Rosetta Stone 2014 Annual Report Download - page 17

Table of Contents
services for only a short time after purchase, online subscription customers could be less likely to continue their subscriptions past the initial term with the
effect that we could earn less revenue over time from each customer than historically.
Our revenue is subject to seasonal and quarterly variations, which could cause our financial results to fluctuate significantly.
We have experienced, and we believe we will continue to experience, substantial seasonal and quarterly variations in our revenue, cash flows and net
income. These variations are primarily related to increased sales of our products and services to consumers in the fourth quarter during the holiday selling
season as well as higher sales to governmental and educational institutions in the second and third quarters. We sell to a significant number of our retailers,
distributors and enterprise and education customers on a purchase 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 enterprise and education 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. 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.
Acquisitions, joint ventures and strategic alliances may have an adverse effect on our business.
We have made and may continue to make acquisitions or enter into joint ventures and strategic alliances as part of our long-term business strategy.
Such transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we do not realize a
satisfactory return on our investment, that we experience difficulty integrating new technology, employees, and business systems, diversion of management's
attention from our other businesses or that we acquire undiscovered liabilities such as patent infringement claims or violations of the U.S. Foreign Corrupt
Practices Act and similar worldwide anti-bribery laws. It may take longer than expected to realize the full benefits, such as increased revenue, enhanced
efficiencies, or more customers, or those benefits may ultimately be smaller than anticipated, or may not be realized. These events and circumstances could
harm our operating results or financial condition.
The anticipated benefits of recent acquisitions could be impacted by a number of risks specific to our business, as well as by risks related to the integration
process.
The Company made four acquisitions from 2013 until early 2014. The significant risks and challenges that may limit our ability to achieve the
anticipated benefits of acquisitions include:
• lack of employee retention stemming from the acquisitions;
• sales of the acquired products and services might not perform as we anticipated;
• the risk of increased attrition of the acquired entities’ customers;
• the risk that cross-selling Rosetta Stone products and services to customers of the acquired entities (and vice versa) might not be successful;
• the pipeline of the acquired entities’ future products under development may take longer than predicted to launch or might fail to launch at all;
• the difficulty of integrating the acquired entities’ technology into our current and future products and services; and
• the difficulty in managing a more complex technology environment which may reduce opportunities for economies of scale that otherwise could
result from an acquisition.
If we are unsuccessful in addressing these risks and challenges, our business and prospects could be harmed.
We may incur significant costs related to data security breaches that could compromise our information technology network security, trade secrets and
customer data.
Threats to our information technology network security can take a variety of forms. Individual hackers and groups of hackers, and sophisticated
organizations or individuals may threaten our information technology network security. Cyber attackers may develop and deploy malicious software to
attack our services and gain access to our networks, data centers, or act in a coordinated manner to launch distributed denial of service or other coordinated
attacks. Cyber threats and attacks are constantly evolving, thereby increasing the difficulty of detecting and successfully defending against them. Cyber
threats and attacks can have cascading impacts that unfold with increasing speed across internal networks and systems. Breaches of our network or data
security could disrupt the security of our internal systems and business applications, impair our ability to provide services to our customers and protect the
privacy of their data, resulting in product development delays, could compromise confidential or technical business information harming our competitive
position, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improved technologies, or otherwise
adversely affect our business.
Our possession and use of personal information presents risks and expenses that could harm our business. Unauthorized disclosure or manipulation of
such data, whether through breach of our network security or otherwise, could expose us to costly litigation and damage our reputation.