SOURCE: ePals

ePals

November 30, 2011 06:00 ET

ePals Corporation Reports Third Quarter 2011 Operating Results

Paid Subscriptions Increase 179% Year-Over-Year

WASHINGTON, DC--(Marketwire - Nov 30, 2011) - ePals Corporation (TSX-V: SLN) ("ePals"), an education technology company and leading safe social learning network, today released its operating results for the three and nine month periods ended September 30, 2011. Interim results were prepared by management in accordance with International Financial Reporting Standards. All figures are in U.S. dollars unless otherwise stated. A conference call will be held today at 8:00 a.m. Eastern Time to discuss operations.

Business Highlights during and subsequent to Q3 2011

  • ePals Corporation began publicly trading on the TSX Venture Exchange (symbol "SLN") on August 9, 2011, following a successful merger with New University Holdings Corp. by ePals, Inc. ("the Merger").

  • Received the net proceeds from a C$23M private placement financing completed in connection with the Merger. As of September 30, 2011, ePals' cash balance was sufficient to fund approximately 12 months of operating expenses.

  • Launched LearningSpace™ 2.0, ePals' social learning platform and, with September release of SchoolSafe™ functionality, extended LearningSpace™ to provide embedded access to third-party applications-starting with Microsoft Office Web Apps and Google Docs. SchoolSafe™ functionality allows schools and districts to provide their students with the ability to utilize productivity tools of choice within a safe, school-controlled, K-12 appropriate environment. SchoolSafe™ functionality, including access to Google Docs and online companions of Microsoft Office's Word, Excel, PowerPoint and OneNote, have been included in RFPs ("requests for proposal") for the 2011/2012 E-Rate season.

  • Began sales and marketing initiatives intended to help drive rapid growth in school based platform subscriptions. These initiatives included commencement of indirect channel sales with Microsoft and Dell for the 2011/12 E-Rate season in the United States and the hiring of Ted Brodheim, former Chief Information Officer for the New York City Department of Education ("NYC DOE"), and Bruce Lai, former Executive Director of School Technology Strategy for the NYC DOE, as senior executives focused on bringing high value solutions to major customers.

  • Signed a Memorandum of Understanding ("MOU") with Kaleido Co. Ltd. ("Kaleido") with the objective of creating and launching a Chinese language version of the ePals Global Community™ in China in 2012, addressing approximately 205 million students from 6-15 years old. The MOU included that a private placement of 1,000,000 ePals' voting common shares at C$0.50 per share is anticipated to be completed upon receiving required approval from local Chinese authorities.

  • Selected Thomas Middelhoff as Chairman of the Board of ePals Europe to focus on building a European management team, establishing key content and distribution partnerships and launching local language versions of the ePals Global Community™ in 2012.

  • Acquired Newstogram™ platform (www.newstogram.com) and the DailyMe® service (www.dailyme.com) business from Nexify, Inc. to bring advanced personalization services to ePals products and begin to build out the ePals media business.

  • Launched formal activities with The Smithsonian Institution combining high quality Smithsonian content and ePals social learning communities globally. These activities included embedding Smithsonian content in ePals' weekly email activities and launching "Children Around the World" and "Invention" content centers.

  • Partnered with United Way Worldwide to bring In2Books®, ePals' flagship eMentoring literacy program, to United Way communities throughout the United States.

Year-over-year, ePals added 2.1 million new registered users to the ePals Global Community™ representing 50% growth. As of September 30, 2011, ePals had more than 6.4 million registered users in approximately 200 countries and territories. The ePals Global Community™ currently connects more than 700,000 classrooms and millions of educators, students and parents around the world in a safe and secure social learning network that combines high-quality content with local, national and international collaborative learning experiences that motivate students and enhance outcomes.

Paid subscriptions increased 179% year-over-year to 237,000, compared to 85,000 in 2010. ePals expects to significantly increase its user and subscription base in the United States and internationally -- including in Europe and China, where ePals recently announced initiatives to launch local language versions of both its subscription products and the ePals Global Community™.

According to Miles Gilburne, ePals Chairman & CEO: "It is a fundamental tenet of ePals' strategic plan that a large majority of our users and revenues will originate outside the United States. That is why we have focused so much energy on this aspect of our business since our listing on the TSX Venture Exchange. And that is why I am so encouraged by the caliber of our partners in China and Europe. Within the next couple of quarters, we expect to have world class teams executing on ePals strategy on three continents." For additional details about China and Europe, please see ePals' press releases dated October 3, 2011 and October 27, 2011 which are available for review at www.corp.epals.com.

Domestically, indirect channel activity for LearningSpace™ 2.0 and SchoolMail®365 has commenced with Dell, Microsoft and integrators such as Computer Generated Solutions focused on selling and supporting ePals' solutions. This includes sales to schools across the United States during the 2011/2012 E-Rate season which runs from now through early Q2 2012. E-Rate is a multi-billion dollar program of the United States Federal Communications Commission that subsidizes much of the cost of United States schools' and libraries' deployment of Internet connectivity, email and web hosting services. ePals' solutions qualify for this substantial subsidy.

Schools and districts may save substantial costs by moving their networks onto the cloud and adopting cloud based software solutions for most of their needs. ePals sits at the top of, and significantly differentiates, K-12 cloud solutions offered by channel partners such as Microsoft and Dell, through provision of communication and collaboration solutions that safely bring actual learning into the cloud and connect students, teachers, parents and mentors together in local, national and global learning communities across school and home.

Soon after commencing joint marketing activities with Microsoft under a multi-year Value Added Reseller Agreement in 2010, Microsoft became a significant shareholder in ePals and is now partnered with ePals in bidding on certain large district accounts. These accounts include some of the United States' largest school districts and typically involve RFPs and multi-year, multi-million dollar bids.

In the third quarter of 2011, following execution by Dell in the second quarter of a sales and marketing agreement coupled with an equity investment in ePals, ePals' LearningSpace™ and SchoolMail®365 products became part of the Dell "Connected Classroom" SKU. Since then, Dell has trained hundreds of its Account Executives and specialists focused on the United States' education market on its products. The Dell partnership enables ePals to pursue small and medium sized accounts throughout the country efficiently in addition to working on large accounts domestically and increasingly internationally.

"Our qualified pipeline has grown significantly based on increased recognition of ePals' products in helping schools save money and satisfy 21st century learning needs, and through the active participation of our partners such as Microsoft and Dell," said Mr. Gilburne. "We've engaged upwards of 500 account executives, solution specialists and others now involved in selling SKUs that contain ePals products, covering, by our estimates, approximately 90% of United States schools. We expect to respond to numerous RFPs with our partners during the 2011/2012 academic year and are targeting aggressive platform marketing internationally for 2012 with partners as well."

Financial Review

The following table is a summary of ePals' unaudited consolidated financial data for the three and nine months ended September 30, 2011 and 2010:


(unaudited)
Three months ended September 30, Nine months ended September 30,
Financial Highlights 2011 2010 2011 2010
Revenue $ 612,192 $ 380,237 $ 1,591,632 $ 946,180
Operating expenses1 (8,983,705 ) (2,724,426 ) (14,342,521 ) (7,730,711 )
Loss from operations (8,371,513 ) (2,344,189 ) (12,750,889 ) (6,784,531 )
Net loss (8,478,826 ) (2,394,965 ) (12,971,585 ) (6,943,223 )
Basic and diluted net loss per share (0.10 ) (0.95 ) (0.44 ) (2.76 )
Cash 14,022,007
Net working capital 10,197,634
(1) Includes transaction expenses for the three and nine months ended September 30, 2011 of $4,706,764.

For the third quarter ended September 30, 2011, ePals reported revenue of $612,000, an increase of 61% compared to $380,000 in the third quarter of 2010. The increase resulted from indirect and direct sales of LearningSpace™ and SchoolMail®365, as well as from ePals' media business in which it develops and distributes its own and third party learning products and educational content to teachers, parents and students worldwide. As the ePals Global Community™ continues to grow, revenues from the media business are expected make a significantly larger relative contribution.

