Scientific Learning Reports Third Quarter 2011 Financial Results

Scientific Learning Corporation (NASDAQ:SCIL), a leading provider of technologies for accelerated learning, today announced financial results for the third quarter ended September 30, 2011.

Total revenue in the third quarter of 2011 was $10.5 million, compared to $10.2 million in the third quarter of 2010. Total booked sales for the third quarter were $12.2 million, an increase from $11.4 million in the third quarter of 2010. Adjusted EBITDA was ($455,000) in the third quarter of 2011 compared to $197,000 in the third quarter of 2010. Net loss in the third quarter of 2011 was ($1.2) million, or ($0.07) per share, compared to a net loss of ($825,000), or ($0.04) per share, in the third quarter of 2010.

“We are pleased with the progress we’re making in the business. For the first time in a year and a half, we saw an increase in total booked sales with growth coming from our core K-12 and consumer businesses,” said Andy Myers, Chief Executive Officer. “Our new on demand platform is showing early signs of success with nearly 400 schools deployed, and we continue to see an increased number of K-12 transactions with our new flexible per student pricing. We also recently launched our first iPad app, the first in our KinderSpark series, which will be made available first as individual apps and later combined into a more comprehensive program for use in pre-K to first grade classrooms. This app entitled Eddy’s Number Party! rose to as high as the fifth most popular paid Education app for the iPad during its first week after release. As we look to the next couple of quarters, we remain focused on our strategic objectives of delivering new content to our key markets, building our recurring revenue base and advancing the success of our customers and learners.”

Booked sales and Adjusted EBITDA are both non-GAAP measures. Additional information on these non-GAAP measures and reconciliations are included at the end of this earnings release and in the investor information section of our website, www.scientificlearning.com.

Conference Call Information

A conference call to discuss third quarter 2011 financial results is scheduled for today, November 3, 2011 at 4:30 p.m. Eastern Time / 1:30 p.m. Pacific Time. Investors and analysts interested in participating in the call are invited to dial (866) 652-3154 (domestic) or (706) 634-7311 (international), Conference ID # 16848151, approximately 10 minutes prior to the start of the call. The conference call will be available live on the Investor Information portion of the Company’s website at http://www.scilearn.com/investorinfo. A replay of this teleconference will be made available on the Scientific Learning website approximately two hours following the conclusion of the call. To hear the replay by phone, please call (855)859-2056 (domestic) and (404) 537-3406 (international) and enter Conference ID # 16848151.

About Scientific Learning Corporation

We accelerate learning by applying proven research on how the brain learns. Scientific Learning’s results are demonstrated in over 200 research studies and protected by over 55 patents. Learners can realize achievement gains of 1 - 2 years in as little as 8 - 12 weeks and maintain an accelerated rate of learning even after the programs end.

Today, learners have used nearly 3 million Scientific Learning software products, which apply “Brain Fitness” principles to the areas of English language and reading. We provide our offerings directly to parents, K–12 schools and learning centers, and in more than 40 countries around the world. For more information, visit http://www.scilearn.com/ or call toll-free (888) 358-0212.

Forward-Looking Statements

This press release contains forward-looking statements that are subject to the safe harbor created by the federal securities laws. Such statements include, among others, statements relating to trends in and growth expectations for our sales, the acceptance of our new offerings, our recurring revenue business model and our product development plans. Such statements are subject to substantial risks and uncertainties. Actual events or results may differ materially as a result of many factors, including but not limited to: general economic and financial conditions (including current adverse conditions in government budgets and the general economy); availability of funding to purchase the Company's products and generally available to schools, including the expiration of federal stimulus funding; unexpected challenges in product development; the acceptance of new products and product changes in existing and new markets; acceptance of subscription and other recurring offerings; seasonality and sales cycles in Scientific Learning's markets; competition; the extent to which the Company's marketing, sales and implementation strategies are successful; personnel changes; the Company's ability to continue to demonstrate the efficacy of its products, and other risks detailed in the Company's SEC reports, including but not limited to the Report on Form 10-Q for the quarter ended June 30, 2011 (Part II, Item 1A, Risk Factors), filed August 12, 2011. The Company disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise.
 
SCIENTIFIC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
  September 30,   December 31,
  2011     2010  
Assets
Current assets:
Cash and cash equivalents $ 2,304 $ 5,415
Short-term investments 5,728 9,631
Accounts receivable, net 8,305 5,053
Prepaid expenses and other current assets   1,697     2,206  
 
Total current assets 18,034 22,305
 
Property and equipment, net 3,336 2,497
Goodwill 4,568 4,568
Other intangible assets, net 648 1,034
Other assets   1,261     1,399  
 
Total assets $ 27,847   $ 31,803  
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 746 $ 543
Accrued liabilities 4,125 4,198
Deferred revenue   13,855     16,388  
 
Total current liabilities 18,726 21,129
Deferred revenue, long-term 5,607 5,483
Other liabilities   831     857  
 
Total liabilities 25,164 27,469
 
Stockholders' equity:
Common stock and additional paid in capital 90,348 89,277
Accumulated deficit   (87,665 )   (84,943 )
 
Total stockholders' equity   2,683     4,334  
 
Total liabilities and stockholders' equity $ 27,847   $ 31,803  

SCIENTIFIC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
  Three Months Ended September 30,     Nine Months Ended September 30,
  2011       2010     2011       2010  
Revenues:
Products $ 6,078 $ 5,049 $ 18,719 $ 17,773
Service and support   4,458     5,185    

14,649
    15,833  
 
Total revenues 10,536 10,234 33,368 33,606
 
Cost of revenues:
Cost of products 504 534 1150 1,616
Cost of service and support   2,273     2,270     6,603     6,996  
 
