Scientific Learning Reports Year End 2015 Financial Results

Booked Sales Increased 4% to $17.6 Million; Generated $0.7 Million in Free Cash Flow

OAKLAND, Calif.--()--Scientific Learning Corp. (OTC PINK: SCIL), a leading provider of technologies for accelerated learning, today announced financial results for the year ended December 31, 2015.

“We are thrilled to report that the momentum for our unique solutions continues to build, enabling us to achieve our first year of sales growth since 2009 and generate more than $0.7 million in free cash flow,” stated Robert C. Bowen, chairman and CEO. “Our strategic focus on students who struggle the most, special education, tier 3 response to intervention (RTI3), and ELL, including students from poverty, has enabled us to sharpen our message and demonstrate the rapid impact our solutions have on achievement and that these changes are enduring over time. These results also demonstrate the leverage that can be gained on a modest sales increase. In 2015 we continued our focus on productivity improvements with 9% in operating cost savings.

“Even with continued limited resources, our development and product management team released important new capabilities to our customers and the market, providing options of deploying Fast ForWord® and Reading Assistant® solutions on the iPad®, Chrome Browser and Chromebook platforms. They also continued to strengthen our core platform, MySciLearn, which continues to scale and perform exceptionally, not only in the K-12 school environment but also in our Consumer, Clinical and International market segments,” Bowen stated.

2015 Operating Highlights:

  • K-12 new sales increased 14% over 2014, and the average sales price increased 9% with current customers, making our solutions available to more students and schools and new districts introducing our interventions.
  • Subscription revenue continues to increase with a 4% increase over 2014 as we continue our business model transition.
  • We released our first ever Free Trial program in September 2015 with over 1,100 participants signed-up. A modest conversion rate of these trials has the potential to produce a significant impact on our 2016 sales, allowing more educators to experience the power of neuroplasticity interventions with students who struggle the most.
  • We are seeing growing demand evidenced by the generation of 45,000 new K-12 leads and 10,000 Consumer leads.
  • We entered into a partnership with Dr. Eric Jensen, a leading spokesperson and author on applying the principles of neuroplasticity in teaching and learning. His book, “Teaching with Poverty in Mind,” is a big hit with educational leaders.
  • All four of our market segments, K-12, consumer, clinical and international produced growth in 2015 with Consumer and Clinical growing in excess of 10%.
  • Fast ForWord and Reading Assistant are now being used in more than 55 countries.
  • More neuroscience research studies are being published each year that verify what our founding scientists discovered more than 30 years ago; school districts continue to publish results showing dramatic and rapid changes in achievement.

2015 Financial Highlights – Year over Year Comparison FY15 vs. FY14

  • Total booked sales increased 4% to $17.6 million, and K-12 booked sales increased 5% to $14.0 million. Total revenues decreased 8% to $17.7 million, driven by lower support and on-site consulting days delivered.
  • Gross profit decreased 6% to $14.2 million, and gross margin increased to 80.3% of total revenues from 78.9% of total revenues.
  • Total cost of sales and operating expenses declined by $1.7 million or 9%.
  • Operating income increased 26% to $1.0 million from $0.8 million.
  • Other income (expense) declined by $1.8 million, driven by a one-time increase of $1.3 million from the sale of patents in 2014 and an increase in warrant valuation expense in 2015.
  • Net earnings per diluted share decreased to a net loss of $0.01 in 2015 compared to net income of $0.06 in 2014.
  • We finished the year with $3.5M in cash. During the year we generated $0.7 million in free cash flow.

“It is our goal and plan in 2016 to continue the momentum that began in 2012 with a significant restructuring to align the organization and operating costs with our new business model. The funding environment continues to improve, and we are pleased that Elementary and Secondary Education Act (ESEA) was re-authorized, with a continued focus on special education, ELL and students from poverty,” stated Mr. Bowen. “As in 2015, we expect our growth and cash generation to come in the second half of the year.”

Booked Sales and Free Cash Flow are both non-GAAP measures. Additional information on these non-GAAP measures and reconciliations are included at the end of this earnings release.

Chairman’s Letter and Financial Statements on OTC.com website

We have filed our annual chairman’s letter and audited financial statements on the OTC website. These can be found at the following website: http://www.otcmarkets.com/stock/SCIL/filings.

About Scientific Learning Corporation

We accelerate learning by applying proven research on how the brain learns. Scientific Learning's results are demonstrated in over 280 research studies and protected by over 45 patents. Learners can realize achievement gains of up to two years in as little as three months and maintain an accelerated rate of learning even after the programs end.

Today, more than 2.6 million learners have used our products. We provide our offerings directly to parents, K-12 schools and learning centers, and in more than 55 countries around the world via browsers, iPad and Chromebook. For more information, visit http://www.scientificlearning.com/.

