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TheStreet Open House

Rosetta Stone Inc. Reports Second Quarter 2012 Results

“Rosetta Stone” is a registered trademark or trademark of Rosetta Stone Ltd. in the United States and other countries.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements, including our guidance for future financial performance and operating targets, and our long-term growth prospects. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “project,” “believe,” “plan,” “expect,” “anticipate,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “seek,” “may,” “likely,” “will,” “financial outlook,” “strategy,” or “continue.” These forward-looking statements reflect the company's current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including demand for language learning software; the advantages of our products, services, technology, brand and business model as compared to others; our strategic focus; our ability to maintain effective internal controls or to remediate material weaknesses; our cash needs and expectations regarding cash flow from operations; our product development plans; the appeal and efficacy of our products; our expectations regarding capturing lifetime value and a broader range of market segments through such offerings; our plans regarding expansion of our marketing initiatives and sales force; our international expansion and growth plans; our plans regarding our kiosks and retail relationships; our plans regarding our Institutional business; the impact of any revisions to our pricing strategy; our ability to manage and grow our business and execute our business strategy; our financial performance; our actions to stabilize our business in the U.S. consumer market including realigning our cost structure and revitalizing our go-to-market strategy; our plans to transition our distribution to more online in the consumer space; adverse trends in general economic conditions and the other factors described more fully in the company's filings with the U.S. Securities and Exchange Commission (SEC), including the company’s annual report on Form 10-K for the fiscal year ended December 31, 2011, which is on file with the SEC. The company assumes no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.

ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
       
 
 
Three Months Ended Six Months Ended
June 30, June 30,
  2012     2011     2012     2011  
Revenue:
Product $ 37,543 $ 48,055 $ 85,073 $ 90,358
Subscription and service   23,269     18,688     45,188     33,362  
Total revenue 60,812 66,743 130,261 123,720
 
Cost of revenue:
Cost of product revenue 7,122 8,773 16,229 17,568
Cost of subscription and service revenue   4,198     2,747     8,565     5,414  
Total cost of revenue 11,320 11,520 24,794 22,982
       
Gross profit   49,492     55,223     105,467     100,738  
 
Operating expenses
Sales and marketing 35,125 40,535 73,529 78,354
Research and development 6,493 6,354 12,766 12,838
General and administrative   12,919     13,809     26,576     28,617  
Total operating expenses   54,537     60,698     112,871     119,809  
 
Loss from operations (5,045 ) (5,475 ) (7,404 ) (19,071 )
 
Other income and (expense):
Interest income 21 83 99 162
Interest expense - (2 ) - (4 )
Other income (expense)   320     47     (44 )   49  
Total other income (expense) 341 128 55 207
 
Loss before income taxes (4,704 ) (5,347 ) (7,349 ) (18,864 )
Income tax benefit   (160 )   (797 )   (902 )   (5,033 )
 
Net loss $ (4,544 ) $ (4,550 ) $ (6,447 ) $ (13,831 )
 
Net loss per share:
Basic $ (0.22 ) $ (0.22 ) $ (0.31 ) $ (0.67 )
Diluted $ (0.22 ) $ (0.22 ) $ (0.31 ) $ (0.67 )
 
Common shares and equivalents outstanding:
Basic weighted average shares   20,995     20,716     20,969     20,695  
Diluted weighted average shares   20,995     20,716     20,969     20,695  
 
ROSETTA STONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
  June 30,   December 31,
2012 2011
 
 
Assets
Current assets:
Cash and cash equivalents $ 118,774 $ 106,516
Restricted cash 46 74
Short term investments 1,600 9,711

Accounts receivable (net of allowance for doubtful accounts of $1,043 and $1,951, respectively)

35,088 51,997
Inventory 6,238 6,723
Prepaid expenses and other current assets 6,425 7,081
Income tax receivable 10,151 7,678
Deferred income taxes   12,169   10,985
Total current assets 190,491 200,765
 
Property and equipment, net 17,936 20,869
Goodwill 34,849 34,841
Intangible assets, net 10,845 10,865
Deferred income taxes 7,913 8,038
Other assets   2,840   1,803
Total assets $ 264,874 $ 277,181
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,434 $ 7,291
Accrued compensation 13,467 11,703
Other current liabilities 26,971 34,911
Deferred revenue   46,012   49,375
Total current liabilities 90,884 103,280
 
Deferred revenue 3,931 2,520
Other long-term liabilities   1,826   176
Total liabilities 96,641 105,976
 
Commitments and contingencies
 
Stockholders' equity:

Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares issued and outstanding June 30, 2012 and December 31, 2011

- -

Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 21,776 and 21,258 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

2 2
Additional paid-in capital 155,305 151,823
Accumulated income 12,635 19,082
Accumulated other comprehensive income   291   298
Total stockholders' equity   168,233   171,205
Total liabilities and stockholders' equity $ 264,874 $ 277,181
 
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
       
Three Months Ended Six Months Ended
June 30, June 30,
  2012     2011     2012     2011  
 
Cash Flows From Operating Activities:
Net loss (4,544 ) (4,550 ) (6,447 ) (13,831 )

