Scientific Learning Reports First Quarter Results

OAKLAND, Calif.--(BUSINESS WIRE)--Scientific Learning (NASDAQ:SCIL), a leading provider of brain fitness solutions for the education market, today announced its revenue for the quarter ended March 31, 2008 was $9.1 million, compared to $8.8 million for the quarter ended March 31, 2007, an increase of 3%. Deferred revenue totaled $19.8 million on March 31, 2008 compared to $16.2 million as of March 31, 2007.

“Andy’s first 90 days have been excellent, and we are already seeing his impact on the K-12 business.”

“In the first quarter, we made eight sales over $100,000, the same number as in the first quarter of 2007. The first quarter is by far the smallest quarter of the year for sales, however, it is a very important marketing quarter, laying the ground work for rest of the year,” said Robert C. Bowen, Chairman and CEO of Scientific Learning. “We were very successful in the first quarter moving qualified leads from our well attended brain-based seminars into the sales pipeline.

“Andy Myers assumed his new responsibilities as President and Chief Operating Officer bringing an exceptional set of skills, experiences, and passion to our important mission.” stated Mr. Bowen. “Andy’s first 90 days have been excellent, and we are already seeing his impact on the K-12 business.”

“During my 90 days at Scientific Learning, I’ve been focused on talking to customers and employees,” said Mr. Myers. “Based on those conversations, I am even more impressed with the results we can achieve for students through the use of Fast ForWord^® and Reading Assistant™ software. In order to improve alignment with our customers, increase sales effectiveness and sales rep productivity, we have implemented a number of changes in our sales and services organization as well as aligned the overall organizational structure to better support accelerating the growth of our K-12 business.”

“This quarter was also our first quarter since the acquisition of the Reading Assistant business. The integration is going as planned, and we are pleased with the sales performance of the Reading Assistant in the quarter,” said Mr. Bowen. “Our customers and our sales organization are reacting positively to this technology solution designed to improve reading fluency.”

Gross margins were 68% in the first quarter of 2008, compared to 71% in the same quarter of 2007. The decline in gross margins was the result of a shift in sales mix to a higher proportion of service and support revenue, and a decline in product gross margin primarily due to amortization and materials costs for the Reading Assistant. This was partially offset by increased service and support gross margins, which improved to 44% in the first quarter of 2008 from 33% in the first quarter of 2007.

Operating expenses in the first quarter of 2008 increased 19% and totaled $11.1 million, compared to $9.3 million in the first quarter of 2007. Over half of the increase in operating expenses was due to the acquisition of the Reading Assistant business and the Reading Assistant research and development team. The operating loss for the quarter was $4.9 million, compared to an operating loss of $3.1 million in the first quarter of 2007.

The net loss for the quarter was $4.7 million, and the loss per share was $.27, compared to a net loss of $2.6 million and $.15 per share in the first quarter of 2007.

Cash and equivalents totaled $4.7 million on March 31, 2008, compared to $12.1 million on March 31, 2007. Accounts receivable totaled $4.7 million at quarter end, the same as at the end of the first quarter of last year. The primary reason for the decline in cash was due to the acquisition of the Reading Assistant, which was an all cash transaction of $10.7 million.

Conference Call Information

The call will be broadcast over the Internet on Tuesday, April 29, 2008 at 5:00 p.m. EDT / 2:00 p.m. PDT. The conference call will be available live on the Investor Information portion of the Company’s website at www.scilearn.com/investorinfo. The conference call can also be accessed at 877-397-0298 (domestic) or 719-325-4869 (international). Please dial in or visit the website at least 10 minutes prior to the commencement of the call to ensure your participation. 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 888-203-1112 (domestic) and 719-457-0820 international and enter the replay passcode: 4397158.

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 Assistant™ 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.

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited
	Three months ended March 31,
		2008				2007
Revenues:
Products	$	4,590			$	5,453
Service and support		4,448				3,359
Other		47				-
Total revenues		9,085				8,812
Cost of revenues:
Cost of products		428				306
Cost of service and support		2,487				2,253
Total cost of revenues		2,915				2,559
Gross profit		6,170				6,253
Operating expenses:
Sales and marketing		6,936				6,406
Research and development		2,119				1,146
General and administrative		1,996				1,771
Total operating expenses		11,051				9,323
Operating loss		(4,881	)			(3,070	)
Other income from related party		67				78
Interest and other income		153				255
Net loss before income tax		(4,661	)			(2,737	)
Income tax expense (benefit)		3				(109	)
Net loss	$	(4,664	)		$	(2,628	)
Basic and diluted net loss per share:	$	(0.27	)		$	(0.15	)
Shares used in computing basic and diluted net loss per share		17,338				17,003

