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Aug. 14, 2019, 12:54 p.m. EDT

10-Q: IMMERSION CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as "anticipates," "believes," "expects," "intends," "may," "will," "places," and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements, which refer to expectations, projections, or other characterizations of future events, or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth below in Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors, those described elsewhere in this report, and those described in our other reports filed with the SEC. The following Management's Discussion and Analysis of Financial Conditions and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

OVERVIEW

The Company believes we are a premier licensing company focused on the creation, design, development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully as they engage with products and experience the digital world around them. We believe we are a leading experts in haptics and our focus on innovation allows us to deliver world-class intellectual property ("IP") and technology that enables the creation of products that delight end users. Our technologies are designed to facilitate the creation of high-quality haptic experiences, enable their widespread distribution, and ensure that their playback is optimized. Our primary business is currently in the mobility, gaming, and automotive markets, but we believe our technology is broadly applicable and see opportunities in evolving new markets, including entertainment, social content, virtual and augmented reality, wearables, as well as residential, commercial, and industrial Internet of Things ("IoT"). In recent years, we have seen a trend towards broad market adoption of haptic technology, and we estimate our technology is now in more than 3 billion devices worldwide. As other companies follow our leadership in recognizing how important tactile feedback can be in people's digital lives, we expect the opportunity to license our IP and technologies will continue to expand.

We have adopted a business model under which we provide advanced tactile software, related tools and technical assistance designed to help integrate our patented technology into our customers' products or enhance the functionality of our patented technology, and offer licenses to our patented technology to our customers. Our licenses enable our customers to deploy haptically-enabled devices, content and other offerings, which they typically sell under their own brand names. We and our wholly owned subsidiaries hold more than 3,800 issued or pending patents worldwide as of June 30, 2019. Our patents cover a wide range of digital technologies and include many of the ways in which touch-related technology can be incorporated into and between hardware products and components, systems software, application software, and digital content. We believe that our IP is relevant to many of the most important and cutting-edge ways in which haptic technology is and can be deployed, including in connection with mobile interfaces and user interactions, in association with pressure and other sensing technologies, as part of video and interactive content offerings, as related to virtual and augmented reality experiences, and in connection with advanced actuation technologies and techniques.

We were incorporated in 1993 in California and reincorporated in Delaware in 1999.

CRITICAL ACCOUNTING POLICES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, stock-based compensation, leases, short-term investments, patents and intangible assets, income taxes, contingencies, and litigation. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the

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results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

Our critical accounting policies and estimates are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain. With the exception of our adoption of ASC 842 Leases, there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019, that have had a material impact on our condensed consolidated financial statements and related notes. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, for a complete discussion of our other critical accounting policies and estimates.

RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

OVERVIEW

Total revenues for the three months ended June 30, 2019 was $8.7 million, an increase of $2.6 million, or 42%, compared to $6.1 million for the three months ended June 30, 2018 primarily driven by a $2.4 million increase in fixed fee license revenue and a $0.3 million, or 7%, increase in per-unit royalty revenue. Total revenues for the six months ended June 30, 2019 was $13.9 million, a decrease of $77.7 million, or 85%, compared to $91.6 million for the six months ended June 30, 2018. The decrease was primarily driven by the $71.6 million decrease in fixed fee license revenue and the $6.0 million decrease in per-unit royalty revenue.

Net loss for the three months ended June 30, 2019 was $8.6 million, an increase of $0.9 million, or 11%, as compared to a net loss of $7.8 million for the three months ended June 30, 2018. This increase was mainly attributable to a $3.5 million increase in costs and expenses partially offset by a $2.6 million increase in total revenues. Net loss for the six months ended June 30, 2019 was $19.6 million as compared to a net income of $62.1 million for the six months ended June 30, 2018. The increase in net loss was mainly attributable to a $77.7 million decrease in total revenues and a $4.8 million increase in costs and expenses.







        REVENUES
        The following table sets forth a summary of our revenues for the three months
        ended June 30, 2019 and 2018 (in thousands except for percentages):
                                              Three Months Ended
                                                   June 30,
                                                2019           2018      Change      % Change
        Revenues:
        Fixed fee license revenue         $    4,254         $ 1,881    $ 2,373       126  %
        Per-unit royalty revenue               4,414           4,111        303         7  %
        Total royalty and license revenue      8,668           5,992      2,676        45  %
        Development, services, and other          75             152        (77 )     (51 )%
        Total revenues                    $    8,743         $ 6,144    $ 2,599        42  %
                                             Six Months Ended
                                                 June 30,
                                             2019        2018        Change       % Change
        Revenues:
        Fixed fee license revenue         $   5,994    $ 77,637    $ (71,643 )     (92 )%
        Per-unit royalty revenue              7,721      13,690       (5,969 )     (44 )%
        Total royalty and license revenue $  13,715      91,327      (77,612 )     (85 )%
        Development, services, and other        150         233          (83 )     (36 )%
        Total revenues                    $  13,865    $ 91,560    $ (77,695 )     (85 )%
        


