IMMERSION CORP 10-Q

Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 , as amended (the “Securities Act”), and Section 21 E of the Securities Exchange Act of 1934 , as amended (the “Exchange Act”). The forward-looking statements involve risks and uncertainties. Forward-looking statements are frequently identified by words such as “anticipates”, “believes”, “expects”, “intends”, “may”, “can”, “will”, “places”, “estimates”, and other similar expressions. However, these words are not the only way we identify forward-looking statements. Examples of forward-looking statements include among other things, any expectations, projections, or other characterizations of future events, or circumstances, and include statements regarding: our strategy and our ability to execute our business plan; our competition and the market in which we operate; our customers and suppliers; our revenue and trends related thereto, and the recognition and components thereof; our costs and expenses, including capital expenditures; our investment of surplus funds and sales of marketable securities seasonality and demand; our investment in research and technology development; changes to general and administrative expenses; our foreign operations and the reinvestment of our earnings related thereto; our investment in and protection of our IP; our employees; capital expenditures and the sufficiency of our capital resources; unrecognized tax benefit and tax liabilities; the impact of changes in interest rates and foreign exchange rates, as well as our plans with respect to foreign currency hedging in general; changes in laws and regulations, including with respect to taxes; our plans and estimates related to and the impact of current and future litigation and arbitration and our dividend, stock repurchase and equity distribution programs. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Actual results could differ materially from those projected in the forward-looking statements, therefore we caution you not to place undue reliance on these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the risk factors contained under Part I, Item 1 A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 , filed with the SEC on March 11, 2024. Any forward-looking statements made by us in this report speak only as of the date of this report, and we do not intend to update these forward-looking statements after the filing of this report, unless required to do so by applicable law or regulation. 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 We are a premier licensing company focused on the invention, acceleration, and scaling, through licensing, of innovative haptic technologies that allow people to use their sense of touch to engage with products and experience the digital world around them. We are one of the 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 virtual and augmented reality, and wearables, as well as residential, commercial, and industrial Internet of Things. In recent years, we have seen a trend towards broad market adoption of haptic technology. 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. 25 Table of Contents We have adopted a business model under which we offer licenses to our patented technology to our customers and offer our customers enabling software, related tools and technical assistance related to integrate our patented technology into our customers’ products or enhance the functionality of our patented technology. 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 800 issu ed or pending patents worldwide as of March 31, 2024 . Our patents cover a wide range of digital technologies and 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. Our portfolio includes numerous patents and patent applications that we believe may become essential to emerging standards in development by Standards Development Organizations (“SDOs”) including media standards in development by ISO/IEC Moving Picture Expert Group (MPEG) and software and system standards in development at IEEE-SA. We were incorporated in 1993 in California and reincorporated in Delaware in 1999 . Results of Operations Overview Total revenues for the three months ended March 31, 2024 was $ 43.8 million, an increase of $ 36.8 million, or 520 %, compared to the same period in 2023 . Total operating expenses were $ 27.2 million the three months ended March 31, 2024 , an increase of $ 23.4 million, or 614 %, compared to the same period in 2023 . Net income was $ 18.7 million in the three months ended March 31, 2024 compared to a net income of $ 8.3 million in the same period in 2023 . The following table sets forth our Condensed Consolidated Statements of Income and Comprehensive Income data as a percentage of total revenues: Three Months Ended March 31, 2024 2023 Revenues: Fixed fee license revenue 88 % 17 % Per-unit royalty revenue 12 82 Total royalty and license revenue 100 99 Development, services, and other 0 1 Total revenues 100 100 Operating expenses: Sales and marketing 3 1 Research and development 0 2 General and administrative 59 51 Total operating expenses 62 54 Operating income 38 46 Interest and other income (loss), net 18 92 Income before provision for income taxes 56 138 Provision for income taxes ( 14 ) ( 21 ) Net income 43 % 117 % 26 Table of Contents Revenues Our revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements. 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. Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 A revenue summary for the three months ended March 31, 2024 and 2023 is as follows (in thousands, except for percentages): Three Months Ended March 31, 2024 2023 $ Change % Change Revenues: Fixed fee license revenue $ 38,728 $ 1,214 $ 37,514 3090 % Per-unit royalty revenue 5,119 5,795 ( 676 ) ( 12 )% Total royalty and license revenue 43,847 7,009 36,838 526 % Development, services, and other revenue — 65 ( 65 ) ( 100 )% Total revenues $ 43,847 $ 7,074 $ 36,773 520 % Royalty and license revenue Fixed fee license revenue increased by $ 37.5 million in the first quarter of 2024 compared to the same period in 2023 primarily due to an increase in gaming license revenue we recognized in the first quarter of 2024 following the License and Settlement Agreement we entered into with Meta Platforms, Inc., (“Meta”) in February 2024. Per-unit royalty revenue decreased by $ 0.7 million, or 12 %, in the first quarter of 2024 compared to the same period in 2023 , primarily due to a $1.1 million decrease in royalties from gaming licensees partially offset by a $ 0.5 million increase in royalties from automotive 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 North America, Asia and Europe for the three months ended March 31, 2024 represented 88%, 11%, and 1%, respectively, of our total revenue as compared to 12%, 84%, and 4%, respectively, for the three months ended March 31, 2023 . 27 Table of Contents Operating Expenses A summary of operating expenses for the three months ended March 31, 2024 , and 2023 is as follows (in thousands, except for percentages): Three Months Ended March 31, 2024 2023 $ Change % Change Sales and marketing $ 1,338 96 $ 1,242 1294 % Research and development 42 130 ( 88 ) ( 68 )% General and administrative 25,853 3,589 22,264 620 % 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 $ 1.2 million in the three months ended March 31, 2024 compared to the same period in 2023 primarily attributable to a $1.3 million increase in compensation, benefits and other personnel-related costs due to an increase in variable compensation and stock-based compensation. Research and Development - Our research and development expenses primarily consisted of employee compensation and benefits, including stock-based compensation and office expense. Research and development expenses decreased $ 0.1 million, or 68 %, in the three months ended March 31, 2024 , compared to the same period in 2023 . This decrease was primarily attributable to decreases in compensation, benefits and other personnel-related costs due to a decrease in severance costs. General and Administrative - Our general and administrative expenses primarily consisted of employee compensation and benefits including stock-based compensation; legal and other professional fees; external legal costs for patents; office expense; travel; and allocated facilities costs. General and administrative expenses increased $ 22.3 million in the three months ended March 31, 2024 as compared to the same period in 2023 primarily due to a $20.8 million increase in legal costs and a $1.7 million increase in compensation, benefits and other personnel related costs. The increase in compensation, benefits and other personnel related costs in the three months ended March 31, 2024 compared to the same period in 2023 were largely driven by increases in variable compensation partially offset by a decrease in stock-based compensation. The increase in legal costs in the three months ended March 31, 2024 compared to the same period in 2023 was due to an increase from legal costs related to the Meta litigation. We are engaged in, and may be required to engage in further, litigation to protect our IP, which may cause our general and administrative expenses to substantially increase reflecting such litigation costs. 28 Table of Contents Interest and Other Income (Loss) Interest and Other Income (loss) - Interest and other income consists primarily of interest and dividend income from cash and cash equivalents and marketable debt and equity securities, short-term investments realized and unrealized gains (losses) on our marketable equity securities and derivative instruments and realized gains (losses) on our marketable debt securities. Three Months Ended March 31, 2024 2023 $ Change % Change Interest and other income (loss), net $ 8,288 $ 6,415 $ 1,873 29 Other income (expense), net ( 182 ) 111 ( 293 ) ( 264 ) % Interest and other income (loss), net $ 8,106 $ 6,526 $ 1,580 24 Interest and other income (loss) increased $ 1.9 million during the three months ended March 31, 2024 compared to the same period in 2023 , primarily driven by a $0.9 million increase in net gains from investments in marketable equity securities and derivative instruments and a $ 0.9 million increase in interest income. Other income (expense), net decreased $ 0.3 million during the three months ended March 31, 2024 compared to the same period in 2023 , primarily driven by a $ 0.2 million increase in net foreign currency translation losses. Income Taxes A summary of provision for income taxes and effective tax rates for the three months ended March 31, 2024 and 2023 is as follows (in thousands): Three Months Ended March 31, 2024 2023 $ Change % Change Income before provision for income taxes $ 24,720 $ 9,785 Provision for income taxes 6,065 1,507 4,558 302 % Effective tax rate 24.5 % 15.4 % Provision for income taxes for the three months ended March 31, 2024 resulted primarily from estimated domestic and foreign taxes included in the calculation of the effective tax rate. Provision for income taxes for the three months ended March 31, 2023 resulted primarily from estimated 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 March 31, 2024 , 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. 