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Delaware
(State of incorporation)
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043837082
(I.R.S. Employer
Identification No.)
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1621 North Kent Street, Suite 1200
Arlington, Virginia
(Address of principal executive offices)
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22209
(Zip Code)
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Large accelerated filer
o
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Accelerated filer
ý
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Non-accelerated filer
o
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Smaller reporting company
o
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Emerging growth company
o
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(Do not check if a smaller reporting company)
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Page
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PART I. FINANCIAL INFORMATION
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Item 1
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Item 2
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Item 3
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Item 4
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PART II. OTHER INFORMATION
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Item 1
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Item 1A
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Item 2
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Item 3
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Item 4
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Item 5
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Item 6
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March 31,
2018 |
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December 31,
2017 |
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Assets
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|
||||
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Current assets:
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|
|
|
|
||||
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Cash and cash equivalents
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$
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39,158
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$
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42,964
|
|
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Restricted cash
|
|
57
|
|
|
72
|
|
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Accounts receivable (net of allowance for doubtful accounts of $270 and $375, at March 31, 2018 and December 31, 2017, respectively)
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13,703
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24,517
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|
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Inventory
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2,078
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3,536
|
|
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Deferred sales commissions
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9,266
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|
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14,466
|
|
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Prepaid expenses and other current assets
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5,179
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4,543
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Total current assets
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69,441
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90,098
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|
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Deferred sales commissions
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6,856
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|
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3,306
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|
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Property and equipment, net
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32,243
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30,649
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Goodwill
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50,225
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49,857
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|
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Intangible assets, net
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18,233
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19,184
|
|
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Other assets
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1,827
|
|
|
1,661
|
|
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Total assets
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$
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178,825
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|
$
|
194,755
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Liabilities and stockholders' (deficit) equity
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Current liabilities:
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|
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Accounts payable
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$
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8,949
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$
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8,984
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Accrued compensation
|
|
12,568
|
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|
10,948
|
|
||
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Income tax payable
|
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299
|
|
|
384
|
|
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Obligations under capital lease
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472
|
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|
450
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|
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Other current liabilities
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14,062
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|
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16,454
|
|
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Deferred revenue
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96,274
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|
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110,670
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|
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Total current liabilities
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132,624
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147,890
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Deferred revenue
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43,996
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40,593
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|
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Deferred income taxes
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2,002
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1,968
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Obligations under capital lease
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1,801
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1,850
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Other long-term liabilities
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31
|
|
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31
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Total liabilities
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180,454
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192,332
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|
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Commitments and contingencies (Note 15)
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Stockholders' (deficit) equity:
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|
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Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
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|
—
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—
|
|
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Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 24,064 and 23,783 shares issued and 23,064 and 22,783 shares outstanding at March 31, 2018 and December 31, 2017, respectively
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2
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|
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2
|
|
||
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Additional paid-in capital
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196,694
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195,644
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Accumulated loss
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(184,521
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)
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(178,890
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)
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Accumulated other comprehensive loss
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(2,369
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)
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(2,898
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)
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Treasury stock, at cost, 1,000 and 1,000 shares at March 31, 2018 and December 31, 2017, respectively
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(11,435
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)
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(11,435
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)
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Total stockholders' (deficit) equity
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(1,629
|
)
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2,423
|
|
||
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Total liabilities and stockholders' (deficit) equity
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$
|
178,825
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$
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194,755
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Three Months Ended
March 31, |
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2018
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2017
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Revenue:
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|
|
|
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Subscription and service
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$
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41,498
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$
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41,450
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Product
|
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1,310
|
|
|
6,243
|
|
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Total revenue
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42,808
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|
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47,693
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|
||
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Cost of revenue:
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Cost of subscription and service revenue
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7,374
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|
|
6,534
|
|
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Cost of product revenue
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2,060
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|
|
1,607
|
|
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Total cost of revenue
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9,434
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|
8,141
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|
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Gross profit
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33,374
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|
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39,552
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|
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Operating expenses:
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Sales and marketing
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24,191
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24,168
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Research and development
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6,306
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|
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6,414
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General and administrative
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8,532
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8,025
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|
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Total operating expenses
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39,029
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38,607
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|
||
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(Loss) income from operations
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(5,655
|
)
|
|
945
|
|
||
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Other income and (expense):
|
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|
|
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Interest income
|
|
25
|
|
|
13
|
|
||
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Interest expense
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(83
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)
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(115
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)
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Other income and (expense)
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(228
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)
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311
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|
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Total other income and (expense)
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(286
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)
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209
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(Loss) income before income taxes
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(5,941
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)
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1,154
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Income tax expense
|
|
461
|
|
|
700
|
|
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Net (loss) income
|
|
$
|
(6,402
|
)
|
|
$
|
454
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(Loss) earnings per share:
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Basic
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|
$
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(0.29
|
)
|
|
$
|
0.02
|
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Diluted
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
Common shares and equivalents outstanding:
|
|
|
|
|
||||
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Basic weighted average shares
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|
22,425
|
|
|
22,125
|
|
||
|
Diluted weighted average shares
|
|
22,425
|
|
|
22,590
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|
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Three Months Ended
March 31, |
||||||
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|
|
2018
|
|
2017
|
||||
|
Net (loss) income
|
|
$
|
(6,402
|
)
|
|
$
|
454
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
||||
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Foreign currency translation gain (loss)
|
|
529
|
|
|
(43
|
)
|
||
|
Other comprehensive income (loss)
|
|
529
|
|
|
(43
|
)
|
||
|
Comprehensive (loss) income
|
|
$
|
(5,873
|
)
|
|
$
|
411
|
|
|
|
|
Three Months Ended March 31,
|
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2018
|
|
2017
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CASH FLOWS FROM OPERATING ACTIVITIES:
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|
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|
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Net (loss) income
|
|
$
|
(6,402
|
)
|
|
$
|
454
|
|
|
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
|
|
|
|
|
||||
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Stock-based compensation expense
|
|
583
|
|
|
147
|
|
||
|
Loss (gain) on foreign currency transactions
|
|
245
|
|
|
(277
|
)
|
||
|
Bad debt recovery
|
|
(75
|
)
|
|
(364
|
)
|
||
|
Depreciation and amortization
|
|
3,610
|
|
|
3,075
|
|
||
|
Deferred income tax expense
|
|
36
|
|
|
300
|
|
||
|
Gain on disposal of equipment
|
|
—
|
|
|
(1
|
)
|
||
|
Amortization of deferred financing fees
|
|
34
|
|
|
71
|
|
||
|
Loss from equity method investments
|
|
—
|
|
|
(5
|
)
|
||
|
Net change in:
|
|
|
|
|
||||
|
Accounts receivable
|
|
11,038
|
|
|
11,188
|
|
||
|
Inventory
|
|
1,467
|
|
|
361
|
|
||
|
Deferred sales commissions
|
|
1,655
|
|
|
1,588
|
|
||
|
Prepaid expenses and other current assets
|
|
(639
|
)
|
|
(807
|
)
|
||
|
Income tax receivable or payable
|
|
(91
|
)
|
|
(537
|
)
|
||
|
Other assets
|
|
(166
|
)
|
|
2
|
|
||
|
Accounts payable
|
|
(58
|
)
|
|
(1,680
|
)
|
||
|
Accrued compensation
|
|
1,597
|
|
|
1,731
|
|
||
|
Other current liabilities
|
|
(2,413
|
)
|
|
(2,989
|
)
|
||
|
Other long-term liabilities
|
|
—
|
|
|
8,762
|
|
||
|
Deferred revenue
|
|
(10,839
|
)
|
|
(15,263
|
)
|
||
|
Net cash (used in) provided by operating activities
|
|
(418
|
)
|
|
5,756
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
||||
|
Purchases of property and equipment
|
|
(3,948
|
)
|
|
(2,313
|
)
|
||
|
Proceeds from sale of fixed assets
|
|
—
|
|
|
2
|
|
||
|
Net cash used in investing activities
|
|
(3,948
|
)
|
|
(2,311
|
)
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
||||
|
Proceeds from the exercise of stock options
|
|
467
|
|
|
74
|
|
||
|
Payments under capital lease obligations
|
|
(115
|
)
|
|
(242
|
)
|
||
|
Net cash provided by (used in) financing activities
|
|
352
|
|
|
(168
|
)
|
||
|
Decrease in cash, cash equivalents, and restricted cash
|
|
(4,014
|
)
|
|
3,277
|
|
||
|
Effect of exchange rate changes in cash, cash equivalents, and restricted cash
|
|
193
|
|
|
233
|
|
||
|
Net (decrease) increase in cash, cash equivalents, and restricted cash
|
|
(3,821
|
)
|
|
3,510
|
|
||
|
Cash, cash equivalents, and restricted cash - beginning of period
|
|
43,036
|
|
|
36,597
|
|
||
|
Cash, cash equivalents, and restricted cash - end of period
|
|
$
|
39,215
|
|
|
$
|
40,107
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
||||
|
Cash paid during the periods for:
|
|
|
|
|
||||
|
Interest
|
|
$
|
49
|
|
|
$
|
44
|
|
|
Income taxes, net of refunds
|
|
$
|
437
|
|
|
$
|
893
|
|
|
Noncash financing and investing activities:
|
|
|
|
|
||||
|
Accrued liability for purchase of property and equipment
|
|
$
|
1,121
|
|
|
$
|
608
|
|
|
Equipment acquired under capital lease
|
|
$
|
25
|
|
|
$
|
—
|
|
|
|
|
Three Months Ended March 31, 2018
|
||||||||||
|
Consolidated Statement of Operations Data:
|
|
As reported
|
|
Effect of change higher/(lower)
|
|
Balances without adoption of ASC 606
|
||||||
|
Revenue:
|
|
|
|
|
|
|
||||||
|
Subscription and service
|
|
$
|
41,498
|
|
|
$
|
(162
|
)
|
|
$
|
41,660
|
|
|
Product
|
|
1,310
|
|
|
931
|
|
|
379
|
|
|||
|
Total revenue
|
|
42,808
|
|
|
769
|
|
|
42,039
|
|
|||
|
Gross profit
|
|
33,374
|
|
|
769
|
|
|
32,605
|
|
|||
|
Loss from operations
|
|
(5,655
|
)
|
|
769
|
|
|
(6,424
|
)
|
|||
|
Loss before income taxes
|
|
(5,941
|
)
|
|
769
|
|
|
(6,710
|
)
|
|||
|
Net loss
|
|
$
|
(6,402
|
)
|
|
$
|
769
|
|
|
$
|
(7,171
|
)
|
|
|
|
As of March 31, 2018
|
|||||||
|
Consolidated Balance Sheet Data:
|
|
As reported
|
|
Effect of change higher/(lower)
|
|
Balances without adoption of ASC 606
|
|||
|
|
|
|
|
|
|
|
|||
|
Deferred sales commissions current
|
|
9,266
|
|
|
(3,801
|
)
|
|
13,067
|
|
|
Total current assets
|
|
69,441
|
|
|
(3,801
|
)
|
|
73,242
|
|
|
Deferred sales commissions non-current
|
|
6,856
|
|
|
3,801
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
|||
|
Other current liabilities
|
|
14,062
|
|
|
(172
|
)
|
|
14,234
|
|
|
Deferred revenue current
|
|
96,274
|
|
|
(1,368
|
)
|
|
97,642
|
|
|
Total current liabilities
|
|
132,624
|
|
|
(1,540
|
)
|
|
134,164
|
|
|
Total liabilities
|
|
180,454
|
|
|
(1,540
|
)
|
|
181,994
|
|
|
|
|
|
|
|
|
|
|||
|
Accumulated loss
|
|
(184,521
|
)
|
|
1,540
|
|
|
(186,061
|
)
|
|
Total stockholders' deficit
|
|
(1,629
|
)
|
|
1,540
|
|
|
(3,169
|
)
|
|
|
|
Three Months Ended March 31, 2018
|
||||||||||
|
Consolidated Segment Data:
|
|
As reported
|
|
Effect of change higher/(lower)
|
|
Balances without adoption of ASC 606
|
||||||
|
Revenue by Segment:
|
|
|
|
|
|
|
||||||
|
Literacy
|
|
$
|
12,384
|
|
|
$
|
35
|
|
|
$
|
12,349
|
|
|
Enterprise & Education ("E&E") Language
|
|
15,436
|
|
|
17
|
|
|
15,419
|
|
|||
|
Consumer Language
|
|
14,988
|
|
|
717
|
|
|
14,271
|
|
|||
|
Total revenue
|
|
$
|
42,808
|
|
|
$
|
769
|
|
|
$
|
42,039
|
|
|
•
|
Identification of the contract, or contracts with a customer.
