Rosetta Stone 2012 Annual Report Download - page 20

Table of Contents


We are currently involved in efforts to stabilize losses in our international business and aim to ultimately expand our operations internationally,
grow our institutional business, and move our business more online, which has strained our managerial, operational, financial and other resources.
We anticipate that continued expansion of our operations will be required to satisfy consumer and institutional demand and to avail ourselves of
new market opportunities. The expanding scope of our business will continue to place a significant strain on our management team, information
technology systems and other resources. To properly manage our growth, we need to hire and retain personnel, upgrade our existing operational,
management and financial and reporting systems, including warehouse management and inventory control, improve our business processes and controls
and identify and develop relationships with additional retailers and distributors. We may also be required to expand our distribution facilities and our
operational facilities or add new facilities, which could require significant capital expenditures. Failure to effectively manage our expansion and move
our business more online in a cost-effective manner could result in difficulty in filling purchase orders, declines in product and service quality and
customer satisfaction, increased costs or disruption of our operations.
Our growth also makes it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary
overhead expenditures to accommodate our future growth, we may not be successful in executing our growth strategy.

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Historically, we have predominantly sold our packaged software programs for a single upfront fee and recorded 65-90% of the revenue at the time
of sale. We are delivering more of our solutions online pursuant to different duration subscription fees. Selling in this manner will result in substantially
less cash and revenue from the initial sale to the customer and could have a substantially negative impact on our revenue, results of operations and cash
flow in the short term.


Our ability to attract customers to online offerings will depend in part on our ability to consistently provide our customers with a valuable and
quality experience for learning languages. If consumers do not perceive our service offering to be of value, or if we introduce new or adjust existing
features or change the mix of content in a manner that is not favorably received by them, we may not be able to attract and retain customers. Customers
may cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently, the need to cut
household expenses, competitive services providing a better value or experience, or customer service issues not being satisfactorily resolved. If too
many of our customers cancel our service, or if we are unable to attract new customers in numbers sufficient to grow our business, our operating results
will be adversely affected. If too many customers cancel our service, we may be required to incur significantly higher marketing and advertising
expenditures than we currently anticipate to replace these customers. We expect to derive an increasing portion of our revenues in the future from
subscriptions to our cloud-based offerings. This subscription model prices and delivers our products in a way that differs from the historical pricing and
delivery methods of our language learning solutions. These changes reflect a shift from perpetual license sales and distribution of our software in favor
of providing our customers the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription
period. This cloud strategy requires continued investment in product development
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