Item 1.
|
Condensed Consolidated Financial Statements
|
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
83,699
|
|
|
$
|
91,434
|
|
Accounts receivable, net of allowance for doubtful accounts of $680 at June 30, 2017 and $467
at December 31, 2016
|
|
|
25,980
|
|
|
|
26,549
|
|
Income tax refunds receivable
|
|
|
1,310
|
|
|
|
2,967
|
|
Prepaid expenses and other current assets
|
|
|
6,213
|
|
|
|
4,631
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
117,202
|
|
|
|
125,581
|
|
Property and equipment, net
|
|
|
15,589
|
|
|
|
14,166
|
|
Goodwill
|
|
|
276,941
|
|
|
|
273,489
|
|
Intangible assets, net
|
|
|
87,949
|
|
|
|
90,717
|
|
Restricted cash
|
|
|
17,932
|
|
|
|
17,992
|
|
Other assets
|
|
|
3,076
|
|
|
|
3,075
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
518,689
|
|
|
$
|
525,020
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,985
|
|
|
$
|
2,170
|
|
Accrued expenses and other current liabilities
|
|
|
24,648
|
|
|
|
28,762
|
|
Accrued income taxes payable
|
|
|
743
|
|
|
|
1,473
|
|
Deferred revenue
|
|
|
17,226
|
|
|
|
16,081
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
44,602
|
|
|
|
48,486
|
|
Revolving line of credit
|
|
|
99,000
|
|
|
|
105,000
|
|
Other long-term liabilities
|
|
|
14,978
|
|
|
|
11,753
|
|
Deferred income taxes
|
|
|
35,556
|
|
|
|
37,780
|
|
Reserve for income taxes
|
|
|
2,792
|
|
|
|
2,727
|
|
Accrued pension benefits
|
|
|
5,824
|
|
|
|
5,296
|
|
Commitments and contingencies
(Note 13)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, Authorized shares: 10,000,000; Issued and outstanding:
none
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, Authorized shares: 250,000,000; Issued: 44,666,826 at
June 30, 2017 and 43,771,600 at December 31, 2016
|
|
|
44
|
|
|
|
43
|
|
Additional paid-in capital
|
|
|
286,607
|
|
|
|
274,946
|
|
Treasury stock, at cost, 2,763,378 shares at June 30, 2017 and 2,493,174 shares at
December 31, 2016
|
|
|
(58,992
|
)
|
|
|
(56,232
|
)
|
Retained earnings
|
|
|
94,117
|
|
|
|
105,718
|
|
Accumulated other comprehensive loss
|
|
|
(5,839
|
)
|
|
|
(10,497
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
315,937
|
|
|
|
313,978
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
518,689
|
|
|
$
|
525,020
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
57,801
|
|
|
$
|
48,733
|
|
|
$
|
110,266
|
|
|
$
|
98,575
|
|
Cost of revenue
|
|
|
10,141
|
|
|
|
7,588
|
|
|
|
18,919
|
|
|
|
15,907
|
|
Cost of revenueamortization of acquired technology
|
|
|
881
|
|
|
|
1,131
|
|
|
|
1,759
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
11,022
|
|
|
|
8,719
|
|
|
|
20,678
|
|
|
|
18,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,779
|
|
|
|
40,014
|
|
|
|
89,588
|
|
|
|
80,406
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
22,722
|
|
|
|
14,648
|
|
|
|
43,964
|
|
|
|
28,735
|
|
Research and development
|
|
|
9,227
|
|
|
|
5,991
|
|
|
|
18,781
|
|
|
|
13,327
|
|
General and administrative
|
|
|
11,814
|
|
|
|
8,638
|
|
|
|
22,741
|
|
|
|
17,487
|
|
Amortization of other intangible assets
|
|
|
1,019
|
|
|
|
742
|
|
|
|
2,030
|
|
|
|
1,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
44,782
|
|
|
|
30,019
|
|
|
|
87,516
|
|
|
|
61,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,997
|
|
|
|
9,995
|
|
|
|
2,072
|
|
|
|
19,380
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
792
|
|
|
|
162
|
|
|
|
1,550
|
|
|
|
324
|
|
Interest income
|
|
|
(66
|
)
|
|
|
(72
|
)
|
|
|
(193
|
)
|
|
|
(126
|
)
|
Loss (gain) on foreign exchange
|
|
|
2,627
|
|
|
|
(373
|
)
|
|
|
3,187
|
|
|
|
434
|
|
Loss (gain) on derivatives
|
|
|
117
|
|
|
|
(200
|
)
|
|
|
171
|
|
|
|
(206
|
)
|
Other expense (income), net
|
|
|
50
|
|
|
|
(32
|
)
|
|
|
56
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income)
|
|
|
3,520
|
|
|
|
(515
|
)
|
|
|
4,771
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit) provision for income taxes
|
|
|
(1,523
|
)
|
|
|
10,510
|
|
|
|
(2,699
|
)
|
|
|
18,975
|
|
(Benefit) provision for income taxes
|
|
|
(1,027
|
)
|
|
|
3,857
|
|
|
|
(1,128
|
)
|
|
|
6,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(496
|
)
|
|
$
|
6,653
|
|
|
$
|
(1,571
|
)
|
|
$
|
12,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholdersbasic
|
|
$
|
(496
|
)
|
|
$
|
6,447
|
|
|
$
|
(1,571
|
)
|
|
$
|
11,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholdersdiluted
|
|
$
|
(496
|
)
|
|
$
|
6,447
|
|
|
$
|
(1,571
|
)
|
|
$
|
11,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,657,071
|
|
|
|
39,377,945
|
|
|
|
39,567,254
|
|
|
|
39,250,297
|
|
Diluted
|
|
|
39,657,071
|
|
|
|
39,748,905
|
|
|
|
39,567,254
|
|
|
|
39,635,262
|
|
Dividends declared per common share
|
|
$
|
0.113
|
|
|
$
|
0.11
|
|
|
$
|
0.226
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited and in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net (loss) income
|
|
$
|
(496
|
)
|
|
$
|
6,653
|
|
|
$
|
(1,571
|
)
|
|
$
|
12,011
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial gain, net of tax of $8, $4, $15 and $8, respectively
|
|
|
15
|
|
|
|
9
|
|
|
|
29
|
|
|
|
18
|
|
Foreign currency translation adjustments, net of tax of $1,952, ($600), $2,411 and $566,
respectively
|
|
|
3,778
|
|
|
|
(1,469
|
)
|
|
|
4,629
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,297
|
|
|
$
|
5,193
|
|
|
$
|
3,087
|
|
|
$
|
12,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,571
|
)
|
|
$
|
12,011
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,173
|
|
|
|
5,771
|
|
Amortization of deferred financing costs and accreted interest
|
|
|
110
|
|
|
|
110
|
|
Loss on retirement of fixed assets
|
|
|
90
|
|
|
|
|
|
Share based compensation
|
|
|
10,023
|
|
|
|
7,399
|
|
Excess tax benefit on stock options
|
|
|
|
|
|
|
(304
|
)
|
Provision for doubtful accounts
|
|
|
591
|
|
|
|
128
|
|
Deferred income taxes
|
|
|
(4,645
|
)
|
|
|
2,296
|
|
Unrealized currency loss on foreign denominated intercompany transactions
|
|
|
2,611
|
|
|
|
430
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
421
|
|
|
|
1,105
|
|
Prepaid expenses and other assets
|
|
|
(2,109
|
)
|
|
|
(480
|
)
|
Restricted cash
|
|
|
61
|
|
|
|
(31
|
)
|
Accounts payable
|
|
|
(207
|
)
|
|
|
95
|
|
Accrued income taxes payable
|
|
|
1,117
|
|
|
|
1,400
|
|
Accrued expenses and other liabilities
|
|
|
(2,288
|
)
|
|
|
(260
|
)
|
Deferred revenue
|
|
|
1,478
|
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,855
|
|
|
|
28,870
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,589
|
)
|
|
|
(1,003
|
)
|
Acquisition of business, net of cash acquired
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,589
|
)
|
|
|
(1,104
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
|
(6,000
|
)
|
|
|
|
|
Excess tax benefit on stock options
|
|
|
|
|
|
|
304
|
|
Common stock dividends paid
|
|
|
(9,295
|
)
|
|
|
(8,473
|
)
|
Purchase of treasury stock
|
|
|
(2,213
|
)
|
|
|
|
|
Proceeds from exercises of common stock options
|
|
|
712
|
|
|
|
2,045
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(16,796
|
)
|
|
|
(6,124
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
795
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(7,735
|
)
|
|
|
21,997
|
|
Cash and cash equivalents at beginning of period
|
|
|
91,434
|
|
|
|
87,520
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
83,699
|
|
|
$
|
109,517
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MONOTYPE IMAGING HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
1. Nature of the
Business
Monotype Imaging Holdings Inc. (the Company or we) empowers expression and engagement for creatives,
designers, engineers and marketers at the worlds most revered brands. These professionals sit at globally recognized organizations or are independent creatives located across the globe. Regardless of their organization or location, we support
their efforts by producing compelling content and technologies that build beloved and valued brands, provide technology that cultivate meaningful engagement with their brand enthusiasts, and provide intelligence and insight through the measure of
content performance to optimize resources and spending. Our mission is to be the first place to turn for the design assets, technology and expertise for all touchpoints. For creatives, designers and engineers, we empower expression through
high-value design assets, technologies that improve the discovery, curation, measurement and brand integrity of content, and through custom studio design services. For marketers, we enable engagement with a customers brand enthusiasts and
measurement of content interactions in digital environments such as mobile messaging and social media platforms. We offer more than 99,000 typeface designs, and include some of the worlds most widely used designs, such as the Times New Roman
®
, Helvetica
®
, Frutiger
®
, ITC Franklin Gothic, FF Meta and Droid
typefaces, and support more than 250 Latin and non-Latin languages. Our e-commerce websites, including
myfonts.com, fonts.com, fontshop.com,
and
linotype.com,
which attracted more than 50 million visits in 2016 from over 200
countries and territories, offer thousands of high-quality font products from the Monotype Libraries, as well as from third parties.
We
are headquartered in Woburn, Massachusetts and we operate in one business segment: the development, marketing and licensing of design assets and technology. We also maintain various offices worldwide for selling and marketing, research and
development and administration. We conduct our operations through five domestic operating subsidiaries, Monotype Imaging Inc., Monotype ITC Inc. (ITC), MyFonts Inc. (MyFonts), Swyft Media Inc. and Olapic, Inc., and six
wholly-owned foreign operating subsidiaries, Olapic Argentina S.A., Monotype Ltd. (Monotype UK), Monotype GmbH (Monotype Germany), Monotype Solutions India Pvt. Ltd. (Monotype India), Monotype Hong Kong Ltd.
(Monotype Hong Kong) and Monotype KK (Monotype Japan).
2. Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements as of June 30, 2017 and for the three and six months ended
June 30, 2017 and 2016 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial
reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, such financial statements do not include all of
the information and footnotes required by GAAP for complete financial statements. GAAP requires the Companys management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ
from those estimates. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods. In managements opinion, these unaudited condensed consolidated interim financial statements
contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented.
These unaudited condensed consolidated interim financial statements should be read in conjunction with the Companys audited consolidated
financial statements for the year ended December 31, 2016, as reported in the Companys Annual Report on Form 10-K. The Companys significant accounting policies and practices are as described in the Annual Report, except for the
adoption of Accounting Standards Update, or ASU, 2016-09, as described in Note 3 below.
3. Recent Accounting Pronouncements
Adopted
Share Based Compensation
In March 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-09,
CompensationStock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting.
The guidance identifies areas for simplification involving several aspects of accounting for share based payments, including income tax consequences, classification of awards as either
equity, or liabilities, an option to make a policy election to recognize gross share based compensation expense with actual forfeitures recognized as they occur as well as certain classification changes on the statement of cash flows. This guidance
is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption permitted. We adopted ASU 2016-09 on January 1, 2017 and elected to account for forfeitures when they occur, on a modified
retrospective basis. As a result of this adoption, $0.6 million of additional stock based compensation expense, net of tax, was recorded to retained earnings on the date of adoption as a cumulative effect adjustment related to our accounting policy
change for forfeitures. In accordance with the adoption of this guidance, the tax effect of differences between tax deductions related to stock compensation and the corresponding
6
financial statement expense will no longer be recorded to additional paid in capital in our balance sheet. Instead, such amounts will be recorded to tax expense. During the second quarter of
2017, we recorded a tax expense of $71 thousand to differences (shortfalls) in stock compensation deductions realized in the second quarter and the corresponding amount of expense recognized for financial statement purposes. During the first half of
2017, we recorded a tax expense of $0.5 million to differences (shortfalls) in stock compensation deductions realized in the six months ended June 30, 2017 and the corresponding amount of expense recognized for financial statement purposes. We
also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock based compensation expense is now classified as an operating activity in our condensed consolidated statements of
cash flows. We did not adjust the classifications of excess tax benefits in our condensed consolidated statements of cash flows for the three and six months ended June 30, 2016. The adoption did not have any other material impact on our
financial statements.
Pending
Pension
Benefits
In March 2017, the FASB issued ASU No. 2017-07
Compensation-Retirement Benefits (Topic 715)-Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This guidance revises the presentation of the net periodic benefit cost in the income statement. The new standard will be effective for annual and
interim periods beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2017-07; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial
statements.
Goodwill
In January
2017, the FASB issued ASU 2017-04,
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminated step 2 from the goodwill impairment test. This guidance is effective for annual and interim
reporting periods beginning after December 15, 2019, with early adoption permitted for testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04; however, we do not expect the adoption of
this standard to have a material impact on our consolidated financial statements.
Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which requires companies to include
amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for
annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB
issued ASU 2016-02,
Leases (Topic 842): Amendments to the FASB Accounting Standards Codification,
which replaces the existing guidance for leases. ASU 2016-02 requires the identification of arrangements that should be accounted for as leases
by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will
be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at
the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all
comparative periods presented in the consolidated financial statements. This guidance is effective for annual and interim periods beginning after December 15, 2018 and requires retrospective application. The Company is currently assessing the
impact that adopting ASU 2016-02 will have on its consolidated financial statements and related disclosures.
Revenue Recognition
In May 2014, the FASB and the International Accounting Standards Board jointly issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606),
which outlines a comprehensive five-step revenue recognition model based on principle that replaces virtually all existing revenue recognition under U.S. GAAP and which requires revenue to be recognized in a manner to depict the
transfer of promised goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The standard requires retrospective application, however, it allows entities to choose
either full retrospective adoption in which the standard is applied to all of the periods presented, or modified retrospective adoption, in which the cumulative catch-up adjustment to the opening balance of retained earnings is recognized at the
date of application, with additional disclosures required to describe these effects. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral Date
, which defers the effective date of ASU 2014-09
by one year. The guidance is effective for annual reporting and interim periods beginning after December 15, 2017, with early adoption permitted for annual and interim periods beginning after December 15, 2016.
7
We expect to adopt the standard on January 1, 2018, and at that time, we expect to apply the
modified retrospective method of adoption. We have developed an implementation plan to adopt this new guidance. As part of this plan, we are currently assessing the impact of the new guidance on our results of operations and internal controls. Based
on our procedures performed to date, we have identified certain revenue streams, specifically term and royalty-based license agreements, for which the standard could have a material impact; however, further analysis is required and we will continue
to evaluate this assessment on a quarterly basis in 2017. Under the current guidance, revenue related to our term license agreements that are bundled with services related performance obligations for which vendor-specific objective evidence
(VSOE) does not exist is required to be recognized ratably over the term of the agreement. However, under the new guidance, the Company will allocate revenue to each performance obligation in the agreement and each will require separate
accounting treatment and lead to accelerated revenue recognition compared with current practice. The license portion will be recognized at the time of delivery and the service revenue will be recognized over time based on the standalone selling
prices of each performance obligation. In addition, we have on occasion, offered extended payment terms for term licenses to our customers, including cases in which the license is delivered in full at the beginning of the contract. We currently
recognize revenue under such arrangements when the payments become due, based upon the current requirement that the fee be fixed or determinable. However, under the new guidance, revenue related to such arrangements would be accelerated, with
revenue related to the license recognized at the time of delivery, less a financing component (interest income) to be recognized over time based on the payment terms. Further, under the new guidance, we will be required to estimate royalty
revenue from our royalty-based licenses in the period that the royalty-bearing event occurs, which is different from our current practice of recognizing royalty revenue when it is reported to us by the licensee, at which time the fee is deemed fixed
or determinable. The Company has converted, and plans to continue to convert, printer imaging electronic OEM customers to fixed fee contracts from royalty bearing contracts. At June 30, 2017, approximately 60% of estimated printer revenue
has been converted to fixed fee contracts. We expect these modifications to have a significant impact on our expected transition adjustment to adopt ASC 606 and we are still in the process of evaluating these and other revenue streams and
quantifying the expected impact that the standard will have on our financial statements and related disclosures.
4. Acquisition
Olapic
On August 9, 2016, the
Company purchased all of the outstanding shares of Olapic, Inc., a privately-held company located in New York, New York; its wholly-owned subsidiaries Olapic UK Ltd., based in London, England; and Olapic Argentina S.A., based in Córdoba,
Argentina (collectively, Olapic). Olapic is a provider of a leading visual commerce platform for collecting, curating, showcasing and measuring crowd sourced photos and videos. Olapics Earned Content Platform helps brands collect,
curate, use and analyze user-generated content in the form of images and videos in their ecommerce experiences and across multiple marketing channels. This allows consumers to make more educated purchasing decisions, discover new products and
connect to the brands community. Olapic leverages photos and videos from social network sites to help to create powerful branded experiences that drive consumer engagement and increase conversions. The Company acquired Olapic for an aggregate
purchase price of approximately $123.7 million, net of cash acquired; the Company paid approximately $13.7 million in cash and borrowed $110.0 million from its line of credit. The Olapic Merger Agreement included an additional
$9.0 million of consideration that has been placed in escrow and will be paid to the founders of Olapic contingent upon their continued employment with the Company. Accordingly, this amount will be recognized as compensation expense over the
service period contractually required to earn such amounts, which is $3.0 million after twenty four months and the remainder after thirty six months from the acquisition date. Monotype issued approximately $17.1 million of a combination of
restricted stock awards and restricted stock units to the founders and employees of Olapic. These awards will vest over time based on continued employment, and accordingly will be accounted for as compensation expense. Seventy four employees from
Olapics U.S. operations, eighty four employees from Olapics Argentina operations and forty UK and European employees joined the Company in connection with the acquisition. The results of operations of Olapic have been included in our
consolidated results and revenue is included within the Creative Professional market beginning on August 9, 2016, the date of acquisition.
The table below provides the Olapic employees by functional area who joined the Company in connection with the acquisition:
|
|
|
|
|
|
|
Number of
employees
|
|
Marketing and selling
|
|
|
117
|
|
Research and development
|
|
|
68
|
|
General and administration
|
|
|
13
|
|
|
|
|
|
|
Total
|
|
|
198
|
|
|
|
|
|
|
8
The purchase price was allocated to the assets and liabilities based upon their estimated fair
value at the date of acquisition, as noted below (in thousands):
|
|
|
|
|
|
|
Estimated Fair
Value at Acquisition
Date
|
|
Cash
|
|
$
|
5,942
|
|
Accounts receivable and other current assets
|
|
|
8,174
|
|
Property and equipment and other assets
|
|
|
1,029
|
|
Goodwill
|
|
|
89,705
|
|
Identifiable intangible assets
|
|
|
30,100
|
|
Accounts payable and other accrued expenses
|
|
|
(2,468
|
)
|
Deferred revenue
|
|
|
(7,334
|
)
|
Deferred tax liability
|
|
|
(1,449
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
123,699
|
|
|
|
|
|
|
The estimated fair values of intangible assets acquired were recorded as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
Value at
Acquisition Date
(in thousands)
|
|
|
Estimated Useful
Life
(in years)
|
|
Developed technology
|
|
$
|
14,300
|
|
|
|
10
|
|
Customer relationships
|
|
|
7,900
|
|
|
|
10
|
|
Non-compete agreements
|
|
|
1,400
|
|
|
|
4
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the purchase price has been allocated to intangible assets and goodwill, respectively, and is
reflected in the tables above. The fair value of the assets acquired and liabilities assumed is less than the purchase price, resulting in the recognition of goodwill. The goodwill reflects the value of the synergies we expect to realize and the
assembled workforce. The acquisition of Olapic was structured in such a manner that the goodwill is not expected to be deductible for tax purposes. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities
assumed based upon the respective estimates of fair value as of the date of the acquisition, which remains preliminary as of June 30, 2017, and using assumptions that the Companys management believes are reasonable given the information
currently available. The Company is in the process of completing its valuation of certain intangible assets, the valuation of the acquired deferred tax assets and liabilities. The final allocation of the purchase price to intangible assets,
goodwill, deferred tax assets and liabilities may differ materially from the information presented in these consolidated financial statements.
We included revenue of $4.6 million and $8.2 million, and a net loss of $9.2 million and $16.6 million, from the acquired Olapic
operations within the Companys consolidated operations for the three and six months ended June 30, 2017, respectively.
Pro Forma Results
The following table shows unaudited pro forma results of operations as if we had acquired Olapic at the beginning of the periods presented (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
Revenue
|
|
$
|
52,713
|
|
|
$
|
105,716
|
|
Net income
|
|
$
|
2,451
|
|
|
$
|
3,104
|
|
Net income available to common stockholders - basic
|
|
$
|
2,245
|
|
|
$
|
2,761
|
|
Net income available to common stock holders - diluted
|
|
$
|
2,245
|
|
|
$
|
2,762
|
|
Net income per common share: basic
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
Net income per common share: diluted
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
Weighted average number of sharesbasic
|
|
|
39,377,945
|
|
|
|
39,250,297
|
|
Weighted average number of sharesdiluted
|
|
|
39,748,905
|
|
|
|
39,635,262
|
|
The unaudited pro forma results of operations are not necessarily indicative of the actual results that would
have occurred had the transactions actually taken place at the beginning of the periods indicated.
9
5. Fair Value Measurements
The following table presents our financial assets and liabilities that are carried at fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at June 30, 2017
|
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalentsmoney market funds
|
|
$
|
10,369
|
|
|
$
|
10,369
|
|
|
$
|
|
|
|
$
|
|
|
Cash equivalentscommercial paper
|
|
|
21,981
|
|
|
|
|
|
|
|
21,981
|
|
|
|
|
|
Cash equivalentsU.S. government and agency securities
|
|
|
17,975
|
|
|
|
17,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
50,325
|
|
|
|
28,344
|
|
|
|
21,981
|
|
|
|
|
|
Restricted cash equivalentsmoney market fund
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Restricted cash equivalentsU.S. government and agency security fund
|
|
|
8,932
|
|
|
|
8,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term assets
|
|
|
17,932
|
|
|
|
17,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
68,257
|
|
|
$
|
46,276
|
|
|
$
|
21,981
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2016
|
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalentsmoney market funds
|
|
$
|
16,994
|
|
|
$
|
16,994
|
|
|
$
|
|
|
|
$
|
|
|
Cash equivalentscommercial paper
|
|
|
16,989
|
|
|
|
|
|
|
|
16,989
|
|
|
|
|
|
Cash equivalentscorporate bonds
|
|
|
4,802
|
|
|
|
|
|
|
|
4,802
|
|
|
|
|
|
Cash equivalentsU.S. government and agency securities
|
|
|
11,368
|
|
|
|
11,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
50,153
|
|
|
|
28,362
|
|
|
|
21,791
|
|
|
|
|
|
Restricted cash equivalentsmoney market fund
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Restricted cash equivalentsU.S. government and agency security fund
|
|
|
8,992
|
|
|
|
8,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term assets
|
|
|
17,992
|
|
|
|
17,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
68,145
|
|
|
$
|
46,354
|
|
|
$
|
21,791
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys recurring fair value measures relate to short-term investments, which are classified as
cash equivalents, derivative instruments and from time to time contingent consideration. The fair value of our cash equivalents are either based on quoted prices for similar assets or other observable inputs such as yield curves at commonly quoted
intervals and other market corroborated inputs. The fair value of our derivatives is based on quoted market prices from various banking institutions or an independent third-party provider for similar instruments. In determining the fair value, we
consider our non-performance risk and that of our counterparties. At June 30, 2017, we had one 30-day forward contract to sell 2.6 million British pounds sterling and purchase $3.4 million that together, had an immaterial fair value; and
at December 31, 2016, we had one 30-day forward contract to sell 2.8 million British pounds sterling and purchase $3.4 million that together, had an immaterial fair value.
10
The Companys non-financial assets and non-financial liabilities subject to non-recurring
measurements include goodwill and intangible assets.
6. Intangible Assets
Intangible assets as of June 30, 2017 and December 31, 2016 were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Weighted-
Average
Amortization
Period (Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
67,976
|
|
|
$
|
(52,548
|
)
|
|
$
|
15,428
|
|
|
$
|
67,502
|
|
|
$
|
(50,808
|
)
|
|
$
|
16,694
|
|
Acquired technology
|
|
|
11
|
|
|
|
68,772
|
|
|
|
(46,668
|
)
|
|
|
22,104
|
|
|
|
68,228
|
|
|
|
(44,361
|
)
|
|
|
23,867
|
|
Non-compete agreements
|
|
|
4
|
|
|
|
14,554
|
|
|
|
(13,098
|
)
|
|
|
1,456
|
|
|
|
14,440
|
|
|
|
(12,655
|
)
|
|
|
1,785
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
44,561
|
|
|
|
|
|
|
|
44,561
|
|
|
|
43,971
|
|
|
|
|
|
|
|
43,971
|
|
Domain names
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
4,400
|
|
|
|
4,400
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
200,263
|
|
|
$
|
(112,314
|
)
|
|
$
|
87,949
|
|
|
$
|
198,541
|
|
|
$
|
(107,824
|
)
|
|
$
|
90,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Debt
On September 15, 2015, the Company entered into a new credit agreement (the
New Credit Agreement
) by and among the
Company, the Companys subsidiary, Monotype Imaging Inc., any financial institution that becomes a Lender (as defined therein) and Silicon Valley Bank, as agent which provides for a five-year $150.0 million secured revolving credit facility
(the
Credit Facility
). The Credit Facility permits the Company to request that the Lenders, at their election, increase the secured credit facility to a maximum of $200.0 million. The Credit Facility is available to the Company on
a revolving basis through September 15, 2020. Repayment of any amounts borrowed is not required until maturity of the Credit Facility; however, the Company may repay any amounts borrowed at any time, without premium or penalty. At June 30,
2017 and December 31, 2016, the Company had $99.0 million and $105.0 million outstanding under the Credit Facility. At June 30, 2017 and December 31, 2016, available borrowings under the Credit Facility have been reduced by
approximately $0.5 million for one standby letter of credit issued in connection with a facility lease agreement, leaving $50.5 million and $44.5 million available for borrowing at June 30, 2017 and December 31, 2016, respectively.
Borrowings under the Credit Facility bear a variable rate not less than zero based upon, at the Companys option, either LIBOR or the
higher of (i) the prime rate as published in the Wall Street Journal, and (ii) 0.5% plus the overnight federal funds rate, plus in each case, an applicable margin. The applicable margin for LIBOR loans, based on the applicable leverage
ratio, is 1.25%, 1.50% or 1.75% per annum, and the applicable margin for base rate loans, based on the applicable leverage ratio, is either 0.25%, 0.50% or 0.75% per annum. At June 30, 2017, our rate, inclusive of applicable margins,
was 2.7% for LIBOR, and at December 31, 2016, our rate, inclusive of applicable margins, was 2.5% for LIBOR.
As of June 30,
2017, the maximum leverage ratio permitted was 3.00:1.00 and our leverage ratio was 2.41:1.00 and the minimum fixed charge coverage ratio was 1.25:1.00 and our fixed charge ratio was 7.82:1.00. Failure to comply with these covenants, or the
occurrence of an event of default, could permit the Lenders under the New Credit Agreement to declare all amounts borrowed under the New Credit Agreement, together with accrued interest and fees, to be immediately due and payable. In addition, the
Credit Facility is secured by a lien on substantially all of the Companys and its domestic subsidiaries tangible and intangible property by a pledge of all of the equity interests of the Companys direct and indirect domestic
subsidiaries and by a pledge by the Companys domestic subsidiaries of 65% of the equity of their direct foreign subsidiaries, subject to limited exceptions. In addition to other covenants, the New Credit Agreement places limits on the Company
and its subsidiaries ability to incur debt or liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its
business. The Company was in compliance with the covenants under the Credit Facility as of June 30, 2017.
11
8. Defined Benefit Pension Plan
Our German subsidiary maintains an unfunded defined benefit pension plan which covers substantially all employees who joined the Company prior
to the plans closure to new participants in 2006. Participants are entitled to benefits in the form of retirement, disability and surviving dependent pensions. Benefits generally depend on years of service and the salary of the employees.
The components of net periodic benefit cost included in the accompanying condensed consolidated statements of operations were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
24
|
|
|
$
|
25
|
|
|
$
|
46
|
|
|
$
|
48
|
|
Interest cost
|
|
|
27
|
|
|
|
30
|
|
|
|
52
|
|
|
|
60
|
|
Amortization
|
|
|
22
|
|
|
|
12
|
|
|
|
44
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
73
|
|
|
$
|
67
|
|
|
$
|
142
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Income Taxes
A reconciliation of income taxes computed at federal statutory rates to income tax expense is as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
(Benefit) provision for income taxes at statutory rate
|
|
$
|
(534
|
)
|
|
|
35.0
|
%
|
|
$
|
3,678
|
|
|
|
35.0
|
%
|
State and local income taxes, net of federal tax benefit
|
|
|
(41
|
)
|
|
|
2.7
|
%
|
|
|
151
|
|
|
|
1.4
|
%
|
Stock based compensation
|
|
|
(56
|
)
|
|
|
3.7
|
%
|
|
|
54
|
|
|
|
0.5
|
%
|
Foreign rate differential
|
|
|
17
|
|
|
|
(1.0
|
)%
|
|
|
(156
|
)
|
|
|
(1.5
|
)%
|
Research credits
|
|
|
152
|
|
|
|
(10.0
|
)%
|
|
|
(90
|
)
|
|
|
(0.8
|
)%
|
Permanent non-deductible acquisition-related expense
|
|
|
(657
|
)
|
|
|
43.1
|
%
|
|
|
258
|
|
|
|
2.5
|
%
|
Net shortfall on stock based compensation
|
|
|
71
|
|
|
|
(4.7
|
)%
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
21
|
|
|
|
(1.4
|
)%
|
|
|
(38
|
)
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income tax (benefit) provision
|
|
$
|
(1,027
|
)
|
|
|
67.4
|
%
|
|
$
|
3,857
|
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
(Benefit) provision for income taxes at statutory rate
|
|
$
|
(945
|
)
|
|
|
35.0
|
%
|
|
|
6,641
|
|
|
|
35.0
|
%
|
State and local income taxes, net of federal tax benefit
|
|
|
(61
|
)
|
|
|
2.3
|
%
|
|
|
271
|
|
|
|
1.4
|
%
|
Stock based compensation
|
|
|
(76
|
)
|
|
|
2.8
|
%
|
|
|
95
|
|
|
|
0.5
|
%
|
Foreign rate differential
|
|
|
62
|
|
|
|
(2.3
|
)%
|
|
|
(257
|
)
|
|
|
(1.4
|
)%
|
Research credits
|
|
|
211
|
|
|
|
(7.8
|
)%
|
|
|
(159
|
)
|
|
|
(0.9
|
)%
|
Permanent non-deductible acquisition-related expense
|
|
|
(902
|
)
|
|
|
33.4
|
%
|
|
|
419
|
|
|
|
2.2
|
%
|
Net shortfall on stock based compensation
|
|
|
542
|
|
|
|
(20.1
|
)%
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
41
|
|
|
|
(1.5
|
)%
|
|
|
(46
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income tax (benefit) provision
|
|
$
|
(1,128
|
)
|
|
|
41.8
|
%
|
|
$
|
6,964
|
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
At June 30, 2017, the reserve for uncertain tax positions was approximately $6.8 million. Of
this amount, $4.0 million is recorded as a reduction of deferred tax assets and $2.8 million is classified as long-term liabilities.
10. Net (Loss)
Income Per Share
For the three and six months ended June 30, 2017 and 2016, the net (loss) income available to common
shareholders is divided by the weighted average number of common shares outstanding during the period to calculate diluted earnings per share. For the three and six months ended June 30, 2017, the assumed exercise of stock options and
assumed vesting of restricted stock and restricted stock units were not included in the computation of net loss per share as their effect would have been anti-dilutive. For the three and six months ended June 30, 2016, the two-class method was
used in the computation of diluted net income per share, as the result was more dilutive.
The following presents a reconciliation of the
numerator and denominator used in the calculation of basic net (loss) income per share and a reconciliation of the numerator and denominator used in the calculation of diluted net (loss) income per share (in thousands, except share and per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, as reported
|
|
$
|
(496
|
)
|
|
$
|
6,653
|
|
|
$
|
(1,571
|
)
|
|
$
|
12,011
|
|
Less: net income attributable to participating securities
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholdersbasic
|
|
$
|
(496
|
)
|
|
$
|
6,447
|
|
|
$
|
(1,571
|
)
|
|
$
|
11,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
41,877,473
|
|
|
|
40,721,081
|
|
|
|
41,674,671
|
|
|
|
40,475,785
|
|
Less: weighted-average shares of unvested restricted common stock outstanding
|
|
|
(2,220,402
|
)
|
|
|
(1,343,136
|
)
|
|
|
(2,107,417
|
)
|
|
|
(1,225,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in computing basic net (loss) income per common
share
|
|
|
39,657,071
|
|
|
|
39,377,945
|
|
|
|
39,567,254
|
|
|
|
39,250,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share applicable to common shareholdersbasic
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholdersbasic
|
|
$
|
(496
|
)
|
|
$
|
6,447
|
|
|
$
|
(1,571
|
)
|
|
$
|
11,668
|
|
Add-back: undistributed earnings allocated to unvested shareholders
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
95
|
|
Less: undistributed earnings reallocated to unvested shareholders
|
|
|
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholdersdiluted
|
|
$
|
(496
|
)
|
|
$
|
6,447
|
|
|
$
|
(1,571
|
)
|
|
$
|
11,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
41,877,473
|
|
|
|
40,721,081
|
|
|
|
41,674,671
|
|
|
|
40,475,785
|
|
Less: weighted-average shares of unvested restricted common stock outstanding
|
|
|
(2,220,402
|
)
|
|
|
(1,343,136
|
)
|
|
|
(2,107,417
|
)
|
|
|
(1,225,488
|
)
|
Weighted-average number of common shares issuable upon exercise of outstanding stock options,
based on the treasury stock method
|
|
|
|
|
|
|
370,960
|
|
|
|
|
|
|
|
384,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares used in computing diluted net (loss) income per common
share
|
|
|
39,657,071
|
|
|
|
39,748,905
|
|
|
|
39,567,254
|
|
|
|
39,635,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share applicable to common shareholdersdiluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following common share equivalents have been excluded from the computation of diluted weighted-average
shares outstanding, as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
887,329
|
|
|
|
643,714
|
|
|
|
919,875
|
|
|
|
662,988
|
|
Unvested restricted stock
|
|
|
839,791
|
|
|
|
386,297
|
|
|
|
695,645
|
|
|
|
352,900
|
|
Unvested restricted stock units
|
|
|
83,469
|
|
|
|
15,377
|
|
|
|
71,526
|
|
|
|
14,085
|
|
11. Stockholders Equity
Share repurchases
On
August 30, 2016, the Companys Board of Directors approved a share purchase program permitting repurchases of up to $25.0 million of the Companys outstanding shares of common stock through December 31, 2017. During the
quarter ended June 30, 2017, the Company repurchased a total of 81,000 shares of its common stock for an aggregate purchase price of $1.6 million, including brokers fees. Intended to offset shareholder dilution, the Company expects to
make repurchases periodically, either on the open market or in privately negotiated transactions, subject to availability, as business and market conditions warrant. The share repurchase program does not obligate the Company to acquire any
particular amount of common stock, and the program may be suspended or discontinued at managements and/or the Board of Directors discretion.
Stock Based Compensation
We
account for share based compensation in accordance with ASC Topic No. 718,
Compensation Stock Compensation,
which requires the measurement of compensation costs at fair value on the date of grant and recognition of compensation
expense over the service period for awards expected to vest. The following presents the impact of share based compensation expense on our condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Marketing and selling
|
|
$
|
2,563
|
|
|
$
|
1,604
|
|
|
$
|
4,893
|
|
|
$
|
3,185
|
|
Research and development
|
|
|
1,078
|
|
|
|
876
|
|
|
|
2,096
|
|
|
|
1,689
|
|
General and administrative
|
|
|
1,551
|
|
|
|
1,141
|
|
|
|
3,034
|
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expensed
|
|
$
|
5,192
|
|
|
$
|
3,621
|
|
|
$
|
10,023
|
|
|
$
|
7,399
|
|
Property and equipment
|
|
|
31
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share based compensation
|
|
$
|
5,223
|
|
|
$
|
3,621
|
|
|
$
|
10,076
|
|
|
$
|
7,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
In the three and six months ended June 30, 2017, $31 thousand and $53 thousand,
respectively, of share based compensation was capitalized as part of internal software projects, and this amount is included in property and equipment, net in our condensed consolidated balance sheet. As of June 30, 2017, the Company had $47.2
million of unrecognized compensation expense related to employees and directors unvested stock option awards, restricted stock units and restricted stock awards that are expected to be recognized over a weighted-average period of 2.7 years.
12. Segment Reporting
We view our
operations and manage our business as one segment: the development, marketing and licensing of technologies and fonts. Factors used to identify our single segment include the financial information available for evaluation by our chief operating
decision maker in making decisions about how to allocate resources and assess performance. While our technologies and services are sold into two principal markets, Creative Professional and OEM, expenses and assets are not formally allocated to
these market segments, and operating results are assessed on an aggregate basis to make decisions about the allocation of resources. The following table presents revenue for these two principle markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Creative Professional
|
|
$
|
30,642
|
|
|
$
|
23,457
|
|
|
$
|
57,713
|
|
|
$
|
47,372
|
|
OEM
|
|
|
27,159
|
|
|
|
25,276
|
|
|
|
52,553
|
|
|
|
51,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,801
|
|
|
$
|
48,733
|
|
|
$
|
110,266
|
|
|
$
|
98,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic segment information
Effective as of January 1, 2017, our presentation of geographic revenue has been changed to better align with how our business operates.
As a result, we now report revenue based on the geographic location of our customers, rather than based on the location of our subsidiary receiving such revenue. For example, licenses may be sold to large international companies which may be
headquartered in the Republic of Korea, but the sales are received and recorded by our subsidiary located in the United States. Historically, in the table below such revenues would be included in the revenue for the United States, whereas for our
new presentation, such revenues would be reported in the Republic of Korea and included in the revenue for Rest of World. Geographic revenue for the three months and six months ended June 30, 2016 has been recast to conform to this
presentation.
We market our products and services principally through offices in the U.S., United Kingdom, Germany, China, Republic of
Korea and Japan. The following table summarizes revenue by customer location (in thousands of dollars, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
% of Total
|
|
|
Sales
|
|
|
% of Total
|
|
|
|
(In thousands, except percentages)
|
|
United States
|
|
$
|
26,750
|
|
|
|
46.3
|
%
|
|
$
|
20,354
|
|
|
|
41.8
|
%
|
Japan
|
|
|
14,854
|
|
|
|
25.7
|
|
|
|
13,016
|
|
|
|
26.7
|
|
Europe, Middle East and Africa (EMEA)
|
|
|
12,551
|
|
|
|
21.7
|
|
|
|
10,649
|
|
|
|
21.8
|
|
Rest of World
|
|
|
3,646
|
|
|
|
6.3
|
|
|
|
4,714
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,801
|
|
|
|
100.0
|
%
|
|
$
|
48,733
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
% of Total
|
|
|
Sales
|
|
|
% of Total
|
|
|
|
(In thousands, except percentages)
|
|
United States
|
|
$
|
46,680
|
|
|
|
42.3
|
%
|
|
$
|
39,014
|
|
|
|
39.6
|
%
|
Japan
|
|
|
29,315
|
|
|
|
26.6
|
|
|
|
26,685
|
|
|
|
27.1
|
|
Europe, Middle East and Africa (EMEA)
|
|
|
23,440
|
|
|
|
21.3
|
|
|
|
22,225
|
|
|
|
22.5
|
|
Rest of World
|
|
|
10,831
|
|
|
|
9.8
|
|
|
|
10,651
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,266
|
|
|
|
100.0
|
%
|
|
$
|
98,575
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Long-lived assets, which include property and equipment, goodwill and intangible assets, but
exclude other assets and deferred tax assets, are attributed to geographic areas in which Company assets reside and is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
317,146
|
|
|
$
|
318,786
|
|
United Kingdom
|
|
|
3,958
|
|
|
|
3,882
|
|
Germany
|
|
|
55,905
|
|
|
|
52,237
|
|
Rest of World
|
|
|
3,470
|
|
|
|
3,467
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
380,479
|
|
|
$
|
378,372
|
|
|
|
|
|
|
|
|
|
|
13. Commitments and Contingencies
Legal Proceedings
From
time-to-time, we may be a party to various claims, suits and complaints. We do not believe that there are claims or legal proceedings that, if determined adversely to us, would have a material adverse effect on our business, results of operations or
financial condition.
Licensing Warranty
Under our standard license agreement with our OEM customers, we warrant that the licensed technologies are free of infringement claims of
intellectual property rights and will meet the specifications as defined in the licensing agreement for a specified period, typically one year. Under the licensing agreements, liability for such indemnity obligations is limited, generally to the
total arrangement fee; however, exceptions have been made on a case-by-case basis, increasing the maximum potential liability to agreed upon amounts at the time the contract is entered into or unlimited liability. We have never incurred costs
payable to a customer or business partner to defend lawsuits or settle claims related to these warranties, and as a result, management believes the estimated fair value of these warranties is minimal. Accordingly, there are no liabilities recorded
for these warranties as of June 30, 2017 and December 31, 2016.
14. Subsequent Events
Dividend Declaration
On July 26,
2017 the Companys Board of Directors declared a $0.113 per share quarterly cash dividend on our outstanding common stock. The record date is set for October 2, 2017 and the dividend is payable to shareholders of record on October 20,
2017. Dividends are declared at the discretion of the Companys Board of Directors and depend on actual cash from operations, the Companys financial condition and capital requirements and any other factors the Companys Board of
Directors may consider relevant. Future dividend declarations, as well as the record and payment dates for such dividends, will be determined by the Companys Board of Directors on a quarterly basis.
Share Purchase Program
Subsequent to
June 30, 2017, the Company purchased 196,989 shares of common stock for $3.6 million, at an average price per share of $18.00 through July 25, 2017. The Company purchased these shares on the open market at prevailing market prices and in
accordance with its previously announced share purchase program. At July 25, 2017, $13.6 million remains for future purchase under the Plan.
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Forward Looking Statements and Projections
This Quarterly Report on Form 10-Q contains forward looking statements. Forward looking statements relate to future events or our
future financial performance. We generally identify forward looking statements by terminology such as may, will, should, expects, plans, anticipates, could,
intends, target, projects, contemplates, believes, estimates, predicts, potential or continue or the negative of these terms or other similar
words. These statements are only predictions. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of
operations and financial condition. The outcome of the events described in
16
these forward looking statements is subject to risks, uncertainties and other factors described in Risks Factors in our Annual Report on Form 10-K for the year ended December 31,
2016, as well as those described in Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Accordingly, you should
not rely upon forward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward looking statements will be achieved or occur, and actual results could differ materially from
those projected in the forward looking statements. The forward looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward
looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Overview
Monotype
empowers expression and engagement for creatives, designers, engineers and marketers at the worlds most revered brands. These professionals sit at globally recognized organizations or are independent creatives located across the globe.
Regardless of their organization or location, we support their efforts by producing compelling content and technologies that build beloved and valued brands, provide technology that cultivates meaningful engagement with their brand enthusiasts, and
provide intelligence and insight through the measure of content performance to optimize resources and spending.
Our mission is to be the
first place to turn for the design assets, technology and expertise for all touchpoints.
For creatives, designers and engineers, we
empower expression through high-value design assets, technologies that improve the discovery, curation, measurement and brand integrity of content, and through custom studio design services. For marketers, we enable engagement with a customers
brand enthusiasts and measurement of content interactions in digital environments such as mobile messaging and social media platforms.
We
offer more than 99,000 typeface designs, and include some of the worlds most widely used designs, such as the Times New Roman
®
,
Helvetica
®
, Frutiger
®
, ITC Franklin Gothic, FF Meta and Droid typefaces, and support more than 250 Latin and non-Latin
languages. Our e-commerce websites, including
myfonts.com, fonts.com, fontshop.com,
and
linotype.com,
which attracted more than 50 million visits in 2016 from over 200 countries and territories, offer thousands of high-quality
font products from the Monotype Libraries, as well as from third parties.
Sources of Revenue
We derive revenue from two principal sources: licensing our fonts and technology to brands and creative professionals, which we refer to as our
Creative Professional revenue, and licensing our fonts and technology to consumer device manufacturers and independent software vendors, which we refer to as our OEM revenue. We derive our Creative Professional revenue primarily from brands,
agencies, publishers, corporations, enterprises, small businesses and individuals. We derive our OEM revenue primarily from consumer device manufacturers. Some of our revenue streams, particularly project-related and custom revenue where spending is
largely discretionary in nature, have historically been, and we expect them to continue to be in the future, susceptible to weakening economic conditions.
Effective as of January 1, 2017, our presentation of geographic revenue has been changed to better align with how our business operates.
As a result, we now report revenue based on the geographic location of our customers, rather than based on the location of our subsidiary receiving such revenue. For example, licenses may be sold to large international companies which may be
headquartered in the Republic of Korea, but the sales are received and recorded by our subsidiary located in the United States. Historically, such revenues would be included in the revenue for the United States in the table below, whereas for our
new presentation, such revenues would be reported in the Republic of Korea and included in the revenue for Rest of World in the table below. Geographic revenue for the three months and six months ended June 30, 2016, has been recast to conform
to this presentation.
17
We market our products and services principally through offices in the U.S., United Kingdom,
Germany, China, Republic of Korea and Japan. The following summarizes revenue by customer location (in thousands of dollars, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
% of Total
|
|
|
Sales
|
|
|
% of Total
|
|
|
|
(In thousands, except percentages)
|
|
United States
|
|
$
|
26,750
|
|
|
|
46.3
|
%
|
|
$
|
20,354
|
|
|
|
41.8
|
%
|
Japan
|
|
|
14,854
|
|
|
|
25.7
|
|
|
|
13,016
|
|
|
|
26.7
|
|
Europe, Middle East and Africa (EMEA)
|
|
|
12,551
|
|
|
|
21.7
|
|
|
|
10,649
|
|
|
|
21.8
|
|
Rest of World
|
|
|
3,646
|
|
|
|
6.3
|
|
|
|
4,714
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,801
|
|
|
|
100.0
|
%
|
|
$
|
48,733
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Sales
|
|
|
% of Total
|
|
|
Sales
|
|
|
% of Total
|
|
|
|
(In thousands, except percentages)
|
|
United States
|
|
$
|
46,680
|
|
|
|
42.3
|
%
|
|
$
|
39,014
|
|
|
|
39.6
|
%
|
Japan
|
|
|
29,315
|
|
|
|
26.6
|
|
|
|
26,685
|
|
|
|
27.1
|
|
Europe, Middle East and Africa (EMEA)
|
|
|
23,440
|
|
|
|
21.3
|
|
|
|
22,225
|
|
|
|
22.5
|
|
Rest of World
|
|
|
10,831
|
|
|
|
9.8
|
|
|
|
10,651
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,266
|
|
|
|
100.0
|
%
|
|
$
|
98,575
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2017 and 2016, revenue from customers outside the United States
comprised 53.7% and 58.2%, respectively, of our total revenue. For the six months ended June 30, 2017 and 2016, revenue from customers outside the United States comprised 57.7% and 60.4%, respectively, of our total revenue. We expect that sales
to our international customers will continue to represent a substantial portion of our revenue for the foreseeable future. Future international revenue will depend on the continued use and expansion of our products worldwide.
We derive a significant portion of our OEM revenue from a limited number of customers, in particular manufacturers of laser printers and
consumer electronic devices. For the three months ended June 30, 2017 and 2016, our top ten licensees by revenue, most of which are OEM customers, accounted for approximately 29.3% and 32.3% of our total revenue, respectively. For the six
months ended June 30, 2017 and 2016, our top ten licensees by revenue accounted for approximately 30.0% and 34.8% of our total revenue, respectively. Although no one customer accounted for more than 10% of our total revenue for the three months
or six months ended June 30, 2017 or 2016, if we are unable to maintain relationships with major customers or establish relationships with new customers, our licensing revenue will be adversely affected.
Creative Professional Revenue
Our Creative Professional revenue is primarily derived from font licenses, font related services and from custom font design services. We
license fonts directly to end-users through our direct sales organization, e-commerce websites and indirectly through third-party resellers. Web font and digital ad related services refer to our web font services and web design tools. Our customers
include graphic designers, advertising agencies, media organizations and corporations. We refer to direct, indirect and custom font design services, as non-web revenue, and refer to revenue that is derived from our websites, as web revenue. In
addition, Creative Professional revenue includes revenue derived from our software as a service, or SaaS, offerings.
Revenue from font
licenses to our e-commerce customers is recognized upon payment by the customer and the software embodying the font is shipped or made available. Revenue from font licenses to other customers is recognized upon shipment of the software embodying the
font and when all other revenue recognition criteria have been met. Revenue from resellers is recognized upon notification from the reseller that our font product has been licensed and when all other revenue recognition criteria have been met.
Custom font design services are generally recognized upon delivery, unless it is part of a bundled services arrangement, in which case, it is recognized over the longest service period, or accounted for on a percentage-of-completion basis where
appropriate. Web font and digital ad service revenue is mainly self-hosted and recorded upon delivery. Revenue from Olapics Earned Content platform is a SaaS-based, subscription model. Company hosted subscription-based arrangements and our
software as a service products are accounted for as subscription revenue, recognized ratably over the subscription period.
18
We consider web server and commercial rights to online fonts as recurring revenue and it is
recognized upon payment by the customer and proof of font delivery, when all other revenue recognition criteria have been met. Contract accounting, completed contract for short-term projects and percentage-of-completion for long-term projects, is
used where services are deemed essential to the software.
OEM Revenue
Our OEM revenue is derived substantially from printer imaging, printer driver and display imaging products. Under our licensing arrangements,
we either receive a royalty for each product unit incorporating our fonts and technology that is shipped by our OEM customers or a fixed fee as specified under license arrangements with certain of our OEM customers. Fixed fee licensing arrangements
are not based on units shipped by the customer, but instead, customers pay us on a periodic basis for the right to embed our fonts and technology in their products over a certain term. Although significantly less than royalties from per-unit
shipments and fixed fees from OEM customers, we also receive revenue from software application and operating systems vendors, who include our fonts and technology in their products, and for font development. Many of our per-unit royalty licenses
continue for the duration that our OEM customers ship products that include our technology, unless terminated for breach. Other licenses have terms that typically range from one fiscal quarter to five years, and usually provide for automatic or
optional renewals. We recognize revenue from per-unit royalties in the period during which we receive a royalty report from a customer, typically one quarter after royalty-bearing units are shipped, as we do not have the ability to estimate the
number of units shipped by our customers. Revenue from fixed fee licenses is generally recognized when it is billed to the customer, so long as the product has been delivered, the license fee is fixed and non-refundable, is not bundled with any
time-based elements and collection is probable. OEM revenue also includes project-related agreements for which contract accounting, completed contract for short-term projects and percentage-of-completion for long-term projects, may be used.
Cost of Revenue
Our cost of revenue consists of font license fees that we pay on certain fonts that are owned by third parties, allocated internal engineering
expense and overhead costs directly related to custom font design services and cloud-based web services costs related to our SaaS-based offerings. License fees that we pay to third parties are typically based on a percentage of our Creative
Professional and OEM revenue and do not involve minimum fees. Our cost of OEM revenue has typically had a lower cost than our cost of Creative Professional revenue because we own a higher percentage of the fonts licensed to our OEM customers,
provide value-added technology and have negotiated lower royalty rates on the fonts we license from third parties because of volume. We have achieved improved margins on our Creative Professional revenue as a result of product mix and lower royalty
rates. In addition, Creative Professional revenue includes custom font design service revenue, which has a substantially higher cost than our other revenue. Our gross profit margin may vary depending on the mix of revenue between sales of our
fonts and sales of third-party fonts, and depending on the level of custom font design service revenue.
Cost of revenue also includes
amortization of acquired technology, which we amortize over 7 to 15 years. For purposes of amortizing acquired technology we estimate the remaining useful life of the technology based upon various considerations, including our knowledge of the
technology and the way our customers use it. We use the straight-line method to amortize our acquired technology. There is no reliable evidence to suggest that we should expect any other pattern of amortization than an even pattern, and we believe
this best reflects the expected pattern of economic usage.
Gross Profit
Our gross profit percentage is influenced by a number of factors including product mix, pricing and volume at any particular time. However, our
cost of OEM revenue is typically lower than our cost of Creative Professional revenue because we own a higher percentage of the fonts licensed to our OEM customers, provide value-added technology and have negotiated lower royalty rates on the fonts
we license from third parties because of volume. In addition, within our Creative Professional business, the cost of our custom font design service revenue is substantially higher than the cost of our other revenue. The relative cost of our Creative
Professional revenue has decreased in recent periods, as efforts to sell license rights to more fonts that we own have been successful, and because we have recently experienced success in our effort to sell certain license rights that carry lower
royalty rates to Creative Professional customers. Our Creative Professional revenue is growing at a faster rate than our OEM revenue. We expect these trends to continue. Our gross profit is subject to variability from period-to-period,
depending on the product mix and the level of custom font design service revenue.
19
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial
condition and results of operations requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.
Information about our critical accounting policies may be found in Managements Discussion and Analysis of Financial Condition and
Results of Operations, under the heading Critical Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016, except for the adoption as of January 1, 2017, of guidance in ASU
2016-09 as more fully described in Note 3 to the accompanying unaudited condensed consolidated quarterly statements.
Results of Operations for the
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
The following table sets forth items in
the condensed consolidated quarterly statements of operations as a percentage of sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Creative Professional
|
|
|
53.0
|
%
|
|
|
48.1
|
%
|
OEM
|
|
|
47.0
|
|
|
|
51.9
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenue
|
|
|
17.6
|
|
|
|
15.6
|
|
Cost of revenueamortization of acquired technology
|
|
|
1.5
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
19.1
|
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
80.9
|
|
|
|
82.1
|
|
Marketing and selling
|
|
|
39.3
|
|
|
|
30.1
|
|
Research and development
|
|
|
15.9
|
|
|
|
12.3
|
|
General and administrative
|
|
|
20.4
|
|
|
|
17.7
|
|
Amortization of other intangible assets
|
|
|
1.8
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
77.4
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3.5
|
|
|
|
20.5
|
|
Interest expense, net
|
|
|
1.3
|
|
|
|
0.2
|
|
Loss (gain) on foreign exchange
|
|
|
4.6
|
|
|
|
(0.8
|
)
|
Loss (gain) on derivatives
|
|
|
0.2
|
|
|
|
(0.4
|
)
|
Other
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense (income)
|
|
|
6.2
|
|
|
|
(1.1
|
)
|
(Loss) income before (benefit) provision for income taxes
|
|
|
(2.7
|
)
|
|
|
21.6
|
|
(Benefit) provision for income taxes
|
|
|
(1.8
|
)
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(0.9
|
)%
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
The following discussion compares the three months ended June 30, 2017 with the three months ended
June 30, 2016.
