UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number001-33612

MONOTYPE IMAGING HOLDINGS INC.

(Exact name of registrant as specified in its charter)


Delaware		20-3289482
(State of incorporation)		(I.R.S. Employer Identification No.)

600 Unicorn Park Drive Woburn, Massachusetts		01801
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:(781) 970-6000

(Former Name, Former Address and Former Fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, ~~and posted on its corporate Web site,~~ if any, every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and an “emerging growth company” inRule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act) Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of October ~~24, 2017~~26, 2018 was ~~41,734,360.~~41,542,490.

MONOTYPE IMAGING HOLDINGS INC.

INDEX


			Page
Part I. Financial Information				2

Item 1.	Consolidated Financial Statements (Unaudited)			2

	•	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017		2

	•	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017		3

	•	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017		4

	•	Condensed Consolidated Statements of Stockholders’ Equity for the nine and three months ended September 30, 2018 and 2017		5

	•	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017		57

	•	Notes to Condensed Consolidated Financial Statements		68

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			1725

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			3140

Item 4.	Controls and Procedures			3242

Part II. Other Information				3242

Item 1.	Legal Proceedings			3242

Item 1A.	Risk Factors			3242

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			3243

Item 3.	Defaults Upon Senior Securities			3344

Item 4.	Mine Safety Disclosures			3344

Item 5.	Other Information			3344

Item 6.	Exhibits			3344

Exhibit Index				3444

Signatures				3545

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share and per share data)


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	79,540		$	91,434		$	70,120		$	82,822
Restricted cash		5,000			—			6,000			11,987
Accounts receivable, net of allowance for doubtful accounts of $598 at September 30, 2017 and $467 at December 31, 2016		30,424			26,549
Accounts receivable, net of allowance for doubtful accounts of $520 at September 30, 2018 and $634 at December 31, 2017								38,571			34,461
Income tax refunds receivable		2,314			2,967			2,107			1,204
Prepaid expenses and other current assets		6,361			4,631			7,062			5,714

Total current assets		123,639			125,581			123,860			136,188
Property and equipment, net		16,690			14,166			14,830			16,763
Goodwill		278,487			273,489			276,798			279,131
Intangible assets, net		86,555			90,717			76,539			84,856
Restricted cash		12,990			17,992			—			6,000
Other assets		2,920			3,075			7,374			3,112

Total assets	$	521,281		$	525,020		$	499,401		$	526,050

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,185		$	2,170		$	2,830		$	1,467
Accrued expenses and other current liabilities		31,409			28,762			32,408			43,096
Accrued income taxes payable		314			1,473			304			522
Deferred revenue		16,898			16,081			11,766			15,102

Total current liabilities		50,806			48,486			47,308			60,187
Revolving line of credit		96,000			105,000			80,000			93,000
Other long-term liabilities		11,430			11,753			3,014			6,428
Deferred income taxes		38,286			37,780			29,958			28,004
Reserve for income taxes		2,685			2,727			2,344			2,783
Accrued pension benefits		6,092			5,296			6,201			6,280
Commitments and contingencies(Note 13)
Commitments and contingencies(Note 14)
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: 44,822,339 at September 30, 2017 and 43,771,600 at December 31, 2016		44			43
Common stock, $0.001 par value, Authorized shares: 250,000,000; Shares issued: 45,773,708 at September 30, 2018 and 44,934,364 at December 31, 2017								44			44
Additional paid-in capital		292,272			274,946			313,354			298,113
Treasury stock, at cost, 3,040,769 shares at September 30, 2017 and 2,493,174 shares at December 31, 2016		(63,359	)		(56,232	)
Treasury stock, at cost, 3,914,493 shares at September 30, 2018 and 3,215,644 shares at December 31, 2017								(72,611	)		(64,083	)
Retained earnings		90,657			105,718			94,940			97,815
Accumulated other comprehensive loss		(3,632	)		(10,497	)		(5,151	)		(2,521	)

Total stockholders’ equity		315,982			313,978			330,576			329,368

Total liabilities and stockholders’ equity	$	521,281		$	525,020		$	499,401		$	526,050

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except share and per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue	$	60,507		$	52,229		$	170,773		$	150,804
Cost of revenue		9,719			8,534			28,638			24,441
License revenue													$	45,831		$	49,913		$	139,791		$	141,083
Service revenue														12,138			10,594			35,548			29,690

Total revenue														57,969			60,507			175,339			170,773
Cost of revenue—license														6,947			6,782			23,841			20,745
Cost of revenue—service														2,448			2,937			7,946			7,893
Cost of revenue—amortization of acquired technology		885			1,327			2,644			3,589			859			885			2,583			2,644

Total cost of revenue		10,604			9,861			31,282			28,030			10,254			10,604			34,370			31,282

Gross profit		49,903			42,368			139,491			122,774			47,715			49,903			140,969			139,491
Operating expenses:
Marketing and selling		22,453			16,538			66,417			45,273			18,212			22,453			58,382			66,417
Research and development		8,997			7,781			27,778			21,108			7,680			8,997			25,432			27,778
General and administrative		11,291			11,353			34,032			28,840			10,786			11,291			38,262			34,032
Restructuring														244			—			6,814			—
Amortization of other intangible assets		1,021			941			3,051			2,418			851			1,021			2,840			3,051

Total operating expenses		43,762			36,613			131,278			97,639			37,773			43,762			131,730			131,278

Income from operations		6,141			5,755			8,213			25,135			9,942			6,141			9,239			8,213
Other (income) expense:
Interest expense		815			429			2,365			753			959			815			2,756			2,365
Interest income		(116	)		(78	)		(309	)		(204	)		(133	)		(116	)		(403	)		(309)
Loss on foreign exchange		1,357			360			4,544			794
Loss (gain) on derivatives		119			(93	)		290			(299	)
Loss (gain) on foreign exchange														408			1,357			(30	)		4,544
(Gain) loss on derivatives														(47	)		119			(138	)		290
Other (income) expense, net		(32	)		5			24			(16	)		—			(32	)		(6	)		24

Total other expense		2,143			623			6,914			1,028			1,187			2,143			2,179			6,914

Income before provision for income taxes		3,998			5,132			1,299			24,107			8,755			3,998			7,060			1,299
Provision for income taxes		2,737			2,707			1,609			9,671			5,434			2,737			4,243			1,609

Net income (loss)	$	1,261		$	2,425		$	(310	)	$	14,436		$	3,321		$	1,261		$	2,817		$	(310)

Net income (loss) available to common stockholders—basic	$	1,196		$	2,341		$	(310	)	$	13,982		$	3,143		$	1,196		$	2,226		$	(310)

Net income (loss) available to common stockholders—diluted	$	1,195		$	2,340		$	(310	)	$	13,983		$	3,143		$	1,195		$	2,226		$	(310)

Net income (loss) per common share:
Net income (loss) per common share- basic and diluted
Basic	$	0.03		$	0.06		$	(0.01	)	$	0.36		$	0.08		$	0.03		$	0.06		$	(0.01)

Diluted	$	0.03		$	0.06		$	(0.01	)	$	0.35		$	0.08		$	0.03		$	0.06		$	(0.01)

Weighted-average number of shares outstanding:
Basic		39,594,130			39,977,120			39,576,312			39,348,437			40,512,837			39,594,130			40,314,169			39,576,312
Diluted		39,798,779			40,261,247			39,576,312			39,699,790			40,609,643			39,798,779			40,454,518			39,576,312
Dividends declared per common share	$	0.113		$	0.110		$	0.339		$	0.330		$	0.116		$	0.113		$	0.348		$	0.339

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017 2016
Net income (loss)
   $ 1,261    $ 2,425    $ (310 ) $ 14,436
Other comprehensive income, net of tax:

Unrecognized actuarial gain, net of tax of $8, $4, $23 and $12, respectively
   16    9    45 26
Foreign currency translation adjustments, net of tax of $1,058, $118, $3,469 and $688, respectively
   2,191    131    6,820 677






Comprehensive income
   $ 3,468    $ 2,565    $ 6,555 $ 15,139


	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Net income (loss)	$	3,321		$	1,261	$	2,817		$	(310)
Other comprehensive income (loss), net of tax:
Unrecognized actuarial gain, net of tax of $7, $8, $20 and $23, respectively		23			16		64			45
Foreign currency translation adjustments, net of tax of $(106), $1,058, $(1,296) and $3,469, respectively		(512	)		2,191		(2,694	)		6,820

Comprehensive income	$	2,832		$	3,468	$	187		$	6,555

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the nine and three months ended September 30, 2018 and 2017

(in thousands, except share and per share data)

Common Stock Treasury Stock
Additional
Paid-In
Retained
Accumulated
Other
Comprehensive
Total
Stock-
holders’
Shares Amount Shares Amount Capital Earnings Income (Loss) Equity
Balance, December 31, 2017
44,934,364 $ 44 3,215,644 $ (64,083) $ 298,113 $ 97,815 $ (2,521) $ 329,368
Net income
2,817 2,817
Issuance of capital shares

—restricted share grants
496,025 —   —   —
—exercised options
248,276 —   3,455 3,455
—restricted units converted
95,043 —   —   —
Repurchase of unvested shares of restricted common stock
—   291,676 —   —
Purchase of treasury stock
—   326,808 (6,678 ) (6,678 )
Shares withheld
80,365 (1,850 ) (1,850 )
Stock based compensation
11,786 11,786
Dividends declared ($0.348 per share)
(14,642 ) (14,642 )
Cumulative adjustment, ASC 606 adoption
8,950 8,950
Unrecognized actuarial loss, net of tax
64 64
Cumulative translation adjustment, net of tax
(2,694 ) (2,694 )

Balance, September 30, 2018
45,773,708 $ 44 3,914,493 $ (72,611 ) $ 313,354 $ 94,940 (5,151 ) $ 330,576

Balance, June 30, 2018
�� 45,738,183 $ 44 3,586,782 $ (66,581 ) $ 308,952 $ 96,477 $ (4,662 ) $ 334,230
Net income
3,321 3,321
Issuance of capital shares

—restricted share grants
19,150 —   —   —
—exercised options
6,197 —   73 73
—restricted units converted
10,178 —   —   —
Repurchase of unvested shares of restricted common stock
—   29,167 —   —
Purchase of treasury stock
—   282,208 (5,697 ) (5,697 )
Shares withheld
16,336 (333 ) (333 )
Stock based compensation
4,329 4,329
Dividends declared ($0.116 per share)
(4,858 ) (4,858 )
Unrecognized actuarial loss, net of tax
23 23
Cumulative translation adjustment, net of tax
(512 ) (512 )

Balance, September 30, 2018
45,773,708 $ 44 3,914,493 $ (72,611 ) $ 313,354 $ 94,940 $ (5,151 ) $ 330,576

MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the nine and three months ended September 30, 2018 and 2017
(in thousands, except share and per share data)
Common Stock Treasury Stock
Additional
Paid-In
Retained
Accumulated
Other
Comprehensive
Total
Stock-
holders’
Shares Amount Shares Amount Capital Earnings Income (Loss) Equity
Balance, December 31, 2016
43,771,600 $ 43 2,493,174 $ (56,232 ) $ 274,946 $ 105,718 $ (10,497) $ 313,978
Net income (loss)
(310 ) (310 )
Issuance of capital shares

—restricted share grants
905,151 1 —
—exercised options
107,343 —   1,062 1,062
—restricted units converted
38,245 —   —   —
Repurchase of unvested shares of restricted common stock
—   167,054 —   —
Purchase of treasury stock
—   340,989 (6,351 ) (6,351 )
Shares withheld
39,552 (776 ) (776 )
Stock based compensation
15,392 15,392
Dividends declared ($0.339 per share)
(14,180 ) (14,180 )
Cumulative adjustment, ASC 606 adoption
872 (571 ) 301
Unrecognized actuarial loss, net of tax
45 45
Cumulative translation adjustment, net of tax
6,820 6,820

Balance, September 30, 2017
44,822,339 $ 44 3,040,769 $ (63,359 ) $ 292,272 $ 90,657 $ (3,632 ) $ 315,982

Balance, June 30, 2017
44,666,826 $ 44 2,763,378 $ (58,992 ) $ 286,607 $ 94,117 $ (5,839 ) $ 315,937
Net income
1,261 1,261
Issuance of capital shares

—restricted share grants
84,055 —   —   —
—exercised options
46,481 —   350 350
—restricted units converted
24,977 —   —   —
Repurchase of unvested shares of restricted common stock
—   37,486 —   —
Purchase of treasury stock
—   232,989 (4,233 ) (4,233 )
Shares withheld
6,916 (134 ) (134 )
Stock based compensation
5,315 5,315
Dividends declared ($0.113 per share)
(4,721 ) (4,721 )
Unrecognized actuarial loss, net of tax
16 16
Cumulative translation adjustment, net of tax
2,191 2,191

Balance, September 30, 2017
44,822,339 $ 44 3,040,769 $ (63,359 ) $ 292,272 $ 90,657 $ (3,632 ) $ 315,982

The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

   Nine Months Ended
September 30,    Nine Months Ended
September 30,
   2017 2016    2018 2017
Cash flows from operating activities

Net (loss) income
   $ (310 ) $ 14,436
Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Net income (loss)
   $ 2,817 $ (310 )
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization
   9,271 9,114    9,548 9,271
Loss on retirement of fixed assets
   90 —      11 90
Loss on abandonment of product line
   3,223 —
Amortization of deferred financing costs and accreted interest
   165 165    165 165
Stock based compensation
   15,294 12,705    11,761 15,294
Excess tax benefit on stock options
   —   (404 )
Provision for doubtful accounts
   734 216    555 734
Deferred income taxes
   (2,982 ) 2,312    (790 ) (2,982 )
Unrealized currency loss on foreign denominated intercompany transactions
   3,870 422    203 3,870
Changes in operating assets and liabilities:

Accounts receivable
   (3,978 ) (372 )    2,198 (3,978 )
Prepaid expenses and other assets
   (2,336 ) (2,778 )    (4,820 ) (1,560 )
Restricted cash
   2 (9,027 )
Accounts payable
   (16 ) (12 )    1,395 (16 )
Accrued income taxes payable
   (349 ) 942    (1,672 ) (349 )
Accrued expenses and other liabilities
   162 2,359    (12,219 ) 162
Deferred revenue
   1,122 1,869    (964 ) 1,122




Net cash provided by operating activities
   20,739 31,947    11,411 21,513




Cash flows from investing activities

Purchases of property and equipment
   (5,272 ) (1,600 )    (2,676 ) (5,272 )
Purchases of intangible asset
   (54 ) —
Acquisition of business, net of cash acquired
   —   (120,444 )
Purchases of intangible assets
   (160 ) (54 )




Net cash used in investing activities
   (5,326 ) (122,044 )    (2,836 ) (5,326 )




Cash flows from financing activities

Payments on revolving line of credit
   (9,000 ) —      (13,000 ) (9,000 )
Proceeds from revolving line of credit
   —   110,000
Common stock dividends paid
   (14,494 ) (14,030 )
Purchase of treasury stock
   (6,446 ) —      (6,651 ) (6,446 )
Common stock dividends paid
   (14,030 ) (12,961 )
Excess tax benefit on stock options
   —   404
Payments for employee taxes on shares withheld
   (1,850 ) (776 )
Proceeds from exercises of common stock options
   1,062 2,390    3,455 1,062




Net cash (used in) provided by financing activities
   (28,414 ) 99,833
Effect of exchange rates on cash and cash equivalents
   1,107 327
Net cash used in financing activities
   (32,540 ) (29,190 )
Effect of exchange rates on cash, cash equivalents and restricted cash
   (724 ) 1,107




(Decrease) increase in cash and cash equivalents
   (11,894 ) 10,063
Cash and cash equivalents at beginning of period
   91,434 87,520
Decrease in cash, cash equivalents and restricted cash
   (24,689 ) (11,896 )
Cash, cash equivalents and restricted cash at beginning of period
   100,809 109,426




Cash and cash equivalents at end of period
   $ 79,540 $ 97,583
Cash, cash equivalents and restricted cash at end of period
   $ 76,120 $ 97,530




The accompanying notes are an integral part of these condensed consolidated financial statements.
MONOTYPE IMAGING HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, ~~2017~~2018
1. Nature of the Business
Monotype Imaging Holdings Inc. (the “Company” or “we”) ~~empowers expression~~is a leading provider of branded and engagement for creatives, designers, engineers and marketers at the world’s 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~~creative professionals and ~~engineers, we empower expression through high-value~~consumer device manufacturers. We provide high-quality, branded or personalized content across multiple devices and mediums. Our solutions, which include type, branded mobile content, visual content marketing solutions, custom design ~~assets,~~services, and tools and technologies that ~~improve~~enable the ~~discovery, curation, measurement~~creative process are licensed through our direct sales channel,e-commerce platforms and brand integrity of content, and through custom studio design services. For marketers, we enable engagement with a customer’s brand enthusiasts and measurement of content interactions in digital environments such as mobile messaging and social mediapartner platforms. We ~~offer more than 99,000 typeface designs,~~also provide consumer device manufacturers and ~~include some~~independent software vendors, or ISVs, with the right solutions for delivering consistent, compelling user experiences. Our solutions power the visual expression of the ~~world’s most widely used designs, such as the Times New Roman~~^®~~, Helvetica~~^®~~, Frutiger~~^®~~, ITC Franklin Gothic™, FF Meta~~leading makers of a wide range of devices, including laser printers, digital copiers 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,~~mobile devices, among others, as well as ~~from third parties.~~provide a high-quality text experience in numerous software applications and operating systems. We license our design assets and technology to creative professionals, consumer device manufacturers and independent software vendors.
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. WeAs of September 30, 2018, we conduct our operations through ~~five~~four 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.~~KK (“Monotype Japan”).
2. Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements as of September 30, ~~2017~~2018 and for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 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 onForm 10-Q and Article 10 of RegulationS-X. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company’s 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 management’s 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. We have elected to early adopt the provisions in RegulationS-X, Rule8-03(a)(5) and10-01(a)(7) requiring an analysis of changes in stockholders’ equity be presented quarterly, in either a statement or on in the notes to the financial statements, for the current and comparative year to date interim periods and state the amount of dividends per share in the aggregate for each class of shares. We have elected to present the requirements in statement form.
These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, ~~2016,~~2017, as reported in the Company’s Annual Report onForm 10-K. The Company’s 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~~the accounting standards described in Note 3 below.
Statement of Operations
For the three and nine months ended September 30, 2018, we have changed our presentation of revenue to disclose service revenue and cost of service revenue separately from license revenue and cost of license revenue, as service revenue now exceeds the materiality threshold for an individual line item. Prior year amounts were historically reported on a combined basis and have been restated to conform to current presentation.
We classify cloud-based subscriptions and other services, such as font related services, custom font design and post contract support as service revenue on our condensed consolidated statements of operations. All other revenue is classified as license revenue.
Highly Inflationary Economy
At September 30, 2018, our wholly-owned Olapic Argentina S.A. subsidiary employs approximately 99 people whose functions mainly include development, sales support and administration. The monthly operations average between $0.4 million and $0.5 million. The Argentinian economy was recently determined to be highly inflationary. A highly inflationary economy is one where the cumulative inflation rate for the three years preceding the beginning of the reporting period, including interim reporting periods, is in excess of 100 percent. Argentina’s inflation rate reached this threshold with the quarterly period ended June 30, 2018. For interim periods ended prior to July 1, 2018, the functional currency for our subsidiary is the Argentinian peso, the foreign entity’s local currency.
For a highly inflationary economy, we followed the guidance in ASC Topic 830,Foreign Currency Matters, (Subtopic ASC 830-10-45) and accounted for the change in functional currency from the Argentinian peso to the U.S. dollar effective July 1, 2018. Under this guidance, translation adjustments are not removed from equity, and the translated amounts for nonmonetary assets and liabilities at the end of the prior period become the accounting basis for those assets both in the period of the change and in subsequent periods. A change in functional currency due to an economy’s designation as highly inflationary results from changes in economic factors (i.e., inflation); therefore, such a change is not considered a change in accounting policy or accounting principle. The change in functional currency did not have a material impact on financial position, operating results or cash flow.
3. Recently Issued Accounting Pronouncements
Adopted
~~Share Based Compensation~~Revenue Recognition
In ~~March 2016,~~May 2014, the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board jointly issued ASU ~~2016-09,~~2014-09,~~Compensation—Stock Compensation~~Revenue from Contracts with Customers (Topic ~~718): Improvements~~606)(“ASC 606”), which outlines a comprehensive five-step revenue recognition model based on a principle that replaces virtually all existing revenue recognition rules under U.S. GAAP and which requires revenue to ~~Employee Share-Based Payment Accounting.~~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. ASU2014-09 also provided the guidance in ASC Topic 340,Other Assets and Deferred Costs—Contracts with Customers (Subtopic340-40), which includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs. 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 cumulativecatch-up adjustment to the opening balance of retained earnings is recognized at the date of application, with additional disclosures required to describe these effects.
We adopted the standard on January 1, 2018, and applied the modified retrospective method of adoption and have elected to apply the new standard only to contracts not completed at January 1, 2018, which represents contracts for which all (or substantially all) of the revenues have not been recognized under existing guidance ~~identifies areas~~as of the date of adoption.
The cumulative effect of the adoption on our condensed consolidated balance sheet, by applying the modified retrospective method as of January 1, 2018, is as follows (in thousands):
   As Reported    Cumulative
Adjustments As Adjusted
   December 31,
2017 January 1,
2018
Assets:

Accounts receivable, net⁽¹⁾
   $ 34,461    $ 7,052 $ 41,513
Prepaid expenses and other current assets⁽²⁾
   5,714    427 6,141
Other assets⁽³⁾
   3,112    650 3,762
Liabilities:

Deferred revenue
   15,102    (2,923 ) 12,179
Other long-term liabilities⁽⁴⁾
   6,428    (825 ) 5,603
Deferred income taxes
   28,004    2,927 30,931
Stockholders’ equity:

Retained earnings
   97,815    8,950 106,765
(1)
Contract assets, short term are included in the accounts receivables, net of allowance for doubtful accounts in our condensed consolidated balance sheet.
(2)
Capitalized contract costs, short term are included in the prepaid expenses and other current assets in our condensed consolidated balance sheet.
(3)
Capitalized contract costs, long term are included in other assets in our condensed consolidated balance sheet.
(4)
Deferred revenue, long term is included in other long-term liabilities in our condensed consolidated balance sheet.
In addition, we recognized additional royalty expenses totaling approximately $2.2 million, or $0.05 per share, upon the adoption of ASC 606, as an indirect effect of a change in accounting principle. These amounts are included in cost of revenue – license in the accompanying condensed consolidated statement of operations for ~~simplification involving several aspects~~the nine months ended September 30, 2018.
The following reflects the Company’s condensed consolidated balance sheet and condensed consolidated statement of operations on an as reported basis and as if we had continued to recognize revenue under the guidance of ASC985-605,Software Revenue Recognition, which is also referred to herein as “legacy GAAP” (in thousands):
   September 30, 2018
   As Reported    Balances without
adoption of ASC 606    Increase
(Decrease)
Assets:

Accounts receivable, net
   $ 38,571    $ 25,334    $ (13,237 )
Prepaid expenses and other current assets
   7,062    6,448    (614 )
Other assets
   7,374    2,648    (4,726 )
Liabilities:

Accrued expenses and other current liabilities
   32,408    30,139    (2,269 )
Deferred revenue
   11,766    18,827    7,061
Other long-term liabilities
   3,014    4,042    1,028
Deferred income taxes
   29,958    24,130    (5,828 )
Stockholders’ equity:

Retained earnings
   94,940    76,371    (18,569 )
   For the three months ended September 30, 2018
   As Reported    Balances without
adoption of ASC 606    Increase
(Decrease)
License revenue
   $ 45,831    $ 38,954    $ (6,877 )
Cost of revenue—license
   6,947    6,877    (70 )
Marketing and selling
   18,212    18,712    500
Provision for income taxes
   5,434    3,801    (1,633 )
Net income (loss)
   3,321    (2,353 )    (5,674 )
Net income (loss)—basic and diluted
   $ 0.08    $ (0.06 )    $ (0.14 )
   For the nine months ended September 30, 2018
   As Reported    Balances without
adoption of ASC 606    Increase
(Decrease)
License revenue
   $ 139,791    $ 126,666    $ (13,125 )
Service revenue
   35,548    35,350    (198 )
Cost of revenue—license
   23,841    21,572    (2,269 )
Marketing and selling
   58,382    59,848    1,466
Provision for income taxes
   4,243    1,342    (2,901 )
Net income (loss)
   2,817    (6,802 )    (9,619 )
Net income (loss)—basic and diluted
   $ 0.06    $ (0.18)    $ (0.24)
The following summarizes the significant changes under ASC 606 as compared to legacy GAAP:
Under legacy GAAP, revenue related to our term licenses that were bundled with service-related performance obligations when vendor-specific objective evidence (“VSOE”) did not exist was required to be recognized ratably over the term of the agreement. Under ASC 606, the Company allocates revenue to each performance obligation in the contract and each performance obligation is accounted for separately; the license revenue is recognized at the time of delivery and the service revenue is recognized over time based on their relative standalone selling prices. The application of this provision is particularly impactful to our new Mosaic product offering which was launched in the first quarter of 2018. This new offering bundles our traditional font licenses with a SaaS based portal, which under legacy GAAP would have been recognized ratably. This provision also has resulted in some revenue from contracts signed prior to 2018 being accelerated and recorded to retained earnings instead of in our operating results in 2018 and beyond.
We have a limited number of contracts in which we 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. Under legacy GAAP, revenue was recognized when the payments became due, based upon the requirement that the fee be fixed or determinable. However, under the new guidance, revenue related to such arrangements is 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. The application of this provision has resulted in revenue from certain contracts signed prior to 2018 being accelerated and recorded to retained earnings instead of in our operating results in 2018 and beyond. This also impacts new contracts that we sign in 2018.
Under legacy GAAP, we recognized royalty revenue when the licensee reported it to us, typically one quarter after royalty-bearing units were shipped, at which time the fee is fixed or determinable. Under ASC 606, we now estimate royalty revenue from our royalty-based licenses in the period that the royalty-bearing event occurs. Thus, revenue from royalties reported to us in the first quarter of 2018 were recorded to retained earnings upon adoption of ASC 606, rather than being recognized as revenue as it would have been under legacy GAAP. This was partially offset by the recognition of revenue in the first quarter of 2018 for estimated royalties that were reported to us in the second quarter of 2018.
ASC 606 requires certain incremental costs related to contract acquisition, such as sales commissions, and contract fulfillment costs to be capitalized and amortized over the expected period of benefit whereas the Company had previously recognized such expenses as incurred.
Please see Note 4 for the Company’s policies related to revenue recognition and accounting for ~~share based payments, including income tax consequences, classification~~costs to obtain and fulfill a customer contract.
Statement of ~~awards~~Cash Flows
In November 2016, the FASB issued ASU2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described 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 changesrestricted cash and restricted cash equivalents in cash and cash equivalents when reconcilingbeginning-of-period andend-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, ~~2016,~~2017, with early adoption permitted. We adopted ASU ~~2016-09~~2016-18 on January 1, ~~2017~~2018 and ~~elected to account for forfeitures when they occur,~~reflected restricted cash and restricted cash equivalents in thebeginning-of-period andend-of-period amounts on the cash flows, on a ~~modified~~ retrospective basis. As aof result of this adoption, ~~$0.6 million of additional stock based compensation expense, net of tax, was recorded to retained earnings~~thebeginning-of-period amount 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 financial~~ statement expense compensation will no longer be recorded to additional paid in capital in our balance sheet. Instead, such amounts will be recorded to tax expense. 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 increased $18.0 million for the ~~three and~~ nine months ended September 30, ~~2016.~~2018 and 2017, respectively, to include restricted cash and restricted cash equivalent balances. The ~~adoption did not have any other~~end-of-period amount on the statement of cash flows increased $6.0 million and $18.0 million for the nine months ended September 30, 2018 and 2017, respectively, to include restricted cash and restricted cash equivalent balances.
Stock Compensation
In May 2017, the FASB issued ASU2016-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.This guidance clarifies when companies would apply modification accounting to changes to the terms or conditions of a stock based payment award. The guidance narrows the definition of a modification. This guidance is effective for annual and interim periods beginning after December 15, 2017. We adopted ASU2016-09 on January 1, 2018 and there was no material impact on our consolidated financial statements.
Pension Benefits
In March 2017, the FASB issued ASUNo. 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 is effective for annual and interim periods beginning after December 15, 2017. We adopted ASU2017-07 on January 1, 2018 and there was no material impact on our consolidated financial statements.
Pending
Internal Use Software
In August 2018, the FASB issued ASU2018-15,Intangibles – Goodwill and Other –Internal-Use Software (Topic350-40): Customer’s Accounting for Implementation of Cost Incurred in a Cloud Computing Arrangement that is Considered a Service Contact.This update clarifies the accounting for implementation costs related to a cloud computing arrangement that is a service contract previously defined in ASU2015-05. This guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2018-15; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Defined Benefit Pension Plan
In August 2018, the FASB issued ASU2018-14,Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This guidance eliminates requirements for certain disclosures and requires certain additional disclosures concerning the company’s defined benefit pension plans and other postretirement plans. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2018-14; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Derivatives
In August 2017, the FASB issued ASUNo. 2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This guidance simplifies the application of the hedge accounting guidance in current GAAP and ~~improve~~improves the financial reporting of hedging relationships by allowing entities to better align their risk management activities and financial reporting for hedging relationships through changes to both designation and measurement for qualifying hedging relationships and the presentation of hedge results. Further, the new guidance allows more flexibility in the requirements to qualify and maintain hedge accounting. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods. We are currently evaluating the impact of the adoption of ASU2017-12; however, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
~~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 ASU2017-04,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 ASU2017-04; 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 ASU2016-02,Leases (Topic 842): Amendments to the FASB Accounting Standards Codification,which replaces the existing guidance for leases. ASU2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a ~~twelve month~~twelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU2016-02, aright-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 ASU2016-02 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.~~ 2018.
The Company ~~is currently assessing the impact that adopting~~will adopt this ASU ~~2016-02 will have~~ on ~~its consolidated financial statements~~January 1, 2019 and ~~related disclosures.~~
~~Revenue Recognition~~
~~In May 2014, the FASB~~has begun planning for adoption by implementing new lease accounting software, 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~~by working to establish additional changes to our processes and internal controls to ensure 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. ASU 2014-09 also provided the guidance in ASC Topic 340,~~Other Assets and Deferred Costs~~—~~Contracts with Customers (Subtopic 340-40)~~~~, which includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.~~requirements are met upon adoption. 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~~for a modified retrospective ~~adoption, in which the~~approach or a modified retrospective approach with comparatives under 840 option, where entities would recognize a cumulative ~~catch-up adjustment~~effect to ~~the opening balance of~~ retained earnings ~~is recognized~~ at the date of ~~application, with additional disclosures required~~adoption without restating prior periods’ balances or disclosures. The Company plans 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.
~~We will adopt the standard on January 1, 2018, and at that time, we will apply~~use the modified retrospective ~~method~~approach with comparatives under 840 option that will not require revising comparative period information or disclosure. We will elect the package of ~~adoption.~~practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we are electing the hindsight practical expedient to determine the lease term for existing leases. We ~~have developed~~will also elect the practical expedient that allows an ~~implementation plan~~accounting policy election to exclude right of use assets and lease obligations from the balance sheet for all leases with an initial term of 12 months or less.
Management is continuing to assess the impact of this standard on the ~~new guidance~~Company’s condensed consolidated balance sheet, condensed consolidated statement of operations, condensed consolidated statements of cash flows or disclosures in the notes to the condensed consolidated financial statements.
4. Revenue Recognition
We recognize revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects consideration that we expect to be entitled to receive in exchange for these services, and excludes any sales incentives and taxes collected from customers that are subsequently remitted to governmental authorities.
We adopted ASC 606 on ~~our operations, financial results and related disclosures. To date, we have substantially~~January 1, 2018 using the modified retrospective method for all contracts not completed ~~our initial assessment~~as of the ~~potential areas~~date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under legacy GAAP. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our products and services and will provide financial statement readers with enhanced disclosures.
Nature of Licenses and Services & Timing of Revenue Recognition
Creative Professional Revenue
Our Creative Professional revenue is primarily derived from rights to use font licenses, custom font design services and hosted software as a service, or SaaS, offerings. We license fonts directly toend-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.
Revenue from font licenses is recognized upfront when the font software is delivered or made available to the customer. Custom font design services are generally not a separate distinct performance obligation and are sold with a license for the custom font, in which case revenue is recognized upon completion of the ~~balance sheet~~services and ~~financial statement components impacted, have prepared our preliminary accounting policy memorandum~~when the font is delivered and ~~are beginning~~
accepted by the customer. In limited cases, the Company has an enforceable right to ~~assess~~payment prior to final delivery and acceptance of custom font design work. In these cases, the ~~quantitative impact~~Company has determined that the proper treatment is a single over-time performance obligation using input methods (incurred hours towards completion) to measure progress towards completion to determine the pattern of ~~adoption, including assessing the impact~~satisfaction of the ~~new guidance~~performance obligation.
For our hosted offerings where we provide our customers the right to access our software without taking possession, revenue is recognized over the contract period on a time-elapsed basis, which is consistent with the transfer of service to the customer. Payment terms and conditions for Creative Professional contracts generally require payment within thirty to sixty days of contract inception. An exception exists for certain contracts for our ~~results~~SaaS offerings or a limited number 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 and we will continue to evaluate this assessment quarterly. Under the current guidance, revenue related to ourmulti-year 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~~have periodic payment terms, generally quarterly or annually, over the term of the ~~agreement. However, under~~contract. In instances where the ~~new guidance,~~timing of revenue recognition differs from the respective payment terms, we have considered whether such contracts include a significant financing component, subject to the applicable practical expedient. The purpose of these payment structures is to align with industry and market standards, not to provide customers with financing. We have determined our contracts generally do not include a significant financing component; however, the Company will ~~allocate revenue~~continue to ~~each performance obligation~~assess (1) the length of time between when the goods or services are delivered and expected payment, and (2) prevailing interest rates in the ~~agreement~~market tore-evaluate this conclusion.
OEM Revenue
Our OEM revenue is derived substantially from printer imaging, printer driver and ~~each will require separate accounting treatment and lead~~display imaging products. OEM revenue primarily relates 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 relative standalone selling prices of each performance obligation. In addition, we have on occasion, offered extended payment terms for term licenses toproviding our customers ~~including cases~~the right to embed our fonts and technology in ~~which~~their products over a certain term. Under our OEM licensing arrangements, we either receive a fixed fee as specified under the license arrangement or a royalty for each product unit incorporating our fonts and technology that 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~~shipped by our OEM customers. Although significantly less than royalties fromper-unit shipments and 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,fees from OEM customers, we ~~will be required to estimate royalty~~also receive revenue from software application and operating systems vendors, who include our ~~royalty-based licenses~~fonts and technology in their products and for font development. Revenue fromper-unit royalty contracts is estimated and recognized in the period that the royalty-bearing event ~~occurs,~~or sale by our OEM customer occurs. Revenue from fixed fee licenses is generally recognized upfront at the point in time when the software embodying the font is shipped or made available to the customer. Certain OEM contracts may include customer support services and unspecified updates for our font technology that is a distinct stand-ready performance obligation and recognized ratably over the service period. Many of ourper-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.
Disaggregated Revenue
The following table presents our revenue disaggregated by the timing of revenue recognition as well as by type of product or services offered (See Note 12 for further information regarding revenue by major markets and revenue by geography):
   For the Three Months Ended
September 30, 2018    For the Nine Months Ended
September 30, 2018
   Creative
Professional    OEM    Total    Creative
Professional    OEM    Total
License revenue:

License transferred in point in time
   $ 25,068    $ 20,763    $ 45,831    $ 77,817    $ 61,974    $ 139,791
Service revenue:

Service transferred in point in time
   319    238    557    1,509    1,943    3,452
Service transferred over time
   10,727    854    11,581    30,203    1,893    32,096












Total
   $ 36,114    $ 21,855    $ 57,969    $ 109,529    $ 65,810    $ 175,339












Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenue is ~~different from~~recognized as the related performance obligations are satisfied as discussed in the revenue categories above.
Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
With the exception of OEM royalty licenses, our ~~current practice of recognizing royalty revenue when it is~~contracts do not generally include a variable component to the transaction price. If royalties are not yet reported to us for the period in which the subsequent sale is expected to occur, we are required to estimate such royalties. When a new contract is signed for the licensing of IP on aper-unit basis, we deliver the licenses and based on ongoing discussions with the customer, will estimate when the distribution will begin and estimate royalties based on distribution forecasts provided by the ~~licensee, at which time~~customer. For ongoing arrangements, we have developed a process to estimateper-unit royalties based on historical data, trends, seasonality, knowledge of changes in contracts/rates, and quarterly discussions with sales personnel to identify significant changes in the ~~fee is deemed fixed or determinable. The Company has,~~customer’s distribution forecast (via seasonality, introduction of new products, discontinuation of products, etc.). Revenue related to the estimation ofper-unit royalties was $7.9 million for both the three and ~~plans to continue to, convert printer imaging electronic OEM customers to fixed fee contracts from royalty bearing contracts. At~~nine months ended September 30, ~~2017, approximately 80%~~2018.
As discussed above, certain of ~~estimated printer~~our Creative Professional contracts have payment terms that differ from the timing of revenue ~~has been converted~~recognition which requires us to ~~fixed fee license contracts. The new guidance also requires certain costs related to contract acquisition, such as sales commissions, to be capitalized and amortized over~~assess whether the ~~expected period of benefit.~~transaction price for those contracts include a significant financing component. We currently recognize such expenses based on when they are earned. We are currently in the process of evaluating our commission plans and other factors that that will impact the period over which such expenses are recognized under the new guidance. We currently plan to electhave elected the practical expedient ~~which~~that permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. ~~We also plan to elect~~For those contracts in which the ~~practical expedient which permits an entity to only apply~~period exceeds the ~~transition guidance to contracts that are not completed at~~one year threshold, this assessment, as well as the ~~date~~quantitative estimate of the ~~initial application~~financing component and its relative significance, requires judgment. We estimate the significant financing component provided to our customers with extended payment terms by determining the present value of ~~ASU 2014-09. We currently plan~~the future payments by applying a discount rate that reflects the customer’s creditworthiness.
Transaction Price Allocated to ~~elect the practical expedient which permits us~~Future Performance Obligations
The aggregate amount of transaction price that is allocated to ~~expense costs as they are incurred if the amortization period is determined to be one year or less.~~
We expect the new guidance to have a significant impact on our financial statements, including the expected transition adjustment to adopt ASC606; however, we are still in the process of evaluating the quantitative impact that the standard will have on our financial statements and related disclosures, which may be material.
Based on the progress of our evaluation to date, while we are still in the process of quantifying the transition adjustment that will be recorded on January 1, 2018, which will depend in part on the additional contracts that are executed during the fourth quarter of 2017, we anticipate that the transition adjustment to retained earnings will include approximately $5 million to $9 million of revenue from contracts entered into on or before December 31, 2017, that otherwise would have been included in 2018 revenue had ASC 606 not been adopted effective January 1, 2018. This estimate is based on contractsperformance obligations that have not yet been ~~entered into~~satisfied or are partially satisfied as of September 30, ~~2017,~~2018 is $21.9 million. This amount consists principally of amounts billed for undelivered services that are included in deferred revenue totaling approximately $13.2 million, as well as ~~an estimate based on our current sales forecasts,~~unbilled backlog, which is the amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations, for enforceable contracts that will be entered into between October 1, 2017 and December 31, 2017. As we have not yet completed our analysis of the quantitative impact of ASC 606 on contracts with our customers, and since this estimate includes assumptions about future events that may or may not take place, actual results could differ materially from this estimate. Furthermore, as the estimate excludes several other key aspects of ASC 606, such as the changes in accounting for costs to acquire contracts, itwhen there is not ~~intended~~a present unconditional right to ~~provide an estimate of~~invoice (a receivable), totaling approximately $8.7 million. Of these amounts, approximately $18.4 million is expected to be recognized as revenue within the full transition adjustment that we will ultimately record. Finally, since the estimate excludes the potential impact of contracts entered into subsequent to January 1, 2018, it is not intended to provide a complete estimate of the impact of ASC606 on 2018 revenue.
~~4. Acquisition~~
~~Olapic, Inc.~~
~~On August 9, 2016, the Company purchased~~next 12 months, with substantially 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. Olapic’s 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 consumersremainder expected to make more educated purchasing decisions, discover new products and connect to the brand’s community. The Company 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, consisting of approximately $13.7 million in cash and borrowed $110.0 million from its line of credit, net of cash acquired. The 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 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 or 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 Olapic’s U.S. operations, eighty four employees from Olapic’s 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,~~following 24 month period, as shown in 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~~
~~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


   Current    Long-term    Total
Deferred revenue
   $ 11,766    $ 1,427    $ 13,193
Unbilled backlog
   6,688    2,055    8,743






Total
   $ 18,454    $ 3,482    $ 21,936






~~The estimated fair values~~Contract Balances
Timing 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 therevenue 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 and using assumptions that the Company’s management believes are reasonable given the information available.
~~We recorded revenue of $5.2 million and $13.5 million, and a net loss of $7.8 million and $24.4 million,~~may differ from the ~~acquired Olapic operations~~timing of invoicing to customers. We record an unbilled receivable, or contract asset, when revenue is recognized prior to invoicing when we have an enforceable right to payment. When invoicing occurs prior to revenue recognition, we have unearned revenue, or contract liabilities, presented on our condensed consolidated balance sheet as “deferred revenue” within ~~the Company’s~~deferred revenue and other long-term liabilities, as appropriate. When invoicing occurs after revenue recognition, we have earned revenue, or contract assets, presented on our condensed consolidated ~~operations for~~balance sheet as “unbilled receivables” within accounts receivable and other assets, as appropriate.
Revenue recognized during the three and nine months ended September 30, ~~2017, respectively. Transaction costs~~2018 from amounts included in deferred revenue at the beginning of ~~$0.7~~the period were approximately $7.2 million and ~~$1.1~~$21.6 million, ~~are included in general and administrative expenses in our condensed consolidated statements of operations for~~respectively. Revenue recognized during both the three and nine months ended September 30, ~~2016, respectively.~~2018 from performance obligations satisfied or partially satisfied in previous periods, mainly due to changes in the estimate of royalty revenues, was $7.9 million. During the nine months ended September 30, 2018, the change in contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was not material. The contract modifications entered into during the nine months ended September 30, 2018 did not have a significant impact on the Company’s contract assets or deferred revenue.
~~Pro Forma Results~~Costs to Obtain and Fulfill a Contract
~~The following table shows unaudited pro forma results~~We recognize an asset for the incremental costs of ~~operations as~~obtaining a contract with a customer if we ~~had acquired Olapic at~~expect the ~~beginning~~benefit of those costs to be longer than one year. We have determined that certain commissions paid under our sales incentive programs meet the requirements to be capitalized. The amount capitalized for incremental costs to obtain contracts as of September 30, 2018 was $2.5 million, of which $0.6 million was short-term and has been included in prepaid expenses and other current assets and $1.9 million was long term and has been included in other assets in our condensed consolidated balance sheet. Costs to obtain a contract are amortized as sales and marketing expense over the expected period of benefit in a manner that is consistent with the transfer of the ~~periods presented (in thousands, except per share amounts):~~

   Three Months
Ended
September 30,
2016    Nine Months
Ended
September 30,
2016
Revenue
   $ 53,586    $ 159,415
Net income
   $ 1,116    $ 4,900
Net income available to common stockholders—basic
   $ 1,032    $ 4,446
Net income available to common stock holders—diluted
   $ 1,031    $ 4,447
Net income per common share: basic
   $ 0.03    $ 0.11
Net income per common share: diluted
   $ 0.03    $ 0.11
Weighted average number of shares—basic
   39,977,120    39,348,437
Weighted average number of shares—diluted
   40,261,247    39,699,790
related goods or services to which the asset relates. The ~~unaudited pro forma results~~judgments made in determining the amount of ~~operations~~costs incurred include whether the commissions are in fact incremental and would not ~~necessarily indicative~~have occurred absent the customer contract and the estimate of the ~~actual results~~amortization period, which ranges between three and ten years depending on the nature of the performance obligations within the contract. These costs are periodically reviewed for impairment. The amount of capitalized costs related to contracts which were terminated on or before September 30, 2018, due to the customer exercising anopt-out clause or the cancellation of an anticipated renewal was not material and was charged to operating expenses in the third quarter of 2018.
We have elected to apply the practical expedient and recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have ~~occurred had~~recognized is one year or less.
We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the ~~transactions actually taken place~~contract, (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs primarily relate to font license fees that we pay on certain fonts that are owned by third parties. These fees are related to license revenue that is satisfied at ~~the beginning~~a point in time and payable again upon license renewal, and as a result are incurred immediately upon contract execution. Accordingly, there are no capitalized costs related to costs to fulfill a contract as of ~~the periods indicated.~~September 30, 2018.
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 September 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 equivalents—money market funds
   $ 12,255    $ 12,255    $ —      $ —
Cash equivalents—commercial paper
   26,672    —      26,672    —
Cash equivalents—U.S. government and agency securities
   1,504    1,504    —      —








Total short-term financial assets
   40,431    13,759    26,672    —
Restricted cash equivalents—money market fund
   9,000    9,000    —      —
Restricted cash equivalents—U.S. government and agency security fund
   8,990    8,990    —      —








Total long-term financial assets
   17,990    17,990    —      —








Total
   $ 58,421    $ 31,749    $ 26,672    $ —








   Fair Value Measurement at September 30, 2018
   Total    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)    Significant Other
Observable Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Assets:

Cash equivalents—money market funds
   $ 28,788    $ 28,788    $ —      $ —
Restricted cash equivalents—money market fund
   6,000    6,000    —      —








Total assets
   $ 34,788    $ 34,788    $ —      $ —








   Fair Value Measurement at December 31, 2016    Fair Value Measurement at December 31, 2017
   Total    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)    Significant Other
Observable Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)    Significant Other
Observable Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Assets:

Cash equivalents—money market funds
   $ 16,994    $ 16,994    $ —      $ —      $ 2,014    $ 2,014    $ —      $ —
Cash equivalents—commercial paper
   16,989    —      16,989    —      16,477    —      16,477    —
Cash equivalents—corporate bonds
   4,802    —      4,802    —      1,457    —      1,457    —
Cash equivalents—U.S. government and agency securities
   11,368    11,368    —      —      10,488    10,488    —      —








Total short-term financial assets
   50,153    28,362    21,791    —
Restricted cash equivalents—money market fund
   9,000    9,000    —      —      3,000    3,000    —      —
Restricted cash equivalents—U.S. government and agency security fund
   8,992    8,992    —      —      8,987    8,987    —      —
















Total long-term financial assets
   17,992    17,992    —      —
Total current assets
   42,423    24,489    17,934    —
Restricted cash equivalents—money market fund
   6,000    6,000    —      —
















Total
   $ 68,145    $ 46,354    $ 21,791    $ —
Total long term assets
   6,000    6,000    —      —
















Total assets
   $ 48,423    $ 30,489    $ 17,934    $ —








The Company’s 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 is ~~either~~ based on quoted prices (unadjusted) for ~~similar assets or other observable inputs such as yield curves at commonly quoted intervals and other market corroborated inputs.~~identical assets. 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 ournon-performance risk and that of our counterparties. At September 30, ~~2017,~~2018, we had one30-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,~~2017, we had one30-day forward contract to sell ~~2.8~~2.5 million British pounds sterling and purchase $3.4 million that together, had an immaterial fair value.
The Company’snon-financial assets andnon-financial liabilities subject tonon-recurring measurements include goodwill and intangible assets.
6. Goodwill and Intangible Assets
During the quarter ended June 30, 2018, the Company decided to cease sales of certain service offerings that were principally acquired as part of the Company’s acquisition of Swyft Media in January 2015. The decision was made in connection with other restructuring actions tore-align the Company’s product and service offerings. See Note 13 for further details regarding the restructuring plan.
The Company has determined that disposal of the Swyft Media component did not qualify for reporting as a discontinued operation under ASC205-20,Discontinued Operations,as it did not represent a strategic shift in the Company’s operations that had (or will have) a major effect on the Company’s consolidated operations or financial results. As a result of its decision to cease sales of certain service offerings, the Company concluded that the useful life of certain long-lived assets, which represented the intangible assets acquired in the acquisition of Swyft Media, was zero and that there was no ongoing expected future cash flows related to these long-lived assets and no residual value. As a result, such assets were determined to be fully impaired and an impairment charge of approximately $2.6 million, representing the carrying value of these intangible assets, was recorded during the quarter ended June 30, 2018.
The Company evaluated whether the disposal group represented a business under ASU2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business,and determined that it did represent a business requiring goodwill to be allocated to the disposal group. The Company determined the fair value of the disposal group utilizing a revenue multiple market approach and allocated the Company’s goodwill to this disposal group on a relative fair value basis based on the fair value of the disposal group to the Company’s consolidated operations as Company only has a single reporting unit. This resulted in the allocation of $0.6 million of goodwill to the disposal group, which was deemed fully impaired as a result of the disposal. The write down is included in the goodwill table shown below.
Goodwill
The changes in the carrying value of goodwill are as follows (in thousands):
Balance at December 31, 2017
   $ 279,131
Foreign currency exchange rate changes
   (1,733 )
Impairment
   (600 )


Balance at September 30, 2018
   $ 276,798


Intangible Assets
Intangible assets ~~consist~~as of ~~the following~~September 30, 2018 and December 31, 2017 were as follows (dollar amounts in thousands):

   Weighted-
Average
Amortization
Period (Years)    September 30, 2017    December 31, 2016       September 30, 2018    December 31, 2017
   Gross
Carrying
Amount    Accumulated
Amortization Net
Balance    Gross
Carrying
Amount    Accumulated
Amortization Net
Balance    Weighted-
Average
Amortization
Period (Years)    Gross
Carrying
Amount    Accumulated
Amortization Net
Balance    Gross
Carrying
Amount    Accumulated
Amortization Net
Balance
Customer relationships
   10    $ 68,194    $ (53,419 ) $ 14,775    $ 67,502    $ (50,808 ) $ 16,694    10    $ 64,895    $ (54,732 ) $ 10,163    $ 68,296    $ (54,213 ) $ 14,083
Acquired technology
   11    69,085    (47,840 ) 21,245    68,228    (44,361 ) 23,867    11    68,921    (51,807 ) 17,114    69,200    (48,945 ) 20,255
Non-compete agreements
   4    14,607    (13,301 ) 1,306    14,440    (12,655 ) 1,785    4    13,654    (13,004 ) 650    14,632    (13,470 ) 1,162
Indefinite-lived intangible assets:

Trademarks
      44,829    —   44,829    43,971    —   43,971       44,212    —   44,212    44,956    —   44,956
Domain names
      4,400    —   4,400    4,400    —   4,400       4,400    —   4,400    4,400    —   4,400
















Total
      $ 201,115    $ (114,560 ) $ 86,555    $ 198,541    $ (107,824 ) $ 90,717       $ 196,082    $ (119,543 ) $ 76,539    $ 201,484    $ (116,628 ) $ 84,856
















7. Debt
On September 15, 2015, the Company entered into a new credit agreement (the “New Credit Agreement”) by and among the Company, the Company’s 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 are not required until maturity of the Credit Facility. However, the Company may repay any amounts borrowed at any time, without premium or penalty. At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company had ~~$96.0~~$80.0 million and ~~$105.0~~$93.0 million outstanding under the Credit Facility. At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 ~~$53.5~~$69.5 million and ~~$44.5~~$56.5 million available for borrowing at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.
Borrowings under the Credit Facility bear a variable rate not less than zero based upon, at the Company’s 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 September 30, 2018, our rate, inclusive of applicable margins, was 3.8% for LIBOR, and at December 31, 2017, our rate, inclusive of applicable margins, was ~~2.8% for LIBOR, and at December 31, 2016, our rate, inclusive of applicable margins, was 2.5%~~3.1% for LIBOR.
As of September 30, ~~2017,~~2018, the maximum leverage ratio permitted was 3.00:1.00 and our leverage ratio was ~~2.47:~~1.75:1.00 and the minimum fixed charge coverage ratio was 1.25:1.00 and our fixed charge ratio was ~~6.57:~~3.62:1.00. 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 Company’s and its domestic subsidiaries’ tangible and intangible property by a pledge of all of the equity interests of the Company’s direct and indirect domestic subsidiaries and by a pledge by the Company’s 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 September 30, ~~2017.~~2018.
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 plan’s 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
September 30,    Nine Months Ended
September 30,
       2017            2016            2017            2016
Service cost
   $ 25    $ 23    $ 71    $ 71
Interest cost
   29    31    81    91
Amortization
   24    13    68    38








Net periodic benefit cost
   $ 78    $ 67    $ 220    $ 200








   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Service cost
   $ 27    $ 25    $ 81    $ 71
Interest cost
   25    29    78    81
Amortization
   22    24    69    68








Net periodic benefit cost
   $ 74    $ 78    $ 228    $ 220








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
September 30,    Three Months Ended September 30,
   2017 2016    2018 2017
Provision for income taxes at statutory rate
   $ 1,399    35.0 % $ 1,796    35.0 %    $ 1,839    21.0 % $ 1,399    35.0 %
State and local income taxes, net of federal tax benefit
   (173 )    (4.3 )% 559    10.9 %    (4 )    0.0 % (173 )    (4.3 )%
Stock based compensation
   141    3.5 % 86    1.7 %    89    1.0 % 141    3.5 %
Foreign rate differential
   (109 )    (2.7 )% (255 )    (4.9 )%    2,662    30.4 % (109 )    (2.7 )%
Research credits
   (381 )    (9.5 )% (141 )    (2.8 )%    (70 )    (0.8 )% (381 )    (9.5 )%
Permanent non-deductible acquisition-related expense
   1,629    40.7 % 905    17.6 %    1,302    14.9 % 1,629    40.7 %
Disqualifying dispositions on incentive stock options
   —      —   (33 )    (0.6 )%
Net shortfall on stock based compensation
   257    6.4 % —      —      76    0.8 % 257    6.4 %
Reversal of reserve for income taxes
   (370 )    (4.2 )% (66 )    (1.6 )%
Other, net
   (26 )    (0.6 )% (210 )    (4.2 )%    (90 )    (1.0 )% 40    1.0 %












Reported income tax provision
   $ 2,737    68.5 % $ 2,707    52.7 %    $ 5,434    62.1 % $ 2,737    68.5 %












   Nine Months Ended
September 30,    Nine Months Ended September 30,
   2017 2016    2018 2017
Provision for income taxes at statutory rate
   $ 455    35.0 % $ 8,437    35.0 %    $ 1,483    21.0 % $ 455    35.0 %
State and local income taxes, net of federal tax benefit
   (234 )    (18.0 )% 830    3.4 %    (55 )    (0.8 )% (234 )    (18.0 )%
Stock based compensation
   64    5.0 % 181    0.8 %    73    1.0 % 64    5.0 %
Foreign rate differential
   (47 )    (3.6 )% (512 )    (2.1 )%    2,214    31.4 % (47 )    (3.6 )%
Research credits
   (170 )    (13.1 )% (300 )    (1.2 )%    (57 )    (0.8 )% (170 )    (13.1 )%
Permanent non-deductible acquisition-related expense
   727    55.9 % 1,324    5.5 %    1,061    15.0 % 727    55.9 %
Disqualifying dispositions on incentive stock options
   —      —   (44 )    (0.2 )%
Net shortfall on stock based compensation
   799    61.5 % —      —
Net (windfall) shortfall on stock based compensation
   (80 )    (1.1 )% 799    61.5 %
Reversal of reserve for income taxes
   (370 )    (5.2 )% (66 )    (5.1 )%
Other, net
   15    1.2 % (245 )    (1.1 )%    (26 )    (0.4 )% 81    6.3 %












Reported income tax provision
   $ 1,609    123.9 % $ 9,671    40.1 %    $ 4,243    60.1 % $ 1,609    123.9 %












