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  • 10-Q (Nov 13, 2013)
  • 10-Q (Aug 13, 2013)
  • 10-Q (May 14, 2013)
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  • 10-Q (Aug 14, 2012)
  • 10-Q (May 8, 2012)

 
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Scientific Learning 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-10.2
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
4fc524dc09c0491

 


 
 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

FORM 10-Q 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2013 

or 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM           TO           . 

COMMISSION FILE NO. 000-24547 

 

SCIENTIFIC LEARNING CORPORATION 

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE

 

94-3234458

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

 

300 Frank H. Ogawa Plaza, Suite 600 

Oakland, CA 94612 

510-444-3500

 

 

(Address of Registrant’s principal executive offices, including zip code, and telephone number, including area code) 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:x  No: o 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes:x No: o 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

 

 

 

 

Large accelerated filer o 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company x

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o   No x 

 

As of August 9, 2013,  there were 23,733,336 shares of Common Stock outstanding.

  

 


 

 


 

 

 

TABLE OF CONTENTS

 

 

 

 

Item Number

 

Page

PART 1.  FINANCIAL INFORMATION 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

Condensed Consolidated Balance Sheets

 

2

 

Condensed Consolidated Statements of Operations

 

3

 

Condensed Consolidated Statements of Comprehensive Loss

 

4

 

Condensed Consolidated Statements of Cash Flows

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

22

Item 4T.

Controls and Procedures 

 

22

 

 

 

PART II. OTHER INFORMATION 

 

 

Item 1.

Legal Proceedings

 

23

Item 1A.

Risk Factors

 

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

Item 3.

Defaults Upon Senior Securities

 

25

Item 4.

Mine Safety Disclosures

 

25

Item 5.

Other Information

 

25

Item 6.

Exhibits

 

25

 

SIGNATURES

 

 

 

  

 

 

1

 


 

 

 

 

 

PART I –  FINANCIAL INFORMATION 

Item 1. Financial Statements 

 

 

 

 

 

 

 

 

 

 

SCIENTIFIC LEARNING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

December 31, 2012

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

2,459 

 

$

2,272 

 

Accounts receivable, net of allowance for doubtful accounts of $32 and $52, respectively

 

1,835 

 

 

2,446 

 

Prepaid expense and other current assets

 

1,027 

 

 

1,484 

 

Total current assets

 

5,321 

 

 

6,202 

 

 

 

 

 

 

 

 

Property and equipment, net

 

1,526 

 

 

2,028 

 

Goodwill

 

4,568 

 

 

4,568 

 

Other assets

 

488 

 

 

260 

 

Total assets

$

11,903 

 

$

13,058 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (net capital deficiency)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

469 

 

$

715 

 

Accrued liabilities

 

1,682 

 

 

1,981 

 

Loan payable

 

 -

 

 

800 

 

Deferred revenue, short-term

 

8,689 

 

 

10,964 

 

Total current liabilities

 

10,840 

 

 

14,460 

 

Deferred revenue, long-term

 

1,179 

 

 

2,521 

 

Long term debt

 

4,129 

 

 

 -

 

Warrant liability

 

894 

 

 

534 

 

Other liabilities

 

698 

 

 

771 

 

Total liabilities

 

17,740 

 

 

18,286 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 8 to the condensed consolidated financial statements)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (net capital deficiency):

 

 

 

 

 

 

Common stock $0.001 par value: 40,000,000 authorized, 23,685,934 and 23,442,837 shares issued and outstanding, respectively, and additional paid-in capital

 

96,296 

 

 

95,839 

 

Accumulated deficit

 

(102,127)

 

 

(101,069)

 

Accumulated other comprehensive income (loss)

 

(6)

 

 

 

Total stockholders' equity (net capital deficiency)

 

(5,837)

 

 

(5,228)

 

 

 

 

 

 

 

 

Total liabilities and stockholder's equity (net capital deficiency)

$

11,903 

 

$

13,058 

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

 

2

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SCIENTIFIC LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

 

2012

 

2013

 

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Subscription

$

1,659 

 

$

921 

$

3,223 

 

$

1,684 

 

License

 

659 

 

 

2,569 

 

1,415 

 

 

4,900 

 

Service and support

 

3,012 

 

 

3,658 

 

6,170 

 

 

7,650 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

5,330 

 

 

7,148 

 

10,808 

 

 

14,234 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

Cost of subscription

 

298 

 

 

242 

 

616 

 

 

505 

 

Cost of license

 

71 

 

 

255 

 

136 

 

 

499 

 

Cost of service and support

 

864 

 

 

1,594 

 

1,825 

 

 

3,430 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

1,233 

 

 

2,091 

 

2,577 

 

 

4,434 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

4,097 

 

 

5,057 

 

8,231 

 

 

9,800 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

2,211 

 

 

4,378 

 

4,641 

 

 

9,267 

 

Research and development

 

934 

 

 

1,933 

 

2,007 

 

 

4,503 

 

General and administrative

 

1,286 

 

 

1,971 

 

2,663 

 

 

4,189 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

4,431 

 

 

8,282 

 

9,311 

 

 

17,959 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(334)

 

 

(3,225)

 

(1,080)

 

 

(8,159)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

313 

 

 

124 

 

69 

 

 

65 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income tax

 

(21)

 

 

(3,101)

 

(1,011)

 

 

(8,094)

 

Provision for income taxes

 

33 

 

 

40 

 

47 

 

 

83 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(54)

 

$

(3,141)

$

(1,058)

 

$

(8,177)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

$

(0.00)

 

$

(0.14)

$

(0.04)

 

$

(0.39)

 

Diluted net loss per share

$

(0.00)

 

$

(0.14)

$

(0.04)

 

$

(0.39)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computation of per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

23,620 

 

 

23,263 

 

23,635 

 

 

21,210 

 

Diluted weighted average shares outstanding

 

23,620 

 

 

23,263 

 

23,635 

 

 

21,210 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SCIENTIFIC LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(54)

 

$

(3,141)

 

$

(1,058)

 

$

(8,177)

 

 

Other comprehensive (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

(7)

 

 

 -

 

 

(8)

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

$

(61)

 

$

(3,141)

 

$

(1,066)

 

$

(8,178)

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

  

4

 


 

 

 

 

  

 

 

 

 

 

 

 

SCIENTIFIC LEARNING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

2013

 

 

2012

Operating Activities:

 

 

 

 

 

Net loss

$

(1,058)

 

$

(8,177)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

717 

 

 

1,225 

Investment impairment charge

 

 -

 

 

200 

Stock-based compensation

 

422 

 

 

485 

Paid-in-kind interest expense

 

133 

 

 

 -

Amortization of debt discount and deferred debt issuance cost

 

109 

 

 

 -

Change in fair value of warrant

 

(338)

 

 

(288)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

611 

 

 

154 

Prepaid expenses and other current assets

 

457 

 

 

481 

Other assets

 

(183)

 

 

(5)

Accounts payable

 

(246)

 

 

228 

Accrued liabilities

 

(299)

 

 

(593)

Deferred revenue

 

(3,617)

 

 

(2,489)

Other liabilities

 

(73)

 

 

(59)

Net cash used in operating activities

 

(3,365)

 

 

(8,838)

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Purchases of property and equipment and additions to capitalized software

 

(157)

 

 

(465)

Net cash used in investing activities

 

(157)

 

 

(465)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Borrowings under bank line of credit

 

2,300 

 

 

3,000 

Repayment of borrowings under bank line of credit

 

(3,100)

 

 

(3,000)

Proceeds from exercise of options

 

37 

 

 

148 

Proceeds from issuance of common stock, net

 

 -

 

 

6,511 

Proceeds from issuance of subordinated debt

 

4,600 

 

 

 -

Debt issuance cost

 

(118)

 

 

 -

Net cash paid for common stock issued

 

(2)

 

 

(31)

Net cash provided by financing activities

 

3,717 

 

 

6,628 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(8)

 

 

 -

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

187 

 

 

(2,675)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,272 

 

 

5,871 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

2,459 

 

$

3,196 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for income taxes

$

 

$

32 

Cash paid for interest

$

27 

 

$

16 

 

 

 

 

 

 

Non-cash financing activity

 

 

 

 

 

Issuance of common stock warrants in connection with common stock offering

$

 -

 

$

2,368 

Issuance of common stock warrants in connection with subordinated debt financing

$

698 

 

$

 -

 

See accompanying notes to unaudited condensed consolidated financial statements. 

5

 


 

 

 

  

Notes to Unaudited Condensed Consolidated Financial Statements 

 

1. Summary of Significant Accounting Policies

Description of Business  

 

Scientific Learning Corporation (the “Company”) develops, distributes and licenses technology that accelerates learning by improving the processing efficiency of the brain.   

The Company’s patented products build learning capacity by rigorously and systematically applying neuroscience-based learning principles to improve the fundamental cognitive skills required to read and learn. To facilitate the use of the Company’s products, the Company offers a variety of on-site and remote professional and technical services, as well as phone, email and web-based support.  The Company sells primarily to K-12 schools in the United States through a direct sales force. 

All of the Company’s activities are in one operating segment. 

The Company was incorporated in 1995 in the State of California and was reincorporated in 1997 in the State of Delaware. 

Basis of Accounting and Liquidity

 

The Company’s cash and cash equivalents were $2.5 million at June 30, 2013, compared to cash and cash equivalents of $2.3 million at December 31, 2012.  In the first six months of 2013, we have used $3.4 million of cash in operations.

 

The Company expects to continue to fund its operations primarily from its current cash balances, cash borrowings available under its credit line from Comerica Bank (“Comerica”), and the issuance of subordinated debt and warrants that was completed on April 5, 2013.  This will require the Company to achieve certain level of booked sales, cash collections and expenses.  The Company’s ability to continue as a going concern is dependent upon many factors.  If the Company is unable to achieve the needed levels of booked sales and cash collections, it expects to further reduce expenses to ensure that it will have sufficient liquidity to continue to fund its operations through at least June 30, 2014.  Reducing expenses substantially below current levels could have a negative impact on the Company’s future growth potential.  In addition, the Company may be required to sell assets, issue additional equity securities or incur additional debt, and may need to obtain waivers or amendments from Comerica in the event the Company does not maintain compliance with its covenants. The Company may not be able to accomplish any of these alternatives. 

 

On April 5, 2013, the Company issued $4.6 million of subordinated debt securities and warrants to purchase an aggregate of 1,846,940 shares of the Company’s common stock, to a group of its current investors.  The notes issued pursuant to the subordinated note and warrant purchase agreement bear simple interest at a rate of 12% per annum.  From the issuance date through the first anniversary thereof, we will pay accrued and unpaid interest quarterly in arrears by increasing the principal amount of each note and thereafter will pay accrued and unpaid interest in cash in arrears on July 31, 2014, November 30, 2014 and the final payment date.  The notes mature on April 5, 2015.  The note and warrant purchase agreements contain customary affirmative and negative covenants, including notification and information covenants and covenants restricting the Company’s ability to merge or liquidate, incur debt, dispose of assets, incur liens, declare dividends or enter into transactions with affiliates.  The note and warrant purchase agreements also require the Company to repay the notes upon the occurrence of a change of control (as defined in the note and warrant purchase agreement) at 101% of the principal amount thereof plus accrued and unpaid interest.

 

On April 5, 2013, we amended our credit line with Comerica. Our amended line of credit has an effective limit of $3.8 million, net of an outstanding letter of credit, and expires on March 31, 2014.

