Immersion Corporation — Q2 2017 Form 10-Q
Business context and reporting period. Immersion develops and licenses haptic technology and intellectual property, primarily for mobility, gaming, automotive, and medical applications. This unaudited report covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $7.0M | $7.9M | $16.3M | $21.5M |
| Operating loss | $(14.9)M | $(9.6)M | $(27.8)M | $(14.2)M |
| Net loss | $(14.8)M | $(5.6)M | $(27.7)M | $(8.3)M |
| Basic and diluted loss per share | $(0.51) | $(0.20) | $(0.95) | $(0.29) |
| Cash used in operating activities | Not stated quarterly | Not stated quarterly | $(28.3)M | $(11.5)M |
- Royalty and license revenue was $6.8M in Q2, down 11%; development, services, and other revenue was $0.2M. For the first half, royalty and license revenue fell 25% to $15.8M.
- Cost of revenue was $54,000 in Q2 and $97,000 for the first half; calculated gross margin was approximately 99% in both periods. Operating expenses were $21.9M in Q2 and $44.0M for the first half.
- General and administrative expense rose 42% in Q2 to $15.6M and 48% in the first half to $31.1M, primarily because of increased litigation spending. Legal expense increased $4.7M in Q2 and $10.3M in the first half year over year.
- At June 30, cash and cash equivalents were $33.2M and short-term investments were $28.9M, totaling $62.0M, down $27.8M from year-end 2016. Current assets were $66.3M versus current liabilities of $21.5M. Total liabilities were $46.8M, including deferred revenue; the balance sheet reports no borrowings or other debt value.
- Stockholders’ equity was $24.0M, down from $55.3M at December 31, 2016. The accumulated deficit was $154.0M.
Changes versus the prior comparable periods
- Q2 revenue declined $0.8M, mainly from lower gaming and medical licensee revenue; automotive and mobility growth partly offset the decline. Gaming royalty and license revenue fell 40% in Q2, primarily reflecting the absence of Sony royalties.
- First-half revenue declined $5.2M. A nonrecurring $3.0M medical license fee recognized in Q1 2016 did not recur; medical and gaming revenue also fell. Automotive revenue increased.
- First-half net loss worsened by $19.4M. In addition to lower revenue and higher operating expenses, 2016 included a $5.0M income tax benefit and $0.6M of discontinued-operations income, neither of which recurred in 2017.
- Operating cash use increased $16.9M year over year, to $28.3M in the first half.
Outlook, risks, and unusual items
- Management said existing cash, cash equivalents, and short-term investments should cover working-capital needs for at least the next 12 months. It expects continued significant cash use to protect and enforce its IP; 2017 capital expenditures were expected to be less than $1.0M.
- Management expects royalty and license revenue to remain a major revenue source, but said gaming revenue may continue to decline until the relevance of its IP is established. Medical revenue is expected to become less significant. Revenue depends on license renewals, customer shipments, product timing, and litigation outcomes; results may fluctuate.
- The company was pursuing patent litigation against Apple and AT&T Mobility, with an ITC decision and investigation schedule extended after quarter-end. Apple also challenged several patents through inter partes reviews. The company said these proceedings are costly and outcomes uncertain.
- In May 2017, an arbitrator found that Sony’s U.S. DS4 controller did not infringe the patent at issue. Immersion also filed Fitbit patent suits in China and the U.S. after quarter-end; it filed suits against Samsung and Motorola on August 3, 2017.
- Samsung requested reimbursement for Korean withholding taxes and penalties. Immersion appealed the tax authority’s findings and said it did not believe an obligation was probable; the potential exposure is not clearly quantified in the filing.
- The company adopted tax-accounting guidance in 2017, recording a $7.0M decrease in prepaid income taxes and a corresponding increase in accumulated deficit. A full valuation allowance remained against U.S. federal deferred tax assets; the company reported a $6.3M liability for unrecognized tax benefits, of which $97,000 could affect the effective tax rate if recognized.
- Effective January 1, 2018, the company expects to adopt the new revenue standard using the modified retrospective method. It anticipates estimating per-unit royalties in the quarter of underlying sales rather than recognizing them when customer reports arrive, typically one quarter later; fixed-fee license effects were still under evaluation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash use and legal spending continue at a pace that materially reduces the $62.0M liquidity balance.
- Developments and financial consequences in the Apple/AT&T, Samsung, Motorola, Fitbit, and Sony matters, including any effect on licensing revenue or IP enforceability.
- Renewal prospects and concentration of revenue among major customers; the filing says two customers accounted for 21% and 12% of first-half revenue, respectively.
- The unresolved Samsung withholding-tax reimbursement request and any potential indemnification obligation.
- The eventual revenue-recognition impact of the 2018 accounting-standard adoption, including estimates and subsequent true-ups for per-unit royalties.