Scientific Learning Feels Impact of COVID-19

May 1, 2020: Volume 27, Number 9

Scientific Learning (Oakland, CA) in April applied for a Small Business Administration loan in the amount of $1.9 million under the Paycheck Protection Program, which is part of the CARES Act passed by Congress in March.

“If the company’s application for the PPP loan is not approved, it will be required to raise additional financing in order to meet cash and operating needs of the business,” CEO Jeffrey Thomas said. “However, there is no assurance that the company can establish new financing that is acceptable.”

Even with new financing, Thomas said if Scientific Learning is unable to achieve the needed levels of booked sales and cash collections, it may be required to further reduce expenses to ensure that it will have sufficient liquidity to continue to fund its operations through April 14, 2021. He warned that reducing expenses could have a negative impact on future growth potential.

In addition, the company may be required to sell assets, issue additional equity securities or incur more debt, and Scientific Learning may not be able to accomplish any of those alternatives.

“These conditions raise substantial doubt about the Company’s ability to continue as a going concern,” Thomas said.

Changes Made

Thomas described the COVID-19 pandemic as “a completely unique circumstance, unprecedented, rapidly changing and life disrupting,” in the company’s 2019 annual report.

Thomas said the pandemic has changed the business with employees working from home and not visiting customers, amid a company-wide 25% reduction in hours to save payroll costs.

For the company’s primary K-12 customer segment, schools and district offices are staffed by public employees who are getting paid and expected to work.

“In theory, our customers are still open for business even though their places of employment (schools) are physically closed,” Thomas said. “On a practical basis, this means a variety of things from non-responsiveness to nearly business as usual from our perspective.”

Booked sales in the first quarter of 2020 were higher than in the first quarter of 2019. Renewals are doing well as the company focuses on current customers, with new business being challenging.

“We are modifying our approach, for example, offering free software, specifically Reading Assistant Plus, to schools that need this tool (repositioned as an independent reading practice program) for their remote learning,” Thomas said. “This has resulted in a large number of pilots that we hope can be converted to paying customers later in the year.”

Stronger Warning for the Future

Annual reports from most companies traditionally include a statement cautioning that the ongoing business of the company is predicated on certain market conditions, competitive arenas and regulatory environments.

In recent years, Scientific Learning’s annual report has described a U.S. K-12 funding environment that is stable at the federal level and positive for most states.

The 2019 report details two initial impacts of the COVID-19 outbreak. The company’s international customers, initially affected in December 2019, have seen their business decline and have delayed payments to Scientific Learning. While U.S. schools grapple with providing distance learning for their students, Scientific Learning has seen slower collections and fewer conversations about new purchases.

“The full impact of the K-12 closures is difficult to estimate,” Thomas said. “The line of credit with our bank does not have specific term, and the bank has the right to cancel the line at any time and require balance of the payment outstanding.”

In April, the bank conducted a review, as it does each year in the second quarter, and renewed Scientific Learning’s current line of credit. In February, the company completed additional financing with its current sub debt holders for $1 million, with the proceeds to be used as additional working capital.

 

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