Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-Q
_____________________________________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 000-18805
______________________________________________________________ 
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________ 
Delaware
94-3086355
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6750 Dumbarton Circle, Fremont, CA 94555
(Address of principal executive offices) (Zip code)
(650) 357-3500
(Registrant’s telephone number, including area code)
______________________________________________________________ 
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act) (Check one):
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
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.    Yes  ¨    No  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No x

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
EFII
The Nasdaq Stock Market LLC
The number of shares of Common Stock outstanding as of May 1, 2019 was 43,139,408.
 




Electronics For Imaging, Inc.
Table of Contents
 
 
Page No.
PART I.
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 
 
Exhibit 2.1
 
Exhibit 3.1
 
Exhibit 3.2
 
Exhibit 10.1
 
Exhibit 10.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 101
 


2

Table of Contents

PART I         FINANCIAL INFORMATION
Item 1:        Condensed Consolidated Financial Statements (Unaudited)
Electronics For Imaging, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
388,246

 
$
309,052

Short-term investments

 
102,349

Accounts receivable, net of allowances of $30.9 million and $32.3 million, respectively
242,121

 
241,841

Inventories
141,880

 
134,348

Income taxes receivable
2,731

 
4,926

Assets held for sale
2,800

 
2,800

Other current assets
50,094

 
44,623

Total current assets
827,872

 
839,939

Property and equipment, net
80,749

 
77,613

Restricted cash equivalents
39,809

 
39,809

Goodwill
391,200

 
390,109

Intangible assets, net
65,157

 
74,722

Deferred tax assets
44,317

 
39,449

Operating lease right-of-use assets
34,582

 

Other assets
41,588

 
37,393

Total assets
$
1,525,274

 
$
1,499,034

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
133,340

 
$
148,587

Accrued and other liabilities
76,024

 
79,323

Deferred revenue
75,716

 
60,547

Convertible senior notes, net – current
338,234

 
334,274

Operating lease liabilities – current
8,764

 

Income taxes payable – current
6,307

 
5,077

Total current liabilities
638,385

 
627,808

Convertible senior notes, net – noncurrent
120,035

 
118,688

Operating lease liabilities – noncurrent
26,991

 

Contingent and other liabilities – noncurrent
3,380

 
7,179

Deferred tax liabilities
3,207

 
3,770

Income taxes payable – noncurrent
15,786

 
15,481

Total liabilities
807,784

 
772,926

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value; 150,000 shares authorized; 55,898 and 55,347 shares issued, respectively
559

 
553

Additional paid-in capital
835,227

 
821,205

Treasury stock, at cost; 13,018 and 12,927 shares, respectively
(491,553
)
 
(489,083
)
Accumulated other comprehensive loss
(13,608
)
 
(12,814
)
Retained earnings
386,865

 
406,247

Total stockholders’ equity
717,490

 
726,108

Total liabilities and stockholders’ equity
$
1,525,274

 
$
1,499,034


See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

Electronics For Imaging, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
Three Months Ended March 31,
(in thousands, except per share amounts)
2019
 
2018
Revenue
$
223,715

 
$
239,866

Cost of revenue
113,896

 
120,759

Gross profit
109,819

 
119,107

Operating expenses:
 
 
 
Research and development
39,737

 
38,279

Sales and marketing
45,871

 
46,680

General and administrative
24,982

 
19,421

Amortization of identified intangibles
9,978

 
12,138

Restructuring and other
2,416

 
4,654

Total operating expenses
122,984

 
121,172

Loss from operations
(13,165
)
 
(2,065
)
Interest expense
(6,918
)
 
(4,954
)
Interest and other income, net
1,572

 
1,289

Loss before income taxes
(18,511
)
 
(5,730
)
Provision (benefit) for income taxes
152

 
(2,135
)
Net loss
$
(18,663
)
 
$
(3,595
)
 
 
 
 
Net loss per basic common share
$
(0.44
)
 
$
(0.08
)
Net loss per diluted common share
$
(0.44
)
 
$
(0.08
)
Shares used in basic per-share calculation
42,614

 
45,030

Shares used in diluted per-share calculation
42,614

 
45,030
























See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

Electronics For Imaging, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Net loss
$
(18,663
)
 
$
(3,595
)
Net unrealized investment gains (losses):
 
 
 
Unrealized holding loss, net of tax*

 
(548
)
Reclassification adjustments included in net loss, net of tax*

 
2

Net unrealized investment loss

 
(546
)
Currency translation adjustments
(794
)
 
5,660

Net unrealized losses on cash flow hedges

 
(41
)
Comprehensive income (loss)
$
(19,457
)
 
$
1,478

____________________

* Tax effects were less than $0.1 million for the periods presented above.    




















See accompanying notes to condensed consolidated financial statements.


5

Table of Contents

Electronics For Imaging, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(unaudited)
 
Common Stock
 
Additional Paid in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Stockholders' Equity
(in thousands)
 Shares
 
 Amount
 
 
 Shares
 
 Amount
 
 
 
Balances as of December 31, 2017
54,249

 
$
542

 
$
745,661

 
(9,070
)
 
$
(375,574
)
 
$
8,138

 
$
402,544

 
$
781,311

Effect from the adoption of ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
4,674

 
4,674

Comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
5,073

 
(3,595
)
 
1,478

Stock repurchases
 
 
 
 
 
 
(615
)
 
(17,601
)
 
 
 
 
 
(17,601
)
Stock-based compensation
 
 
 
 
6,770

 
 
 
 
 
 
 
 
 
6,770

Stock issued pursuant to ESPP
202

 
3

 
5,007

 
 
 
 
 
 
 
 
 
5,010

Restricted stock vested
39

 

 

 
 
 
 
 
 
 
 
 

Balances as of March 31, 2018
54,490

 
$
545

 
$
757,438

 
(9,685
)
 
$
(393,175
)
 
$
13,211

 
$
403,623

 
$
781,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2018
55,347

 
$
553

 
$
821,205

 
(12,927
)
 
$
(489,083
)
 
$
(12,814
)
 
$
406,247

 
$
726,108

Effect from the adoption of ASC 842
 
 
 
 
 
 
 
 
 
 
 
 
(719
)
 
(719
)
Comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(794
)
 
(18,663
)
 
(19,457
)
Stock repurchases
 
 
 
 
 
 
(91
)
 
(2,470
)
 
 
 
 
 
(2,470
)
Stock-based compensation
 
 
 
 
9,274

 
 
 
 
 
 
 
 
 
9,274

Stock issued pursuant to ESPP
212

 
2

 
4,752

 
 
 
 
 
 
 
 
 
4,754

Restricted stock vested
339

 
$
4

 
$
(4
)
 

 
 
 
 
 
 
 

Balances as of March 31, 2019
55,898

 
$
559

 
$
835,227

 
(13,018
)
 
$
(491,553
)
 
$
(13,608
)
 
$
386,865

 
$
717,490



















See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

Electronics For Imaging, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(18,663
)
 
$
(3,595
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
17,217

 
17,106

Deferred taxes
(11,736
)
 
10,638

Provisions for bad debt and sales-related allowances
(467
)
 
(1,219
)
Provision for inventory obsolescence
2,355

 
1,650

Stock-based compensation expense
9,274

 
6,770

Non-cash accretion of interest expense on convertible notes and imputed financing obligation
4,802

 
3,802

Change in fair value of contingent consideration, including accretion
2,006

 
(1,459
)
Payment of contingent obligations
(464
)
 
(26
)
Net change in derivative assets and liabilities
714

 
1,271

Other non-cash charges
577

 
386

Changes in operating assets and liabilities
(24,491
)
 
(29,031
)
Net cash provided by (used in) operating activities
(18,876
)
 
6,293

Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of short-term investments
102,006

 
7,318

Purchases, net of proceeds from sales, of property and equipment
(2,711
)
 
(4,214
)
Businesses purchased, net of cash acquired

 
(252
)
Net cash provided by investing activities
99,295

 
2,852

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
4,754

 
5,010

Purchases of treasury stock and net share settlements
(2,470
)
 
(17,601
)
Repayment of acquisition-related debt
(1,437
)
 
(254
)
Contingent consideration payments related to businesses acquired
(2,252
)
 
(698
)
Net cash used in financing activities
(1,405
)
 
(13,543
)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash equivalents
180

 
332

Increase (decrease) in cash, cash equivalents, and restricted cash equivalents
79,194

 
(4,066
)
Cash, cash equivalents, and restricted cash equivalents at beginning of period
348,861

 
202,876

Cash, cash equivalents, and restricted cash equivalents at end of period
$
428,055

 
$
198,810










See accompanying notes to condensed consolidated financial statements.


