What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-07 · 93 added, 45 removed, 152 unchanged (48% of the section changed)

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our revenue and the recognition and components thereof;

our costs and expenses;

including capital expenditures;

our costs and expenses, including capital expenditures;

seasonality and demand;

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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 1,800 issued or pending patents worldwide as of March 31, 2021.

We and our wholly-owned subsidiaries hold more than 1,700 issued or pending patents worldwide as of June 30, 2021.

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.

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Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of May 6, 2021, the date of issuance of this Quarterly Report on Form 10-Q.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of August 16, 2021, the date of issuance of this Quarterly Report on Form 10-Q.

These estimates may change as new events occur and additional information is obtained.

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RESULTS OF OPERATIONS

Total revenue for the three months ended March 31, 2021 was $7.2 million, an increase of $0.9 million, or 14%, compared to $6.3 million for the three months ended March 31, 2020 primarily driven by a $0.9 million or 18%, increased in per-unit royalty revenue.

Net income for the three months ended March 31, 2021 was $2.0 million, an increase of $6.9 million, or 142%, as compared to a net loss of $4.8 million for the three months ended March 31, 2020.

Total revenue for the three months ended June 30, 2021 was $11.0 million, an increase of $5.3 million, or 94%, compared to $5.7 million for the three months ended June 30, 2020 primarily driven by a $4.8 million or 111%, increase in per-unit royalty revenue and a $0.5 million or 41% increase in license revenue.

Total revenue for the six months ended June 30, 2021 was $18.2 million, an increase of $6.2 million, or 52%, compared to $11.9 million for the six months ended June 30, 2020 primarily driven by a $5.7 million or 61%, increase in per-unit royalty revenue and a $0.5 million or 20% increase in license revenue.

Net income for the three months ended June 30, 2021 was $5.3 million, an increase of $6.1 million as compared to a net loss of $0.7 million for the three months ended June 30, 2020.

The increase in net income was mainly attributable to a $5.3 million increase in total revenue and a $1.5 million decrease in total operating expenses.

Net income for the six months ended June 30, 2021 was $7.4 million, an increase of $12.9 million as compared to a net loss of $5.5 million for the six months ended June 30, 2020.

The increase in net income was mainly attributable to a $6.2 million increase in total revenue and a $7.7 million decrease in total operating expenses.

The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of total revenue:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Fixed fee license revenue 17 % 23 % 17 % 22 %

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Royalty and license revenue are 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 three months ended March 31, 2021 and 2020 are as follows (in thousands, except for percentages):

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

A revenue summary for the three months ended June 30, 2021 and 2020 are as follows (in thousands, except for percentages):

Three Months Ended

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Total revenues $ 11,010 $ 5,668 $ 5,342 94%

Royalty and license revenue — Royalty and license revenue for the three months ended March 31, 2021 increased $0.9 million, or 14%, from $6.2 million for the three months ended March 31, 2020 to $7.1 million for the three months ended March 31, 2021.

Per-unit royalty revenue increased by $0.9 million, or 18%, in the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily caused by a $0.7 million increase in royalties from our gaming licensees.

Fixed fee license revenue was relatively flat in the three months ended March 31, 2021 compared to the same period in 2020.

Royalty and license revenue — Royalty and license revenue for the three months ended June 30, 2021 increased $5.3 million, or 95%, from $5.6 million for the three months ended June 30, 2020 to $10.9 million for the three months ended June 30, 2021.

Per-unit royalty revenue increased by $4.8 million, or 111%, in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily attributable to a $2.3 million increase in royalty revenue from our mobility licensees, a $1.7 million increase in royalties from our gaming licensees and a $0.9 million increase in revenue from our automotive licensees.

Fixed fee license revenue increased $0.5 million in the three months ended June 30, 2021 compared to the same period in 2020 primarily due increased license revenue from our 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.

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We also anticipate that our royalty revenue will fluctuate relative to our customers’ unit shipments.

Development, services and other revenue — Development, services, and other revenue was $91,000 for the three months ended March 31, 2021 as compared to the $75,000 the three months ended March 31, 2020.

Geographically, revenues generated in Asia, North America, and Europe for the three months ended March 31, 2021 represented 74%, 19%, and 7%, respectively, of our total revenue as compared to 79%, 17%, and 4%, respectively, for the three months ended March 31, 2020.