Forward-Looking Statements

This press release contains forward-looking statements. 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: anticipated future sales and financial results, 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 amount and duration of federal and state funding); 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 development, marketing, sales and implementation strategies are successful; the results from the Company’s free trial program; personnel changes; and the Company's ability to continue to demonstrate the efficacy of its products. 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
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Audited)
       
December 31, 2015 December 31, 2015
Assets
Current assets:
Cash and cash equivalents $ 3,513 $ 2,032
Accounts receivable, net of allowance for doubtful accounts of $14 and $21, respectively 1,390 1,831
Prepaid expense and other current assets 721   1,097  
Total current assets 5,624 4,960
 
Property and equipment, net 667 465
Other assets 156   33  
Total assets $ 6,447   $ 5,458  
 
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable $ 41 $ 257
Accrued liabilities 1,348 1,399
Deferred revenue 7,832   7,873  
Total current liabilities 9,221 9,529
 
Deferred revenue, net of current 224 363
Subordinated debt 4,830 4,092
Warrant liability 903 226
Other liabilities 96   107  
Total liabilities 15,274 14,317
 
Stockholders' deficit:
Common stock $0.001 par value: 40,000,000 authorized, 24,344,001 and 24,068,870 shares issued and outstanding as of December 31, 2015 and December 31, 2014, respectively, and additional paid-in capital 97,240 97,002
Accumulated deficit (106,062 ) (105,857 )
Accumulated other comprehensive loss (5 ) (4 )
Total stockholders' deficit (8,827 ) (8,859 )
 
Total liabilities and stockholders' deficit $ 6,447   $ 5,458  
 
 
 
 
 
 
 
SCIENTIFIC LEARNING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Audited)
       
Year Ended December 31,
2015 2014
Revenues:
Subscription $ 7,221 $ 6,955
License 3,509 3,199
Service and support 7,000   9,017
 
Total revenues 17,730 19,171
 
Cost of revenues:
Cost of subscription 836 1,044
Cost of license 97 121
Cost of service and support 2,555   2,887
 
Total cost of revenues 3,488 4,052
 
Gross profit 14,242 15,119
 
Operating expenses:
Sales and marketing 7,275 8,068
Research and development 2,398 2,400
General and administrative 3,555   3,847
 
Total operating expenses 13,228 14,315
 
Operating income 1,014 804
 
Interest and other income (expense), net (1,215 ) 628
 
Income (loss) before provision for income tax (201 ) 1,432
Provision for income taxes 4   16
 
Net income (loss) $ (205 ) $ 1,416
 
Net income (loss) per share:
Basic $ (0.01 ) $ 0.06
Diluted $ (0.01 ) $ 0.06
 
Weighted average shares used in computing net income (loss) per share:
Basic weighted average shares outstanding 24,204   23,769
Effect of dilutive securities:
Employee stock options and awards - 20
 
Diluted weighted average shares outstanding 24,204   23,789
 
 
 
 
 
 
 
SCIENTIFIC LEARNING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Audited)
 
      Year Ended December 31,
2015     2014
Operating Activities:
Net income (loss) $ (205 ) $ 1,416
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization 341 798
Stock based compensation expense 239 350
Paid-in-kind interest expense - 151
Amortization of debt discount and deferred debt issuance cost 217 384
Increase (decrease) in fair value of warrant 416 (269 )
Gain on sale of patents - (1,337 )
 
Changes in operating assets and liabilities:
Accounts receivable 441 426
Prepaid expenses and other current assets 348 (467 )
Other assets (100 ) 555
Accounts payable (216 ) (37 )
Accrued liabilities (51 ) (361 )
Deferred revenue (181 ) (2,349 )
Other liabilities 1   99  
Net cash provided by (used in) operating activities 1,250 (641 )
 
Investing Activities:
Purchases of property and equipment and additions to capitalized software (531 ) (312 )
Net proceeds from patent sale -   1,337  
Net cash provided by (used in) investing activities (531 ) 1,025
 
Financing Activities:
Borrowings under bank line of credit 232 -
Repayment of borrowings under bank line of credit (232 ) -
Repayment of borrowings under subordinated debt (4,177 ) (1,000 )
Payments under capital lease (12 ) -
Proceeds from exercise of options and employee stock purchase plan - 11
Proceeds from issuance of subordinated debt 5,000 -
Debt issuance cost (47 ) -
Net settlement of common stock (1 ) (1 )
Net cash provided by (used in) financing activities 763 (990 )
 
Effect of exchange rate changes on cash and cash equivalents (1 ) -  
 
Increase (decrease) in cash and cash equivalents 1,481 (606 )
 
Cash and cash equivalents at beginning of period 2,032   2,638  
 
Cash and cash equivalents at end of period $ 3,513   $ 2,032  
 
 
 
 
 
 
 
Scientific Learning Corporation
Supplemental Information
     
 

Reconciliation of Booked Sales, Revenue and Change in Deferred Revenue

 
$s in thousands Year ended December 31,
 
2015 2014
 
Booked Sales $ 17,550 $ 16,813
Less: Revenue recognized (17,730 ) (19,171 )
Other adjustments   -     9  
Net increase (decrease) in current and long-term deferred $ (180 ) $ (2,349 )
 
Beginning balance in current and long-term deferred 8,236 10,585
Ending balance in current and long-term deferred 8,056 8,236
 
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.
 
 

Free Cash Flow

 
$s in thousands Year ended December 31,
 
2015 2014
 
Net cash provided by (used in) operating activities   1,250     (641 )
Less Investing activities
Purchases of property and equipment and additions to capitalized software (531 ) (312 )
Net proceeds from patent sale   -     1,337  
Net cash provided by (used in) investing activities   (531 )   1,025  
   
Free Cash Flow   719     384  
 
Free Cash Flow 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 Free Cash Flow will be useful in allowing investors to compare our performance with that of other companies. The table above shows the calculation of Free Cash Flow.
 
 
 
 

Contacts

Scientific Learning Corp.
Steve Nathan, 510-625-2256
VP of Finance and Corporate Controller
SNathan@scilearn.com
cell: 925-872-9704

Release Summary

Scientific Learning Corp. reports its year end 2015 financial results.

Contacts

Scientific Learning Corp.
Steve Nathan, 510-625-2256
VP of Finance and Corporate Controller
SNathan@scilearn.com
cell: 925-872-9704