Scientific Learning Reports Third Quarter 2018 Financial Results

Booked Sales Increased 1 Percent to $7.0 Million; K-12 Channel Grows
for Fourth Consecutive Quarter

OAKLAND, Calif.–(BUSINESS WIRE)–#ELLScientific
Learning Corp.
(OTC PINK: SCIL), a leading SaaS service provider
that delivers neuroscience-based educational technologies, today
announced it has released its unaudited financial results for the third
quarter of fiscal year 2018. Details of the quarterly results can be
found at https://www.otcmarkets.com/stock/SCIL/disclosure.

The company’s growth momentum continues after a solid third quarter,
enabling it to achieve sales growth of one percent for the third quarter
and a fourth consecutive quarter of sales growth in the K-12 channel.
The success is attributed to a growing understanding of the company’s
unique solutions, decision makers placing greater importance on
evidence-based solutions as required by the federal Every Student
Succeeds Act (ESSA), and the announcement of new
Fast ForWord products
, enhanced with SmartLearning
Technology
.

Released this past quarter, Fast ForWord Foundations I and Foundations
II, the new versions of the flagship Fast ForWord Language and Fast
ForWord Language to Reading programs, include an intelligent back-end
engine that intuits when a student is struggling and provides
just-in-time interventions personalized to each learner’s strengths and
weaknesses. With this SmartLearning Technology, educators can deliver
smarter, more focused interventions and faster results for the nation’s
most vulnerable students.

“Initial customer feedback has been extremely positive, and we are
experiencing other peripheral benefits including faster implementation
with better fidelity to recommended protocols and improved retention
rates,” said Jeff Thomas, CEO of Scientific Learning. “We expect the
vastly improved new Fast ForWord with SmartLearning Technology to be a
strong catalyst for fulfilling our long-term strategic plan; attracting
new customers and sustaining existing users for longer periods.”

Thomas also stated that the company is seeing increased interest in its
solutions because of the strong, documented evidence of efficacy. ESSA
emphasizes the use of evidence-based
interventions
to help schools improve outcomes for English language
learners, students who are economically disadvantaged, and those with
disabilities. According to the WhatWorks
Clearinghouse
, which reviews existing research on programs,
products, practices, and policies in education, Fast ForWord is the
top-ranked English language development intervention.

In other news, Scientific Learning announced it is decelerating its
actions to acquire Shanghai-based BrainMaps.
According to a Wall
Street Journal
story posted on Oct. 19, 2018, China posted its
weakest growth in nearly a decade, with the rate of growth dropping to
6.5 percent, the lowest since the first quarter of 2009. These recent
developments have impacted Chinese consumers and potential franchisee
investors. Based on this economic slowdown along with evolving
government regulations in the education sector, the Company decided the
best course of action is to pause and evaluate the specific impact on
BrainMaps and the overall growth of the English Language Learning market
in China. The company is committed to supporting BrainMaps and working
to realize more value from the English Language Learning market in China.

“We are pleased that we have been able to post four consecutive quarters
of growth. We are working to continue that momentum by putting even
greater focus on the customer, highlighting the improvements in our new
product releases, and improving our sales processes,” said Thomas. “That
said, we are disappointed that we have not been able to complete the
acquisition of BrainMaps in China, but we still see this as a viable and
valuable option for the future,” said Thomas.

About Scientific Learning Corp.

Based in Oakland, Calif., Scientific Learning is a leading SaaS service
provider that delivers neuroscience-based educational technologies.
Scientific Learning’s programs have been used by nearly 3.0 million
learners in more than 2,400 K-12 schools in the United States, by over
300 private practice clinicians, by thousands of students via a
direct-to-consumer channel, and in over 55 countries via value-added
resellers. The company’s Fast ForWord® programs cross-train foundational
language and cognitive skills necessary for rapid English language
development, while Reading Assistant™ uses speech verification
technology to provide real-time corrective feedback to students as they
read and speak, in a manner similar to that of an individualized
language and reading coach.

Safe Harbor Statement: The information posted in this release
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. You can identify these
statements by use of the words “may,” “will,” “should,” “plans,”
“explores,” “expects,” “anticipates,” “continue,” “estimate,” “project,”
“intend,” and similar expressions. The forward-looking statements in
this release include statements regarding plans to shift the Company’s
business focus towards China. Forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially
from those projected or anticipated. Factors which could cause results
or events to differ from current expectations include, among other
things: the inability to complete a financing transaction sufficient to
complete the acquisition of BrainMaps and support BrainMaps’ growth in
China at terms that are reasonable to the Company or at all; the
inability to secure approval of the acquisition from SCIL’s board of
directors or its shareholders; general economic and business conditions;
effects of potential geopolitical unrest and regional conflicts;
competition; and various other factors beyond the Company’s control.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can provide no assurance
that such expectations will prove to have been correct. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. Except as required by
law, the Company assumes no obligation to update or revise any
forward-looking statements.

