Item 7. Management’s Discussion and Analysis
Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP and our discussion and analysis of its financial condition and operating results require the management to make judgments, assumptions and estimates that affect the amounts reported. See Note 1 . Significant Accounting Policies of the N otes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Fixed fee license revenue
In certain contracts, we grant a fixed fee license to our existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolves throughout the contract term. For such arrangements, we have two separate performance obligations:
•
Performance Obligation A - Transfer rights to our patent portfolio as it exists when the contract is executed;
•
Performance Obligation B - Transfer rights to our patent portfolio as it evolves over the term of the contract, including access to new patent applications that the licensee can benefit from over the term of the contract.
For fixed fee license agreements that contain both Performance Obligation A and B, we will allocate the transaction price based on the standalone price for each of the two performance obligations. We use a number of factors primarily related to the attributes of our patent portfolio to estimate standalone prices related to Performance Obligation A and B to perform this allocation.
Per-unit Royalty revenue
As we may not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows us to adequately review the reports and include the actual amounts in our quarterly results for such quarter, we accrue the related revenue based on estimates of our licensees’ underlying sales, subject to certain constraints on our ability to estimate such amounts. We develop such estimates based on a combination of available data including, but not limited to, approved customer forecasts, a look back at historical royalty reporting for each of our customers, and industry information available for the licensed products.
As a result of accruing per-unit royalty revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true up revenue to the actual amounts reported by our licensees. The true-ups represent the difference between per-unit royalty based on actual sales reported by our licensees in a quarter-lag, and the estimate of per-unit royalty that was reported in the same quarter the underlying sales occurred.
Income Taxes
We are subject to income taxes in the U.S. and foreign jurisdictions. The evaluation of our uncertain tax positions involves significant judgment in the interpretation and application of GAAP and complex domestic and international tax laws, including the Act and matters related to the allocation of international taxation rights between countries. Although management believes our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our reserves. Reserves are adjusted considering changing facts and circumstances, such as the closing of a tax examination or the refinement of an estimate. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
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As disclosed in Note 5 . Contingencies of the Notes to the Consolidated Financial Statements, we have made a deposit payment to reimburse LGE for withholding taxes and related penalties paid by LGE as a result of an assessment LGE have received from the South Korean tax authorities. This payment is recorded as Long-term deposits on our Consolidated Balance Sheets . We expect to be reimbursed by LGE to the extent we ultimately prevail or prevailed in the appeal in the Korean courts. We regularly assess the likelihood that we will prevail in this case against the South Korean tax authorities and consequently the likelihood that this deposit will be recoverable. In the event that we do not ultimately prevail in our appeal in the Korean courts, the deposit included in Long-term deposits would be recorded as additional income tax expense on our Consolidated Statements of Income and Comprehensive Income , in the period in which we do not ultimately prevail.
Results of Operations
Overview
Total revenues in 2023 were $ 33.9 million, a decrease of $ 4.5 million, or 12 %, compared to 2022 .
Total operating expenses were $ 16.0 million, an increase of $ 2.0 million or 14 % compared to 2022 .
In 2023 , we had net income of $ 34.0 million, an increase of $ 3.3 million, or 11 % compared to 2022 .
The following table sets forth our Consolidated Statements of Income and Comprehensive Income data as a percentage of total revenues:
Year Ended December 31,
2023
2022
Revenues:
Total royalty and license revenue
99
%
99
%
Development, services, and other
1
1
Total revenues
100
100
Costs and expenses:
Sales and marketing
5
3
Research and development
1
3
General and administrative
41
30
Total costs and expenses
47
36
Operating income
53
64
Interest and other income
74
6
Income before benefit from (provision for) income taxes
127
70
Benefit from (provision for) income taxes
( 26
)
10
Net income
100
%
80
%
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Revenues
Our revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenue earned from development, services and other revenue. Royalty and license revenue is composed of per unit royalties earned based on usage or net sales by licensees and fixed payment license fees charged for our IP and software.
A revenue summary for the year ended December 31, 2023 and 2022 are as follows (in thousands, except for percentages):
Years Ended December 31,
2023
2022
$ Change
% Change
Fixed fee license revenue
$
5,283
$
11,953
$
( 6,670
)
( 56 )%
Per-unit royalty revenue
28,498
26,225
2,273
9 %
Total royalty and license revenue
33,781
38,178
( 4,397
)
( 12 )%
Development, services, and other revenue
138
283
( 145
)
( 51 )%
Total revenues
$
33,919
$
38,461
$
( 4,542
)
( 12 )%
Fixed fee license revenue decreased $ 6.7 million, or 56 % in 2023 compared to 2022 , primarily attributable to a $ 6.6 million decrease in mobility revenue, a $ 0.6 million decrease in automotive license revenue partially offset by a $0.5 million increase in gaming license revenue.
