Amendment No. 3 to Schedule 13D

0001193125-15-217943.txt : 20150609 0001193125-15-217943.hdr.sgml : 20150609 20150609160152 ACCESSION NUMBER: 0001193125-15-217943 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20150609 DATE AS OF CHANGE: 20150609 GROUP MEMBERS: JOHN H. LEWIS GROUP MEMBERS: OSMIUM CAPITAL II, LP GROUP MEMBERS: OSMIUM CAPITAL, LP GROUP MEMBERS: OSMIUM DIAMOND, LP GROUP MEMBERS: OSMIUM SPARTAN, LP GROUP MEMBERS: OSMIUM SPECIAL OPPORTUNITY FUND, LP SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ROSETTA STONE INC CENTRAL INDEX KEY: 0001351285 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 043837082 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-85255 FILM NUMBER: 15920942 BUSINESS ADDRESS: STREET 1: 1919 NORTH LYNN STREET STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209 BUSINESS PHONE: 1-800-788-0822 MAIL ADDRESS: STREET 1: 1919 NORTH LYNN STREET STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Osmium Partners, LLC CENTRAL INDEX KEY: 0001316729 IRS NUMBER: 550793716 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 300 DRAKES LANDING ROAD STREET 2: SUITE 172 CITY: GREENBRAE STATE: CA ZIP: 94904 BUSINESS PHONE: (415) 785-4044 MAIL ADDRESS: STREET 1: 300 DRAKES LANDING ROAD STREET 2: SUITE 172 CITY: GREENBRAE STATE: CA ZIP: 94904 SC 13D/A 1 d939980dsc13da.htm AMENDMENT NO. 3 TO SCHEDULE 13D Amendment No. 3 to Schedule 13D

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 13D

INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT

TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO

RULE 13d-2(a)

(Amendment No. 3)*

Rosetta Stone Inc.

(Name of Issuer)

Common Stock, par value $0.00005 per share

(Title of Class of Securities)

777780107

(CUSIP Number)

Osmium Partners, LLC

300 Drakes Landing Road, Suite 172

Greenbrae, CA 94904

Attention: John H. Lewis

Telephone: (415) 785-4044

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

June 8, 2015

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box x.

Note. Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent.

*	The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes.)


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON John H. Lewis
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS PF
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION United States
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 148,417
		8	SHARED VOTING POWER 1,951,224
		9	SOLE DISPOSITIVE POWER 148,417
		10	SHARED DISPOSITIVE POWER 1,951,224
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 2,099,641
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 9.7%
14	TYPE OF REPORTING PERSON IN


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Osmium Partners, LLC
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS AF
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 1,951,224
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 1,951,224
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,951,224
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 9.0%
14	TYPE OF REPORTING PERSON IA, OO


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Osmium Capital, LP
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 583,648
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 583,648
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 583,648
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 2.7%
14	TYPE OF REPORTING PERSON PN


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Osmium Capital II, LP
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 317,769
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 317,769
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 317,769
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 1.5%
14	TYPE OF REPORTING PERSON PN


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Osmium Spartan, LP
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 195,034
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 195,034
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 195,034
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0.9%
14	TYPE OF REPORTING PERSON PN


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Osmium Diamond, LP
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 193,328
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 193,328
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 193,328
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0.9%
14	TYPE OF REPORTING PERSON PN


CUSIP No.: 777780107


1	NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Osmium Special Opportunity Fund, LP
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) ¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH		7	SOLE VOTING POWER 0
		8	SHARED VOTING POWER 661,445
		9	SOLE DISPOSITIVE POWER 0
		10	SHARED DISPOSITIVE POWER 661,445
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 661,445
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES ¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 3.1%
14	TYPE OF REPORTING PERSON PN

EXPLANATORY NOTE

This Amendment No. 3 to Schedule 13D (“Amendment No. 3”) is being filed with respect to the Reporting Persons beneficial ownership in Rosetta Stone Inc. (“Rosetta” or the “Issuer”). This Amendment No. 3 supplements the Schedule 13D as previously filed on August 21, 2014, as amended by Amendment No. 1 filed on November 20, 2014 and by Amendment No. 2 filed on March 6, 2015 (as amended, the “Schedule 13D”). Each Item below amends and supplements the information disclosed under the corresponding Item of the Schedule 13D. Unless otherwise indicated herein, capitalized terms used but not defined in this Amendment No. 3 shall have the same meaning herein as are ascribed to such terms in the Schedule 13D. Except as set forth herein, this Amendment No. 3 does not modify any of the information previously reported by the Reporting Persons in the Schedule 13D.

ITEM 3.

Source and Amount of Funds or Other Consideration

The source and amount of funds (excluding commissions) used by the Funds in making their purchase of the shares of Common Stock owned by each of them in the aggregate was $20,011,753.34 from working capital.

The source and amount of funds (excluding commissions) used by Mr. Lewis individually in making his purchase of the shares of Common Stock owned by him personally in the aggregate was $1,913,878.77 from his personal funds.

One or more of the Reporting Persons effect purchases of securities through margin accounts which may extend margin credit to the Reporting Persons as and when required to open or carry positions in the margin accounts, subject to applicable federal margin regulations, stock exchange rules and brokers’ credit policies. In such instances, the positions held in the margin accounts are pledged as collateral security for the repayment of debit balances in the accounts.

ITEM 4.

Purpose of Transaction.

This Amendment No. 3 is being filed in conjunction with a press release made by Osmium Partners with respect to Rosetta, dated June 8, 2015, wherein Osmium Partners expressed an opinion upon the value of Rosetta’s common stock, citing, among other things, information pertaining to Rosetta’s institutional Enterprise and Education business and comparable transaction multiples. The foregoing description does not purport to be complete and is qualified in its entirety by reference to the press release, a copy of which is attached as Exhibit 2 hereto and is incorporated herein by reference.

Except as disclosed above, none of the Reporting Persons has any other plans or proposals which relate to, or would result in, any of the matters referred to in paragraphs (a) through (j), inclusive, of the instructions to Item 4 of Schedule 13D. The Reporting Persons may, at any time and from time to time, review or reconsider their position and/or change their purpose and/or formulate plans or proposals with respect thereto.

ITEM 5.

Interest in Securities of the Issuer.

(a) The Reporting Persons beneficially own:

(i)

Fund I directly owns 583,648 shares of Common Stock representing 2.7% of all of the outstanding shares of Common Stock of the Issuer.

(ii)

Fund II directly owns 317,769 shares of Common Stock representing 1.5% of all of the outstanding shares of Common Stock of the Issuer.

(iii)

Fund III directly owns 195,034 shares of Common Stock representing 0.9% of all of the outstanding shares of Common Stock of the Issuer.

(iv)

Fund IV directly owns 193,328 shares of Common Stock representing 0.9% of all of the outstanding shares of Common Stock of the Issuer.

(v)

Fund V directly owns 661,445 shares of Common Stock representing 3.1% of all of the outstanding shares of Common Stock of the Issuer.

(vi)

Osmium Partners, as the general partner of each of the Funds, may be deemed to beneficially own the 1,951,224 shares of Common Stock held by them, representing 9.0% of all of the outstanding shares of Common Stock of the Issuer.

(vii)

Mr. Lewis individually owns 148,417 shares of Common Stock representing 0.7% of all of the outstanding shares of Common Stock. Mr. Lewis may also be deemed to be the beneficial owner of the shares of Common Stock beneficially owned by Osmium Partners.

(viii)

Collectively, the Reporting Persons beneficially own 2,099,641 shares of Common Stock representing 9.7% of all of the outstanding shares of Common Stock.

Each Reporting Person disclaims beneficial ownership with respect to any shares of Common Stock other than the shares owned directly and of record by such Reporting Person.

The percentages set forth in this response are based on the 21,610,589 shares of Common Stock outstanding as of April 30, 2015, as reported by the Issuer in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 as filed with the SEC on May 6, 2015.

(b) Osmium Partners and Mr. Lewis may be deemed to share with Fund I, Fund II, Fund III, Fund IV and Fund V (and not with any third party) the power to vote or direct the vote of and to dispose or direct the disposition of the 583,648 shares of Common Stock, 317,769 shares of Common Stock, 195,034 shares of Common Stock, 193,328 shares of Common Stock, and 661,445 shares of Common Stock reported herein, respectively. Mr. Lewis, individually, has the power to vote or direct the vote of and to dispose or direct the disposition of the 148,417 shares of Common Stock reported herein as individually owned by him.