 
 
 
 
 
SCIENTIFIC LEARNING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
         
September 30, 2018 December 31, 2017
(unaudited) (as adjusted, unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,350 $ 2,846
Accounts receivable, net of allowance for doubtful
accounts of $45 and $19, respectively 4,490 1,928
Prepaid expense and other current assets   287     716  
Total current assets 7,127 5,490
 
Software development costs and equipment, net 2,919 2,466
Other assets   513     521  
Total assets $ 10,559   $ 8,477  
 
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable $ 211 $ 167
Accrued liabilities 1,455 1,328
Deferred revenue   11,039     10,096  
Total current liabilities 12,705 11,591
 
Deferred revenue, net of current 2,755 2,816
Subordinated debt 6,000 5,955
Warrant liability 1,158 1,257
Other liabilities   126     174  
Total liabilities 22,744 21,793
 
 
Stockholders’ deficit:

Common stock, $0.001 par value, 40,000,000 authorized, 27,624,402
and 24,670,904 shares issued and outstanding as of September 30,
2018 and December 31, 2017, respectively, and additional paid-in
capital

99,740 97,710
Accumulated deficit (111,925 ) (111,015 )
Accumulated other comprehensive loss       (11 )
Total stockholders’ deficit   (12,185 )   (13,316 )
 
Total liabilities and stockholders’ deficit $ 10,559   $ 8,477  
 
 
 
 
 
 
SCIENTIFIC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
                   
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(unaudited)

(as adjusted,

unaudited)

(unaudited)

(as adjusted,

unaudited)

Revenues:
Subscription $ 2,293 $ 2,187 $ 6,698 $ 6,311
License 581 640 1,851 1,966
Service and support   1,259     1,308     3,998     4,363  
 
Total revenues 4,133 4,135 12,547 12,640
 
Cost of revenues:
Cost of subscription 327 259 844 698
Cost of license 6 5 14 9
Cost of service and support   675     691     2,006     2,057  
 
Total cost of revenues 1,008 955 2,864 2,764
 
Gross profit 3,125 3,180 9,683 9,876
 
Operating expenses:
Sales and marketing 1,730 1,714 4,938 5,006
Research and development 689 636 2,024 1,866
General and administrative   1,187     875     3,040     2,384  
 
Total operating expenses   3,606     3,225     10,002     9,256  
 
Operating income (loss) (481 ) (45 ) (319 ) 620
 
Other income (expense):
Interest and other expense, net (248 ) (231 ) (703 ) (410 )
Change in the fair value of warrants   651     48     99     387  
Total other income and (expense) 403 (183 ) (604 ) (23 )
 
Net Income (loss) before provision for income tax (78 ) (228 ) (923 ) 597
Provision for income taxes   1     3     6     8  
 
Net income (loss) $ (79 ) $ (231 ) $ (929 ) $ 589  
 
Net income (loss) per share:
Basic $ (0.00 ) $ (0.01 ) $ (0.03 ) $ 0.02
Diluted $ (0.00 ) $ (0.01 ) $ (0.03 ) $ 0.02
 
Weighted average shares used in computing net income (loss) per
share:
Basic weighted average shares outstanding   27,622     24,667     27,490     24,594  
Effect of dilutive securities:
Employee stock options and Restricted Stock Unit 338
Warrants               2,208  
Diluted weighted average shares outstanding   27,622     24,667     27,490     27,140  
 
 
 
 
 
 
SCIENTIFIC LEARNING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
        Nine Months Ended September 30,
2018     2017
(unaudited)

(as adjusted,

unaudited)

Operating Activities:
Net income (loss) $ (929 ) $ 589
Adjustments to reconcile net income(loss) to cash used by
operating activities:
Depreciation and amortization 491 307
Stock based compensation expense 190 144
Amortization of debt discount and debt issuance cost 45 88
Change in fair value of warrant (99 ) (387 )
Gain on sale of investment (175 )
Loss on disposition of foreign subsidiary 30
Changes in operating assets and liabilities:
Accounts receivable (2,562 ) (1,014 )
Prepaid expenses and other current assets 429 121
Other assets 9 18
Accounts payable 44 (11 )
Accrued liabilities 127 83
Deferred revenue 880 (16 )
Other liabilities   (17 )   99  
Net cash used in operating activities (1,362 ) (154 )
 
Investing Activities:
Purchases of property and equipment, net (44 )
Net proceeds from sale of investment 175
Additions to capitalized software   (944 )   (1,105 )
Net cash used in investing activities (944 ) (974 )
 
Financing Activities:
Borrowings under bank line of credit 939
Repayment of borrowings under bank line of credit (939 )
Payments under capital lease (29 ) (18 )
Proceeds from issuance of common stock, net 1,840
Proceeds from issuance of subordinated debt 1,180
Repayment of borrowings under subordinated debt (200 )
Debt issuance cost       (44 )
Net cash provided by financing activities 1,811 918
 
Effect of exchange rate changes on cash and cash equivalents   (1 )   (2 )
 
Decrease in cash and cash equivalents (496 ) (212 )
 
Cash and cash equivalents at beginning of period   2,846     2,725  
 
Cash and cash equivalents at end of period $ 2,350   $ 2,513  
 
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 13 $ 17
Cash paid for interest $ 620 $ 479
 
Non-cash financing activities
Capital lease $ $ 43
 
 
 
 

Contacts

Scientific Learning Corp.
Hallie Smith, 619-888-0887
hsmith@scilearn.com