| 2016 Annual Report
To Our Valued Shareholders
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Innovation: (cid:58)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:86)(cid:72)(cid:72)(cid:78)(cid:3)(cid:82)(cid:88)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:79)(cid:82)(cid:85)(cid:72)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:44)(cid:51)(cid:15)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:16)(cid:75)(cid:82)(cid:90)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)
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Adoption:(cid:3)(cid:44)(cid:81)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:86)(cid:88)(cid:86)(cid:87)(cid:68)(cid:76)(cid:81)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:89)(cid:68)(cid:81)(cid:74)(cid:72)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3)
(cid:75)(cid:68)(cid:83)(cid:87)(cid:76)(cid:70)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:72)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:71)(cid:72)(cid:83)(cid:79)(cid:82)(cid:92)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:88)(cid:86)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:80)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:86)(cid:82)(cid:79)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:72)(cid:70)(cid:82)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)
(cid:70)(cid:82)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:72)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:40)(cid:48)(cid:86)(cid:17)
Monetization: (cid:58)(cid:72)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:15)(cid:3)(cid:44)(cid:51)(cid:15)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:16)(cid:75)(cid:82)(cid:90)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:15)(cid:3)(cid:72)(cid:81)(cid:68)(cid:69)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3)(cid:75)(cid:68)(cid:83)(cid:87)(cid:76)(cid:70)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:88)(cid:86)(cid:87)(cid:68)(cid:76)(cid:81)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:86)(cid:87)(cid:85)(cid:72)(cid:68)(cid:80)(cid:17)
Recognition: (cid:44)(cid:81)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:44)(cid:51)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:82)(cid:79)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:88)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:70)(cid:78)(cid:81)(cid:82)(cid:90)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:71)(cid:15)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:80)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:82)(cid:81)(cid:72)(cid:87)(cid:76)(cid:93)(cid:72)(cid:71)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:262)(cid:87)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:16)(cid:80)(cid:68)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:79)(cid:72)(cid:68)(cid:71)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:3)(cid:83)(cid:79)(cid:68)(cid:87)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:72)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:3)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:76)(cid:81)(cid:81)(cid:82)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:73)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:86)(cid:17)
(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:74)(cid:72)(cid:86)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:89)(cid:68)(cid:85)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:79)(cid:72)(cid:81)(cid:74)(cid:87)(cid:75)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:74)(cid:85)(cid:72)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:15)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:76)(cid:81)(cid:81)(cid:82)(cid:89)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:36)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:91)(cid:76)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:72)(cid:72)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:78)(cid:72)(cid:92)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:80)(cid:82)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:92)(cid:70)(cid:79)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:86)(cid:87)(cid:68)(cid:74)(cid:72)(cid:86)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)
(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:80)(cid:82)(cid:81)(cid:72)(cid:87)(cid:76)(cid:93)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:44)(cid:51)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:90)(cid:72)(cid:3)(cid:69)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:17)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x]
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27969
Immersion Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3180138
(IRS Employer Identification No.)
50 Rio Robles
San Jose, California 95134
(Address of principal executive offices, zip code)
(408) 467-1900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Name of Each Exchange on which Registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to
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be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
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chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes [x] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Accelerated filer [x]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2016, the
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last business day of the registrant’s most recently completed second fiscal quarter, was $117,078,997 (based on the closing
sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and
director and each person whom owns 5% or more of the outstanding common stock of the registrant have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes. Number of shares of common stock outstanding at February 22, 2017: 28,984,917.
Portions of the definitive Proxy Statement for the 2017 Annual Meeting are incorporated by reference into Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
IMMERSION CORPORATION
2016 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
PART IV
Item 15.
Signatures
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11
21
21
21
27
28
30
31
41
42
72
72
73
75
75
75
75
75
76
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Forward-looking Statements
In addition to historical information this Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (“the Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). The forward-looking statements involve
risks and uncertainties. Forward-looking statements are frequently identified by words such as “anticipates,”
“believes,” “expects,” “intends,” “may,” “will,” and other similar expressions. However, these words are not the
only way we identify forward-looking statements. In addition, any statements which refer to expectations, projections,
or other characterizations of future events, or circumstances, are forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements as a result of a number of factors, including
those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
“Risk Factors” and those described elsewhere in this report, and those described in our other reports filed with the
Securities and Exchange Commission (“SEC”). We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-
looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures
in this report and in our other reports publicly disclosed or filed w
ith the SEC that attempt to advise you of the risks
and factors that may affect our business.
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Item 1. Business
Overview
PART I
Immersion Corporation (“Immersion”) is a premier licensing company focused on the creation, design,
development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully
as they engage with products and experience the digital world around them. We are the torchbearers of haptics and
our mission is to innovate touch technology that informs, humanizes, and excites while working with customers and
industry partners to bring these tactile experiences to consumers. Our technologies are designed to facilitate the
creation of high-quality haptic experiences, enable their widespread distribution, and ensure that their playback is
optimized for end users. Our primary business is currently in the mobility, gaming, automotive and medical markets,
but we believe our technology is broadly applicable and see opportunities in evolving new markets, including
entertainment, social and advertising content, virtual and augmented reality, and wearables. In recent years, we have
seen a trend towards broad market adoption of haptic technology, and estimate our technology is now in more than 3
billion devices worldwide. As other companies follow our leadership in recognizing how important tactile feedback
can be in people's digital lives, we expect the opportunity to license our intellectual property (“IP”) will continue to
expand.
We have adopted a hybrid business model, under which we provide advanced tactile software, related tools and
technical assistance designed to help integrate our patented technology into our customers’ products or enhance the
functionality of our patented technology, and offer licenses to our patented technology to our customers. Our licenses
enable our customers to deploy haptically-enabled devices, content and other offerings, which they typically sell under
their own brand names. In 2016, we and our wholly-owned subsidiaries increased our issued or pending patents by
300 to more than 2,400 patents worldwide as of December 31, 2016, covering a wide range of digital technologies
and including many of the ways in which touch-related technology can be incorporated into and between hardware
products and components, systems software, application software, and digital content. We believe that our IP is
relevant to many of the most important and cutting-edge ways in which haptic technology is and can be deployed,
including in connection with Basic Haptic mobile interfaces and user interactions, in association with pressure and
other sensing technologies, as part of video and interactive content offerings, related to virtual and augmented reality
experiences, and in connection with advanced actuation technologies and techniques.
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We were incorporated in 1993 in California and reincorporated in Delaware in 1999. We consummated our initial
public offering on November 12, 1999.
Our Business Strategy
Our goal is to continue to be the technology and market leader in haptics and drive the adoption of our touch
technology across markets and applications to improve user experiences in the digital realm. Key aspects of our
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strategy include:
Innovate: Develop and patent our innovative technology to provide haptics in mobile, gaming, automotive,
wearable, virtual and augmented reality, content, and other products and services to transform user experiences with
unique and customizable tactile effects.
Drive Adoption: Communicate the advantages of our patented innovations and technologies to the relevant
customers in target end markets and encourage their adoption through demonstrations and incorporation in the
offerings of world-class companies.
Monetize: License our technology to customers for use in the creation, distribution and playback of high quality
haptic experiences in various products, services and markets.
Expand Markets and Applications: Work closely with component suppliers, chip vendors, systems integrators,
content enablers and other partners to broaden the use of haptics within our current core markets and to expand it into
emerging markets, such as wearables, virtual and augmented reality, and the Internet of Things.
We rely on the skills and talent of our employees to successfully execute our strategy through ongoing innovation,
licensing activities, and collaboration with customers and partners to ensure that high quality tactile experiences are
brought to market. Accordingly, we seek to hire and retain employees with world class haptic expertise, as well as the
executive management and operating personnel required to successfully execute our business strategies. In order to
attract these high caliber employees, we have created an environment and culture that fosters and supports research,
development, and innovation in breakthrough technologies with significant opportunities for broad industry adoption
through licensing. We believe we have created a compelling company for inventive and entrepreneurial technology
professionals who are able to work within our collaborative and supportive corporate environment to innovate and
execute on our opportunities and drive strong growth.
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We drive substantially all of our revenue from the licensing of our software and patents. Parties licensed to our IP
regard that act as an investment-one which is devalued when unlicensed parties use our IP. Litigation against
unlicensed third parties as a strategy is a last step after all other avenues for resolution have been exhausted. If
unlicensed parties continue to ship products that use our technology solutions
or intellectual property without fairly
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remunerating us, litigation is the proper public step to protect our intellectual property and assets, as well as inform
existing licensees that we are protecting their investment. As haptics gains wider acceptance in the market, the
likelihood of unlicensed use of our IP increases. This could result in ongoing dispute resolution and litigation efforts,
as we seek to protect the investment that we and our valid licensees have made in the technology.
Haptics and Its Benefits
While the digital world offers many advanced technologies and capabilities, it often fails to provide us with the
meaningful touch experiences that inform and enrich our real-world interactions. As we experience the physical world
in our everyday lives, we rely on our sense of touch to provide us with reassuring context and confirmation, to bring
us closer to one another through rich communications, and to enjoy entertainment, sports and other activities through
realistic engagement. Without these tactile qualities, our digital experiences can feel flat and ineffective, pale
reflections of the real world.
Immersion haptic technologies breathe life back into digital experiences, restoring the missing elements of
confirmation, realism and rich communication to the digital world and help realize our Vision - “With touch, we make
people’s digital lives more personal, vivid, and meaningful”:
Confirmation: Today’s touchscreens, touch pads, and other touch surfaces can lack the physical feedback that is
provided by mechanical keyboards and switches and that we need to fully understand the context of our interactions.