(c) The following Reporting Persons engaged in the following open-market transactions with respect to the Issuer’s Common Stock during the last 60 days:

Osmium Capital, LP


Transaction Date	Number of Shares		Price per Share		Type of Transaction
4/17/2015		5,000	$	7.847		Purchase
4/21/2015		7,000	$	8.164		Purchase
4/23/2015		2,000	$	8.150		Purchase
4/28/2015		2,000	$	8.529		Purchase
4/29/2015		2,000	$	8.700		Purchase
4/30/2015		2,500	$	8.442		Purchase
5/6/2015		2,000	$	8.200		Purchase
5/7/2015		100	$	7.200		Purchase
5/8/2015		5,000	$	7.500		Purchase
5/11/2015		7,000	$	7.184		Purchase
5/12/2015		10,000	$	6.975		Purchase
5/13/2015		8,000	$	6.900		Purchase
5/20/2015		1,000	$	6.670		Purchase
5/21/2015		1,500	$	6.700		Purchase
5/26/2015		4,000	$	6.680		Purchase
5/27/2015		4,000	$	6.671		Purchase
5/28/2015		4,000	$	6.450		Purchase

Osmium Capital II, LP


Transaction Date	Number of Shares		Price per Share		Type of Transaction
4/23/2015		1,000	$	8.150		Purchase
4/27/2015		1,500	$	8.400		Purchase
4/28/2015		1,485	$	8.529		Purchase
4/30/2015		2,409	$	8.442		Purchase
5/12/2015		2,000	$	6.975		Purchase
5/13/2015		2,000	$	6.900		Purchase
5/20/2015		2,000	$	6.670		Purchase
5/21/2015		2,500	$	6.700		Purchase
5/26/2015		2,000	$	6.680		Purchase
5/27/2015		3,000	$	6.671		Purchase
5/28/2015		1,000	$	6.450		Purchase

Osmium Diamond, LP


Transaction Date	Number of Shares		Price per Share		Type of Transaction
4/22/2015		2,000	$	8.240		Purchase
4/27/2015		500	$	8.400		Purchase
5/1/2015		200	$	8.350		Purchase
5/8/2015		754	$	7.470		Purchase
5/11/2015		4,000	$	7.184		Purchase
5/14/2015		5,000	$	6.800		Purchase
5/15/2015		4,946	$	6.686		Purchase
5/18/2015		10,000	$	6.749		Purchase

Other than the foregoing, no transactions in the Common Stock have been effected by the Reporting Persons in the last sixty (60) days.

(d) Not applicable.

(e) Not applicable.

ITEM 7.

Material to be Filed as Exhibits.



Exhibit 1		Joint Filing Agreement (Filed herewith)

Exhibit 2		Press Release of the Reporting Persons dated June 8, 2015

SIGNATURE

After reasonable inquiry and to the best of its knowledge and belief, the undersigned each certifies that the information with respect to it set forth in this Statement is true, complete and correct.

Dated: June 8, 2015


		John H. Lewis Osmium Partners, LLC Osmium Capital, LP Osmium Capital II, LP Osmium Spartan, LP Osmium Diamond, LP Osmium Special Opportunity Fund, LP
		By:		/s/ John H. Lewis
		John H. Lewis, for himself and as Managing Member of Osmium Partners, LLC, for itself and as General Partner of Osmium Capital, LP, Osmium Capital II, LP, Osmium Spartan, LP, Osmium Diamond, LP and Osmium Special Opportunity Fund, LP

EXHIBIT INDEX



Exhibit 1		Joint Filing Agreement (Filed herewith)

Exhibit 2		Press Release of the Reporting Persons dated June 8, 2015

EX-1 2 d939980dex1.htm EX-1 EX-1

EXHIBIT 1

JOINT FILING AGREEMENT

In accordance with Rule 13d-1(k) under the Securities Exchange Act of 1934, as amended, the persons named below agree to the joint filing on behalf of each of them of a statement on Schedule 13D (including amendments thereto) with respect to the Common Stock, par value $0.00005 per share, of Rosetta Stone Inc., and further agree that this Joint Filing Agreement be included as an Exhibit to such joint filing. In evidence thereof, the undersigned hereby execute this Agreement.