Revenue by Market
We view our operations and manage our business as one segment: the development, marketing and licensing of technologies and fonts. Factors used
to identify our single segment include the financial information available for evaluation by our chief operating decision maker in making decisions about how to allocate resources and assess performance. While our technologies and services are sold
to customers in two principal markets, Creative Professional and consumer device manufacturers and independent software vendors, together OEM, expenses and assets are not formally allocated to these markets, and operating results are assessed on an
aggregate basis to make decisions about the allocation of resources.
20
The following table presents revenue for these two principal markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Increase
|
|
|
|
2017
|
|
|
2016
|
|
|
Creative Professional
|
|
$
|
30,642
|
|
|
$
|
23,457
|
|
|
$
|
7,185
|
|
OEM
|
|
|
27,159
|
|
|
|
25,276
|
|
|
|
1,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
57,801
|
|
|
$
|
48,733
|
|
|
$
|
9,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue was $57.8 million and $48.7 million for the three months ended June 30, 2017 and 2016, respectively, an increase of $9.1 million,
or 18.6%.
Creative Professional revenue increased $7.1 million, or 30.6%, to $30.6 million for the three months ended June 30, 2017,
as compared to $23.5 million for the three months ended June 30, 2016, mainly due to revenue from Olapic and continued growth in sales of recurring licenses and digital ad revenue in the second quarter of 2017, as compared to the same period in
2016.
OEM revenue increased $1.9 million, or 7.4%, to $27.2 million for the three months ended June 30, 2017, from $25.3 million for
the three months ended June 30, 2016. Revenue from our printer imaging electronic OEM customers increased period over period, due to $2.4 million of one-time benefits as we continue to convert customers to fixed fee contracts from royalty
bearing contracts, and increased revenue from our display imaging consumer electronic OEM customers, partially offset by decreased revenue from our independent software vendor customers.
Cost of Revenue and Gross Profit
Cost of revenue, excluding amortization of acquired technology, was $10.1 million and $7.6 million for the three months ended June 30,
2017 and 2016, respectively, an increase of $2.5 million, or 33.6%. The increase in cost of revenue, excluding amortization of acquired technology, is partially due to both product mix and an increase in revenue, period over period. In the second
quarter of 2017, cost of revenue included our Olapic business and a larger proportion of our Creative Professional revenue, as compared to the same period in 2016. As a percentage of sales, cost of revenue, excluding amortization of acquired
technology, was 17.6% and 15.6% of total revenue in the three months ended June 30, 2017 and 2016, respectively.
The portion of cost
of revenue consisting of amortization of acquired technology was $0.9 million and $1.1 million for the three months ended June 30, 2017 and 2016, respectively, a decrease of $0.2 million, or 22.1%.
Gross profit in the three months ended June 30, 2017 decreased 1.2 percentage points to 80.9% of sales in the second quarter of 2017, as
compared to 82.1% of sales in the same period in 2016, mainly due to variations in product mix, net of decreased amortization of acquired technology. In the second quarter of 2017, as compared to the same period in 2016, our gross profit included
lower margins from our Olapic business, which we acquired in August 2016. In addition, for the three months ended June 30, 2017, Creative Professional revenue, which typically has a higher associated cost than OEM revenue, increased as a
percentage of our total revenue to 53.0%, as compared to 48.1% of total revenue in the same period in 2016.
Operating Expenses
Marketing and Selling.
Marketing and selling expense increased $8.1 million, or 55.1% to $22.7 million in the three months
ended June 30, 2017, as compared to $14.6 million in the three months ended June 30, 2016. Personnel and personnel related expenses increased $6.8 million due to additional headcount mainly from our acquisition of Olapic and targeted
hiring in our direct sales organization, and additional compensation expense recognized on deferred compensation arrangements in connection with our acquisitions of Swyft and Olapic. Increased infrastructure expense due to increased headcount
contributed $0.7 million to the overall increase in marketing and selling expense, period over period. Targeted marketing spending increased $0.3 million in the second quarter of 2017, as compared to the same period in 2016, due to the timing
of activities.
Research and Development.
Research and development expense increased $3.2 million, or 54.0%, to $9.2 million in the
three months ended June 30, 2017, as compared to $6.0 million in the three months ended June 30, 2016. Personnel expenses increased $2.3 million due to increased headcount in connection with our acquisition of Olapic, net of a reduction
for capitalized personnel costs for development projects and an increase in personnel costs classified as cost of sales for custom font development in the second quarter of 2017, as compared to the same period in 2016. Consulting expenses increased
$0.3 million in the second quarter of 2017, as compared to the same period in 2016. Increased rent expense contributed $0.2 million to the overall increase, period over period.
21
General and Administrative.
General and administrative expense increased $3.2 million, or
36.8%, to $11.8 million in the three months ended June 30, 2017, as compared to $8.6 million in the three months ended June 30, 2016. Personnel and personnel related expenses increased $2.2 million in the second quarter of 2017, as
compared to the same period in 2016, primarily the result of key hiring and the Olapic acquisition. Infrastructure expenses, such as rent, software and depreciation expense, increased $0.9 million period over period, mainly due to the addition of
Olapic. Legal expenses decreased $0.2 million in the three months ended June 30, 2017, as compared to the same period in 2016, due to timing of acquisitions.
Amortization of Other Intangible Assets.
Amortization of other intangible assets was $1.0 million and $0.7 million for the three months
ended June 30, 2017 and 2016, respectively, an increase of $0.3 million, or 37.3%, mainly due to our acquisition of Olapic.
Interest Expense, Net
Interest expense, net of interest income was $0.7 million and $0.1 million for the three months ended June 30, 2017 and 2016, an increase
of $0.6 million, mainly due to borrowings under our revolving line of credit in August 2016, in connection with our acquisition of Olapic.
Loss (Gain) on Foreign Exchange
Loss (gain) on foreign exchange was a loss of $2.6 million and a gain of $0.4 million for the three months ended June 30, 2017 and 2016,
respectively, a decrease of $3.0 million, primarily the result of currency fluctuations on our foreign denominated receivables and payables. In the three months ended June 30, 2017, the loss was primarily due to the strengthening of the Euro,
as compared to the U.S. dollar, on U.S. dollar denominated receivables held by our foreign subsidiaries.
Loss (Gain) on Derivatives
Loss (gain) loss on derivatives was a loss of $0.1 million and a gain of $0.2 million in the three months ended June 30, 2017 and
2016, respectively, a decrease of $0.3 million due to our 30-day forward currency contracts.
(Benefit) Provision for Income Taxes
For the three months ended June 30, 2017 and 2016, our effective tax rate was a benefit of 67.4% and a provision of 36.7%,
respectively. The change in our effective tax rate is primarily due to a charge of 43.1% for non-deductible expenses, as compared to 2.5% for the same period in 2016. The change is due to deferred compensation associated with the Olapic acquisition
and also due to the fact that the impact of the non-deductible expenses as a percentage of pre-tax income (loss) is higher in 2017 as compared to 2016, as a result of the decrease in overall pre-tax (loss) income. The effective tax rate for the
three months ended June 30, 2017 included an expense of 4.7% related to a net shortfall on stock compensation. We adopted ASU 2016-09,
Improvements to Employee Share-Based Payments
on January 1, 2017 which specifies that all tax
effects related to share based payments will be recorded through the income statement. There was no similar item in the same period in 2016, as these items were recorded to equity prior to the adoption of this standard. The effective tax rate for
the second quarter of 2017 included a benefit of 10.0% for research credits, as compared to 0.8% in the same period in 2016.
22
Results of Operations for the Six Months Ended June 30, 2017 Compared to Six Months
Ended June 30, 2016
The following table sets forth items in the condensed consolidated year-to-date statement of operations
as a percentage of sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Creative Professional
|
|
|
52.3
|
%
|
|
|
48.1
|
%
|
OEM
|
|
|
47.7
|
|
|
|
51.9
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenue
|
|
|
17.2
|
|
|
|
16.1
|
|
Cost of revenueamortization of acquired technology
|
|
|
1.6
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
18.8
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
81.2
|
|
|
|
81.6
|
|
Marketing and selling
|
|
|
39.9
|
|
|
|
29.2
|
|
Research and development
|
|
|
17.0
|
|
|
|
13.5
|
|
General and administrative
|
|
|
20.6
|
|
|
|
17.7
|
|
Amortization of other intangible assets
|
|
|
1.8
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
79.3
|
|
|
|
61.9
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1.9
|
|
|
|
19.7
|
|
Interest expense, net
|
|
|
1.2
|
|
|
|
0.2
|
|
Loss on foreign exchange
|
|
|
2.8
|
|
|
|
0.4
|
|
Loss (gain) on derivatives
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
Other
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
4.3
|
|
|
|
0.4
|
|
(Loss) income before (benefit) provision for income taxes
|
|
|
(2.4
|
)
|
|
|
19.3
|
|
(Benefit) provision for income taxes
|
|
|
(1.0
|
)
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(1.4
|
)%
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
The following discussion compares the six months ended June 30, 2017 with the six months ended
June 30, 2016.
Revenue by Market.
The following table presents revenue for these two principal markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
Increase
|
|
|
|
2017
|
|
|
2016
|
|
|
Creative Professional
|
|
$
|
57,713
|
|
|
$
|
47,372
|
|
|
$
|
10,341
|
|
OEM
|
|
|
52,553
|
|
|
|
51,203
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
110,266
|
|
|
$
|
98,575
|
|
|
$
|
11,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue was $110.3 million and $98.6 million for the six months ended June 30, 2017 and 2016, respectively, an increase of $11.7 million,
or 11.9%.
Creative Professional revenue increased $10.3 million, or 21.8%, to $57.7 million for the six months ended June 30, 2017,
as compared to $47.4 million for the six months ended June 30, 2016, mainly due to revenue from Olapic and continued growth in sales of recurring licenses and digital ad revenue in the first half of 2017, as compared to the same period in 2016.
23
OEM revenue was $52.6 million and $51.2 million for the six months ended June 30, 2017 and
2016, respectively, an increase of $1.4 million, or 2.6%. Revenue from our printer imaging electronic OEM customers increased period over period, due to $4.1 million of one-time benefits as we continue to convert customers to fixed fee contracts
from royalty bearing contracts, and revenue from our display imaging consumer electronic OEM customers increased, partially offset by decreased revenue from our independent software vendor customers.
