Scientific Learning Reports Third Quarter 2018 Financial Results

Scientific 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

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