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Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

Royalty and license revenue - Royalty and license revenue is comprised of per unit royalties earned based on usage or net sales by licensees and fixed payment license fees charged for our IP and software. Total royalty and license revenue for three months ended June 30, 2019 increased $2.7 million, or 45%, from $6.0 million for the three months ended June 30, 2018 to $8.7 million for the three months ended June 30, 2019.

Per-unit royalty revenue increased by $0.3 million, or 7%, from $4.1 million for the three months ended June 30, 2018 to $4.4 million for the three months ended June 30, 2019 primarily caused by a $1.0 million increase in royalties obtained from our mobility licenses ("mobility royalties") partially offset by a $0.5 million decrease in royalties obtained from our gaming licenses ("gaming royalties"), and a $0.2 million decrease in royalties obtained from our automotive licenses ("automotive royalties") and royalties obtained from our medical licenses ("medical royalties"). The $1.0 million increase in mobility royalties was due mainly to per-unit royalty agreements entered into during the three months ended June 30, 2019 and partially offset by the impact of lower shipments estimated for other mobility licensees. The $0.5 million decrease in gaming royalties and $0.1 million decrease in automotive and medical royalties was caused by lower shipment volumes estimated for our gaming, automotive and medical licensees.

Fixed fee license revenue increased $2.4 million, or 126%, from $1.9 million for the three months ended June 30, 2018 to $4.3 million for the three months ended June 30, 2019. This increase was primarily related a $2.0 million increase in gaming license revenue and a $0.9 million increase in mobility license revenue. These increases in license revenue were partially offset by a $0.5 million decrease in automotive license revenue.

We expect royalty and license revenue to continue to be the major components of our future revenue. Under Revenue Recognition Accounting standards section ASC 606, our fixed fee license revenue could fluctuate depending upon the timing of execution of new fixed license fee arrangements. We also anticipate that our royalty revenue will fluctuate relative to our customer's unit shipments. We historically experienced seasonally higher royalty revenue from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter compared to other calendar quarters. Due to the elimination of the one-quarter lag in reporting royalty income upon adoption of ASC 606, we now expect to experience this seasonal impact in the fourth calendar quarter. We anticipate a continued reduction in royalty and license revenue in the future from our medical customers as a percentage of our consolidated royalty and license revenue, as this line of business is a less significant portion of our market focus

Development, services and other revenue - Development, services, and other revenue for the three months ended June 30, 2019 decreased by $77,000, or 51%, from $152,000 for the three months ended June 30, 2018 to $75,000 for the three months ended June 30, 2019.

Geographically, revenues generated in Asia, North America, and Europe for the three months ended June 30, 2019 represented 58%, 37%, and 5%, respectively, of our total revenue as compared to 56%, 27%, and 17%, respectively, for the three months ended June 30, 2018. The increase in revenue attributable to Asia as a percentage of total revenue was primarily driven by increased revenues from mobility customers, partially offset by decreased revenues from automotive customers in Asia. The increase in revenue attributable to North America as a percentage of total revenue was primarily driven by higher revenues from gaming customers partially offset by lower revenue from mobility customers in the region. The decrease in revenue attributable to Europe as a percentage of total revenue was primarily caused by lower revenues from gaming customers in the region.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Royalty and license revenue - Total royalty and license revenue for the six months ended June 30, 2019 decreased by $77.7 million, or 85%, from $91.3 million for the six months ended June 30, 2018 to $13.7 million for the six months ended June 30, 2019.

Per-unit royalty revenue decreased by $6.0 million, or 44%, from $13.7 million for the six months ended June 30, 2018 to $7.7 million for the six months ended June 30, 2019. This decrease in per-unit royalty revenue was primarily caused by a $5.2 million decrease in automotive royalties and a $1.2 million decrease in gaming royalties and was partially offset by a $0.4 million increase in mobility royalties. The decrease in automotive royalties was mainly due to the impact of certain per-unit royalty agreements entered into during the first quarter of 2018 that contained a minimum royalty provision for which we recognized the whole set of minimum royalties as revenue at the inception of such agreements. The decrease in gaming royalties was due to lower shipments experienced by our licensees. The increase in mobility royalties was primarily due to

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revenue from per-unit royalty agreements entered into during the six months ended June 30, 2019 partially offset by the impact of lower shipment volumes reported by other mobility licensees.

