Rosetta Stone 2015 Annual Report Download - page 82

Table of Contents
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liabilities (primarily developed technology and deferred revenue) in Step 2 of the interim goodwill impairment test, resulted in an implied fair value of
goodwill below its carrying value. As a result, the Company recorded an impairment loss of $5.6 million associated with the interim impairment assessment
of the Consumer Fit Brains reporting unit as of December 31, 2015.
During the fourth quarter of 2015, the Company determined that sufficient indication existed to require performance of an interim goodwill impairment
analysis for the Enterprise & Education Language reporting unit. This indicator was due to declines in the operations of the Enterprise & Education
Language reporting unit, with decreases in revenue and bookings within this reporting unit driving lower than expected operating results for the quarter and
impacting the forecast going forward. As a result of the operating results in the fourth quarter of 2015, the Company has further refined its strategy of focusing
on the Enterprise & Education segment and, as discussed in Note 21, in March 2016, the Company announced a plan to exit the direct distribution of
Enterprise & Education language offerings in a number of non-US markets and right-size the overall business. In particular, the Company initiated a process
to exit direct presence and close offices in China, Brazil and France. This plan is expected to result in significantly lower projected revenues, bookings, and
short-term profitability of the Enterprise & Education Language reporting unit. As a result, the Company determined that sufficient indication existed to
require the performance of an interim goodwill impairment analysis for this reporting unit. While this analysis did indicate that the fair value of the Enterprise
& Education Language reporting unit declined, the fair value is still greater than the carrying value of this reporting unit. Since the Enterprise & Education
Language reporting unit passed the Step 1 test, no further analysis or testing under Step 2 was necessary and no impairment charges were recorded in
connection with this interim impairment assessment of this reporting unit.
The Company also routinely reviews goodwill at the reporting unit level for potential impairment as part of the Company’s internal control framework.
In the fourth quarter of 2015, the Company evaluated any reporting unit with remaining goodwill that was not tested for impairment to determine if a
triggering event has occurred. As of December 31, 2015, the Company concluded that there were no indicators of impairment that would cause it to believe
that it is more likely than not that the fair value of these reporting units is less than the carrying value. Accordingly, a detailed impairment test has not been
performed and no impairment charges were recorded in connection with the interim impairment reviews of any such reporting units.
2014 Activity
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During the first quarter of 2014, the Company determined sufficient indication existed to require performance of an interim goodwill impairment
analysis as of March 31, 2014 for the then extant Rest of World Consumer reporting unit (“ROW Consumer”). This indicator was due to unexpected declines
in the operations of the ROW Consumer reporting unit, with further decreases in revenue and bookings within the reporting unit driving lower than expected
operating results and impacting the forecast going forward. In this interim goodwill impairment test, the ROW Consumer reporting unit failed Step 1 of the
goodwill impairment test. The combination of the lower reporting unit fair value calculated in Step 1 and the identification of unrecognized fair value
changes to the carrying values of other assets and liabilities (primarily tradename and deferred revenue) in Step 2 of the interim goodwill impairment test,
resulted in an implied fair value of goodwill below the carrying value of goodwill for ROW Consumer. As a result, the Company recorded a goodwill
impairment loss of $2.2 million, which represents a full impairment of ROW Consumer’s goodwill.
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In the fourth quarter of 2014, the then extant North America Consumer Language reporting unit experienced a decline in the demand for its products
and services at its current pricing levels. In an attempt to increase demand, the Company lowered prices in its direct-to-consumer and retail sales channels.
This strategy increased the number of units sold, however, revenue recognized decreased significantly due to the lower prices in 2014. Additionally, these
results were significantly lower than the forecasted bookings, meaning that while the Company was able to increase the number of units sold, the per unit
price was lower than expected. As a result of the reduced demand and the need to offer lower prices in the fourth quarter of 2014 to generate sales, the
Company began to evaluate whether the decline in demand at prior price levels has resulted in the need for a permanent price decline. As a result of the above
events, the Company considered it appropriate to perform an interim goodwill impairment test for the North America Consumer Language reporting unit. The
combination of the lower reporting unit fair value of the North America Consumer Language reporting unit, and the identification of unrecognized fair value
changes to the carrying values of other assets and liabilities (primarily tradename, developed technology and deferred revenue) in Step 2 of the interim
goodwill impairment test, resulted in a negative implied fair value of goodwill for the North America Consumer
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