rst-10q_20190930.htm

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

Commission file number: 1-34283

 

Rosetta Stone Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State of incorporation)

 

043837082

(I.R.S. Employer

Identification No.)

 

 

 

1621 North Kent Street, Suite 1200

Arlington, Virginia

(Address of principal executive offices)

 

22209

(Zip Code)

703-387-5800

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address, if changed since last report)

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    No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No 

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

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company 

 

Emerging growth company

 

 

 

 

 (Do not check if a smaller reporting company)

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.00005 per share

RST

New York Stock Exchange

 

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

As of October 31, 2019, there were 24,059,722 shares of the registrant’s Common Stock, $.00005 par value, outstanding.

 

 

 


 

ROSETTA STONE INC.

 

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1

Financial Statements (unaudited)

3

Item 2

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

32

Item 3

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4

Controls and Procedures

43

PART II. OTHER INFORMATION

 

Item 1

Legal Proceedings

44

Item 1A

Risk Factors

44

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3

Defaults Upon Senior Securities

58

Item 4

Mine Safety Disclosures

58

Item 5

Other Information

58

Item 6

Exhibits

59

Signatures

 

60

 

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

ROSETTA STONE INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

 

As of

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,205

 

 

$

38,092

 

Restricted cash

 

 

45

 

 

 

82

 

Accounts receivable (net of allowance for doubtful accounts of $508 and $372 at September 30, 2019 and December 31, 2018, respectively)

 

 

33,093

 

 

 

21,950

 

Inventory

 

 

1,523

 

 

 

933

 

Deferred sales commissions

 

 

11,872

 

 

 

11,597

 

Prepaid expenses and other current assets

 

 

4,922

 

 

 

4,041

 

Total current assets

 

 

87,660

 

 

 

76,695

 

Deferred sales commissions

 

 

7,788

 

 

 

6,933

 

Property and equipment, net

 

 

40,206

 

 

 

36,405

 

Operating lease right-of-use assets

 

 

6,078

 

 

 

 

Intangible assets, net

 

 

14,699

 

 

 

15,850

 

Goodwill

 

 

48,678

 

 

 

49,239

 

Other assets

 

 

1,786

 

 

 

2,136

 

Total assets

 

$

206,895

 

 

$

187,258

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,757

 

 

$

8,938

 

Accrued compensation

 

 

8,902

 

 

 

9,046

 

Income tax payable

 

 

192

 

 

 

328

 

Operating lease liabilities

 

 

1,701

 

 

 

 

Other current liabilities

 

 

11,436

 

 

 

13,925

 

Deferred revenue

 

 

123,103

 

 

 

113,378

 

Total current liabilities

 

 

154,091

 

 

 

145,615

 

Deferred revenue

 

 

55,729

 

 

 

49,507

 

Deferred income taxes

 

 

2,331

 

 

 

2,776

 

Operating lease liabilities

 

 

4,301

 

 

 

 

Other long-term liabilities

 

 

1,022

 

 

 

1,368

 

Total liabilities

 

 

217,474

 

 

 

199,266

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)

 

 

 

 

 

 

Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 25,060 and 24,426 shares issued, and 24,060 and 23,426 shares outstanding, at September 30, 2019 and December 31, 2018, respectively)

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

210,475

 

 

 

202,355

 

Treasury stock, at cost; 1,000 and 1,000 shares at September 30, 2019 and December 31, 2018, respectively)

 

 

(11,435

)

 

 

(11,435

)

Accumulated loss

 

 

(205,860

)

 

 

(199,592

)

Accumulated other comprehensive loss

 

 

(3,761

)

 

 

(3,338

)

Total stockholders' deficit

 

 

(10,579

)

 

 

(12,008

)

Total liabilities and stockholders' deficit

 

$

206,895

 

 

$

187,258

 

 

See accompanying notes to consolidated financial statements

3


Table of Contents

 

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

45,456

 

 

$

42,750

 

 

$

136,009

 

 

$

129,060

 

Cost of revenue

 

 

9,416

 

 

 

8,768

 

 

 

26,703

 

 

 

26,132

 

Gross profit

 

 

36,040

 

 

 

33,982

 

 

 

109,306

 

 

 

102,928

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

24,700

 

 

 

24,948

 

 

 

73,738

 

 

 

74,013

 

Research and development

 

 

5,517

 

 

 

6,465

 

 

 

17,031

 

 

 

18,790

 

General and administrative

 

 

8,687

 

 

 

8,510

 

 

 

25,945

 

 

 

25,366

 

