Immersion(IMMR) - 2018 Q4 - Annual Report

Part I Business Immersion Corporation licenses haptic technology, adding touch to digital experiences across mobility, gaming, and automotive markets, leveraging over 3,400 patents - Immersion's primary business is licensing haptic technologies for mobility, gaming, and automotive markets, with an estimated presence in over 3 billion devices worldwide[13] - The company's business strategy is built on three pillars: Innovating and patenting new haptic technologies, driving market adoption through partnerships, and monetizing its IP portfolio through licensing[16][17] - As of December 31, 2018, the company's intellectual property portfolio included over 3,400 issued or pending patents worldwide, a core asset for its licensing model[14][32][59] - Key licensees include major technology companies such as Apple, LG Electronics, Google, Microsoft, and Nintendo, as well as automotive suppliers like Continental and Bosch[40][41][42] Market Area Revenue Percentage | Market Area | 2018 Revenue % | 2017 Revenue % | 2016 Revenue % | | :--- | :--- | :--- | :--- | | Mobile Communications, Wearables, and Consumer Electronics | 81% | 49% | 57% | | Automotive | 13% | 15% | 7% | | Console and PC Gaming | 5% | 30% | 24% | | Medical | 1% | 6% | 12% | Risk Factors The company faces substantial risks, including heavy reliance on a limited number of customers, high litigation costs, and revenue volatility from ASC 606 adoption - A limited number of customers account for a significant portion of revenue; Apple Inc. accounted for 69% of total revenues in 2018, while Samsung accounted for 60% in 2016 with no renewal agreement for products released after December 31, 2015[73][74] - The company is engaged in expensive and time-consuming litigation to enforce its intellectual property rights against companies with significantly greater financial resources, such as Samsung and Motorola, with uncertain outcomes[77] - The adoption of the new revenue standard, ASC 606, effective January 1, 2018, causes a substantial portion of fixed license fee revenue to be recognized upfront, leading to less predictability in revenue compared to historical periods[72][125] - The company faces risks related to its 2015 corporate reorganization and international tax structure, including an ongoing arbitration with Samsung over a $6.3 million claim for withholding taxes imposed by Korean authorities[90][91][92] - The company has experienced turnover in senior management, including a new CEO who joined in January 2019, which could lead to operational inefficiencies and added costs[89] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[131] Properties Immersion leases its corporate headquarters in San Jose, California, an R&D facility in Montreal, Canada, and smaller office spaces internationally - The company's corporate headquarters is a leased facility of approximately 42,000 square feet in San Jose, California, with the lease expiring in April 2023[132] - A key research and development facility of approximately 10,000 square feet is leased in Montreal, Quebec, Canada, with the lease expiring in February 2024[133] Legal Proceedings This section details significant legal activities, dominated by patent infringement litigation, including settlements with Apple and Fitbit, and ongoing cases against Samsung and Motorola - Reached a settlement with Apple in January 2018, resolving all pending litigation, including ITC investigations and district court cases, which were subsequently terminated[154][155][156] - Reached a global settlement with Fitbit in July 2018, resulting in the dismissal of patent infringement lawsuits in both the U.S. and China[169][171] - Engaged in ongoing patent infringement litigation against Samsung in the U.S. District Court for the Eastern District of Texas, with a jury selection scheduled for May 2019, while Samsung has also filed petitions for Inter Partes Review (IPR) of the asserted patents[173][176][177] - Involved in an arbitration with Samsung, which is demanding reimbursement of approximately $6.9 million plus interest for withholding taxes and penalties imposed by Korean tax authorities, with a final award expected by February 28, 2019[186] - Filed a new patent infringement lawsuit against Samsung Electronics GmbH in Germany in February 2019[190] Mine Safety Disclosures This item is not applicable to the company - Not applicable[191] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Immersion's common stock trades on Nasdaq under 'IMMR', with no anticipated cash dividends or share repurchases in 2018 - The company's common stock is traded on the Nasdaq Global Market under the symbol "IMMR"[194] - The company does not anticipate paying cash dividends in the foreseeable future[196] - There were no purchases of the company's common stock by or on behalf of the company during the year ended December 31, 2018[198] Selected Financial Data This section provides a five-year summary of Immersion's consolidated financial data, noting that 2018 data under ASC 606 is not directly comparable to prior years under ASC 605 - Effective January 1, 2018, the company adopted ASC 606 using the modified retrospective method, making financial data for 2018 not directly comparable to 2014-2017 data prepared under ASC 605[207] Selected Financial Data (in thousands, except per share data) | (in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $110,979 | $35,013 | $57,086 | $63,393 | $52,937 | | Operating income (loss) | $53,101 | $(45,422) | $(15,263) | $4,719 | $5,967 | | Net income (loss) | $54,343 | $(45,291) | $(39,381) | $2,858 | $4,123 | | Diluted net income (loss) per share | $1.73 | $(1.55) | $(1.37) | $0.10 | $0.14 | | Total assets | $145,995 | $51,975 | $103,767 | $105,415 | $97,521 | | Total stockholders' equity | $99,660 | $9,657 | $55,340 | $86,615 | $76,603 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 217% revenue increase in 2018 to $111.0 million, largely driven by new fixed-fee license agreements and ASC 606 adoption, with improved liquidity to $124.9 million Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment and estimates, particularly in revenue recognition under ASC 606 and accounting for income taxes - The adoption of ASC 606 requires significant judgment, especially for fixed-fee license agreements with multiple performance obligations, necessitating allocation of transaction price between existing and evolving patent portfolios[214][215] - Under ASC 606, per-unit royalty revenue is now accrued based on estimates of licensee sales in the current quarter, rather than being recognized a quarter in arrears, requiring management to estimate sales and resulting in true-up adjustments in subsequent quarters[219][220] - Accounting for income taxes is complex due to multinational operations and the need to assess the realizability of deferred tax assets, with a valuation allowance maintained against most U.S. and certain foreign deferred tax assets[229][231] Results of Operations For 2018, total revenues surged 217% to $111.0 million from $35.0 million in 2017, primarily due to a $71.0 million increase in fixed-fee license revenue, significantly impacted by ASC 606 which accounted for a $68.1 million increase, leading to a net income of $54.3 million from a $45.3 million net loss Revenue Type (in thousands) | Revenue Type (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Fixed fee license revenue | $83,573 | $12,575 | $30,389 | | Per-Unit royalty revenue | $26,984 | $21,514 | $25,641 | | Total royalty and license revenue | $110,557 | $34,089 | $56,030 | | Development, services, and other | $422 | $924 | $1,056 | | Total revenues | $110,979 | $35,013 | $57,086 | - The adoption of ASC 606 in 2018 had a significant impact, increasing reported revenues by $76.6 million compared to what would have been reported under the old standard (ASC 605), including a $68.1 million impact on fixed-fee licenses and an $8.5 million impact on per-unit royalties[237][242] Expense Type (in thousands) | Expense Type (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Sales and marketing | $6,118 | $13,516 | $14,613 | | Research and development | $9,727 | $11,759 | $13,388 | | General and administrative | $41,815 | $53,343 | $44,151 | | Restructuring Costs | $0 | $1,620 | $0 | - General and administrative expenses decreased by $11.5 million (22%) in 2018 compared to 2017, primarily due to a $12.7 million decrease in legal expenses after settling litigation with Apple and Fitbit[261] - The company recorded an income tax provision of $392,000 in 2018, resulting in an effective tax rate of 0.7%, with a full valuation allowance maintained against most federal, state, and certain foreign net deferred tax assets[266] Liquidity and Capital Resources The company's liquidity strengthened significantly in 2018, with cash and investments increasing by $78.4 million to $124.9 million, driven by $69.9 million in net cash from operating activities, a major improvement from the $43.8 million used in 2017 Cash, Cash Equivalents, and Short-Term Investments (in millions) | (in millions) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash, cash equivalents, and short-term investments | $124.9 | $46.5 | - Net cash provided by operating activities was $69.9 million in 2018, compared to net cash used in operating activities of $43.8 million in 2017, with the $113.8 million positive change driven by higher net income and changes in deferred revenue related to ASC 606 adoption[279] - As of December 31, 2018, approximately $33.4 million remained available under the company's authorized share repurchase program[282] - The company's contractual obligations as of December 31, 2018, consist solely of operating leases totaling $4.8 