 

Borrowings under the amended line of credit are subject to reporting covenants requiring the provision of financial statements to Comerica and ongoing compliance with certain financial covenants.  As part of our recent amendment to the line of credit, we amended the financial covenants in order to align them with our then current operating plan.  The amended covenants require us to maintain a specified minimum adjusted quick ratio, to achieve certain levels of booked sales and to maintain a cash balance of at least $1.0 million. The required levels for the adjusted quick ratio and booked sales vary over the term of the agreement and if we do not comply with the covenants, we risk being unable to borrow under the line of credit. As of June 30, 2013, we were not in compliance with our line of credit covenants.  Even if we remain in compliance, a provision in the line of credit entitles Comerica to prevent us from borrowing or request that any outstanding borrowings be repaid at any time, regardless of whether covenants are met.  As such, it is not certain that the Company will be able to utilize cash available under the line of credit.  

 

6

 


 

 

 

As of June 30, 2013, we had no borrowings outstanding on the line of creditDuring the months ending January 31, 2013, February 28, 2013, May 31, 2013 and June 30, 2013 we were not in compliance with our line of credit covenants.  Comerica granted us waivers of the covenant violations for these periods. 

 

On August 9, 2013 the Company again amended the credit line. In the amendment, Comerica agreed to waive past covenant violations and agreed not to measure compliance with the financial covenants until such time as the Company seeks to borrow against the line of credit. The amendment also requires that the financial covenants be renegotiated prior to the Company borrowing against the line of credit.  There is no assurance that the Company would be able to successfully do so.

 

Use of Estimates 

 

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are material differences between these estimates and actual results, the Company’s consolidated financial statements could be affected.  

 

Principles of Consolidation 

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in Shanghai, China and Puerto Rico.  All significant intercompany balances and transactions have been eliminated in consolidation. 

 

Interim Financial Information 

 

The interim consolidated financial information as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 is unaudited, and includes all necessary adjustments, which consisted only of normal recurring adjustments, for a fair presentation of the Company’s financial position at such dates and the Company’s results of operations and cash flows for those periods. The balance sheet as of December 31, 2012 has been derived from audited consolidated financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In addition, the results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results for the entire year ending December 31, 2013, or for any other period. 

 

These unaudited, condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto and Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission. 

 

Cash Pledge

 

As of June 30, 2013, the Company pledged cash collateral in the amount of $150,000, which relates to a letter of credit issued to American Express Corporation.  This pledge is part of the 4th amendment of our line of credit with Comerica signed on August 9, 2013.  See Note 6.

 

Software and Web Site Development Costs 

 

The Company capitalizes certain software development costs incurred subsequent to the establishment of technological feasibility and amortizes those costs over the estimated lives of the related products. The annual amortization is computed using the straight-line method over the remaining estimated economic life of the product. Technological feasibility is established upon completion of a working model.  In the three months ended June 30, 2013, the Company did not capitalize any costs relating to new products that had reached technological feasibility.  In the six months ended June 30, 2013, the Company capitalized $30,000 of costs relating to new products that had reached technological feasibility.  In the three and six months ended June 30, 2012, the Company capitalized $10,000 and $56,000 of costs relating to new products that had reached technological feasibility, respectively.  For the three and six months ended June 30, 2013, the Company recorded amortization expense of $30,000 and $58,000, respectively.  For the three and six months ended June 30, 2012, the Company recorded amortization expense of $44,000 and $83,000, respectively. 

 

The Company also capitalizes costs related to internal use software and website application, infrastructure development and content development costs.  Costs related to preliminary project activities and post implementation activities are expensed as incurred.  Costs incurred during the application development stage are capitalized.  Internal-use software is amortized on a straight line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The capitalized costs

7

 


 

 

 

are included in “Property and equipment” in the consolidated balance sheet. In each case the software or website is for internal needs, and the Company does not plan to market the software externally. For the three and six months ended June 30, 2013, the Company capitalized approximately $71,000 and $142,000 of software and website development costs, respectively.  For the three and six months ended June 30, 2012, the Company capitalized approximately $0.2 million and $0.3 million of software and website development costs, respectivelyFor the three and six months ended June 30, 2013, the Company recorded amortization expense of $0.2 million and $0.3 million,  respectively.  For the three and six months ended June 30, 2012, the Company recorded amortization expense of $0.2 million and $0.4 million, respectively. 

 

Net Loss Per Share 

 

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period.  Diluted net loss per share reflects the potential dilution of securities by adding common stock equivalents (computed using the treasury stock method) to the weighted-average number of common shares outstanding during the period, if dilutive. For the three and six months ended June 30, 2013, stock options and awards exercisable for 2.2 million and 1.9 million shares of common stock along with common stock warrants exercisable for 4.4 million shares of common stock were excluded from the calculation of diluted net loss per share because their effect is anti-dilutive. 

 

Recent Accounting Pronouncements 

 

There are no material changes from the pronouncements disclosed in part II, Item 8 – “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2012.

   

2. Warrant Liability 

 

In connection with the Company’s private common stock offering that closed on March 28, 2012, the Company issued warrants (“PIPE warrants”) to purchase an aggregate of 2,505,852 shares of common stock.  The warrants have an exercise price of $1.82 per share and expire five years from the date of issuance. In addition, the warrants contain a cash settlement provision that may be triggered upon request by the warrant holders if the Company is acquired or a merger event, as defined by the warrant agreement, occurs. 

 

In addition, in connection with the Company’s subordinated debt financing completed on April 5, 2013, the Company issued warrants (“Sub-debt warrants”) to purchase an aggregate of 1,846,940 shares of common stock.  The warrants have an exercise price of $1.03 per share and expire three years from the date of issuance. The warrants contain a cash settlement provision that may be triggered upon request by the warrant holders if the Company is acquired or in the event of a merger, as defined by the warrant agreement, occurs. 