Development, services and other revenue — Development, services, and other revenue was $129,000 for the three months ended June 30, 2021 as compared to the $75,000 the three months ended June 30, 2020.

Geographically, revenues generated in Asia, North America, and Europe for the three months ended June 30, 2021 represented 84%, 8%, and 8%, respectively, of our total revenue as compared to 78%, 16%, and 6%, respectively, for the three months ended June 30, 2020.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

A revenue summary for the three months ended June 30, 2021 and 2020 are as follows (in thousands, except for percentages):

Six Months Ended

2021 2020 $ Change % Change

Fixed fee license revenue $ 3,099 $ 2,578 $ 521 20%

Per-unit royalty revenue 14,850 9,197 5,653 61%

Total royalty and license revenue 17,949 11,775 6,174 52%

Development, services, and other revenue 220 150 70 47%

Total revenues $ 18,169 $ 11,925 $ 6,244 52%

Royalty and license revenue — Royalty and license revenue for the six months ended June 30, 2021 increased $6.2 million, or 52%, from $11.8 million for the six months ended June 30, 2020 to $17.9 million for the six months ended June 30, 2021.

Per-unit royalty revenue increased by $5.7 million, or 61%, in the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily attributable to a $2.4 million increase in royalty revenue from our mobility licensees, a $2.4 million increase in royalties from our gaming licensees and a $1.0 million increase in revenue from our automotive licensees.

Fixed fee license revenue increased $0.5 million in the six months ended June 30, 2021 compared to the same period in 2020 primarily due increased license revenue from our 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.

Development, services and other revenue — Development, services, and other revenue was $220,000 for the six months ended June 30, 2021 as compared to the $150,000 the six months ended June 30, 2020.

Geographically, revenues generated in Asia, North America, and Europe for the six months ended June 30, 2021 represented 80%, 12%, and 8%, respectively, of our total revenue as compared to 79%, 16%, and 5%, respectively, for the six months ended June 30, 2020.

OPERATING EXPENSES

The following tables set forth a summary of our operating expenses for the three months ended March 31, 2021 and 2020 (in thousands):

The following tables set forth a summary of our operating expenses for the three and six months ended June 30, 2021 and 2020 (in thousands):

Three Months Ended

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% of total revenue 24 % 72 %

Six Months Ended

2021 2020 Change % Change

Sales and marketing $ 2,300 $ 2,971 $ (671) (23)%

% of total revenue 13 % 25 %

Research and development $ 2,639 $ 3,012 $ (373) (12)%

% of total revenue 15 % 25 %

General and administrative $ 4,860 $ 11,443 $ (6,583) (58)%

% of total revenue 27 % 96 %

Sales and Marketing - Our sales and marketing expenses primarily consisted of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and allocated facilities costs.

Sales and marketing expenses decreased $0.6 million, or 36%, in the first quarter of 2021 as compared to the first quarter of 2020 primarily attributable to a $0.3 million decrease in depreciation expense, a $0.1 million decrease in facility costs and a $0.1 million decrease in travel costs.

The decrease in depreciation expense in the first quarter of 2021 compared to the same period in 2020 was primarily attributable to the accelerated depreciation in the first quarter of 2020 resulting from the shortening in estimated useful life of the leasehold improvements of the San Jose, California ("SJ Facility") to March 31, 2020 following our decision to exit this facility.

The decrease in facilities expense was largely attributable to the decrease in rent expense following the sublease of the SJ Facility in the second quarter of 2020.

The decrease in travel costs were mainly attributable to reduced business activities as a result of the COVID-19 pandemic.

Sales and marketing expenses decreased $0.1 million, or 5%, in three months ended June 30, 2021 as compared to three months ended June 30, 2020 primarily attributable to a $0.1 million decrease in facilities related costs partially offset by a $0.1 million increase in compensation, benefits and other personnel related costs.

Sales and marketing expenses decreased $0.7 million, or 23%, in the six months ended June 30, 2021 as compared to the same period in 2020 primarily attributable to a $0.3 million decrease in depreciation expense, a $0.2 million decrease in facilities related costs and a $0.3 million decrease in sales and marketing and travel costs partially offset by a $0.2 million increase in compensation, benefits and other personnel related costs.

