IMMR

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended July 31, 2025, for Immersion Corporation. The Company operates in two segments: Immersion (haptic technology licensing) and Barnes & Noble Education (BNED), a controlling interest acquired on June 10, 2024. The filing reflects a fiscal year change to a May 1–April 30 cycle. Management has concluded that disclosure controls and procedures were ineffective as of July 31, 2025, due to material weaknesses in internal controls related to BNED's control environment and the business combination accounting.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 59% to $292.0 million, driven primarily by the inclusion of BNED for a full quarter (vs. partial quarter in 2024) and growth in BNED's "First Day" programs. Immersion segment revenue declined 92% to $3.9 million due to the absence of one-time perpetual license fees recorded in the prior year.
• Profitability Decline: The Company reported an operating loss of $26.4 million compared to an operating income of $13.6 million in the prior year. BNED reported an operating loss of $26.5 million, while Immersion reported a slight operating profit of $0.2 million.
• Debt Increase: BNED increased long-term borrowings to $170.0 million (from $103.1 million) to fund working capital needs, specifically inventory buildup for the fall semester.
• Cash Flow Improvement: Operating cash outflow improved to $(61.7) million from $(114.4) million, attributed to timing of vendor payments and inventory management.

Guidance, Outlook, Risks, and Unusual Items

• Seasonality: BNED's business is highly seasonal, with the majority of sales and operating profit realized in the second and third fiscal quarters (fall and spring semesters). Q1 is typically the lowest revenue period.
• Subsequent Event - Tax Liability: Following a November 2025 administrative decision, Immersion reimbursed Samsung approximately $9.7 million for Korean withholding taxes. This amount is expected to be recognized as an income tax charge in the third quarter of fiscal 2026.
• Subsequent Event - Dividend Increase: The Board increased the quarterly dividend from $0.045 to $0.075 per share, effective for the payment made in January 2026.
• Legal Proceedings:
  • Valve Corporation: Litigation regarding haptic patents remains stayed pending Patent Trial and Appeal Board (PTAB) decisions. Several IPRs have resulted in claims being found unpatentable, with appeals filed.
  • Korean Withholding Tax (LGE): Appeals regarding withholding taxes on royalties paid by LG Electronics are ongoing in the Seoul High Court.
• Internal Controls: Material weaknesses in internal controls over financial reporting related to BNED and the business combination remain unremediated as of the filing date.

Investor Verification Checklist

• Debt Covenants: Verify BNED's compliance with the Consolidated Fixed Charge Coverage Ratio and minimum Availability covenants under the Restated ABL Facility, given the recent operating losses.
• Inventory Levels: Review the $400.6 million merchandise inventory balance to assess potential obsolescence risks, particularly for non-returnable items.
• Tax Exposure: Monitor the resolution of the Korean withholding tax matters (Samsung and LGE) which could result in significant future charges.
• Control Remediation: Track progress on the remediation plan for material weaknesses in internal controls, specifically regarding BNED's financial reporting and consolidation processes.
• Noncontrolling Interest: Note that Immersion owns approximately 32.9% of BNED; verify the attribution of net income/loss to noncontrolling interests (67.1%) in future filings.