Immersion Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. The filing was signed February 25, 2022. Immersion is a haptics intellectual-property licensing company serving mobile, gaming and automotive markets.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $35.1 million | $30.5 million | +15% |
| Operating income | $17.8 million | $2.2 million | +$15.6 million |
| Operating margin | 50.7% | 7.3% | +43.4 percentage points |
| Net income | $12.5 million | $5.4 million | +131% |
| Basic / diluted EPS | $0.40 / $0.39 | $0.19 / $0.19 | Higher |
| Operating cash flow | $17.4 million | $0.02 million | Higher |
| Cash, cash equivalents and short-term investments | $137.9 million | $59.5 million | +$78.4 million |
- Revenue was almost entirely royalty and license revenue: $34.7 million, including $28.8 million per-unit royalties and $5.8 million fixed-fee licenses. Development, services and other revenue was $0.4 million.
- Costs and operating expenses declined 39% to $17.3 million. General and administrative expense fell 46% to $9.8 million; sales and marketing fell 35% to $3.2 million; research and development fell 17% to $4.2 million.
- Income before tax was $17.3 million. The company recorded a $4.8 million tax provision, versus a $2.2 million tax benefit in FY2020. The FY2021 effective tax rate was 27.8%.
- Investing cash outflow was $87.7 million, primarily from marketable-security purchases; financing cash inflow was $62.2 million, principally from common-stock issuance. The company raised approximately $59.2 million net through 2021 equity offerings.
- At year-end, total assets were $175.5 million and total liabilities were $34.2 million. The filing does not report outstanding interest-bearing borrowings; liabilities include deferred revenue, leases, derivatives and other obligations.
Material changes and business mix
- Per-unit royalty revenue increased 17% year over year. Gaming royalties rose approximately $3.0 million and automotive royalties rose $1.8 million, partly offset by a $0.4 million decline in mobility royalties.
- Revenue mix shifted: mobile, wearables and consumer electronics represented 60% of revenue, down from 69%; gaming rose to 21% from 15%; automotive rose to 19% from 15%.
- Two customers accounted for 34% and 12% of FY2021 revenue. Asia generated 76% of revenue; Korea accounted for 38% and Japan 29%.
- The company held more than 1,600 issued or pending patents worldwide. It reported 26 full-time-equivalent employees at year-end.
Outlook, risks and unusual items
- Management expects royalty and license revenue to remain the major revenue source and anticipates market mix to remain fairly consistent, while warning that revenue can vary with license timing, customer shipments and seasonality. No quantified revenue or earnings guidance is provided.
- Management expected general and administrative expense to decline in the near term through cost reductions, but warned that IP litigation could substantially increase it. Planned 2022 capital expenditures were expected to be below $1.0 million; management stated it had sufficient capital for working-capital needs for the next 12 months and beyond.
- Key risks include dependence on licensing renewals and a small number of customers; customer product demand and shipment levels; semiconductor and component shortages; patent enforcement and litigation; long automotive development cycles; and the end of further Microsoft royalties under its perpetual, royalty-free license.
- Samsung concentration and Korean withholding-tax exposure remain important. The company recorded $3.3 million of additional tax expense in Q4 2021 related to the Samsung matter, including a $2.2 million impairment of long-term deposits and a $1.1 million accrued liability. On February 24, 2022, Korea’s Supreme Court affirmed the lower court ruling; Immersion expected reimbursement from Samsung for the amount cancelled by the courts. The separate LGE tax appeal remained pending, with a further hearing scheduled for April 2022; the company said it could not estimate any potential liability.
- Immersion initiated arbitration against automotive licensee Marquardt over alleged unpaid royalties and missing royalty reports. Marquardt denied the claims and counterclaimed for approximately $138,000. Mediation was scheduled for March 2022.
- In February 2022, the company repurchased 904,499 shares for $4.3 million and approved a new repurchase program of up to $30 million. These actions followed the 2021 equity issuance, which increased shares outstanding and diluted existing holders.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements; it identified revenue recognition and contingencies as critical audit matters.
Important facts for investors to verify
- Whether royalty growth and the improved operating margin persist after the substantial FY2021 expense reductions, and how much reflects recurring operations versus timing or other items.
- Customer identities and renewal terms behind the 34% and 12% revenue concentrations, plus exposure to Korea and Japan and to the Samsung relationship.
- Final recoverability and timing of the Korean tax deposits, including the unresolved LGE appeal and any reimbursement due from Samsung.
- Outcome and collectability of the Marquardt arbitration claim, including unpaid royalties and the counterclaim.
- Current investment and derivative exposures: year-end marketable securities were $93.7 million including non-current corporate bonds, while $6.3 million of sold options was recorded as a liability.
- Net effect of equity issuance, the February 2022 repurchase and the new repurchase authorization on cash, shares outstanding and future dilution.