The decrease in depreciation expense in the first half of 2021 compared to the same period in 2020 was primarily attributable to the accelerated depreciation in the first quarter of 2020 resulting from the shortening in estimated useful life of the leasehold improvements of the San Jose, California ("SJ Facility") to March 31, 2020 following our decision to exit this facility.

The decrease in facilities expenses during the three and six months ended June 30, 2021 compared to the same periods in 2020 was largely attributable to the decrease in rent expense following the sublease of the SJ Facility in the second quarter of 2020.

The increase in compensation, benefits and other personnel related costs in the three and six months ended June 30, 2021 compared to the same periods in 2020 was primarily due to increases in commissions and other variable compensation.

Research and Development — Our research and development expenses are comprised of employee compensation and benefits, outside services and consulting fees, tooling and supplies, and an allocation of facilities costs.

Research and development expenses decreased $0.4 million, or 23%, for the three months ended March 31, 2021 compared to three months ended March 31, 2020.

This decrease was primarily due to a $0.2 million decrease in depreciation expense and $0.1 million decrease in facilities expense primarily attributable to the reasons discussed above.

Research and development expenses was flat for the three months ended June 30, 2021 compared to three months ended June 30, 2020.

Research and development expenses decrease $0.4 million, or 12%, for the six months ended June 30, 2021 compared to the same period in 2020.

This decrease was primarily due to a $0.2 million decrease in consulting and outside services, a $0.2 decrease in depreciation expense and a $0.2 million decrease in facilities related costs partially offset by a $0.3 million increase compensation, benefits and other personnel related costs.

The decrease in consulting and outside services cost in the six months ended June 30, 2021 compared to the same period in 2020 was largely due to a reduction in consultant headcount.

The decrease facilities expenses in the six months ended June 30, 2021 compared to the same period in 2020 was driven by factors discussed above.

The increase in compensation, benefits and other personnel related costs in the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to increases in variable compensation and stock-based compensation expense.

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 primarily consisted of employee compensation and benefits, legal and professional fees, external legal costs for patents, office supplies, travel, and allocated facilities costs.

General and administrative expenses decreased $5.1 million, or 70%, in the three months ended March 31, 2021 as compared to the same period in 2020 primarily due to a $2.0 million decrease in compensation, benefits and other personnel related costs, a $1.3 million decrease in legal expenses, a $0.9 million decrease in professional services and outside services, $0.5 million decrease in depreciation expense and a $0.2 million decrease in facilities costs.

The decrease in compensation, benefits and other personnel related costs was primarily due to reduced headcount, lower salaries, variable compensation driven by the transition of our Accounting, Human Resources, Finance and IT functions from San Jose, California to Montreal, Canada and the impact of the COVID-19 related cost reduction initiatives implemented during 2020.

General and administrative expenses decreased $1.5 million, or 36%, in the three months ended June 30, 2021 as compared to the same period in 2020 primarily due to a $0.5 million decrease in legal expenses, a $0.3 million decrease in compensation, benefits and other personnel related costs, a $0.3 million decrease in professional services and outside services and a $0.2 million decrease in facilities costs.

General and administrative expenses decreased $6.6 million, or 58%, in the six months ended June 30, 2021 as compared to the same period in 2020 primarily due to a $2.3 million decrease in compensation, benefits and other personnel related costs, a $1.8 million decrease in legal expenses, a $1.2 million decrease in professional services and outside services, a $0.5 million decrease in depreciation expense and a $0.4 million decrease in facilities costs.

The decrease in legal expense was primarily attributable to reduced activities, as well as a decrease in patent maintenance and prosecution costs.

The decrease in consulting and professional services fees was due to decreases in accounting and audit fees and consulting and other professional fees in the first quarter of 2021 compared to the same period in 2020.

The decrease in depreciation expense and facilities costs were primarily attributable to the reasons discussed above.

The decrease in consulting and professional services fees was due to decreases in accounting and audit fees and consulting and other professional fees in the three and six months ended June 30, 2021 compared to the same periods in 2020.

The decrease in depreciation expense and facilities costs were primarily driven by the factors discussed above.

We expect our general and administrative expenses to remain stable in the near future as we achieve targeted reductions in consulting and professional services, and other costs.