Fixed fee license revenue decreased $71.6 million, or 92%, from $77.6 million six months ended June 30, 2018 to $6.0 million for six months ended June 30, 2019. The decrease was primarily related to a certain material fixed fee license agreements entered into with a mobility customer during the first quarter of 2018.

Development, services and other revenue - Development, services, and other revenue for six months ended June 30, 2019 decreased by $83,000, or 36%, from $233,000 for the six months ended June 30, 2018 to $150,000 for the six months ended June 30, 2019.

Geographically, revenues generated in Asia, North America, and Europe for the six months ended June 30, 2019 represented 54%, 38%, and 8%, respectively, of our total revenue as compared to 7%, 84%, and 9%, respectively, for the six months ended June 30, 2018. The increase in revenue from Asia as a percentage of total revenue was primarily driven by increased revenues from mobility customers and partially offset by a decrease in revenues from automotive customers in the region. The decrease in revenue attributable to North America as a percentage of total revenue was primarily caused by lower revenues from mobility customers and partially offset by increased revenue from gaming and automotive customers in the region.







        OPERATING EXPENSES
        The following tables set forth a summary of our operating expenses for the three
        and six months ended June 30, 2019 and 2018 (in thousands):
                                      Three Months Ended
                                           June 30,
                                      2019          2018       Change      % Change
        Sales and marketing        $   1,579     $  1,570     $     9         1  %
        % of total revenue                18 %         26 %
        Research and development   $   1,831     $  2,222     $  (391 )     (18 )%
        % of total revenue                21 %         36 %
        General and administrative $  14,448     $ 10,553     $ 3,895        37  %
        % of total revenue               165 %        172 %
                                      Six Months Ended
                                          June 30,
                                      2019         2018       Change      % Change
        Sales and marketing        $  3,188     $  2,790     $   398        14  %
        % of total revenue               23 %          3 %
        Research and development   $  4,133     $  5,042     $  (909 )     (18 )%
        % of total revenue               30 %          6 %
        General and administrative $ 27,143     $ 21,789     $ 5,354        25  %
        % of total revenue              196 %         24 %
        


Sales and Marketing - Our sales and marketing expenses are primarily comprised of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and allocation of facilities costs. Sales and marketing expenses increased $9,000, or 1%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily attributable to nominal increase in advertising and marketing costs. Sales and marketing expenses increased $0.4 million, or 14%, for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 primarily attributable to a $0.3 million increase in compensation, benefits, and other personnel related costs as a result of higher headcount and an increase in stock-based compensation expense and a $0.2 million increase in advertising and marketing expense in the six months ended June 30, 2019 as compared to the same period in 2018. These expense increases were partially offset by a $0.2 million decrease in outside services costs.

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Research and Development - Our research and development expenses are comprised of employee compensation and benefits, consulting fees, tooling and supplies, and an allocation of facilities costs. Research and development expenses decreased $0.4 million, or 18%, for the three months ended June 30, 2019 compared to three months ended June 30, 2018. This decrease was primarily due to a $0.5 million decrease in compensation, benefits and other personnel related costs driven by reduced headcount and a decrease in stock-based compensation expense in the three months ended June 30, 2019 as compared to the same period in 2018. This decrease was partially offset by a $0.1 million increase in outside services. Research and development expenses decreased $0.9 million, or 18%, for the six months ended June 30, 2019 compared to six months ended June 30, 2018 primarily due to an $0.8 million decrease in compensation, benefits and other personnel related costs attributable to lower salaries and benefits as a result of reduced headcount and the impact of 2018 employee retention programs and a $0.1 million decrease in facilities costs in the six months ended June 30, 2019 compared to the same period in 2018. These expense decreases were partially offset by a $0.1 million increase in outside services costs.

We believe that continued investment in research and development is critical to our future success, and we expect to continue making targeted investments in areas of research and technology development to support future growth in key markets.

General and Administrative - Our general and administrative expenses consist of employee compensation and benefits; legal and professional fees; external legal costs for patents; office supplies; travel; and allocation of facilities costs. General and administrative expenses increased $3.9 million, or 37%, for three months ended June 30, 2019 compared to the three months ended June 30, 2018 due to a $3.6 million increase in legal expenses as we continue to invest in, protect, and for the defense of our extensive IP portfolio and a $0.9 million increase in consulting and professional services fees in the three months ended June 30, 2019 compared to the same period in 2018, These increases were partially offset by a $0.8 million decrease in employee compensation benefits, and other personnel related costs.

