Scientific Learning Reports Record First Quarter Results

http://www.businesswire.com/news/home/20100422006837/en

Booked Sales Increase 33% and Net Loss per Share Improves 38% to $0.10 from
$0.16
OAKLAND, Calif.--(Business Wire)--
Scientific Learning Corporation (NASDAQ:SCIL), a leading provider of
technologies for accelerated learning, today announced financial results for the
first quarter ended March 31, 2010.

First Quarter Summary (1Q10 vs. 1Q09)

* Total revenues increased 28% to a first quarter record of $11.1 million, total
booked sales increased 33% to a first quarter record of $8.0 million and K-12
booked sales increased 33% to a first quarter record of $7.3 million;
* Gross profit increased 35% to $8.1 million and gross margin increased to 73.3%
of total revenues from 69.9% of total revenues;
* Operating loss improved to $1.9 million from an operating loss of $2.9
million;
* Net loss per share improved 38% to $0.10 from $0.16; and
* Cash and short-term investments increased to $16.3 million from $6.0 million

Andy Myers, Chief Executive Officer stated, "We delivered strong financial
results in what is typically our seasonally slowest period of the year. Sales
momentum in the first quarter was driven by our ability to leverage increased
funding levels in Title I and IDEA programs through operational changes and a
differentiated product offering. We continue to invest in the technology and
infrastructure necessary to strengthen our product development and remain
optimistic in our long-term ability to continue to grow our business."

Operating Results

Total revenues increased 28% to $11.1 million in the first quarter of 2010
compared to $8.6 million in the first quarter of 2009. Product revenues
increased 39% to $5.5 million and service and support revenue increased 20% to
$5.6 million. Total and K-12 booked sales both increased 33% in the first
quarter.

Gross profit increased 35% to $8.1 million in the first quarter of 2010 compared
to $6.0 million in the first quarter of 2009. Gross profit margin increased 340
basis points to 73.3% of total revenues. The increase in the gross margin was
driven by a revenue mix shift toward higher-margin product sales and increases
in both product and service and support gross margins. Product gross margin
increased to 90.6% from 89.9%, while service and support gross margin increased
to 56.3% from 52.8%.

Total operating expenses increased 12% to $10.0 million in the first quarter of
2010 compared to $8.9 million in the first quarter of 2009. Sales and marketing
expenses increased 9% to $6.0 million, research and development expenses
increased 28% to $2.0 million and general and administrative expenses increased
6% to $2.1 million. The year-over-year increase in research and development
expenses was impacted by the capitalization of approximately $300,000 of
software development costs in the first quarter of 2009. If these costs had been
expensed instead of capitalized, research and development expenses would have
increased 6% in the first quarter 2010.

Earnings before interest, taxes, depreciation, amortization, and stock
compensation (EBITDAS) in the first quarter improved to negative $800,000 from
negative $2.1 million. Operating loss improved to $1.9 million in the first
quarter 2010 compared to $2.9 million in the first quarter 2009. Net loss
improved to $1.9 million, or $0.10 per share, in the first quarter of 2010
compared to a net loss of $2.9 million, or $0.16 per share, in the first quarter
of 2009.

The company believes that booked sales and EBITDAS (both non-GAAP measures) are
important measures of operating performance and has chosen to disclose these
figures as part of the earnings results. EBITDAS and booked sales should not be
considered in isolation from net income and revenue and are not intended to
represent substitute measures of performance calculated under GAAP.
Reconciliations of booked sales, revenue and deferred revenue, and EBITDAS and
net income (net loss) are included at the end of this earnings release and in
the investor information section of our website, www.scientificlearning.com.

Selected Balance Sheet Information

As of March 31, 2010, cash and short term investments were $16.3 million
compared to $20.7 million at December 31, 2009 and $6.0 million at March 31,
2009. The sequential quarterly decline is driven by normal seasonal trends in
the business. Net accounts receivable were $3.4 million at March 31, 2010
compared to $6.4 million at December 31, 2009 and $5.4 million at March 31,
2009. As of March 31, 2010 and December 31, 2009 there were no short-term
borrowings under our line of credit. As of March 31, 2009, short term borrowings
were $2.5 million.

Conference Call Information

A conference call to discuss first quarter results and the outlook for 2010 is
scheduled for today, April 22, 2009 at 5:00 p.m. Eastern Time / 2:00 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 number 64742562 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 (800) 642-1687 (domestic) and (706) 645-9291
international and enter conference id number 64742562.

About Scientific Learning Corporation

Scientific Learning creates educational software that accelerates learning by
improving the processing efficiency of the brain. Based on more than 30 years of
neuroscience and cognitive research, the Fast ForWord family of products
provides struggling readers with computer-delivered exercises that build the
cognitive skills required to read and learn effectively. Scientific Learning's
Reading AssistantTM
combines advanced speech recognition technology with scientifically-based
courseware to help students strengthen fluency, vocabulary and comprehension to
become proficient, life-long readers. The efficacy of the products has been
established by more than 550 research studies and publications. For more
information, visit www.scientificlearning.com or call toll-free 888-452-7323.

