Immersion Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless noted.
Business context
Immersion licenses haptic software and patents and provides related tools and technical services. Its main markets are mobile and consumer devices, gaming, automotive, and medical. The company reported one operating segment and said its technology was incorporated in more than 3 billion devices worldwide.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $35.0 million | $57.1 million |
| Operating income (loss) | $(45.4) million | $(15.3) million |
| Net income (loss) | $(45.3) million | $(39.4) million |
| Basic loss per share | $(1.55) | $(1.37) |
| Operating cash flow | $(43.8) million | $22.0 million |
| Cash, cash equivalents and short-term investments | $46.5 million | $89.8 million |
| Working capital | $29.0 million | $73.0 million |
| Total assets | $52.0 million | $103.8 million |
| Stockholders’ equity | $9.7 million | $55.3 million |
Gross profit was $34.8 million, approximately 99.4% of revenue; operating margin was approximately negative 129.7%. Royalty and license revenue represented 97.4% of revenue. The filing does not report interest-bearing debt as a separate item; reported liabilities were $42.3 million, including $26.7 million of deferred revenue. Management said available cash and investments should cover working-capital needs for at least 12 months.
Material changes versus FY 2016
- Revenue fell 39%, mainly because the prior year included a one-time $19.0 million Samsung license fee. Variable royalties also declined, reflecting expired contracts and lower customer volumes.
- Operating loss widened by $30.2 million. General and administrative expense rose $9.2 million, primarily due to higher legal costs; restructuring costs were $1.6 million.
- Net loss increased $5.9 million, partly offset by a much smaller tax provision in 2017. The 2016 tax provision included a $28.1 million non-cash valuation-allowance charge.
- Cash and short-term investments declined $43.3 million. Operating cash flow swung from $22.0 million provided in 2016 to $43.8 million used in 2017.
- Revenue mix shifted: mobile, wearables and consumer accounted for 48% versus 57%; gaming 31% versus 24%; automotive 15% versus 7%; and medical 6% versus 12%.
Outlook, risks and unusual items
- Management expected royalty and license revenue, particularly from mobility, to remain the main revenue source in 2018 and anticipated automotive growth. It warned of possible gaming revenue pressure from patent expirations, contract-renewal timing, and uncertainty.
- In December 2017, Immersion announced a restructuring: exiting mobile advertising, focusing China activity on mobile OEM licensing, and prioritizing IP licensing in gaming and VR/AR. Approximately 56 positions, or 41% of the workforce, were eliminated. The company expected lower sales and marketing expense in 2018; substantially all accrued restructuring costs were expected to be paid in Q1 2018.
- ASC 606 adoption was scheduled for January 1, 2018. The company expected earlier recognition of much fixed-fee license revenue and estimated a $5.2 million opening accumulated-deficit adjustment for fourth-quarter 2017 per-unit royalties. A substantial portion of deferred revenue was also expected to be recognized as an adoption adjustment; the final allocation was still being completed.
- Apple and Immersion reached a confidential multi-year patent license and settlement in January 2018, after year-end. The filing also describes ongoing patent litigation with Samsung, Motorola and Fitbit, and related patent-review proceedings.
- Samsung sought approximately $6.3 million plus interest and costs in arbitration over Korean withholding taxes; Immersion denied liability and said it considered a material charge remote. LG also sought reimbursement for Korean withholding taxes; the amount was not clearly stated in the filing, and Immersion disputed the claim.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate to 21% beginning in 2018. Immersion recorded a $12.9 million reduction to deferred tax assets and the related valuation allowance with no earnings impact, maintained a valuation allowance against most deferred tax assets, and said its GILTI assessment remained incomplete.
- Customer and geographic concentration remain significant: three customers represented 49% of 2017 revenue, and Asia generated 63%. Samsung, which contributed 33% in 2016, contributed no reported revenue in 2017.
Important facts for investors to verify
- How the 2018 ASC 606 adoption affected reported revenue, deferred revenue, and opening equity, including the final fixed-fee allocation and royalty estimates.
- Whether recurring mobility and gaming licensing revenue can replace nonrecurring fees and offset expired contracts and patents.
- The pace of cash use, restructuring savings, and management’s stated 12-month liquidity outlook.
- Outcomes and potential costs of the Samsung tax arbitration and LG tax dispute, as well as patent litigation and related proceedings.
- Terms and financial contribution of the confidential Apple settlement and multi-year license.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2017.