 

Under the FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, an equity contract that can be settled in cash at the request of the holder must be classified as an asset or a liability. The accounting guidance also requires that the warrants be re-measured at fair value at each reporting date, with the change in fair value recorded in the Company’s condensed consolidated statement of operations.

 

At June 30, 2013, the estimated fair value of the PIPE warrants was approximately $464,000 and is recorded as a liability on the Company’s condensed consolidated balance sheet.  For the three and six months ended June 30, 2013, there was a decrease of approximately $291,000 and $70,000, respectively, to the warrant liability which was recorded as income, in interest and other income on the condensed consolidated statements of operations. 

 

On April 5, 2013, the initial estimated fair value of the Sub-debt warrants was approximately $698,000.  At June 30, 2013, the estimated fair value of the Sub-debt warrants was approximately $430,000 and is recorded as a liability on the Company’s condensed consolidated balance sheet.  During the three months ended June 30, 2013, there was a decrease from the initial value of approximately $268,000 to the warrant liability which was recorded as income, in interest and other income on the condensed consolidated statements of operations. 

 

The fair value was estimated using the Black-Scholes-Merton option pricing model, which requires the input of highly subjective assumptions as determined by management. To the extent these assumptions change in future periods, the fair value of the common stock warrants may increase or decrease and the change in fair value will be recorded in our results of operations.  As of June 30, 2013, all common stock warrants were outstanding.

 

 

 

 

8

 


 

 

 

3. Fair Value Measurements 

 

The Company generally invests its excess cash in money market funds.  Cash and cash equivalents represent highly liquid instruments with insignificant interest rate risk and original maturities of three months or less.

 

The Company has established a three-tier fair value hierarchy, categorizing the inputs used to measure fair value.  The hierarchy can be described as follows: Level 1- observable inputs such as quoted prices in active markets; Level 2- inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3- unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Cash equivalents consist of money market funds that have original maturities of 90 days or less.  These instruments are valued using quoted prices in active markets and as such are classified in Level 1 of the fair value hierarchy.  The Company has no Level 2 financial assets as of June 30, 2013.

 

At June 30, 2013, the Company had outstanding warrants to purchase shares of its common stock, which were issued on March 28, 2012 and April 5, 2013.  The warrants are measured at fair value each reporting period and are classified as liabilities with a fair value of $0.9 million at June 30, 2013.  The warrants are valued using the Black-Scholes-Merton option pricing model using valuation assumptions determined by management and are classified as Level 3 in the Company’s fair value hierarchy. 

 

As of June 30, 2013, the Company used the following assumptions when determining the fair value of the PIPE warrants: 

 

 

 

 

 

 

 

 

Expected life (in years)

3.75 

 

Risk-free interest rate

0.94 

%

Dividend yield

%

Expected volatility

78 

%

 

The Company assessed the sensitivity of the fair value of the PIPE warrants with respect to the assumptions above and noted that a change in the price of our common stock of 10% would affect the fair value of the warrants by 17% or $0.1 million.  A change in volatility of 10% would affect the fair value of the warrants by 20% or $0.1 million. 

 

As of June 30, 2013, the Company used the following assumptions when determining the fair value of the Sub-debt warrants

 

 

 

 

 

Expected life (in years)

2.83 

 

Risk-free interest rate

0.66 

%

Dividend yield

%

Expected volatility

84 

%

 

The Company assessed the sensitivity of the fair value of the Sub-debt warrants with respect to the assumptions above and noted that a change in the price of our common stock of 10% would affect the fair value of the warrants by 16% or $0.07 million.  A change in volatility of 10% would affect the fair value of the warrants by 13% or $0.05 million. 

 

The following table summarizes the changes in fair value for all outstanding common stock warrants for the quarter ended June 30, 2013  (in thousands): 

 

 

 

 

 

 

Six Months Ended June 30, 2013

Balance at December 31, 2012

$  

534

    Issuance of warrants with subordinated debt financing

 

698

Total change in fair value

$

(338)

Balance at June 30, 2013

$  

894

 

 

 

 

 

 

 

 

9

 


 

 

 

The following table represents the fair value hierarchy for assets and liabilities, which are measured at fair value on a recurring basis as of June 30, 2013  (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

Level 1

  

Level 2

  

Level 3

  

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

Money market instruments

$  

649 

 

$  

 -

 

$  

 -

  

$  

649 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

$  

 -

 

$  

 -

 

$  

894 

 

$  

894 

 

4.  Stock-Based Compensation 

 

The Company granted options to purchase 583,750 shares of common stock and 125,595 restricted stock units during the six months ended June 30, 2013.  The Company granted options to purchase 182,000 shares of common stock and 113,257 restricted stock units during the six months ended June 30, 2012. 

 

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model with subjective assumptions, developed as follows: 

  

Expected volatility – Based on the historical prices of common stock over the expected life of each option. 

  

Expected life – Based on the history of option exercise and cancellation activity of the options. 

 

Risk-free interest rate – Based on the U.S. Treasury yield curve in effect at the time of grants for periods corresponding with the expected life of the options. 

  

Dividend yield – As the Company has not paid, nor does it currently plan to pay, dividends in the future, the assumed dividend yield is zero. 

 

 

The fair value of stock options granted was estimated using the following weighted-average assumptions: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Expected life (in years)

 

5.5 

 

 

5.5 

 

 

5.5 

 

 

5.5 

Risk-free interest rate

 

0.9% 

 

 

1.2% 

 

 

0.9% 

 

 

1.1% 

Dividend yield

 

0% 

 

 

0% 

 

 

0% 

 

 

0% 

Expected volatility

 

74% 

 

 

63% 

 

 

74% 

 

 

63% 

 

  

 

5. Warranties and Indemnification 

 

The Company generally provides a warranty that the Company’s software products will substantially operate as described in the manuals and guides that accompany the software for a period of 90 days. The warranty does not apply in the event of misuse, accident, and certain other circumstances. To date, the Company has not incurred any material costs associated with these warranties and has no accrual for such items at June 30, 2013. 

 

From time to time, the Company enters into contracts that require the Company, upon the occurrence of certain contingencies, to indemnify parties against third party claims. These contingent obligations primarily relate to (i) claims against the Company’s customers for violation of third party intellectual property rights caused by the Company’s products; (ii) claims resulting from personal injury or property damage resulting from the Company’s activities or products; (iii) claims by the Company’s office lessor arising out of the use of the premises; and (iv) agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities arising out of their activities on behalf of the Company. Because the obligated amounts for these types of agreements are not explicitly stated, the overall maximum amount of these obligations cannot be reasonably estimated. Additionally, the Company is not aware of any claims under such indemnification provisions.  Accordingly, no liabilities have been recorded for these obligations as of June 30, 2013.

  

 

10

 


 

 

 

6. Loan Payable 

 

As of June 30, 2013, the Company had no borrowings outstanding on the line of credit.    However, during the months ending January 31, 2013, February 28, 2013, May 31, 2013 and June 30, 2013, the Company was not in compliance with its covenants.    Comerica granted the Company waivers of the covenant violations for these periods. 

 

On April 5, 2013, the Company entered into an amendment (the “Third Amendment”) to its amended and restated loan and security agreement, dated as of February 9, 2012 (as amended), by and between the Company and Comerica Bank.  The Third Amendment amends certain covenants, accounts for the transactions consummated under the Subordinated Note and Warrant Purchase Agreement (the “Purchase Agreement”).  Under the terms of the Third Amendment, the line of credit was reduced to be a maximum borrowing of $3.8 million, net of an existing letter of credit and extended to March 31, 2014.  The financial covenants have been amended as follows: (1) amended the adjusted quick ratio requirement to varying levels, which range from 0.6:1.0 to 1.0:1.0, over the term of the agreement; (2) amended the booked sales to plan ratio covenant whereby the Company is required to maintain certain levels of booked sales on a three-month rolling basis over the term of the agreement; and (3) amended the minimum cash balance covenant whereby the Company is required to maintain a minimum cash balance of $1.0 million. Compliance with these covenants is required to be maintained on a monthly basis

 

On August 9, 2013,  the Company entered into an amendment (the “Fourth Amendment”) to its amended and restated loan and security agreement, dated as of February 9, 2012 (as amended), by and between the Company and Comerica Bank.    In the Fourth Amendment, Comerica agreed to waive past covenant violations and agreed not to measure compliance with the financial covenants until such time as the Company seeks to borrow against the line of credit. The Fourth Amendment also requires that the financial covenants be renegotiated prior to the Company borrowing against the line of credit.  There is no assurance that the Company would be able to successfully do so.  In addition, the Fourth Amendment pledges $150,000 as cash collateral for an outstanding letter of credit.

 

7. Provision for Income Taxes  

 

In the three and six months ended June 30, 2013, the Company recorded income tax expense of  $33,000 and  $47,000, respectively. In the three and six months ended June 30, 2012 the Company recorded income tax expense of $40,000 and $83,000, respectively.  The tax expense for the three and six months ended June 30, 2013 and 2012 consists primarily of deferred tax expense relating to the amortization of acquired goodwill, current state tax expense and current foreign tax expense.    

 

The Company has established and continues to maintain a full valuation allowance against its deferred tax assets as the Company does not believe that the realization of those assets is more likely than not.  

 

At June 30, 2013, the Company has unrecognized tax benefits of approximately $2.7 million.    The Company does not have unrecognized tax benefits that, if recognized, would affect the effective tax rate. The Company does not believe there will be any material changes in the unrecognized tax positions over the next twelve months. Interest and penalty costs related to unrecognized tax benefits are insignificant and classified as a component of “Provision for income taxes” in the accompanying statements of operations. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax returns remain open to examination by the appropriate governmental agencies for tax years 2008 to 2012. The federal and state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes. The Company is not currently under audit in any major tax jurisdiction.

 

8. Commitments and Contingencies 

 

The Company leases office space and equipment under non-cancelable operating leases with various expiration dates. 

 

In addition, the Company leases certain equipment under capital lease arrangements that extend through 2014 for the amounts of $101,000 in 2013 and $25,000 in 2014. The Company also makes royalty payments to the institutions who participated in the original research that produced its initial products. The Company’s minimum royalty payments are $150,000 per year. 

 

At June 30, 2013, the Company's future minimum lease payments and future payments under its royalty agreements are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining 2013

 

2014

 

2015

 

2016

 

2017 and thereafter

 

Total

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease obligations

 

$

398 

 

$

670 

 

$

624 

 

$

229 

 

$

155 

 

$

2,076 

Minimum royalty obligations

 

 

 -

 

 

150 

 

 

 -

 

 

 -

 

 

 -

 

 

150 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

398 

 

$

820 

 

$

624 

 

$

229 

 

$

155 

 

$

2,226 

11

 


 

 

 

 

 

  

 

9. Restructuring   

 

During the third quarter of 2012, as part of the Company’s strategy to better align its costs and organizational structure with the current economic environment and reduce losses, the Company implemented two reductions in its workforce of approximately 30% in the aggregate compared to staff levels at the end of the second quarter of 2012.  Employees were notified in July and September 2012.

 

As a result, the Company recorded severance costs of $1.5 million, of which the Company paid $1.1 million during fiscal 2012.  As of June 30, 2013,  $146,000 of severance remains recorded within Accrued Liabilities and Other Liabilities.  A significant portion of this liability is related to severance payments for one officer that departed the Company in the third quarter of 2012, but is payable over an extended period of time.  This amount is expected to be fully paid by the first quarter of 2015. 