Per-unit royalty revenue increased by $ 2.3 million, or 9 %, in 2023 compared to 2022 , primarily caused by a $3.3 million increase in royalties from automotive licensees and a $2.2 million increase in royalties from gaming licensees. These increases were partially offset by a $2.5 million decrease in royalties from mobility licensees and a $0.6 million decrease in royalties from other licensees.
We expect royalty and license revenue to continue to be a major component of our future revenue as our technology is included in products and we succeed in our efforts to monetize our IP. 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 customers’ unit shipments.
Geographically, revenues generated in Asia, Europe and North America for the year ended December 31, 2023 represented 74 %, 17 %, and 9%, respectively, of our total revenue as compared to 62 %, 10 % and 28 %, respectively, for the year ended December 31, 2022
Operating Expenses
A summary of operating expenses for the year ended December 31, 2023 and 2022 are as follows (in thousands, except for percentages):
Years Ended December 31,
2023
2022
$ Change
% Change
Sales and marketing
$
1,751
1,219
$
532
44
%
Research and development
281
1,380
( 1,099
)
( 80 )
%
General and administrative
13,960
11,442
2,518
22
%
Sales and Marketing - Our sales and marketing expenses primarily consisted of employee compensation and benefits, including stock-based compensation, marketing costs and allocated facilities costs.
Sales and marketing expenses increased $ 0.5 million, or 44 %, in 2023 compared to 2022 , primarily attributable to a $ 0.6 million increase in compensation, benefits and other personnel related costs largely due to higher variable compensation and stock-based compensation expenses.
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Research and Development - Our research and development expenses primarily consisted of employee compensation and benefits, including stock-based compensation; outside services and consulting fees; tooling and supplies; and allocated facilities costs.
Research and development expenses decreased $ 1.1 million, or 80 %, in 2023 compared to 2022 , primarily attributable to a $ 0.8 million decrease in compensation, benefits, and other personnel related costs and a $ 0.2 million decrease in office expenses and allocated facilities costs. The decrease in compensation, benefits and other personnel related costs in 2023 compared to 2022 were largely attributable to lower headcount and decreases in stock-based compensation expense.
General and Administrative - Our general and administrative expenses primarily consisted of employee compensation and benefits including stock-based compensation; legal other professional fees; external legal costs for patents; office expense; travel; and allocated facilities costs.
General and administrative expenses increased $ 2.5 million, or 22 %, in 2023 as compared to 2022 primarily due to a $ 2.2 million increase in compensation, benefits and other personnel related costs and $ 0.3 million increase in legal fees. The increase in compensation, benefits, and other personnel related costs in 2023 compared to 2022 were largely driven by increases in variable compensation and severance costs. The increase in legal expenses in 2023 compared to 2022 was largely attributable to an increase in legal consulting costs.
We may be required to engage in litigation to protect our IP, in which case our general and administrative expenses could substantially increase reflecting such litigation costs.
Interest and Other Income (Loss)
A summary of interest and other income, other expense for the year ended December 31, 2023 and 2022 are as follows (in thousands):
Years Ended December 31,
2023
2022
$ Change
% Change
Interest and other income (loss), net
25,008
2,838
$
22,170
781
%
Other income (expense), net
( 20 )
( 293 )
273
( 93 )
%
$
24,988
$
2,545
$
22,443
882
%
Interest and Other Income (loss) - Interest and other income (loss) consists primarily of interest and dividend income from cash and cash equivalents, marketable debt and equity securities, realized and unrealized gains (losses) on our marketable equity securities and derivative instruments and realized gains (losses) on our marketable debt securities.
Interest and other income increased $22.2 million during 2023 compared to 2022 primarily driven by a $ 19.9 million increase in gains from investments in marketable securities and derivative instruments net and a $ 2.3 million increase in interest and dividend income.
Other income (expense), net increased $ 0.3 million in 2023 compared to 2022 , primarily driven by increase in net foreign currency transaction gains.
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Income Taxes
A summary of provision for income taxes and effective tax rates for the year ended December 31, 2023 and 2022 are as follows (in thousands):
Years Ended December 31,
2023
2022
$ Change
% Change
Income before provision for (benefit from) income taxes
$
42,915
$
26,965
Provision for (benefit from) income taxes
8,939
( 3,699 )
12,638
( 342 )
%
Effective tax rate
( 20.8 )
%
13.7
%
Provision for income taxes for the year ended December 31, 2023 , resulted primarily from estimated domestic and foreign taxes included in the calculation of the effective tax rate. Benefit from income taxes for the year ended December 31, 2022, resulted primarily from estimated domestic and foreign taxes included in the calculation of the effective tax rate.
We provided no valuation allowance for federal assets, whose future realization is more likely than not and continue to maintain full valuation allowance for state deferred tax assets in the United States as well as federal tax assets in Canada. The year-over-year change in provision for income taxes resulted primarily from the change in income from continuing operations across various tax jurisdictions.
We continue to maintain full valuation allowance for state and certain foreign deferred tax assets in the United States and Canada 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 December 31, 2023 we had unrecognized tax benefits under ASC 740 Income Taxes of approximately $ 7.5 million, of which $ 4.9 million could be payable in cash. In addition, interest and penalty $ 0.2 million could also be payable in cash in relation to the unrecognized tax benefits. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $ 4.9 million. We account for interest and penalties related to uncertain tax positions as a component of income tax provision. We do not expect to have any significant changes to unrecognized tax benefits during the next twelve months.
Liquidity and Capital Resources
Our cash equivalents, investments - current and investments - noncurrent consist primarily of money-market funds, investment in equity and debt marketable securities (including mutual funds) and certificates of deposit. All marketable securities are stated at market value. Realized gains and losses on marketable equity securities and marketable debt securities are recorded in Other income (expense), net on the Consolidated Statements of Income and Comprehensive Income . Unrealized gains and losses on marketable equity securities (including mutual funds) are reported as Other income (expense), net on our Consolidated Statement of Income and Comprehensive Income. Unrealized gains and losses on marketable debt securities reported as a component of Accumulated other comprehensive income(loss) on our Consolidated Balance Sheets . Certificates of deposit are reported as Investments-current or Investments -noncurrent based on their term when purchased. Interest income from certificates of deposit are reported as Interest and other income (loss), net on the Consolidated Statement of Income and Comprehensive Income.
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Cash, cash equivalents and investments- As of December 31, 2023 our cash, cash equivalents, and investments-current totaled $ 160.4 million, an increase of $10.7 million from $ 149.7 million on December 31, 2022 .
A summary of select cash flow information for the years ended December 31, 2023 and 2022 (in thousands):
Years Ended December 31,
2023
2022
Net cash provided by operating activities
$
20,600
$
40,146
Net cash provided by (used in) investing activities
$
3,398
$
( 29,405
)
Net cash provided by used in financing activities
$
( 16,747
)
$
( 13,411
)
Cash provided by operating activities - Our operating activities primarily consists of net income adjusted for certain non-cash items including depreciation and amortization; stock-based compensation expense, deferred income taxes and the effect of changes in operating assets and liabilities.
Net cash provided by operating activities was $ 20.6 million in the year ended December 31, 2023 a $ 19.5 million decrease compared to the same period in 2022 . This cash decrease was primarily attributable to a $11.2 million decrease from changes in noncash items a $11.7 million decrease from changes in net operating assets and partially offset by a $3.3 million increase in net income.
Cash provided by (used in) investing activities - Our investing activities primarily consist of purchases of marketable securities and other investments and proceeds from disposal of marketable securities and other investments; proceeds from issuance of derivative instruments; payments made to settle derivative instruments and purchases of computer equipment, furniture and leasehold improvements.
Net cash provided by investing activities during the year ended December 31, 2023 was $ 3.4 million primarily consisting of $193.7 million in proceeds from selling marketable securities and derivatives partially offset by $190.3 million used to purchase marketable securities and in the settlement of derivative instruments.
Net cash used in investing activities during the year ended December 31, 2022 was $ 29.4 million primarily consisting of $ 165.4 million of purchases marketable securities and in the settlement of derivative instrument partially offset by $ 136.0 million of proceeds from sale of derivative instruments.
Cash provided by (used in) financing activities — Our financing activities primarily consist of cash proceeds from issuance of common stock, proceeds from stock option exercises and stock purchases under our employee stock purchase plan and cash paid for repurchases of our common stock.
Net cash used by financing activities during the year ended December 31, 2023 was $ 16.7 million primarily consisting of $ 8.3 million stock repurchases, $ 7.4 million in dividend payments and $ 1.2 million in shares withheld to cover payroll taxes.
