Rosetta Stone 2009 Annual Report Download - page 28

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Table of Contents
order basis and we receive orders when these customers need products and services. As a result, their orders are typically not evenly distributed throughout
the year. Our quarterly results of operations also may fluctuate significantly as a result of a variety of other factors, including the timing of holidays and
advertising initiatives, changes in our products, services and advertising initiatives and changes in those of our competitors. Budgetary constraints of our
institutional customers may also cause our quarterly results to fluctuate.
As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our results of operations between different quarters are not
necessarily meaningful and that these comparisons are not reliable as indicators of our future performance. In addition, these fluctuations could result in
volatility and adversely affect our cash flows. As our business grows, these seasonal fluctuations may become more pronounced. Any seasonal or quarterly
fluctuations that we report in the future may differ from the expectations of market analysts and investors. This could cause the price of our common stock to
fluctuate significantly.
Because a significant portion of our sales are made to or through retailers and distributors, none of which have any obligation to sell our products, the
failure or inability of these parties to sell our products effectively could hurt our revenue growth and profitability.
We rely on retailers and distributors, together with our direct sales force, to sell our products. Our sales to retailers are highly concentrated on a small
group, including Amazon.com, Apple, Barnes & Noble, Borders and Office Depot. We expect that our arrangements with these retailers and distributors will
continue to generate significant revenue for us. Sales to or through our retailers and distributors accounted for approximately 18% of our revenue for the year
ended December 31, 2009.
We have no control over the amount of products that these retailers purchase from us or sell on our behalf, we do not have long-term contracts with any
of them, and they have no obligation to offer or sell our products or to give us any particular shelf space or product placement within their stores. Thus, there
is no guarantee that this source of revenue will continue at the same level as it has in the past or that these retailers will not promote competitors' products
over our products or enter into exclusive relationships with competitors. Any material adverse change in the principal commercial terms, material decrease in
the volume of sales generated by our larger retailers or distributors or major disruption or termination of a relationship with these retailers and distributors
could result in a potentially significant decline in our revenue and profitability. Furthermore, product display locations and promotional activities that retailers
undertake can affect the sales of our products. The fact that we also sell our products directly could cause retailers or distributors to reduce their efforts to
promote our products or stop selling our products altogether. In addition, if one or more of such retailers or distributors were unable to meet their obligations
with respect to accounts payable to us, we could be forced to write off such accounts. In addition, any bankruptcy, liquidation, insolvency or other failure of
any of these retailers or distributors could result in significant financial loss and cause us to lose revenue in future periods.
Substantially all of our inventory is located in one warehouse facility. Any damage or disruption at this facility could cause significant financial loss,
including loss of revenue and harm to our reputation.
Substantially all of our inventory is located in one warehouse facility. We could experience significant interruption in the operation of this facility or
damage or destruction of our inventory due to natural disasters, accidents, failures of the inventory locator or automated packing and shipping systems or
other events. If a material portion of our inventory were to be damaged or destroyed, we might be unable to meet our contractual obligations which could
cause us significant financial loss, including loss of revenue and harm to our reputation.
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