At September 30, ~~2017,~~2018, the reserve for uncertain tax positions was approximately ~~$6.5~~$7.0 million. Of this amount, ~~$4.0~~$4.7 million is recorded as a reduction of deferred tax assets and ~~$2.5~~$2.3 million is classified as long-term liabilities. During the quarter, the Company recorded a benefit of $0.4 million related to reserves no longer required due to the lapses of statutes of limitations.
As disclosed in the Company’s 2017Form 10-K, the Company recorded the tax effects of the 2017 Tax Cuts and Jobs Act (“The Act”) in the consolidated financial statements for the year ended December 31, 2017. The new legislation required the Company to pay tax on the unremitted earnings of its foreign subsidiaries through December 31, 2017. The Company recorded an initial estimate of the tax on unremitted earnings of approximately $0.2 million; however, this amount was offset by available foreign tax credits, and as a result the net estimated amount payable related to the deemed repatriation of foreign earnings was zero. The Company finalized this estimate during the quarter, and there was no change from the initial estimate.
10. Net Income (Loss) Per Share
For the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the net income (loss) available to common shareholders is divided by the weighted average number of common shares outstanding during the period to calculate diluted earnings per share. The assumed exercise of stock options and assumed vesting of restricted stock and restricted stock units were included in the computation of net income per share for the three and nine months ended September 30, 2018 and for the three months ended September 30, 2017, but were excluded in the computation of net (loss) per share for the nine months ended September 30, 2017, as their effect would have been anti-dilutive. For the three ~~months ended September 30, 2017 and for the three~~ and nine months ended September 30, ~~2016,~~2018 and for the three months ended September 30, 2017, thetwo-class method was used in the computation of diluted net income (loss) 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 income (loss) per share and, a reconciliation of the numerator and denominator used in the calculation of diluted net income (loss) per share (in thousands, except share and per share data):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Numerator:

Net income (loss), as reported
   $ 1,261    $ 2,425    $ (310 )    $ 14,436
Less: net income attributable to participating securities
   (65 )    (84 )    —      (454 )








Net income (loss) available to common shareholders—basic
   $ 1,196    $ 2,341    $ (310 )    $ 13,982








Denominator:

Basic:

Weighted-average shares of common stock outstanding
   41,750,884    41,687,590    41,700,355    40,730,524
Less: weighted-average shares of unvested restricted common stock outstanding
   (2,156,754 )    (1,710,470 )    (2,124,043 )    (1,382,087 )








Weighted-average number of common shares used in computing basic net income (loss) per common share
   39,594,130    39,977,120    39,576,312    39,348,437








Net income (loss) per share applicable to common shareholders—basic
   $ 0.03    $ 0.06    $ (0.01 )    $ 0.36








   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Numerator:

Net income (loss) available to common shareholders—basic
   $ 1,196    $ 2,341    $ (310 )    $ 13,982
Add-back: undistributed earnings allocated to unvested shareholders
   (179 )    (88 )    —      33
Less: undistributed earnings reallocated to unvested shareholders
   178    87    —      (32 )








Net income (loss) available to common shareholders—diluted
   $ 1,195    $ 2,340    $ (310 )    $ 13,983








Denominator:

Diluted:

Weighted-average shares of common stock outstanding
   41,750,884    41,687,590    41,700,355    40,730,524
Less: weighted-average shares of unvested restricted common stock outstanding
   (2,156,754 )    (1,710,470 )    (2,124,043 )    (1,382,087 )
Weighted-average number of common shares issuable upon exercise of outstanding stock options, based on the treasury stock method
   204,649    284,127    —      351,353








Weighted-average number of common shares used in computing diluted net income (loss) per common share
   39,798,779    40,261,247    39,576,312    39,699,790








Net income (loss) per share applicable to common shareholders—diluted
   $ 0.03    $ 0.06    $ (0.01 )    $ 0.35








   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Numerator:

Net income (loss), as reported
   $ 3,321    $ 1,261    $ 2,817    $ (310 )
Less: net income (loss) attributable to participating securities
   (178 )    (65 )    (591 )    —








Net income (loss) available to common shareholders—basic
   $ 3,143    $ 1,196    $ 2,226    $ (310 )








Denominator:

Basic:

Weighted-average shares of common stock outstanding
   42,040,716    41,750,884    42,026,047    41,700,355
Less: weighted-average shares of unvested restricted common stock outstanding
   (1,527,879 )    (2,156,754 )    (1,711,878 )    (2,124,043 )








Weighted-average number of common shares used in computing basic net income (loss) per common share
   40,512,837    39,594,130    40,314,169    39,576,312








Net income (loss) per share applicable to common shareholders—basic
   $ 0.08    $ 0.03    $ 0.06    $ (0.01 )








   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Numerator:

Net income (loss) available to common shareholders—basic
   $ 3,143    $ 1,196    $ 2,226    $ (310 )
Add-back: undistributed earnings allocated to unvested shareholders
   —      (179 )    —      —
Less: undistributed earnings reallocated to unvested shareholders
   —      178    —      —








Net income (loss) available to common shareholders—diluted
   $ 3,143    $ 1,195    $ 2,226    $ (310 )








   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Denominator:

Diluted:

Weighted-average shares of common stock outstanding
   42,040,716    41,750,884    42,026,047    41,700,355
Less: weighted-average shares of unvested restricted common stock outstanding
   (1,527,879 )    (2,156,754 )    (1,711,878 )    (2,124,043 )
Weighted-average number of common shares issuable upon exercise of outstanding stock options
   96,806    204,649    140,349    —








Weighted-average number of common shares used in computing diluted net income (loss) per common share
   40,609,643    39,798,779    40,454,518    39,576,312








Net income (loss) per share applicable to common shareholders—diluted
   $ 0.08    $ 0.03    $ 0.06    $ (0.01 )








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
September 30,    Nine Months Ended
September 30,    Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016    2018    2017    2018    2017
Options
   633,858    776,827    824,536    700,934    506,003    633,858    488,471    824,536
Unvested restricted stock
   566,934    357,338    652,741    354,379    535,558    566,934    420,908    652,741
Unvested restricted stock units
   32,971    15,873    58,674    14,681    17,248    32,971    26,645    58,674
11. Stockholders’ Equity
~~Share Purchases~~Stock purchases
On ~~August 30, 2016,~~May 3, 2018, the Company’s Board of Directors approved a share purchase program permitting repurchases of up to $25.0 million of the Company’s outstanding shares of common stock through ~~December 31, 2017.~~June 7, 2019. During the quarter ended September 30, ~~2017,~~2018, the Company repurchased a total of ~~232,989~~282,208 shares of its common stock for an aggregate purchase price of ~~$4.2~~$5.7 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 ~~management’s~~the discretion of management and/or the Company’s Board of ~~Directors’ discretion.~~Directors.
~~Share~~Stock Based Compensation
We account for ~~share~~stock 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~~stock based compensation expense on our condensed consolidated statements of operations (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,    Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016    2018    2017    2018    2017
Marketing and selling
   $ 2,455    $ 2,164    $ 7,348    $ 5,349    $ 2,031    $ 2,455    $ 4,515    $ 7,348
Research and development
   1,131    1,180    3,227    2,869    900    1,131    2,781    3,227
General and administrative
   1,685    1,962    4,719    4,487    1,395    1,685    4,465    4,719
















Total expensed
   $ 5,271    $ 5,306    $ 15,294    $ 12,705    $ 4,326    $ 5,271    $ 11,761    $ 15,294
Property and equipment
   44    —      97    —      3    44    24    97
















Total share based compensation
   $ 5,315    $ 5,306    $ 15,391    $ 12,705
Total stock based compensation
   $ 4,329    $ 5,315    $ 11,785    $ 15,391
















In the three ~~and nine~~ months ended September 30, 2018 and 2017, ~~$44~~$3 thousand and ~~$97~~$44 thousand, respectively, of ~~share~~stock 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. In the nine months ended September 30, 2018 and 2017, $24 thousand and $97 thousand, respectively, of stock 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. For the nine months ended September 30, 2018, $1.4 million of stock based compensation expense was reversed as a result of forfeitures of awards by employees included in the restructuring plan. Thisnon-recurring amount has been included in restructuring expenses.
As of September 30, ~~2017,~~2018, the Company had ~~$42.7~~$29.0 million of unrecognized ~~share based~~ compensation expense related to employees and directors’ unvested restricted stock ~~option~~ awards, restricted stock units and ~~restricted~~ stock option awards that are expected to be recognized over a weighted-average period of ~~2.6~~2.2 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
September 30,    Nine Months Ended
September 30,    Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016    2018    2017    2018    2017
Creative Professional
   $ 34,521    $ 27,798    $ 92,234    $ 75,170    $ 36,114    $ 34,521    $ 109,529    $ 92,234
OEM
   25,986    24,431    78,539    75,634    21,855    25,986    65,810    78,539
















Total
   $ 60,507    $ 52,229    $ 170,773    $ 150,804    $ 57,969    $ 60,507    $ 175,339    $ 170,773
















Geographic segment information
~~Effective as~~We market our products and services principally through offices in the United States, United Kingdom, Germany, China, Republic 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~~Korea and Japan. We report revenue based on the geographic location of our ~~customers, rather than based on the location of our subsidiary receiving such revenue.~~customers. 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~~defined as Rest of World. ~~Geographic revenue for the three months and nine months ended September 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 September 30,
   2017 2016
   Sales    % of Total Sales    % of Total
   (In thousands, except percentages)
United States
   $ 27,951    46.2 % $ 25,129    48.1 %
Japan
   14,963    24.7 12,187    23.3
Europe, Middle East, and Africa (EMEA)
   13,952    23.1 9,971    19.1
Rest of World
   3,641    6.0 4,942    9.5






Total
   $   60,507    100.0 % $   52,229    100.0 %






   Nine Months Ended September 30,
   2017 2016
   Sales    % of Total Sales    % of Total
   (In thousands, except percentages)
United States
   $ 74,631    43.7 % $ 64,125    42.5 %
Japan
   44,278    25.9 38,872    25.8
Europe, Middle East, and Africa (EMEA)
   37,392    21.9 32,215    21.4
Rest of World
   14,472    8.5 15,592    10.3






Total
   $ 170,773    100.0 % $ 150,804    100.0 %






   Three Months Ended September 30,
   2018 2017
   Sales    % of Total Sales    % of Total
   (In thousands, except percentages)
United States
   $ 26,389    45.5 % $ 27,951    46.2 %
Japan
   12,847    22.2 14,963    24.7
Europe, Middle East and Africa (EMEA)
   12,809    22.1 13,952    23.1
Rest of World
   5,924    10.2 3,641    6.0






Total
   $ 57,969    100.0 % $ 60,507    100.0 %






   Nine Months Ended September 30,
   2018 2017
   Sales    % of Total Sales    % of Total
   (In thousands, except percentages)
United States
   $ 78,360    44.7 % $ 74,631    43.7 %
Japan
   36,217    20.7 44,278    25.9
Europe, Middle East and Africa (EMEA)
   42,873    24.4 37,392    21.9
Rest of World
   17,889    10.2 14,472    8.5






Total
   $ 175,339    100.0 % $ 170,773    100.0 %






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):

   September 30,
2017    December 31,
2016    September 30,
2018    December 31,
2017
Long-lived assets:

United States
   $ 316,048    $ 318,786    $ 305,562    $ 314,930
United Kingdom
   4,050    3,882    3,628    4,004
Germany
   57,563    52,237    55,310    58,319
Rest of World
   4,071    3,467
Asia (including Japan)
   3,667    3,497








Total
   $ 381,732    $ 378,372    $ 368,167    $ 380,750








13. Restructuring
On June 6, 2018, the Company implemented a restructuring plan, under which the Company will reduce headcount in certain areas of the Company, made the decision to cease sales and marketing of the Swyft product and service line and to close a regional office, all in an effort to improve operational efficiencies. The plan provided for the elimination of approximately 50 positions worldwide across a variety of functions, with a concentration within engineering, as well as sales and marketing. The Company recorded net charges totaling $0.2 million and $6.8 million in the three and nine months ended September 30, 2018, respectively, related to severance and termination benefits, net of stock based compensation reversal, the write off of goodwill and intangible assets attributable to Swyft, the acceleration of the final deferred compensation payment to the founders of Swyft, and charges associated with the office closure.
The following presents the details of the restructuring expense line item within our consolidated statements of operations (in thousands):
   Three
Months Ended
September 30, 2018    Nine
Months Ended
September 30, 2018
Severance and termination benefits
   $ 177    $ 4,403
Reversal of stock based compensation expense
   —      (1,402 )
Accelerated deferred compensation
   —      523
Office closure
   67    67
Intangible assets impairment
   —      2,623
Write off of allocated goodwill
   —      600




Total restructuring
   $ 244    $ 6,814




We reversed $1.4 million of stock based compensation expense as a result of forfeitures of awards by employees included in the restructuring plan. See Note 6 for further details regarding the intangible asset disposal and write off of goodwill.
The following presents a roll forward of the restructuring reserves and provision activity (in thousands):
   Personnel
related �� Facilities
related    Total
Restructuring reserve at January 1, 2018
   $ 1,333    $ —      $ 1,333
Restructuring charges
   194    —      194
Cash payments
   (985 )    —      (985 )






Restructuring reserve at March 31, 2018
   542    —      542
Restructuring charges
   4,031    —      4,031
Cash payments
   (479 )    —      (479 )
Foreign currency exchange rate changes
   (5 )    —      (5 )






Restructuring reserve at June 30, 2018
   $ 4,089    $ —      $ 4,089
Restructuring charges
   177    67    244
Cash payments
   (1,295 )    —      (1,295 )
Foreign currency exchange rate changes
   (24 )    —      (24 )






Restructuring reserve at September 30, 2018
   $ 2,947    $ 67    $ 3,014






Future cash expenditures related to the restructuring are expected to be approximately $2.3 million, net of tax savings. We expect the restructuring plan to be completed by the end of 2018, other than the payment of deferred termination benefits to certain terminated employees.
14. 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 acase-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 September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.
~~14.~~
15. Subsequent Events
Stock Purchase Program
Subsequent to September 30, 2018, the Company purchased 315,000 shares of common stock for $6.3 million, at an average price per share of $19.80 through October 26, 2018. The Company purchased these shares on the open market at prevailing market prices and in accordance with its previously announced share purchase program. At October 26, 2018, $12.0 million remains for future purchase under the Plan.
Dividend Declaration
On October ~~26, 2017~~25, 2018, the Company’s Board of Directors declared a ~~$0.113~~$0.116 per share quarterly cash dividend on our outstanding common stock. The record date is set for January 2, ~~2018~~2019 and the dividend is payable to shareholders of record on January 22, ~~2018.~~2019. Dividends are declared at the discretion of the Company’s Board of Directors and depend on actual cash from operations, the Company’s financial condition and capital requirements and any other factors the Company’s 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 Company’s Board of Directors on a quarterly basis.
~~Share Purchase Program~~
Subsequent to September 30, 2017, the Company purchased 8,000 shares of common stock for $0.2 million, at an average price per share of $19.63 through October 24, 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 October 24, 2017, $12.8 million remains for future purchase under the Plan.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Projections
This Quarterly Report onForm 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 these forward looking statements is subject to risks, uncertainties and other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report onForm 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 onForm 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~~We are a leading global provider of design assets, technology and expertise that are designed to enable the best user experiences, ensure brand integrity and help companies engage their best customers. We empower expression and engagement for creatives, designers, engineers and marketers at the world’s most revered brands. ~~These~~Monotype is home to some of the world’s most well-known typeface collections. We provide high-quality creative assets and technology solutions to marketers and content creators that empower our customers to achieve global brand fidelity and drive consistent user experiences across a wide variety of devices and online media. Along with our custom type services, our solutions enable consumers and professionals ~~sit at globally recognized organizations or are independent creatives located across the globe. Regardless of~~to express their ~~organization or location, we support their efforts by producing compelling content~~creativity, while our tools and technologies ~~that build beloved~~improve creative workflows and ~~valued brands,~~maximize efficiency as content is published or distributed. Our solutions provide ~~technology that cultivate meaningful engagement with their brand enthusiasts,~~worldwide language coverage and ~~provide intelligence~~high-quality text, 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 customer’s brand enthusiasts and measurement of content interactions in digital environments such as mobile messaging and social media platforms.
our embedded solutions support compelling user interfaces. We offer more than ~~99,000~~14,000 typeface designs, and include some of the world’s 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 andnon-Latin languages. Oure-commerce websites, includingmyfonts.com, fonts.com, ~~fontshop.com,~~linotype.com,and ~~linotype.com,~~fontshop.com, which attracted more than 50 million ~~visits~~visitors in ~~2016~~2017 from over 200 countries and territories, offer thousands of high-quality font products including our own fonts from the Monotype Libraries, as well as fonts from third parties.
Sources of Revenue
We derive revenue from two principal sources: licensing our ~~fonts~~design assets and technology to brands and creative professionals, which we refer to as ~~our~~ Creative Professional revenue, and licensing our text imaging solutions 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. Creative Professional and OEM revenues are both comprised of license and service revenues. We classify cloud-based subscriptions and other services, such as font related services, custom font design and post contract support as service revenue. All other revenue is classified as license revenue. We operate our business based on two principal markets, Creative Professional and OEM, which is the basis for the following discussion of operating results.
Some of our revenue streams, particularly project-related and custom font design service 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~~Geographic revenue, ~~has been changed to better align with our business operates. As a result, we now report revenue~~which is 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 Statesis 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 nine months ended September 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 summarizes revenue by customer location (in thousands of dollars, except percentages):below:

   Three Months Ended September 30,
   2017 2016
   Sales    % of Total Sales    % of Total
   (In thousands, except percentages)
United States
   $ 27,951    46.2 % $ 25,129    48.1 %
Japan
   14,963    24.7 12,187    23.3
Europe, Middle East, and Africa (EMEA)
   13,952    23.1 9,971    19.1
Rest of World
   3,641    6.0 4,942    9.5






Total
   $   60,507    100.0 % $   52,229    100.0 %






   Nine Months Ended September 30,    Three Months Ended September 30,
   2017 2016    2018 2017
   Sales    % of Total Sales    % of Total    Sales    % of Total Sales    % of Total
   (In thousands, except percentages)    (In thousands, except percentages)
United States
   $ 74,631    43.7 % $ 64,125    42.5 %    $ 26,389    45.5 % $ 27,951    46.2 %
Japan
   44,278    25.9 38,872    25.8    12,847    22.2 14,963    24.7
Europe, Middle East, and Africa (EMEA)
   37,392    21.9 32,215    21.4
Europe, Middle East and Africa (EMEA)
   12,809    22.1 13,952    23.1
Rest of World
   14,472    8.5 15,592    10.3    5,924    10.2 3,641    6.0












Total
   $ 170,773    100.0 % $ 150,804    100.0 %    $ 57,969    100.0 % $ 60,507    100.0 %












   Nine Months Ended September 30,
   2018 2017
   Sales    % of Total Sales    % of Total
   (In thousands, except percentages)
United States
   $ 78,360    44.7 % $ 74,631    43.7 %
Japan
   36,217    20.7 44,278    25.9
Europe, Middle East and Africa (EMEA)
   42,873    24.4 37,392    21.9
Rest of World
   17,889    10.2 14,472    8.5






Total
   $ 175,339    100.0 % $ 170,773    100.0 %






For the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, revenue from customers outside the United States comprised ~~53.8%~~54.5% and ~~51.9%~~53.8%, respectively, of our total revenue. For the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, revenue from customers outside the United States comprised ~~56.3%~~55.3% and ~~57.5%~~56.3%, respectively, of our total revenue. We expect that sales by our international subsidiaries 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 September 30, ~~2017~~2018 and ~~2016,~~2017, our top ten licensees by revenue, most of which are OEM customers, accounted for approximately ~~27.5%~~26.9% and ~~33.5%~~27.5% of our total revenue, respectively. For the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, our top ten licensees by revenue accounted for approximately ~~28.4%~~23.6% and ~~30.9%~~28.4% of our total revenue, respectively. Although no one customer accounted for more than 10% of our total revenue for the three months or nine months ended September 30, ~~2017~~2018 or ~~2016,~~2017, 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~~For a description of our Creative Professional revenue ~~is primarily derived from font licenses, font~~and 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 Olapic’s 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.
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.~~policy, see Note 4.
OEM Revenue
~~Our OEM revenue is derived substantially from printer imaging, printer driver and display imaging products. Under our licensing arrangements, we either receive~~For 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~~description 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~~revenue 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 contractrelated accounting ~~completed contract for short-term projects and percentage-of-completion for long-term projects, may be used.~~policy, see Note 4.
Cost of Revenue
Our cost of revenue consists of font license fees that we pay on certain fonts that are owned by third parties, personnel and allocated internal engineering expense and overhead costs ~~directly~~ related to custom font design services and SaaS based offerings and cloud-based web ~~services costs related to our SaaS-based offerings.~~service costs. 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 and SaaS based 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 fromperiod-to-period, depending on the product mix and the level of custom font design and SaaS based service revenue.
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies,” included in our Annual Report on Form10-K for the year ended December 31, ~~2016,~~2017, except for the adoption as of January 1, ~~2017,~~2018, of guidance in ~~ASU 2016-09~~ASC 606 as more fully described in Note 3 to the accompanying unaudited condensed consolidated quarterly statements.
Results of Operations for the Three Months Ended September 30, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017
Revenue and cost of revenue, bifurcated into license and service, is as follows:
   Three Months Ended
September 30,
   2018    2017    Increase
(Decrease)
License revenue
   $ 45,831    $ 49,913    $ (4,082 )
Service revenue
   12,138    10,594    1,544
Cost of revenue—license
   6,947    6,782    165
Cost of revenue—service
   2,448    2,937    (489 )
License revenue decreased primarily due to certainone-time printer revenue recognized in the third quarter of 2017, as a result of conversion of customers to fixed fee contracts from royalty bearing contracts. There was no corresponding item in the current period. In addition, our royalty based revenue is lower in the three months ended September 30, 2018, as a result of the adoption of ASC 606. We now estimate and accrue royalty-based revenue in the quarter when the royalty-based units are shipped, as opposed to when those shipments were reported to us by the licensee under legacy GAAP.
Service revenue has increased primarily due to the growth of our SaaS-based product offerings, including our Mosaic solution.
Gross profit from license revenue, before amortization of acquired technology, decreased to 84.8% from 86.4%, period over period. Gross profit from service revenue, before amortization of acquired technology, increased to 79.8% and 72.3%. See further discussion below for additional information regarding our period over period revenue and cost of revenue.
While revenue from services has grown to a level of significance requiring separate disclosure, we continue to operate our business based on our two principal markets, Creative Professional and OEM, which is the basis for the following discussion of operating results.
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
September 30,    Three
Months Ended
September 30,
       2017         2016        2018 2017
Revenue:

Creative Professional
   57.1 % 53.2 %    62.3 % 57.1 %
OEM
   42.9 46.8    37.7 42.9




Total revenue
   100.0 100.0    100.0 100.0
Cost of revenue
   16.0 16.3    16.2 16.0
Cost of revenue—amortization of acquired technology
   1.5 2.6    1.5 1.5




Total cost of revenue
   17.5 18.9    17.7 17.5




Gross profit
   82.5 81.1    82.3 82.5
Marketing and selling
   37.1 31.7    31.4 37.1
Research and development
   14.9 14.9    13.2 14.9
General and administrative
   18.7 21.7    18.6 18.7
Restructuring
   0.4 —
Amortization of other intangible assets
   1.7 1.8    1.5 1.7




Total operating expenses
   72.4 70.1    65.1 72.4




Income from operations
   10.1 11.0    17.2 10.1
Interest expense, net
   1.1 0.6    1.5 1.1
Loss on foreign exchange
   2.3 0.7    0.7 2.3
Loss (gain) on derivatives
   0.2 (0.2 )
(Gain) loss on derivatives
   (0.1 ) 0.2
Other income
   (0.1 ) —      —   (0.1 )




Total other expense
   3.5 1.1    2.1 3.5
Income before provision for income taxes
   6.6 9.9    15.1 6.6
Provision for income taxes
   4.5 5.3    9.4 4.5




Net income
   2.1 % 4.6 %    5.7 % 2.1 %




The following discussion compares the three months ended September 30, 2018 with the three months ended September 30, 2017.
Revenues 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.
The following table presents revenue for these two principal markets (in thousands):

   Three Months Ended
September 30,    Increase    Three Months Ended
September 30,    Increase
(Decrease)
   2017    2016       2018    2017
Creative Professional
   $ 34,521    $ 27,798    $ 6,723    $ 36,114    $ 34,521    $ 1,593
OEM
   25,986    24,431    1,555    21,855    25,986    (4,131 )












Total revenue
   $ 60,507    $ 52,229    $ 8,278    $ 57,969    $ 60,507    $ (2,538 )












Revenue
Revenue was ~~$60.5~~$58.0 million and ~~$52.2~~$60.5 million for the three months ended September 30, 2018 and 2017, respectively, a decrease of $2.5 million, or 4.2%.
Creative Professional revenue was $36.1 million and ~~2016,~~$34.5 million for the three months ended September 30, 2018 and 2017, respectively, an increase of ~~$8.3~~$1.6 million, or ~~15.9%.~~4.6%, mainly due to growth in sales to enterprise customers and increased service revenue as SaaS offerings continue to become a larger part of our portfolio.
~~Creative Professional~~OEM revenue ~~increased $6.7~~decreased $4.1 million, or ~~24.2%~~16.0%, to ~~$34.5~~$21.9 million in the three months ended September 30, ~~2017,~~2018, as compared to ~~$27.8~~$26.0 million in the three months ended September 30, ~~2016, mainly due to continued growth in sales of recurring licenses and revenue from Olapic.~~
~~OEM revenue was $26.0 million and $24.4 million in the three months ended September 30, 2017 and 2016, respectively, an increase of $1.6 million, or 6.4%.~~2017. Revenue from our printer imaging ~~electronic~~ OEM customers ~~increased~~decreased period over period partially due to lower revenue from customers under fixed fee contracts and partially due to $2.0 million ofone-time ~~benefits as we continue to convert~~ payments recognized in the third quarter of 2017 from the conversion of customers to fixed fee contracts from royalty bearing ~~contracts, and increased~~contracts. There was no corresponding item in the current period. Display imaging revenue ~~from our display imaging consumer electronic OEM customers, partially offset by~~ decreased ~~revenue from our independent software vendor customers.~~mainly due to a few large deals in the third quarter of 2017 that did not repeat in the third quarter of 2018.
Cost of Revenue and Gross Profit
Cost of revenue, excluding amortization of acquired technology, was ~~$9.7~~$9.4 million and ~~$8.5~~$9.7 million for the three months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively, ~~an increase~~a decrease of ~~$1.2~~$0.3 million, or ~~13.4%. In the third quarter of 2017, cost of revenue, excluding amortization of acquired technology, included~~3.3%, mainly due to lower associated costs with our OEM business, as a result of the one-time benefit of converting customers to fixed fee contracts. This was partially offset by a full quarter of costs from our Olapic business, as compared to the same period in 2016. We acquired Olapic on August 9, 2016.total revenue.
The portion of cost of revenue consisting of amortization of acquired technology ~~decreased $0.4 million, or 33.3%, to~~was unchanged at $0.9 million for the three months ended September 30, 2018 and 2017, ~~as compared to $1.3 million for~~respectively.
Gross profit was 82.3% in the three months ended September 30, ~~2016, primarily due~~2018, as compared to ~~an asset that became fully amortized in October 2016.~~
~~Gross profit~~82.5% in the three months ended September 30, 2017, ~~increased 1.4~~a decrease of 0.2 percentage points to 82.5% of sales, as compared to 81.1% in the three months ended September 30, 2016. In the third quarter of 2017, as compared to the same period in 2016, our gross profit included higher margins from our OEM business, as a result of the one-time benefit, described above, partially offset by a full quarter of Olapic, which provides a lower gross profit percentage than our other product lines. We acquired Olapic on August 9, 2016.points.
Operating Expenses
Marketing and Selling.Marketing and selling expense ~~increased $6.0~~decreased $4.3 million, or ~~35.8%~~18.9%, to ~~$22.5~~$18.2 million in the three months ended September 30, ~~2017,~~2018, as compared to ~~$16.5~~$22.5 million in the same period in ~~2016.~~2017. Personnel and personnel related expenses ~~increased $4.5~~decreased $3.2 million, period over period, due to ~~additional~~lower headcount mainly from our ~~acquisition~~restructuring actions in the second quarter of ~~Olapic~~2018. Targeted marketing spending and targeted hiring in our direct sales organization, and increased variable compensation due to the increased revenue, period over period. Increased rent and software expense, mainly due to increased headcount, contributed $1.0consulting together decreased $1.1 million ~~to the overall increase in marketing and selling expense,~~ in the third quarter of ~~2017,~~2018, as compared to the same period in ~~2016. Targeted marketing spending increased $0.3 million in the third quarter of~~ 2017, ~~as compared~~due to ~~the same period in 2016,~~portfolio decisions around discretionary programs. Decreased facilities expense, mainly due to ~~our acquisition~~the consolidation of ~~Olapic and~~certain regional offices in 2017, was offset by increased software expenses, mainly due to investments in information systems supporting the ~~timing of other marketing activities.~~Creative Professional business, period over period.
Research and Development. Research and development expense ~~increased $1.2~~was $7.7 million ~~or 15.6% to~~and $9.0 million in the three months ended September 30, 2018 and 2017, ~~as compared~~respectively, a decrease of $1.3 million, or 14.6%, primarily due to ~~$7.8 million in the three months ended September 30, 2016.~~lower personnel expenses. Personnel and personnel related expenses ~~increased $1.1~~decreased $1.2 million, period over period, due to ~~increased~~lower 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 developmentmainly from restructuring actions in the ~~third~~second quarter of ~~2017, as compared to~~2018 and in the ~~same period in 2016.~~fourth quarter of 2017.
General and Administrative. General and administrative expense was ~~$11.3~~$10.8 million and ~~$11.4~~$11.3 million in the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, a decrease of ~~$0.1~~$0.5 million, or ~~0.6%~~4.5%. ~~Personnel~~Audit and ~~personnel~~legal expenses together decreased $0.4 million in the third quarter of 2018, as compared to the same period in 2017, mainly due to lower audit fees in the third quarter of 2018 and additional expenses incurred related ~~expenses decreased $0.6~~to shareholder activities in the prior period, which did not recur.
Restructuring.Restructuring expense was $0.2 million in the three months ended September 30, ~~2017, as compared~~2018 due to additional severance expense and charges associated with the closure of one of our regional offices. There were no similar charges in the same period in 2016, due primarily to a redeployment of Olapic employees to either sales or development related activities from the administrative organization in connection with our Olapic integration strategy. This was partially offset by increased software expense, of $0.5 million generally due to increased headcount, period over period.2017.
Amortization of Other Intangible Assets. Amortization of other intangible assets was ~~$1.0~~$0.9 million and ~~$0.9~~$1.0 million in the three months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively, ~~an increase~~a decrease of $0.1 million, or ~~8.4%~~16.8%.
Interest Expense, Net
Interest expense, net of interest income was ~~$0.7~~$0.8 million and ~~$0.4~~$0.7 million in the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$0.3~~$0.1 million, or 18.2%, mainly due to ~~a full quarter of~~increases in interest ~~expense~~rates on our outstanding borrowings, ~~under our revolving line of credit for~~partially offset by a reduction in the ~~acquisition of Olapic on August 9, 2016.~~balance outstanding.
Loss on Foreign Exchange
Losses on foreign exchange were ~~$1.4~~$0.4 million and ~~$0.4~~$1.4 million in the three months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively, ~~an increase~~a decrease of $1.0 million, primarily the result of currency fluctuations on our foreign denominated receivables and payables. In the three months ended September 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) on derivatives was a ~~loss~~gain of ~~$0.1 million~~$47 thousand and a ~~gain~~loss of $0.1 million in the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, a decrease of ~~$0.2~~$0.1 million, due to our30-day forward currency contracts.
Provision for Income Taxes
~~During~~For the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, our effective tax rate was ~~68.5%~~62.1% and ~~52.7%~~68.5%, respectively. The increase in our effective rate for the three months ended September 30, 2017 included 40.7% for non-deductible expenses, as compared to 17.6% for the same period in 2016. The increase is due to non-deductible deferred compensation associated with the Olapic acquisition. TheOur effective tax rate for the three months ended September 30, 2018 was lower than our 2017 ~~included an expense~~effective tax rate primarily due to the enactment of ~~6.4% related~~The Act in December 2017. Significant changes resulting primarily from The Act included:
The statutory tax rate in the three months ended September 30, 2018 is 21.0%, as compared 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~~the U.S. statutory tax ~~effects related to share based payments will be recorded through the income statement. There was no similar item~~rate of 35.0% in the same period in ~~2016,~~2017.
Foreign rate differential increased our effective rate 30.4% in the three months ended September 30, 2018, as ~~these items were recorded~~compared to ~~equity prior~~a decrease of 2.7% in the same period in 2017, due to changes in tax treatment of foreign earnings under The Act. These changes include significant new limitations on the ~~adoption~~ability to utilize foreign tax credits, and the effects of ~~this standard. The~~the new Global Intangible Low Taxed Income (GILTI) provisions. These provisions have resulted in a significantly higher effective tax rate on foreign earnings.
Non-deductible expenses added 14.9% to the effective tax rate for the ~~third quarter of 2017 included a benefit of 9.5% for research credits,~~three months ended September 30, 2018, as compared to ~~2.8%~~40.7% in the same period in ~~2016.~~2017, primarily due to increased income before taxes.
In addition, the effective rate for the three months ended September 30, 2018 was reduced by 4.2% for a reduction in reserves resulting from the expiration of statutes of limitations. State and local ~~income~~ taxes, net of federal ~~tax~~ benefit, provided a benefit of 4.3% in the ~~third quarter of~~three months ended September 30, 2017, as compared to ~~a charge of 10.9% in~~0.0% for the ~~same period in 2016,~~three months ended September 30, 2018, mainly due to adjustments to our deferred state tax balances, which resulted from changes in our estimated state tax rate.
Results of Operations for the Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017
Revenue and cost of revenue, bifurcated into license and service, is as follows:
   Nine Months Ended
September 30,
   2018    2017    Increase
(Decrease)
License revenue
   $ 139,791    $ 141,083    $ (1,292 )
Service revenue
   35,548    29,690    5,858
Cost of revenue—license
   23,841    20,745    3,096
Cost of revenue—service
   7,946    7,893    53
License revenue decreased primarily due to certainone-time printer revenue recognized in the nine months ended September 30, 2017, as a result of conversion of customers to fixed fee contracts from royalty bearing contracts, partially offset by growth in sales to our enterprise customers. There was no corresponding item in the current period. In addition, our royalty based revenue is lower in the nine months ended September 30, 2018, a result of the adoption of ASC 606. We now estimate and accrue our royalty-based revenue in the quarter when the royalty-based units are shipped, as opposed to when those shipments were reported to us by the licensee under legacy GAAP. This change had the effect of shifting traditional holiday seasonality revenue for consumer electronics from the first quarter of 2018 to the fourth quarter of 2017.
Service revenue has increased primarily due to the growth of our SaaS-based product offerings, including our Mosaic solution.
Gross profit from license revenue, before amortization of acquired technology, decreased to 82.9% from 85.3%, primarily due to additionalnon-recurring royalty expense in the nine months ended September 30, 2018 for which there was no corresponding revenue in the corresponding period in 2017, in accordance with ASC 606. Gross profit from service revenue, before amortization of acquired technology, increased to 77.6% from 73.4%. See further discussion below for additional information regarding our period over period revenue and cost of revenue.
While revenue from services has grown to a level of significance requiring separate disclosure, we continue to operate our business based on our two principal markets, Creative Professional and OEM, which is the basis for the following discussion of operating results.
The following table sets forth items in the condensed consolidatedyear-to-date statements of operations as a percentage of sales for the periods indicated:

   Nine Months Ended
September 30,    Nine Months Ended
September 30,
       2017         2016        2018 2017
Revenue:

Creative Professional
   54.0 % 49.8 %    62.5 % 54.0 %
OEM
   46.0 50.2    37.5 46.0




Total revenue
   100.0 100.0    100.0 100.0
Cost of revenue
   16.8 16.2    18.1 16.8
Cost of revenue—amortization of acquired technology
   1.5 2.4    1.5 1.5




Total cost of revenue
   18.3 18.6    19.6 18.3




Gross profit
   81.7 81.4    80.4 81.7
Marketing and selling
   38.9 30.0    33.3 38.9
Research and development
   16.3 14.0    14.5 16.3
General and administrative
   19.9 19.1    21.8 19.9
Restructuring
   3.9 —
Amortization of other intangible assets
   1.8 1.6    1.6 1.8




Total operating expenses
   76.9 64.7    75.1 76.9




Income from operations
   4.8 16.7    5.3 4.8
Interest expense, net
   1.2 0.4    1.3 1.2
Loss on foreign exchange
   2.7 0.5    —   2.7
Loss (gain) on derivatives
   0.2 (0.2 )
(Gain) loss on derivatives
   (0.1 ) 0.2




Total other expense
   4.1 0.7    1.2 4.1
Income before provision for income taxes
   0.7 16.0    4.1 0.7
Provision for income taxes
   0.9 6.4    2.5 0.9




Net (loss) income
   (0.2 %) 9.6 %    1.6 % (0.2 %)




The following discussion compares the nine months ended September 30, 2018 with the nine months ended September 30, 2017.
Revenue by Market.
The following table presents revenue for these two principal markets (in thousands):

   Nine Months Ended
September 30,    Increase    Nine Months Ended
September 30,    Increase
(Decrease)
   2017    2016       2018    2017
Creative Professional
   $ 92,234    $ 75,170    $ 17,064    $ 109,529    $ 92,234    $ 17,295
OEM
   78,539    75,634    2,905    65,810    78,539    (12,729 )












Total revenue
   $ 170,773    $ 150,804    $ 19,969    $ 175,339    $ 170,773    $ 4,566












Revenue
Revenue was ~~$170.8~~$175.3 million and ~~$150.8~~$170.8 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$20.0~~$4.5 million, or ~~13.2%~~2.7%.
Creative Professional revenue increased ~~$17.1~~$17.3 million, or ~~22.7%~~18.8%, to ~~$92.2~~$109.5 million for the nine months ended September 30, 2017, as compared to ~~$75.2~~$92.2 million in the same period in ~~2016,~~2017, mainly due to ~~revenue from Olapic and continued~~ growth in sales of ~~recurring licenses~~revenue from our enterprise customers, including the launch of our Mosaic solution and ~~digital ad revenue.~~higher service revenue as SaaS offerings continue to become a larger part of our offering portfolio.
OEM revenue ~~was~~decreased $12.7 million, or 16.3%, to $65.8 million in the nine months ended September 30, 2018, as compared to $78.5 million ~~and $75.6~~in the nine months ended September 30, 2017. Revenue from our printer imaging OEM customers decreased period over period partially due to $6.1 million ~~for~~ofone-time payments recognized in the nine months ended September 30, 2017 ~~and 2016, respectively, an increase~~from the conversion of ~~$2.9 million, or 3.8%. Revenue from our printer imaging electronic OEM customers increased period over period, due to $6.1 million of one-time benefits as we continue to convert~~ customers to fixed fee contracts from royalty bearing ~~contracts,~~contracts. There was no corresponding item in the current period. Additionally, we recorded lower royalty based revenue as a result of the adoption of ASC 606. We now estimate and ~~increased~~accrue royalty-based revenue in the quarter when the royalty-based units are shipped, as opposed to when those shipments were reported to us by the licensee under legacy GAAP. This change had the effect of shifting traditional holiday seasonality revenue for consumer electronics from ~~our display imaging consumer electronic OEM customers, partially offset by decreased revenue from our independent software vendor customers.~~the first quarter of 2018 to the fourth quarter of 2017.
Cost of Revenue and Gross Profit
Cost of revenue, excluding amortization of acquired technology, was ~~$28.6~~$31.8 million and ~~$24.4~~$28.6 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$4.2~~$3.2 million, or ~~17.0%. The increase in cost of revenue, excluding amortization of acquired technology, is partially~~11.0%, mainly due to ~~both product mix~~$2.2 million of additionalnon-recurring royalty expense for which there was no corresponding revenue item in the period in accordance with ASC 606 and ~~an increase in~~higher costs associated with the revenue ~~period over period. In the nine months ended September 30, 2017, cost of revenue included a full nine months of costs~~ from our ~~Olapic business which we acquired on August 9, 2016 and a larger proportion of our Creative Professional revenue, as compared to the same period in 2016.~~enterprise customers. As a percentage of ~~revenue,~~sales, cost of revenue, excluding amortization of acquired technology, was ~~16.8%~~18.1% and ~~16.2%~~16.8% of total revenue in the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.
Amortization of acquired technology was unchanged at $2.6 ~~million and $3.6~~ million for the nine months ended September 30, 2018 and 2017, ~~and 2016, respectively, a decrease of $1.0 million, or 26.3%, primarily due to an asset that became fully amortized in October 2016.~~respectively.
Gross profit was 80.4% in the nine months ended September 30, 2018, as compared to 81.7% ~~and 81.4%~~ in the nine months ended September 30, 2017, ~~and 2016, respectively, an increase~~a decrease of ~~0.3~~1.3 percentage points ~~mainly~~partially due to ~~variations~~the additionalnon-recurring royalty expense as described above, and partially due to the continued shift in product mix ~~net of decreased amortization of acquired technology. In the nine months ended September 30, 2017, as compared to the same period in 2016, our gross profit included a higher proportion of~~between Creative Professional ~~revenue in our mix of total revenue which typically has a~~and the higher ~~associated cost than~~margin OEM partially offset by improved margins on our Creative Professional revenue with enterprise customers. Our Creative Professional revenue has grown organically and from the acquisition of Olapic. In the nine months ended September 30, 2017, Creative Professional revenue increased as a percentage of total revenue to 54.0% of total revenue, as compared to 49.8% of total revenue in the same period in 2016.business.
Operating Expenses
Marketing and Selling.Marketing and selling expense ~~increased $21.1~~was $58.4 million ~~or 46.7%, to~~and $66.4 million for the nine months ended September 30, 2018 and 2017, ~~as compared to $45.3~~respectively, a decrease of $8.0 million, ~~in the same period in 2016.~~or 12.1%. Personnel and personnel related expenses ~~increased $17.1~~decreased $6.6 million, in period over period, due to lower headcount mainly from our ~~acquisition~~restructuring actions in the second quarter of ~~Olapic~~2018. Targeted marketing spending and ~~targeted hiring in our direct sales organization, and increased variable compensation due to the increased revenue, period over period. Increased software and rent~~consulting expense ~~primarily due to increased headcount, contributed $2.7~~together decreased $1.8 million ~~to the overall increase in marketing and selling expense,~~ in the nine months
ended September 30, ~~2017,~~2018, as compared to the same period in ~~2016. Marketing spending~~2017, due to portfolio decisions around discretionary programs. Software expenses increased ~~$0.6~~$1.1 million, period over period, ~~primarily~~ due to ~~our acquisition of Olapic and targeted campaigns. Consulting expenses increased $0.6~~investments in information systems supporting the Creative Professional business. Facilities expense decreased $0.7 million ~~in the nine months ended September 30, 2017, as compared to the same period in 2016,~~ due to the ~~timing~~consolidation of ~~activities.~~certain regional offices in 2017.
Research and Development. Research and development expense ~~increased $6.7~~was $25.4 million ~~or 31.6%, to~~and $27.8 million in the nine months ended September 30, 2018 and 2017, ~~as compared to $21.1~~respectively, a decrease of $2.4 million, ~~for the nine months ended September 30, 2016.~~or 8.5%. Personnel and personnel related expenses ~~increased $5.4~~decreased $1.4 million in the nine months ended September 30, ~~2017,~~2018, as compared to the same period in ~~2016, mainly~~2017, due to ~~increased~~lower 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 developmentmainly from restructuring actions in the ~~third~~second quarter of ~~2017, as compared to~~2018 and in the ~~same period in 2016. Increased infrastructure expenses~~fourth quarter of 2017. Decreased facilities expense contributed ~~$0.7~~$0.4 million to the ~~increase in research and development,~~overall decrease period over period, ~~a result~~due to the consolidation of ~~increased headcount and the addition of Olapic.~~certain regional offices in 2017. Consulting ~~expenses increased~~expense decreased $0.4 million, ~~in the nine months ended September 30, 2017, as compared~~period over period due to the ~~same period in 2016.~~timing of projects.
General and Administrative. General and administrative expense ~~increased $5.2~~was $38.3 million ~~or 18.0%, to~~and $34.0 million in the nine months ended September 30, 2018 and 2017, ~~as compared to $28.8~~respectively, an increase of $4.3 million, or 12.4%. Outside consulting and legal expenses increased $3.1 million in the nine months ended September 30, ~~2016.~~2018, as compared to the same period in 2017, primarily due to additional expenses incurred related to shareholder activities. Personnel and personnel related expenses increased ~~$3.0~~$0.4 million, period over period, mainly the result of key hiring. Increased infrastructure expenses, such as facilities, software and depreciation, together contributed $1.4 million to the overall increase in general and administrative expenses, period over period. Audit expenses decreased $0.7 million in the nine months ended September 30, ~~2017,~~2018, as compared to the same period in ~~2016, primarily~~2017, mainly due to lower audit fees.
Restructuring.Restructuring expense was $6.8 million in the ~~result~~nine months ended September 30, 2018. There was no restructuring expense in the same period in 2017. Included in restructuring costs is a $3.2 million write down of ~~key hiring~~intangible assets and goodwill allocated to the ~~addition~~Swyft business, which was discontinued in connection with the restructuring action announced in June 2018. Severance expenses totaled $4.4 million and an acceleration of ~~Olapic. Software and depreciation expense together increased $1.9~~Swyft deferred compensation payment resulted in an incremental charge of $0.5 million ~~period over period,~~ mainly due to the ~~addition~~restructuring action in the second quarter of ~~Olapic.~~2018. Facilities charges were $0.1 million due to the closure of one of our regional offices in the third quarter of 2018. These charges were partially offset by a $1.4 million reversal of stock based compensation expense as a result of forfeitures of awards by employees included in the restructuring plan. There were no similar charges in the same period in 2017.
Amortization of Other Intangible Assets. Amortization of other intangible assets was ~~$3.0~~$2.8 million and ~~$2.4~~$3.0 million for the nine months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively, ~~an increase~~a decrease of ~~$0.6~~$0.2 million, or ~~26.2%, mainly due to our acquisition of Olapic.~~7.0%.
Interest Expense, Net
Interest expense, net of interest income was ~~$2.0~~$2.4 million and ~~$0.5~~$2.1 million in the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, an increase of ~~$1.5~~$0.3 million, ~~mainly due to nine months of interest expense on our~~or 14.4%, as reductions in outstanding borrowings under our revolving line of credit ~~for the acquisition of Olapic on August 9, 2016.~~
were offset by an increase in interest rates.
(Gain) Loss on Foreign Exchange
~~Losses~~(Gain) losses on foreign exchange ~~were~~was a gain of $30 thousand and a loss of $4.5 ~~million and $0.8~~ million for the nine months ended September 30, 2018 and 2017, ~~and 2016,~~ respectively, ~~an increase~~a decrease of ~~$3.7~~$4.6 million, primarily the result of currency fluctuations on our foreign denominated receivables and payables. In the nine months ended September 30, 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~~were a ~~loss~~gain of ~~$0.3~~$0.1 million and a ~~gain~~loss of $0.3 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively, a decrease of ~~$0.6~~$0.4 million, due to our30-day forward currency contracts.
Provision for Income Taxes
For the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, our effective tax rate was ~~123.9%~~60.1% and ~~40.1%~~123.9%, respectively. Our effective tax rate for the nine months ended September 30, 2018 is significantly lower than our 2017 effective tax rate primarily due to:
As a result of the enactment of The Act in December 2017, the statutory tax rate in the nine months ended September 30, 2018 is 21.0%, as compared to the U.S. statutory tax rate of 35.0% in the same period in 2017.
Foreign rate differential increased our effective rate 31.4% in the nine months ended September 30, 2018, as compared to a decrease of 3.6% in the same period in 2017, due to changes in tax treatment of foreign earnings under The Act. These changes include significant new limitations on the ability to utilize foreign tax credits, and the effects of the new Global Intangible Low Taxed Income (GILTI) provisions. These provisions have resulted in a significantly higher effective tax rate on foreign earnings.
Non-deductible expenses added 15.0% to the effective tax rate for the nine months ended September 30, 2018, as compared to 55.9% in the same period in 2017, as a result of the increase in ~~our~~income before taxes and changes in deductibility of certain expenses under The Act.
In addition, a net windfall on stock based compensation resulted in a 1.1% reduction in the effective rate for the nine months ended September 30, ~~2017 included 55.9% for non-deductible expenses,~~2018, as compared to ~~5.5% for~~a shortfall rate in the same period in ~~2016. The~~2017 that resulted in a 61.5% increase ~~is due to non-deductible deferred compensation associated with~~in the ~~Olapic acquisition~~effective rate. Further, state and ~~also due to~~local taxes reduced the ~~fact that the impact of the non-deductible expenses as a percentage of pre-tax income is higher in 2017 as compared to 2016, as a result of the decrease in overall pre-tax income. The~~ effective tax rate for the nine months ended September 30, 2017 ~~included an expense of 61.5% related~~by 18.0%, as compared 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~~0.8% in the ~~same period in 2016, as these items were recorded to equity prior to the adoption of this standard. State and local income taxes, net of federal tax benefit, provided a benefit of 18.0% in~~current period. For the nine months ended September 30, ~~2017, as compared to a charge of 3.4%~~2018 the change in ~~the same period in 2016,~~state tax resulted mainly ~~due to~~from adjustments to our deferred ~~state~~stat tax balances which resulted from changes in our estimated state tax rate.
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 onForm 10-Q.
Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017
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 September 30, ~~2017,~~2018, our principal sources of liquidity were cash and cash equivalents totaling ~~$79.5~~$70.1 million and a $150.0 million revolving credit facility, of which there was ~~$96.0~~$80.0 million of outstanding borrowings. On ~~August 30, 2016,~~May 3, 2018, 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.~~June 7, 2019. In the nine months ended September 30, ~~2017,~~2018, we used ~~$6.4 million in cash to purchase shares under the plan and in the year ended December 31, 2016, we used $5.6~~$6.7 million in cash to purchase shares under the plan. At September 30, ~~2017,~~2018, the plan has ~~$12.9~~$18.3 million available for future purchases. ~~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):

   Nine Months Ended
September 30,
   2017    2016
Net cash provided by operating activities
   $ 20,739    $ 31,947
Net cash used in investing activities
   (5,326 )    (122,044 )
Net cash (used in) provided by financing activities
   (28,414 )    99,833
Effect of exchange rates on cash and cash equivalents
   1,107    327




(Decrease) increase in cash and cash equivalents
   $ (11,894 )    $ 10,063




   Nine Months Ended
September 30,
   2018    2017
Net cash provided by operating activities
   $ 11,411    $ 21,513
Net cash used in investing activities
   (2,836 )    (5,326 )
Net cash used in financing activities
   (32,540 )    (29,190 )
Effect of exchange rates on cash, cash equivalents and restricted cash
   (724 )    1,107




Total decrease in cash, cash equivalents and restricted cash
   $ (24,689 )    $ (11,896 )




Operating Activities
We generated $11.4 million in cash from operations during the nine months ended September 30, 2018. Net income, after adjusting for depreciation and amortization, loss on retirement of fixed assets, amortization of deferred financing costs and accretion of interest, stock based compensation, provision for doubtful accounts, deferred income taxes and unrealized currency gain on foreign denominated intercompany transactions generated $24.3 million in cash. Thenon-cash impairment of Swyft related intangible assets added back $3.2 million.
Accrued expenses and accounts payable used $10.8 million, inclusive of largenon-recurring payments of deferred compensation of $10.0 million, additional royalty payments resulting from the adoption of ASC 606 of $2.1 million and payment of investor relations advisor fees of $2.2 million. In addition, we paid 2017 accrued variable compensation, offset by additional restructuring accruals. Decreased accounts receivable, net of decreased deferred revenue generated $1.2 million in cash, primarily a result of customer payments received, net of an increase in unbilled receivables due to the adoption of ASC 606. Prepaid expense and other assets used $4.8 million in cash, mainly due to an increase in long term unbilled receivables and capitalized contract costs related to the adoption of ASC 606. Accrued income taxes used $1.7 million during the nine months ended September 30, 2018.
Variations in operating cash flows occur fromtime-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 ~~$20.7~~$21.5 million in cash from operations during the nine months ended September 30, 2017. Net income, after adjusting for depreciation and amortization, loss on retirement of fixed assets, loss on debt extinguishment, amortization of deferred financing costs and accretion of interest, ~~share~~stock based compensation, excess tax benefit on stock options, provision for doubtful accounts, deferred income taxes and unrealized currency gain on foreign denominated intercompany transactions generated $26.1 million in cash. Increased prepaid expenses and other assets combined with decreased accounts payable, offset by an increase in accrued expenses and other liabilities, used ~~$2.2~~$1.4 million, which is mainly due to the timing of payments. Accrued income taxes used $0.3 million during the nine months ended September 30, 2017. Increased accounts receivable, coupled with decreased deferred revenue used $2.9 million net in cash, which is mainly due to the timing of customer payments.
~~We generated $31.9 million in cash from operations during~~Investing Activities
During the nine months ended September 30, 2016. Net 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 gain on foreign denominated intercompany transactions generated $38.92018, we used $2.8 million in ~~cash. In connection with~~investing activities mainly for the ~~acquisition~~purchase of ~~Olapic Inc. on August 9, 2016, we used $9.0 million to fund an escrow account to be used for future payments due in 2018~~property and 2019 under the Merger Agreement. Accrued income taxes generated $0.9 million during the nine months ended September 30, 2016. Deferred revenue, net of increased accounts receivable generated $1.5 million net in cash, which is mainly due to the timing of a large contract signing. Increases in accrued expenses and other liabilities, and prepaid expenses and other assets, combined with a decrease in accounts payable used $0.4 million net in cash, which is mainly due to the timing of payments.
~~Investing Activities~~
equipment. During the nine months ended September 30, 2017, we used $5.3 million in investing activities mainly for the purchase of property and equipment. ~~During the nine months ended September 30, 2016, we used $122.0 million in investing activities for the purchase of $1.6 million of property and equipment and $120.4 million for acquisitions.~~
Financing Activities
Cash used in financing activities for the nine months ended September 30, 2018 was $32.5 million. We received cash from the exercises of stock options of $3.5 million. We paid cash dividends of $14.5 million and paid $13.0 million on our outstanding revolving line of credit. We also purchased $6.7 million in treasury stock and paid $1.8 million in employee taxes on shares withheld in the nine months ended September 30, 2018. Cash used in financing activities for the nine months ended September 30, 2017 was ~~$28.4~~$29.2 million. We received cash from the exercises of stock options of $1.0 million. We paid cash dividends of $14.0 million and paid $9.0 million on our outstanding revolving line of credit. We also purchased $6.4 million in treasury stock and paid $0.8 million in employee taxes on shares withheld in the nine months ended September 30, 2017.
Cash generated from financing activities for the nine months ended September 30, 2016 was $99.8 million. Cash borrowed from our revolving Credit Facility for the acquisition of Olapic, Inc. generated $110.0 million. We received cash from the exercises of stock options of $2.4 million and the excess tax benefit on stock options provided $0.4 million. We paid cash dividends of $13.0 million in the nine months ended September 30, 2016.
Dividends
On July ~~26, 2017~~25, 2018 our Board of Directors approved a ~~$0.113~~$0.116 per share or ~~$4.7~~$4.9 million, quarterly cash dividend on our outstanding common stock. The record date was October ~~2, 2017~~1, 2018 and the dividend was paid to shareholders of record on October ~~20, 2017.~~19, 2018. We anticipate this to be a recurring quarterly dividend with future payments and record dates, subject to board approval. On October ~~26, 2017,~~25, 2018, the Company’s Board of Directors approved a ~~$0.113~~$0.116 per share quarterly cash dividend on our outstanding common stock. The record date is set for January 2, ~~2018~~2019 and the dividend is payable to shareholders of record on January 22, ~~2018.~~2019.
Credit Facility
On September 15, 2015, the Company entered into a new credit agreement (the “New Credit Agreement”) by and among the Company, the Company’s 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 are 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 Company’s 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 September 30, 2018, our rate, inclusive of applicable margins, was 3.8% for LIBOR, and at December 31, 2017, our rate, inclusive of applicable margins, was ~~2.8% for LIBOR, and at December 31, 2016, our rate, inclusive of applicable margins, was 2.5%~~3.1% for LIBOR. The Company had outstanding borrowings under the Credit Facility of ~~$96.0~~$80.0 million at September 30, ~~2017,~~2018, and ~~$105.0~~$93.0 million at December 31, ~~2016.~~2017. The Credit Facility has $0.5 million reserved for onestand-by letter of credit in connection with a facility lease agreement, leaving ~~$53.5~~$69.5 million and ~~$44.5~~$56.5 million available for borrowing at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.
As of September 30, ~~2017,~~2018, the maximum leverage ratio permitted was 3.00:1.00 and our leverage ratio was ~~2.47:~~1.75:1.00 and the minimum fixed charge coverage ratio was 1.25:1.00 and our fixed charge ratio was ~~6.57:~~3.62:1.00. 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 Company’s and its domestic subsidiaries’ tangible and intangible property by a pledge of all of the equity interests of the Company’s direct and indirect domestic subsidiaries and by a pledge by the Company’s 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 September 30, ~~2017.~~2018.
The following table presents a reconciliation from net income (loss), which is the most directly comparable GAAP operating performance measure, to EBITDA and from EBITDA to Adjusted EBITDA as defined in our Credit Facility (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,    Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016    2018    2017    2018    2017
Net income (loss)
   $ 1,261    $ 2,425    $ (310 )    $ 14,436    $ 3,321    $ 1,261    $ 2,817    $ (310 )
Provision for income taxes
   2,737    2,707    1,609    9,671    5,434    2,737    4,243    1,609
Interest expense, net
   699    351    2,056    549    826    699    2,353    2,056
Depreciation and amortization
   3,098    3,343    9,271    9,114    3,101    3,098    9,548    9,271
















EBITDA
   $ 7,795    $ 8,826    $ 12,626    $ 33,770    $ 12,682    $ 7,795    $ 18,961    $ 12,626
Share based compensation
   5,271    5,306    15,294    12,705
Stock based compensation
   4,326    5,271    11,761    15,294
Non-cash add backs
   —      —      —      —      —    —    —    —
Restructuring, issuance and cash non-operating costs
   202    19    198    497    265    202    4,682    198
Acquisition expenses
   —      1,125    —      1,125    —    —    —    —
















Adjusted EBITDA⁽¹⁾
   $ 13,268    $ 15,276    $ 28,118    $ 48,097    $ 17,273    $ 13,268    $ 35,404    $ 28,118
















(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 operations impact of depreciation and amortization expense, interest expense, net, the provision (benefit) for income taxes and ~~share~~stock 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 we have had a
significant amount of debt in the past, 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. ~~Share~~Stock based compensation and the associated expense has a meaningful impact on our financial statements.Non-cash expenses, restructuring, issuance and cashnon-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 income for complete analysis of our profitability, as net 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 the covenants under our Credit Facility as of September 30, ~~2017.~~2018.
Non-GAAP Measures
In our quarterly earnings press releases and conference calls, in addition to Adjusted EBITDA as discussed above, we ~~rely internally on certain measures~~discuss a key measure that ~~are~~is not calculated according to GAAP. Thisnon-GAAP measure is net adjusted EBITDA, which is defined as net income (loss) ~~income~~ before interest expense, net, other (income) expense, net, provision for income taxes, depreciation, amortization of acquired intangible assets and ~~share~~stock 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 fromperiod-to-period without direct correlation to underlying operating performance. We believe that thesenon-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.
In our quarterly earnings press releases and conference calls, in addition to Adjusted EBITDA and net adjusted EBITDA as discussed above, we discuss another key measure that is not calculated according to GAAP. Thisnon-GAAP measure isnon-GAAP earnings per diluted share, which is defined as earnings per diluted share before amortization of acquired intangible assets, stock based compensation expenses and acquisition-related compensation. We usenon-GAAP earnings per diluted share as one of our principal indicators of the operating performance of our business. We usenon-GAAP earnings per diluted share 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 thatnon-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 fromperiod-to-period without direct correlation to underlying operating performance. We believe that thesenon-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 ournon-GAAP earnings per diluted share may be valuable indicators of our operating performance.
In March 2018, we revised our definition ofnon-GAAP net adjusted EBITDA andnon-GAAP earnings per share to exclude the impact ofone-timenon-recurring expenses, such as certain advisor fees, royalty expenses and restructuring expenses. This change more accurately reflects management’s view of the Company’s business and financial performance. The three months and nine months ended September 30, 2017 have been restated for comparison purposes.
The following table presents a reconciliation from net income (loss), which is the most directly comparable GAAP operating financial measure, to net adjusted EBITDA as used by management (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,    Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016    2018    2017    2018    2017
Net income (loss)
   $ 1,261    $ 2,425    $ (310 )    $ 14,436    $ 3,321    $ 1,261    $ 2,817    $ (310 )
Interest expense, net
   699    351    2,056    549    826    699    2,353    2,056
Other expense, net
   1,444    272    4,858    479
Other expense (income), net
   361    1,444    (174 )    4,858
Provision for income taxes
   2,737    2,707    1,609    9,671    5,434    2,737    4,243    1,609
















Income from operations
   $ 6,141    $ 5,755    $ 8,213    $ 25,135    9,942    6,141    9,239    8,213
Depreciation and amortization
   3,098    3,343    9,271    9,114    3,101    3,098    9,548    9,271
Share based compensation
   5,271    5,306    15,294    12,705
Stock based compensation⁽¹⁾
   4,326    5,271    13,163    15,294
Acquisition-related compensation⁽¹⁾⁽²⁾
   1,407    1,077    4,221    2,233    661    1,407    2,934    4,221
Non-recurring expenses⁽³⁾
   244    210    11,734    210
















Net adjusted EBITDA⁽²⁾
   $ 15,917    $ 15,481    $ 36,999    $ 49,187
Net adjusted EBITDA⁽⁵⁾
   $ 18,274    $ 16,127    $ 46,618    $ 37,209
















The following table presents a reconciliation from net income (loss) per diluted share, which is the most directly comparable GAAP measure, tonon-GAAP earnings per diluted share as used by management:
Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
GAAP income (loss) per diluted share
$ 0.08 $ 0.03 $ 0.06 $ (0.01 )
Amortization, net of tax of $0.01, $0.03, $0.03 and $0.12, respectively
0.03 0.01 0.11 0.03
Stock based compensation, net of tax of $0.02, $0.09, $0.06 and $0.31, respectively⁽¹⁾
0.09 0.04 0.27 0.07
Acquisition-related compensation, net of tax of $0.00, $0.00, $0.00 and $0.00, respectively⁽²⁾
0.02 0.04 0.08 0.11
Non-recurring expenses, net of tax of $0.00, $0.00, $0.07 and $0.00, respectively⁽⁴⁾
0.00 0.00 0.22 0.00

Non-GAAP earnings per diluted share⁽⁶⁾
$ 0.22 $ 0.12 $ 0.74 $ 0.20

(1)
For the nine months ended September 30, 2018, $1.4 million, or $0.03 per share, of stock based compensation expense was reversed as a result of forfeitures of awards by employees included in the restructuring plan. Thisnon-recurring amount has been included in restructuring expenses.
(2)
For the three months ended September 30, ~~2017 and 2016,~~2018, the amount includes ~~$0.5~~$0.7 million, ~~and $0.6 million, respectively,~~or $0.02 per share, of expense associated with the deferred compensation arrangement resulting from ~~an amendment to~~ the ~~Swyft Merger Agreement and $0.9 million and $0.5 million, respectively, of expense associated with the deferred compensation arrangement with the founders of~~ Olapic ~~in connection with the~~ acquisition. For the ~~nine~~three months ended September 30, 2017, ~~and 2016,~~ the amount includes ~~$1.6~~$0.9 million, ~~and $1.7 million, respectively,~~or $0.02 per share, of expense associated with the deferred compensation arrangement resulting from ~~an amendment to~~ the ~~Swyft Merger Agreement and $2.6 million~~Olapic acquisition and $0.5 million, ~~respectively,~~or $0.01 per share, of expense associated with the deferred compensation arrangement resulting from the Amendment to the Swyft Merger Agreement. For the nine months ended September 30, 2018, the amount includes $2.4 million, or $0.07 per share, of expense associated with the ~~founders~~deferred compensation arrangement resulting from the Olapic acquisition and $0.5 million, or $0.01 per share, of ~~Olapic in connection~~expense associated with the ~~acquisition.~~deferred compensation arrangement resulting from the Amendment to the Swyft Merger Agreement. For the nine months ended September 30, 2017, the amount includes $2.6 million, or $0.07 per share, of expense associated with the deferred compensation arrangement resulting from the Olapic acquisition and $1.6 million, or $0.04 per share, of expense associated with the deferred compensation arrangement resulting from the Amendment to the Swyft Merger Agreement.
~~(2)~~(3)
For the three months ended September 30, 2018, the amount includes $0.2 million of restructuring expenses. For the three months ended September 30, 2017, the amount includes $0.2 million of certain advisor fees related to shareholder activities. For the nine months ended September 30, 2018, the amount includes $2.7 million of certain advisor fees related to shareholder activities, $2.2 million of royalty expenses, recorded in cost of sales, associated with revenue that was not recognized under ASC 606 and $6.8 million of restructuring expenses. For the nine months ended September 30, 2017, the amount includes $0.2 million of certain advisor fees related to shareholder activities.
(4)
For the three months ended September 30, 2018, the amount includes $0.2 million, or $0.00 per share, net of tax, of restructuring expenses. For the three months ended September 30, 2017, the amount includes $0.1 million, or $0.00 per share, net of tax, of certain advisor fees related to shareholder activities. For the nine months ended September 30, 2018, the amount includes $2.1 million, or $0.05 per share, net of tax, of certain advisor fees related to shareholder activities, $1.7 million, or $0.04 per share, net of tax, of royalty expenses, recorded in cost of sales, associated with revenue that was not recognized under ASC 606 and $5.2 million, or $0.13 per share, net of tax, of restructuring expenses. For the nine months ended September 30, 2017, the amount includes $0.1 million, or $0.00 per share, net of tax, of certain advisor fees related to shareholder activities.
(5)
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 ~~operations~~income impact of depreciation and amortization expense and ~~share~~stock 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~~Stock 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.Non-recurring expenses, such as certain advisor fees, royalty expenses and restructuring expenses, have 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.
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 share 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 income (loss) 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
September 30,    Nine Months Ended
September 30,
       2017            2016            2017            2016
GAAP net income (loss) per diluted share
   $ 0.03    $ 0.06    $ (0.01 )    $ 0.35
Amortization, net of tax of $0.03, $0.03, $0.12 and $0.06, respectively
   0.01    0.03    0.03    0.09
Share based compensation, net of tax of $0.09, $0.07, $0.31 and $0.13, respectively
   0.04    0.06    0.07    0.20
Acquisition-related compensation, net of tax of $0.00, $0.00, $0.00 and $0.00, respectively⁽¹⁾
   0.04    0.03    0.11    0.06








Non-GAAP earnings per diluted share⁽²⁾
   $ 0.12    $ 0.18    $ 0.20    $ 0.70








~~(1)~~(6) For the three months ended September 30, 2017 and 2016, the amount includes $0.5 million, or $0.01 per share, and $0.6 million, or $0.02 per share, respectively, of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement and $0.9 million, or $0.02 per share, and $0.5 million, or $0.01 per share, respectively, of expense associated with the deferred compensation arrangement with the founders of Olapic in connection with the acquisition. For the nine months ended September 30, 2017 and 2016, the amount includes $1.6 million, or $0.04 per share, and $1.7 million, or $0.04 per share, respectively, of expense associated with the deferred compensation arrangement resulting from an amendment to the Swyft Merger Agreement and $2.6 million, or $0.07 per share, and $0.5 million, or $0.01 per share, respectively, of expense associated with the deferred compensation arrangement with the founders of Olapic in connection with the acquisition.
~~(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 ~~operations~~income impact of amortization expense and ~~share~~stock 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 fromnon-GAAP earnings per diluted share is a material limitation. ~~Share~~Stock based compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion fromnon-GAAP ~~diluted~~ earnings per diluted share is a material limitation. Acquisition-related compensation and its associated income or (expense) has a meaningful impact on our financial statements therefore its exclusion fromnon-GAAP earnings per diluted share is a material limitation.Non-recurring expenses, such as certain advisor fees, royalty expenses and restructuring expenses, have a meaningful impact on our financial statements and therefore its exclusion fromnon-GAAPearnings per diluted 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 tonon-GAAP earnings per diluted share. Asnon-GAAP earnings per diluted share is not defined by GAAP, our definition ofnon-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 thatnon-GAAP earnings per diluted 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risk, including interest rate risk and foreign currency exchange risk.
Concentration of Revenue and Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Cash equivalents consist primarily of bank ~~deposits and certain investments, such as commercial paper, corporate securities and municipal securities, with maturities less than 90 days at the date of purchase.~~deposits. Deposits of cash held outside the United States totaled approximately ~~$18.5~~$29.5 million and ~~$16.4~~$24.3 million at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.
We grant credit to customers in the ordinary course of business. Credit evaluations are performed on an ongoing basis to reduce credit risk, and no collateral is required from our customers. An allowance for uncollectible accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and credit evaluation. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, none of our customers individually accounted for 10% or more of our gross accounts receivable. Due to the nature of our quarterly revenue streams derived from royalty revenue, it is not unusual for our accounts receivable balances to include a few customers with large balances. Historically, we have not recorded material losses due to customers’ nonpayment. Our Creative Professional business consists of a higher volume of lower dollar value transactions. Accordingly, as the percent of Creative Professional revenue increases in relation to total revenue, we expect the average time to collect our accounts receivables, and our overall accounts receivables balances, to increase.
For the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, no customer accounted for more than 10% of our revenue.
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates relates primarily to our long-term debt. At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company had borrowings under our revolving Credit Facility of ~~$96.0~~$80.0 million and ~~$105.0~~$93.0 million, respectively. The interest rate on our Credit Facility fluctuates with either the prime rate or the LIBOR interest rate and at September 30, ~~2017~~2018 our rate was ~~2.8%~~3.8% for LIBOR. A 10% increase in the rate would ~~have increased~~increase our annual interest expense by ~~$0.1~~$0.2 million.
Foreign Currency Exchange Rate Risk
In accordance with ASC Topic No. 830,Foreign Currency Matters, or ASC 830, all assets and liabilities of our foreign subsidiaries whose functional currency is a currency other than U.S. dollars are translated into U.S. dollars at an exchange rate as of the balance sheet date. Revenue and expenses of these subsidiaries are translated at the average monthly exchange rates. The resulting translation adjustments as calculated from the translation of our foreign subsidiaries to U.S. dollars are recorded as a separate component of stockholders’ equity.
As discussed in Note 1, our wholly-owned Olapic Argentina S.A. subsidiary employs approximately 99 people whose functions mainly include development, sales support and administration. The Argentinian economy was recently determined to be highly inflationary. Argentina’s inflation rate reached this threshold with the quarterly period ended June 30, 2018. In accordance with this designation, we were required to apply the guidance in ASC Topic 830,Foreign Currency Matters, (Subtopic ASC 830-10-45-10), and account for a change in functional currency from the Argentinian peso to the U.S. dollar effective July 1, 2018. While we conduct our operation in Argentina Pesos, effective July 1, 2018, the functional currency was changed to the U.S. dollar. The operation is a service center supporting the company’s products and generates no revenue. Thus, the expenses primarily consist of compensation and related costs, totaling approximately $0.4 million to $0.5 million per month. The change in functional currency to U.S. dollars did not have a material impact on our financial position, operating results or cash flows.
For the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, revenue from customers outside the United States, primarily EMEA and Japan, comprised ~~53.8%~~54.5% and ~~51.9%~~53.8%, respectively, of our total revenue. ~~The~~An effect of a 10% strengthening of the British pound sterling, the Euro and/or Japanese yen, ~~and Argentine peso,~~ relative to the U.S. dollar, would have ~~decreased~~increased our revenues by ~~$2.3~~$2.0 million, ~~decreased~~increased expenses by ~~$2.7~~$1.8 million and increased operating income by ~~$0.5~~$0.2 million for the three months ended September 30, ~~2017.~~2018. For the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, revenue from customers outside the United States, primarily EMEA and Japan, comprised ~~56.3%~~55.3% and ~~57.5%~~56.3%, respectively, of our total revenue. ~~The~~An effect of a 10% strengthening of the British pound sterling, the Euro and/or Japanese yen, ~~and Argentine peso,~~ relative to the U.S. dollar, would have ~~decreased~~increased our revenues by ~~$6.7~~$6.0 million, ~~decreased~~increased expenses by ~~$7.8~~$5.8 million and increased operating income by ~~$1.2~~$0.2 million for the nine months ended September 30, ~~2017.~~2018. The sensitivity analysis assumes that all currencies move in the same direction at the same time and the ratio ofnon-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels.
We incur foreign currency exchange gains and losses related to certain customers that are invoiced in U.S. dollars, but who have the option to make an equivalent payment in their own functional currencies at a specified exchange rate as of a specified date. In the period from that date until payment in the customer’s functional currency is received and converted into U.S. dollars, we can incur realized gains and losses. We also incur foreign currency exchange gains and losses on certain intercompany assets and liabilities denominated in foreign currencies. We are currently utilizing30-day forward contracts to mitigate our exposure on these currency fluctuations. Any increase or decrease in the fair value of the forward contracts is offset by the change in the value of the hedged assets of our consolidated foreign affiliate. At September 30, ~~2017,~~2018, we had one30-day forward contract to sell 2.6 million British pounds sterling and to purchase $3.4 million that together, had an immaterial fair ~~value, and at~~value. At December 31, ~~2016,~~2017, we had one30-day forward contract to sell ~~2.8~~2.5 million British pounds sterling and to purchase $3.4 million that together, had an immaterial fair value.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, ~~2017.~~2018. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives.
Based on the evaluation of our disclosure controls and procedures as of September 30, ~~2017,~~2018, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II—OTHER INFORMATION
Item 1. 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.
Item 1A. Risk Factors
Except as noted below, there are no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report onForm 10-K for the year ended December 31, ~~2016.~~2017.
~~Our~~We conduct a substantial portion of our business ~~could be negatively affected~~outside North America and, as a result, we face diverse risks related to engaging in international business.

We have offices in seven foreign countries and we are dedicating a significant portion of our sales efforts in countries outside North America. We are dependent on international sales for a substantial amount of our total revenue. In 2017 and 2016, approximately 56.9% and 58.3%, respectively, of our total revenue was derived from operations outside the U.S. In the three and nine months ended September 30, 2018, 54.5% and 55.3%, respectively, of our total revenue was derived from operations outside of the ~~actions~~U.S. and we expect that international sales will continue to represent a substantial portion of ~~activist stockholders.~~

Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in publicly traded companies recently. On October 6, 2017, we were notified that various funds affiliated with Starboard Value, BLR Partners LP and FMLP Inc. (collectively, the “Starboard Group”), have obtained a significant stake in our ~~Company~~revenue for the ~~purposes~~foreseeable future. This future international revenue will depend on the continued use and expansion of ~~(i) engaging~~our type and technologies, including the licensing of our solutions worldwide.

We are subject to the risks of conducting business internationally, including:

our ability to enforce our contractual and intellectual property rights, especially in ~~discussions with~~those foreign countries that do not respect and protect intellectual property rights to the ~~Company regarding operating results, cost~~same extent that the United States does, which increases the risk of unauthorized and ~~capital allocation, opportunities~~uncompensated use of our type or technologies;

United States and foreign government trade or tariff restrictions, including those that may impose restrictions on importation of programming, technology or components to ~~enhance stockholder value~~or from the United States;

foreign government taxes, regulations and ~~corporate governance, (ii) taking all action necessary~~permit requirements, including foreign taxes that we may not be able to ~~achieve the foregoing and (iii) taking any other actions the Starboard Group determines to undertake in connection with their respective investment~~offset against taxes imposed upon us in the ~~Company, including, but not limited~~United States, and foreign tax and other laws limiting our ability to ~~a potential solicitation of proxies~~repatriate funds to the United States;

risks related to fluctuations in ~~furtherance of seeking representation on~~foreign currency exchange rates, in particular fluctuations in the ~~Board of Directors~~exchange rate of the ~~Company. Considering~~Japanese yen, the European Union’s euro, and ~~responding to any proposals from~~ the ~~Starboard Group or any other activist stockholders,~~United Kingdom’s pound sterling, including potential proxy contests, could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business. We expect to incur significant legal and advisory fees in the fourth quarter of 2017risks related to hedging activities we may undertake;

foreign labor laws, regulations and restrictions;

changes in diplomatic and trade relationships, including the ~~activist stockholder matters. Additionally, such stockholder activism could give rise~~United Kingdom’s decision to ~~perceived uncertainties~~leave the European Union, as ~~to our future, adversely affect our relationships with customers~~well as related events;

difficulty in staffing and ~~service providers, make it more difficult to attract~~managing foreign operations;

political instability, natural disasters, war and/or events of terrorism; and ~~retain qualified personnel, and cause our stock price to experience periods~~

the strength of ~~volatility.~~international economies, including consideration of high inflation rates.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Unregistered Sales of Equity Securities

~~(a)~~

~~Unregistered Sales of Equity Securities~~

None.

(b)Use of proceeds

~~(b)~~ ~~Use of proceeds~~

Not applicable.

(c)Purchases of Equity Securities by the Issuer and Affiliated Purchasers

~~(c)~~

~~Purchases of Equity Securities by the Issuer and Affiliated Purchasers~~

The following table provides information about purchases by the Company during the quarter ended September 30, ~~2017~~2018 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

Monotype Imaging Holdings Inc. Purchases of Equity Securities

Period
   Total Number of
Shares
Purchased⁽¹⁾⁽²⁾    Average Price
Paid
per Share    Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs⁽²⁾    Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet be Purchased
Under the Plans or
Programs
July 4, 2017 to July 28, 2017⁽³⁾
   210,321    $ 16.90    196,989    $ 13,622,045
August 2, 2017 to August 31, 2017
   35,764    $ 9.52    18,000    $ 13,280,506
September 1, 2017 to September 29, 2017⁽³⁾
   31,306    $ 14.73    18,000    $ 12,943,743





Total
   277,391    $ 13.72    232,989    $ 12,943,743


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽³⁾		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
July 2, 2018 to July 31, 2018^(1)(2)(3)		77,824	$	18.76		69,000	$	22,602,054
August 1, 2018 to August 31, 2018⁽¹⁾⁽³⁾		55,877	$	16.23		44,600	$	21,692,774
September 3, 2018 to September 28, 2018^(1)(2)(3)		194,010	$	18.81		168,608	$	18,321,846

Total		327,711	$	18.40		282,208	$	18,321,846

(1)

The Company repurchased unvested restricted stock ~~at zero cost~~ in accordance with either the Third Amended and Restated 2007 Stock Option and Incentive Plan (“2007 Award Plan”), or the ~~Second Amended and Restated~~ 2010 Inducement ~~Plan (“2010 Inducement Plan”).~~Plan. The price paid by the Company was determined pursuant to the terms of either the 2007 Award Plan or the 2010 Inducement Plan and related restricted stock agreements.

(2)	The Company withheld 2,263 shares and 14,073 shares of vested restricted stock to satisfy the payment of taxes associated with the awards’ vestings in July and September, respectively.

(3)	The Company purchased shares of common stock in accordance with its share repurchase program announced on ~~August 30, 2016.~~May 3, 2018. The Company purchased the shares on the open market at prevailing prices.

~~(3)~~

~~The Company withheld 505 shares and 6,916 shares of vested restricted stock for payment of taxes associated with the vesting in July and September, respectively.~~

Subsequent to September 30, 2018, the Company purchased 315,092 shares of common stock for $6.3 million, at an average price per share of $19.80 through October 26, 2018. The Company purchased these shares on the open market at prevailing market prices and in accordance with its previously announced share purchase program. At October 26, 2018, $12.0 million remains for future purchase under the share purchase program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosure

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report onForm 10-Q and such Exhibit Index is incorporated herein by reference.

EXHIBIT INDEX

Listed and indexed below are all exhibits filed as part of this report.


Exhibit No.		Description

10.1		Executive Incentive Bonus Plan *

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.*

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.*

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.**

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

**	Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: November ~~1, 2017~~2, 2018	By:	/S/ ANTHONY CALLINI
		Anthony Callini
		Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)

3545


	Common Stock				Treasury Stock					Additional Paid-In		Retained			Accumulated Other Comprehensive			Total Stock- holders’
	Shares		Amount		Shares		Amount			Capital		Earnings			Income (Loss)			Equity
Balance, December 31, 2017		44,934,364	$	44		3,215,644	$	(64,083)		$	298,113	$	97,815		$	(2,521)		$	329,368
Net income													2,817						2,817
Issuance of capital shares
—restricted share grants		496,025		—							—								—
—exercised options		248,276		—							3,455								3,455
—restricted units converted		95,043		—							—								—
Repurchase of unvested shares of restricted common stock				—		291,676		—											—
Purchase of treasury stock				—		326,808		(6,678	)										(6,678	)
Shares withheld						80,365		(1,850	)										(1,850	)
Stock based compensation											11,786								11,786
Dividends declared ($0.348 per share)													(14,642	)					(14,642	)
Cumulative adjustment, ASC 606 adoption													8,950						8,950
Unrecognized actuarial loss, net of tax																64			64
Cumulative translation adjustment, net of tax																(2,694	)		(2,694	)

Balance, September 30, 2018		45,773,708	$	44		3,914,493	$	(72,611	)	$	313,354	$	94,940			(5,151	)	$	330,576

Balance, June 30, 2018	��	45,738,183	$	44		3,586,782	$	(66,581	)	$	308,952	$	96,477		$	(4,662	)	$	334,230
Net income													3,321						3,321
Issuance of capital shares
—restricted share grants		19,150		—							—								—
—exercised options		6,197		—							73								73
—restricted units converted		10,178		—							—								—
Repurchase of unvested shares of restricted common stock				—		29,167		—											—
Purchase of treasury stock				—		282,208		(5,697	)										(5,697	)
Shares withheld						16,336		(333	)										(333	)
Stock based compensation											4,329								4,329
Dividends declared ($0.116 per share)													(4,858	)					(4,858	)
Unrecognized actuarial loss, net of tax																23			23
Cumulative translation adjustment, net of tax																(512	)		(512	)

Balance, September 30, 2018		45,773,708	$	44		3,914,493	$	(72,611	)	$	313,354	$	94,940		$	(5,151	)	$	330,576


	As Reported		Cumulative Adjustments			As Adjusted
	December 31, 2017		Cumulative Adjustments			January 1, 2018
Assets:
Accounts receivable, net⁽¹⁾	$	34,461	$	7,052		$	41,513
Prepaid expenses and other current assets⁽²⁾		5,714		427			6,141
Other assets⁽³⁾		3,112		650			3,762
Liabilities:
Deferred revenue		15,102		(2,923	)		12,179
Other long-term liabilities⁽⁴⁾		6,428		(825	)		5,603
Deferred income taxes		28,004		2,927			30,931
Stockholders’ equity:
Retained earnings		97,815		8,950			106,765


	September 30, 2018
	As Reported		Balances without adoption of ASC 606		Increase (Decrease)
Assets:
Accounts receivable, net	$	38,571	$	25,334	$	(13,237	)
Prepaid expenses and other current assets		7,062		6,448		(614	)
Other assets		7,374		2,648		(4,726	)

Liabilities:
Accrued expenses and other current liabilities		32,408		30,139		(2,269	)
Deferred revenue		11,766		18,827		7,061
Other long-term liabilities		3,014		4,042		1,028
Deferred income taxes		29,958		24,130		(5,828	)
Stockholders’ equity:
Retained earnings		94,940		76,371		(18,569	)


	For the three months ended September 30, 2018
	As Reported		Balances without adoption of ASC 606			Increase (Decrease)
License revenue	$	45,831	$	38,954		$	(6,877	)
Cost of revenue—license		6,947		6,877			(70	)
Marketing and selling		18,212		18,712			500
Provision for income taxes		5,434		3,801			(1,633	)
Net income (loss)		3,321		(2,353	)		(5,674	)
Net income (loss)—basic and diluted	$	0.08	$	(0.06	)	$	(0.14	)

	For the nine months ended September 30, 2018
	As Reported		Balances without adoption of ASC 606			Increase (Decrease)
License revenue	$	139,791	$	126,666		$	(13,125	)
Service revenue		35,548		35,350			(198	)
Cost of revenue—license		23,841		21,572			(2,269	)
Marketing and selling		58,382		59,848			1,466
Provision for income taxes		4,243		1,342			(2,901	)
Net income (loss)		2,817		(6,802	)		(9,619	)
Net income (loss)—basic and diluted	$	0.06	$	(0.18)		$	(0.24)


	For the Three Months Ended September 30, 2018						For the Nine Months Ended September 30, 2018
	Creative Professional		OEM		Total		Creative Professional		OEM		Total
License revenue:
License transferred in point in time	$	25,068	$	20,763	$	45,831	$	77,817	$	61,974	$	139,791
Service revenue:
Service transferred in point in time		319		238		557		1,509		1,943		3,452
Service transferred over time		10,727		854		11,581		30,203		1,893		32,096

Total	$	36,114	$	21,855	$	57,969	$	109,529	$	65,810	$	175,339


	~~Number of~~ ~~employees~~
~~Marketing and selling~~		~~117~~
~~Research and development~~		68
~~General and administration~~		13

~~Total~~		~~198~~


	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


	Current		Long-term		Total
Deferred revenue	$	11,766	$	1,427	$	13,193
Unbilled backlog		6,688		2,055		8,743

Total	$	18,454	$	3,482	$	21,936


	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


	Three Months Ended September 30, 2016		Nine Months Ended September 30, 2016
Revenue	$	53,586	$	159,415
Net income	$	1,116	$	4,900
Net income available to common stockholders—basic	$	1,032	$	4,446
Net income available to common stock holders—diluted	$	1,031	$	4,447
Net income per common share: basic	$	0.03	$	0.11
Net income per common share: diluted	$	0.03	$	0.11
Weighted average number of shares—basic		39,977,120		39,348,437
Weighted average number of shares—diluted		40,261,247		39,699,790


	Fair Value Measurement at September 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 equivalents—money market funds	$	12,255	$	12,255	$	—	$	—
Cash equivalents—commercial paper		26,672		—		26,672		—
Cash equivalents—U.S. government and agency securities		1,504		1,504		—		—

Total short-term financial assets		40,431		13,759		26,672		—
Restricted cash equivalents—money market fund		9,000		9,000		—		—
Restricted cash equivalents—U.S. government and agency security fund		8,990		8,990		—		—

Total long-term financial assets		17,990		17,990		—		—

Total	$	58,421	$	31,749	$	26,672	$	—


	Fair Value Measurement at December 31, 2016								Fair Value Measurement at December 31, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents—money market funds	$	16,994	$	16,994	$	—	$	—	$	2,014	$	2,014	$	—	$	—
Cash equivalents—commercial paper		16,989		—		16,989		—		16,477		—		16,477		—
Cash equivalents—corporate bonds		4,802		—		4,802		—		1,457		—		1,457		—
Cash equivalents—U.S. government and agency securities		11,368		11,368		—		—		10,488		10,488		—		—

Total short-term financial assets		50,153		28,362		21,791		—
Restricted cash equivalents—money market fund		9,000		9,000		—		—		3,000		3,000		—		—
Restricted cash equivalents—U.S. government and agency security fund		8,992		8,992		—		—		8,987		8,987		—		—

Total long-term financial assets		17,992		17,992		—		—
Total current assets										42,423		24,489		17,934		—
Restricted cash equivalents—money market fund										6,000		6,000		—		—

Total	$	68,145	$	46,354	$	21,791	$	—
Total long term assets										6,000		6,000		—		—

Total assets									$	48,423	$	30,489	$	17,934	$	—


Balance at December 31, 2017	$	279,131
Foreign currency exchange rate changes		(1,733	)
Impairment		(600	)

Balance at September 30, 2018	$	276,798


	Weighted- Average Amortization Period (Years)				September 30, 2017												December 31, 2016															September 30, 2018												December 31, 2017
				Gross Carrying Amount				Accumulated Amortization				Net Balance				Gross Carrying Amount				Accumulated Amortization				Net Balance				Weighted- Average Amortization Period (Years)			Gross Carrying Amount				Accumulated Amortization				Net Balance				Gross Carrying Amount				Accumulated Amortization				Net Balance
Customer relationships			10			$	68,194			$	(53,419	)		$	14,775			$	67,502			$	(50,808	)		$	16,694			10			$	64,895			$	(54,732	)		$	10,163			$	68,296			$	(54,213	)		$	14,083
Acquired technology		11				69,085				(47,840	)			21,245				68,228				(44,361	)			23,867			11				68,921				(51,807	)			17,114				69,200				(48,945	)			20,255
Non-compete agreements		4				14,607				(13,301	)			1,306				14,440				(12,655	)			1,785			4				13,654				(13,004	)			650				14,632				(13,470	)			1,162
Indefinite-lived intangible assets:
Trademarks						44,829				—				44,829				43,971				—				43,971							44,212				—				44,212				44,956				—				44,956
Domain names						4,400				—				4,400				4,400				—				4,400							4,400				—				4,400				4,400				—				4,400

Total					$	201,115			$	(114,560	)		$	86,555			$	198,541			$	(107,824	)		$	90,717						$	196,082			$	(119,543	)		$	76,539			$	201,484			$	(116,628	)		$	84,856


	Three Months Ended September 30,										Three Months Ended September 30,
	2017					2016					2018					2017
Provision for income taxes at statutory rate	$	1,399		35.0	%	$	1,796		35.0	%	$	1,839		21.0	%	$	1,399		35.0	%
State and local income taxes, net of federal tax benefit		(173	)	(4.3	)%		559		10.9	%		(4	)	0.0	%		(173	)	(4.3	)%
Stock based compensation		141		3.5	%		86		1.7	%		89		1.0	%		141		3.5	%
Foreign rate differential		(109	)	(2.7	)%		(255	)	(4.9	)%		2,662		30.4	%		(109	)	(2.7	)%
Research credits		(381	)	(9.5	)%		(141	)	(2.8	)%		(70	)	(0.8	)%		(381	)	(9.5	)%
Permanent non-deductible acquisition-related expense		1,629		40.7	%		905		17.6	%		1,302		14.9	%		1,629		40.7	%
Disqualifying dispositions on incentive stock options		—		—			(33	)	(0.6	)%
Net shortfall on stock based compensation		257		6.4	%		—		—			76		0.8	%		257		6.4	%
Reversal of reserve for income taxes												(370	)	(4.2	)%		(66	)	(1.6	)%
Other, net		(26	)	(0.6	)%		(210	)	(4.2	)%		(90	)	(1.0	)%		40		1.0	%

Reported income tax provision	$	2,737		68.5	%	$	2,707		52.7	%	$	5,434		62.1	%	$	2,737		68.5	%


	Nine Months Ended September 30,										Nine Months Ended September 30,
	2017					2016					2018					2017
Provision for income taxes at statutory rate	$	455		35.0	%	$	8,437		35.0	%	$	1,483		21.0	%	$	455		35.0	%
State and local income taxes, net of federal tax benefit		(234	)	(18.0	)%		830		3.4	%		(55	)	(0.8	)%		(234	)	(18.0	)%
Stock based compensation		64		5.0	%		181		0.8	%		73		1.0	%		64		5.0	%
Foreign rate differential		(47	)	(3.6	)%		(512	)	(2.1	)%		2,214		31.4	%		(47	)	(3.6	)%
Research credits		(170	)	(13.1	)%		(300	)	(1.2	)%		(57	)	(0.8	)%		(170	)	(13.1	)%
Permanent non-deductible acquisition-related expense		727		55.9	%		1,324		5.5	%		1,061		15.0	%		727		55.9	%
Disqualifying dispositions on incentive stock options		—		—			(44	)	(0.2	)%
Net shortfall on stock based compensation		799		61.5	%		—		—
Net (windfall) shortfall on stock based compensation												(80	)	(1.1	)%		799		61.5	%
Reversal of reserve for income taxes												(370	)	(5.2	)%		(66	)	(5.1	)%
Other, net		15		1.2	%		(245	)	(1.1	)%		(26	)	(0.4	)%		81		6.3	%

Reported income tax provision	$	1,609		123.9	%	$	9,671		40.1	%	$	4,243		60.1	%	$	1,609		123.9	%


	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Severance and termination benefits	$	177	$	4,403
Reversal of stock based compensation expense		—		(1,402	)
Accelerated deferred compensation		—		523
Office closure		67		67
Intangible assets impairment		—		2,623
Write off of allocated goodwill		—		600

Total restructuring	$	244	$	6,814


	Personnel related			��	Facilities related		Total
Restructuring reserve at January 1, 2018	$	1,333			$	—	$	1,333
Restructuring charges		194				—		194
Cash payments		(985	)			—		(985	)

Restructuring reserve at March 31, 2018		542				—		542
Restructuring charges		4,031				—		4,031
Cash payments		(479	)			—		(479	)
Foreign currency exchange rate changes		(5	)			—		(5	)

Restructuring reserve at June 30, 2018	$	4,089			$	—	$	4,089
Restructuring charges		177				67		244
Cash payments		(1,295	)			—		(1,295	)
Foreign currency exchange rate changes		(24	)			—		(24	)

Restructuring reserve at September 30, 2018	$	2,947			$	67	$	3,014


	Three Months Ended September 30,				Increase		Three Months Ended September 30,				Increase (Decrease)
	2017		2016				2018		2017		Increase (Decrease)
Creative Professional	$	34,521	$	27,798	$	6,723	$	36,114	$	34,521	$	1,593
OEM		25,986		24,431		1,555		21,855		25,986		(4,131	)

Total revenue	$	60,507	$	52,229	$	8,278	$	57,969	$	60,507	$	(2,538	)


Period	Total Number of Shares Purchased⁽¹⁾⁽²⁾		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽²⁾		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
July 4, 2017 to July 28, 2017⁽³⁾		210,321	$	16.90		196,989	$	13,622,045
August 2, 2017 to August 31, 2017		35,764	$	9.52		18,000	$	13,280,506
September 1, 2017 to September 29, 2017⁽³⁾		31,306	$	14.73		18,000	$	12,943,743

Total		277,391	$	13.72		232,989	$	12,943,743

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