SCIENTIFIC LEARNING CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
Unaudited
	March 31,				December 31,				March 31,
	2008				2007				2007
Assets
Current assets:
Cash and cash equivalents	$	4,672			$	21,179			$	12,108
Accounts receivable, net		4,742				6,155				4,706
Deferred income taxes		1,191				1,191				-
Prepaid expenses and other current assets		1,756				1,291				1,286
Total current assets		12,361				29,816				18,100
Property and equipment, net		1,741				1,742				1,140
Loan to JTT Holdings		-				1,000				-
Deferred acquisition costs		-				319				-
Goodwill		4,557				-				-
Identified intangible assets, net		7,011				-				-
Other assets		939				926				901
Total assets	$	26,609			$	33,803			$	20,141
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable	$	439			$	716			$	646
Accrued liabilities		4,239				3,859				3,690
Deferred revenue		15,322				17,379				12,694
Total current liabilities		20,000				21,954				17,030
Deferred revenue, long-term		4,443				5,576				3,491
Other liabilities		464				453				422
Total liabilities		24,907				27,983				20,943
Stockholders' equity (deficit):
Common stock and additional paid in capital		83,104				82,558				79,718
Accumulated deficit		(81,402	)			(76,738	)			(80,520	)
Total stockholders' equity (deficit):		1,702				5,820				(802	)
Total liabilities and stockholders' equity (deficit)	$	26,609			$	33,803			$	20,141

SCIENTIFIC LEARNING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
				Three months ended March 31,
					2008				2007
Operating Activities:
Net loss				$	(4,664	)		$	(2,628	)
Items to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				272				82
	Stock based compensation				533				465
	Changes in operating assets and liabilities:
		Accounts receivable			1,413				2,392
		Prepaid expenses and other current assets			(465	)			(315	)
		Other assets			(13	)			8
		Accounts payable			(277	)			39
		Accrued liabilities			380				(1,399	)
		Deferred revenue			(3,190	)			(2,974	)
		Other liabilities			11				11
Net cash used in operating activities					(6,000	)			(4,319	)
Investing Activities:
	Purchases of property and equipment, net				(92	)			(281	)
	Purchase of goodwill				(4,557	)			-
	Purchase of identified intangible assets				(7,190	)			-
	Loan to JTT Holdings				1,000				-
	Acquisition costs				319				-
Net cash used in investing activities					(10,520	)			(281	)
Financing Activities:
	Proceeds from issuance of common stock, net				13				344
Net cash provided by financing activities					13				344
Decrease in cash and cash equivalents					(16,507	)			(4,256	)
Cash and cash equivalents at beginning of period					21,179				16,364
Cash and cash equivalents at end of period				$	4,672			$	12,108

Scientific Learning Corporation
Supplemental Information
Reconciliation of Booked Sales, Revenue and Change in Deferred Revenue
$s in thousands
	First Quarter
		2008				2007
Booked Sales	$	5,895			$	5,838
Less Revenue		9,085				8,812
Net (Decrease) increase in current and long-term deferred	$	(3,190	)		$	(2,974	)
Beginning balance in current and long-term deferred		22,955				19,159
Ending balance in current and long-term deferred	$	19,765			$	16,185
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 Adjusted EBITDA
$s in thousands
	First Quarter
		2008				2007
Net Income (Loss)	$	(4,664	)		$	(2,628	)
Adjustments to reconcile to Adj EBITDA:
Income Tax provision		3				(109	)
Interest Expense (income)		(153	)			(255	)
Depreciation		93				82
Amortization		179				-
Stock compensation expense		533				465
Adjusted EBITDA	$	(4,009	)		$	(2,445	)
Adjusted earnings before interest, taxes, depreciation, amortization and stock 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 Income, the closest GAAP measure.
Non-Cash Charges
$s in thousands	First Quarter
	2008
	Depreciation & Amortization				Stock-based Compensation				Total
Included in:
Cost of Products		113				0				113
Cost of Service and Support		32				51				83
Operating Expenses		127				482				609
Total	$	272			$	533			$	805
$s in thousands	First Quarter
	2007
	Depreciation & Amortization				Stock-based Compensation				Total
Included in:
Cost of Products		0				0				0
Cost of Service and Support		20				48				68
Operating Expenses		62				417				479
Total	$	82			$	465			$	547