Total operating expenses

 

 

38,904

 

 

 

39,923

 

 

 

116,714

 

 

 

118,169

 

Loss from operations

 

 

(2,864

)

 

 

(5,941

)

 

 

(7,408

)

 

 

(15,241

)

Other income and (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

6

 

 

 

23

 

 

 

48

 

 

 

71

 

Interest expense

 

 

(119

)

 

 

(82

)

 

 

(278

)

 

 

(246

)

Other income and (expense)

 

 

(33

)

 

 

99

 

 

 

1,282

 

 

 

(130

)

Total other income and (expense)

 

 

(146

)

 

 

40

 

 

 

1,052

 

 

 

(305

)

Loss before income taxes

 

 

(3,010

)

 

 

(5,901

)

 

 

(6,356

)

 

 

(15,546

)

Income tax (benefit) expense

 

 

(93

)

 

 

588

 

 

 

(88

)

 

 

1,503

 

Net loss

 

$

(2,917

)

 

$

(6,489

)

 

$

(6,268

)

 

$

(17,049

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.28

)

 

$

(0.27

)

 

$

(0.75

)

Diluted

 

$

(0.12

)

 

$

(0.28

)

 

$

(0.27

)

 

$

(0.75

)

Common shares and equivalents outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

 

23,609

 

 

 

22,814

 

 

 

23,369

 

 

 

22,647

 

Diluted weighted average shares

 

 

23,609

 

 

 

22,814

 

 

 

23,369

 

 

 

22,647

 

 

See accompanying notes to consolidated financial statements

4


Table of Contents

 

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(2,917

)

 

$

(6,489

)

 

$

(6,268

)

 

$

(17,049

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(371

)

 

 

(144

)

 

 

(423

)

 

 

(225

)

Other comprehensive loss

 

 

(371

)

 

 

(144

)

 

 

(423

)

 

 

(225

)

Comprehensive loss

 

$

(3,288

)

 

$

(6,633

)

 

$

(6,691

)

 

$

(17,274

)

 

See accompanying notes to consolidated financial statements

5


Table of Contents

 

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,268

)

 

$

(17,049

)

Non-cash adjustments to reconcile net loss to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

3,988

 

 

 

3,388

 

Loss (gain) on foreign currency transactions

 

 

201

 

 

 

26

 

Bad debt expense

 

 

288

 

 

 

110

 

Depreciation and amortization

 

 

10,924

 

 

 

10,891

 

Operating lease costs

 

 

1,604

 

 

 

 

Deferred income tax (benefit) expense

 

 

(710

)

 

 

437

 

(Gain) loss on disposal or sale of assets

 

 

(1,389

)

 

 

12

 

Amortization of deferred financing costs

 

 

51

 

 

 

102

 

Net change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(11,552

)

 

 

(8,314

)

Inventory

 

 

(589

)

 

 

1,856

 

Deferred sales commissions

 

 

(1,138

)

 

 

(1,193

)

Prepaid expenses and other current assets

 

 

(1,039

)

 

 

875

 

Income tax receivable or payable

 

 

(139

)

 

 

(397

)

Other assets

 

 

242

 

 

 

(407

)

Accounts payable

 

 

(162

)

 

 

(36

)

Accrued compensation

 

 

456

 

 

 

(979

)

Other current liabilities

 

 

(1,898

)

 

 

(3,969

)

Operating lease liabilities

 

 

(1,575

)

 

 

 

Other long-term liabilities

 

 

(31

)

 

 

 

Deferred revenue

 

 

16,394

 

 

 

14,384

 

Net cash provided by (used in) operating activities

 

 

7,658

 

 

 

(263

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13,720

)

 

 

(11,700

)

Proceeds from sale of assets

 

 

1,396

 

 

 

17

 

Net cash used in investing activities

 

 

(12,324

)

 

 

(11,683

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

3,556

 

 

 

1,547

 

Proceeds from borrowings under credit facility

 

 

10,500

 

 

 

 

Repayments of borrowings under credit facility

 

 

(10,500

)

 

 

 

Payment of deferred financing costs

 

 

(47

)

 

 

(4

)

Payments under financing lease liabilities

 

 

(331

)

 

 

(336

)

Net cash provided by financing activities

 

 

3,178

 

 

 

1,207

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(1,488

)

 

 

(10,739

)

Effect of exchange rate changes in cash, cash equivalents, and restricted cash

 

 

(436

)

 

 

(400

)

Net decrease in cash, cash equivalents, and restricted cash

 

 

(1,924

)

 

 