Dated: June 8, 2015


		John H. Lewis Osmium Partners, LLC Osmium Capital, LP Osmium Capital II, LP Osmium Spartan, LP Osmium Diamond, LP Osmium Special Opportunity Fund, LP
		By:		/s/ John H. Lewis
		John H. Lewis, for himself and as Managing Member of Osmium Partners, LLC, for itself and as General Partner of Osmium Capital, LP, Osmium Capital II, LP, Osmium Spartan, LP, Osmium Diamond, LP and Osmium Special Opportunity Fund, LP

EX-2 3 d939980dex2.htm EX-2 EX-2

EXHIBIT 2

300 Drakes Landing Road #172

Greenbrae, CA 94904

Land: (415) 747 8698

Fax: (415) 747 8979

main@osmiumpartners.com

www.osmiumpartners.com

Greenbrae, CA

6/8/2015

Osmium Partners Supports an Evaluation of Rosetta Stone’s Strategic Alternatives

•

Given recent M&A activity, Osmium Partners (“Osmium”) believes a strategic buyer should pay at least $16 per share.

•

If $16.00 or better is not achievable after evaluating strategic alternatives, Osmium is very supportive of the current leadership and business strategy, and Rosetta Stone should stay independent.

Dear fellow shareholders,

Osmium Partners is the second largest shareholder of Rosetta Stone Inc. (RST) owning approximately 9.7% of the shares outstanding. We are not surprised by the current stock price of the Company given the recent changes in strategy, management and new Board leadership. However, we believe the Company is significantly undervalued given the business model shift, value of the underlying assets, and recent comparable transactions. Osmium believes Rosetta Stone’s shares could transact to a strategic buyer at a price of $16 per share or better. Therefore, Osmium encourages an evaluation of strategic alternatives.

Since the 2009 IPO of the Company, we believe the sell-side and investment community has viewed Rosetta Stone as a dying CD business while overlooking the growing SaaS based, institutional Enterprise and Education (“E&E”) business. Rosetta Stone’s E&E business has grown from $43 million in 2009 to $90 million in revenue on a trailing twelve-month basis, with 2015 guidance from the Company of $122-$130 million in bookings. As further discussed below, Osmium notes that there has been five recent comparable acquisitions by strategic buyers ranging from 2.1x - 5.9x Total Enterprise Value (TEV)/Revenue.

LOGO

What Makes the E&E Business So Valuable?

Rosetta Stone’s E&E business has several characteristics attractive to strategic buyers:

•

100% Software-as-a-Service (web based subscription offering).

•

80%+ annual customer renewal rates.

•

As of March 31, 2015, the E&E business has posted trailing twelve-month revenue of $90 million with 2015 bookings guidance of $122-130 million.

•

In 2014, gross margins overall were approximately 80%, implying $72 million in gross profit dollars for the E&E business.

As shown in the table of transaction values below, strategic buyers and private equity firms have found significant value in contractually obligated software revenue streams:

Year

Target

Acquirer

TEV/Revenue

Transaction
Size

2015

Scholastic’s Educational Technology and Services Business

Houghton Mifflin Harcourt

2.3x

575 mm

2014

Renaissance Learning

Hellman & Friedman

5.9x

1.1 bn

2012

GlobalEnglish

Pearson PLC

2.1x

90 mm

2012

Archipelago Learning

PLATO Learning

4.1x

291 mm

2011

Blackboard

Providence Equity Partners

3.7x

1.64 bn

2011

Renaissance Learning

Permira

3.5x

486 mm

Median

3.6x

530 mm

In early 2014, banks such as Bank of America, Credit Suisse and RBC Capital Markets provided financing to Hellman & Friedman’s $1.1 billion acquisition of Renaissance Learning, a company with similar characteristics to Rosetta Stone. Renaissance Learning’s leverage ratio rose to 7.5x EBITDA after it was purchased.¹

¹	The Wall Street Journal, May 20, 2014, available at

http://www.wsj.com/articles/SB10001424052702304422704579574184101045614.