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 the Company`s investment in technology and
infrastructure, product development efforts and long-term growth. 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 the general economy and in the financial and credit markets);
availability of funding to purchase the Company's products and generally
available to schools including the amount and duration of federal stimulus
funding; unexpected challenges in product development; the acceptance of new
products and product changes; seasonality and sales cycles in Scientific
Learning's markets; competition; factors affecting trends in education; 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-K for the year ended
December 31, 2009 (Part I, Item 1A, Risk Factors), filed March 3, 2010. 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 BALANCE SHEETS
(In thousands)
Unaudited

March 31, December 31, March 31,
2010 2009 2009
Assets
Current assets:
Cash and cash equivalents $ 8,281 $ 20,679 $ 5,981
Short-term investments 7,997 - -
Accounts receivable, net 3,418 6,390 5,441
Prepaid expenses and other current assets 2,322 2,142 1,797

Total current assets 22,018 29,211 13,219

Property and equipment, net 2,143 1,780 1,724
Goodwill 4,568 4,568 4,568
Other intangible assets, net 5,215 5,476 6,190
Other assets 2,138 2,093 1,365

Total assets $ 36,082 $ 43,128 $ 27,066

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 457 $ 812 $ 725
Accrued liabilities 3,629 7,362 3,062
Borrowings under line of credit - - 2,500
Deferred revenue 14,345 15,859 12,946

Total current liabilities 18,431 24,033 19,233
Deferred revenue, long-term 6,177 6,371 4,327
Other liabilities 845 795 656

Total liabilities 25,453 31,199 24,216

Stockholders' equity:
Common stock and additional paid in capital 87,790 87,182 85,764
Accumulated deficit (77,152 ) (75,253 ) (82,914 )
Accumulated other comprehensive loss (9 ) - -

Total stockholders' equity: 10,629 11,929 2,850

Total liabilities and stockholders' equity $ 36,082 $ 43,128 $ 27,066

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited

Three months ended March 31,
2010 2009

Revenues:
Products $ 5,502 $ 3,971
Service and support 5,563 4,653
Total revenues 11,065 8,624

Cost of revenues:
Cost of products 519 401
Cost of service and support 2,434 2,196
Total cost of revenues 2,953 2,597

Gross profit 8,112 6,027

Operating expenses:
Sales and marketing 5,950 5,443
Research and development 1,968 1,537
General and administrative 2,063 1,940

Total operating expenses 9,981 8,920

Operating loss (1,869 ) (2,893 )

Interest and other income 16 61

Net loss before income tax (1,853 ) (2,832 )
Income tax expense 46 29
Net loss $ (1,899 ) $ (2,861 )

Basic and diluted net loss per share: $ (0.10 ) $ (0.16 )
Shares used in computing basic and diluted net loss per share 18,338 17,863

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited

Three months ended March 31,
2010 2009

Operating Activities:
Net loss $ (1,899 ) $ (2,861 )
Items to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 622 359
Stock based compensation 479 408
Changes in operating assets and liabilities:
Accounts receivable 2,972 2,276
Prepaid expenses and other current assets (180 ) (456 )
Other assets (21 ) 68
Accounts payable (355 ) 51
Accrued liabilities (3,733 ) (902 )
Deferred revenue (1,708 ) (2,679 )
Other liabilities 50 31

Net cash used in operating activities (3,773 ) (3,705 )

Investing Activities:
Purchases of property and equipment, net (642 ) (297 )
Purchases of investments (8,112 ) -
Additions to capitalized software - (325 )

Net cash used in investing activities (8,754 ) (622 )

Financing Activities:
Borrowings under bank line of credit - 2,500
Proceeds from issuance of common stock, net 129 258

Net cash provided by financing activities 129 2,758

Decrease in cash and cash equivalents (12,398 ) (1,569 )

Cash and cash equivalents at beginning of period 20,679 7,550

Cash and cash equivalents at end of period $ 8,281 $ 5,981

Scientific Learning Corporation
Supplemental Information

Reconciliation of Booked Sales, Revenue and Change in Deferred Revenue

$s in thousands
First Quarter
2010 2009

Booked Sales $ 8,025 $ 6,032
Less Revenue (11,065 ) (8,624 )
Other adjustments 1,331 (87 )
Net decrease in current and long-term deferred $ (1,709 ) $ (2,679 )

Beginning balance in current and long-term deferred 22,230 19,952
Ending balance in current and long-term deferred $ 20,522 $ 17,273

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 Income to EBITDAS

$s in thousands
First Quarter
2010 2009

Net loss $ (1,899 ) $ (2,861 )
Adjustments to reconcile to EBITDAS:
Income tax provision 46 29
Interest income, net (11 ) (4 )
Depreciation and amortization 622 359
Stock compensation expense 479 408
Adjusted EBITDAS $ (763 ) $ (2,069 )

Earnings before interest, taxes, depreciation, amortization and stock compensation expense (EBITDAS) 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 EBITDAS will be useful in allowing investors to compare our performance with that of other companies. The table above shows a reconciliation of EBITDAS to Net Income, the closest GAAP measure.

Non-Cash Charges

$s in thousands First Quarter
2010
Depreciation & Stock-based Total
Amortization Compensation
Included in:
Cost of Products 261 0 261
Cost of Service and Support 64 39 103
Operating Expenses 297 440 737
Total $ 622 $ 479 $ 1,101

$s in thousands First Quarter
2009
Depreciation & Amortization Stock-based Compensation Total
Included in:
Cost of Products 155 0 155
Cost of Service and Support 28 42 70
Operating Expenses 176 366 542
Total $ 359 $ 408 $ 767

Scientific Learning Corporation
Jessica Lindl, 510-625-6784 (Media)
Senior Vice President, Marketing and Product Management
jlindl@scilearn.com
Bob Feller, 510-625-2281 (Investors)
Chief Financial Officer
investorrelations@scilearn.com

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