(11,139

)

Cash, cash equivalents, and restricted cash—beginning of period

 

 

38,174

 

 

 

43,036

 

Cash, cash equivalents, and restricted cash—end of period

 

$

36,250

 

 

$

31,897

 

SUPPLEMENTAL CASH FLOW DISCLOSURE:

 

 

 

 

 

 

 

 

Cash paid during the periods for:

 

 

 

 

 

 

 

 

Interest

 

$

227

 

 

$

144

 

Income taxes, net of refund

 

$

465

 

 

$

1,342

 

Noncash operating, investing and financing activities:

 

 

 

 

 

 

 

 

Accrued liability for purchase of property and equipment

 

$

1,135

 

 

$

1,793

 

 

See accompanying notes to consolidated financial statements

6


Table of Contents

 

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Non-Designated

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Loss

 

 

Loss

 

 

Deficit

 

Balance—January 1, 2019

 

 

22,912

 

 

$

2

 

 

$

202,355

 

 

$

(11,435

)

 

$

(199,592

)

 

$

(3,338

)

 

$

(12,008

)

Stock issued upon the exercise of stock options

 

 

67

 

 

 

 

 

 

744

 

 

 

 

 

 

 

 

 

 

 

 

744

 

Restricted stock award and performance stock unit vesting

 

 

270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrestricted common stock issued in lieu of cash bonus

 

 

37

 

 

 

 

 

 

576

 

 

 

 

 

 

 

 

 

 

 

 

576

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,220

 

 

 

 

 

 

 

 

 

 

 

 

1,220

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(544

)

 

 

 

 

 

(544

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

213

 

 

 

213

 

Balance—March 31, 2019

 

 

23,286

 

 

$

2

 

 

$

204,895

 

 

$

(11,435

)

 

$

(200,136

)

 

$

(3,125

)

 

$

(9,799

)

Stock issued upon the exercise of stock options

 

 

206

 

 

 

 

 

 

2,145

 

 

 

 

 

 

 

 

 

 

 

 

2,145

 

Restricted stock award and performance stock unit vesting

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,356

 

 

 

 

 

 

 

 

 

 

 

 

1,356

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,807

)

 

 

 

 

 

(2,807

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(265

)

 

 

(265

)

Balance—June 30, 2019

 

 

23,562

 

 

$

2

 

 

$

208,396

 

 

$

(11,435

)

 

$

(202,943

)

 

$

(3,390

)

 

$

(9,370

)

Stock issued upon the exercise of stock options

 

 

76

 

 

 

 

 

 

667

 

 

 

 

 

 

 

 

 

 

 

 

667

 

Restricted stock award and performance stock unit vesting

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,412

 

 

 

 

 

 

 

 

 

 

 

 

1,412

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,917

)

 

 

 

 

 

(2,917

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(371

)

 

 

(371

)

Balance—September 30, 2019

 

 

23,659

 

 

$

2

 

 

$

210,475

 

 

$

(11,435

)

 

$

(205,860

)

 

$

(3,761

)

 

$

(10,579

)

 

 

See accompanying notes to consolidated financial statements

7


Table of Contents

 

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(unaudited) (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Non-Designated

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Loss

 

 

Loss

 

 

Equity / (Deficit)

 

Balance—January 1, 2018

 

 

22,316

 

 

$

2

 

 

$

195,644

 

 

$

(11,435

)

 

$

(178,890

)

 

$

(2,898

)

 

$

2,423

 

Stock issued upon the exercise of stock options

 

 

54

 

 

 

 

 

 

467

 

 

 

 

 

 

 

 

 

 

 

 

467

 

Restricted stock award and performance stock unit vesting

 

 

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

583

 

 

 

 

 

 

 

 

 

 

 

 

583

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,402

)

 

 

 

 

 

(6,402

)

Cumulative effect adjustment - adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

771

 

 

 

 

 

 

771

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

529

 

 

 

529

 

Balance—March 31, 2018

 

 

22,537

 

 

$

2

 

 

$

196,694

 

 

$

(11,435

)

 

$

(184,521

)

 

$

(2,369

)

 

$

(1,629

)

Stock issued upon the exercise of stock options

 

 

85

 

 

 

 

 

 

850

 

 

 

 

 

 

 

 

 

 

 

 

850

 

Restricted stock award and performance stock unit vesting

 

 

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,352

 

 

 

 

 

 

 

 

 

 

 

 

1,352

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,158

)

 

 

 

 

 

(4,158

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(610

)

 

 

(610

)

Balance—June 30, 2018