Immersion Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 6, 2020. The company licenses haptic technology, software and patents, primarily for mobile devices, gaming and automotive applications. This is an annual filing; fourth-quarter results are noted below.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $36.0 million | $111.0 million |
| Gross profit / gross margin | $35.8 million / 99.5% | $110.8 million / 99.8% |
| Operating income (loss) / margin | ($21.5) million / (59.6)% | $53.1 million / 47.8% |
| Net income (loss) / diluted EPS | ($20.0) million / ($0.64) | $54.3 million / $1.73 |
| Operating cash flow | ($34.1) million | $69.9 million |
| Cash, cash equivalents and short-term investments | $89.5 million | $124.9 million |
| Working capital | $95.1 million | $120.5 million |
| Total liabilities / stockholders’ equity | $41.1 million / $83.8 million | $46.3 million / $99.7 million |
The filing does not show conventional borrowings. Lease liabilities were $3.8 million at year-end, with $4.1 million of future operating lease payments. Cash and investments fell $35.4 million during 2019.
Revenue was 99% royalty and license revenue. Per-unit royalties were $23.0 million, down 15%; fixed-fee license revenue was $12.6 million, down 85%. Revenue by market: mobile, wearables and consumer 63%; gaming 16%; automotive 21%; medical less than 1%. Samsung represented 27% of revenue. International revenue was approximately 72%.
Fourth quarter: Revenue was $11.5 million, operating income $0.5 million and net income $1.0 million, compared with $10.9 million revenue, an operating loss of $3.5 million and a net loss of $3.1 million in Q4 2018.
Changes versus prior period and unusual items
- Annual revenue declined 68% and results moved from profit to loss. Management attributed most of the revenue decline to the absence of a material mobility fixed-fee license agreement signed in Q1 2018; per-unit royalty revenue also fell $4.0 million.
- 2018 is not a clean comparison: adoption of ASC 606 changed recognition of fixed-fee licenses and minimum royalties, including recognition of some revenue at contract inception. The filing says ASC 606 materially affected reported revenue and timing.
- Operating cash flow swung from $69.9 million provided in 2018 to $34.1 million used in 2019, reflecting lower earnings and working-capital movements, including lower deferred revenue.
- General and administrative expense included a $0.9 million impairment of the San Jose lease right-of-use asset and $0.3 million accelerated amortization of leasehold improvements as the company prepared to exit that facility.
- In December 2019, Immersion repurchased 387,309 shares for $2.7 million; approximately $30.6 million remained authorized at year-end.
Outlook, risks and contingencies
- Management said cash and investments should fund working-capital needs for at least the next 12 months; projected 2020 capital expenditures were less than $1.0 million. No revenue or earnings guidance was provided.
- The company expects licensing and royalty revenue to remain its primary revenue source, with results sensitive to license renewals, new agreements, licensee shipments and the timing of fixed-fee contracts. Management expects targeted sales and R&D investment and anticipates lower G&A expense as litigation and consulting costs decline.
- Customer concentration, patent enforceability, litigation costs, international operations and volatile royalty reporting are key risks. Samsung was 27% of 2019 revenue; the filing also identifies reliance on a limited number of licensees.
- Immersion paid Samsung $6.9 million under an arbitration award concerning Korean withholding taxes, plus approximately $0.9 million in arbitration costs. The company recorded the $6.9 million as a deposit while pursuing a Korean court appeal; an unfavorable outcome could result in income tax expense. A separate LG withholding-tax indemnity dispute remained in court, with potential exposure not clearly quantified in the filing.
- Samsung and Motorola patent disputes were settled and licensed in 2019. In China, three patents asserted against Samsung were declared invalid; Immersion appealed those decisions. The filing states that litigation outcomes and potential liabilities cannot be predicted.
- The filing identifies the COVID-19 outbreak as a potential disruption to customers’ manufacturing, distribution and sales. It also describes management turnover, activist-stockholder activity and tax-reorganization uncertainty.
Important facts for investors to verify
- How much recurring per-unit royalty revenue can replace large, nonrecurring fixed-fee licenses, and whether the 2019 decline in mobility, gaming and automotive royalties persists.
- Renewal terms, shipment exposure and ongoing revenue concentration, particularly the significance of Samsung and the effect of the Microsoft agreement, under which Immersion receives no further royalties.
- Cash generation and liquidity if operating cash outflows continue; confirm the timing and recoverability of the Samsung tax deposit and possible LG indemnity exposure.
- Progress and outcomes of the Korean tax appeals and Chinese patent appeals, plus the costs and revenue effects of other IP enforcement activity.
- Effects of ASC 606 estimates and quarterly royalty true-ups on reported revenue; the filing recorded a $247,000 downward royalty adjustment in Q4 2019 related to prior-quarter estimates.