|
|
•
|
Identification of the performance obligations in the contract.
|
|
•
|
Determination of the transaction price.
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract.
|
|
•
|
Recognition of the revenue when, or as, the Company satisfies a performance obligation.
|
|
|
|
Accounts Receivable
|
|
Deferred Revenue (current)
|
|
Deferred Revenue (non-current)
|
||||||
|
Opening balance as of January 1, 2018
|
|
$
|
24,517
|
|
|
$
|
110,670
|
|
|
$
|
40,593
|
|
|
Increase/(decrease), net
|
|
(10,814
|
)
|
|
(14,396
|
)
|
|
3,403
|
|
|||
|
Ending balance as of March 31, 2018
|
|
$
|
13,703
|
|
|
$
|
96,274
|
|
|
$
|
43,996
|
|
|
|
|
As of March 31, 2018
|
||||||||||||||||||
|
|
|
Total
|
|
Less than
1 Year |
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years |
||||||||||
|
Literacy
|
|
$
|
33,735
|
|
|
$
|
25,483
|
|
|
$
|
7,694
|
|
|
$
|
508
|
|
|
$
|
50
|
|
|
E&E Language
|
|
51,803
|
|
|
39,991
|
|
|
10,466
|
|
|
1,014
|
|
|
332
|
|
|||||
|
Consumer Language
|
|
54,732
|
|
|
30,800
|
|
|
9,754
|
|
|
1,764
|
|
|
12,414
|
|
|||||
|
Total
|
|
$
|
140,270
|
|
|
$
|
96,274
|
|
|
$
|
27,914
|
|
|
$
|
3,286
|
|
|
$
|
12,796
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Net (loss) income
|
|
$
|
(6,402
|
)
|
|
$
|
454
|
|
|
Foreign currency translation gain (loss)
|
|
529
|
|
|
(43
|
)
|
||
|
Comprehensive (loss) income
|
|
$
|
(5,873
|
)
|
|
$
|
411
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Numerator:
|
|
|
|
|
|
|
||
|
Net (loss) income
|
|
$
|
(6,402
|
)
|
|
$
|
454
|
|
|
Denominator:
|
|
|
|
|
|
|
||
|
Basic shares:
|
|
|
|
|
||||
|
Weighted average number of common shares - basic
|
|
22,425
|
|
|
22,125
|
|
||
|
Diluted shares:
|
|
|
|
|
||||
|
Weighted average number of common shares - basic
|
|
22,425
|
|
|
22,125
|
|
||
|
Number of dilutive common stock equivalent shares included in diluted shares calculation
|
|
—
|
|
|
465
|
|
||
|
Weighted average number of common shares - diluted
|
|
22,425
|
|
|
22,590
|
|
||
|
(Loss) earnings per common share:
|
|
|
|
|
|
|
||
|
Basic
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
Diluted
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
|
|
Three Months Ended
March 31, |
||||
|
|
|
2018
|
|
2017
|
||
|
Stock options
|
|
543
|
|
|
116
|
|
|
Restricted stock units
|
|
230
|
|
|
183
|
|
|
Restricted stocks
|
|
558
|
|
|
166
|
|
|
Total common stock equivalent shares
|
|
1,331
|
|
|
465
|
|
|
|
|
March 31,
2018 |
|
December 31,
2017 |
||||
|
Raw materials
|
|
$
|
1,322
|
|
|
$
|
2,893
|
|
|
Finished goods
|
|
756
|
|
|
643
|
|
||
|
Total inventory
|
|
$
|
2,078
|
|
|
$
|
3,536
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Included in cost of revenue:
|
|
|
|
|
||||
|
Cost of subscription and service revenue
|
|
$
|
1,454
|
|
|
$
|
994
|
|
|
Cost of product revenue
|
|
406
|
|
|
244
|
|
||
|
Total included in cost of revenue
|
|
1,860
|
|
|
1,238
|
|
||
|
Included in operating expenses:
|
|
|
|
|
||||
|
Sales and marketing
|
|
181
|
|
|
143
|
|
||
|
Research and development
|
|
2
|
|
|
3
|
|
||
|
General and administrative
|
|
576
|
|
|
751
|
|
||
|
Total included in operating expenses
|
|
759
|
|
|
897
|
|
||
|
Total
|
|
$
|
2,619
|
|
|
$
|
2,135
|
|
|
|
|
Literacy
|
|
E&E Language
|
|
Consumer Language
|
|
Total
|
||||||||
|
Balance as of January 1, 2018
|
|
|
|
|
|
|
|
|
||||||||
|
Gross Goodwill
|
|
$
|
9,962
|
|
|
$
|
39,895
|
|
|
$
|
27,514
|
|
|
$
|
77,371
|
|
|
Accumulated Impairment
|
|
—
|
|
|
—
|
|
|
(27,514
|
)
|
|
(27,514
|
)
|
||||
|
Goodwill as of January 1, 2018
|
|
$
|
9,962
|
|
|
$
|
39,895
|
|
|
$
|
—
|
|
|
$
|
49,857
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Effect of change in foreign currency rate
|
|
—
|
|
|
368
|
|
|
—
|
|
|
368
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance as of March 31, 2018
|
|
|
|
|
|
|
|
|
||||||||
|
Gross Goodwill
|
|
$
|
9,962
|
|
|
$
|
40,263
|
|
|
$
|
27,514
|
|
|
$
|
77,739
|
|
|
Accumulated Impairment
|
|
—
|
|
|
—
|
|
|
(27,514
|
)
|
|
(27,514
|
)
|
||||
|
Goodwill as of March 31, 2018
|
|
$
|
9,962
|
|
|
$
|
40,263
|
|
|
$
|
—
|
|
|
$
|
50,225
|
|
|
|
|
Trademark / tradename *
|
|
Core technology
|
|
Customer relationships
|
|
Patents and Other
|
|
Total
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Gross Carrying Amount
|
|
$
|
12,505
|
|
|
$
|
15,636
|
|
|
$
|
26,656
|
|
|
$
|
312
|
|
|
$
|
55,109
|
|
|
Accumulated Amortization
|
|
(1,755
|
)
|
|
(12,222
|
)
|
|
(20,515
|
)
|
|
(278
|
)
|
|
(34,770
|
)
|
|||||
|
Accumulated Impairment
|
|
(26
|
)
|
|
(1,001
|
)
|
|
(128
|
)
|
|
—
|
|
|
(1,155
|
)
|
|||||
|
Balance as of January 1, 2018
|
|
$
|
10,724
|
|
|
$
|
2,413
|
|
|
$
|
6,013
|
|
|
$
|
34
|
|
|
$
|
19,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Gross Carrying Amount
|
|
12,517
|
|
|
15,719
|
|
|
26,747
|
|
|
312
|
|
|
55,295
|
|
|||||
|
Accumulated Amortization
|
|
(1,817
|
)
|
|
(12,781
|
)
|
|
(21,015
|
)
|
|
(285
|
)
|
|
(35,898
|
)
|
|||||
|
Accumulated Impairment
|
|
(26
|
)
|
|
(1,009
|
)
|
|
(129
|
)
|
|
—
|
|
|
(1,164
|
)
|
|||||
|
Balance as of March 31, 2018
|
|
$
|
10,674
|
|
|
$
|
1,929
|
|
|
$
|
5,603
|
|
|
$
|
27
|
|
|
$
|
18,233
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Included in cost of revenue:
|
|
|
|
|
||||
|
Cost of subscription and service revenue
|
|
$
|
114
|
|
|
$
|
117
|
|
|
Cost of product revenue
|
|
32
|
|
|
29
|
|
||
|
Total included in cost of revenue
|
|
146
|
|
|
146
|
|
||
|
Included in operating expenses:
|
|
|
|
|
||||
|
Sales and marketing
|
|
481
|
|
|
455
|
|
||
|
Research and development
|
|
364
|
|
|
339
|
|
||
|
General and administrative
|
|
—
|
|
|
—
|
|
||
|
Total included in operating expenses
|
|
845
|
|
|
794
|
|
||
|
Total
|
|
$
|
991
|
|
|
$
|
940
|
|
|
|
|
As of March 31, 2018
|
||
|
2018 - remaining
|
|
$
|
2,384
|
|
|
2019
|
|
1,532
|
|
|
|
2020
|
|
1,282
|
|
|
|
2021
|
|
940
|
|
|
|
2022
|
|
940
|
|
|
|
Thereafter
|
|
548
|
|
|
|
Total
|
|
$
|
7,626
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
||||
|
Accrued marketing expenses
|
|
$
|
3,122
|
|
|
$
|
5,316
|
|
|
Accrued professional and consulting fees
|
|
1,338
|
|
|
1,609
|
|
||
|
Sales return reserve
|
|
459
|
|
|
1,176
|
|
||
|
Sales, withholding and property taxes payable
|
|
3,391
|
|
|
3,616
|
|
||
|
Other
|
|
5,752
|
|
|
4,737
|
|
||
|
Total other current liabilities
|
|
$
|
14,062
|
|
|
$
|
16,454
|
|
|
|
|
As of March 31, 2018
|
||
|
2018-remaining
|
|
$
|
425
|
|
|
2019
|
|
564
|
|
|
|
2020
|
|
560
|
|
|
|
2021
|
|
557
|
|
|
|
2022
|
|
418
|
|
|
|
Thereafter
|
|
1
|
|
|
|
Total minimum lease payments
|
|
$
|
2,525
|
|
|
Less amount representing interest
|
|
252
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
2,273
|
|
|
Less current portion
|
|
472
|
|
|
|
Obligations under capital lease, long-term
|
|
$
|
1,801
|
|
|
•
|
Three
-year cumulative evaluation period ended
March 31, 2018
results in a cumulative U.S. pre-tax loss;
|
|
•
|
from 2006, when the U.S. entity began filing as a C-corporation for income tax purposes, through 2010, the U.S. entity generated taxable income each year;
|
|
•
|
the Company has a history of utilizing all operating tax loss carryforwards and has not had any tax loss carryforwards or credits expire unused;
|
|
•
|
lengthy or indefinite loss carryforward periods for U.S. federal and most state jurisdictions apply; and
|
|
•
|
the Company incurred a U.S. federal jurisdiction net operating loss for the most recently completed calendar year and has additional net operating loss carryforwards subject to limitation pursuant to IRC Section 382.
