Summary Of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Summary Of Significant Accounting Policies

Summary Of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Description of Business

Scientific Learning Corporation, together with its subsidiaries (collectively, the "Company") develops, distributes and licenses technology that accelerates learning by applying proven research on how the brain learns.

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.

Use of Estimates

The preparation of 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 financial statements could be affected.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Shanghai Zhiyong Information Technology Co., Ltd. and Scientific Learning Puerto Rico, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Interim Financial Information

The interim consolidated financial information as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 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, 2010 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, 2011 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2011, or for any other period.

These condensed consolidated financial statements and notes should be read in conjunction with the Company's audited 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, 2010, filed with the Securities and Exchange Commission.

Software and Web Site Development Costs

Software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. In the three and six months ended June 30, 2011 and 2010, the Company did not capitalize any software development costs. The Company amortizes these costs to cost of product revenues over the estimated useful life of the software, which is three years. The Company recorded amortization expense of $24,000 and $49,000 in the three and six months ended June 30, 2011, respectively. The Company recorded amortization expense of $82,000 and $164,000 in the three and six months ended June 30, 2010, respectively.

The Company also capitalizes web site application, infrastructure development and content development costs where a website or software is developed for its internal needs and the Company does not plan to market the software externally. The Company capitalized approximately $0.4 million and $0.7 million of software and website development costs in the three and six months ended June 30, 2011, respectively. The Company capitalized approximately $0.1 million and $0.2 million of software and website development costs in the three and six months ended June 30, 2010, respectively. The Company recorded amortization expense of $0.1 million and $0.2 million in the three and six months ended June 30, 2011, respectively. The Company recorded amortization expense of $20,000 and $23,000 in the three and six months ended June 30, 2010, respectively.

Net Income (Loss) Per Share

The Company uses the treasury stock method to reflect the potential dilutive effect of common stock equivalents, including options and restricted stock units. Basic net income (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 to the weighted-average number of common shares outstanding during the period, if dilutive.  The anti-dilutive securities totaled 1.2 million and 1.9 million for the three and six months ended June 30, 2011, respectively. The anti-dilutive securities totaled 2.0 million for the three and six months ended June 30, 2010.

The following table sets forth the computation of net income (loss) per share (in thousands, except per share data):

	Three Months ended June 30,					Six Months ended June 30,
	2011		2010			2011			2010
Net income (loss)	$	884	$	(781	)	$	(1,479	)	$	(2,679	)
Basic weighted average shares outstanding		18,812		18,453			18,770			18,397
Effect of dilutive securities:
Employee stock options and awards		673		—			—			—
Diluted weighted average shares outstanding		19,485		18,453			18,770			18,397
Earnings per share:
Basic earnings per share	$	0.05	$	(0.04	)	$	(0.08	)	$	(0.15	)
Diluted earnings per share	$	0.05	$	(0.04	)	$	(0.08	)	$	(0.15	)

Recent Accounting Pronouncements

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs – In May 2011, the Financial Accounting Standards Board ("FASB") issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The guidance is effective for interim and annual financial periods beginning after December 15, 2011. The Company plans to adopt the guidance on January 1, 2012, and adoption is not expected to have an impact on the Company's condensed consolidated statement of financial condition, operations and cash flows.

Presentation of Comprehensive Income – In May 2011, the FASB issued guidance to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company plans to adopt the guidance on January 1, 2012, and adoption is not expected to have an impact on the Company's condensed consolidated statement of financial condition, operations and cash flows.