Scientific Learning Corp. Reports Operating Results (10-Q)

Scientific Learning Corp. (SCIL) filed Quarterly Report for the period ended 2009-06-30.

Scientific Learning Corp. develops markets and sells proprietary software and other educational products and services. The products and services are based on research on how the brain learns and are designed to increase human learning and performance. Language and reading skills are the foundation for all learning and the company developed products to help children learn how to read or become better readers. Teh Fast ForWord products are intensive computer-based training programs that focus on improving critical language and reading skills. Scientific Learning Corp. has a market cap of $39.5 million; its shares were traded at around $2.2 with and P/S ratio of 0.8.

Highlight of Business Operations:

Federal education funds are a critical resource in helping school districts address the needs of the most challenged learners. We believe that a significant proportion of our sales are funded by federal sources, particularly Title One and IDEA (special education) grants. With the passage of the American Recovery and Reinvestment Act (“ARRA” - the recent stimulus bill), these two federal sources are together projected to increase from $24.9 billion in the 2008 – 2009 school year to $37 billion in the 2009 – 2010 school year. State funds also provide school districts with funds that are used to purchase our products. However, there continues to be uncertainty about and delay in the timing of the release of these ARRA funds to school districts. State funds provide school districts with the majority of their funding, and those funds are also sometimes used to purchase our products. States faced severe budget shortfalls in fiscal 2009 and forecast continuing funding difficulties in 2010. The National Conference of State Legislatures estimates that the cumulative state budget gap was $113.2 billion in fiscal 2009, and in June 2009, forecast a cumulative budget gap for 2010 of $142.6 billion, involving 46 states.

We recorded a net loss of $314,000 for the three months ended June 30, 2009 compared to a net loss of $438,000 in the same period in 2008. We recorded a net loss of $3.2 million for the six months ended June 30, 2009 compared to a net loss of $5.1 million in the same period in 2008.

Booked sales to non-school customers, including both private practice clinicians and international customers, decreased by 23% and 30% respectively in the three and six month periods ended June 30, 2009 compared to the same period in 2008. We believe that the decrease in non school sales is primarily caused by adverse economic conditions affecting our customers in both the private practice and international markets. The sales decrease also reflects a decline of $408,000 in OEM sales related to the Reading Assistant product line in the six months ended June 30, 2009 as compared to the same period in 2008, because we are no longer focusing on new OEM projects, and $121,000 in sales to correctional institutions, a market segment to which we no longer devote resources.

During the second quarter of 2009, we closed 25 sales that had a contract value in excess of $100,000, compared to 31 in the same period in 2008. For the three months ended June 30, 2009 and 2008 respectively, approximately 59% and 69% of our booked sales were realized from booked sales over $100,000. Large booked sales include volume and negotiated discounts but the percentage discount applicable to any given transaction will vary and the relative percentage of large booked sales and smaller booked sales in a given quarter may fluctuate. Because we discount product license fees but do not discount service and support fees, product booked sales and revenue are disproportionately affected by discounting. We cannot predict the size and number of large transactions in the future.

In the three and six months ending June 30, 2009, we recorded income tax expense of $36,000 and $66,000 respectively, principally consisting of deferred tax expense relating to the amortization of acquired goodwill and state tax expense. In the three and six months ending June 30, 2008, we recorded income tax expense of $1.2 million, consisting of an increase to our deferred tax asset valuation allowance. We reestablished a full valuation allowance against our deferred tax asset based on our assessment that we no longer met the criteria that the asset will more likely than not be realized.

Our cash, cash equivalents and short term investments were $4.9 million at June 30, 2009, compared to $7.6 million at December 31, 2008.

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