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Interest and Other Income (Loss), Net — Interest and other income (loss), net consists of interest income from cash equivalents and short-term investments, translation exchange rate gains (losses) and other income.

Interest and other income (loss), net decreased $0.1 million during the three months ended March 31, 2021 compared to the same period in 2020 primarily driven by a $0.2 million decrease in investment earnings on cash and cash equivalents partially offset by a $0.2 million decrease in foreign currency exchange losses.

The decrease in investment earnings was primarily due to lower interest rates during the three months ended March 31, 2021 compared to the same periods in 2020.

The decrease in the foreign exchange losses was primarily driven by the fluctuation in South Korean Won exchanges rates against the U.S.

Interest and other income (loss), net decreased $0.3 million during the three months ended June 30, 2021 compared to the same period in 2020 primarily driven by a $0.2 million decrease in other income and a $0.1 million increase in foreign currency exchange gains.

Interest and other income (loss), net decreased $0.4 million during the six months ended June 30, 2021 compared to the same period in 2020 primarily driven by a $0.3 million decrease in investment earnings on cash and cash equivalents and a $0.3 million decrease other income and partially offset by a $0.1 million increase in foreign currency exchange gains.

The decrease in investment earnings was primarily due to lower interest rates during the six months ended June 30, 2021 compared to the same period in 2020.

The foreign exchange gains were primarily driven by the fluctuation in South Korean Won exchanges rates against the U.S.

PROVISION FOR INCOME TAXES

The following table sets forth a summary of our provision for income taxes for the three months ended March 31, 2021 and 2020 (in thousands except for percentages):

The following table sets forth a summary of our provision for income taxes for the three and six months ended June 30, 2021 and 2020 (in thousands except for percentages):

Three Months Ended

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Effective tax rate 8.7 % (6.1) %

Provision for income tax for the three months ended March 31, 2021 and 2020 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate.

Six Months Ended

2021 2020 Change % Change

Loss before benefit from (provision for) income taxes 8,024 (5,447)

Provision for income taxes 647 93 554 596%

Effective tax rates 8.1 % (1.7) %

Provision for income tax for the three and six months ended June 30, 2021 and 2020 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate.

We continue to carry a full valuation allowance on our U.S.

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We also maintain liabilities for uncertain tax positions.

As of March 31, 2021, we had unrecognized tax benefits under ASC 740 of approximately $4.5 million and applicable interest of $0.

As of June 30, 2021, we had unrecognized tax benefits under ASC 740 of approximately $4.5 million and applicable interest of $0.

The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $0.

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The securities are stated at market value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

On March 31, 2021, our cash and cash equivalents totaled $102.6 million, an increase of $43.1 million from $59.5 million on December 31, 2020.

Three Months Ended

On June 30, 2021, our cash and cash equivalents totaled $107.3 million, an increase of $47.8 million from $59.5 million on December 31, 2020.

Six Months Ended

2021 2020 Change % Change

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stock-based compensation expense and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $4.4 million during the three months ended March 31, 2021, a $5.7 million increase compared the same period in 2020.

This increase in net cash provided by operating activities was primarily attributable to a $6.9 million increase in net income which was partially offset by a $1.3 million decrease in noncash items.

Net cash provided by operating activities was $9.1 million during the six months ended June 30, 2021, a $13.8 million increase compared the same period in 2020.

This increase in net cash provided by operating activities was primarily attributable to a $12.9 million increase in net income and $2.4 million increase in cash provided by changes in net operating assets partially offset by a $1.5 million decrease in noncash items.

Investing Activities

Our investing activities primarily consist of purchases of and proceeds from maturities of short-term investments and purchases of computer equipment, furniture and leasehold improvements related to facilities expansion.

Net cash used in investing activities during the three months ended March 31, 2021 was $0.1 million consisting purchases of property and equipment.

Net cash provided by investing activities during the three months ended March 31, 2020 was $3.0 million primarily consisting of $3.0 million proceeds from maturities of short-term investments.

Net cash used in investing activities during the six months ended June 30, 2021 was $0.1 million consisting of purchases of property and equipment.

Net cash provided by investing activities during the six months ended June 30, 2020 was $3.0 million primarily consisting of $3.0 million proceeds from maturities of short-term investments.