million[283] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rate changes affecting its investment portfolio, with a hypothetical 100 basis point increase resulting in an approximate $28,000 decrease in fair value - The company's primary market risk is interest rate fluctuation on its $95.4 million portfolio of cash equivalents and short-term investments as of December 31, 2018[285] - A hypothetical 100 basis point increase in interest rates would decrease the fair value of the company's cash equivalents and short-term investments by approximately $28,000 as of year-end 2018[285] - Foreign currency exchange rate risk is not considered material as the vast majority of revenue and expense activities are transacted in U.S. dollars, and the company does not use hedging instruments[287] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for 2016-2018 and the independent auditor's report, highlighting the change in revenue accounting due to ASC 606 adoption - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and on the company's internal control over financial reporting[291][292] - The auditor's report includes an explanatory paragraph noting the change in accounting for revenue from contracts with customers due to the adoption of ASC 606 on January 1, 2018[293] Consolidated Balance Sheet (in thousands) | (in thousands) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Current Assets | $135,825 | $48,080 | | Total Assets | $145,995 | $51,975 | | Total Current Liabilities | $15,345 | $19,100 | | Total Liabilities | $46,335 | $42,318 | | Total Stockholders' Equity | $99,660 | $9,657 | Consolidated Statements of Operations (in thousands) | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenues | $110,979 | $35,013 | $57,086 | | Operating Income (Loss) | $53,101 | $(45,422) | $(15,263) | | Net Income (Loss) | $54,343 | $(45,291) | $(39,381) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[443] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with new controls implemented for ASC 606 adoption - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[444] - Management's annual report on internal control over financial reporting concluded that such controls were effective as of December 31, 2018[446][447] - In 2018, the company implemented changes to its internal controls over financial reporting in conjunction with the adoption of the new revenue recognition standard, ASC 606[449] Other Information The company reports no other information for this item - None[450] Part III Directors, Executive Officers and Corporate Governance Information regarding executive officers is provided in Part I, with all other required information concerning directors and corporate governance incorporated by reference from the 2019 Proxy Statement - Information required by this item is incorporated by reference from the company's definitive Proxy Statement for its 2019 annual stockholders' meeting[461] Executive Compensation Information regarding executive and director compensation, including the Compensation Discussion and Analysis, is incorporated by reference from the company's 2019 Proxy Statement - Information required by this item is incorporated by reference from the company's definitive Proxy Statement for its 2019 annual stockholders' meeting[462] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by certain beneficial owners and management, as well as details on equity compensation plans, is incorporated by reference from the company's 2019 Proxy Statement - Information required by this item is incorporated by reference from the company's definitive Proxy Statement for its 2019 annual stockholders' meeting[463] Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related person transactions, and director independence is incorporated by reference from the company's 2019 Proxy Statement - Information required by this item is incorporated by reference from the company's definitive Proxy Statement for its 2019 annual stockholders' meeting[464] Principal Accounting Fees and Services Information regarding the fees paid to and services provided by the principal independent registered public accounting firm is incorporated by reference from the company's 2019 Proxy Statement - Information required by this item is incorporated by reference from the company's definitive Proxy Statement for its 2019 annual stockholders' meeting[465] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including material contracts, equity plans, and CEO/CFO certifications - Lists the financial statements and schedules filed with the report[468][469] - Includes a list of filed exhibits, such as material contracts, equity plans, and executive agreements; notably, the Settlement and License Agreement with Apple Inc. is listed as Exhibit 10.31[471][474] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits[476] Form 10-K Summary The company reports no Form 10-K summary - None[478]