Accrued costs are shown in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

Restructuring

Accrued at December 31, 2012

 

285 

Charges

 

 -

Cash payments

 

(118)

Adjustments

 

(21)

Accrued at June 30, 2013

 

146 

 

 

10.  Long-term debt

 

On April 5, 2013, the Company issued $4.6 million of subordinated debt securities and warrants to purchase an aggregate of 1,846,940 shares of the Company’s common stock, to a group of its current investors.  The notes issued pursuant to the subordinated note and warrant purchase agreement bear simple interest at a rate of 12% per annum.  From the issuance date through the first anniversary thereof, the Company will pay accrued and unpaid interest quarterly in arrears by increasing the principal amount of each note (“PIK Interest”) and thereafter will pay accrued and unpaid interest in cash in arrears on July 31, 2014, November 30, 2014 and the final payment date.  The notes mature on April 5, 2015.  The note and warrant purchase agreement contains customary affirmative and negative covenants, including notification and information covenants and covenants restricting the Company’s ability to merge or liquidate, incur debt, dispose of assets, incur liens, declare dividends or enter into transactions with affiliates.  As of June 30, 2013, the Company was in compliance with all covenants related to the subordinated debt.  The note and warrant purchase agreement also requires the Company to repay the notes upon the occurrence of a change of control (as defined in the note and warrant purchase agreement) at 101% of the principal amount thereof plus accrued and unpaid interest.

 

The total value allocated to the warrants was approximately $698,000 and was recorded as a debt discount against the proceeds of the notes and will be amortized to interest expense over term of the notes.  See Note 2.  The aggregate debt issuance costs associated with the subordinated debt financing were $118,000, which are comprised of outside legal costs. These costs have been capitalized as debt issuance costs, included in Other Assets and will be amortized as interest expense over the life of the notes.

 

At June 30, 2013, the Company's subordinated notes payable is made up of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of April 5, 2013

 

 

As of June 30, 2013

Subordinated notes payable

$

4,600

 

$

4,600

Deferred debt discount

 

(698)

 

 

(604)

Accrued PIK interest

 

 -

 

 

133

   Long-term debt

$

3,902

 

$

4,129

 

12

 


 

 

 

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations 

 

This report contains forward-looking statements. Forward-looking statements are not historical facts but rather are based on current expectations about our business and industry, as well as our beliefs and assumptions. Words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” and variations and negatives of these words and similar expressions are used to identify forward-looking statements. Statements regarding our expectations for our future business results and financial position, our business strategies and objectives, and trends in our market are forward-looking statements. Forward-looking statements are not guarantees of future performance or events, and are subject to risks, uncertainties and other factors, many of which are beyond our control and some of which we may not even be presently aware. As a result, our future results and other future events or trends may differ materially from those anticipated in our forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, the risks and uncertainties discussed in this Management’s Discussion and in the Risk Factors section of our most recent Annual Report on Form 10-K as amended by the Risk Factors sections  contained in our Report on Form 10-Q filed subsequent to the Annual Report on Form 10-K. We also refer you to the risk factors that are or may be discussed from time to time in our public announcements and filings with the Securities and Exchange Commission, or the SEC, including our future Forms 8-K, 10-Q and 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our view only as of the date of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. 

 

Overview 

We are an education company that accelerates learning by applying proven research on how the brain learns in online and on-premise software solutions. Our results show that learners who use our products can realize achievement gains of up to 2 years in as little as 3 months and maintain an accelerated rate of learning even after product use ends. We provide our learning solutions primarily to U.S. K-12 schools in traditional brick-and-mortar, virtual or blended learning settings and also to parents and learning centers, in approximately 45 countries around the world.

 

We are highly differentiated because of our continuous focus on the “science of learning” - combining advances in the field of brain research with standards-based learning objectives to achieve dramatic student gains.  At December 31, 2012, proof that our products produce substantial academic gains was demonstrated in 273 efficacy studies, including randomized controlled trials and longitudinal studies, representing results from approximately 130,000 aggregate participants. These studies show gains for students at all K-12 grade levels, for at-risk, special education, English language, Title I (low income, under achieving), and a variety of other students. Gains have been demonstrated throughout the United States and in ten other countries. The studies show that these gains endure over time.

 

In 2011, we began to transition to a software as a service (SaaS) model. Our easy-to-use and easy-to-access web-based platforms are able to effectively deliver individualized learning opportunities to a large number of students simultaneously. Our Fast ForWord and Reading Assistant educational software products are now available on our browser-based SciLEARN Enterprise software platform and our on-demand platform MySciLEARN. The SciLEARN Enterprise and MySciLEARN platforms meet the needs of institution and district-wide installations by providing scalability, remote access, centralized reporting, asynchronous online professional development, and ease of administration for multiple campuses.  As of June 30, 2013, we had 136 full-time equivalent employees, compared to 229 at June 30, 2012. 

 

Business Highlights  

 

We market our products primarily as learning acceleration solutions, to be used in a blended model with existing teaching and curriculum materials, at both the elementary and secondary school levels. According to the U.S. Department of Education (USDE), in 2012, 67% of fourth graders in the United States were not “proficient” in reading and 33% performed below the “basic” level. Between 2009 and 2011, there was no change in average 4th grade reading scores.

 

States provide school districts with the majority of their funding, and those funds are also sometimes used to purchase our products.  Additionally, federal education funds are critical resources 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 I and IDEA (Individuals with Disabilities Education Act) grants.  With respect to these sources, the National Education Association estimates that the federal sequestration that went into effect on March 1, 2013 will reduce Title I funding by $740 million and IDEA special education funding by $645 million in the 2013-14 school year.  Our Q2 sales were definitely impacted along with the US Department of Education providing states and districts with waivers to carryover unspent funds.  This resulted in delayed decision as well as reduction in size of transactions.    