Net cash provided by financing activities during the year ended December 31, 2022 was $ 13.4 million primarily consisting of cash paid for stock repurchases.
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Total cash, cash equivalents, and investments-current were $ 160.4 million as of December 31, 2023 of which approximately 24 %, or $ 38.2 million, was held by our foreign subsidiaries and subject to repatriation tax effects. Our intent is to permanently reinvest a majority of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.
We intend to continue to invest in, protect, and defend our extensive IP portfolio, which can result in the use of cash in the event of litigation.
On February 23, 2022, our Board approved a stock repurchase program of up to $ 30.0 million of our common stock for a period of up to twelve months (the “February 2022 Stock Repurchase Program”).
In the year ended December 31, 2022, we repurchased 1,637,566 shares of our common stock for $ 8.9 million at an average purchase price of $ 5.46 per share. The February 2022 Stock Repurchase Program was terminated on December 29, 2022.
On December 29, 2022, the Board
approved the December 2022 Stock Repurchase Program of up to $ 50 million of our common stock , which terminated
and superseded the February 2022 Stock Repurchase Program. Any stock
repurchases may be made through open market and privately negotiated
transactions, at such times and in such amounts as management deems
appropriate, including pursuant to one or more
Rule 10 b 5 - 1 trading plans adopted in accordance with Rule 10 b 5 - 1 of the Exchange Act. Additionally, the Board
authorized the use of any derivative or similar instrument to effect stock
repurchase transactions, including without limitation, accelerated share
repurchase contracts, equity forward transactions, equity option transactions,
equity swap transactions, cap transactions, collar transactions, naked put
options, floor transactions or other similar transactions or any combination of
the foregoing transactions. The December 2022 Stock Repurchase Program was
implemented as a method to return value to our stockholders. The timing,
pricing and sizes of any repurchases will depend on a number of factors,
including the market price of our common stock and general market and economic
conditions. The December 2022 Stock Repurchase Program does not obligate
Immersion to repurchase any dollar amount or number of shares, and the program
may be suspended or discontinued at any time. On August 8, 2023, the Board
approved an amendment to extend the expiration date of the December 2022 Stock
Repurchase Program that was set to expire on December 29,
2023 to December 29, 2024.
In the year ended December 31, 2023 we repurchased 1,217,774 shares of our common stock for $8.3 million at an average purchase price of $ 6.77 per share. As of December 31, 2023 we have $ 41.7 million available for future repurchase under the December 2022 Stock Repurchase Program.
On November 14, 2022, the Board declared a quarterly dividend in the amount of $ 0.03 per share, was paid on January 30, 2023 to stockholders of record on January 15, 2023. In addition, on December 29, 2022, our Board declared a special dividend in the amount of $ 0.10 per share, which was paid on January 30, 2023 to stockholders of record on January 15, 2023.
On February 21, 2023, the Board declared a quarterly dividend, in the amount of $ 0.03 per share, which was paid on April 28, 2023 to stockholders of record on April 13, 2023.
On May 10, 2023, the Board declared a third quarterly dividend in the amount of $ 0.03 per share which was paid on July 28, 2023, to shareholders of record on July 13, 2023.
On August 11, 2023, the Board declared a quarterly dividend in the amount of $ 0.03 per share, which was paid on October 27, 2023 to shareholders of record on October 16, 2023.
On November 13, 2023, our Board declared a quarterly dividend in the amount of $ 0.045 per share, which was paid on January 25, 2024 to shareholders of record on January 14, 2024.
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Future dividends will be subject to further review and approval by the Board in accordance with applicable law. The Board reserves the right to adjust or withdraw the quarterly dividend in future periods as it reviews our capital allocation strategy from time-to-time.
In the year ended December 31, 2023, the total dividends paid was $ 7.4 million.
As of December 31, 2023 we had a liability for unrecognized tax benefits totaling $ 7.4 million, of which $ 4.2 million could be payable in cash. In addition, interest and penalty of $ 0.2 million could also be payable in cash in relation to the unrecognized tax benefits.
We did not have any other significant non-cancellable purchase commitments as of December 31, 2023
We anticipate that capital expenditures for property and equipment for 2023 will be less than $ 1.0 million.
As of March 11, 2024 , the date of this Annual Report on Form 10-K, we believe we have sufficient capital resources to meet our working capital needs for the next twelve months and beyond.
Recent Accounting Pronouncements
See Note 1 . Significant Accounting Policies of the Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements.
Item 7 A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
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