Adjustments to reconcile net loss to cash provided by (used in) operating activities,

net of business acquisitions
Stock-based compensation expense 2,096 1,704 3,731 3,141
Bad debt expense 431 92 596 308
Depreciation and amortization 2,046 2,141 4,482 4,255
Deferred income tax benefit 158 5,941 (1,156 ) 2,964
Loss on sales of equipment 348 1 380 16
Net change in:
Restricted cash 5 (5 ) 28 23
Accounts receivable (1,261 ) (10,332 ) 16,314 7,987
Inventory 1,189 652 480 240
Prepaid expenses and other current assets 146 485 649 551
Income tax receivable (1,504 ) (6,237 ) (2,740 ) (8,241 )
Other assets 144 (1,253 ) (1,065 ) (1,316 )
Accounts payable (2,281 ) 3,770 (2,868 ) 2,757
Accrued compensation 3,850 3,264 1,774 397
Other current liabilities 207 1,476 (7,813 ) 357
Excess tax benefit from stock options exercised (18 ) (13 ) (18 ) (31 )
Other long-term liabilities 9 (6 ) 1,596 (12 )
Deferred revenue   2,391     (69 )   (1,855 )   (1,572 )
Net cash provided by (used in) operating activities   3,412     (2,939 )   6,068     (2,007 )
 
Cash Flows From Investing Activities:
Purchases of property and equipment (1,031 ) (2,814 ) (1,998 ) (5,465 )
Proceeds from (purchases of) available-for-sale securities 4,805 (99 ) 8,112 (1,906 )
Acquisition, net of cash acquired   -     -     -     (75 )
Net cash provided by (used in) investing activities   3,774     (2,913 )   6,114     (7,446 )
 
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options - 40 - 80
Tax benefit of stock options exercised 18 13 18 31
Payments under capital lease obligations   (1 )   (2 )   (3 )   (5 )
Net cash provided by financing activities   17     51     15     106  
 
Increase (decrease) in cash and cash equivalents 7,203 (5,801 ) 12,197 (9,347 )
 
Effect of exchange rate changes in cash and cash equivalents   (502 )   76     61     405  
 
Net increase (decrease) in cash and cash equivalents 6,701 (5,725 ) 12,258 (8,942 )
 
Cash and cash equivalents—beginning of period   112,073     112,539     106,516     115,756  
 
Cash and cash equivalents—end of period $ 118,774   $ 106,814   $ 118,774   $ 106,814  
 
ROSETTA STONE INC.
Reconciliation of Net Loss to Adjusted EBITDA
(in thousands)
(unaudited)
       
 
Three Months Ended Six Months Ended
June 30, June 30,
  2012     2011     2012     2011  
 
Net loss $ (4,544 ) $ (4,550 ) $ (6,447 ) $ (13,831 )
Interest (income)/expense, net (21 ) (81 ) (99 ) (158 )
Income tax benefit (160 ) (797 ) (902 ) (5,033 )
Depreciation and amortization 2,046 2,141 4,482 4,255
Stock-based compensation 2,096 1,704 3,731 3,141
Other EBITDA Adjustments   1,706     254     2,093     254  
 
Adjusted EBITDA* $ 1,123   $ (1,329 ) $ 2,858   $ (11,372 )
 

*Adjusted EBITDA equals GAAP net income or loss plus interest expense, income tax expense, depreciation, amortization, stock-based compensation expenses, restructuring costs and any expenses related to the previously disclosed lawsuit against Google, Inc.

Prior period Adjusted EBITDA has been conformed to current definition.

 
ROSETTA STONE INC.
Reconciliation of Previously Reported Adjusted EBITDA to Current Presentation
(in thousands)
(unaudited)
           
 
Quarter Ended Quarter Ended
 
  3/31/2011     6/30/2011     9/30/2011     12/31/2011     2011     3/31/2012  
 
Net loss $ (9,281 ) $ (4,550 ) $ (1,177 ) $ (4,979 ) $ (19,987 ) $ (1,903 )
Interest (income)/expense, net (77 ) (81 ) (61 ) (78 ) (297 ) (78 )
Income tax (benefit) expense (4,236 ) (797 ) (4,762 ) 1,814 (7,981 ) (742 )
Depreciation and amortization 2,114 2,141 2,184 2,285 8,724 2,436
Stock-based compensation   1,437     1,704     1,836     7,376     12,353     1,635  
 
Previously Reported Adjusted EBITDA $ (10,043 ) $ (1,583 ) $ (1,980 ) $ 6,418 $ (7,188 ) $ 1,348
Other EBITDA Adjustments   -     254     189     655     1,098     387  
 
Revised Adjusted EBITDA* $ (10,043 ) $ (1,329 ) $ (1,791 ) $ 7,073   $ (6,090 ) $ 1,735  
 

*Adjusted EBITDA equals GAAP net income or loss plus interest expense, income tax expense, depreciation, amortization, stock-based compensation expenses, restructuring costs and any expenses related to the previously disclosed lawsuit against Google, Inc.

Prior period Adjusted EBITDA has been conformed to current definition.

 
ROSETTA STONE INC.
Reconciliation of Net Loss to Non-GAAP Net Loss
(in thousands, except per share amounts)
(unaudited)
       
 
Three Months Ended Six Months Ended
June 30, June 30,
  2012     2011     2012     2011  
 
Net loss $ (4,544 ) $ (4,550 ) $ (6,447 ) $ (13,831 )
Stock-based compensation, net of tax (1) 1,310 1,065 2,332 1,963
Amortization of intangibles, net of tax (1)   6     15     13     29  
Non-GAAP net loss $ (3,228 ) $ (3,470 ) $ (4,102 ) $ (11,839 )
 
Non-GAAP net loss per share:
Basic $ (0.15 ) $ (0.17 ) $ (0.20 ) $ (0.57 )
Diluted $ (0.15 ) $ (0.17 ) $ (0.20 ) $ (0.57 )
 
Common shares and equivalents outstanding:
Basic weighted average shares   20,995     20,716     20,969     20,695  
Diluted weighted average shares   20,995     20,716     20,969     20,695  
 
(1) Non-GAAP tax rate of 37.5%




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