 

13

 


 

 

 

We experienced a decline in revenue and booked sales in the first six months of 2013compared to 2012, which we believe resulted from continued budget pressures on schools as well as lower number of sales employees compared to the same period of 2012According to the Center on Budget and Policy Priorities, in the 2012-2013 school year, elementary and high schools in approximately half of the states are receiving less state funding than in the prior school year, and in approximately 35 states school funding now stands below 2008 levels.  We have seen improved state level funding for the 2013-14 school year which should help offset the reduction in federal funding.

 

Despite the recent attention school districts have paid to balancing their budgets, we believe our solutions will remain well-positioned for federal Title I, IDEA and competitive funding opportunities such as Race to the Top and School Improvement Grants, to the extent they continue to be funded, due to the continued emphasis on achievement mandates and education reform.

 

Company Highlights  

 

Our total revenue decreased by 25% and 24% during the three and six months ended June 30, 2013, respectively, compared to the same period in 2012. Our total booked sales decreased 40% and 39% during the three and six months ended June 30, 2013, respectively, compared to the same period in 2012.  Booked sales are not a generally accepted accounting principles (“GAAP”) financial measure. (For more explanation on booked sales, see the discussion below.)

 

K-12 booked sales decreased by 46% and 44% to $3.2 million and $5.1 million in the three and six months ended June 30, 2013,  respectively, compared to the same period of 2012Non-school booked sales, including private practice, international, direct to consumer, virtual schools and OEM customers, decreased by 7%  and 18% to  $1.1 million and $2.1 million during the three and six months ended June 30, 2013, respectively, compared to the same period in 2012.  We believe that the decline in booked sales reflects continued budget pressures on schools as well as a 34% decrease in the number of salespeople compared to the second quarter of 2012.

 

The weak environment and concerns about federal funding has also resulted in a lower average transaction value in 2013.  In the first six months of 2013, we closed 7 transactions in excess of $100,000, compared to 13 transactions for the same period in 2012.  Over time, we believe our on  demand MySciLEARN platform will enable us to significantly increase the number of smaller, more predictable transactions and recurring revenue.

 

Cost of revenues decreased 41%  and 42% in the three and six months ended June 30, 2013,  respectively, compared to 2012, primarily due to reduced headcount as a result of our fiscal year 2012 restructuring and lower levels of on-site training.  In addition, we have completed the amortization of purchased software and have lower royalty payments

 

Operating expenses decreased by 47% and 48% in the three and six months ended June 30, 2013, respectively, compared to 2012, which is due primarily to a reduction in headcount compared to the same period in 2012.  As of June 30, 2013, we had 136 full-time equivalent employees, compared to 229 at June 30, 2012.  The decrease is also due to lower sales commissions, bonus accruals, consulting, audit and tax related expenses and other expense reductions.

 

As a result of these expense reductions, we have reduced our operating loss for the three months ended June 30, 2013 to $0.3 million  from $3.2 million for the three months ended June 30, 2012 and we have reduced our operating loss for the six months ended June 30, 2013 to $1.1 million compared to an operating loss of $8.2 million for the six months ended June 30, 2012.

 

Consolidated Results of Operations  

 

Revenues 

 

The following table sets forth information relating to our revenues (dollar amounts in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

% Change

 

2013

 

2012

 

% Change

Subscription

$

1,659 

 

$

921 

 

80% 

 

$

3,223 

 

$

1,684 

 

91%

License

 

659 

 

 

2,569 

 

(74)%

 

 

1,415 

 

 

4,900 

 

(71)%

Service and support

 

3,012 

 

 

3,658 

 

(18)%

 

 

6,170 

 

 

7,650 

 

(19)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$

5,330 

 

$

7,148 

 

(25)%

 

$

10,808 

 

$

14,234 

 

(24)%

  

 

14

 


 

 

 

Subscription revenue primarily includes revenue from annual or monthly customer subscriptions to our web-based applications, including Fast ForWord,  Reading Assistant and BrainPro. We expect that subscription revenue will grow as we add new subscription customers, our existing subscription customers renew their licenses and some of our perpetual license customers choose to buy additional licenses as subscriptions. 

 

License revenue primarily includes revenue from sales of perpetual licenses to our software applications, including Fast ForWord and Reading Assistant.  We do not expect perpetual license revenue to return to its levels recorded in prior years as a result of our goal to convert to a SaaS-based subscription business model. 

 

Service and support revenue is primarily derived from annual agreements for us to host software applications purchased by our customers as perpetual licenses and provide reporting services, support, and maintenance, as well as ad hoc trainings, professional development, consulting, and other technical service agreements. We expect service and support revenue to continue to decline as we do not expect the addition of support revenue from customers purchasing additional perpetual licenses to offset a decline in support revenue from existing licenses.  In addition, we continue to expect customers to migrate toward our lower-priced web-based trainings from on-site service delivery. 

 

For the three and six months ended June 30, 2013,  total revenue decreased by $1.8 million and $3.4 million or 25% and 24%,  respectively, compared to the same period in 2012.  Booked sales decreased by $2.8 million and $4.6 million or 40% and 39%, for the three and six months ended June 30, 2013,  respectively, compared to the same period in 2012.  For the three and six months ended June 30, 2013, subscription revenue increased by $0.7 million and $1.5 million or 80%  and 91%,  respectively, compared to the same period in 2012, as we increased the number of subscription customers on our MySciLEARN platform.    License revenue declined $1.9 million and $3.5 million or 74% and 71% for the three and six months ended June 30, 2013,  respectively, compared to the same period in 2012,  primarily due to the decline in booked sales and a smaller portion of customers purchasing perpetual licenses. Service and support revenue declined $0.6 million and $1.5 million or 18% and 19% for the three and six months ended June 30, 2013,  respectively, compared to the same period in 2012, primarily because we delivered fewer on-site training days compared to 2012.