29 Table of Contents Liquidity and Capital Resources Our cash equivalents, investments - current and investments - noncurrent consist primarily of money-market funds, investments in marketable equity and debt securities (including mutual funds), investments in U.S. treasury securities 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 Condensed 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 Condensed Consolidated Statement of Income and Comprehensive Income. Unrealized gains and losses on marketable debt securities reported as a component of Accumulated other comprehensive income on our Condensed Consolidated Balance Sheets . Certificates of deposit are report as Investment - current or Investment -noncurrent based on their remaining maturity days. Interest income from certificates of deposit are reported as Interest and other income (loss), net on the Condensed Consolidated Statement of Income and Comprehensive Income. Cash, cash equivalents and investments-current - As of March 31, 2024 , our cash, cash equivalents, and investments- current totaled $ 179.1 million, an increase of $ 18.7 million from $ 160.4 million on December 31, 2023 . A summary of select cash flow information for the three months ended March 31, 2024 and 2023 are as follows (in thousands): Three Months Ended March 31, 2024 2023 Net cash provided by operating activities $ 29,897 $ 3,523 Net cash provided by (used in) investing activities $ 6,876 $ ( 19,708 ) Net cash used in financing activities $ ( 1,747 ) $ ( 5,151 ) Cash provided by (used in) 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 $ 29.9 million in the three months ended March 31, 2024 , a $ 26.4 million increase compared to the same period in 2023 . This cash increase was primarily attributable to a $10.0 million increase in net income and $16.9 million increase from changes in net operating assets partially offset by a $0 .9 million decrease in non-cash items. The increase in cash from changes in net operating assets primarily consisted of $8.5 million increase in deferred revenue resulted from the Nintendo license agreement renewal and $6.1 million increase in income taxes payable. 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 property and equipment. Net cash provided in investing activities during the three months ended March 31, 2024 was $ 6.9 million primarily consisting of $48.7 million in proceeds from selling marketable securities and derivatives partially offset by a $40.9 million in cash used to purchase marketable securities and in the settlement of derivative instruments. Net cash used in investing activities during the three months ended March 31, 2023 was $19.7 million primarily consisting of $56.3 million in cash used to purchase marketable securities and in the settlement of derivative instrument partially offset by $36.6 million in proceeds from selling marketable securities and derivatives. 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. 30 Table of Contents Net cash used in financing activities during the three months March 31, 2024 was $ 1.7 million primarily consisting of $1.5 million in dividend payments, and $0.3 million in shares withheld to cover payroll taxes. Net cash used in financing activities during the three months ended March 31, 2023 was $ 5.2 million primarily consisting of $4.4 million cash paid for stock repurchases and $0.8 million in shares withheld to cover payroll taxes. Total cash, cash equivalents, and short-term investments were $ 179.1 million as of March 31, 2024 of which approximately 35%, or $63.4 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. On November 13 , 2023 , our Board declared a quarterly dividend in the amount of $ 0.045 per share , will be payable, subject to any prior revocation, on January 25, 2024 to shareholders of record on January 14, 2024. 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. 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 February 28, 2024, our Board declared a quarterly dividend in the amount of $ 0.045 per share , which was paid on April 19 , 2024 to shareholders of record on April 12 , 2024. We may 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 December 29, 2022, our Board of Directors ( the “ Board” ) approved a stock repurchase program of up to $ 50.0 million of our common stock for a period of up to twelve months (the “December 2022 Stock Repurchase Program”), which terminated and superseded the stock repurchase program that had been approved by the Board on February 23, 2022. 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 Securities Exchange Act of 1934 , as amended. 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 us 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 . During 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. We did not repurchase any stock during the three months ended March 31, 2024. As of March 31, 2024, we had $ 41.7 million available for repurchase under the December 2022 Stock Repurchase Program. We did not have any other significant non-cancellable purchase commitments as of March 31, 2024 . 31 Table of Contents We anticipate that capital expenditures for property and equipment for the remainder of 2024 will be less than $ 1.0 million. As of the date of this Quarterly Report on Form 10-Q, we believe we have sufficient capital resources to meet our working capital needs for the next twelve months and beyond. Critical Accounting 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 accounting principles generally accepted in the United States of America (“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, marketable securities and derivative instruments, income taxes and contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the 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. 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, 2023 , filed with the SEC on March 11, 2024, for a complete discussion of our critical accounting policies and estimates. The preparation of financial statements and related disclosures in conformity with U.S. GAAP and our discussion and analysis of our 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 Notes to Condensed Consolidated Financial Statements in Part I, Item 1 herein, which describes the significant accounting policies and methods used in the preparation of our condensed 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. Recent Accounting Pronouncements See Note 1 . Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements.