital plus print)
  • Successful China school pilot completed with thousands of students
  • Expense reduction efforts beginning to take effect
  • Registered users increased 28% year-over-year to 12.4 million

In the third quarter, prioritized focus on the Company's current revenue producing business lines grew media subscription and content licensing revenue. Total revenue increased 23% year-over-year to $3.7 million, led by a 25% increase in subscription and licensing revenue from the media business. The higher media subscription revenue was driven by a net 7% increase in the number of media subscriptions during the period which included a 30% improvement in retention rates year-over-year. ePals new high quality print and digital products increased the number of active customers 18%.

Media content licensing revenue increased over 200% in the third quarter of 2013 compared to the prior year period due to new licensing contracts with both new and existing customers. Media content licensing which has low direct costs, continues to grow significantly and will continue to be a primary point of focus for the media business. For the nine months ended September 30, 2013, media content licensing revenue has increased 98%, compared to the prior year period, which is the result of utilizing existing media related assets to generate new and improved licensing deals through an improved sales strategy.

During the quarter, the Company committed additional resources to improve platform product quality and to enhance and broaden the range of distribution channels for media content, specifically focusing on making content available through various mobile devices. ePals conversion of digital bundles to "all access" enabled media subscribers to obtain the publications on any platform that is serviced by ePals Media. This has resulted in increasing adoption of digital products, with over 20% of subscriptions purchased in digital or hybrid (digital plus print) formats in the third quarter of 2013, compared to 5% in the first quarter of 2013. Additionally, the Company has made progress with mobile applications and increased the number of content brands available in a digital format, including the development of iPhone and native Android apps for a number of the Company's popular brands. As of November 11, 2013, ePals titles made up five of the top ten highest grossing iPad apps for children's magazines.

Expense reduction initiatives have been implemented to reduce costs not associated with driving near-term revenue opportunities. The most significant reductions have been within the U.S. enterprise platform sales business as the Company continues to move away from a direct platform only sales force and expand its existing indirect channels and related product bundles. The result is a more variable cost structure versus the fixed cost structure of a direct sales force. In connection with this change, ePals reduced its investment in certain marketing costs, such as trade shows, that were previously incurred in connection with the direct sales force. In addition to these restructurings, the Company's cost reduction initiatives are beginning to take hold and as a result, the Company estimates that it will reduce fixed costs by more than 20% by the end of 2013 from Q1 levels.

During the third 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 which should enhance revenue opportunities as well as improve product features and functionality.

ePals continued executing on its international efforts in China and Europe with the translation of Chinese-language versions of the Company's publications including such as Babybug®, Ladybug®, Spider®, Click®, Appleseeds®, and Ask®. See ePals press release dated November 27, 2013 regarding the launch of commercial operations in China. In Europe ePals now has nine content partners that will enable more international content in the global community, which includes two new partners signed during Q3.

Q3 Financial Review

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

For the three months ended September 30, 2013, ePals had total revenue of $3.7 million. Media revenue increased $0.8 million, or 26% year-over-year, due primarily to an increase in licensing, subscription and advertising revenue, while platform revenue declined due to a shift in strategy related to ePals' platform business. For the nine months ended September 30, 2013, ePals had total revenue of $11.7 million and media revenue increased $1.8 million, or 18% year-over-year, for the reasons discussed above.

Operating expenses for the three months ended September 30, 2013 were $9.9 million, an increase of $2.3 million or 30% from the prior year period. During the third quarter of 2012, there was a non-cash gain of $2.1 million related to the change in estimated fair value of the acquisition liabilities which reduced total operating expenses for the period. Technology, development & operational support costs increased by $0.9 million or 28% from the prior period. This increase was due primarily to additional expenditures to support expansion of international operations in Europe and China, costs related to the development and enhancement of ePals' digital commerce marketplace launched in July 2013 and an increase in revenue sharing expenses created by an increase in media advertising revenue. Comparing the three months ended September 30, 2013 to same period in 2012, sales & marketing expenses increased by approximately $0.7 million due to higher agency commissions associated with the sale of subscriptions and increased expenses related to the consumer catalog for the media business. These increases are partially offset by a decrease in acquisition investigation expenses related to less activity in 2013 compared to the legal work related to the negotiation of agreements for ePals' joint venture in China and other business acquisitions contemplated in connection with European initiatives in 2012. Operating expenses for the nine months ended September 30, 2013 were $29.5 million, an increase of $6.3 million or 27% from the prior year period. As discussed above, the $2.1 million non-cash gain during 2012 reduced the total operating expenses for the period. Technology, development & operational support costs increased by approximately $3.2 million, while sales & marketing expenses increased by approximately $1.8 million.

The net loss from operations for the quarter was $6.1 million versus $4.6 million in the prior year period, and $6.4 million in the second quarter of 2013. During the third quarter of 2012, in addition to the $2.1 million gain previously discussed, there were $0.8 million in acquisition investigation expenses. Without these transactions, the net loss from operations would have been $6.0 million for the third quarter of 2012.

The net loss for the three months ended September 30, 2013 was $7.6 million, or ($0.04) per share, compared to a net loss of $4.6 million, or ($0.03) per share for the three months ended September 30, 2012. The comparable net loss for the third quarter of 2012, after removing the non-cash gain of $2.1 million and the $0.8 million in acquisition investigation expenses previously discussed, is $6.0 million. The net loss for the nine months ended September 30, 2013 was $17.0 million, or ($0.10) per share, compared to a net loss of $12.7 million, or ($0.10) per share for the nine months ended September 30, 2012. In addition to the drivers previously discussed, these increases in net loss year-over-year are primarily due to increased interest expense, with an offsetting impact from gains from the change in fair value of the Company's derivatives in 2013.

As of November 15, 2013, ePals had a total of 277,184,634 common shares outstanding, of which 105,788,690 are voting common shares and 171,395,944 are restricted voting common shares.

Important factors, including those discussed in ePals' regulatory filings (, could cause actual results to differ from ePals' expectations and those differences may be material. ePals' financial statements for the three and nine months ended September 30, 2013, together with the related management's discussion & analysis, is filed at on November 27, 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 school administrators, teachers, students and parents worldwide trusted content, interactive learning experiences, and a collaborative learning community. ePals' award-winning products include: popular children's educational publishing brands from toddlers to teens, including Cricket® and Cobblestone®; the ePals Global Community®; and In2Books®, a common core eMentoring program that builds reading, writing and critical thinking skills. ePals also offers SchoolMail365 and has recently launched, a teaching resource marketplace connecting educators to original, classroom-tested content. Also new is a full service content-licensing, clearance and production service for education publishers. ePals serves approximately 1 million classrooms and reaches millions of teachers, students and parents in 222 countries and territories. Product websites include:;;; and Corporate information is available at

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  
September 30, 2013 and December 31, 2012  
    September 30, 2013     December 31, 2012  
Current assets                
  Cash & cash equivalents   $ 698,818     $ 3,948,499  
  Accounts receivable, net of allowance for doubtful accounts (see Note 4)     1,026,006       1,581,300  
  Inventory     783,404       417,702  
  Other current assets     835,407       875,618  
    Total current assets     3,343,635       6,823,119  
Property and equipment, net     524,989       516,575  
Investment in NeuPals (see Note 5)     894,378       1,164,523  
Goodwill     14,419,953       14,419,953  
Other intangible assets, net     7,960,856       8,016,615  
Restricted cash (see Note 3)     75,663       75,663  
Other assets     63,503       84,519  
    Total assets   $ 27,282,977     $ 31,100,967  
Liabilities and Stockholders' Equity (Deficit)  
Current liabilities                
  Accounts payable and accrued expenses   $ 7,906,173     $ 6,951,523  
  Acquisition consideration liabilities, current (see Note 3)     182,390       182,390  
  Deferred revenue, current     3,934,131       6,185,628  
  Bank line-of-credit (see Note 6)     1,500,000       1,500,000  
  Notes payable to related parties (see Note 6)     1,900,000       -  
  Finance lease obligations, current (see Note 12)     75,916       72,789  
  Other current liabilities     79,139       24,719  
    Total current liabilities     15,577,749       14,917,049  
Secured convertible debentures (see Note 3 and 6)     18,626,331       11,117,161  
Deferred revenue, less current portion     1,400,374       917,881  
Finance lease obligations, less current portion (see Note 12)     133,460       32,554  
Acquisition consideration liabilities, less current (see Note 3)     122,911       122,911  
Other liabilities     11,440       11,440  
    Total liabilities     35,872,265       27,118,996  
Commitments and contingencies (see Note 12)                
Stockholders' equity (deficit)                
Share capital (see Note 7)     97,177,187       94,609,838  
Additional paid-in capital     7,127,817       5,312,802  
Accumulated deficit     (111,265,107 )     (94,295,643 )
Unvested voting common stock     (1,876 )     (3,752 )
Accumulated other comprehensive loss     (135,261 )     (149,226 )
Less: Treasury stock (719,998 shares)     (1,492,048 )     (1,492,048 )
    Total stockholders' equity (deficit)     (8,589,288 )     3,981,971  
    Total liabilities and stockholders' equity (deficit)   $ 27,282,977     $ 31,100,967  
ePals Corporation
Condensed Consolidated Interim Statements of Comprehensive Loss
Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2013     2012     2013     2012  
Revenue (Note 9)   $ 3,749,004     $ 3,041,453     $ 11,741,065     $ 10,593,266  
Operating expenses:                                
  Technology, development & operational support     3,917,392       3,061,569       11,936,402       8,766,316  
  General and administrative expenses     1,574,680       2,165,804       5,793,060       6,131,945  
  Sales & marketing     3,792,948       3,103,249       9,284,352       7,453,362  
  Stock-based compensation (see Note 8)     126,659       244,568       1,235,782       1,167,868  
  Depreciation & amortization     330,372       398,200       980,122       1,168,914  
  Loss on investment in NeuPals (see Note 5)     135,020       -       270,145       -  
  Acquisition investigation expenses     -       756,336       -       1,163,755  
  Change in estimated fair value of acquisition share consideration (see Note 3)     -       (2,113,830 )     -       (2,626,070 )
Total operating expenses     9,877,071       7,615,896       29,499,863       23,226,090  
Loss from operations     (6,128,067 )     (4,574,443 )     (17,758,798 )     (12,632,824 )
Other income (expense):                                
  Gain from change in fair value of derivatives (see Note 3)     26,000       -       3,053,000       -  
  Interest expense, net     (983,611 )     (25,743 )     (2,398,530 )     (64,950 )
  Net foreign currency exchange gains (losses)     (492,930 )     (332 )     134,864       (9,140 )
Net loss     (7,578,608 )     (4,600,518 )     (16,969,464 )     (12,706,914 )
Other comprehensive income (loss):                                
  Items that may be subsequently reclassfied into net income/loss                                
    Foreign currency translation     (12,873 )     (1,699 )     13,965       (5,271 )
Total comprehensive loss   $ (7,591,481 )   $ (4,602,217 )   $ (16,955,499 )   $ (12,712,185 )
Net loss per common share:                                
Basic and diluted   $ (0.04 )   $ (0.03 )   $ (0.10 )   $ (0.10 )
Weighted average number of common shares:                                
Basic and diluted     173,668,223       142,139,062       165,777,306       131,258,058  
ePals Corporation  
Consolidated Statements of Cash Flows  
Nine Months Ended September 30, 2013 and 2012 (Unaudited)  
      Nine Months Ended
September 30,
      2013       2012  
Cash flows from operating activities:                
  Net loss   $ (16,969,464 )   $ (12,706,914 )
  Adjustments to reconcile net loss to net cash used in operating activities:                
    Gain from change in fair value of derivatives (see Note 3)     (3,053,000 )     -  
    Depreciation and amortization     980,122       1,168,914  
    Stock-based compensation (see Note 8)     1,235,782       1,167,868  
    Bad debt expense     (47,085 )     330,865  
    Loss on investment in NeuPals (see Note 5)     270,145       -  
    Amortization of financing costs from debentures (see Note 6)     1,416,512       -  
    Net foreign currency exchange (gains) losses     (134,864 )     9,140  
    Restricted share vesting     1,876       3,217  
    Change in estimated fair value of acquisition consideration (see Note 3)     -       (2,626,070 )
    Increase in restricted cash     -       189  
    Changes in operating assets and liabilities:                
      Accounts receivable     859,057       172,021  
      Inventory     (365,702 )     (273,314 )
      Other current assets     40,213       (382,653 )
      Accounts payable and accrued expenses     923,152       1,245,840  
      Deferred revenue     (1,769,003 )     (2,473,119 )
      Other     (48,261 )     (37,887 )
        Total adjustments     308,944       (1,694,989 )
        Net cash used in operating activities     (16,660,520 )     (14,401,903 )
Cash flows from investing activities:                
  Cash paid for acquisition of Carus Publishing Company     -       (1,500,000 )
  Purchases of equipment     (362,062 )     (192,500 )
  Increase in other intangible assets     (573,614 )     (405,241 )
  Decrease in other assets     21,016       -  
        Net cash used in investing activities     (914,660 )     (2,097,741 )
Cash flows from financing activities:                
  Proceeds from secured convertible debentures, net of expenses (see Note 6)     9,327,495       -  
  Proceeds from notes payable to related parties, net of cash repayments (see Note 6)     4,900,000       970,000  
  Proceeds from private placement, net of expenses     -       9,228,798  
  Payments on finance lease obligations     (61,723 )     (87,490 )
  Proceeds from finance lease financing     163,742       63,510  
  Proceeds from exercise of stock options     -       53,213  
        Net cash provided by financing activities     14,329,514       10,228,031  
Decrease in cash & cash equivalents     (3,245,666 )     (6,271,613 )
Effect of exchange rates on cash     (4,015 )     (9,860 )
Cash & cash equivalents at the beginning of the period     3,948,499       6,895,829  
Cash & cash equivalents at the end of the period   $ 698,818     $ 614,356  
Non-cash financing activities:                
Issuance of common shares to consultants for payment of services   $ -     $ 23,500  
Issuance of common shares related to credit facility from insider   $ 3,000,000     $ 109,349  
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 472,073     $ 59,437  
Cash paid for income taxes     34,564       20,548  

Refer to the notes of ePals Condensed Consolidated Interim Financial Report for the three and nine months ended September 30, 2013 filed at on November 27, 2013 as these notes are an integral part of these financial statements.

Contact Information

    Chief Financial Officer
    Aric Holsinger
    ePals Corporation
    Phone: (703) 885-3400

    Investor Relations
    Cory Pala
    Phone: (416) 657-2400