Technology, development and operational expenses increased 38% year-over-year in the third quarter of 2011 to $1,621,000 as ePals completed and launched LearningSpace™ 2.0. ePals does not capitalize technology research and development costs. Sales & marketing expenses increased 56% to $845,000 related to staff hiring and marketing initiatives with channel partners including Dell and Microsoft. General and administrative expenses increased 69% to $1,207,000 due to new senior management hires and increased legal fees, corporate insurance and auditor/tax fees associated with ePals' new public corporate structure.

ePals' third quarter 2011 results were affected by several one-time charges relating to its Merger in July 2011 and the acquisition of the Newstogram™ platform and the DailyMe® service business from Nexify, Inc. Transaction expenses related to the Merger during the three months ended September 30, 2011 totaled $4,584,000. Transaction expenses related to the acquired Nexify businesses during the three months ended September 30, 2011 totaled $123,000. Excluding these transaction expenses, ePals' net loss for the three months ended September 30, 2011 would have been $3,772,000, or ($0.05) per share, compared to a net loss of $2,395,000, or ($0.95) per share, for the third quarter of 2010. After transaction costs, interest, depreciation and amortization, ePals reported a third quarter 2011 net loss of $8,479,000, or ($0.10) per share, compared to a net loss of $2,395,000, or ($0.95) per share, for the third quarter of 2010.

For the nine month period ended September 30, 2011, ePals reported a 68% increase in revenue to $1,592,000, from revenue of $946,000 for the same period in 2010. Combined technology, development and operational expenses, general & administrative expenses and sales & marketing expenses increased 21% to $8,729,000 from $7,197,000. Prior to merger and acquisition transaction expenses, the net loss for the nine months ended September 30, 2011 was $8,265,000, or ($0.28) per share, a 19% increase compared to a net loss of $6,943,000, or ($2.76) per share, for the same period in 2010. After transaction costs, interest, depreciation and amortization, ePals reported a nine-month net loss of $12,972,000, or ($0.44) per share, compared to a net loss of $6,943,000, or ($2.76) per share, for the third quarter of 2010.

During the third quarter of 2011, ePals received the net proceeds of a private placement financing completed in connection with the Merger that generated cash, net of expenses, of approximately $21,222,000, with $2,999,000 of the funds used to pay down a bank line-of-credit. At September 30, 2011, ePals held cash of $14,022,000 as compared to $309,000 at December 31, 2010. Working capital at September 30, 2011 was $10,198,000.

As of November 29, 2011, ePals has a total of 116,136,198 common shares outstanding, of which 67,477,060 are voting common shares and 48,659,138 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 nine months ended September 30, 2011, together with management's discussion and analysis, have been filed at www.sedar.com.

Conference Call Today (8:00 a.m. ET)
A conference call to discuss these results will take place today at 8:00 a.m. Eastern Time. Speaking on the call will be Chairman & CEO Miles Gilburne, President Ed Fish, and CFO Aric Holsinger. In addition, Thomas Middelhoff, the Chairman of the Board of recently announced ePals Europe, will be present to discuss the ePals Europe initiative.

To participate in the call, please dial +1-719-325-4796 or 1-877-795-3613 approximately 10 minutes prior to the conference call, and enter passcode 2887499. A recording of the conference call will be available through December 10, 2011. Please dial +1-719-457-0820 or 1-888-203-1112 and provide the passcode 2887499 to listen to the rebroadcast. The call will also be available on ePals' website at www.corp.ePals.com for replay.

About ePals Corporation
ePals Corporation (TSX-V: SLN) is an education technology company and the leading provider of safe social learning networks. 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™; SchoolMail®365; LearningSpace™; and In2Books®, a common core eMentoring program that builds reading, writing and critical thinking skills. ePals customers and partners include International Baccalaureate, Microsoft Corporation, Dell Inc., IBM Corp., National Geographic and leading school districts across the United States and globally. ePals serves approximately 700,000 educators and reaches millions of teachers, students and parents in approximately 200 countries and territories. For the ePals Global Community™, visit www.epals.com. Corporate information is available at www.corp.epals.com.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the 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 a proposed partnership arrangement with Kaleido and proposed private placement in connection therewith; ePals' strategy, prospects and success in pursuing international markets and the composition of its leadership teams to be established in connection therewith; and ePals' anticipated plans to increase its subscription base and channel partners. These statements relate to future events or future performance. 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 Europe and ePals China; the acceptance of ePals' products and services by customers throughout Europe and in China; that ePals Europe and ePals China will be able to secure distribution partners for sale of ePals' products and services; the sales opportunities available to ePals in Europe and in China; 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 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 Europe and China 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.

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:

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

    Senior Marketing Manager
    Jacqueline Van Meter
    ePals Corporation
    Phone: (703) 885-3400

    Investor Relations
    Cory Pala
    e.vestor
    Phone: (416) 657-2400
    cpala@corp.epals.com