|
|
Authorization Dates of 2009 Plan Additions
|
|
Number of Common Stock Shares Authorized to 2009 Plan
|
|
|
February 27, 2009
|
|
2,437,744
|
|
|
May 26, 2011
|
|
1,000,000
|
|
|
May 23, 2012
|
|
1,122,930
|
|
|
May 23, 2013
|
|
2,317,000
|
|
|
May 20, 2014
|
|
500,000
|
|
|
June 12, 2015
|
|
1,200,000
|
|
|
May 24, 2017
|
|
1,900,000
|
|
|
•
|
Service-Based Restricted Stock Awards, Restricted Stock Units, Performance-Based Restricted Stock Awards, and Performance Share Units: Fair value is determined based on the quoted market price of our common stock on the date of grant.
|
|
•
|
Service-Based Stock Options and Performance-Based Stock Options: Fair value is determined using the Black-Scholes pricing model, which requires the use of estimates, including the risk-free interest rate, expected volatility, expected dividends, and expected term.
|
|
•
|
Market-Based Restricted Stock Awards and Market-Based Stock Options: The fair value of the market-based awards is determined using a Monte-Carlo simulation model. The Monte Carlo valuation also estimates the number of market-based awards that would be awarded which is reflected in the fair value on the grant date. There have been no market based awards or options granted in the periods presented.
|
|
|
|
Three Months Ended
March 31, |
||
|
|
|
2018
|
|
2017
|
|
Expected stock price volatility
|
|
39.8%
|
|
none
|
|
Expected term of options
|
|
6 years
|
|
none
|
|
Expected dividend yield
|
|
—
|
|
none
|
|
Risk-free interest rate
|
|
2.73%
|
|
none
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Included in cost of revenue:
|
|
|
|
|
||||
|
Cost of subscription and service revenue
|
|
$
|
(39
|
)
|
|
$
|
(15
|
)
|
|
Cost of product revenue
|
|
(13
|
)
|
|
27
|
|
||
|
Total included in cost of revenue
|
|
(52
|
)
|
|
12
|
|
||
|
Included in operating expenses:
|
|
|
|
|
||||
|
Sales and marketing
|
|
(101
|
)
|
|
(228
|
)
|
||
|
Research and development
|
|
(16
|
)
|
|
(151
|
)
|
||
|
General and administrative
|
|
752
|
|
|
514
|
|
||
|
Total included in operating expenses
|
|
635
|
|
|
135
|
|
||
|
Total
|
|
$
|
583
|
|
|
$
|
147
|
|
|
|
|
Service Based Awards
|
|
Weighted
Average Grant Date Fair Value |
|
Aggregate
Intrinsic Value |
|||||
|
Non-vested Service-based Awards, January 1, 2018
|
|
431,118
|
|
|
$
|
8.07
|
|
|
$
|
3,477,484
|
|
|
Service-based awards granted
|
|
209,862
|
|
|
13.81
|
|
|
|
|
||
|
Service-based awards vested
|
|
(111,232
|
)
|
|
8.42
|
|
|
|
|
||
|
Service-based awards canceled
|
|
(10,105
|
)
|
|
7.91
|
|
|
|
|
||
|
Non-vested Service-Based Awards, March 31, 2018
|
|
519,643
|
|
|
$
|
10.31
|
|
|
$
|
5,359,286
|
|
|
|
|
PSUs
|
|
Weighted
Average Grant Date Fair Value |
|
Aggregate
Intrinsic Value |
|||||
|
Non-vested PSUs, January 1, 2018
|
|
433,588
|
|
|
$
|
9.43
|
|
|
$
|
5,406,842
|
|
|
PSUs granted
|
|
318,833
|
|
|
13.82
|
|
|
|
|||
|
PSUs vested
|
|
(28,051
|
)
|
|
9.43
|
|
|
|
|||
|
PSUs canceled
|
|
(21,335
|
)
|
|
9.43
|
|
|
|
|||
|
Non-vested PSUs, March 31, 2018
|
|
703,035
|
|
|
$
|
11.42
|
|
|
$
|
9,244,910
|
|
|
|
|
Service-based Options
|
|
Weighted
Average Exercise Price |
|
Weighted
Average Contractual Life (years) |
|
Aggregate
Intrinsic Value |
|||||
|
Service-based Options Outstanding, January 1, 2018
|
|
1,628,711
|
|
|
$
|
9.81
|
|
|
6.79
|
|
$
|
5,203,196
|
|
|
Service-based options granted
|
|
1,692
|
|
|
13.72
|
|
|
|
|
|
|||
|
Service-based options exercised
|
|
(53,710
|
)
|
|
8.69
|
|
|
|
|
|
|||
|
Service-based options canceled
|
|
(37,101
|
)
|
|
14.88
|
|
|
|
|
|
|||
|
Service-based Options Outstanding, March 31, 2018
|
|
1,539,592
|
|
|
9.74
|
|
|
6.65
|
|
5,878,052
|
|
||
|
Vested and expected to vest March 31, 2018
|
|
1,521,668
|
|
|
9.76
|
|
|
6.63
|
|
5,780,367
|
|
||
|
Exercisable at March 31, 2018
|
|
1,317,006
|
|
|
$
|
9.99
|
|
|
6.46
|
|
$
|
4,782,483
|
|
|
|
|
Units Outstanding
|
|
Weighted
Average Grant Date Fair Value |
|
Aggregate
Intrinsic Value |
|||||
|
Units Outstanding, January 1, 2018
|
|
234,658
|
|
|
$
|
10.19
|
|
|
$
|
2,926,185
|
|
|
Units granted
|
|
1,222
|
|
|
13.72
|
|
|
16,766
|
|
||
|
Units released
|
|
—
|
|
|
—
|
|
|
|
|||
|
Units cancelled
|
|
—
|
|
|
—
|
|
|
|
|||
|
Units Outstanding, March 31, 2018
|
|
235,880
|
|
|
10.21
|
|
|
3,101,822
|
|
||
|
Vested and expected to vest at March 31, 2018
|
|
235,639
|
|
|
11.19
|
|
|
3,098,649
|
|
||
|
Vested and deferred at March 31, 2018
|
|
220,063
|
|
|
$
|
10.14
|
|
|
$
|
2,893,828
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Severance costs
|
|
$
|
10
|
|
|
$
|
754
|
|
|
Contract termination costs
|
|
—
|
|
|
—
|
|
||
|
Other costs
|
|
21
|
|
|
26
|
|
||
|
Total
|
|
$
|
31
|
|
|
$
|
780
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
|
||||
|
Cost of revenue
|
|
$
|
35
|
|
|
$
|
165
|
|
|
Sales and marketing
|
|
2
|
|
|
331
|
|
||
|
Research and development
|
|
—
|
|
|
218
|
|
||
|
General and administrative
|
|
(6
|
)
|
|
66
|
|
||
|
Total
|
|
$
|
31
|
|
|
$
|
780
|
|
|
|
|
As of March 31,
|
||||||
|
|
|
2018
|
|
2017
|
||||
|
Accrued lease abandonment costs, beginning of period
|
|
$
|
1,081
|
|
|
$
|
2,123
|
|
|
Costs incurred and charged to expense
|
|
—
|
|
|
—
|
|
||
|
Principal reductions
|
|
(262
|
)
|
|
(252
|
)
|
||
|
Accrued lease abandonment costs, end of period
|
|
$
|
819
|
|
|
$
|
1,871
|
|
|
Accrued lease abandonment costs liability:
|
|
|
|
|
|
|||
|
Short-term - included in "Other current liabilities"
|
|
$
|
819
|
|
|
$
|
1,057
|
|
|
Long-term
|
|
—
|
|
|
814
|
|
||
|
Total
|
|
$
|
819
|
|
|
$
|
1,871
|
|
|
|
|
|
|
Language
|
|
|
||||||||||||||||||
|
|
|
Literacy Segment
|
|
E&E Language Segment
|
|
Consumer Language Segment
|
|
Shared Services
|
|
Combined Language
|
|
Total Company
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Revenue
|
|
$
|
12,384
|
|
|
$
|
15,436
|
|
|
$
|
14,988
|
|
|
$
|
—
|
|
|
$
|
30,424
|
|
|
$
|
42,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Cost of revenue
|
|
2,008
|
|
|
1,612
|
|
|
3,805
|
|
|
19
|
|
|
5,436
|
|
|
7,444
|
|
||||||
|
Sales and marketing
|
|
6,228
|
|
|
7,989
|
|
|
9,107
|
|
|
229
|
|
|
17,325
|
|
|
23,553
|
|
||||||
|
Research and development
|
|
1,815
|
|
|
—
|
|
|
—
|
|
|
3,908
|
|
|
3,908
|
|
|
5,723
|
|
||||||
|
General and administrative
|
|
461
|
|
|
(55
|
)
|
|
(9
|
)
|
|
—
|
|
|
(64
|
)
|
|
397
|
|
||||||
|
Segment contribution
|
|
$
|
1,872
|
|
|
$
|
5,890
|
|
|
$
|
2,085
|
|
|
$
|
(4,156
|
)
|
|
$
|
3,819
|
|
|
$
|
5,691
|
|
|
Segment contribution margin %
|
|
15.1
|
%
|
|
38.2
|
%
|
|
13.9
|
%
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Unallocated depreciation and amortization, stock compensation, restructuring and other expenses (net) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
|||||||||||
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
638
|
|
|||||||||||
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
583
|
|
|||||||||||
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
1,332
|
|
|||||||||||
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
4,543
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Corporate unallocated expenses, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Unallocated general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
6,803
|
|
|||||||||||
|
Unallocated non-operating expense
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|||||||||||
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
7,089
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,941
|
)
|
||||||||||
|
|
|
|
|
Language
|
|
|
||||||||||||||||||
|
|
|
Literacy Segment
|
|
E&E Language Segment
|
|
Consumer Language Segment
|
|
Shared Services
|
|
Combined Language
|
|
Total Company
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Revenue
(1)
|
|
$
|
10,170
|
|
|
$
|
16,500
|
|
|
$
|
21,023
|
|
|
$
|
—
|
|
|
$
|
37,523
|
|
|
$
|
47,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Cost of revenue
|
|
1,828
|
|
|
1,844
|
|
|
2,911
|
|
|
(3
|
)
|
|
4,752
|
|
|
$
|
6,580
|
|
|||||
|
Sales and marketing
|
|
5,514
|
|
|
7,635
|
|
|
9,825
|
|
|
492
|
|
|
17,952
|
|
|
$
|
23,466
|
|
|||||
|
Research and development
|
|
1,504
|
|
|
—
|
|
|
—
|
|
|
4,501
|
|
|
4,501
|
|
|
$
|
6,005
|
|
|||||
|
General and administrative
|
|
363
|
|
|
(98
|
)
|
|
(70
|
)
|
|
—
|
|
|
(168
|
)
|
|
$
|
195
|
|
|||||
|
Segment contribution
|
|
$
|
961
|
|
|
$
|
7,119
|
|
|
$
|
8,357
|
|
|
$
|
(4,990
|
)
|
|
$
|
10,486
|
|
|
$
|
11,447
|
|
|
Segment contribution margin %
|
|
9.4
|
%
|
|
43.1
|
%
|
|
39.8
|
%
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Unallocated depreciation and amortization, stock compensation, restructuring and other expenses (net) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
1,561
|
|
|||||||||||
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
702
|
|
|||||||||||
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
409
|
|
|||||||||||
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
1,536
|
|
|||||||||||
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
4,208
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Corporate unallocated expenses, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Unallocated general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
6,294
|
|
|||||||||||
|
Unallocated non-operating income
|
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|||||||||||
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
6,085
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,154
|
|
||||||||||
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
(1)
|
||||
|
United States
|
|
$
|
36,965
|
|
|
$
|
41,241
|
|
|
International
|
|
5,843
|
|
|
6,452
|
|
||
|
Total
|
|
$
|
42,808
|
|
|
$
|
47,693
|
|
|
|
|
March 31,
2018 |
|
December 31,
2017 |
||||
|
United States
|
|
$
|
29,290
|
|
|
$
|
27,647
|
|
|
International
|
|
2,953
|
|
|
3,002
|
|
||
|
Total
|
|
$
|
32,243
|
|
|
$
|
30,649
|
|
|
|
|
Three Months Ended
March 31, |
||||||
|
|
|
2018
|
|
2017
(1)
|
||||
|
Language learning
|
|
$
|
29,958
|
|
|
$
|
36,630
|
|
|
Literacy
|
|
12,384
|
|
|
10,170
|
|
||
|
Brain fitness
|
|
466
|
|
|
893
|
|
||
|
Total
|
|
$
|
42,808
|
|
|
$
|
47,693
|
|
|
1.
|
Grow literacy sales by providing fully aligned digital instruction and assessment tools for K-12, building a direct distribution sales force to augment our historical reseller model, and continuing to develop our implementation services business;
|
|
2.
|
Position our E&E Language business for profitable growth by focusing our direct sales on our best geographies and customer segments, partnering with resellers in other geographies and successfully delivering our Catalyst
TM
product to Corporate customers. Catalyst integrates our Foundations, Advantage and Advanced English for Business products with enhanced reporting, assessment and administrator tools that offers a simple, more modern, metrics-driven suite of tools that are results-oriented and easily integrated with leading corporate language-learning systems;
|
|
3.
|
Seek to maximize the benefit of the changes we have made in our Consumer Language products and successfully transition to SaaS delivery to seek additional growth opportunities with greater emphasis on a streamlined, mobile-oriented product portfolio focused on customers' demand, while optimizing our marketing spend appropriately;
|
|
4.
|
Seek opportunities to leverage our language assets including our content, tools and pedagogy, as well as our well-known Rosetta Stone brand, through partnerships with leading players in key markets around the world; and
|
|
5.
|
Continue to identify opportunities to become more efficient.
|
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|||||||
|
Subscription and service
|
|
$
|
41,498
|
|
|
$
|
41,450
|
|
|
$
|
48
|
|
|
0.1
|
%
|
|
Product
|
|
1,310
|
|
|
6,243
|
|
|
(4,933
|
)
|
|
(79.0
|
)%
|
|||
|
Total revenue
|
|
42,808
|
|
|
47,693
|
|
|
(4,885
|
)
|
|
(10.2
|
)%
|
|||
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|||||||
|
Cost of subscription and service revenue
|
|
7,374
|
|
|
6,534
|
|
|
840
|
|
|
12.9
|
%
|
|||
|
Cost of product revenue
|
|
2,060
|
|
|
1,607
|
|
|
453
|
|
|
28.2
|
%
|
|||
|
Total cost of revenue
|
|
9,434
|
|
|
8,141
|
|
|
1,293
|
|
|
15.9
|
%
|
|||
|
Gross profit
|
|
33,374
|
|
|
39,552
|
|
|
(6,178
|
)
|
|
(15.6
|
)%
|
|||
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|||||||
|
Sales and marketing
|
|
24,191
|
|
|
24,168
|
|
|
23
|
|
|
0.1
|
%
|
|||
|
Research and development
|
|
6,306
|
|
|
6,414
|
|
|
(108
|
)
|
|
(1.7
|
)%
|
|||
|
General and administrative
|
|
8,532
|
|
|
8,025
|
|
|
507
|
|
|
6.3
|
%
|
|||
|
Total operating expenses
|
|
39,029
|
|
|
38,607
|
|
|
422
|
|
|
1.1
|
%
|
|||
|
(Loss) income from operations
|
|
(5,655
|
)
|
|
945
|
|
|
(6,600
|
)
|
|
(698.4
|
)%
|
|||
|
Other income and (expense):
|
|
|
|
|
|
|
|
|
|||||||
|
Interest income
|
|
25
|
|
|
13
|
|
|
12
|
|
|
92.3
|
%
|
|||
|
Interest expense
|
|
(83
|
)
|
|
(115
|
)
|
|
32
|
|
|
(27.8
|
)%
|
|||
|
Other income and (expense)
|
|
(228
|
)
|
|
311
|
|
|
(539
|
)
|
|
(173.3
|
)%
|
|||
|
Total other income and (expense)
|
|
(286
|
)
|
|
209
|
|
|
(495
|
)
|
|
(236.8
|
)%
|
|||
|
Loss before income taxes
|
|
(5,941
|
)
|
|
1,154
|
|
|
(7,095
|
)
|
|
(614.8
|
)%
|
|||
|
Income tax expense
|
|
461
|
|
|
700
|
|
|
(239
|
)
|
|
(34.1
|
)%
|
|||
|
Net (loss) income
|
|
$
|
(6,402
|
)
|
|
$
|
454
|
|
|
$
|
(6,856
|
)
|
|
(1,510.1
|
)%
|
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||||||||
|
Literacy
|
|
12,384
|
|
|
28.9
|
%
|
|
10,170
|
|
|
21.3
|
%
|
|
2,214
|
|
|
21.8
|
%
|
|||
|
E&E Language
|
|
15,436
|
|
|
36.1
|
%
|
|
16,500
|
|
|
34.6
|
%
|
|
(1,064
|
)
|
|
(6.4
|
)%
|
|||
|
Consumer Language
|
|
14,988
|
|
|
35.0
|
%
|
|
21,023
|
|
|
44.1
|
%
|
|
(6,035
|
)
|
|
(28.7
|
)%
|
|||
|
Total Revenue
|
|
$
|
42,808
|
|
|
100.0
|
%
|
|
$
|
47,693
|
|
|
100.0
|
%
|
|
$
|
(4,885
|
)
|
|
(10.2
|
)%
|
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|||||||
|
Subscription and service
|
|
$
|
41,498
|
|
|
$
|
41,450
|
|
|
$
|
48
|
|
|
0.1
|
%
|
|
Product
|
|
1,310
|
|
|
6,243
|
|
|
(4,933
|
)
|
|
(79.0
|
)%
|
|||
|
Total revenue
|
|
42,808
|
|
|
47,693
|
|
|
(4,885
|
)
|
|
(10.2
|
)%
|
|||
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|||||||
|
Cost of subscription and service revenue
|
|
7,374
|
|
|
6,534
|
|
|
840
|
|
|
12.9
|
%
|
|||
|
Cost of product revenue
|
|
2,060
|
|
|
1,607
|
|
|
453
|
|
|
28.2
|
%
|
|||
|
Total cost of revenue
|
|
9,434
|
|
|
8,141
|
|
|
1,293
|
|
|
15.9
|
%
|
|||
|
Gross profit
|
|
$
|
33,374
|
|
|
$
|
39,552
|
|
|
$
|
(6,178
|
)
|
|
(15.6
|
)%
|
|
Gross margin percentages
|
|
78.0
|
%
|
|
82.9
|
%
|
|
(4.9
|
)%
|
|
|
||||
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||
|
|
|
(in thousands, except percentages)
|
|||||||||||||
|
Sales and marketing
|
|
$
|
24,191
|
|
|
$
|
24,168
|
|
|
$
|
23
|
|
|
0.1
|
%
|
|
Research and development
|
|
6,306
|
|
|
6,414
|
|
|
(108
|
)
|
|
(1.7
|
)%
|
|||
|
General and administrative
|
|
8,532
|
|
|
8,025
|
|
|
507
|
|
|
6.3
|
%
|
|||
|
Total operating expenses
|
|
$
|
39,029
|
|
|
$
|
38,607
|
|
|
$
|
422
|
|
|
1.1
|
%
|
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||
|
|
|
(in thousands, except percentages)
|
|||||||||||||
|
Interest income
|
|
$
|
25
|
|
|
$
|
13
|
|
|
$
|
12
|
|
|
92.3
|
%
|
|
Interest expense
|
|
(83
|
)
|
|
(115
|
)
|
|
32
|
|
|
(27.8
|
)%
|
|||
|
Other income and (expense)
|
|
(228
|
)
|
|
311
|
|
|
(539
|
)
|
|
(173.3
|
)%
|
|||
|
Total other income and (expense)
|
|
$
|
(286
|
)
|
|
$
|
209
|
|
|
$
|
(495
|
)
|
|
(236.8
|
)%
|
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||
|
|
|
(in thousands, except percentages)
|
|||||||||||||
|
Income tax expense
|
|
$
|
461
|
|
|
$
|
700
|
|
|
$
|
(239
|
)
|
|
(34.1
|
)%
|
|
|
|
Three Months Ended March 31,
|
|
2018 Versus 2017
|
|||||||||||
|
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
|||||||
|
|
|
(in thousands, except percentages)
|
|||||||||||||
|
Net cash (used in) provided by operating activities
|
|
$
|
(418
|
)
|
|
$
|
5,756
|
|
|
$
|
(6,174
|
)
|
|
(107.3
|
)%
|
|
Net cash used in investing activities
|
|
$
|
(3,948
|
)
|
|
$
|
(2,311
|
)
|
|
$
|
(1,637
|
)
|
|
70.8
|
%
|
|
Net cash provided by (used in) financing activities
|
|
$
|
352
|
|
|
$
|
(168
|
)
|
|
$
|
520
|
|
|
(309.5
|
)%
|
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
||||||||||
|
|
|
(in thousands)
|
||||||||||||||||||
|
Capitalized leases and other financing arrangements
|
|
$
|
2,525
|
|
|
$
|
567
|
|
|
$
|
1,122
|
|
|
$
|
836
|
|
|
$
|
—
|
|
|
Operating leases
|
|
6,685
|
|
|
3,782
|
|
|
2,509
|
|
|
394
|
|
|
—
|
|
|||||
|
Total
|
|
$
|
9,210
|
|
|
$
|
4,349
|
|
|
$
|
3,631
|
|
|
$
|
1,230
|
|
|
$
|
—
|
|
|
•
|
identify, anticipate, understand and respond to these trends in a timely manner;
|
|
•
|
introduce appealing new products and performance features on a timely basis;
|
|
•
|
provide appealing solutions that engage our customers;
|
|
•
|
adapt and offer our products and services using rapidly evolving, widely varying and complex technologies;
|
|
•
|
anticipate and meet consumer demand for additional languages, learning levels and new platforms for delivery;
|
|
•
|
effectively position and market our products and services;
|
|
•
|
identify and secure cost-effective means of marketing our products to reach the appropriate consumers;
|
|
•
|
identify cost-effective sales distribution channels and other sales outlets where interested consumers will buy our products;
|
|
•
|
anticipate and respond to consumer price sensitivity and pricing changes of competitive products; and
|
|
•
|
identify and successfully implement ways of building brand loyalty and reputation.
|
|
•
|
appropriately and efficiently allocate our marketing for multiple products;
|
|
•
|
accurately identify, target and reach our audience of potential customers with our marketing messages;
|
|
•
|
select the right marketplace, media and specific media vehicle in which to advertise;
|
|
•
|
identify the most effective and efficient level of spending in each marketplace, media and specific media vehicle;
|
|
•
|
determine the appropriate creative message and media mix for advertising, marketing and promotional expenditures;
|
|
•
|
effectively manage marketing costs, including creative and media expenses, in order to maintain acceptable customer acquisition costs;
|
|
•
|
differentiate our products as compared to other products;
|
|
•
|
create greater awareness of our new products, our brands and our learning solutions;
|
|
•
|
drive traffic to our e-commerce website, call centers, distribution channels and retail partners; and
|
|
•
|
convert customer inquiries into actual orders.
|
|
•
|
customers' budgetary constraints and priorities;
|
|
•
|
the timing of our customers' budget cycles;
|
|
•
|
the need by some customers for lengthy evaluations that often include administrators and faculties; and
|
|
•
|
the length and timing of customers' approval processes.
|
|
•
|
delays in or loss of marketplace acceptance of our products and services;
|
|
•
|
diversion of our resources;
|
|
•
|
a lower rate of license renewals or upgrades for Consumer Language, Literacy and E&E Language customers;
|
|
•
|
injury to our reputation;
|
|
•
|
increased service expenses or payment of damages; or
|
|
•
|
costly litigation.
|
|
Exhibits
|
|
|
|
2.1+
|
|
|
|
3.1
|
|
|
|
3.2
|
|
|
|
4.1
|
|
|
|
4.2
|
|
|
|
10.1*
|
|
|
|
10.2*
|
|
|
|
31.1*
|
|
|
|
31.2*
|
|
|
|
32**
|
|
|
|
101.INS*
|
|
XBRL Instance Document.
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema.
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase.
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase.
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase.
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase.
|
|
|
ROSETTA STONE INC.
|
|
|
/s/ THOMAS M. PIERNO
|
|
|
Thomas M. Pierno
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
1.
|
Definitions
.
For purposes of this Agreement, the following terms shall have the meanings indicated:
|
|
(a)
|
“
Cause
” shall mean Recipient (i) committed a felony or a crime involving moral turpitude or committed any other act or omission involving fraud, embezzlement or any other act of dishonesty in the course of his employment by the Company or an Affiliate which conduct damaged the Company or an Affiliate; (ii) substantially and repeatedly failed to perform duties of the office held by him or her as reasonably directed by the Company or an Affiliate; (iii) committed gross negligence or willful misconduct with respect to the Company or an Affiliate; (iv) committed a material breach of any employment agreement between Recipient and the Company or an Affiliate that is not cured within ten (10) days after receipt of written notice thereof from the Company or the Affiliate, as applicable; (v) failed, within ten (10) days after receipt by Recipient of written notice thereof from the Company or an Affiliate, to correct, cease or otherwise alter any failure to comply with instructions or other action or omission which the Board or CEO reasonably believes does or may materially or adversely affect the Company’s or an Affiliate’s business or operations; (vi) committed misconduct which is of such a serious or substantial nature that a reasonable likelihood exists that such misconduct will materially injure the reputation of the Company or an Affiliate; (vii) harassed or discriminated against the Company’s or an Affiliate’s employees, customers or vendors in violation of the Company’s policies with respect to such matters; (viii) misappropriated funds or assets of the Company or an Affiliate for personal use or willfully violated the Company policies or standards of business conduct as determined in good faith by the Board or the CEO; (ix) failed, due to some action or inaction on the part of Recipient, to have immigration status that permits Recipient to maintain full-time employment with the Company or an Affiliate in the United States in compliance with all applicable immigration law; or (x) disclosed trade secrets of the Company or an Affiliate.
|
|
(b)
|
“
Change in Control
” means (i) the liquidation, dissolution or winding-up of the Company, (ii) the sale, license or lease of all or substantially all of the assets of the Company, or (iii) a share exchange, reorganization, recapitalization, or merger or consolidation of the Company with or into any other corporation or corporations (or other form of business entity) or of any other corporation or corporations (or other form of business entity) with or into the Company, but excluding any merger effected exclusively for the purpose of changing the domicile of the Company; provided, however, that a Change in Control shall not include any of the aforementioned transactions listed in clauses (i), (ii) and (iii) involving the Company or a Subsidiary Corporation in which the holders of shares of the Company voting stock outstanding immediately prior to such transaction or any Affiliate of such holders continue to hold at least a majority, by voting power, of the capital stock or, by a majority, based on fair market value as determined in good faith by the Board, of the assets, in each case in substantially the same proportion, of (x) the surviving or resulting corporation (or other form of business entity), (y) if the surviving or resulting corporation (or other form of business entity) is a wholly owned subsidiary of another corporation (or other form of business entity) immediately following such transaction, the parent corporation (or other form of business entity) of such surviving or resulting corporation (or other form of business entity) or (z) a successor entity holding a majority of the assets of the Company. In addition, a Change in Control shall not include a bona fide, firm commitment underwritten public offering of the Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended.
|
|
(c)
|
“
Common Stock
” shall mean the common stock of the Company, $.00005 par value per share (or such other par value as may be designated by act of the Company’s shareholders).
|
|
(d)
|
“
Disability
” shall have the meaning ascribed to such term in the Plan, as it may be amended from time to time.
|
|
(e)
|
“
Forfeiture Restrictions
” shall mean the prohibitions and restrictions set forth herein with respect to the sale or other disposition of the Shares issued to Recipient hereunder and the obligation to forfeit and surrender such Shares to the Company.
|
|
(f)
|
“
Good Reason
” shall have the meaning ascribed to such term in Recipient’s employment agreement with the Company, or, if none, Recipient’s resignation from employment with the Company due to (i) a material diminution in Recipient’s annual base salary, duties, authority or responsibilities or (ii) relocation of Recipient’s primary place of employment to a geographic area more than fifty (50) miles from Recipient’s then-current primary place of employment, without Recipient’s consent; provided that Recipient has given thirty (30) days advance written notice to the Company of the initial existence of the condition described in (i) and/or (ii) and the Company has not within such thirty (30) day period remedied the condition.
|
|
(g)
|
“
Period
of Restriction
”
shall mean the period during which Restricted Shares are subject to Forfeiture Restrictions and during which Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered.
|
|
(h)
|
“
Performance Stock Unit
” shall mean a Performance Stock Unit issued under the Plan that is subject to the Transfer Restrictions set forth herein.
|
|
(i)
|
“Restricted Shares”
shall mean shares of Common Stock that are subject to the Forfeiture Restrictions under this Agreement.
|
|
2.
|
Grant of Performance Stock Units; Settlement of Award
.
Effective as of the Grant Date, the Company shall cause to be issued in Recipient’s name the number of Performance Stock Units set forth on the Cover Sheet. In accepting the award of Performance Stock Units granted under this Agreement, Recipient accepts and agrees to be bound by all the terms and conditions of the Plan and this Agreement. The Performance Share Units awarded pursuant to this Agreement represent the opportunity to receive Restricted Shares of the Company if performance goals outlined in Section 4(a) of this Agreement are satisfied. Except as otherwise provided in Section 4, as soon as reasonably practicable after the Performance Period (as defined below), as provided in Section 4(b), the Company shall issue to Recipient one Restricted Share in exchange for each Performance Stock Unit earned under this Agreement (including any additional Performance Stock Units described in Section 5) that has not been forfeited under the Plan or this Agreement, which settlement date shall be no later than the 15th day of the third month following the later of (i) the last day of the Company’s fiscal year in which the Performance Period ends or (ii) the last day of the Recipient’s taxable year in which the Performance Period ends. Thereafter, Recipient shall have no further rights with respect to such Performance Stock Unit. The Company shall cause to be delivered to Recipient in electronic book entry form any Restricted Shares, and any shares of Common Stock or rights to acquire shares of Common Stock distributed by the Company in respect of Restricted Shares during any Period of Restriction (the “
Retained Stock Distributions
”), that are to be issued under the terms of this Agreement in exchange for Performance Stock Units awarded hereby. During the Period of Restriction such electronic book entries shall contain a restrictive legend notation to the effect that ownership of such Restricted Shares (and any Retained Stock Distributions), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and this Agreement. During the Period of Restriction any regular dividends paid in cash or property (other than Retained Stock Distributions) with respect to the Restricted Shares and Retained Stock Distributions (the “
Retained Cash Distributions
”) shall not be paid to Executive but instead shall be accumulated by the Company until the date the Forfeiture Restrictions applicable to the Restricted Shares and Retained Stock Distributions with respect to which such Retained Cash Distributions shall have been made, paid, or declared shall have become vested and then on that date such Retained Cash Distributions shall be paid to Executive. Executive shall have the right to vote the Restricted Shares awarded to Executive and to exercise all other rights, powers and privileges of a holder of the Shares, with respect to such Restricted Shares, with the exception that (a) Executive shall not be entitled to delivery of such Restricted Shares until the Forfeiture Restrictions applicable thereto shall have expired, (b) the Company shall retain custody of all Retained Stock Distributions made or declared with respect to the Restricted Shares and Retained Cash Distributions made or declared with respect to the Restricted Shares and the Retained Stock Distributions (and such Retained Stock Distributions and Retained Cash Distributions shall be subject to the same restrictions, terms and conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Stock Distributions and Restricted Cash Distributions shall have been made, paid, or declared shall have become vested, and such Retained Stock Distributions and Retained Cash Distributions shall not bear interest or be segregated in separate accounts and (c) Executive may not sell, assign, transfer, pledge, exchange, encumber, or dispose of the Restricted Shares or any Retained Stock Distributions or any Restricted Cash Distributions during the Period of Restriction. Upon issuance the book entry representing the Restricted Shares shall be delivered to such depository as may be designated by the Compensation Committee of the Board (the “Committee”) as a depository for safekeeping until the forfeiture of such Restricted Shares occurs or the Forfeiture Restrictions lapse, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Shares and any securities constituting Retained Stock Distributions which shall be forfeited in accordance with the Plan and this Agreement.
|
|
3.
|
Settlement is contingent upon the Recipient remaining in the employment or service of the Company or its Subsidiaries through the settlement date, except as otherwise provided in Section 4.
|
|
4.
|
Transfer Restrictions
.
The Performance Stock Units granted hereby may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of (other than by will or the applicable laws of descent and distribution) without the written consent of the Company. Any such attempted sale, assignment, pledge, exchange, hypothecation, transfer, encumbrance or disposition in violation of this Agreement shall be void and the Company shall not be bound thereby. Further, any shares of Common Stock issued to Recipient in exchange for Performance Stock Units awarded hereby may not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable securities laws. Recipient also agrees that the Company may (a) refuse to cause the transfer of any such shares of Common Stock to be registered on the applicable stock transfer records of the Company if such proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of any applicable securities law and (b) give related instructions to the transfer agent, if any, to stop registration of the transfer of such shares of the Common Stock. The shares of Common Stock that may be issued under the Plan are registered with the Securities and Exchange Commission under a Registration Statement on Form S-8. A Prospectus describing the Plan and the shares of Common Stock is available from the Company or at www.etrade.com.
|
|
5.
|
Vesting; Forfeiture
.
|
|
(a)
|
Recipient shall earn, and be eligible to vest in, the number of Restricted Shares, if any, determined by the Committee following the end of the period commencing on January 1, 2018, and ending on December 31, 2018 (the “
Performance Period
”), based on the level of achievement of the applicable performance goals approved by the Committee in accordance with the 2018 Annual Incentive Program, communicated to Recipient and set forth in the Company’s records. The number of Restricted Shares that may become earned shall range from zero to one hundred and fifty percent (150%) of the Performance Stock Units, based on the level of achievement of the applicable performance goals during the Performance Period, as determined by the Committee at the end of the Performance Period. Subject to this Section 4, the number of Restricted Shares earned shall be determined as soon as reasonably practicable after the date of the Recipient’s eligible termination or the end of the Performance Period, as applicable (the “
Certification Date
”). Any Restricted Shares that are not earned or do not vest pursuant to the terms of this Section 4, shall be immediately and irrevocably forfeited, including the right to receive other distributions pursuant to Section 5 hereof, as of the Certification Date, or the date of Recipient’s termination of employment, as applicable.
|
|
(b)
|
Vesting Schedule
:
|
|
(i)
|
50% of the Restricted Shares that become earned in accordance with Section 4(a) shall vest on the first anniversary of the Grant Date, subject to Recipient’s continued eligibility under the Plan through such date.
|
|
(ii)
|
25% of the Restricted Shares that become earned in accordance with Section 4(a) shall vest on the second anniversary of the Grant Date, subject to Recipient’s continued eligibility under the Plan through such date.
|
|
(iii)
|
25% of the Restricted Shares that become earned in accordance with Section 4(a) shall vest on the third anniversary of the Grant Date, subject to Recipient’s continued eligibility under the Plan through such date.
|
|
(c)
|
The Forfeiture Restrictions shall lapse with respect to a portion of the total number of Restricted Shares earned under Section 4(a) in accordance with the above schedule, rounded to the nearest whole number, except that on the third anniversary of the Grant Date, the Forfeiture Restrictions shall lapse with respect to the then remaining number of Restricted Shares earned under Section 4(a) for which the Forfeiture Restrictions have not previously lapsed.
|
|
(d)
|
If Recipient’s employment terminates as a result of Recipient’s involuntary termination not-for-Cause or for Good Reason, the following provisions shall apply:
|
|
(i)
|
If prior to the end of the Performance Period, the number of Restricted Shares earned shall be determined as set forth in Section 4(a) prorated for Recipient’s service during the Performance Period, and the earned Restricted Shares shall vest on the Certification Date.
|
|
(ii)
|
If after the end of the Performance Period, any portion of the Restricted Shares that have not previously vested shall vest.
|
|
(e)
|
Upon the lapse of the Forfeiture Restrictions with respect to the Restricted Shares earned under Section 4(a) the Company shall cause to be delivered to Recipient one share of Common Stock in exchange for each Restricted Share earned in electronic book entry form, and such Common Stock shall be transferable by Recipient (except to the extent that any proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of applicable securities law).
|
|
(f)
|
If Recipient ceases to be eligible under the Plan for any reason before the first, second or third anniversary of the Grant Date, as applicable, including death or Disability and except as provided in Sections 4(d) and 4(g), the Forfeiture Restrictions then applicable to the unvested Restricted Shares shall not lapse and all of the unvested Restricted Shares shall be forfeited to the Company upon termination of eligibility under the Plan and neither the Company nor any Affiliate shall have any further obligations to Recipient under this Agreement.
|
|
(g)
|
Upon the occurrence of a Change in Control, the Performance Stock Units and Restricted Shares shall be treated in accordance with the Company’s then applicable Change in Control Severance Plan; provided that, if the Company shall not have a Change in Control Severance Plan at the time of a Change in Control then:
|
|
(i)
|
the Performance Period shall end on the date of the Change in Control and the performance goals applicable to the Performance Stock Units shall be deemed satisfied (A) based on the level of performance achieved as of the date of the Change in Control, if determinable, or (B) at the target level, if not determinable; provided, however, that if less than 50% of the Performance Period has elapsed as of the date of the Change in Control, then the performance goals applicable to such award shall be deemed satisfied at the target level; and
|
|
(ii)
|
any Restricted Shares earned in accordance with Section 4(g)(i) shall vest immediately and shares of Common Stock shall be delivered to Recipient as soon as reasonably practicable.
|
|
6.
|
Dividend Equivalent Payments.
|
|
(a)
|
Cash Dividends.
If during the period Recipient holds any Performance Stock Units granted under this Agreement the Company pays a dividend in cash with respect to the outstanding shares of the Common Stock, then the Company will increase the Performance Stock Units awarded hereby that have not then been forfeited to the Company or exchanged by the Company for shares of the Common Stock by an amount equal to:
|
|
(b)
|
Stock Dividends.
If during the period Recipient holds any Performance Stock Units granted under this Agreement the Company pays a dividend in shares of the Common Stock with respect to the outstanding shares of the Common Stock, then the Company will increase the Performance Stock Units awarded hereby that have not then been forfeited to or exchanged by the Company for shares of the Common Stock by an amount equal to the product of (a) the Performance Stock Units awarded hereby that have not been forfeited to the Company or exchanged by the Company for shares of the Common Stock and (b) the number of shares of the Common Stock paid by the Company per share of the Common Stock (collectively, the “
Stock Dividend Performance Stock Units
”). Each Stock Dividend Performance Stock Unit will be subject to the same restrictions, limitations and conditions applicable to the Performance Stock Units for which such Stock Dividend Performance Stock Unit was awarded and will be exchanged for Restricted Shares at the same time and on the same basis as such Performance Stock Unit.
|
|
7.
|
Capital Adjustments and Reorganizations
.
The existence of the Performance Stock Units shall not affect in any way the right or power of the Company or any company the stock of which is awarded pursuant to this Agreement to make or authorize any adjustment, recapitalization, reorganization or other change in its capital structure or its business, engage in any merger or consolidation, issue any debt or equity securities, dissolve or liquidate, or sell, lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or proceeding.
|
|
8.
|
Tax Withholding
.
To the extent that the receipt of the Restricted Shares or the lapse of any Forfeiture Restrictions results in income to Recipient for federal, state, local or foreign income, employment or other tax purposes with respect to which the Company or its Affiliates or subsidiaries have a withholding obligation, Recipient shall deliver to the Company at the time of such receipt or lapse, as the case may be, such amount of money as the Company or any Affiliate may require to meet such obligation under applicable tax laws or regulations, and, if Recipient fails to do so, the Company and its Affiliates and subsidiaries are authorized to withhold from the Shares granted hereby or from any cash or stock remuneration then or thereafter payable to Recipient in any capacity any tax required to be withheld by reason of such taxable income, sufficient to satisfy the withholding obligation.
|
|
9.
|
Section 409A of the Code.
The provisions of this Agreement and any payments made herein are intended to comply with, and should be interpreted consistent with, the requirements of Section 409A of the Code, and any related regulations or other effective guidance promulgated thereunder by the U.S. Department of the Treasury or the Internal Revenue Service. Notwithstanding anything contained herein to the contrary, in the event any settlement of the Performance Stock Units hereunder constitutes “deferred compensation” within the meaning of Section 409A of the Code, and the Recipient is a “specified employee” (as determined under the Company’s policy for identifying specified employees) on the date of his or her “separation from service” (within the meaning of Section 409A of the Code), the date for settlement shall be the earlier of (i) within 30 days following the date of the Recipient’s death or (ii) the later of (x) the date that settlement would otherwise be made hereunder or (y) the first business day following the end of the sixth-month period following the date of the Recipient’s separation from service.
|
|
10.
|
No Fractional Shares
.
All provisions of this Agreement concern whole shares of Common Stock. If the application of any provision hereunder would yield a fractional share, such fractional share shall be rounded down to the next whole share if it is less than 0.5 and rounded up to the next whole share if it is 0.5 or more.
|
|
11.
|
Relationship
.
For purposes of this Agreement, Recipient shall be considered to be eligible under the Plan as long as Recipient has an employment, director or third party service provider relationship with the Company and its Affiliates. The Committee shall determine any questions as to whether and when there has been a termination of such eligibility under the Plan, and the cause of such termination, under the Plan and the Committee’s determination shall be final and binding on all persons.
|
|
12.
|
Not an Employment Agreement
.
This Agreement is not an employment agreement, and no provision of this Agreement shall be construed or interpreted to create an employment relationship between Recipient and the Company or any Affiliate, to guarantee the right to remain employed by the Company or any Affiliate for any specified term or require the Company or any Affiliate to employ Recipient for any period of time.
|
|
13.
|
Performance Stock Units Do Not Award Any Rights Of A Shareholder
. Recipient shall not have the voting rights or any of the other rights, powers or privileges of a holder of the Common Stock with respect to the Performance Stock Units that are awarded hereby. Only after a share of the Common Stock is issued in exchange for a Performance Stock Unit will Recipient have all of the rights of a shareholder with respect to such share of Common Stock issued in exchange for a Performance Stock Unit.
|
|
14.
|
Legend
. Recipient consents to the placing of an appropriate legend notation restricting resale or other transfer on the electronic book entry representing the Performance Stock Units and Restricted Shares restricting resale or other transfer of the Performance Stock Units and Restricted Shares except in accordance with all applicable securities laws and rules thereunder.
|
|
15.
|
Notices
.
Any notice, instruction, authorization, request, demand or other communications required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Company’s principal business office address to the attention of the Company’s General Counsel and to Recipient at Recipient’s residential address as it appears on the books and records of the Company, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested.
|
|
16.
|
Amendment and Waiver
.
Except as otherwise provided herein or in the Plan or as necessary to implement the provisions of the Plan, this Agreement may be amended, modified or superseded only by written instrument executed by the Company and Recipient. Only a written instrument executed and delivered by the party waiving compliance hereof shall waive any of the terms or conditions of this Agreement. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized officer of the Company. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement, in one or more instances, shall be construed as a continuing waiver of any such condition or breach, a waiver of any other condition, or the breach of any other term or condition.
|
|
17.
|
Dispute Resolution
. In the event of any difference of opinion concerning the meaning or effect of the Plan or this Agreement, such difference shall be resolved by the Committee.
|
|
18.
|
Governing Law and Severability
.
The validity, construction and performance of this Agreement shall be governed by the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect.
|
|
19.
|
Successors and Assigns
.
Subject to the limitations which this Agreement imposes upon the transferability of the Performance Stock Units granted hereby, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and to Recipient, Recipient’s permitted assigns, executors, administrators, agents, legal and personal representatives.
|
|
20.
|
Discretionary Nature of Plan.
The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. All references to the Plan shall be deemed references to the Plan as may be amended. The grant of the Performance Stock Units in this Agreement does not create any contractual right or other right to receive any Performance Stock Units or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of Recipient’s employment with the Company.
|
|
21.
|
Interpretation.
Any dispute regarding the interpretation of this Agreement shall be submitted by the Recipient or by the Company forthwith to the Board or the Committee, which shall review such dispute at its next regular meeting. The resolution of such dispute by the Board or the Committee shall be final and binding on all persons.
|
|
22.
|
Counterparts
.
This Agreement may be executed in one or more counterparts, each of which shall be an original for all purposes but all of which taken together shall constitute but one and the same instrument.
|
|
23.
|
Acceptance.
Recipient agrees that by accepting this Agreement, Recipient confirms that Recipient has read and understands the terms and provisions thereof, and accepts the Performance Stock Units subject to all of the terms and conditions of the Plan and this Agreement. Recipient acknowledges that there may be adverse tax consequences upon the grant or settlement of the Performance Stock Units, the vesting of the Restricted Shares or disposition of the underlying shares and that Recipient has been advised to consult a tax advisor prior to such grant, settlement, vesting or disposition.
|
|
1.
|
Definitions
.
For purposes of this Agreement, the following terms shall have the meanings indicated:
|
|
(a)
|
“
Cause
” shall mean Recipient (i) committed a felony or a crime involving moral turpitude or committed any other act or omission involving fraud, embezzlement or any other act of dishonesty in the course of his employment by the Company or an Affiliate which conduct damaged the Company or an Affiliate; (ii) substantially and repeatedly failed to perform duties of the office held by him or her as reasonably directed by the Company or an Affiliate; (iii) committed gross negligence or willful misconduct with respect to the Company or an Affiliate; (iv) committed a material breach of any employment agreement between Recipient and the Company or an Affiliate that is not cured within ten (10) days after receipt of written notice thereof from the Company or the Affiliate, as applicable; (v) failed, within ten (10) days after receipt by Recipient of written notice thereof from the Company or an Affiliate, to correct, cease or otherwise alter any failure to comply with instructions or other action or omission which the Board or CEO reasonably believes does or may materially or adversely affect the Company’s or an Affiliate’s business or operations; (vi) committed misconduct which is of such a serious or substantial nature that a reasonable likelihood exists that such misconduct will materially injure the reputation of the Company or an Affiliate; (vii) harassed or discriminated against the Company’s or an Affiliate’s employees, customers or vendors in violation of the Company’s policies with respect to such matters; (viii) misappropriated funds or assets of the Company or an Affiliate for personal use or willfully violated the Company policies or standards of business conduct as determined in good faith by the Board or the CEO; (ix) failed, due to some action or inaction on the part of Recipient, to have immigration status that permits Recipient to maintain full-time employment with the Company or an Affiliate in the United States in compliance with all applicable immigration law; or (x) disclosed trade secrets of the Company or an Affiliate.
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(b)
|
“
Change in Control
” means (i) the liquidation, dissolution or winding-up of the Company, (ii) the sale, license or lease of all or substantially all of the assets of the Company, or (iii) a share exchange, reorganization, recapitalization, or merger or consolidation of the Company with or into any other corporation or corporations (or other form of business entity) or of any other corporation or corporations (or other form of business entity) with or into the Company, but excluding any merger effected exclusively for the purpose of changing the domicile of the Company; provided, however, that a Change in Control shall not include any of the aforementioned transactions listed in clauses (i), (ii) and (iii) involving the Company or a Subsidiary Corporation in which the holders of shares of the Company voting stock outstanding immediately prior to such transaction or any Affiliate of such holders continue to hold at least a majority, by voting power, of the capital stock or, by a majority, based on fair market value as determined in good faith by the Board, of the assets, in each case in substantially the same proportion, of (x) the surviving or resulting corporation (or other form of business entity), (y) if the surviving or resulting corporation (or other form of business entity) is a wholly owned subsidiary of another corporation (or other form of business entity) immediately following such transaction, the parent corporation (or other form of business entity) of such surviving or resulting corporation (or other form of business entity) or (z) a successor entity holding a majority of the assets of the Company. In addition, a Change in Control shall not include a bona fide, firm commitment underwritten public offering of the Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended.
|
|
(c)
|
“
Common Stock
” shall mean the common stock of the Company, $.00005 par value per share (or such other par value as may be designated by act of the Company’s shareholders).
|
|
(d)
|
“
Disability
” shall have the meaning ascribed to such term in the Plan, as it may be amended from time to time.
|
|
(e)
|
“
Good Reason
” shall have the meaning ascribed to such term in Recipient’s employment agreement with the Company, or, if none, Recipient’s resignation from employment with the Company due to (i) a material diminution in Recipient’s annual base salary, duties, authority or responsibilities or (ii) relocation of Recipient’s primary place of employment to a geographic area more than fifty (50) miles from Recipient’s then-current primary place of employment, without Recipient’s consent; provided that Recipient has given thirty (30) days advance written notice to the Company of the initial existence of the condition described in (i) and/or (ii) and the Company has not within such thirty (30) day period remedied the condition.
|
|
(f)
|
“
Performance Stock Unit
” shall mean a Performance Stock Unit issued under the Plan that is subject to the Transfer Restrictions set forth herein.
|
|
2.
|
Grant of Performance Stock Units; Vesting of Award
.
Effective as of the Grant Date, the Company shall cause to be issued in Recipient’s name the number of Performance Stock Units set forth on the Cover Sheet. In accepting the award of Performance Stock Units granted under this Agreement, Recipient accepts and agrees to be bound by all the terms and conditions of the Plan and this Agreement. The Performance Share Units awarded pursuant to this Agreement represent the opportunity to receive Common Stock of the Company if performance goals outlined in Section 4(a) of this Agreement are satisfied. Except as otherwise provided in Section 4, as soon as reasonably practicable after the applicable Performance Period (as defined below) as provided in Section 4(b), the Company shall issue to Recipient one share of the Common Stock in exchange for each Performance Stock Unit earned under this Agreement (including any additional Performance Stock Units described in Section 5) that has not been forfeited under the Plan or this Agreement, which date shall be no later than the 15th day of the third month following the later of (i) the last day of the Company’s fiscal year in which the Performance Period ends or (ii) the last day of the Recipient’s taxable year in which the Performance Period ends. Thereafter, Recipient shall have no further rights with respect to such Performance Stock Unit. The Company shall cause to be delivered to Recipient in electronic book entry form any shares of the Common Stock that are to be issued under the terms of this Agreement in exchange for Performance Stock Units awarded hereby, and such shares of the Common Stock shall be transferable by Recipient as provided herein (except to the extent that any proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of applicable securities law). Vesting is contingent upon the Recipient remaining in the employment or service of the Company or its Subsidiaries through the vesting date, except as otherwise provided in Section 4.
|
|
3.
|
Transfer Restrictions
.
The Performance Stock Units granted hereby may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of (other than by will or the applicable laws of descent and distribution) without the written consent of the Company. Any such attempted sale, assignment, pledge, exchange, hypothecation, transfer, encumbrance or disposition in violation of this Agreement shall be void and the Company shall not be bound thereby. Further, any shares of Common Stock issued to Recipient in exchange for Performance Stock Units awarded hereby may not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable securities laws. Recipient also agrees that the Company may (a) refuse to cause the transfer of any such shares of Common Stock to be registered on the applicable stock transfer records of the Company if such proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of any applicable securities law and (b) give related instructions to the transfer agent, if any, to stop registration of the transfer of such shares of the Common Stock. The shares of Common Stock that may be issued under the Plan are registered with the Securities and Exchange Commission under a Registration Statement on Form S-8. A Prospectus describing the Plan and the shares of Common Stock is available from the Company or at www.etrade.com.
|
|
4.
|
Vesting; Forfeiture
.
|
|
(a)
|
Recipient shall earn the number of Performance Stock Units, if any, determined by the Committee following the end of the period commencing on January 1, 2018, and ending on December 31, 2020 (the “
3 Year Performance Period
”), with an opportunity to earn up to 50% of the target Performance Stock Units granted based on performance commencing on January 1, 2018 and ending December 31, 2019 (the “
2 Year Performance Period
” and together with the 3 Year Performance Period, each a “
Performance Period
”). The number of shares of Common Stock earned will be based on the level of achievement of the applicable performance goals approved by the Committee in accordance with the 2018 Long-Term Incentive Program, communicated to Recipient and set forth in the Company’s records. The total number of shares of Common Stock that may become earned shall range from zero to [two hundred percent (200%) for CEO/one hundred percent (100%) for other executive officers] of the Performance Stock Units, based on the level of achievement of the applicable performance goals during the 3 Year Performance Period, as determined by the Committee at the end of the 3 Year Performance Period. Subject to this Section 4, the number of shares of Common Stock earned shall be determined as soon as reasonably practicable after the end of the applicable Performance Period (the “
Certification Date
”). Any shares of Common Stock that are not earned pursuant to the terms of this Section 4, shall be immediately and irrevocably forfeited, including the right to receive other distributions pursuant to Section 5 hereof, as of the Certification Date, or the date of Recipient’s termination of employment, as applicable.
|
|
(b)
|
Vesting Schedule
:
|
|
(i)
|
Following the 2 Year Performance Period, the number of shares of Common Stock earned in accordance with Section 4(a) shall vest on the later of (A) the Certification Date for the 2 Year Performance Period and (B) the second anniversary of the Grant Date, subject to Recipient’s continued eligibility under the Plan through such date; provided that the number of shares of Common Stock that may be earned pursuant to this Section 4(b)(i) may not exceed 50% of the Performance Stock Units granted to the Recipient pursuant to this Agreement.
|
|
(ii)
|
Following the 3 Year Performance Period, the number of shares of Common Stock earned in accordance with Section 4(a) shall vest on the later of (A) the Certification Date for the 3 Year Performance Period and (B) the third anniversary of the Grant Date, subject to Recipient’s continued eligibility under the Plan through such date; provided that the number of shares of Common Stock that may be earned pursuant to Sections 4(b)(i) and (ii), in the aggregate, may not exceed [two hundred percent (200%) for CEO/one hundred percent (100%) for other executive officers] of the Performance Stock Units granted to the Recipient pursuant to this Agreement.
|
|
(c)
|
The Performance Shares Units shall vest with respect to a number of Shares rounded to the nearest whole number.
|
|
(d)
|
If Recipient’s employment terminates as a result of Recipient’s involuntary termination not-for-Cause or for Good Reason, the following provisions shall apply:
|
|
(i)
|
If prior to the end of a Performance Period, the number of shares of Common Stock earned shall be determined as set forth in Section 4(a) prorated for the Recipient’s service during each incomplete Performance Period, and the earned shares of Common Stock shall be delivered in accordance with Section 4(b).
|
|
(ii)
|
If after the end of a Performance Period but before the Performance Share Units are settled, the number of shares of Common Stock earned shall be determined as set forth in Section 4(a), and the earned shares of Common Stock shall be delivered in accordance with Section 4(b).
|
|
(e)
|
Upon the vesting of the Performance Stock Units earned under Section 4(a) the Company shall cause to be delivered to Recipient one share of Common Stock in exchange for each Performance Stock Unit earned in electronic book entry form, and such Common Stock shall be transferable by Recipient (except to the extent that any proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of applicable securities law).
|
|
(f)
|
If Recipient ceases to be eligible under the Plan for any reason before the Performance Share Units are earned, including death or Disability and except as provided in Sections 4(d) and 4(g), the unearned Performance Stock Units shall be forfeited to the Company upon termination of eligibility under the Plan and neither the Company nor any Affiliate shall have any further obligations to Recipient under this Agreement.
|
|
(g)
|
Upon the occurrence of a Change in Control, the Performance Stock Units shall be treated in accordance with the Company’s then applicable Change in Control Severance Plan regardless of whether Recipient participates in such plan; provided that, if the Company shall not have a Change in Control Severance Plan at the time of a Change in Control then:
|
|
(i)
|
Each incomplete Performance Period shall end on the date of the Change in Control and the performance goals applicable to the Performance Stock Units shall be deemed satisfied (A) based on the level of performance achieved as of the date of the Change in Control, if determinable, or (B) at the target level, if not determinable; provided, however, that if less than 50% of a Performance Period has elapsed as of the date of the Change in Control, then the performance goals applicable to such award shall be deemed satisfied at the target level; and
|
|
(ii)
|
any shares of Common Stock earned in accordance with Section 4(g)(i) shall be delivered to Recipient as soon as reasonably practicable.
|
|
5.
|
Dividend Equivalent Payments.
|
|
(a)
|
Cash Dividends.
If during the period Recipient holds any Performance Stock Units granted under this Agreement the Company pays a dividend in cash with respect to the outstanding shares of the Common Stock, then the Company will increase the Performance Stock Units awarded hereby that have not then been forfeited to the Company or exchanged by the Company for shares of the Common Stock by an amount equal to:
|
|
(b)
|
Stock Dividends.
If during the period Recipient holds any Performance Stock Units granted under this Agreement the Company pays a dividend in shares of the Common Stock with respect to the outstanding shares of the Common Stock, then the Company will increase the Performance Stock Units awarded hereby that have not then been forfeited to or exchanged by the Company for shares of the Common Stock by an amount equal to the product of (a) the Performance Stock Units awarded hereby that have not been forfeited to the Company or exchanged by the Company for shares of the Common Stock and (b) the number of shares of the Common Stock paid by the Company per share of the Common Stock (collectively, the “
Stock Dividend Performance Stock Units
”). Each Stock Dividend Performance Stock Unit will be subject to the same restrictions, limitations and conditions applicable to the Performance Stock Units for which such Stock Dividend Performance Stock Unit was awarded and will be exchanged for shares of the Common Stock at the same time and on the same basis as such Performance Stock Unit.
|
|
6.
|
Capital Adjustments and Reorganizations
.
The existence of the Performance Stock Units shall not affect in any way the right or power of the Company or any company the stock of which is awarded pursuant to this Agreement to make or authorize any adjustment, recapitalization, reorganization or other change in its capital structure or its business, engage in any merger or consolidation, issue any debt or equity securities, dissolve or liquidate, or sell, lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or proceeding.
|
|
7.
|
Tax Withholding
.
To the extent that the receipt of the Common Stock upon vesting or settlement of the Performance Share Units results in income to Recipient for federal, state, local or foreign income, employment or other tax purposes with respect to which the Company or its Affiliates or subsidiaries have a withholding obligation, Recipient shall deliver to the Company at the time of such receipt such amount of money as the Company or any Affiliate may require to meet such obligation under applicable tax laws or regulations, and, if Recipient fails to do so, the Company and its Affiliates and subsidiaries are authorized to withhold from the Shares granted hereby or from any cash or stock remuneration then or thereafter payable to Recipient in any capacity any tax required to be withheld by reason of such taxable income, sufficient to satisfy the withholding obligation.
|
|
8.
|
Section 409A of the Code.
The provisions of this Agreement and any payments made herein are intended to comply with, and should be interpreted consistent with, the requirements of Section 409A of the Code, and any related regulations or other effective guidance promulgated thereunder by the U.S. Department of the Treasury or the Internal Revenue Service. Notwithstanding anything contained herein to the contrary, in the event any settlement of the Performance Stock Units hereunder constitutes “deferred compensation” within the meaning of Section 409A of the Code, and the Recipient is a “specified employee” (as determined under the Company’s policy for identifying specified employees) on the date of his or her “separation from service” (within the meaning of Section 409A of the Code), the date for settlement shall be the earlier of (i) within 30 days following the date of the Recipient’s death or (ii) the later of (x) the date that settlement would otherwise be made hereunder or (y) the first business day following the end of the sixth-month period following the date of the Recipient’s separation from service.
|
|
9.
|
No Fractional Shares
.
All provisions of this Agreement concern whole shares of Common Stock. If the application of any provision hereunder would yield a fractional share, such fractional share shall be rounded down to the next whole share if it is less than 0.5 and rounded up to the next whole share if it is 0.5 or more.
|
|
10.
|
Relationship
.
For purposes of this Agreement, Recipient shall be considered to be eligible under the Plan as long as Recipient has an employment, director or third party service provider relationship with the Company and its Affiliates. The Committee shall determine any questions as to whether and when there has been a termination of such eligibility under the Plan, and the cause of such termination, under the Plan and the Committee’s determination shall be final and binding on all persons.
|
|
11.
|
Not an Employment Agreement
.
This Agreement is not an employment agreement, and no provision of this Agreement shall be construed or interpreted to create an employment relationship between Recipient and the Company or any Affiliate, to guarantee the right to remain employed by the Company or any Affiliate for any specified term or require the Company or any Affiliate to employ Recipient for any period of time.
|
|
12.
|
Performance Stock Units Do Not Award Any Rights Of A Shareholder
. Recipient shall not have the voting rights or any of the other rights, powers or privileges of a holder of the Common Stock with respect to the Performance Stock Units that are awarded hereby. Only after a share of the Common Stock is issued in exchange for a Performance Stock Unit will Recipient have all of the rights of a shareholder with respect to such share of Common Stock issued in exchange for a Performance Stock Unit.
|
|
13.
|
Legend
. Recipient consents to the placing of an appropriate legend notation restricting resale or other transfer on the electronic book entry representing the Performance Stock Units restricting resale or other transfer of the Performance Stock Units except in accordance with all applicable securities laws and rules thereunder.
|
|
14.
|
Notices
.
Any notice, instruction, authorization, request, demand or other communications required hereunder shall be in writing, and shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Company’s principal business office address to the attention of the Company’s General Counsel and to Recipient at Recipient’s residential address as it appears on the books and records of the Company, or at such other address and number as a party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received, if sent by facsimile means (confirmation of such receipt by confirmed facsimile transmission being deemed receipt of communications sent by facsimile means); and when delivered (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested.
|
|
15.
|
Amendment and Waiver
.
Except as otherwise provided herein or in the Plan or as necessary to implement the provisions of the Plan, this Agreement may be amended, modified or superseded only by written instrument executed by the Company and Recipient. Only a written instrument executed and delivered by the party waiving compliance hereof shall waive any of the terms or conditions of this Agreement. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized officer of the Company. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner effect the right to enforce the same. No waiver by any party of any term or condition, or the breach of any term or condition contained in this Agreement, in one or more instances, shall be construed as a continuing waiver of any such condition or breach, a waiver of any other condition, or the breach of any other term or condition.
|
|
16.
|
Dispute Resolution
. In the event of any difference of opinion concerning the meaning or effect of the Plan or this Agreement, such difference shall be resolved by the Committee.
|
|
17.
|
Governing Law and Severability
.
The validity, construction and performance of this Agreement shall be governed by the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect.
|
|
18.
|
Successors and Assigns
.
Subject to the limitations which this Agreement imposes upon the transferability of the Performance Stock Units granted hereby, this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and to Recipient, Recipient’s permitted assigns, executors, administrators, agents, legal and personal representatives.
|
|
19.
|
Discretionary Nature of Plan.
The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. All references to the Plan shall be deemed references to the Plan as may be amended. The grant of the Performance Stock Units in this Agreement does not create any contractual right or other right to receive any Performance Stock Units or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of Recipient’s employment with the Company.
|
|
20.
|
Interpretation.
Any dispute regarding the interpretation of this Agreement shall be submitted by the Recipient or by the Company forthwith to the Board or the Committee, which shall review such dispute at its next regular meeting. The resolution of such dispute by the Board or the Committee shall be final and binding on all persons.
|
|
21.
|
Counterparts
.
This Agreement may be executed in one or more counterparts, each of which shall be an original for all purposes but all of which taken together shall constitute but one and the same instrument.
|
|
22.
|
Acceptance.
Recipient agrees that by accepting this Agreement, Recipient confirms that Recipient has read and understands the terms and provisions thereof, and accepts the Performance Stock Units subject to all of the terms and conditions of the Plan and this Agreement. Recipient acknowledges that there may be adverse tax consequences upon the grant or vesting of the Performance Stock Units or disposition of the underlying shares and that Recipient has been advised to consult a tax advisor prior to such grant, vesting or disposition.
|
|
|
|
|
|
By:
|
|
/s/ A. JOHN HASS
|
|
|
|
A. John Hass
President, Chief Executive Officer,
and Chairman of the Board
|
|
|
|
|
|
By:
|
|
/s/ THOMAS M. PIERNO
|
|
|
|
Thomas M. Pierno
Chief Financial Officer
|
|
/s/ A. JOHN HASS
|
|
A. John Hass
President, Chief Executive Officer,
and Chairman of the Board
|
|
/s/ THOMAS M. PIERNO
|
|
Thomas M. Pierno
Chief Financial Officer
|