SOURCE: ePals

ePals

November 29, 2012 06:39 ET

ePals Announces Third Quarter 2012 Results

Key Corporate Metrics Increase Substantially on Year-Over-Year Basis

Achieved Business License in China

Sequential Growth in Media Revenues and Circulation

WASHINGTON, DC--(Marketwire - Nov 29, 2012) - ePals Corporation (TSX VENTURE: SLN) ("ePals" or the "Company"), a leading education media and safe social learning company, today released its operating results for the third quarter and nine months ended September 30, 2012. Results were prepared by management in accordance with International Financial Reporting Standards. All figures are in U.S. dollars unless otherwise stated.

Highlights 

  • Q3 revenue of approximately $3 million, up approximately 400% year-over-year;
  • Registered users at September 30 of 9.6 million, up approximately 50% year-over-year;
  • Subscriptions at September 30 of approximately 550,000, up approximately 125% year-over-year.

"Our third quarter results reflect the trends we have been sharing the last few quarters. Continued success on our international and media strategies and steady progress on other initiatives position us well to capitalize on the growth of social learning," said Miles Gilburne, ePals Chairman & CEO. "The issuance of the business license for our joint venture in China, commencement of operations in Europe, restoration of year-over-year growth in our media business, including imminent introduction of Chinese and Spanish language versions of our publications, continued growth in the reach and substantive activities in our global community, and ongoing enhancement of our licensed platform products in response to market demands, give us confidence in our market leading position and path forward."

Business Highlights

           
    September 30,      
Key Business Metrics   2012   2011   Increase  
(amounts in thousands, except per user data)                  
Registered users     9,635     6,474   49 %
                   
Subscriptions     540     237   128 %
                   
Revenue(1,2)   $ 3,041   $ 612   397 %
Average revenue per user (ARPU)   $ 0.33   $ 0.10   238 %
                   

(1) Represents revenue for the three months ended September 30, 2012 and 2011.
(2) 2011 results exclude the acquisition of Carus Publishing Company which was completed in December 2011.

Highlights in the quarter and subsequent to the quarter include:

  • In October 2012, the Chinese government issued a 20-year business license to NeuPals, the joint venture between ePals and NueEdu Tianjin, enabling it to officially launch operations in China in the first quarter of 2013, a market that most other US and international companies have struggled to enter.

  • ePals expanded its relationship in China, completing a deal with Neusoft Publishing to translate, localize and publish for distribution Mandarin versions of ePals publications and content throughout China. Work has already begun in earnest. As part of the arrangement, ePals secured the right to publish those Mandarin versions outside of China in K-12 markets in North America and around the world. This arrangement coupled with ePals' recent completion of a small acquisition of a Spanish-language publication to focus on the Hispanic media market in the US and elsewhere substantially increases the Company's focus on the fast-growing demand for native language children's media around the world.

  • ePals has reversed historical year-over-year double digit subscription declines in its publishing business and is now seeing growth in key metrics such as modest sequential revenue growth, driven by post-acquisition operational and marketing enhancements, combined with an aggressive digital strategy focused on launching digital editions of its award winning publications that can be accessed through any internet browser-enabled device, including tablets and smart phones.

  • ePals has grown to 9.6 million registered users as of September 30, 2012 -- and over 10.7 million currently -- driven by an increased number of students being added by their teachers, the adoption of the new enhanced version of the ePals Global Community™ launched in June 2012, and increased customer acquisition marketing efforts.

  • ePals launched two new Learning Centers that provide rigorous, project-based learning tools and content that are expected to drive engagement. These activities map onto emerging learning standards around the world focused on critical thinking, communication and global competency. ePals' Common Core Implementation Center is a place for teachers to find and share ready-to-use projects, resources and best practices on the Common Core State Standards. ePals' News and Journalism Center is a place for students to find high quality, professional and student generated reporting and respond via comments or by writing their own pieces. These Learning Centers demonstrate the power of the ePals platform to build safe and secure collaborative media products for itself and leading education and other media companies that can form the basis of additional licensing relationships and premium services to be introduced by ePals in 2013.

  • In response to market dynamics, ePals formalized its free-to-premium platform strategy by introducing a set of advanced policy management and student information system (SIS) integration services that separate these services from specific collaborative tools, offer schools best of breed choices, and appeal to Value Added Resellers and OEMs around the world.

Third Quarter Financial Review

The following tables summarize ePals' unaudited consolidated financial data for the three and nine months ended September 30, 2012 and 2011:

             

(unaudited)
  Three months ended
September 30,
       
Q3 2012 Financial Highlights   2012     2011     Increase (Decrease)    
%
 
(dollars in thousands, except share and per share data)                              
Revenue   $ 3,041     $ 612     $ 2,429     397 %
Operating expenses:                              
  Technology, development & operational support     3,062       1,621       1,441     89 %
  General & administrative     2,166       1,424       742     52 %
  Sales & marketing     3,103       845       2,258     267 %
  Stock-based compensation     245       527       (282 )   (54 %)
  Depreciation & amortization     398       77       321     417 %
  Merger transaction costs     -       4,584       (4,584 )   (100 %)
  Change in estimated FV of acquisition share consideration     (2,114 )     -       (2,114 )   (100 %)
  Acquisition investigation expenses     756       123       633     515 %
Total operating expenses     (7,616 )     (9,201 )     (1,585 )   (17 )%
Loss from operations     (4,575 )     (8,589 )     (4,014 )   (47 %)
Other income (expense)     (26 )     (107 )     (81 )   (76 %)
Net loss   $ (4,601 )   $ (8,696 )   $ (4,095 )   (47 %)
Basic and diluted net loss per share   $ (0.03 )   $ (0.11 )              
Weighted average shares outstanding-Basic and diluted     142,139,062       82,721,996                
                               
                               
                               

(unaudited)
  Nine months ended
September 30,
       
YTD Q3 2012 Financial Highlights   2012     2011     Increase (Decrease)    
%
 
(dollars in thousands, except share and per share data)                              
Revenue   $ 10,593     $ 1,592     $ 9,001     566 %
Operating expenses:                              
  Technology, development & operational support     8,766       4,039       4,727     117 %
  General & administrative     6,132       2,934       3,198     109 %
  Sales & marketing     7,453       1,756       5,697     324 %
  Stock-based compensation     1,168       755       413     55 %
  Depreciation & amortization     1,169       152       1,017     669 %
  Merger transaction costs     -       4,584       (4,584 )   (100 %)
  Change in estimated FV of acquisition share consideration     (2,626 )     -       (2,626 )   (100 %)
  Acquisition investigation expenses     1,164       123       1,041     846 %
Total operating expenses     (23,226 )     (14,343 )     8,883     62 %
Loss from operations     (12,633 )     (12,751 )     (118 )   (1 %)
Other income (expense)     (74 )     (221 )     (147 )   (67 %)
Net loss   $ (12,707 )   $ (12,972 )   $ (265 )   (2 %)
Basic and diluted net loss per share   $ (0.10 )   $ (0.44 )              
Weighted average shares outstanding-Basic and diluted     131,258,058       29,649,523                
                               
                               
                               

The $9 million increase in revenues during the first nine months of 2012 compared to the prior-year period was due to the addition of media subscription sales and other consumer-based revenues.

Total operating expenses for the first nine months of 2012 were approximately $23.2 million, an increase of $8.9 million compared to the first nine months of 2011 which was prior to the Company's public listing on the TSX-V, and before business acquisitions made in between the comparable periods. Approximately $10.6 million of the year-over-year increase in operating expenses is attributable to the establishment of the Company's home-based business to consumers.

Sales and marketing expenses for the nine months ended September 30, 2012 increased by $5.7 million compared to same period of 2011, as a result of additional staffing in marketing, business development and education media, and higher consulting expenses for marketing and education media based on new marketing initiatives for the media portion of the business. Approximately $3.9 million of the increase was attributable to the establishment of the home-based business to consumers. 

Technology, development & operational expenses increased by approximately $4.7 million during the nine months ended September 30, 2012 compared to the prior-year period, with approximately $4.2 million generated by the establishment of the home-based business to consumers and the remainder due to the development and support of ePals' expanding products, including the enhanced feature set of the Global Community platform.

The establishment of our home-based business to consumers accounted for approximately $1.8 million of the $3.2 million increase in general and administrative expenses for the nine months ended September 30, 2012 compared to the same prior-year period. The remaining increase was due to human resources and accounting consultants for the integration of the businesses acquired in 2011, new senior management hires, and increased fees for legal, audit, tax and corporate insurance associated with ePals' public corporate structure and international initiatives. 

During the third quarter of 2012, the Company recognized a $2.1 million gain related to the change in the fair value of the acquisition consideration liabilities due to former shareholders of Carus. During the prior year period, the Company incurred $4.6 million in transaction costs related to the July 2011 merger. Acquisition investigation expenses in 2012 were primarily legal costs associated with finalizing corporate documents and licenses on the China joint venture.

As of November 15, 2012, ePals had a total of 142,709,255 common shares outstanding, of which 92,426,248 are voting common shares and 50,283,007 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' unaudited financial statements and accompanying notes for the three and nine months ended September 30, 2012, together with the related management's discussion & analysis, will be filed at www.sedar.com on November 29, 2012. ePals' unaudited financial statements that are attached to this press release should be read in conjunction with the notes to the financial statements.

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

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

To participate in the call, please dial +1-719-325-2362 or 1-888-455-2260 approximately 10 minutes prior to the conference call, and enter passcode 9446749. A recording of the conference call will be available by dialing +1-719-457-0820 or 1-888-203-1112 and entering the passcode 9446749. The call will also be available on ePals' website at www.corp.ePals.com for replay.

About ePals Corporation
ePals Corporation (TSX VENTURE: SLN) is a leading education media and safe social learning company connecting K-12 schools, students, teachers and parents around the world for shared, 21st century learning. ePals operates the K-12 market's premier social learning network, connecting millions of users in over 330,000 schools for collaboration around high quality content and educational projects. ePals also publishes industry-leading children's literature in physical and digital formats. These magazines, books and mobile apps are subscribed to by hundreds of thousands of families and approximately one-third of all US middle schools. ePals' award-winning products and brandsinclude: the ePals Global Community™; SchoolMail®365; LearningSpace®; In2Books®, Cricket® and Cobblestone®. ePals customers and partners include major media and technology companies, as well as leading school districts and educational organizations across the United States and globally. ePals reaches approximately 850,000 classrooms and millions of teachers, students and parents in approximately 200 countries and territories. For the ePals Global Community™, visit www.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; contributions and/or prospects of one or more of the Company's business lines, 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  
(formerly New University Holdings Corp.)  
Condensed Consolidated Interim Statements of Financial Position  
September 30, 2012 and December 31, 2011  
             
    (Unaudited)        
    September 30,
 2012
    December 31,
2011
 
Assets                
Current assets                
  Cash & cash equivalents   $ 614,356     $ 6,895,829  
  Accounts receivable, net of allowance for doubtful accounts     836,962       1,119,694  
  Inventory     639,750       366,436  
  Other current assets     1,081,210       698,557  
    Total current assets     3,172,278       9,080,516  
                 
Property and equipment, net     496,499       585,325  
Goodwill     19,142,054       19,142,054  
Other intangible assets, net     10,203,337       10,685,685  
Restricted cash     75,448       75,259  
Other assets     84,673       144,748  
                 
    Total assets   $ 33,174,289     $ 39,713,587  
                 
Liabilities and Stockholders' Equity                
Current liabilities                
  Accounts payable and accrued expenses   $ 7,631,800     $ 6,340,603  
  Acquisition consideration liabilities     6,696,243       10,822,313  
  Deferred revenue, current     4,421,969       6,664,697  
  Bank line-of-credit     1,500,000       1,500,000  
  Notes payable to related parties     970,000       -  
  Capital lease obligations, current     75,916       55,147  
  Other current liabilities     29,531       50,444  
    Total current liabilities     21,325,459       25,433,204  
                 
Deferred revenue, less current portion     999,875       1,230,266  
Capital lease obligations, less current portion     48,626       55,804  
Other liabilities     8,609       24,948  
                 
    Total liabilities     22,382,569       26,744,222  
                 
Commitments and contingencies                
                 
Stockholders' equity                
  Share capital     88,366,415       78,098,272  
  Additional paid-in capital     4,214,859       3,951,679  
  Accumulated deficit     (80,181,875 )     (67,474,961 )
  Unvested voting common stock     (3,752 )     (6,969 )
  Accumulated other comprehensive loss     (111,879 )     (106,608 )
  Less: Treasury stock (719,998 shares)     (1,492,048 )     (1,492,048 )
                 
    Total stockholders' equity     10,791,720       12,969,365  
                 
    Total liabilities and stockholders' equity   $ 33,174,289     $ 39,713,587  
                 
                 

Refer to the notes of ePals Condensed Consolidated Interim Financial Report for the three and nine months ended September 30, 2012 and 2011 as these notes are an integral part of these financial statements.

   
   
   
ePals Corporation
(formerly New University Holdings Corp.)
Condensed Consolidated Interim Statements of Comprehensive Loss
Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)
 
                         
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
                                 
Revenue   $ 3,041,453     $ 612,192     $ 10,593,266     $ 1,591,632  
                                 
Operating expenses:                                
  Technology, development & operational support     (3,061,569 )     (1,621,402 )     (8,766,316 )     (4,039,290 )
  General & administrative     (2,165,804 )     (1,424,219 )     (6,131,945 )     (2,934,327 )
  Sales & marketing     (3,103,249 )     (845,151 )     (7,453,362 )     (1,755,425 )
  Stock-based compensation     (244,568 )     (526,786 )     (1,167,868 )     (754,567 )
  Depreciation & amortization     (398,200 )     (77,041 )     (1,168,914 )     (152,148 )
  Merger transaction costs     -       (4,583,458 )     -       (4,583,458 )
  Change in estimated fair value of acquisition share consideration     2,113,830       -       2,626,070       -  
  Acquisition investigation expenses     (756,336 )     (123,306 )     (1,163,755 )     (123,306 )
Total operating expenses     (7,615,896 )     (9,201,363 )     (23,226,090 )     (14,342,521 )
                                 
Loss from operations     (4,574,443 )     (8,589,171 )     (12,632,824 )     (12,750,889 )
                                 
Other income (expense):                                
  Interest expense, net     (25,743 )     (18,041 )     (64,950 )     (131,424 )
  Net foreign currency exchange losses     (332 )     (89,272 )     (9,140 )     (89,272 )
                                 
Net loss     (4,600,518 )     (8,696,484 )     (12,706,914 )     (12,971,585 )
                                 
Other comprehensive income (loss):                                
  Foreign currency translation     (1,699 )     (835 )     (5,271 )     (3,511 )
                                 
Total comprehensive loss   $ (4,602,217 )   $ (8,697,319 )   $ (12,712,185 )   $ (12,975,096 )
                                 
                                 
Net loss per common share:                                
Basic & diluted   $ (0.03 )   $ (0.11 )   $ (0.10 )   $ (0.44 )
                                 
Weighted average number of common shares:                                
Basic & diluted     142,139,062       82,721,996       131,258,058       29,649,523  
                                 
                                 

Refer to the notes of ePals Condensed Consolidated Interim Financial Report for the three and nine months ended September 30, 2012 and 2011 as these notes are an integral part of these financial statements.

   
   
   
ePals Corporation  
(formerly New University Holdings Corp.)  
Condensed Consolidated Interim Statements of Cash Flows  
Nine Months Ended September 30, 2012 and 2011 (Unaudited)  
   
    Nine Months Ended
September 30,
 
    2012     2011  
Cash flows from operating activities:                
  Net loss   $ (12,706,914 )   $ (12,971,585 )
  Adjustments to reconcile net loss to net cash used in operating activities:                
    Depreciation and amortization     1,168,914       152,148  
    Stock-based compensation     1,167,868       754,567  
    Non-cash Merger transaction costs     -       3,265,671  
    Change in estimated fair value of acquisition consideration liabilities     (2,626,070 )     -  
    Bad debt expense     330,865       8,664  
    Increase in restricted cash     189       561  
    Changes in operating assets and liabilities:                
      Accounts receivable     172,021       (319,164 )
      Inventory     (273,314 )     -  
      Other current assets     (382,653 )     (156,206 )
      Accounts payable and accrued expenses     1,245,840       953,356  
      Deferred revenue     (2,473,119 )     (949,485 )
      Other     (25,530 )     301,750  
        Total adjustments     (1,694,989 )     4,011,862  
                 
        Net cash used in operating activities     (14,401,903 )     (8,959,723 )
                 
Cash flows from investing activities:                
    Cash paid for acquisition of Carus Publishing Company     (1,500,000 )     -  
    Purchase of equipment     (192,500 )     (301,731 )
    Increase in other intangible assets     (405,241 )     (103,575 )
    Cash received from merger of New University Holdings Corp. and ePals, Inc.     -       125,173  
    Cash received from business acquisition     -       8,594  
        Net cash used in investing activities     (2,097,741 )     (271,539 )
                 
Cash flows from financing activities:                
    Proceeds from April 2012 Private Placement, net of expenses     9,228,798       -  
    Proceeds from notes payable from related parties     970,000       -  
    Proceeds from exercise of stock options     53,213       67,553  
    Payments on capital lease obligations     (87,490 )     (39,777 )
    Proceeds from capital lease financing     63,510       99,709  
    Proceeds from July 2011 private placement, net of expenses     -       21,221,637  
    Proceeds from convertible notes payable, net of expenses     -       3,255,985  
    Payment of principal on bank line-of-credit     -       (2,999,074 )
    Proceeds from issuance of Series C preferred stock, net     -       1,435,972  
    Payments to unaccredited investors to retire shares     -       (238,538 )
    Proceeds from issuance of common stock     -       316,299  
    Proceeds from exercise of warrants     -       1,597  
    Payment of note payable to related party     -       (90,170 )
        Net cash provided by financing activities     10,228,031       23,031,193  
                 
(Decrease) increase in cash & cash equivalents     (6,271,613 )     13,799,931  
                 
Effect of exchange rates on cash     (9,860 )     (87,073 )
                 
Cash & cash equivalents at the beginning of the period     6,895,829       309,149  
Cash & cash equivalents at the end of the period   $ 614,356     $ 14,022,007  
                 
                 

Refer to the notes of ePals Condensed Consolidated Interim Financial Report for the three and nine months ended September 30, 2012 and 2011 as these notes are an integral part of these financial statements.

Contact Information

  • 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