Immersion Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Immersion develops and licenses patented haptic technology. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
- Revenue: $7.31 million, up 2% year over year. Royalty and license revenue was $7.23 million: fixed-fee licenses rose 37% to $1.75 million, while per-unit royalties declined 5% to $5.49 million. Development, services and other revenue was $0.08 million.
- Profit and margins: Operating income was $3.60 million, compared with $2.49 million; operating margin increased to about 49% from 35%. Net income was $5.08 million, or $0.15 per diluted share, versus $2.04 million, or $0.07. Net income included $2.03 million of interest and other income, versus a $0.32 million loss a year earlier, including investment and derivative-related effects.
- Expenses: Total costs and expenses fell 21% to $3.71 million. Sales and marketing declined 56% to $0.49 million and research and development declined 61% to $0.51 million, largely due to lower headcount and stock-based compensation. General and administrative expense rose 22% to $2.71 million, primarily on higher compensation and stock-based compensation.
- Cash flow: Operating activities provided $11.04 million, versus $4.41 million. Investing activities provided $4.83 million, mainly reflecting marketable-security and derivative transactions; financing activities used $4.40 million, primarily for share repurchases. Cash and cash equivalents increased to $62.96 million from $51.49 million.
- Liquidity and balance sheet: Cash, cash equivalents and marketable equity securities totaled $146.5 million at quarter-end; marketable debt securities were an additional $11.18 million. Total assets were $180.86 million, liabilities $37.51 million and stockholders’ equity $143.35 million. The filing reports no borrowings or debt balance. Other current liabilities included $10.95 million of derivative instruments.
- Taxes: Income tax expense was $0.56 million and the effective tax rate was 10.0%, versus 6.5%. The company reported $6.3 million of unrecognized tax benefits and a $27.3 million valuation allowance against certain deferred tax assets.
Changes and notable items
- Fixed-fee license revenue increased $0.47 million, primarily from gaming; per-unit royalties decreased $0.31 million, reflecting lower mobility and automotive royalties partly offset by gaming growth. Asia generated 75% of revenue.
- Q1 2022 other income benefited from investment activity, including gains on equity and debt securities, partly offset by derivative losses. Results are therefore affected by investment and derivative valuations as well as licensing operations.
- In February, Immersion repurchased 904,499 shares from Invenomic for approximately $4.3 million under a separate repurchase agreement. The company also authorized a $30 million repurchase program; it repurchased 34,282 shares for $0.2 million under that program during the quarter, with $29.8 million remaining.
- Following a February 2022 Korea Supreme Court decision in the Samsung tax matter, Immersion received approximately $5.0 million in March and expected an additional approximately $0.5 million reimbursement. It had recorded a $1.4 million impairment related to Samsung deposits in Q4 2021.
Outlook, risks and contingencies
- Outlook: No specific revenue or earnings guidance was provided. Management expects royalties and license fees to remain major revenue sources, while noting fixed-fee revenue depends on contract timing and per-unit royalties fluctuate with customers’ unit shipments. It expected 2022 capital expenditures to be below $1.0 million and stated that resources should meet working-capital needs for the next 12 months and beyond.
- Legal and tax matters: The LG Electronics Korean withholding-tax appeal remained pending; a further hearing was scheduled for July 7, 2022. Immersion had provided LGE a provisional deposit of approximately $5.0 million and recorded a $0.8 million impairment in Q4 2021. The company says outcomes and potential liabilities cannot be predicted. In the Marquardt automotive-license arbitration, the parties reached a binding settlement term sheet in March; an April 4 amendment documented a prepayment of certain future royalties.
- Business risks: Revenue depends on licensee sales, reporting estimates and the timing of fixed-fee agreements. Per-unit royalties are estimated before licensee reports arrive; Q1 2022 included a $0.3 million upward true-up. The filing also notes potential IP litigation costs, COVID-related economic uncertainty, and foreign-currency, investment-market and tax risks. Management reported no material changes to the risk factors in the 2021 Form 10-K.
- Other: Work-from-home and travel restrictions related to COVID-19 remained in place. The filing states disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the increase in net income is sustainable operating performance versus investment, derivative and other non-operating effects.
- Subsequent cash receipts and final outcomes for the Samsung reimbursement and the pending LGE tax appeal, including any impact on deposits or tax expense.
- Whether Marquardt’s royalty prepayment and other license terms support future reported royalty revenue, and whether the settlement has any additional financial effects.
- Trends in per-unit royalties by mobility, gaming and automotive customers, and the timing and concentration of fixed-fee license agreements.
- Future use of the $30 million repurchase authorization, considering cash needs, marketable-security exposure and the company’s investment and derivative positions.