Total cost of revenues 2,777 2,804 7,753 8,612
 
Gross profit 7,759 7,430 25,615 24,994
 
Operating expenses:
Sales and marketing 4,682 4,763 14,075 16,563
Research and development 2,347 1,945 7,801 5,808
General and administrative   1,922     1,517     6,343     6,040  
 
Total operating expenses 8,951 8,225 28,219 28,411
 
Operating loss (1,192 ) (795 ) (2,604 ) (3,417 )
 
Interest and other income (expense), net   (5 )   14     10     49  
 
Loss before provision for income taxes (1,197 ) (781 ) (2,594 ) (3,368 )
Provision for income taxes   46     44     128     136  
Net loss $ (1,243 ) $ (825 ) $ (2,722 ) $ (3,504 )
 
Net loss per share:
Basic net loss per share $ (0.07 ) $ (0.04 ) $ (0.14 ) $ (0.19 )
Diluted net loss per share $ (0.07 ) $ (0.04 ) $ (0.14 ) $ (0.19 )
 
Weighted average shares used in computation of per share data:
Basic weighted average shares outstanding 18,883 18,551 18,807 18,447
Diluted weighted average shares outstanding 18,883 18,551 18,807 18,447

 
SCIENTIFIC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
  Nine Months Ended September 30,
  2011       2010  
Operating Activities:
Net loss $ (2,722 ) $ (3,504 )
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization 1,389 1,919
Stock-based compensation 1,005 1,159
Changes in operating assets and liabilities:
Accounts receivable (3,251 ) 1,800
Prepaid expenses and other current assets 489 12
Other assets 69 (121 )
Accounts payable 203 (258 )
Accrued liabilities (73 ) (3,247 )
Deferred revenue (2,409 ) (367 )
Other liabilities   (26 )   76  
 
Net cash used in operating activities (5,326 ) (2,531 )
 
Investing Activities:
Purchases of property and equipment, net (1,773 ) (1,371 )
Purchases of short-term investments (4,633 ) (11,920 )
Maturities of short-term investments   8,555     2,824  
 
Net cash provided by (used in) investing activities 2,149 (10,467 )
 
Financing Activities:
Proceeds from issuance of common stock 177 386
Net settlement of common stock   (111 )   -  
 
Net cash provided by financing activities 66 386
 
Decrease in cash and cash equivalents (3,111 ) (12,612 )
 
Cash and cash equivalents at beginning of period   5,415     20,679  
 
Cash and cash equivalents at end of period $ 2,304   $ 8,067  

Scientific Learning Corporation
Supplemental Information
 
Reconciliation of Booked Sales, Revenue and Change in Deferred Revenue
 
$s in thousands
  Three months ended September 30,   Nine months ended September 30,
  2011       2010     2011       2010      
 
Booked sales $ 12,166 $ 11,399 $ 30,367 $ 31,460
Less: revenue 10,536 10,234 33,368 33,606
Other adjustments   69     145     592     1,779  
Net decrease in current and long-term deferred revenue $ 1,699   $ 1,310   $ (2,409 ) $ (367 )
 
Beginning balance in current and long-term deferred revenue $ 17,763 $ 20,553 $ 21,871 $ 22,230
Ending balance in current and long-term deferred revenue $ 19,462 $ 21,863 $ 19,462 $ 21,863
 
 
Booked sales is a non-GAAP financial measure that we believe to be a useful measure of the current level of business activity both for management and for investors. Booked sales equals the total value (net of allowances) of software and services invoiced in the period. Because a significant portion of our revenue is recognized over a period of months, booked sales is a good indicator of current activity. The table above shows the reconciliation of booked sales, revenue, and changes in deferred revenue.
 
Reconciliation of Net Loss to Adjusted EBITDA
 
$s in thousands
Three months ended September 30, Nine months ended September 30,
  2011     2010     2011     2010  
 
Net loss $ (1,243 ) $ (825 ) $ (2,722 ) $ (3,504 )
Adjustments to reconcile to Adjusted EBITDA:
Provision for income taxes 46 44 128 136
Interest (income) expense, net (3 ) (13 ) 9 (40 )
Depreciation and amortization 479 650 1,394 1,919
Stock-based compensation expense   266     341     1,006     1,159  
Adjusted EBITDA $ (455 ) $ 197   $ (185 ) $ (330 )
 
Earnings before interest, taxes, depreciation, amortization and stock-based compensation expense (Adjusted EBITDA) is a non-GAAP financial measure we believe to be a useful measure of the resources available to the Company in the current period. We also believe that Adjusted EBITDA will be useful in allowing investors to compare our performance with that of other companies. The table above shows a reconciliation of Adjusted EBITDA to net loss, the closest GAAP measure.
 
Non-Cash Charges
 
$s in thousands Three months ended September 30, 2011 Nine months ended September 30, 2011

Depreciation &Amortization

Stock-basedCompensation
Total

Depreciation &Amortization

Stock-basedCompensation
Total
Included in:
Cost of products $ 141 $ 1 $ 142 $ 419 $ 1 $ 420
Cost of service and support - 10 10 - 30 30
Operating expenses   339     255     594     976     975   1,951
Total $ 480   $ 266   $ 746   $ 1,395   $ 1,006 $ 2,401
 
$s in thousands Three months ended September 30, 2010 Nine months ended September 30, 2010

Depreciation &Amortization

Stock-basedCompensation
Total

Depreciation &Amortization

Stock-basedCompensation
Total
Included in:
Cost of Products $ 265 $ - $ 265 $ 790 $ - $ 790
Cost of Service and Support 41 27 68 126 90 216
Operating Expenses   344     313     657     1,003     1,068   2,071
Total $ 650   $ 340   $ 990   $ 1,919   $ 1,158 $ 3,077

Copyright Business Wire 2010

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