Financing Activities

Our financing activities primarily consist of cash 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 provided by financing activities during the three months ended March 31, 2021 was $38.7 million primarily consisting of $35.9 million net proceeds from common stock issuances and $2.7 million proceeds from stock option exercises.

Net cash used in financing activities during the three months ended March 31, 2020 was $11.9 million, and primarily consisted of $12.0 million in cash paid for stock repurchases.

Our total cash and cash equivalents were $102.6 million as of March 31, 2021, of which approximately 11% ($11.0 million) was held by our foreign subsidiaries and subject to repatriation tax effects.

Net cash provided by financing activities during the six months ended June 30, 2021 was $38.8 million primarily consisting of $35.8 million net proceeds from common stock issuances and $2.9 million proceeds from stock option exercises.

Net cash used in financing activities during the six months ended June 30, 2020 was $30.6 million, and primarily consisted of $30.6 million in cash paid for stock repurchases.

Our total cash and cash equivalents were $107.3 million as of June 30, 2021, of which approximately 13%, or $14.0 million was held by our foreign subsidiaries and subject to repatriation tax effects.

Our intent is to permanently reinvest all 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 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 February 11, 2021, we entered into the Distribution Agreement with an investment banking firm to issue and sell shares of our common stock having an aggregate offering price of up to $50 million.

In accordance with the terms of the Distribution Agreement, we are obligated to pay 2.25% commission on the gross sales proceeds from common stock sold, and to provide customary indemnification rights and the reimbursement of legal fees and disbursements.

The Distribution Agreement may be terminated by either party upon prior written notice to the other party, or at any time under certain circumstances.

We are not obligated to sell any shares under the Distribution Agreement.

During the first quarter of 2021, we sold 3.3 million shares of our common stock pursuant to the Distribution Agreement and we received net proceeds of approximately $35.9 million from the offering net of $1.2 million of commissions and other offering costs.

We terminated the Distribution Agreement on March 5, 2021.

On February 11, 2021, we entered into an equity distribution agreement (the "February 2021 Distribution Agreement") with an investment banking firm to issue and sell shares of our common stock having an aggregated offering price of up to $50 million.

Under the terms of the February 2021 Distribution Agreement, we are obligated to pay 2.25% commission on the gross sales proceeds from common stock sold and customary indemnification rights and the reimbursement of legal fees and disbursements.

During the first quarter of 2021, we sold 3.3 million shares of our common stock pursuant to the February 2021 Distribution Agreement and we received net proceeds of approximately $35.9 million from the offering net of $1.2 million of commissions and other offering costs.

We terminated the February 2021 Distribution Agreement on March 5, 2021.

During the first quarter of 2020, we repurchased approximately 2.0 million shares of our common stock for approximately $12.0 million at an average cost of $5.95 per share.

On July 6, 2021, we entered into an equity distribution agreement (the "July 2021 Distribution Agreement:") with an investment banking firm to issue and sell shares of our common stock having an aggregated offering price of up to $60 million.

Under the July 2021 Distribution Agreement, we will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitations on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made.

Subject to the terms and conditions of the July 2021 Distribution Agreement, the investment banker may sell the shares by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, including sales made through the Nasdaq Global Select Market or on any other existing trading market for the common stock.

We are obligated to pay 2.25% commission on the gross sales proceeds from common stock sold and customary indemnification rights and the reimbursement of legal fees and disbursements.

The July 2021 Distribution Agreement may be terminated by either party upon prior written notice to the other party, or at any time under certain circumstances, including but not limited to the occurrence of a material adverse change in Immersion.

We are not obligated to sell any shares under the July 2021 Distribution Agreement .

As of August 12, 2021, we sold 1.9 million shares of our common stock and we received net proceeds of approximately

$14.5 million from the offering after deducting commissions and other estimated offering expense.

We anticipate that capital expenditures for property and equipment for the year ending December 31, 2021 will be less than $1 million.

While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic and capital market conditions for the first half of 2021 and beyond, as of May 6, 2021, 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.

While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic and capital market conditions for the first half of 2021 and beyond, as of August 16, 2021, 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.

Cash from operations could also be affected by various risks and uncertainties, including but not limited to the risks detailed in Part II, Item 1A Risk Factors.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis