IMMERSION CORPORATION 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 withU.S. generally accepted accounting principles ("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. Note 1. Significant Accounting Policies of the Notes to Consolidated Financial Statements in Part II, Item 8 of this 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 theU.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. 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 35
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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.
Legal and Other Contingencies
We are subject to various legal proceedings and claims that arise in the
ordinary course of business, the outcomes of which are inherently uncertain. We
record a liability when it is probable that a loss has been incurred and the
amount is reasonably estimable, the determination of which requires significant
judgment. Resolution of legal matters in a manner inconsistent with management's
expectations could have a material impact on our financial condition and
operating results.
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Table of Contents Results of Operations Overview
Total revenues in 2022 were
Total cost and operating expenses were
In 2022, we had net income of
The following table sets forth our Consolidated Statements of Income and Comprehensive Income data as a percentage of total revenues:
Years Ended
December 31,
2022 2021
Revenues:
Total royalty and license revenue 99 % 99 %
Development, services, and other 1 1
Total revenues 100 100
Costs and expenses:
Cost of revenues - -
Sales and marketing 3 9
Research and development 3 12
General and administrative 30 28
Total costs and expenses 36 49
Operating income 64 51
Interest and other income 7 4
Other income (expense), net (1) (2)
Income before benefit from (provision for) income taxes 70 50
Benefit from (provision for) income taxes 10 (14)
Net income 80 % 36 %
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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 years ended
Years Ended December 31,
2022 2021 $ Change % Change
Fixed fee license revenue $ 11,953 $ 5,843 $ 6,110 105%
Per-unit royalty revenue 26,225 28,846 (2,621) (9)%
Total royalty and license revenue 38,178 34,689 3,489 10%
Development, services, and other revenue 283 400 (117) (29)%
Total revenues $ 38,461 $ 35,089 $ 3,372 10%
Fixed fee license revenue increased
Per-unit royalty revenue decreased by$2.6 million , or 9%, in 2022 compared to 2021, primarily caused by a$3.1 million decrease in royalties from mobility licensees and a$1.8 million decrease in royalties from automotive licensees. These decreases were partially offset by a$1.7 million increase in royalties from other licensees and a$0.7 million increase in royalties from gaming 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
Operating Expenses
A summary of operating expenses for the years ended
Years Ended December 31,
2022 2021 $ Change % Change
Sales and marketing $ 1,215 3,241 $ (2,026) (63) %
Research and development 1,380 4,150 (2,770) (67) %
General and administrative 11,442 9,835 1,607 16 %
Sales and Marketing - Our sales and marketing expenses primarily consisted of
employee compensation and benefits, including stock-based compensation; sales
commissions; advertising; collateral marketing materials; market development
funds; travel; and allocated facilities costs.
Sales and marketing expenses decreased $2.0 million , or 63%, in 2022 compared to
2021, primarily attributable to a $1.7 million decrease in compensation,
benefits and other personnel related costs and a $0.2 million decrease in
advertising and marketing expenses. The decrease in compensation, benefits and
other personnel-related costs were due to lower headcount and decreases in
variable compensation expense.
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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
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$1.6 million , or 16%, in 2022 as compared to 2021 primarily due to a$2.7 million increase in compensation, benefits and other personnel related costs partially offset by a$0.6 million decrease in legal costs and a$0.5 million decrease in consulting and professional services. The increases in compensation, benefits and other personnel related costs in 2022 compared to 2021 were driven by increases in stock-based compensation expense and higher variable compensation. The decrease in legal expense in 2022 compared to 2021 was primarily attributable to reduced activities, as well as a decrease in patent maintenance and prosecution 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 years ended
Years Ended
2022 2021 $ Change % Change
Interest and other income (loss), net 2,838 374 $ 2,464 659 %
Other income (expense), net (293) (859) 566 (66) %
$ 2,545 $ (485) $ 3,030 (625) %
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 $2.5 million during the 2022 compared to
2021 primarily driven by a $4.7 million increase in interest and dividend income
partially offset by a $2.2 million increase in net loss from investments in
marketable securities and derivative instruments.
The increase in interest and dividend income in 2022 compared to 2021 was largely attributable to higher interest and dividend income from investments as well as interest income from a Korean tax litigation settlement.
The increase in net loss from investments in marketable securities and derivative instruments in 2022 compared to 2021 primarily consisted of a$8.4 million increase in net losses on investment in marketable securities partially offset by a$6.2 million increase in net gains on derivative instruments. 39
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Income Taxes
A summary of provision for income taxes and effective tax rates for the year
ended
Years Ended
2022 2021 $ Change % Change
Income before benefit from (provision for)
income taxes $ 26,965 $ 17,290
Benefit from (provision for) income taxes 3,699 (4,806) 8,505 (177) % Effective tax rate 13.7 % (27.8) % Benefit from income taxes for the year endedDecember 31, 2022 , resulted primarily from estimated domestic and foreign taxes included in the calculation of the effective tax rate. Provision for income taxes for the years endedDecember 31, 2021 primarily consisted of estimatedU.S. taxes, adjustments to uncertain tax positions withholding tax reserve, foreign taxes and foreign withholding taxes. We put partial valuation allowance for certain federal assets, whose future realization is not more likely than not and continue to maintain full valuation allowance for state deferred tax assets inthe United States as well as federal tax assets inCanada . As a result, a benefit of$5.7 million generated from ourU.S. territory was included in the calculation of the effective tax rate, which was the main reason for the difference between the statutory tax rate and actual effective tax rate. 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 put partial valuation allowance for certain federal assets, whose future realization is not more likely than not and continue to maintain full valuation allowance for state and certain foreign deferred tax assets inthe United States andCanada 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 ofDecember 31, 2022 , we had unrecognized tax benefits under ASC 740 Income Taxes of approximately$7.1 million , of which$1.4 million could be payable in cash. In addition, interest and penalty$0.1 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$1.4 million . We account for interest and penalties related to uncertain tax positions as a component of income tax provision. We do not expect to have any significant changes to unrecognized tax benefits during the next twelve months.
Liquidity and Capital Resources
Our cash equivalents, investments - current and investments - noncurrent consist
primarily of money-market funds, investment in equity and debt marketable
securities (including mutual funds) and certificates of deposit. All marketable
securities are stated at market value. Realized gains and losses on marketable
equity securities and marketable debt securities are recorded in Other income
(expense), net on the Consolidated Statements of Income and Comprehensive
Income. Unrealized gains and losses on marketable equity securities (including
mutual funds) are reported as Other income (expense), net on our Consolidated
Statement of Income and Comprehensive Income. Unrealized gains and losses on
marketable debt securities reported as a component of Accumulated other
comprehensive income(loss) on our Consolidated Balance Sheets. Certificates of
deposit are reported as Investments-current or Investments -noncurrent based on
their term when purchased. Interest income from certificates of deposit are
reported as Interest and other income (loss), net on the Consolidated Statement
of Income and Comprehensive Income.
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Cash, cash equivalents and investments- As of
A summary of select cash flow information for the years endedDecember 31, 2022 and 2021 (in thousands): Years Ended December 31, 2022 2021 Net cash provided by operating activities$ 40,146 $ 17,449 Net cash used in investing activities$ (29,405) $ (87,684) Net cash provided by (used in) financing activities$ (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$40.1 million in the year endedDecember 31, 2022 , a$22.7 million increase compared to the same period in 2021. This cash increase was primarily attributable to a$18.2 million increase in net income and a$9.4 million increase from changes in net operating assets partially offset by a$5.1 million decrease from changes in non-cash items.
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 used in investing activities during the year endedDecember 31 , 2022,was$29.4 million primarily consisting of$165.4 million in cash used to purchase marketable securities and in the settlement of derivative instrument partially offset by$136.0 million in proceeds from selling marketable securities and derivatives. Net cash used in investing activities during the year endedDecember 31, 2021 was$87.7 million primarily consisting of$123.4 million of purchases marketable securities and in the settlement of derivative instrument partially offset by$36.1 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
Net cash provided by financing activities during the year endedDecember 31, 2021 was$62.2 million primarily consisting of$59.2 million of net proceeds from common stock issuances and$3.0 million cash proceeds from stock option exercises and stock purchases under our employee stock purchase plan. Total cash, cash equivalents, and investments-current were$149.7 million as ofDecember 31, 2022 of which approximately 21%, or$31.7 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.
OnFebruary 23, 2022 , our Board of Directors (the "Board") approved a stock repurchase program of up to$30 million of our common stock for a period of up to twelve months (the "February 2022 Stock Repurchase Program"). OnDecember 29, 2022 , the Board approved a stock repurchase program of up to$50 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 41
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had been approved by our Board of Directors onFebruary 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 10b5-1 trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. 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 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 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.
In the year ended
As of
On
In addition, onDecember 29, 2022 , our Board declared a special dividend in the amount of$0.10 per share, which was paid onJanuary 30, 2023 to stockholders of record onJanuary 15, 2023 .
Further, on
OnDecember 31, 2022 , we had a liability for unrecognized tax benefits totaling$7.1 million , of which$1.4 million could be payable in cash. In addition, interest and penalty of$0.1 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
We anticipate that capital expenditures for property and equipment for 2023 will
be less than
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 in 2022 and beyond, as ofFebruary 22, 2023 , 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.
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