Immersion Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The interim financial statements are unaudited. Immersion develops and licenses haptic technology through a hybrid model of software, services, and intellectual-property licenses.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior balance-sheet date |
|---|---|---|
| Revenue | $9.224 million | $13.623 million |
| Operating loss | $12.852 million | $4.608 million |
| Net loss | $12.865 million; $0.44 per share | $2.695 million; $0.09 per share |
| Operating cash flow | $(14.317) million | $(5.856) million |
| Cash, cash equivalents and short-term investments | $75.977 million | $89.772 million at December 31, 2016 |
| Total assets | $83.196 million | $103.767 million at December 31, 2016 |
| Total liabilities | $45.606 million | $48.427 million at December 31, 2016 |
Royalty and license revenue was $9.006 million; development, services and other revenue was $0.218 million. Cost of revenue was $0.043 million, implying gross margin of approximately 99.5%. Operating margin was approximately negative 139%. The filing presents no debt balance as a separate line item. Cash and investments declined $13.8 million during the quarter, principally reflecting operating cash use. Management said available cash and investments should meet working-capital needs for at least 12 months.
Changes versus the comparable period
- Revenue fell 32%, primarily from lower medical licensing revenue and reduced mobility royalties. Royalty and license revenue decreased 33%.
- Variable royalty revenue declined 24% to $6.5 million; fixed license revenue fell 49% to $2.5 million, partly because Q1 2016 included a non-recurring $3.0 million medical license fee.
- Operating expenses rose $3.8 million. General and administrative expense increased 54% to $15.532 million, largely due to higher litigation and legal costs; sales and marketing and R&D expenses decreased.
- Net loss widened by $10.2 million. Management attributed the change mainly to lower revenue, higher operating expenses, and a $0.152 million tax provision versus a $1.701 million tax benefit in Q1 2016.
- Operating cash use increased $8.5 million year over year. Stockholders’ equity fell to $37.590 million from $55.340 million at year-end.
Outlook, commentary and risks
- Management expects royalty and license revenue to remain a major revenue source, but says it may fluctuate with licensee product shipments, product launches, customer recognition of the IP, and litigation outcomes. Mobility is expected to remain a primary revenue stream; the company anticipates continued reduction in medical revenue as a share of total revenue.
- Management expects significant ongoing spending to protect and enforce its IP. It expects sales and marketing expense to increase in 2017 and targeted R&D investment to continue. 2017 capital expenditures were expected to be below $1.0 million.
- Apple and AT&T Mobility patent litigation and related patent challenges are significant uncertainties and contributed to elevated legal expense. The ITC hearing concluded May 4, 2017, after quarter-end; the initial determination was scheduled for August 11, 2017. The filing cautions that litigation outcomes are uncertain.
- After quarter-end, Samsung requested reimbursement for Korean withholding taxes and penalties. Immersion said it did not believe an obligation was probable and intended to defend the matter.
- Revenue is concentrated: three customers accounted for 18%, 15%, and 10% of Q1 revenue. The company disclosed no renewed Samsung agreement for products released after December 31, 2015.
- The company early adopted income-tax guidance in Q1 2017, recording a $7.0 million cumulative reduction in prepaid income taxes and increase in accumulated deficit as of January 1, 2017. A full valuation allowance remained against U.S. federal deferred tax assets.
- Immersion planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It expected, among other changes, to estimate per-unit royalties in the quarter of licensee sales rather than recognize them when reports arrive, typically one quarter later.
- Other material risks include dependence on licensing and customer renewals, patent validity and enforcement, volatile quarterly royalties, competition, and international and tax uncertainties. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track royalty revenue by mobility, gaming, medical, and automotive customers, and determine how much of the decline reflects recurring business versus the prior-year one-time medical fee.
- Monitor litigation milestones, patent challenges, legal spending, and any resulting settlements, licensing changes, or adverse rulings.
- Assess customer concentration and the status and revenue implications of the Samsung licensing relationship.
- Reconcile continued operating cash burn against the $76.0 million liquidity pool and management’s 12-month funding statement.
- Review the effects of the 2018 revenue-standard adoption, particularly royalty estimates and timing of fixed-fee license revenue.
- Follow the Samsung tax-reimbursement request and the company’s uncertain-tax-position and deferred-tax valuation assessments.