Immersion Corporation — FY2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed March 6, 2013. This is an annual report, not a standalone Q4 filing. Dollar amounts below are in U.S. dollars.
Business context
Immersion develops and licenses haptic software, technology, and patents that add touch feedback to digital products. It reported one operating segment and focused on mobile communications and consumer electronics, gaming, automotive, medical, and other markets. The business was predominantly licensing-based: royalty and license revenue was 90.1% of FY2012 revenue. The company reported more than 1,300 issued or pending patents.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $32.169 million | $30.635 million |
| Royalty and license revenue | $28.989 million | $26.916 million |
| Product sales | $1.982 million | $2.583 million |
| Gross profit | $30.981 million | $29.380 million |
| Gross margin | 96.3% | 95.9% |
| Operating income (loss) | $(5.095) million | $(0.053) million |
| Net income (loss) | $(5.564) million | $(1.604) million |
| Diluted loss per share | $(0.20) | $(0.06) |
| Operating cash flow | $(4.249) million | $2.377 million |
FY2012 revenue increased 5%; royalty and license revenue increased 8%, while product sales fell 23%. Higher general and administrative expense, including approximately $7.5 million of litigation expense, drove the larger operating loss. Research and development expense was $8.421 million, broadly flat year over year.
At year-end, cash and cash equivalents were $4.558 million and short-term investments were $38.988 million, totaling $43.546 million, down from $56.285 million a year earlier. Working capital was $38.640 million; total assets were $63.442 million and stockholders’ equity was $44.641 million. The balance sheet reports no borrowings or debt balance; total liabilities were $18.801 million, including $10.221 million of long-term deferred revenue. The company stated that available cash and cash equivalents were expected to meet working-capital needs for at least 12 months.
FY2012 investing cash flow was $6.062 million, largely reflecting investment maturities net of purchases; financing cash flow was $(4.553) million, including $5.721 million of share repurchases. Capital expenditures were $1.0 million. The company had $19.4 million remaining under its repurchase authorization. Its stated sensitivity to a 100-basis-point rate increase was an estimated $122,000 decrease in the fair value of cash equivalents and investments.
Quarterly comparison and material changes
In Q4 2012, revenue was $8.860 million, gross profit $8.474 million, operating loss $171,000, and net loss $200,000, or $(0.01) per share. Q4 2011 revenue was $7.690 million, gross profit $7.348 million, operating income $225,000, and net loss $270,000, or $(0.01) per share. Q4 2012 revenue was higher, but operating results were weaker.
Annual revenue growth reflected increases in mobility, medical, automotive, and chip-related licensing, partly offset by lower gaming royalties and product sales. Medical product sales declined, particularly for Virtual IV. In December 2012, Immersion entered a licensing agreement with its Virtual IV partner and said it would stop manufacturing that product, implying significantly lower product sales going forward. The company also repurchased 1,054,538 shares during 2012 for $5.721 million.
Outlook, risks, contingencies, and unusual items
- Management expected royalties to remain the major revenue component in 2013, citing broader product adoption and its Basic Haptics patent-licensing program. It did not provide specific revenue or earnings guidance.
- Management expected significantly lower product sales and cost of revenue after the Virtual IV licensing transition; development-contract revenue was not expected to become a significant share of revenue. It anticipated less than $500,000 of 2013 property and equipment spending and approximately $3.5 million of patent-application cost capitalization.
- Litigation remains a significant uncertainty. Immersion settled with Motorola in November 2012. The ITC investigation against HTC remained pending, with a hearing scheduled for March 2013; HTC also obtained reexaminations of three Immersion patents. Outcomes and potential financial effects were not estimable in the filing.
- Customer concentration is material: one customer accounted for 24% of FY2012 revenue. Licensing receipts also depend on licensees’ product shipments, customer demand, contract interpretation, and patent enforceability.
- Other key risks include competition from internal OEM designs and standard platform haptics, patent challenges and expirations, lengthy automotive and medical product cycles, volatile results, and possible litigation costs. The company reported an accumulated deficit of $111.721 million.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at December 31, 2012. Management nevertheless identified internal controls as a risk area in its general risk disclosures.
Investor verification priorities
- Track renewal and growth of royalty-bearing licenses, especially the Basic Haptics program, and the shipment trends behind reported royalties.
- Review the HTC ITC case and patent reexaminations, and assess any later settlements, rulings, or changes in legal spending.
- Check the revenue and margin effects of ending Virtual IV manufacturing and transitioning to licensing.
- Monitor cash and short-term investments, operating cash burn, repurchases, and the timing and use of deferred revenue.
- Assess the 24% customer concentration and whether major licensees continue using Immersion technology in new products.