Cost of Revenue and Gross Profit
Cost of revenue excluding amortization of acquired technology was $18.9 million and $15.9 million in the six months ended June 30, 2017
and 2016, respectively, an increase of $3.0 million, or 18.9%. The increase in cost of revenue, excluding amortization of acquired technology, is partially due to both product mix and an increase in revenue, period over period. In the first half of
2017, cost of revenue included our Olapic business and a larger proportion of our Creative Professional revenue, as compared to the same period in 2016. As a percentage of sales, cost of revenue, excluding amortization of acquired technology, was
17.2% and 16.1% of total revenue in the six months ended June 30, 2017 and 2016, respectively.
Amortization of acquired technology
was $1.8 million and $2.3 million for the six months ended June 30, 2017 and 2016, respectively, a decrease of $0.5 million, or 22.2%, primarily due to an asset that became fully amortized in October 2016.
Gross profit was 81.2% and 81.6% of sales in the six months ended June 30, 2017 and 2016, respectively, a decrease of 0.4%, mainly due to
variations in product mix, net of decreased amortization of acquired technology. In the first half of 2017, as compared to the same period in 2016, our gross profit included lower margins from our Olapic business, which we acquired in August 2016.
In the six months ended June 30, 2017, Creative Professional revenue, which typically has a higher associated cost than OEM revenue, increased as a percentage of total revenue to 52.3% of total revenue, as compared to 48.1% of total revenue in
the same period in 2016.
Operating Expenses
Marketing and Selling.
Marketing and selling expense increased $15.3 million, or 53.0%, to $44.0 million in the six months ended
June 30, 2017, as compared to $28.7 million in the six months ended June 30, 2016. Personnel and personnel related expenses increased $12.5 million due to additional headcount mainly from our acquisition of Olapic and targeted hiring in
our direct sales organization, and additional compensation expense recognized on deferred compensation arrangements in connection with our acquisitions of Swyft and Olapic. Increased infrastructure expense due to increased headcount contributed
$1.7 million to the overall increase in marketing and selling expense, period over period. Consulting and marketing expenses increased $0.6 million in the first half of 2017, as compared to the same period in 2016, due to the timing of
activities.
Research and Development.
Research and development expense increased $5.5 million, or 40.9%, to $18.8 million in the
six months ended June 30, 2017, as compared to $13.3 million in the six months ended June 30, 2016. Personnel expenses increased $4.3 million in the first half of 2017, as compared to the same period in 2016, a result of increased
headcount in connection with our acquisition of Olapic, net of a reduction for capitalized personnel costs for development projects and an increase in personnel costs classified as cost of sales for custom font development. Increased rent expense
contributed $0.6 million to the overall increase period over period, mainly due to the addition of Olapic. Consulting expenses increased $0.4 million in the first half of 2017, as compared to the same period in 2016.
General and Administrative.
General and administrative expense increased $5.2 million, or 30.1% to $22.7 million in the six months
ended June 30, 2017, as compared to $17.5 million in the same period in 2016. Personnel expenses increased $3.5 million in the six months ended June 30, 2017, as compared to the same period in 2016, mainly the result of key hiring and the
Olapic acquisition. Infrastructure expenses, such as software, rent and depreciation expenses, increased $1.8 million period over period, mainly due to the addition of Olapic. Legal expenses decreased $0.4 million in the six months ended
June 30, 2017, as compared to the same period in 2016, due to timing of acquisitions.
Amortization of Other Intangible
Assets.
Amortization of other intangible assets was $2.0 million and $1.5 million for the six months ended June 30, 2017 and 2016, respectively, an increase of $0.5 million, or 37.4%, mainly due to our acquisition of Olapic.
Interest Expense, Net
Interest expense, net of interest income increased $1.2 million to $1.4 million for the six months ended June 30, 2017, as compared to
$0.2 million for the six months ended June 30, 2016, mainly due to borrowings under our revolving line of credit in August 2016, in connection with our acquisition of Olapic.
24
Loss on Foreign Exchange
Loss on foreign exchange increased $2.8 million to $3.2 million for the six months ended June 30, 2017, as compared to $0.4 million for
the six months ended June 30, 2016, primarily the result of currency fluctuations on our foreign denominated receivables and payables. In the first half of 2017, the loss was mainly attributed to the strengthening of the Euro, as compared to
the U.S. dollar, on U.S. dollar denominated receivables held by our foreign subsidiaries.
Loss (Gain) on Derivatives
Loss (gain) on derivatives was a loss of $0.2 million and a gain of $0.2 million in the six months ended June 30, 2017 and 2016,
respectively, a decrease of $0.4 million primarily due to our 30-day forward currency contracts.
Provision for Income Taxes
For the six months ended June 30, 2017 and 2016, our effective tax rate was a benefit of 41.8% and a provision of 36.7%, respectively. The
increase in the effective tax rate for the six months ended June 30, 2017 included a charge of 33.4% for non-deductible expenses, as compared to 2.2% for the same period in 2016. The increase is due to deferred compensation associated with the
Olapic acquisition and also due to the fact that the impact of the non-deductible expenses as a percentage of pre-tax income (loss) is higher in 2017 as compared to 2016, as a result of the decrease in overall pre-tax (loss) income. The effective
tax rate for the six months ended June 30, 2017 included an expense of 20.1% related to a net shortfall on stock compensation. We adopted ASU 2016-09,
Improvements to Employee Share-Based Payments
on January 1, 2017 which specifies
that all tax effects related to share based payments will be recorded through the income statement. There was no similar item in the same period in 2016, as these items were recorded to equity prior to the adoption of this standard. The effective
tax rate for the second quarter of 2017 included a benefit of 7.8% for research credits, as compared to 0.9% in the same period in 2016.
Recently
Issued Accounting Pronouncements
Information concerning recently issued accounting pronouncements may be found in Note 3 to our
unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Cash Flows for the Six Months Ended June 30, 2017 and 2016
Since our inception, we have financed our operations primarily through cash from operations, private and public stock sales and long-term debt
arrangements, as described below. We believe our existing cash and cash equivalents, our cash flow from operating activities and available bank borrowings will be sufficient to meet our anticipated cash needs for at least one year from the issuance
of these financial statements. At June 30, 2017, our principal sources of liquidity were cash and cash equivalents totaling $83.7 million and a $150.0 million revolving credit facility, of which there was $99.0 million of outstanding
borrowings. On August 30, 2016, our Board of Directors approved a share repurchase program of up to $25.0 million of our outstanding common stock, which permits purchases through December 31, 2017. In the six months ended June 30,
2017, we used $2.2 million in cash to purchase shares under the plan. Olapic has, and will continue to operate at a net loss in the near term. Our future working capital requirements will depend on many factors, including the operations of our
existing business, our potential strategic expansion and future acquisitions we might undertake.
The following table presents our cash
flows from operating activities, investing activities and financing activities for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
11,855
|
|
|
$
|
28,870
|
|
Net cash used in investing activities
|
|
|
(3,589
|
)
|
|
|
(1,104
|
)
|
Net cash used in financing activities
|
|
|
(16,796
|
)
|
|
|
(6,124
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
795
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in cash and cash equivalents
|
|
$
|
(7,735
|
)
|
|
$
|
21,997
|
|
|
|
|
|
|
|
|
|
|
25
Operating Activities
Variations in operating cash flows occur from time-to-time, because our enterprise customers make upfront payments on subscription revenue.
These payments are required under the terms of our license agreements and can cause large fluctuations in accounts receivable and deferred revenue. The timing and extent of such payments may significantly impact our cash balances.
We generated $11.9 million in cash from operations during the six months ended June 30, 2017. Net loss, after adjusting for depreciation
and amortization, amortization of deferred financing costs and accretion of interest, loss on retirement of fixed assets, share based compensation, provision for doubtful accounts, deferred income taxes, and unrealized currency loss on foreign
denominated intercompany transactions generated $13.5 million in cash. Decreased accrued expenses and accounts payable used $2.5 in cash, primarily a result of the payment of 2016 accrued variable compensation. Increased deferred revenue and
decreased accounts receivable, offset by increased prepaid expense used $0.2 million in cash, mainly due to timing. Accrued income taxes generated $1.1 million during the six months ended June 30, 2017.
We generated $28.9 million in cash from operations during the six months ended June 30, 2016. Net (loss) income, after adjusting for
depreciation and amortization, amortization of deferred financing costs and accretion of interest, share based compensation, excess tax benefit on stock options, provision for doubtful accounts, deferred income taxes, and unrealized currency loss on
foreign denominated intercompany transactions generated $27.8 million in cash. Decreased accounts receivable offset by decreased deferred revenue generated $0.3 million in cash, mainly due to timing of customer payments. Decreased accrued expenses
and increased prepaid expenses offset by increased accounts payable used $0.6 million, primarily a result of the payment of 2015 accrued variable compensation amounts. Increased accrued income taxes generated $1.4 million during the six months ended
June 30, 2016.
Investing Activities
During the six months ended June 30, 2017, we used $3.6 million in investing activities mainly for the purchase of property and equipment.
During the six months ended June 30, 2016 we used $1.1 million in investing activities mainly for the purchase of property and equipment.
Financing Activities
Cash used in financing activities for the six months ended June 30, 2017 was $16.8 million. We received cash from exercises of stock
options of $0.7 million. We paid cash dividends of $9.3 million and we paid $6.0 million on our outstanding revolving line of credit. We also purchased $2.2 million of treasury stock in the six months ended June 30, 2017.
Cash used in financing activities for the six months ended June 30, 2016 was $6.1 million. We received cash from exercises of stock
options of $2.0 million, excess tax benefit on stock options provided $0.3 million and we paid cash dividends of $8.5 million in the six months ended June 30, 2016.
Dividends
On
April 27, 2017 our Board of Directors approved a $0.113 per share or $4.7 million, quarterly cash dividend on our outstanding common stock. The record date was July 3, 2017 and the dividend was paid to shareholders of record on
July 21, 2017. We anticipate this to be a recurring quarterly dividend with future payments and record dates, subject to board approval.
Credit Facility
On September 15, 2015, the Company entered into a new credit agreement (the
New Credit Agreement
) by and among the
Company, the Companys subsidiary, Monotype Imaging Inc., any financial institution that becomes a Lender (as defined therein) and Silicon Valley Bank, as agent which provides for a five-year $150.0 million secured revolving credit facility
(the
Credit Facility
). The Credit Facility permits the Company to request that the Lenders, at their election, increase the secured credit facility to a maximum of $200.0 million. The Credit Facility is available to the Company on
a revolving basis through September 15, 2020. Repayment of any amounts borrowed is not required until maturity of the Credit Facility; however, the Company may repay any amounts borrowed at any time, without premium or penalty. Borrowings under
the Credit Facility bear a variable rate not less than zero based upon, at the Companys option, either LIBOR or the higher of (i) the prime rate as published in the Wall Street Journal, and (ii) 0.5% plus the overnight federal funds
rate, plus in each case, an applicable margin. The applicable margin for LIBOR loans, based on the applicable leverage ratio, is 1.25%, 1.50% or 1.75% per annum, and the applicable margin for base rate loans, based on the applicable leverage
ratio, is either 0.25%, 0.50% or 0.75%% per annum. At June 30, 2017, our rate, inclusive of applicable margins, was 2.7% for LIBOR, and at December 31, 2016, our rate, inclusive of applicable margins, was 2.5% for LIBOR. The Company
had outstanding borrowings under the Credit Facility of $99.0 million at June 30, 2017, and $105.0 million at December 31, 2016. The Credit Facility has $0.5 million reserved for one stand-by letter of credit in connection with a facility
lease agreement, leaving $50.5 million and $44.5 million available for borrowing at June 30, 2017 and December 31, 2016, respectively.