General and administrative expenses increased $5.4 million, or 25%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily caused by a $4.8 million increase in legal expenses and a $1.4 million increase in consulting and professional services fees in the six months ended June 30, 2019 as compared to the same period in 2018. These increases were partially offset by a $1.2 million decrease in employee compensation, benefits and other personnel related costs largely attributable to a decrease in stock-based compensation expense.

We expect our general and administrative expenses to decrease in the future as we complete certain outstanding litigation matters and achieve targeted reductions in consulting and professional services.

INTEREST AND OTHER INCOME

Interest and Other Income - Interest and other income consists of interest income from cash equivalents and short-term investments, interest on notes receivable, translation exchange rate gains and other income. Interest and other income was $0.5 million during the three months ended June 30, 2019 compared to $0.4 million for three months ended June 30, 2018 primarily driven by a $0.1 million increase in foreign currency exchange gains in the three months ended June 30, 2019 compared to the same period in 2018. Interest and other income was $1.1 million during the six months ended June 30, 2019 compared to $0.6 million for the six months ended June 30, 2018 due to a $0.4 million increase in investment income earned and $0.2 million increase in foreign currency exchange gains.







        BENEFIT (PROVISION) FOR INCOME TAXES
        The following table sets forth a summary of our benefit (provision) for income
        taxes for the three and six months ended June 30, 2019 and 2018 (in thousands
        except for percentages):
                                                  Three Months Ended
                                                       June 30,
                                                  2019          2018       Change     % Change
        Loss before benefit for income taxes   $  (8,623 )   $ (7,920 )
        Benefit for income taxes                       3          162     $ (159 )     (98 )%
        Effective tax rate                             - %        2.0 %
        


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                                                       Six Months Ended
                                                           June 30,
                                                     2019            2018          Change         % Change
        Income (loss) before benefit
        (provision) for income taxes             $  (19,524 )    $   62,416
        Provision for income taxes                     (112 )          (291 )   $       179          (62 )%
        Effective tax rate                             (0.6 )%          0.5 %
        


The benefit for income tax for the three months ended June 30, 2019 and provision for income tax for the six months ended June 30, 2019 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. For the three and six months ended June 30, 2019, we used a year-to-date approach to calculate the effective tax rate. We continue to carry a full valuation allowance on our federal deferred tax assets. As a result, no benefit for losses generated from our U.S. territory was included in the calculation of the year-to-date effective tax rate, which was the main reason for the difference between the statutory tax rate and actual effective tax rate. The benefit for income tax for the three months ended June 30, 2018 and provision for income tax for the six months ended June 30, 2018 resulted primarily from estimated foreign taxes included in the calculation of the annual effective tax rate.

The year-over-year change in benefit for income taxes resulted primarily from the change in mix of income (loss) from continuing operations across various tax jurisdictions, including the United States.

On December 22, 2017, the Tax Act was passed into law. Among other changes, the Tax Act introduced the Base Erosion and Anti-Abuse Tax (the "BEAT"), which creates a new tax on certain related-party payments. We concluded that we have not met the threshold requirements of the BEAT. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of topics, is expected to be issued. In accordance with ASC 740, we will recognize any effects of the guidance in the period that such guidance is issued.

We continue to maintain a valuation allowance of $24.5 million against certain of our deferred tax assets, including all federal, state, and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset balance due to historical losses, the variability of operating results, and uncertainty regarding near term projected results. In the event that we determine the deferred tax assets are realizable based on an assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made. The valuation allowance does not impact our ability to utilize the underlying net operating loss carryforwards.

We also maintain liabilities for uncertain tax positions. As of June 30, 2019, we had unrecognized tax benefits under ASC 740 of approximately $5.2 million and applicable interest of $22,000. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $95,000.

LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents, and short-term investments consist primarily of money market funds and treasury bills and government agency securities. All of our short-term investments are classified as available-for-sale. The securities are stated at market value, with unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholders' equity.

On June 30, 2019, our cash, cash equivalents, and short-term investments totaled $101.6 million, a decrease of $23.3 million from $124.9 million on December 31, 2018.







                                                                 Six Months Ended
                                                                     June 30,
                                                                 2019         2018
        Net cash provided by (used in) operating activities   $ (23,915 )   $ 81,961
        Net cash provided by (used in) investing activities   $   5,061     $  1,776
        Net cash provided by financing activities             $     480     $  8,078
        


. . .

Aug 14, 2019

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