Immersion Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. All dollar amounts below are U.S. dollars; financial statement amounts are in millions unless noted. Immersion develops and licenses haptic technology and related software, primarily for mobility, gaming, and automotive markets. It reports one operating segment.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $6.257 | $5.122 |
| Royalty and license revenue | $6.182 | $5.047 |
| Net loss | $(4.828) | $(11.016) |
| Basic and diluted loss per share | $(0.16) | $(0.35) |
| Cash used in operating activities | $(1.316) | $(7.578) |
- Revenue increased 22% year over year. Per-unit royalties rose 48% to $4.895 million, while fixed-fee license revenue fell 26% to $1.287 million. Development, services, and other revenue was $75,000.
- Operating loss was $4.548 million, versus $11.499 million. Total costs and expenses decreased 35% to $10.805 million. Management attributed much of the improvement to lower legal and settlement costs following litigation settlements, and lower compensation and stock-based compensation expense.
- Operating margin was approximately negative 73%, compared with negative 225% in Q1 2019. Interest and other expense was $228,000, versus income of $598,000 a year earlier; the change primarily reflected foreign-currency losses and lower investment earnings.
Liquidity, assets, and capital
- Cash and cash equivalents were $76.229 million at March 31, 2020, down from $86.478 million at year-end 2019. There were no short-term investments at quarter-end. Management reported total cash, cash equivalents, and short-term investments of $76.2 million and said it expected these resources to cover working-capital needs for the next 12 months.
- Current assets were $91.091 million and current liabilities $11.716 million. Total liabilities were $39.745 million; the filing does not list conventional borrowings or other financial debt. Operating lease liabilities totaled $4.075 million.
- Operating cash use improved to $1.316 million. Investing activities provided $2.979 million, primarily from investment maturities. Financing activities used $11.912 million, mainly for share repurchases. Cash and cash equivalents declined $10.249 million during the quarter.
- The company repurchased approximately 2.0 million shares for $11.975 million, averaging $5.95 per share; approximately $18.7 million remained authorized. Outstanding shares were 29.6 million at March 31, compared with 31.4 million at December 31, 2019.
- Accumulated deficit was $123.393 million. Contract assets totaled about $14.7 million at quarter-end, down $5.4 million from year-end, mainly as royalties were billed against minimum royalties previously recognized.
Changes, outlook, and material matters
- Revenue mix and markets: Mobility royalties increased, primarily following licensing agreements entered into in 2019. Gaming and automotive royalties each declined, which management attributed mainly to lower estimated shipment volumes. Asia represented 79% of Q1 revenue, versus 48% a year earlier.
- COVID-19: Management said the pandemic had not materially affected Q1 financial results, but could reduce customers’ manufacturing, distribution, and sales and thereby lower royalties, revenue, cash flows, and liquidity during 2020. The company implemented remote-work and travel restrictions and announced executive salary reductions, lower director cash compensation, reduced professional-services costs, relocation of some positions, and suspension of its 401(k) match. It gave no specific revenue or earnings guidance.
- Business outlook: Management expects royalty and license revenue to remain the main revenue source, but fixed-fee revenue may fluctuate with the timing of new agreements. It expected 2020 capital expenditures below $1 million. The company expected to recognize $29.3 million of remaining revenue for fixed-fee license obligations satisfied over time: $13.9 million within one to three years and $15.4 million after three years.
- Leases: The company entered a San Francisco office lease in Q1. It also agreed to sublease its San Jose facility to Neato, with expected sublease receipts of $3.085 million through 2023; commencement was subject to delivery and COVID-related conditions. The company remains primarily liable under its original lease.
- Korean tax disputes: Immersion had paid Samsung $6.9 million under an arbitration award and was appealing the underlying Korean tax assessment; the amount remained recorded as a deposit, subject to recovery if the appeal succeeds. On April 8, 2020, after quarter-end, it paid LG Electronics a provisional deposit of approximately $5.0 million, also potentially recoverable depending on the Korean court appeal. Unfavorable outcomes could result in additional income tax expense.
- Other risks: Samsung represented a significant portion of Q1 revenue, though the filing does not state a clear percentage. Key risks include reliance on a limited number of licensees, renewals and enforcement of patent rights, litigation and tax indemnification exposure, customer shipment volumes, and pandemic-related disruption. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much revenue and royalties depend on Samsung and other major licensees, and whether license agreements renew on favorable terms.
- Whether COVID-19 materially affects licensees’ shipment volumes, particularly in mobility, gaming, and automotive markets, and whether reported royalty estimates are later adjusted.
- The status and recoverability of the $6.9 million Samsung-related deposit and the $5.0 million LG provisional deposit, including potential cash and tax impacts.
- Whether cash use, operating losses, and share repurchases remain consistent with management’s stated 12-month liquidity outlook.
- Whether the Neato sublease commenced as expected and generates the disclosed rent receipts while Immersion remains responsible for the underlying lease.