Immersion Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Immersion develops and licenses haptic technology and intellectual property, primarily for mobility, gaming, and automotive markets. Results are unaudited and consolidated.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $11.0m | $5.7m | $18.2m | $11.9m |
| Operating income (loss) | $5.8m | $(1.1)m | $8.3m | $(5.6)m |
| Net income (loss) | $5.3m | $(0.7)m | $7.4m | $(5.5)m |
| Diluted EPS | $0.17 | $(0.03) | $0.24 | $(0.19) |
| Operating cash flow | Not separately reported | Not separately reported | $9.1m | $(4.8)m |
- Q2 operating margin was approximately 53%, compared with a 19% operating loss margin in Q2 2020. For the first half, operating margin was approximately 46%, versus a 47% operating loss margin in 2020.
- Royalty and license revenue drove almost all revenue: Q2 per-unit royalties were $9.1m and fixed-fee licenses $1.8m. Development, services, and other revenue was $0.1m.
- At June 30, cash and cash equivalents were $107.3m, up from $59.5m at year-end 2020. Current assets were $122.1m and current liabilities $9.8m. Total liabilities were $30.2m; the filing reports no borrowings or debt balance.
- First-half investing cash outflow was $0.1m. Financing provided $38.8m, primarily from $35.8m of net stock-offering proceeds and $2.9m from option exercises. Cash increased by $47.8m during the period.
Changes versus prior comparable periods
- Q2 revenue increased 94% year over year; first-half revenue increased 52%. Management attributed the gains mainly to higher per-unit royalties from mobility, gaming, and automotive licensees.
- Q2 per-unit royalties increased 111% to $9.1m; first-half per-unit royalties increased 61% to $14.9m. Q2 fixed-fee license revenue rose 41%; first-half fixed-fee revenue rose 20%.
- First-half total operating expenses declined $7.7m to $9.9m. General and administrative expense fell 58%, primarily due to lower personnel, legal, professional-services, depreciation, and facilities costs. Prior-year comparisons also reflect elevated expenses.
- First-half operating cash flow improved by $13.8m, from a $4.8m use to $9.1m provided, principally reflecting the swing to net income.
- Share count increased following the first-quarter sale of 3.3m shares under the February 2021 ATM offering; net proceeds were approximately $35.9m.
Outlook, risks, contingencies, and unusual items
- No quantified revenue or earnings guidance is provided. Management expects royalty and license revenue to remain the primary revenue source, but says royalties fluctuate with licensee shipments and fixed-fee revenue with the timing of agreements. It expects general and administrative expense to remain stable and 2021 capital expenditures to be below $1m.
- Management believed available capital was sufficient for working capital needs for the next 12 months. A July 2021 ATM permits sales of up to $60m; by August 12, the company had sold 1.9m shares for approximately $14.5m net, creating further potential dilution.
- Per-unit royalty revenue includes estimates of licensee sales. Q2 included a $2.0m upward adjustment to royalty revenue for prior estimates, an unusual item investors may wish to separate when assessing underlying growth.
- Revenue is concentrated among a limited number of licensees; Samsung represented a significant amount of Q2 revenue, but the filing does not provide a clear percentage or amount. International revenue was 88% of first-half total revenue.
- Global component shortages, COVID-19 and related economic uncertainty, customer product changes, license renewals, and patent enforcement are cited risks. The company also identifies management turnover and its history of losses; accumulated deficit was $105.8m.
- Two Korean withholding-tax matters remain contingent: $6.9m deposited in connection with the Samsung dispute and a $5.0m provisional deposit to LGE. The company expects recovery to the extent it prevails in court; adverse outcomes could result in additional tax expense. The filing says potential liability cannot be estimated for the LGE matter.
- On August 3, 2021, the company initiated arbitration against automotive licensee Marquardt over alleged unpaid royalties. Marquardt’s last reported royalty amount was approximately $0.5m for Q3 2020; the total past-due amount is still to be determined.
- The San Francisco office remained closed under work-from-home arrangements; a $32,000 impairment charge on its right-of-use asset was recorded in Q2.
Most important facts for investors to verify
- Whether revenue growth is durable and supported by licensee shipments, given customer concentration and the $2.0m Q2 royalty true-up.
- How the Samsung and LGE court proceedings affect the $11.9m of related deposits and potential tax expense or recovery.
- Whether Marquardt resumes reporting and paying royalties, and the amount recoverable through arbitration.
- The number and price of shares sold under the July ATM, resulting dilution, and the use of proceeds.
- Whether component supply constraints, COVID-19 effects, customer product decisions, and license renewals alter royalties or cash generation.