LOGO

Osmium believes strategic buyers would model significant synergies from a transaction:

•

Rosetta Stone has one of the world’s best known language-learning brands.²

•

Rosetta Stone is in over 20,000 schools – two potential acquirers, in our judgment, each have approximately 85,000 schools.

•

Competitors have similar SaaS based platforms, but very limited, if any, SaaS based language-learning products to sell into their respective school bases.

•

E&E segment also houses Lexia Learning (a highly acclaimed literacy product).

•

Two potential acquirers have four to five times the sales force of Rosetta Stone.

•

Net-Net: Osmium believes there would be a significant cross selling opportunity into a school base four times greater than Rosetta Stone’s current base with little to no overlap of existing products and a much larger sales force across a scalable SaaS based platform.

E&E Segment Valuation

In arriving at our conclusion of a possible current valuation for Rosetta Stone, we made several assumptions specific to the E&E business:

•

We believe that a strategic buyer could generate 50%+ EBITDA margins on top of an existing SaaS based platform, or at least $36 million dollars in incremental EBITDA based on current twelve-month trailing revenue.

•

If financed on similar terms to the recent Renaissance Learning transaction, we believe Rosetta Stone could be 100% bank financed without any out of pocket equity from a strategic buyer.

•

To be conservative, we:

Assumed no benefits in cross selling a new suite of high quality brands in Literacy and Language learning into an installed school base that is four times the size of Rosetta Stone’s current base.

Assumed no benefit from employing a sales force that is four times that of Rosetta Stone’s.

²	Brief of Appellant at 5, Rosetta Stone Ltd. v. Google Inc., No. 10-2007 (4th Cir. Nov. 29, 2010), available at

http://www.citizen.org/documents/Rosetta Stone v Google Appellant Brief Lined.pdf.

LOGO

Valued the E&E business at 7.5x our estimate of EBITDA flow through that a Strategic buyer would be able to attain, reflecting a 17% discount to median market transactions and a 3.0x 2014 trailing GAAP revenue.

Consumer Segment Valuation

In addition to the E&E business, Osmium believes that, under proper care and supervision, Rosetta Stone’s consumer franchise is also a valuable asset. We believe the Company has an enormously well-known and trusted brand due to spending approximately $1.0 billion in Sales & Marketing and $200 million in R&D since 2007. Rosetta Stone brand has 74% aided awareness and unaided awareness of 45% vs. 6% for the next closest competitor.³

The consumer-facing business contains assets such as language learning, Kids learning, Fit Brains (a leader in brain-training software, second only to Lumosity, acquired for $12 million) and LiveMocha (leading social, online community for language learners, acquired for $8.8 million) with a run rate of approximately $188 million in annual bookings. Osmium understands these businesses may shrink in the near term, but we believe the Rosetta Stone consumer business in a sale is worth 0.5x TEV/Revenue or slightly over $90 million dollars. Finally, Rosetta Stone’s Consumer business has grown its SaaS-based platform from 100,430 subscribers in 1Q14 to 189,248 as of 1Q15 with a revenue run rate of $35 million.⁴

Given (1) Rosetta Stone’s mix of world-class branding, (2) two valuable business units in Consumer and E&E, and (3) substantial growth in Rosetta Stone’s Lexia Learning, we believe Rosetta Stone could achieve a median (3.6x TEV/Revenue) type valuation currently, translating to a share price of $20 per share.


Segment Value Per Share	E&E		Consumer		Cash		Share Price (Premium)
Low (2.1x TEV/Revenue)	$	8.49	$	4.22	$	2.06	$	14.77 (+82%	)
Median (3.6x TEV/Revenue)	$	14.56	$	4.22	$	2.06	$	20.84 (+157%	)
High (5.9x TEV/Revenue)	$	23.85	$	4.22	$	2.06	$	30.13 (+272%	)

Id.

⁴	Rosetta Stone Inc., Quarterly Report (Form 10-Q), at 37 (May 6, 2015).

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Potential Strategic Buyers

Following are several companies Osmium believes could be potential acquirers of Rosetta Stone:


Strategic Acquirer		Strategic Fit With

Houghton Mifflin Harcourt Company		Interest in entering “$2.2 bn Self-study Language Learning” market (05/12/15 presentation)

Pearson PLC		Wall Street English, MyEnglishLab, GlobalEnglish, Pearson School and Pearson Higher Education

EF Education First		Continued focus and expansion of EF North America

Benesse Holdings, Inc.		Technology add-on offering to traditional Berlitz Language Center

IAC/InterActiveCorp		Cross-sell opportunities with Tutor.com (where 90% of revenues come from contracts with institutions) and Princeton Review

Graham Holdings Company		Added offering to Kaplan K12 Learning Services Catalog and Kaplan International English

The Walt Disney Company		Disney Interactive and Disney English which is a subsidiary of Disney Publishing

Acquisition Premiums in Small Cap Markets

Small public companies typically have limited Wall Street analyst coverage, fewer institutional investors, and thin investor level patience for strategy shifts or leadership changes. We believe these factors drive significant share price volatility and temporarily create significantly undervalued publicly traded businesses. This opportunity in many cases is not lost on strategic buyers that are willing to pay significant premiums to market while still buying an asset that is significantly accretive to the acquirer’s bottom line. Some recent notable examples:

•

GeekNet was priced at $7.90 per share in May 2015 and received two offers for the Company by Hot Topic and Gamestop. Gamestop ended up paying $20.00 per share in cash a week later, representing a +150% market premium.

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•

ZipRealty was priced at $3.10 per share in July 2014 and Realogy paid $6.75 in a cash transaction for a one day market premium of +117%.

In the US markets in 2014 and 2015 alone, we note that 28 companies with average market capitalizations of less than $500 million have been acquired with a one day premium to market changes of at least +70%.⁵ Given these premiums paid, we would not be surprised to get to a teens share price in a sale process.

Conclusion

We appreciate the recent actions that the Board of Directors of the Company has taken to focus the Company on its most valuable assets to drive shareholder value. Recent actions include:

•

Fall 2014: Adding Directors Caroline Tsay, Steve Yankovich, and John Hass

•

Early spring 2015: Total organizational focus on maximizing value of the E&E business, and appointing John Hass as interim CEO

•

Late spring 2015: Addition of expert Al Angrisani to the transition team as well as noted investor David Nierenberg to the Board.

Rosetta Stone appears to be at a key inflection point. We are excited to be shareholders with an engaged team that has a renewed focus on the serious learners, a customer segment which purchase longer-term recurring subscriptions. With over $200 million in gross profit in 2014, we believe that there is no shortage of opportunities to allocate capital into a software brand that has significant name recognition and growth opportunities. We believe the future is bright for the Company as a standalone entity or as part of a larger entity.

Thank you.

⁵	Source: S&P Capital IQ and Osmium estimates.

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Sincerely,

John H. Lewis

Chief Investment Officer & Managing Partner

Osmium Partners, LLC

415-785-4044

CERTAIN FACTUAL AND STATISTICAL (BOTH HISTORICAL AND PROJECTED) INDUSTRY AND MARKET DATA AND OTHER INFORMATION CONTAINED HEREIN WAS OBTAINED BY OSMIUM PARTNERS FROM INDEPENDENT, THIRD-PARTY SOURCES THAT IT DEEMS TO BE RELIABLE. HOWEVER, OSMIUM HAS NOT INDEPENDENTLY VERIFIED ANY OF SUCH DATA OR OTHER INFORMATION, OR THE REASONABLENESS OF THE ASSUMPTIONS UPON WHICH SUCH DATA AND OTHER INFORMATION WAS BASED, AND THERE CAN BE NO ASSURANCE AS TO THE ACCURACY OF SUCH DATA AND OTHER INFORMATION. FURTHER, MANY OF THE STATEMENTS AND ASSERTIONS CONTAINED HEREIN REFLECT THE BELIEF OF OSMIUM, WHICH BELIEF MAY BE BASED IN WHOLE OR IN PART ON SUCH DATA AND OTHER INFORMATION. OSMIUM RECOGNIZES THAT THERE MAY BE CONFIDENTIAL OR OTHERWISE NON-PUBLIC INFORMATION IN THE POSSESSION OF THE COMPANIES DISCUSSED IN THIS LETTER THAT COULD LEAD THESE COMPANIES OR OTHERS TO DISAGREE WITH OSMIUM’S CONCLUSIONS.

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