 

We continue to focus on increasing the percentage of recurring, predictable revenue.    In the second quarter of 2011, we launched SciLEARN On Demand, a fully cloud-based platform.  Hosted off-site by Scientific Learning, SciLEARN On Demand allowed anytime, anywhere access to our Fast ForWord products. In the first quarter of 2012, SciLEARN On Demand was re-branded as MySciLEARN with the introduction of additional services and capabilities that were added to the original SciLEARN On Demand environment to provide a more complete learning and management platform for our customers. In the second quarter of 2012, we released Reading Assistant on the MySciLEARN platformAs of June 30, 2013, the total number of active schools was 3,179 with 85% of those sites using the MySciLEARN  version of Fast ForWord and/ or Reading Assistant. Over time, we expect that the MySciLEARN platform will increase the portion of our revenue that is recurring. We also expect that MySciLEARN, together with the new per student pricing options we introduced in the second quarter of 2011 and changes in our business model, will increase our volume of smaller transactions, shorten sales cycles, and increase our ability to drive predictable, recurring revenue.

 

Booked sales  

 

Booked sales are a non-GAAP financial measure that management uses to evaluate current selling activity. We believe that booked sales is a useful metric for investors as well as management because it is the most direct measure of current demand for our products and services. Booked sales equals the total value (net of allowances) of subscriptions, licenses, and services and support invoiced in the period. Revenue on a GAAP basis is recorded for booked sales when all four of the requirements for revenue recognition have been met; if any of the requirements to recognize revenue are not met, the sale is recorded as deferred revenue. We use booked sales information for resource allocation, planning, compensation and other management purposes. We believe that revenue is the most comparable GAAP measure to booked sales. However, booked sales should not be considered in isolation from revenue, and is not intended to represent a substitute measure of revenue or any other performance measure calculated under GAAP.  

 

 

 

 

 

 

 

 

 

 

 

 

15

 


 

 

 

The following reconciliation table sets forth our booked sales, revenues and change in deferred revenue for the three and six months ended June 30, 2013 and 2012 (dollar amounts in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2013

 

 

2012

 

% Change

 

 

2013

 

 

2012

 

% Change

 

Total deferred revenue beginning of period

 

$

10,902 

 

$

14,858 

 

(27)%

 

$

13,485 

 

$

17,322 

 

(22)%

 

Booked sales

 

 

4,296 

 

 

7,128 

 

(40)%

 

 

7,191 

 

 

11,743 

 

(39)%

 

Less: revenue recognized

 

 

(5,330)

 

 

(7,148)

 

(25)%

 

 

(10,808)

 

 

(14,234)

 

(24)%

 

Adjustments

 

 

 

 

 

(5)

 

(100)%

 

 

 

 

 

 

(100)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred revenue end of period

 

$

9,868 

 

$

14,833 

 

(33)%

 

$

9,868 

 

$

14,833 

 

(33)%

 

 

For the three months ended June 30, 2013 and 2012, booked sales declined 40% to $4.3 million,  compared to $7.1 million respectively.  For the six months ended June 30, 2013 and 2012 booked sales declined 39% to $7.2 million, compared to $11.7 million respectively.  Booked sales are primarily composed of sales to the K-12 sector which decreased by 46% and 44% to $3.2 million and $5.1 million for the three and six months ended June 30, 2013,  respectively, compared to $6 million and $9.2 million in the three and six months ended June 30, 2012,  respectivelyWe believe that the decline in booked sales reflects continued budget pressures on schools as well as a 34% decrease in the number of salespeople compared to the second quarter of 2012.

 

Booked sales to the K-12 sector were 74% and 84% of total booked sales for the three months ended June 30, 2013 and 2012, respectively. Booked sales to the K-12 sector were 71% and 79% of total booked sales for the six months ended June 30, 2013 and 2012, respectively.

 

For the three months ended June 30, 2013 and 2012, booked sales to non-school customers declined 7% to $1.1 million, compared to $1.2 million, respectively.  For the six months ended June 30, 2013 and 2012, booked sales to non-school customers declined 18% to $2.1 million compared to $2.5 million,  respectively.  Growth in our consumer and international business was more than offset by declines in private practice and our OEM and virtual school activity.

 

Historically, large booked sales, which we define as transactions totaling more than $100,000, have been an important indicator of mainstream education industry acceptance and an important factor in reaching our goal of increasing sales force productivity. For the three and six months ended June 30, 2013,  we closed three and seven transactions,  respectively, in excess of $100,000 compared to eight and thirteen in the three and six months ended June 30, 2012,  respectively.  School districts continue to struggle with current and anticipated budget shortfalls, making it especially difficult to close large deals in our pipeline. 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.  GAAP requires us to allocate discounts disproportionately to product licenses compared to service and support fees for non-subscription orders and accordingly, our product license revenues are disproportionately smaller than the related product booked sales. We cannot predict the size and number of large transactions in the future. MySciLEARN, together with new per student pricing options we introduced in the second quarter of 2011 and changes in our business model, are designed to decrease our dependence on large transactions by increasing our volume of smaller transactions and shortening sales cycles.

 

We continue to focus on increasing the percentage of subscription sales. In the three and six months ended June 30, 2013, subscription booked sales represented 51%  and 48%,  respectively, of total booked sales compared to 29%  and 28% of total booked sales for the three and six months ended June 30, 2012,  respectively.  

 

 

 

 

 

 

 

 

 

 

 

 

16

 


 

 

 

The following table sets forth information relating to our subscription booked sales (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2013

 

 

2012

 

% Change

 

 

2013

 

 

2012

 

% Change

Subscription booked sales

 

$

2,181 

 

$

2,058 

 

6% 

 

$

3,444 

 

$

3,330 

 

3%

Non-subscription booked sales

 

 

2,115 

 

 

5,070 

 

(58)%

 

 

3,747 

 

 

8,413 

 

(55)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total booked sales

 

$

4,296 

 

$

7,128 

 

(40)%

 

$

7,191 

 

$

11,743 

 

(39)%