Immersion Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Immersion develops and licenses haptic technology and intellectual property for mobility, automotive, gaming, medical, and wearable applications. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $5.1 million | $85.4 million |
| Fixed-fee license revenue | $1.7 million | $75.8 million |
| Per-unit royalty revenue | $3.3 million | $9.6 million |
| Operating income (loss) | $(11.5) million | $70.1 million |
| Net income (loss) | $(11.0) million | $69.9 million |
| Basic and diluted EPS | $(0.35) | $2.35 basic; $2.29 diluted |
| Operating cash flow | $(7.6) million | $86.2 million |
Revenue fell 94% year over year. The prior-year quarter included significant fixed-fee license agreements; the current quarter also had lower royalties. Cost of revenue was $15,000, while operating expenses were $16.6 million, up $1.3 million. General and administrative expense rose 13% to $12.7 million, primarily due to higher legal and professional costs; research and development expense fell 18% to $2.3 million.
Cash, cash equivalents, and short-term investments totaled $117.6 million at March 31, down from $124.9 million at December 31, 2018. Cash and equivalents were $102.7 million and short-term investments $15.0 million. Current assets were $127.9 million and current liabilities $24.9 million. The filing reports no borrowings; operating lease liabilities totaled $4.6 million, including $1.2 million current. Management said available cash and investments should fund working-capital needs for at least 12 months.
Material changes and outlook
- Fixed-fee license revenue declined 98%, mainly because of material mobility-customer agreements recognized in Q1 2018. Per-unit royalties decreased 65%, including lower automotive revenue and reduced shipments in gaming and mobility.
- Management expects license and royalty revenue to remain central, but says fixed-fee revenue can vary with the timing of new agreements and royalties with customer shipments. ASC 606’s recognition rules and estimated royalty accruals can contribute to substantial quarterly fluctuations.
- As of March 31, the company expected to recognize $33.3 million of remaining revenue for fixed-fee agreements’ over-time performance obligation: $13.5 million over one to three years and $19.8 million after three years. This is contracted revenue, not a general revenue forecast.
- Management expects targeted R&D investment and continued cash use to protect and defend its IP. It anticipated 2019 capital expenditures below $1 million. No specific revenue or earnings guidance was provided.
- ASC 842 adoption on January 1, 2019 added $4.0 million of right-of-use assets and $4.9 million of operating lease liabilities at adoption, with no opening-equity adjustment.
Risks, contingencies, and unusual items
- Samsung Korean tax arbitration: A March 27, 2019 award required Immersion to pay Samsung approximately $6.9 million plus approximately $871,454 in arbitration costs. The company paid the $6.9 million on April 22, after quarter-end; it recorded a $6.9 million deposit and related payable at March 31 while pursuing a Korean administrative appeal. It expects reimbursement if it prevails. The filing does not clearly state whether the arbitration costs were included in the quarter-end accrual.
- Other litigation and IP challenges: Patent litigation with Samsung and Motorola is ongoing, and the USPTO instituted multiple inter partes review proceedings challenging patents asserted in those disputes. Immersion also reported a German Samsung infringement action and an appeal of decisions invalidating three Chinese patents. The company cannot predict litigation outcomes; legal costs may be material.
- LGE tax claim: A Korean tax tribunal rejected Immersion’s arguments concerning withholding taxes and penalties imposed on LG Electronics. Immersion said it intended to appeal and assessed the likelihood of a material charge as remote.
- Concentration and business volatility: Two customers accounted for 20% and 13% of Q1 revenue. Results depend on licensing renewals, enforcement and validity of patents, licensee product shipments, and timing of fixed-fee agreements. The company had an accumulated deficit of $109.5 million.
- Tax uncertainty: The company maintained a $24.4 million valuation allowance against deferred tax assets and reported approximately $4.6 million of unrecognized tax benefits, plus $19,000 of interest.
Important facts for investors to verify
- Whether new fixed-fee license agreements or royalty trends can replace the unusually large prior-year license revenue, and how ASC 606 affects period-to-period comparability.
- The accounting and cash impact of the Samsung arbitration award, including the approximately $871,454 cost award, the Korean appeal, and any potential recovery.
- Developments in Samsung and Motorola litigation and patent reviews, including effects on patent validity, licensing leverage, legal expense, and future cash use.
- Customer concentration, license renewals, and the shipment assumptions underlying estimated royalties and the $33.3 million contracted revenue balance.
- Liquidity after the post-quarter Samsung payment and whether operating cash use remains consistent with management’s stated 12-month funding assessment.