7

Table of Contents

Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements

Note 1.     Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements (“Condensed Consolidated Financial Statements”) include the accounts of Electronics For Imaging, Inc. and its subsidiaries (“EFI” or “Company”). All intercompany accounts and transactions have been eliminated in consolidation.

These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S.") and (“GAAP”) for interim financial information, rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements, and accounting policies consistent in all material respects with those applied in preparing our audited annual consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”), except for the adoption of ASC 842 as described below. These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and notes included in the 2018 Form 10-K. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, management considers necessary for the fair presentation of our financial position, operating results, comprehensive income (loss), and cash flows for the interim periods presented. Our results for the interim periods are not necessarily indicative of results to be expected for the entire year.

On April 14, 2019, the Company entered into a definitive agreement and plan of merger to be acquired by an affiliate of Siris Capital Group, LLC (“Siris”). See Note 2Business Acquisitions for further details.

Recently Adopted Accounting Pronouncements

Leases. On January 1, 2019, we adopted FASB ASU No. 2016-02, Leases (ASC 842), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use ("ROU") assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The standard had a material impact on our Condensed Consolidated Balance Sheet, but did not materially affect our Condensed Consolidated Statements of Operations or of Cash Flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for leases that existed prior to January 1, 2019. We also elected to combine our lease and non-lease components and to not recognize ROU assets and lease liabilities for leases with an initial term of 12 months or less. We elected not to adopt the hindsight practical expedient when determining lease term and assessing impairment of ROU assets.

We determine if an arrangement is a lease at inception. We evaluate classification of leases at commencement and as necessary at modification. As of March 31, 2019, we did not have any finance leases as lessee. Operating leases are included in operating lease right-of-use assets, net, operating lease liabilities – current, and operating lease liabilities – noncurrent on the Condensed Consolidated Balance Sheets. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance, utilities, and fuel and vehicle maintenance charges. Our leases may include options to extend or terminate the lease. The lease terms are determined using the noncancellable period, including any rent-free periods provided by the lessor, and reflect options to extend or terminate the lease when it is reasonably certain that we will exercise that option. At lease inception, and in subsequent periods as necessary, we estimate the lease term based on an assessment of extension and termination options that are reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


We do not separate non-lease components from lease components for all underlying classes of assets. In addition, the Company does not recognize ROU assets and lease liabilities for short-term leases, which have a lease term of twelve months or less and do not include an option to purchase the underlying asset that we are reasonably certain to exercise.

Upon adoption, we recorded a cumulative effect adjustment to retained earnings of $0.7 million, net of a tax adjustment of $0.1 million, related to immaterial leases that we did not recognize in the Consolidated Statements of Operations on a straight-line basis under ASC 840. See Note 11Leases, for additional disclosures required upon adopting the standard.

The cumulative effect of the adjustments made to the Company's Condensed Consolidated Balance Sheet as of the adoption date is detailed as follows (in thousands):
 
December 31, 2018
 
Adjustments to Adopt ASC 842
 
January 1, 2019
 
As Reported
 
 
As Adjusted
Assets:
 
 
 
 
 
Other current assets
$
44,623

 
$
(1,626
)
 
$
42,997

Operating lease right-of-use assets

 
36,863

 
36,863

Total assets
1,499,034

 
35,237

 
1,534,271

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accrued and other liabilities
79,323

 
(2,000
)
 
77,323

Operating lease liabilities – current

 
8,720

 
8,720

Operating lease liabilities – noncurrent

 
29,236

 
29,236

Total liabilities
772,926

 
35,956

 
808,882

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Retained earnings
406,247

 
(719
)
 
405,528

Total stockholders' equity
726,108

 
(719
)
 
725,389


Significant Accounting Policies

There have been no other material changes in our significant accounting policies, as compared to the significant accounting policies described in our 2018 Form 10-K.

Note 2.    Business Acquisitions

Proposed Acquisition

On April 14, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with East Private Holdings II, LLC, (“Parent”) and East Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company continuing as the surviving company of the merger and a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of the Siris Funds (as defined below). The all-cash transaction is valued at approximately $1.7 billion.

Subject to the terms and conditions set forth in the Merger Agreement, each share of the Company’s common stock outstanding immediately prior to the Merger will automatically be cancelled, extinguished and converted into the right to receive $37.00 per share in cash, without interest, and less any applicable withholding taxes (the “Merger Consideration”), (other than shares held by (a) the Company as treasury stock, (b) owned by the Parent or Merger Sub, (c) owned by any direct or wholly owned subsidiary of the Company, or (d) stockholders of the Company who properly exercised their appraisal rights under the General Corporation Law of the state of Delaware.

In addition, at or immediately prior to the effective time of the Merger, each of the Company’s outstanding restricted stock units that is subject to time-based vesting requirements only (“RSU”) and each of the Company’s outstanding restricted stock units that is subject to both time-based and performance-based vesting requirements (“PSU”) will be treated, as follows: (1) each RSU that is currently

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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


outstanding as of immediately prior to the effective time of the Merger that is vested or scheduled to vest within 12 months after the closing of the Merger (the “Closing”) will be converted into the right to receive the Merger Consideration promptly following the Closing; (2) each other RSU will be assumed and converted into the right to the Merger Consideration, subject to applicable tax withholding, in accordance with its existing vesting schedule and applicable terms and conditions immediately prior to the effective time of the Merger, including the holder’s continued employment or service through the applicable vesting date; (3) each PSU granted pursuant to the Company’s 2019 annual bonus program will be assumed and converted into the right to receive the Merger Consideration, subject to applicable tax withholding, in accordance with its existing vesting schedule and applicable terms and conditions immediately prior to the effective time of the Merger, including achievement of the applicable performance goals and the holder’s continued employment or service through the applicable vesting date; (4) each other PSU (“LTIP PSU”), to the extent it would vest if the target level of performance established for the award had been attained, will be assumed and converted into a right to receive the Merger Consideration, subject to applicable tax withholding, in accordance with the time-based vesting schedule for the award (but in no event earlier than the end of the applicable performance period) and the applicable terms and conditions immediately prior to the effective time of the Merger (other than the performance-based vesting conditions), including the holder’s continued employment through the applicable vesting date; and (5) each LTIP PSU, to the extent eligible to vest only if the target level of performance under the award was exceeded and held by an individual employed by the Company or one of its subsidiaries at the effective time of the Merger, will be assumed and converted into the right to receive the Merger Consideration, subject to applicable tax withholding, in accordance with the applicable terms and conditions immediately prior to the effective time of the Merger, including the time-based and performance-based vesting requirements applicable to the award, and any such LTIP PSU held by an individual not employed by the Company or one of its subsidiaries at the effective time of the Merger will be cancelled without payment at the effective time of the Merger. Any PSUs as to which the applicable performance period has ended prior to the effective time of the Merger and that remain subject only to time-based vesting conditions will be treated as RSUs as described above. In addition, at or immediately prior to the effective time of the Merger, each of the Company’s stock options (whether vested or unvested) will be cancelled and converted into the right to receive, for each of the Company’s common stock subject to the option, the Merger Consideration less the per-share exercise price of the option (with any option that has a per-share exercise price equal to or greater than the Merger Consideration being cancelled without payment at the effective time of the Merger), subject to applicable tax withholding. In each case, any existing provisions for accelerated vesting of Company equity awards in connection with the transaction or in connection with a severance event under an employment or similar agreement will continue in effect in accordance with their terms.

Completion of the Merger is subject to the satisfaction of several conditions, including: (i) adoption of the Merger Agreement by the requisite vote of the Company’s stockholders; (ii) the expiration or termination of any applicable waiting period relating to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); and (iii) certain other customary conditions. On May 3, 2019, the U. S. Federal Trade Commission granted early termination of the waiting period under the HSR Act.

During the period beginning on the date of the Merger Agreement until 12:01 am New York time on May 29, 2019 (the “Go-Shop Period), the Company may solicit alternative acquisition proposals from third parties and will have the right to terminate the Merger Agreement to enter into a superior proposal subject to the terms and conditions of the Merger Agreement. If the Company terminates the Merger Agreement for the purpose of entering into an agreement in respect of a superior proposal during the Go-Shop Period, the Company must pay a termination fee of $25.4 million to Parent. If there is a superior proposal, the Merger Agreement provides Parent with a customary right to attempt to match a superior proposal.

The Merger Agreement contains certain termination rights for each of the Company and Parent, and further provides that, upon termination of the Merger Agreement, under specified circumstances, the Company may be required to pay Parent a termination fee of either $25.4 million as described above, or $59.2 million or the Parent may be required to pay the Company a reverse termination fee of $109.9 million.

Parent has obtained (i) equity financing commitments from Siris Partners IV, L.P. and Siris Partners IV Parallel, L.P. (collectively, the “Siris Funds”), and (ii) debt financing commitments from certain financial institutions for the purpose of, among other things, funding the aggregate Merger Consideration. Pursuant to a limited guarantee delivered by the Siris Funds to the Company, the Siris Funds have also agreed to guarantee Parent’s obligation to pay any termination fee or damages awards to the Company and to reimburse the Company with respect to certain expenses in connection with the Merger, in each case as required by the Merger Agreement.

The Merger Agreement has been adopted by the board of directors of the Company, and the board of directors of the Company has recommended that the stockholders of the Company adopt the Merger Agreement. The Merger is expected to close in the third quarter of 2019, subject to satisfaction of the closing conditions. If the Merger is completed, our common stock will be delisted from Nasdaq

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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


and deregistered under the Securities Exchange Act of 1934, as amended, and we will no longer file periodic reports with the Securities and Exchange Commission.

Acquisition of BDR Boya Kimya San.Tic. A.S.

On May 3, 2019, we acquired BDR Boya Kimya San.Tic. A.S. ("BDR"), a digital textile ink development and manufacturing company based in Turkey. BDR will expand the Company's digital textile ink offerings as well as providing a low-cost manufacturing facility for ink.

Note 3.     Net Loss Per Share

Net income (loss) per basic common share is computed using the weighted average number of common shares outstanding during the period. Net income (loss) per diluted common share is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding common stock options having a dilutive effect using the treasury stock method, non-vested shares of RSUs having a dilutive effect, non-vested PSUs for which the performance criteria have been met, shares to be purchased under our Employee Stock Purchase Plan (“ESPP”) having a dilutive effect, the assumed release of shares for the expected satisfaction of contingent consideration based on achievement of specified performance criteria related to the acquisition of Corrugated Technologies, Inc. (“CTI”), the assumed conversion of our notes having a dilutive effect using the treasury stock method when the stock price exceeds the conversion price of our 0.75% Convertible Senior Notes due 2019 (“2019 Notes”) and 2.25% Convertible Senior Notes due 2023 (“2023 Notes” and together with the 2019 Notes, the “Notes”), as well as the dilutive effect of our warrants when the stock price exceeds the warrant strike price. Our stock price has not exceeded the conversion price of the Notes or the strike price of the warrants during any periods presented. Any potential shares that are anti-dilutive are excluded from the effect of dilutive securities.

PSUs and market-based restricted stock units that would be issuable if the end of the reporting period were the end of the vesting period, if the result would be dilutive, are assumed to be outstanding for purposes of determining net income per diluted common share as of the later of the beginning of the period or the grant date. Accordingly, PSUs, which vested on various dates during the three months ended March 31, 2019 and 2018, based on achievement of specified performance criteria related to revenue, cash flows from operating activities, and non-GAAP operating income targets, are included in the determination of net income per diluted common share as of the beginning of each period.

Basic and diluted net loss per share are reconciled as follows (in thousands, except per share amounts):
 
Three Months Ended March 31,
Basic and Diluted Net Loss per Share
2019
 
2018
Basic net loss per share:
 
 
 
Net loss
$
(18,663
)
 
$
(3,595
)
Weighted average common shares outstanding
42,614

 
45,030

Basic net loss per share
$
(0.44
)
 
$
(0.08
)
Diluted net loss per share:
 
 
 
Net loss
$
(18,663
)
 
$
(3,595
)
Weighted average common shares outstanding
42,614

 
45,030

Weighted average common shares outstanding for purposes of computing diluted net loss per share
42,614

 
45,030

Diluted net loss per share
$
(0.44
)
 
$
(0.08
)


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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Potential shares of common stock that were not included in the determination of diluted net loss per share because the impact of including them would have been anti-dilutive or performance conditions have not been met, consisted of the following (in thousands):
 
Three Months Ended March 31,
Potential Shares Excluded from Diluted Net Loss per Share Computation
2019
 
2018
Options
28

 
69

RSUs & PSUs
1,183

 
751

ESPP purchase rights
1,281

 
862

Total potential shares of common stock excluded from the computation of diluted net loss per share
2,492

 
1,682


The weighted-average number of common shares outstanding does not include the effect of the potential common shares from conversion of our Notes and exercise of our warrants because the effect would have been anti-dilutive since the conversion price of the Notes and the strike price of the warrants exceeded the average market price of our common stock. We have the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion of the Notes. Our intent is to settle the principal amount of the Notes in cash upon conversion. As a result, only amounts payable in excess of the principal amount of the Notes are considered in diluted net income (loss) per share under the treasury stock method. The Note Hedges are not included in the calculation of diluted net loss per share because the effect of any exercise of the Note Hedges would be anti-dilutive. Please refer to Note 10Debt for additional information and definitions.

Note 4.     Segment Information

Operating segment information is presented based on the internal reporting used by the chief operating decision making group (“CODM”) to allocate resources and evaluate operating segment performance. Our segments consist of Industrial Inkjet, Productivity Software, and Fiery.

Industrial Inkjet consists of our VUTEk super-wide and wide format display graphics, Nozomi corrugated packaging and display, Reggiani textile, and Cretaprint ceramic tile decoration and building material industrial digital inkjet printers; digital ultra-violet (“UV”) curable, light-emitting diode (“LED”) curable, ceramic, water-based, and thermoforming and specialty inks, as well as a variety of textile inks including dye sublimation, pigmented, reactive dye, acid dye, pure disperse dye, water-based dispersed printing ink, supplies, and coatings; digital inkjet printer parts; and professional services. Printing surfaces include paper, vinyl, corrugated, textile, glass, plastic, aluminum composite, ceramic tile, wood, and many other flexible and rigid substrates.

Productivity Software consists of a complete software suite that enables efficient and automated end-to-end business and production workflows for the print and packaging industries. This Productivity Suite also provides tools to enable revenue growth, efficient scheduling, and optimization of processes, equipment, and personnel. Customers are provided the financial and technical flexibility to deploy locally within their business or to be hosted in the cloud. The Productivity Suite addresses all segments of the print industry and consists of the: (i) Packaging Suite, with Radius at its core, for tag & label, cartons, and flexible packaging businesses; (ii) Corrugated Packaging Suite, with CTI at its core, for corrugated packaging businesses, including corrugated control capability using EFI Escada; (iii) Enterprise Commercial Print Suite, with Monarch at its core, for enterprise print businesses; (iv) Publication Print Suite, with Monarch or Technique at its core, for publication print businesses; (v) Midmarket Print Suite, with Pace at its core, for medium size print businesses; (vi) Quick Print Suite, with PrintSmith Vision and essential capabilities of Digital StoreFront at its core, for small printers and in-plant sites; and (vii) Value Added Products, available with the suite and standalone, such as web-to-print, e-commerce, cross media marketing, warehousing, fulfillment, shop floor data collection, and shipping to reduce costs, increase profits, and offer new products and services to their existing and future customers. We also market Optitex computer-aided fashion design software, which facilitates fast fashion and increased efficiency in the textile and fashion industries.

Fiery consists of Fiery and FreeFlow Print Server (“FFPS”), which was acquired from Xerox Corporation (“Xerox”), that transform digital copiers and printers into high performance networked printing devices for the office, commercial and industrial printing markets. This operating segment is comprised of (i) stand-alone Digital Front Ends ("DFEs") connected to digital printers, copiers, and other peripheral devices, (ii) embedded DFEs and design-licensed solutions used in digital copiers and multi-functional devices, (iii) optional software integrated into our DFE solutions such as Fiery Central, and Graphics Arts Package, (iv) Fiery Self Serve, our self-service and payment solution, and (v) stand-alone software-based solutions such as our proofing, textile, and scanning solutions.

Operating income is not reported by operating segment because operating expenses include significant shared expenses and other costs that are managed outside of the operating segments. Such operating expenses include various corporate expenses such as stock-

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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


based compensation, corporate sales and marketing, research and development, amortization of identified intangibles, various non-recurring charges, and other separately managed general and administrative expenses.

Our revenue and gross profit (i.e., gross profit excluding stock-based compensation expense) by operating segment are summarized as follows (in thousands):
 
Three Months Ended March 31,
Segment Revenue and Gross Profit
2019
 
2018
Industrial Inkjet
 
 
 
Revenue
$
130,423

 
$
142,209

Gross profit
44,312

 
49,707

Gross profit percentage
34.0
%
 
35.0
%
Productivity Software
 
 
 
Revenue
$
39,512

 
$
43,775

Gross profit
28,333

 
31,413

Gross profit percentage
71.7
%
 
71.8
%
Fiery
 
 
 
Revenue
$
53,780

 
$
53,882

Gross profit
37,959

 
38,755

Gross profit percentage
70.6
%
 
71.9
%

Operating segment profit is reconciled to our Condensed Consolidated Statements of Operations as follows:
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
Segment gross profit
$
110,604

 
$
119,875

Stock-based compensation expense
(785
)
 
(768
)
Gross profit
$
109,819

 
$
119,107


Tangible and intangible assets, net of liabilities, are summarized by operating segment as follows:
(in thousands)
Industrial
Inkjet
 
Productivity
Software
 
Fiery
 
Unallocated
Net Assets
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
Goodwill
$
147,568

 
$
169,728

 
$
73,904

 
$

 
$
391,200

Identified intangible assets, net
32,514

 
19,450

 
13,193

 

 
65,157

Tangible assets, net of liabilities
257,339

 
(9,102
)
 
27,054

 
(14,158
)
 
261,133

Net tangible and intangible assets
$
437,421

 
$
180,076

 
$
114,151

 
$
(14,158
)
 
$
717,490

December 31, 2018
 
 
 
 
 
 
 
 
 
Goodwill
$
147,932

 
$
168,186

 
$
73,991

 
$

 
$
390,109

Identified intangible assets, net
38,782

 
21,677

 
14,263

 

 
74,722

Tangible assets, net of liabilities
234,689

 
(12,747
)
 
21,092

 
18,243

 
261,277

Net tangible and intangible assets
$
421,403

 
$
177,116

 
$
109,346

 
$
18,243

 
$
726,108


Corporate and unallocated net assets primarily consist of cash and cash equivalents, restricted cash equivalents, corporate headquarters facility, convertible senior notes, income taxes receivable, and income taxes payable.


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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Note 5.     Revenue

We derive our revenue primarily from product revenue, which includes industrial digital inkjet printers, ink, and parts; print production software; and DFEs. We receive service revenue from printer maintenance agreements, customer support, training, software development, and consulting.

The following table presents our disaggregated revenue by source, excluding sales and usage-based taxes:
Revenue by Major Products and Services
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
(in thousands)
Industrial
Inkjet
 
Productivity
Software
 
Fiery
 
Total
 
Industrial
Inkjet
 
Productivity
Software
 
Fiery
 
Total
Industrial Inkjet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Printers and parts
$
75,905

 
$

 
$

 
$
75,905

 
$
88,374

 
$

 
$

 
$
88,374

Ink, supplies, and maintenance
54,518

 

 

 
54,518

 
53,835

 

 

 
53,835

Productivity Software
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses

 
9,608

 

 
9,608

 

 
12,656

 

 
12,656

Professional services

 
7,592

 

 
7,592

 

 
7,545

 

 
7,545

Maintenance and subscriptions

 
22,312

 

 
22,312

 

 
23,574

 

 
23,574

Fiery
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Digital front ends and related products

 

 
49,573

 
49,573

 

 

 
50,096

 
50,096

Maintenance and subscriptions

 

 
4,207

 
4,207

 

 

 
3,786

 
3,786

Total
$
130,423

 
$
39,512

 
$
53,780

 
$
223,715

 
$
142,209

 
$
43,775

 
$
53,882

 
$
239,866

Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transferred at a Point in Time
$
124,616

 
$
9,608

 
$
49,573

 
$
183,797

 
$
137,110

 
$
12,656

 
$
50,096

 
$
199,862

Transferred Over Time
5,807

 
29,904

 
4,207

 
39,918

 
5,099

 
31,119

 
3,786

 
40,004

Total
$
130,423

 
$
39,512

 
$
53,780

 
$
223,715

 
$
142,209

 
$
43,775

 
$
53,882

 
$
239,866

Recurring/Non-Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Recurring
$
75,905

 
$
17,200

 
$
49,573

 
$
142,678

 
$
88,374

 
$
20,201

 
$
50,096

 
$
158,671

Recurring
54,518

 
22,312

 
4,207

 
81,037

 
53,835

 
23,574

 
3,786

 
81,195

Total
$
130,423

 
$
39,512

 
$
53,780

 
$
223,715

 
$
142,209

 
$
43,775

 
$
53,882

 
$
239,866


We report revenue by geographic region based on ship-to destination which is summarized as follows:
Revenue by Geographic Region
Three Months Ended March 31,
(in thousands)
2019
 
2018
Americas
$
104,569

 
$
117,385

Europe, Middle East, and Africa (“EMEA”)
91,159

 
88,175

Asia Pacific (“APAC”)
27,987

 
34,306

Total revenue
$
223,715

 
$
239,866


Remaining Performance Obligations

Revenue allocated to remaining performance obligations includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods (“backlog”). Remaining performance obligations were $91.8 million as of March 31, 2019, of which we expect to recognize substantially all of the revenue over the next 12 months.

Contract Balances

Timing of revenue recognition may differ from timing of invoicing to customers. Payment terms and conditions vary by contract. Deferred revenue (contract liability) represents amounts received in advance, or invoiced in advance, for software and product support contracts, consulting and integration projects, SaaS arrangements, or product sales. We defer these amounts when we collect or invoice the customer and then generally recognize revenue either ratably over the support contract term, upon performing the related services, under the cost-to-cost method, or in accordance with our revenue recognition policy. Revenue recognized during the three months ended March 31, 2019, which was included in deferred revenue as of December 31, 2018, was $28.7 million.

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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Unbilled accounts receivable represent contract assets for revenue that have been recognized in advance of billing the customer, which is common for long-term contracts. Billing requirements vary by contract but are generally structured around time-based milestones. Unbilled accounts receivable as of December 31, 2018, that were transferred to accounts receivable during the three months ended March 31, 2019, were $17.2 million.

The following table reflects the balances in unbilled accounts receivable and deferred revenue (in thousands):
 
March 31, 2019
 
December 31, 2018
Unbilled accounts receivable – current
$
22,684

 
$
20,507

Unbilled accounts receivable – noncurrent
8,101

 
8,320

Deferred revenue – current
75,716

 
60,547

Deferred revenue – noncurrent
205

 
290


Note 6.     Supplemental Financial Statement Information

Supplemental disclosures about cash flow information are as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Net cash paid for income taxes
$
1,295

 
$
2,562

Cash paid for interest expense
1,388

 
1,716

Property, equipment, and intellectual property received, but not paid
1,288

 
999

Inventory reclassified as property and equipment, net for operating leases
4,921

 

Right of use asset recognized upon adoption of ASC 842
36,863

 

Lease liability recognized upon adoption of ASC 842
37,956

 

Non-cash changes in right of use assets and lease liabilities
279

 


Inventories

Inventories are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Raw materials
$
58,574

 
$
55,794

Work-in-process
13,545

 
12,971

Finished goods
69,761

 
65,583

Total
$
141,880

 
$
134,348


Assets Held for Sale

During the fourth quarter of 2017, our management approved a plan to sell approximately 31.5 acres of land and two manufacturing buildings located at One Vutek Place and 189 Waukewan Street, Meredith, New Hampshire, consisting of 163,000 total square feet. In the three months ended September 30, 2018, we sold the 189 Waukewan Street land and building for net proceeds of $1.1 million and recognized a gain of $0.1 million. The One Vutek Place land and building remained in assets held for sale at a total value of $2.8 million as of March 31, 2019 and December 31, 2018 on the Condensed Consolidated Balance Sheets and are actively being marketed.

Deferred Contract Acquisition Costs

Certain of our sales incentive programs that meet the definition of an incremental cost of obtaining a customer contract are required to be capitalized under ASC 340-40. We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year, and amortize such costs over the expected period of benefit, generally three to four years. We determined the period of benefit by taking into consideration our customer contracts, our technology, and other factors. For contracts that have durations of less than one year, we follow the practical expedient and expense these costs when incurred.

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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Equipment Leased to Customers Under Operating Leases, Net

Equipment leased to customers under operating leases was as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Equipment leased to customers under operating leases
$
12,170

 
$
7,376

Accumulated depreciation
(3,815
)
 
(3,555
)
Equipment leased to customers under operating leases, net
$
8,355

 
$
3,821


Scheduled minimum future rental revenue on operating leases as of March 31, 2019 was as follows (in thousands):
Remainder of 2019
$
2,213

2020
3,790

2021
1,584

2022
1,632

2023
2,900

Total
$
12,119


Restricted Cash Equivalents and Investments.

We have restricted cash equivalents that are required to be maintained by the lease related to our Manchester, NH facility. The funds are deposited with MUFG Americas Capital Leasing & Finance, LLC where they are restricted as collateral until the end of the underlying building lease period in 2024. These restricted cash equivalents were $39.8 million as of both March 31, 2019 and December 31, 2018.

Product Warranty Reserves

Product warranty reserves are included in accrued and other liabilities on our Condensed Consolidated Balance Sheets (In thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Beginning balance
$
12,774

 
$
16,335

Provisions, net of releases
2,433

 
2,972

Settlements
(3,159
)
 
(4,501
)
Ending balance
$
12,048

 
$
14,806


Accumulated Other Comprehensive Loss (“AOCL”)

AOCL classified within stockholders’ equity on our Condensed Consolidated Balance Sheets was as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Currency translation loss
$
(13,608
)
 
$
(12,814
)

Amounts reclassified out of AOCL, net of tax, were immaterial for all periods presented, and consisted of unrealized gains and losses from investments in debt securities that are reported within interest and other income, net, in our Condensed Consolidated Statements of Operations.


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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Note 7.     Accounts Receivable

The accounts receivable allowance consisted of the following (in thousands):
Accounts Receivable Allowance
March 31, 2019
 
December 31, 2018
Allowance for doubtful accounts
$
21,537

 
$
21,354

Allowance for returns
4,724

 
4,417

Allowance for trade-ins
4,092

 
4,955

Allowance for sales rebates
587

 
1,540

Total accounts receivable allowance
$
30,940

 
$
32,266


Accounts Receivable Sale Arrangements

Trade receivables are derecognized from our Condensed Consolidated Balance Sheets when sold to third parties upon determining that such receivables are presumptively beyond the reach of creditors in a bankruptcy proceeding. Any servicing obligation is measured based on the fair value that a third party would charge to service these receivables. These servicing liabilities were determined to not be material as of March 31, 2019 and December 31, 2018.

U.S. trade receivables sold without recourse are generally short-term receivables with payment due dates of less than 10 days from the date of sale, and are subject to a servicing obligation. Trade receivables sold under these facilities were $2.4 million during the three months ended March 31, 2019, and $16.7 million during the year ended December 31, 2018, which approximates the cash received.

European trade receivables sold without recourse are generally short-term receivables secured by letters of credit with payment due dates of less than one year. Trade receivables sold under these facilities were $1.7 million during the three months ended March 31, 2019 and $10.3 million during the year ended December 31, 2018, which approximates the cash received.

We report collections from the sale of trade receivables to third parties as operating cash flows in the Condensed Consolidated Statements of Cash Flows.

Financing Receivables

Our financing receivables consist of sales-type lease and trade receivables that have an original contractual maturity in excess of one year. Sales-type lease receivables are included within other current assets and other assets, while trade receivables are included in accounts receivable, net and in other assets. Our financing receivables are summarized as follows (in thousands):
Financing Receivables
March 31, 2019
 
December 31, 2018
Sales-type lease receivables
$
30,140

 
$
31,201

Trade receivables
23,829

 
14,681

Total financing receivables
$
53,969

 
$
45,882

 
 
 
 
Scheduled to be received in excess of one year
$
28,500

 
$
29,470


Note 8.     Fair Value Measurements

We invest our excess cash on deposit with major banks in money market, U.S. Treasury and government-sponsored entity, corporate, municipal government, asset-backed, and mortgage-backed residential debt securities. By policy, we invest primarily in high-grade marketable securities. We are exposed to credit risk in the event of default by the financial institutions or issuers of these investments to the extent of the amounts recorded in our Condensed Consolidated Balance Sheets.

We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Typically, the cost of these investments approximates fair value. Marketable investments with a maturity greater than three months are classified as available-for-sale short-term investments. Available-for-sale securities are stated at fair value and, as of December 31, 2018, any unrealized gains and losses were included in the Condensed Consolidated Statement of Operations. Realized

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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


gains and losses on sales or maturities of financial instruments are recognized upon sale of the investments using the specific identification method.

Our available-for-sale short-term investments are summarized as follows (in thousands):
Available-for-Sale Short-Term Investments
Amortized cost
 
Gross unrealized
gains
 
Gross unrealized
losses
 
Fair value
March 31, 2019
 
 
 
 
 
 
 
Total short-term investments
$

 
$

 
$

 
$

December 31, 2018
 
 
 
 
 
 
 
U.S. Government and sponsored entities
$
50,329

 
$

 
$

 
$
50,329

Corporate debt securities
47,434

 

 

 
47,434

Municipal securities
379

 

 

 
379

Asset-backed securities
4,091

 

 

 
4,091

Mortgage-backed securities – residential
116

 

 

 
116

Total short-term investments
$
102,349

 
$

 
$

 
$
102,349


In the three months ended December 31, 2018 we determined that it was more likely than not we would sell a substantial portion of our available for sale securities and recognized an unrealized loss of $0.9 million which was reported in interest income and other income, net in the Consolidated Statements of Operations. Accordingly, there were no unrecognized losses in the investment portfolio as of December 31, 2018. In the three months ended March 31, 2019, we sold all of our available for sale securities, recognizing an insignificant gain. As of March 31, 2019, we own no short-term investments.

Fair Value Measurements

Our fair value hierarchy is defined as follows:
Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2: Inputs that are other than quoted prices included within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date for the duration of the instrument’s anticipated life or by comparison to similar instruments; and
Level 3: Inputs that are unobservable or reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These include management’s own judgments about market participant assumptions developed based on the best information available in the circumstances.

We utilize the market approach to measure the fair value of our fixed income securities. The market approach is a valuation technique that uses the prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value of our fixed income securities is obtained using readily-available market prices from a variety of industry standard data providers, large financial institutions, and other third-party sources for the identical underlying securities. The fair value of our investments in certain money market funds is expected to maintain a net asset value of $1.00 per share and, as such, is priced at the expected market price.

We obtain the fair value of our Level 2 financial instruments from several third-party asset managers, custodian banks, and accounting service providers. Independently, these service providers use professional pricing services to gather pricing data, which may include quoted market prices for identical or comparable instruments or inputs other than quoted prices that are observable either directly or indirectly. As part of this process, we engaged a pricing service to assist management in its pricing analysis and assessment of other-than-temporary impairment. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we utilize a third-party pricing service, the impairment analysis and related valuations represent conclusions of management and not conclusions or statements of any third party.


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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Our assets and liabilities measured at fair value by levels within the fair value hierarchy are summarized as follows:
 
March 31, 2019
 
December 31, 2018
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
230

 
$

 
$

 
$
230

 
$
28,715

 
$

 
$

 
$
28,715

U.S. Government and sponsored entities

 

 

 

 
28,885

 
21,444

 

 
50,329

Corporate debt securities

 

 

 

 

 
47,434

 

 
47,434

Municipal securities

 

 

 

 

 
379

 

 
379

Asset-backed securities

 

 

 

 

 
4,036

 
55

 
4,091

Mortgage-backed securities – residential

 

 

 

 

 
116

 

 
116

Derivative assets

 
3,244

 

 
$
3,244

 

 
3,468

 

 
$
3,468

Total
$
230

 
$
3,244

 
$

 
$
3,474

 
$
57,600

 
$
76,877

 
$
55

 
$
134,532

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration, current and noncurrent
$

 
$

 
$
10,017

 
$
10,017

 
$

 
$

 
$
10,501

 
$
10,501

Self-insurance

 

 
841

 
841

 

 

 
840

 
840

Derivative liabilities

 
3,889

 

 
3,889

 

 
3,399

 

 
3,399

Total
$

 
$
3,889

 
$
10,858

 
$
14,747

 
$

 
$
3,399

 
$
11,341

 
$
14,740


Money market funds are classified as cash equivalents and are classified as Level 1 because these securities are actively traded at $1.00 net asset value. Investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency. Investments in U.S. Treasury obligations are classified as Level 1 because these securities are valued based on quoted prices in active markets. There were no transfers between Level 1 and 2 during the three months ended March 31, 2019 and 2018.

Government agency investments and corporate debt instruments, including investments in asset-backed and mortgage-backed securities, have generally been classified as Level 2 because markets for these securities are less active or valuations for such securities utilize significant inputs, which are directly or indirectly observable. We held asset-backed securities with income payments derived from and collateralized by a specified pool of underlying assets. Asset-backed securities in the portfolio were predominantly collateralized by credit cards and auto loans.

Liabilities for Contingent Consideration

Acquisition-related liabilities for contingent consideration (i.e., earnouts) as of March 31, 2019 are related to our prior acquisitions. The fair value of these earnouts is estimated to be $10.0 and $10.5 million as of March 31, 2019, and December 31, 2018, respectively, by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include risk-free discount rates between 0.6% and 5.0%, as well as probability-adjusted revenue, gross profit, and direct operating income using the Monte Carlo valuation method. Probability-adjusted revenue, gross profit, and direct operating income are significant inputs that are not observable in the market and are therefore classified as Level 3 inputs. These contingent liabilities have been reflected in the Condensed Consolidated Balance Sheet as of March 31, 2019, as current and noncurrent liabilities of $9.8 and $0.2 million, respectively.


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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Changes in the fair value of contingent consideration are summarized as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Liability for Contingent Consideration
 
 
 
Beginning balance
$
10,501

 
$
35,702

Changes in valuation
1,986

 
(1,459
)
Earnout accretion
21

 
230

Payments and settlements
(2,716
)
 
(724
)
Foreign currency adjustment
225

 
246

Ending balance
$
10,017

 
$
33,995


The Generation Digital earnout liability valuation increased during the three months ended March 31, 2019 by $2.0 million based on actual and updated forecasted financial performance data. Earnout payments of $2.7 million during the three months ended March 31, 2019 primarily related to the Escada contingent consideration liability. During the three months ended March 31, 2018, the Generation Digital and Shuttleworth earnout liability valuations decreased based on actual and forecasted financial performance data. Earnout payments primarily related to the Shuttleworth contingent consideration liability.

Since the primary inputs to the fair value measurement of contingent consideration liabilities are the probability-adjusted revenue and discount rate, we reviewed the sensitivity of the fair value measurement to changes in these inputs. We assessed the probability of achieving the revenue and profitability performance targets for contingent consideration associated with each acquisition at percentage levels between 50% and 100% as of each respective acquisition date based on an assessment of the historical performance of each acquired entity, our current expectations of future performance, and other relevant factors. A change in probability-adjusted revenue of five percentage points from the level assumed in the current valuations would result in an increase in the fair value of contingent consideration of $0.9 million or a decrease of $0.2 million. A change in the discount rate of one percentage point would result in an immaterial change in the fair value of contingent consideration. The potential undiscounted amount of contingent consideration that we could be required to pay related to our business acquisitions, beyond amounts currently accrued, is $17.2 million as of March 31, 2019.

Fair Value of Derivative Instruments

We utilize the income approach to measure the fair value of our derivative assets and liabilities. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates, and forward prices, and are therefore classified as Level 2 measurements. The notional amount of our derivative assets and liabilities was $186.6 and $191.8 million as of March 31, 2019 and December 31, 2018, respectively.

Fair Value of Convertible Senior Notes

In September 2014, we issued $345 million aggregate principal amount of convertible senior notes. The 2019 Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The fair value of the 2019 Notes as of March 31, 2019 was approximately $336 million and was considered as a Level 2 fair value measurement. Fair value was estimated based upon actual quotations obtained at the end of the reporting period or the most recent date available. A substantial contributing factor to the market value of our 2019 Notes is the conversion premium.

In November 2018, we issued $150 million aggregate principal amount of convertible senior notes. The 2023 Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The fair value of the 2023 Notes as of March 31, 2019 was approximately $150 million and was considered a Level 2 fair value measurement. Fair value was estimated based upon actual quotations obtained at the end of the reporting period or the most recent date available. A substantial contributing factor to the market value of our 2023 Notes is the conversion premium.


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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Note 9.     Derivatives and Hedging

We are exposed to market risk and foreign currency exchange risk from changes in foreign currency exchange rates, which could affect operating results, financial position, and cash flows. We manage our exposure to these risks through our regular operating and financing activities and, when appropriate, through use of derivative financial instruments. These derivative financial instruments are used to hedge monetary assets and liabilities, intercompany balances, trade receivables, and to reduce earnings and cash flow volatility resulting from shifts in foreign currency exchange rates. Our objective is to offset the remeasurement gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. We do not have any leveraged derivatives, nor do we use derivative contracts for speculative purposes. We present the fair value of all open derivative instruments, including any embedded in other contracts, as assets or liabilities on our Condensed Consolidated Balance Sheets. The related cash flow impacts of our derivative contracts are reflected as cash flows from operating activities.

Our exposures are primarily related to non-U.S. dollar-denominated revenue in Europe, the U.K., Latin America, China, Israel, and Australia, and to non-U.S. dollar-denominated operating expenses in Europe, India, the U.K., China, Israel, Brazil, and Australia. We hedge balance sheet remeasurement exposure associated with British pound sterling, Canadian dollar, Chinese renminbi, Brazilian real, Israeli shekel, Japanese yen, and Euro-denominated intercompany balances; Brazilian real, British pound sterling, Australian dollar, Chinese renminbi, Israeli shekel, and Euro-denominated trade receivables; and British pound sterling, Israeli shekel, Canadian dollar, and Euro-denominated net monetary assets.

By their nature, derivative instruments involve, to varying degrees, elements of market and credit risk. The market risk associated with these instruments resulting from currency exchange movement is expected to offset the market risk of the underlying transactions, assets, and liabilities being hedged. Under our master netting agreements with our foreign currency derivative counterparties, we are allowed to net transactions of the same currency with a single net amount payable by one party to the other. The derivatives held by us are not subject to any credit contingent features negotiated with these counterparties. We are not required to pledge cash collateral related to these foreign currency derivative contracts. We do not believe there is significant risk of loss from non-performance by the counterparty associated with these instruments because, by policy, we only deal with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

Balance Sheet Hedges

Our forward contracts are not designated for hedge accounting treatment since there is a natural offset for the remeasurement of the underlying foreign currency denominated asset or liability. We recognize changes in the fair value of non-designated derivative instruments in earnings in the period of change. Gains and losses on foreign currency forward contracts used to hedge balance sheet exposures are recognized in interest income and other income, net, in the same period as the remeasurement gain or loss of the related foreign currency denominated assets and liabilities. Our forward contracts not designated for hedge accounting treatment consisted of hedges of Australian dollar, British pound sterling, Brazilian real, Canadian dollar, Chinese renminbi, Euro, Israeli shekel, and Japanese yen.

These balance sheet hedges cover currency exposures in the following line items in the notional amounts indicated (in thousands):
Balance sheet categories
March 31, 2019
 
December 31, 2018
Accounts Receivable
$
51,047

 
$
52,200

Other assets and liabilities, net
40,267

 
40,400

Intercompany balances
95,256

 
99,200

Total
$
186,570

 
$
191,800



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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Note 10.     Debt

Our debt primarily consisted of convertible senior notes summarized as follows (in thousands):
Convertible Senior Notes
March 31, 2019
 
December 31, 2018
2019 Notes (Maturing September 1, 2019)
 
 
 
Principal amount
$
345,000

 
$
345,000

Debt discount, net of amortization
(5,795
)
 
(9,366
)
Debt issuance costs, net of amortization
(971
)
 
(1,360
)
Convertible senior notes – current
$
338,234

 
$
334,274

 
 
 
 
2023 Notes (Maturing November 15, 2023)
 
 
 
Principal amount
$
150,000

 
$
150,000

Debt discount, net of amortization
(26,463
)
 
(27,653
)
Debt issuance costs, net of amortization
(3,502
)
 
(3,659
)
Convertible senior notes – non-current
$
120,035

 
$
118,688


0.75% Convertible Senior Notes Due 2019

In September 2014, we issued $345.0 million principal amount of the 2019 Notes. The initial conversion rate is 18.9667 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $52.72 per share of common stock. Upon conversion of the 2019 Notes, holders will receive cash, shares of common stock or a combination thereof, at our election. As of March 31, 2019, none of the conditions allowing holders of the 2019 Notes to convert had been met. The 2019 Notes mature on September 1, 2019. Our intent is to settle the principal amount of the Notes in cash. If the conversion value exceeds the principal amount, we would deliver shares of our common stock for our conversion obligation in excess of the aggregate principal amount. The cash payment of the principal amount will be presented as financing cash flow while the discount portion will be operating cash flow on our Statements of Cash Flows.

If the proposed transaction with an affiliate of Siris is completed (See Note 2 Business Acquisitions) prior to the maturity date of the 2019 Notes, we will be required to repay the principal amount of the 2019 Notes, as well as a make-whole amount, in cash at the closing date of the transaction. Under the terms of the 2019 Notes, we estimate the total cash payment would be approximately $345.0 million.

We allocated the total transaction costs incurred in the issuance of the 2019 Notes to the liability and equity components based on their relative values. Issuance costs of $7.0 million attributable to the original $281.4 million liability component are being amortized to expense over the term of the 2019 Notes, and issuance costs of $1.6 million attributable to the original $63.6 million equity component were offset against the equity component in stockholders’ equity. Additionally, we recorded a deferred tax liability of $23.7 million on the debt discount, which is not deductible for tax purposes.

2.25% Convertible Senior Notes Due 2023

In November 2018, we issued $150 million aggregate principal amount of the 2023 Notes. Of the $145 million total net proceeds, we used $40.0 million for concurrent stock repurchases. The 2023 Notes are senior unsecured obligations and were issued at par with interest payable semiannually in arrears on May 15 and November 15 of each year, commencing May 15, 2019. The 2023 Notes will mature on November 15, 2023. The initial conversion rate is 28.0128 shares of common stock per $1,000 principal amount of the 2023 Notes, which is equivalent to an initial conversion price of approximately $35.70 per share of common stock. Upon conversion of the 2023 Notes, holders will receive cash, shares of common stock, or a combination thereof, at our election. Our intent is to settle the principal amount of the 2023 Notes in cash upon conversion. If the conversion value exceeds the principal amount, we intend to deliver shares of our common stock for our conversion obligation in excess of the aggregate principal amount. As of March 31, 2019, none of the conditions allowing holders of the 2023 Notes to convert had been met.

If the proposed transaction with an affiliate of Siris is completed (See Note 2 Business Acquisitions), we will be required to repay the principal amount of the 2023 Notes, plus the cash value of any share price in excess of the initial conversion price, plus a make-

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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


whole payment in cash for the early redemption, on the closing date of the transaction. Under the terms of the 2023 Notes, we estimate the total cash payment would be approximately $179.1 million.

We allocated the total transaction costs incurred in the issuance of the 2023 Notes to the liability and equity components based on their relative values. Issuance costs of $3.7 million attributable to the original $122.0 million liability component are being amortized to expense over the term of the Notes, and issuance costs of $0.9 million attributable to the original $28.0 million equity component were offset against the equity component in stockholders’ equity. Additionally, we recorded a deferred tax liability of $6.6 million on the debt discount, which is not deductible for tax purposes.

The equity components of the Notes as of March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):
 
2019 Notes
 
2023 Notes
Equity component
$
63,643

 
$
28,045

Less: debt issuance costs allocated to equity
(1,582
)
 
(853
)
Greenshoe option value
568

 

Tax effects
485

 
(6,619
)
Equity component, net
$
63,114

 
$
20,573


Interest expense recognized on the Notes was as follows (in thousands):
Interest Expense
Three Months Ended March 31,
 
2019
 
2018
2019 Notes
 
 
 
0.75% coupon
$
647

 
$
647

Amortization of debt discount
3,571

 
3,355

Amortization of debt issuance costs
389

 
397

Interest expense on 2019 Notes
$
4,607

 
$
4,399

 
 
 
 
2023 Notes


 


2.25% Coupon
$
844

 
$

Amortization of debt discount
1,190

 

Amortization of debt issuance costs
157

 

Interest expense on 2023 Notes
$
2,191

 
$


Note Hedges

We paid an aggregate of $63.9 million in convertible note hedge transactions with respect to our common stock (“Note Hedges”) in September 2014 in conjunction with the issuance of the 2019 Notes. The Note Hedges will expire upon maturity of the 2019 Notes. The Note Hedges are intended to offset the potential dilution upon conversion and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes in the event that the market value per share of our common stock, as measured under the terms of the Note Hedges, is greater than the strike price of the Note Hedges. The strike price of the Note Hedges initially corresponded to the conversion price of the 2019 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion price of the 2019 Notes. The Note Hedges are separate transactions and are not part of the 2019 Notes. Holders of the 2019 Notes do not have any rights with respect to the Note Hedges.

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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Warrants

Concurrently with entering into the Note Hedges, we separately sold warrants to acquire shares of our common stock at a strike price of $68.86 per share (the "Warrants"), in conjunction with the issuance of the 2019 Notes. We received aggregate proceeds of $34.5 million from the sale of the Warrants. If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on our earnings per share. The Warrants are separate transactions and are not part of the 2019 Notes or the Note Hedges and are accounted for as a component of additional paid-in capital. Holders of the 2019 Notes and Note Hedges do not have any rights with respect to the Warrants. If the proposed transaction with an affiliate of Siris is completed (See Note 2 Business Acquisitions ), we will be required to repurchase the warrants for approximately $4.6 million on the date of the transaction.

Revolving Credit Agreement

In January 2019, we entered into a 5-year $150.0 million revolving credit agreement with an option for an additional $50.0 million, subject to certain requirements. Interest is variable with a premium applied to an index rate. The amount of the premium varies based on our net leverage ratio. Interest is due monthly on any borrowings, and a commitment fee is assessed on the portion of the facility that is not utilized. This credit facility is secured by substantially all of our domestic assets and the pledge of 65% of the stock of our foreign subsidiaries. The agreement contains various affirmative and negative covenants, as well as three financial covenants based on leverage and interest coverage ratios. As of March 31, 2019, the Company was in compliance with the financial covenants under this agreement.

The issuance cost of $0.8 million incurred on this facility was recorded in other long-term assets and is being amortized on a straight-line basis over the 5-year term of this agreement. There were no borrowings outstanding under the facility at March 31, 2019.

Note 11.    Leases

We lease facilities and equipment under non-cancellable operating leases that have remaining lease terms of 5 month to 47 years, and 1 month to 5 years, respectively. Generally, each leased facility is subject to an individual lease or sublease, certain of which may provide options to extend or terminate the lease agreement. Facilities primarily consist of corporate offices, manufacturing sites, and storage facilities. Equipment primarily consists of vehicles and office equipment. Certain lease agreements also include variable lease payments that are primarily comprised of common area maintenance and utility charges, along with fuel and maintenance charges for vehicles. Short-term leases and sublease income are not material for the period. As further explained in Note 1 Basis of Presentation and Significant Accounting Policies, we adopted ASC 842 effective January 1, 2019. Accordingly, right of use assets and lease liabilities for these operating leases are included on the Condensed Consolidated Balance Sheet as of March 31, 2019 but not as of December 31, 2018.

The components of our lease expense were as follows (in thousands):
 
Three Months Ended
March 31, 2019
Operating lease expense
$
2,721

Variable lease expense
392

Total lease expense
$
3,113


Other information related to lease term and discount rate is as follows:
 
March 31, 2019
Weighted average remaining lease term (years)
13.9

Weighted average discount rate
4.0
%


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Table of Contents
Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Future minimum lease payments under noncancellable operating leases for each of the next five years ending December 31 and thereafter as of March 31, 2019 are as follows (in thousands):
 
March 31, 2019
2019
$
7,535

2020
8,936

2021
5,889

2022
3,545

2023
1,995

Thereafter
24,560

Total lease payments
52,460

Less: imputed interest
(16,705
)
Total lease liabilities
$
35,755


Future minimum operating lease payments for the years ending December 31, 2019 and 2020 in the preceding table exclude sublease rental income of $0.2 and $0.1 million, respectively. There were no leases signed but not commenced as of March 31, 2019.

Future minimum lease payments under noncancellable operating leases for each of the next five years and thereafter as of December 31, 2018 were as follows (in thousands):
 
December 31, 2018
2019
$
6,559

2020
6,216

2021
4,355

2022
2,582

2023
1,423

Thereafter
24,180

Total
$
45,315

Future minimum operating lease payments for the years ending December 31, 2019 and 2020 in the preceding table exclude sublease rental income of $0.4 and $0.1 million, respectively.

Note 12.     Commitments and Contingencies

Contingent Consideration

We may be required to make payments to the former owners of acquired businesses based on the achievement of specified performance targets as further explained in Note 8Fair Value Measurements.

Lease Commitments and Contractual Obligations

As of March 31, 2019, we have leased certain of our current facilities and vehicles under noncancellable operating lease agreements. We are required to pay property taxes, insurance, and nominal maintenance costs for certain of these facilities and vehicles, and any increases over the base year of these expenses on the remainder of these leases. See additional discussion in Note 11Leases.

Legal Proceedings

From time to time, we are involved in a variety of claims, lawsuits, investigations, or proceedings relating to contractual disputes, securities laws, intellectual property rights, employment, or other matters that may arise in the normal course of business. We assess our potential liability in each of these matters by using the information available to us. We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and various combinations of

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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


appropriate litigation and settlement strategies. We accrue estimated losses from contingencies if a loss is deemed probable and can be reasonably estimated.

As of March 31, 2019, we are subject to the matters described below:

Matan Digital Printing (“MDG”) Matter. EFI acquired Matan Digital Printers (“Matan”) in 2015 from sellers (the “2015 Sellers”) that had acquired Matan Digital Printing Ltd. from other sellers in 2001 (the “2001 Sellers”). The 2001 Sellers have asserted a claim against the 2015 Sellers and Matan asserting that they are entitled to a portion of the 2015 Sellers’ proceeds from EFI’s acquisition. The 2015 Sellers dispute this claim and have agreed to indemnify EFI against the 2001 Sellers’ claim.

We do not believe that it is probable that we will incur a loss in the resolution of this matter. It is reasonably possible, however, that our financial statements could be materially affected by an unfavorable resolution and we could incur a material loss in this matter. We estimate the range of loss to be between one dollar and $10.1 million. If we incur a loss in this matter, it will be offset by a receivable of an equal amount representing a claim for indemnification against the escrow account established in connection with the Matan acquisition.

Purported Class Action Lawsuit. On August 10, 2017, a putative class action was filed against the Company and its two named executive officers in the U.S. District Court for the District of New Jersey, captioned Pipitone v. Electronics For Imaging, Inc., No. 2:17-cv-05992 (D.N.J.). A First Amended Complaint was filed on February 20, 2018. The plaintiffs alleged, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. On January 31, 2019, the district court dismissed the complaint without prejudice. On April 12, 2019, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit.

At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is possible that our financial statements could be materially affected by an unfavorable resolution of this matter. Because this matter was dismissed in its preliminary pleading stages, however, and because we view the plaintiffs’ likelihood of success on appeal to be small, we are not in a position to estimate an amount or range of reasonably possible loss that may be incurred.

Purported Derivative Shareholder Lawsuits. On August 22, 2017, a purported derivative shareholder complaint was filed in the Superior Court of the State of California for the County of Alameda captioned Schiffmiller v. Gecht, No. RG17873197. A First Amended Complaint was filed on April 13, 2018. The complaint makes claims derivatively and on behalf of the Company as nominal defendant against the Company’s named executive officers and directors for alleged breaches of fiduciary duties and unjust enrichment, and alleges, among other things, that statements by the Company and its officers about the Company’s financial reporting, revenue recognition, internal controls, and disclosure controls and procedures were false or misleading. The complaint alleges the Company has suffered damage as a result of the individual defendants’ alleged actions, and seeks an unspecified amount of damages, restitution, and declaratory and other relief. The derivative action has been stayed pending the resolution of the Pipitone class action described above.

At this time, we do not believe it is probable that we will incur a material loss in this matter. However, it is possible that our financial statements could be materially affected by an unfavorable resolution of this matter, which was stayed pending the resolution of the Pipitone class action described above. As the Pipitone matter was dismissed but is now on appeal, it is unclear whether this matter will continue to be stayed or will be dismissed, and we therefore are not in a position to estimate an amount or range of reasonably possible loss that may be incurred.

Other Matters. As of March 31, 2019, we were subject to various other claims, lawsuits, investigations, and proceedings in addition to the matters discussed above. There is at least a reasonable possibility that additional losses may be incurred in excess of the amounts that we have accrued. However, we believe that these claims are not material to our financial statements or the range of reasonably possible losses is not reasonably estimable. Litigation is inherently unpredictable, and while we believe that we have valid defenses with respect to legal matters pending against us, our financial statements could be materially affected in any particular reporting period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.


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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


Note 13.     Stock Repurchase Program

On September 11, 2017, the board of directors approved the repurchase of an additional $125.0 million for our share repurchase program commencing September 11, 2017 and expiring on December 31, 2018. The board of directors had previously authorized $150 million under the program in November 2015. We completed the total authorized amount as of December 31, 2018. As of March 31, 2019, there was no new authorized program for repurchases.

Our employees have the option to surrender shares of common stock to satisfy their tax withholding obligations that arise on the vesting of RSUs, the exercise price of certain stock options, and any tax withholding obligations incurred from exercise of stock options. Employees surrendered 91,027 and 7,571 shares at an aggregate value of $2.5 and $0.2 million during the three months ended March 31, 2019 and 2018, respectively.

Note 14.     Stock-based Compensation

Our stock-based compensation expense is summarized as follows:
Stock-based Compensation Expense
Three Months Ended March 31,
(in thousands)
2019
 
2018
Cost of revenue
$
785

 
$
768

Research and development
3,017

 
2,355

Sales and marketing
1,782

 
1,799

General and administrative
3,690

 
1,848

Total stock-based compensation expense
$
9,274

 
$
6,770


Stock-based compensation expense related to ESPP purchase rights and RSUs is summarized as follows:
Stock-Based Compensation Expense by Award Type
Three Months Ended March 31,
(in thousands)
2019
 
2018
RSUs
$
7,728

 
$
5,324

ESPP purchase rights
1,546

 
1,446

Total stock-based compensation expense
9,274

 
6,770

Income tax benefit
(1,243
)
 
(858
)
Stock-based compensation expense, net of tax
$
8,031

 
$
5,912


Valuation Assumptions for ESPP Purchase Rights and Stock Options

We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except time-based RSUs and market-based awards. Time-based RSUs are valued at the closing market price on the date of grant. Market-based awards are valued using the Monte Carlo valuation method.

The estimated weighted average fair value per share and underlying assumptions of ESPP purchase rights issued were as follows:
 
Three Months Ended March 31,
ESPP Assumptions
2019
 
2018
Weighted average fair value per share
$7.54
 
$9.30
Expected volatility
43
%
71%
 
59
%
107%
Risk-free interest rate
2.46
%
2.56%
 
1.60
%
2.20%
Expected term (in years)
0.5

2.0
 
0.5

2.0

No stock options were granted during the three months ended March 31, 2019 and 2018. As of March 31, 2019, 75,000 shares underlying stock options are outstanding and exercisable. They are time-based options with an aggregate intrinsic value of $0.8 million, a weighted average exercise price of $16.57 per share, and remaining contractual term of 0.44 years. Aggregate intrinsic value for stock options represents the difference between the closing price per share of our common stock on the last trading day of the

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Electronics For Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(Continued)


period and the option exercise price, multiplied by the number of in-the-money stock options outstanding, vested and expected to vest, and exercisable as of March 31, 2019.

Non-vested RSUs

Non-vested RSUs were awarded to employees under our equity incentive plans. Non-vested RSUs do not have the voting rights of common stock and the shares underlying non-vested RSUs are not considered issued and outstanding. Non-vested RSUs generally vest over a service period of one to four years. The compensation expense incurred for these service-based awards is based on the closing market price of our stock on the date of grant and is amortized on a graded vesting basis over the requisite service period.

Non-vested RSU activity during the three months ended March 31, 2019 is summarized below (shares in thousands):
 
Time-based
 
Performance-based
 
Market-based
 
Total
 
Shares
 
Weighted average grant date fair value
 
Shares
 
Weighted average grant date fair value
 
Shares
 
Weighted average grant date fair value
 
Shares
 
Weighted average grant date fair value
Non-vested at January 1, 2019
1,385

 
$
32.59

 
1,466

 
$
34.18

 
70

 
$
26.67

 
2,921

 
$
33.25

Granted
125

 
27.22

 
549

 
27.22

 

 

 
674

 
27.22

Vested
(169
)
 
28.44

 
(170
)
 
28.65

 

 

 
(339
)
 
28.55

Forfeited
(18
)
 
33.51

 
(466
)
 
35.47

 

 

 
(484
)
 
35.40

Non-vested at March 31, 2019
1,323

 
32.60

 
1,379

 
31.66

 
70

 
26.67

 
2,772