Business context and reporting period
Immersion Corporation (NASDAQ: IMMR) develops and licenses haptic technology, software and related intellectual property for mobility, gaming, automotive, medical and other markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. The company reports as one operating segment.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 |
|---|---|---|
| Revenue | $10.6 million | $24.5 million |
| Operating income (loss) | $(1.3) million | $(21.9) million |
| Net income (loss) | $(1.4) million | $(21.0) million |
| Basic and diluted loss per share | $(0.04) | $(0.67) |
| Operating cash flow | Not separately presented for the quarter | $(30.9) million |
Cost of revenue was $62,000 for the quarter and $117,000 for the nine-month period, implying gross margins of approximately 99.4% and 99.5%, respectively. These margins precede operating expenses. Nine-month sales and marketing expense was $4.9 million, research and development was $6.1 million, and general and administrative expense was $35.4 million.
At September 30, cash and cash equivalents were $86.6 million and short-term investments were $9.0 million, totaling $95.6 million. Current assets were $109.5 million versus current liabilities of $13.4 million. Total liabilities were $43.3 million; the filing reports no borrowings, while operating lease liabilities totaled $4.1 million. Stockholders’ equity was $84.4 million.
Material changes versus comparable periods
- Third-quarter revenue rose 24% year over year, to $10.6 million from $8.6 million. Per-unit royalties increased 55% to $6.4 million, mainly from mobility licenses; fixed-fee license revenue declined 5% to $4.1 million.
- Nine-month revenue fell 76% to $24.5 million from $100.1 million. Fixed-fee license revenue dropped 88% to $10.1 million, largely because a material mobility license agreement generated substantial revenue in the first quarter of 2018. Per-unit royalties declined 21% to $14.2 million.
- The third-quarter net loss narrowed to $1.4 million from $4.6 million, reflecting higher revenue and lower operating expenses, including reduced legal and settlement costs and lower employee compensation. For the nine months, the company shifted from $57.5 million net income in 2018 to a $21.0 million net loss in 2019, mainly due to the revenue decline and higher operating expenses.
- Cash, cash equivalents and short-term investments declined $29.3 million from December 31, 2018. Nine-month operating cash flow changed from $75.5 million provided in 2018 to $30.9 million used in 2019.
Outlook, risks, contingencies and unusual items
- Management expects royalty and license revenue to remain the main revenue sources, but cautions that fixed-fee revenue depends on the timing of new agreements and per-unit royalties fluctuate with customers’ shipments. The company historically sees higher mobility and gaming royalties in the first calendar quarter due to holiday sales reporting.
- Management believes current cash, cash equivalents and short-term investments are sufficient for working capital needs for at least the next 12 months, and expects 2019 capital expenditures below $1 million. It expects general and administrative costs to decline as litigation concludes and consulting and professional-services costs are reduced; it also plans targeted research and development investment.
- Signed contracts and payments received supported an expected $31.1 million of future revenue from fixed-license performance obligations satisfied over time: $12.4 million over one to three years and $18.7 million over more than three years. This is contracted revenue, not a general revenue forecast.
- On October 23, 2019, the board authorized abandonment of the San Jose leased facility and the company began seeking a subtenant, with relocation planned as soon as practicable. At September 30, the facility had a $2.4 million right-of-use asset and a $3.0 million associated lease liability; the filing does not quantify the ultimate financial effect of the planned move.
- The company paid Samsung approximately $6.9 million plus approximately $871,000 in arbitration costs in April 2019 under an award concerning Korean withholding taxes. The Korean court appeal remained pending; the company expects reimbursement if it prevails. Separately, LG Electronics’ related Korean tax matter was under appeal. An unfavorable outcome could result in additional tax expense or reimbursement obligations; the filing does not provide a clear maximum exposure.
- Patent litigation with Samsung and Motorola was settled and dismissed with prejudice in 2019, with related inter partes review proceedings terminated. Other IP proceedings included appeals concerning invalidated Chinese patents. The company states that litigation remains costly and outcomes cannot be predicted.
- Three customers represented 27%, 12% and 10% of nine-month revenue. Management identifies customer concentration, license renewals, shipment levels, patent enforceability, litigation costs, and revenue timing under ASC 606 as significant business risks.
- The company recorded $143,000 of downward royalty true-ups in the third quarter for prior-period estimates. It also maintained a $24.5 million valuation allowance against certain deferred tax assets and reported approximately $5.1 million of unrecognized tax benefits.
Important facts for investors to verify
- Whether increased mobility royalties and new license agreements can offset the absence of the large 2018 fixed-fee license and the declines in automotive and gaming royalties.
- How operating cash use and the reduction in liquid investments develop, given the nine-month operating cash outflow and accumulated deficit of $119.5 million.
- Developments in the Samsung and LG Korean tax proceedings, including the potential for reimbursement or additional expense.
- The financial and operational consequences of vacating the San Jose facility, including sublease prospects and any impairment or exit costs.
- Revenue concentration and the renewal, shipment and reporting trends of major licensees, as well as the status of material IP and patent matters.