26
As of June 30, 2017, the maximum leverage ratio permitted was 3.00:1.00 and our leverage
ratio was 2.41:1.00 and the minimum fixed charge coverage ratio was 1.25:1.00 and our fixed charge ratio was 7.82:1.00. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the New Credit
Agreement to declare all amounts borrowed under the New Credit Agreement, together with accrued interest and fees, to be immediately due and payable. In addition, the Credit Facility is secured by a lien on substantially all of the Companys
and its domestic subsidiaries tangible and intangible property by a pledge of all of the equity interests of the Companys direct and indirect domestic subsidiaries and by a pledge by the Companys domestic subsidiaries of 65% of the
equity of their direct foreign subsidiaries, subject to limited exceptions. In addition to other covenants, the New Credit Agreement places limits on the Company and its subsidiaries ability to incur debt or liens and engage in sale-leaseback
transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Company was in compliance with the covenants under the Credit Facility as
of June 30, 2017.
The following table presents a reconciliation from net (loss) income, which is the most directly comparable GAAP
operating performance measure, to EBITDA and from EBITDA to Adjusted EBITDA as defined in our credit facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net (loss) income
|
|
$
|
(496
|
)
|
|
$
|
6,653
|
|
|
$
|
(1,571
|
)
|
|
$
|
12,011
|
|
(Benefit) provision for income taxes
|
|
|
(1,027
|
)
|
|
|
3,857
|
|
|
|
(1,128
|
)
|
|
|
6,964
|
|
Interest expense, net
|
|
|
726
|
|
|
|
90
|
|
|
|
1,357
|
|
|
|
198
|
|
Depreciation and amortization
|
|
|
3,122
|
|
|
|
2,897
|
|
|
|
6,173
|
|
|
|
5,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
2,325
|
|
|
$
|
13,497
|
|
|
$
|
4,831
|
|
|
$
|
24,944
|
|
Share based compensation
|
|
|
5,192
|
|
|
|
3,621
|
|
|
|
10,023
|
|
|
|
7,399
|
|
Non-cash add backs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, issuance and cash non-operating costs
|
|
|
(53
|
)
|
|
|
98
|
|
|
|
(4
|
)
|
|
|
478
|
|
Acquisition expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(1)
|
|
$
|
7,464
|
|
|
$
|
17,216
|
|
|
$
|
14,850
|
|
|
$
|
32,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjusted EBITDA is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as income (loss) from operations and net income
(loss). Adjusted EBITDA as an operating performance measure has material limitations since it excludes the statement of income impact of depreciation and amortization expense, interest expense, net, the provision (benefit) for income taxes and share
based compensation and therefore does not represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. We have significant intangible assets and amortization
expense is a meaningful element in our financial statements and therefore its exclusion from Adjusted EBITDA is a material limitation. We have a significant amount of debt, and interest expense is a necessary element of our costs and therefore its
exclusion from Adjusted EBITDA is a material limitation. We generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary element of our costs and therefore its exclusion from
Adjusted EBITDA is a material limitation. We have share based compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion from Adjusted EBITDA is a material limitation. Non-cash expenses,
restructuring, issuance and cash non-operating expenses have a meaningful impact on our financial statements. Therefore, their exclusion from Adjusted EBITDA is a material limitation. As a result, Adjusted EBITDA should be evaluated in conjunction
with net (loss) income for complete analysis of our profitability, as net (loss) income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. As Adjusted
EBITDA is not defined by GAAP, our definition of Adjusted EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the
limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.
|
The Credit Facility also contains provisions for an increased interest rate during periods of default. We do not believe that these
covenants will affect our ability to operate our business, and we were in compliance with all covenants under our Credit Facility as of June 30, 2017.
27
Non-GAAP Measures
In addition to Adjusted EBITDA as discussed above, we rely internally on a financial measure that is not calculated according to GAAP. This
non-GAAP measure is net adjusted EBITDA, which is defined as net (loss) income before interest expense, net, other (income) expense, net, provision for income taxes, depreciation, amortization of acquired intangible assets and share based
compensation expenses. We use net adjusted EBITDA as a principal indicator of the operating performance of our business. We use net adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the
financial results and forecasts reported to our board of directors, determining bonus compensation for our employees based on operating performance and evaluating short-term and long-term operating trends in our operations. We believe that net
adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period-to-period without direct correlation to underlying
operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational
decision-making. We believe that trends in our net adjusted EBITDA may be valuable indicators of our operating performance.
The following
table presents a reconciliation from net (loss) income, which is the most directly comparable GAAP operating financial measure, to net adjusted EBITDA as used by management (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net (loss) income
|
|
$
|
(496
|
)
|
|
$
|
6,653
|
|
|
$
|
(1,571
|
)
|
|
$
|
12,011
|
|
Interest expense, net
|
|
|
726
|
|
|
|
90
|
|
|
|
1,357
|
|
|
|
198
|
|
Other expense (income), net
|
|
|
2,794
|
|
|
|
(605
|
)
|
|
|
3,414
|
|
|
|
207
|
|
(Benefit) provision for income taxes
|
|
|
(1,027
|
)
|
|
|
3,857
|
|
|
|
(1,128
|
)
|
|
|
6,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,997
|
|
|
|
9,995
|
|
|
|
2,072
|
|
|
|
19,380
|
|
Depreciation and amortization
|
|
|
3,122
|
|
|
|
2,897
|
|
|
|
6,173
|
|
|
|
5,771
|
|
Share based compensation
|
|
|
5,192
|
|
|
|
3,621
|
|
|
|
10,023
|
|
|
|
7,399
|
|
Acquisition-related compensation
(1)
|
|
|
1,407
|
|
|
|
578
|
|
|
|
2,814
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjusted EBITDA
(2)
|
|
$
|
11,718
|
|
|
$
|
17,091
|
|
|
$
|
21,082
|
|
|
$
|
33,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the three months ended June 30, 2017, the amount includes $0.9 million of expense associated with the deferred compensation with the founders of Olapic in connection with the acquisition and
$0.5 million of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement. For the three months ended June 30, 2016, the amount includes $0.6 million of expense associated with
the deferred compensation arrangement resulting from the Amendment to the Swyft Merger Agreement. For the six month ended June 30, 2017, the amounts include $1.8 million of expense associated with the deferred compensation arrangement with the
founders of Olapic in connection with the acquisition and $1.0 million of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement. For the six months ended June 30, 2016, the
amounts include $1.2 million of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement.
|
(2)
|
Net adjusted EBITDA is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as income (loss) from operations and net income
(loss). Net adjusted EBITDA as an operating performance measure has material limitations since it excludes the statement of income impact of depreciation and amortization expense and share based compensation and therefore does not represent an
accurate measure of profitability. We have significant intangible assets and amortization expense is a meaningful element in our financial statements and therefore its exclusion from net adjusted EBITDA is a material limitation. Share based
compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion from net adjusted EBITDA is a material limitation. As a result, net adjusted EBITDA should be evaluated in conjunction with net
income (loss) for complete analysis of our profitability, as net income (loss) includes the financial statement impact of these items and is the most directly comparable GAAP performance measure to net adjusted EBITDA. As net adjusted EBITDA is not
defined by GAAP, our definition of net adjusted EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations
that net adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.
|
28
In our quarterly earnings press releases and conference calls, in addition to Adjusted EBITDA and
net adjusted EBITDA as discussed above, we discuss a key measure that is not calculated according to GAAP. This non-GAAP measure is non-GAAP earnings per diluted share, which is defined as earnings per diluted share before amortization of acquired
intangible assets and share based compensation expenses. We use non-GAAP earnings per diluted share as one of our principal indicators of the operating performance of our business. We use non-GAAP earnings per diluted shares in internal forecasts,
supplementing the financial results and forecasts reported to our board of directors and evaluating short-term and long-term operating trends in our operations. We believe that non-GAAP earnings per diluted share permits a comparative assessment of
our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period-to-period without direct correlation to underlying operating performance. We believe that these
non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our
non-GAAP earnings per diluted share may be valuable indicators of our operating performance.
The following table presents a
reconciliation from net (loss) income per diluted share, which is the most directly comparable GAAP measure, to non-GAAP earnings per diluted share as used by management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
GAAP net (loss) income per diluted share
|
|
$
|
(0.01
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.29
|
|
Amortization, net of tax of $0.03, $0.02, $0.04 and $0.03, respectively
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.05
|
|
|
|
0.06
|
|
Share based compensation, net of tax of $0.09, $0.03, $0.11 and $0.07, respectively
|
|
|
0.04
|
|
|
|
0.07
|
|
|
|
0.15
|
|
|
|
0.13
|
|
Acquisition-related compensation, net of tax of $0.00, $0.00, $0.00 and $0.00, respectively
(1)
|
|
|
0.03
|
|
|
|
0.01
|
|
|
|
0.07
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP earnings per diluted
share
(2)
|
|
$
|
0.08
|
|
|
$
|
0.27
|
|
|
$
|
0.23
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the three months ended June 30, 2017, the amount includes $0.9 million, or $0.02 per share, of expense associated with the deferred compensation arrangement with the founders of Olapic in connection with
the acquisition and $0.5 million, or $0.01 per share, of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement. For the three months ended June 30, 2016 the amount includes
$0.6 million, or $0.01 per share, of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement. For the six months ended June 30, 2017, the amount includes $1.8 million, or
$0.04 per share, of expense associated with the deferred compensation arrangement with the founders of Olapic in connection with the acquisition and $1.0 million, or $0.03 per share, of expense associated with the deferred compensation
arrangement resulting from an amendment to the Swyft Merger Agreement. For the six months ended June 30, 2016 the amount includes $1.2 million, or $0.03 per share, of expense associated with the deferred compensation arrangement resulting from
an amendment to the Swyft Merger Agreement.
|
(2)
|
Non-GAAP earnings per diluted share is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as earnings per share and
earnings per diluted share. Non-GAAP earnings per diluted share as an operating performance measure has material limitations since it excludes the statement of income impact of amortization expense and share based compensation, and therefore, does
not represent an accurate measure of profitability. We have significant intangible assets and amortization expense is a meaningful element in our financial statements and therefore its exclusion from non-GAAP earnings per diluted share is a material
limitation. Share based compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion from non-GAAP diluted earnings per share is a material limitation. Contingent consideration and its
associated income or (expense) has a meaningful impact on our financial statements therefore its exclusion from non-GAAP diluted earnings per share is a material limitation. As a result, non-GAAP earnings per diluted share should be evaluated in
conjunction with earnings per diluted share for complete analysis of our profitability, as earnings per diluted share includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to
non-GAAP earnings per diluted share. As non-GAAP earnings per diluted share is not defined by GAAP, our definition of non-GAAP earnings per diluted share may differ from and therefore may not be comparable to similarly titled measures used by other
companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that non-GAAP earnings per share has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our
operating results as reported under GAAP.
|