Immersion Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Immersion develops and licenses haptic technology and intellectual property, primarily for mobility, gaming and automotive applications. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in millions.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $5.7 | $8.7 | $11.9 | $13.9 |
| Operating loss | $(1.1) | $(9.2) | $(5.6) | $(20.7) |
| Net loss | $(0.7) | $(8.6) | $(5.5) | $(19.6) |
| Basic and diluted loss per share | $(0.03) | $(0.27) | $(0.19) | $(0.63) |
- Q2 royalty and license revenue was $5.6 million, including $4.3 million of per-unit royalties and $1.3 million of fixed-fee licenses. Development, services and other revenue was $0.1 million.
- Operating loss was 19% of revenue in Q2 2020, versus 105% in Q2 2019; the filing does not separately present a gross margin.
- Cash and cash equivalents were $54.1 million at June 30, down from $86.5 million at December 31, 2019. The company had no short-term investments at quarter-end. Total assets were $85.6 million, total liabilities $35.9 million and stockholders’ equity $49.7 million.
- No borrowings or debt balance is listed on the balance sheet. Current assets were $64.7 million and current liabilities $9.3 million.
- For the first half, operating cash use was $4.8 million, investing cash provided was $3.0 million, and financing cash use was $30.6 million. Financing use primarily reflected $30.6 million of share repurchases.
Changes versus the prior comparable period
- Q2 revenue declined 35%, mainly because fixed-fee license revenue fell 70% to $1.3 million. Per-unit royalties decreased 3% to $4.3 million.
- First-half revenue declined 14%. Fixed-fee license revenue fell 57%, partly offset by a 19% increase in per-unit royalties, mainly from mobility agreements signed in 2019.
- Q2 net loss narrowed by $7.9 million year over year. General and administrative expense declined $10.4 million, primarily due to lower legal costs following 2019 litigation settlements, as well as lower consulting and personnel costs. First-half G&A expense fell $15.7 million.
- COVID-19-related shipment delays and weaker business conditions weighed on automotive and gaming royalties. Mobility royalty growth partly offset those declines in the first half.
- During the first half, the company repurchased approximately 4.9 million shares for $30.6 million, at an average $6.21 per share; no authorization remained at June 30. Shares outstanding fell from 31.4 million at year-end to 26.9 million at June 30.
Outlook, risks and unusual items
- Management said it believed available capital was sufficient for working-capital needs for the next 12 months, as of August 6, 2020. Expected 2020 capital expenditures were less than $1 million. No specific revenue or earnings guidance was provided.
- Management expects royalties and license fees to remain the principal revenue source; fixed-fee revenue may fluctuate with the timing of new agreements. It also expects targeted reductions in G&A costs and continued targeted R&D investment.
- COVID-19 created uncertainty around customers’ production, shipments and royalty payments. The company reported lower estimated Q2 royalties following expected shipment-volume reductions and implemented salary and compensation reductions, bonus-plan cuts, lower professional-services spending, relocation of some roles, and a temporary suspension of company retirement-plan matching. A $0.2 million Canadian wage subsidy reduced Q2 operating expenses.
- Cash declined partly due to repurchases and operating cash use. Long-term deposits increased to $11.7 million, including a $5.0 million provisional deposit to LG Electronics (LGE) related to Korean withholding-tax litigation; a $6.9 million Samsung-related deposit was also recorded.
- In July 2020, after quarter-end, a Korean court ruled that the withholding taxes and penalties imposed on Samsung should be canceled. Korean tax authorities appealed in August. The company expects reimbursement to the extent it prevails in the Korean courts. The LGE appeal remained pending, with a decision anticipated around October 8, 2020. An adverse outcome could result in additional income-tax expense; the company said it could not estimate potential liability for the matters.
- Other key risks include dependence on a limited number of licensees, renewal and negotiation of IP licenses, patent validity and enforcement, litigation costs, volatility in license timing and royalty estimates, and continuing pandemic effects. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19-related customer shipment delays and royalty reductions persist, and whether mobility growth can offset weakness in gaming and automotive.
- The status and financial consequences of the Samsung and LGE Korean tax matters, including recovery of the recorded deposits and any potential additional tax expense.
- Revenue mix and timing of new fixed-fee license agreements, including the reliability of estimated per-unit royalties and subsequent true-ups.
- Cash use after the substantial first-half repurchases, the absence of remaining repurchase authorization, and management’s 12-month liquidity assessment.
- Customer concentration and the renewal, enforceability and commercial value of the company’s patent licenses.