By providing users with intuitive and unmistakable tactile confirmation as they push virtual buttons and scroll through
lists, haptics can instill confidence, increase input speed, reduce errors and help improve safety. This is especially
important in environments that involve distractions, such as automotive and commercial applications, where audio or
visual confirmation is insufficient.
Realism: Haptics can inject a sense of realism into user experiences by exciting the senses and allowing the user
to become immersed in the action and nuance of the application. For example, in haptically-enhanced videos, mobile
games and simulations that integrate audio-visual content with tactile sensations, users can literally feel guns recoil,
engines revving, and the crack of a baseball bat crushing a home run. As another example, medical students and
doctors can practice performing cardiac procedures by using simulation systems that realistically recreate the forces
that would be encountered in navigating pacing leads through a beating heart.
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Rich Communications: When humans communicate through touch, they are better able to establish emotional
connections and feelings of closeness. In mobile devices and wearables, haptics can enhance voice, chat and video
applications by creating a sense of physical presence, allowing for more personal and engaging communications
between users. Moreover, haptics can offer users a discreet and unobtrusive way of exchanging meaningful
information without disruptive audio or visual feedback.
We believe these features of our haptic technology are broadly applicable to a number of markets and devices. By
we believe we will serve as a strategic
continuing to enhance these features through further research and development,
partner for our customers and partners in helping them develop a more compelling user experience for consumers.
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Our Offerings
We provide software, IP and haptic expertise to our customers through a variety of different offerings, including
software licenses, patent licenses, and combined licenses that cover both software and patents. In most cases, our
software licenses include services, design tools and software development kits (“SDKs”), as well as licenses to our
patents to the extent necessary to implement the licensed software, with the specific rights and restrictions to the
applicable patents described in the license agreements. When we offer patent licenses, we provide the customer with
a defined right to use our patented innovations in its own products by allowing it to use specified aspects of our broad
international patent portfolio, subject to limitations by specific field of use and other restrictions. In certain cases, we
also provide our patent licensees with enablement tools such as reference designs and prototypes, technical and design
services as well as other assistance and support.
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Our agreements are typically structured with fixed, variable or a mix of fixed and variable royalty and/or license
payments over certain defined periods, as well as, in certain cases, fees for support or other services.
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Software Offerings
We generally license our software as part of Immersion TouchSense-branded offerings that are intended to address
the needs of our target markets. Our TouchSense offerings include haptic creation, deployment and playback software,
SDKs, developer and enablement tools and documentation, technical and design services, as well as support.
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TouchSense Lite and TouchSense Premium: Targeted to the mobile device, wearables, and consumer electronics
markets, TouchSense software development kits consist of solutions enabling the design of tactile effects used in
device interfaces and applications, and enhancing the playback of haptic content. Our toolkits enable original
equipment manufacturers (“OEMs”) and their suppliers to easily add customized haptic experiences to their own
branded devices and other products. Our offerings include TouchSense Lite and TouchSense Premium for Mobile and
Wearable OEMs.
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TouchSense Software Development Kits: Targeted to mobile game developers, application developers, platform
providers, and content creators, TouchSense Software Development Kits consist of design tools, integration software
and effect libraries that allow for the design, encoding and playback of tactile effects in mobile content, including
games, ads and video. TouchSense Software Development Kits offer high fidelity tactile effects to augment and
enhance mobile content, while ensuring quality playback within consumer devices. Our offerings include TouchSense
Software Development Kit for Mobile Games and for Mobile Videos.
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TouchSense Ads: Targeted at advertisers, digital marketers and mobile advertising distribution platforms.
TouchSense Ads consists of mobile video advertisements from brand advertisers that have been enabled to playback
with haptic effects on Android mobile devices. Immersion’s haptic technology controls the actuator on the mobile
devices to produce tailored effects that users can feel while viewing the video advertisement. TouchSense Ads can be
played on mobile web sites and in an app using standard VAST/VPAID compatible mobile video players that support
HTML5. The product includes design services for creating haptic waveforms, or tracks, as well as a web-based ad
campaign reporting portal.
TouchSense Force: TouchSense Force is the suite of offerings for the PC/Console gaming/virtual reality markets.
It is targeted at developers, peripheral manufacturers, and platforms. The suite consists of design tools, APIs, reference
designs, and firmware that aim to set the standard for haptics in gaming and virtual reality by providi
ng advanced next
generation haptic solutions that enable consistent haptic experiences on existing vibration based controllers and enable
new tactile gaming experiences.
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Patent Licenses
Through more than twenty years of innovative research, development and business activity, we have built a far-
reaching and deep portfolio of patents covering many of the foundational aspects and commercial applications of
haptic technology. We have implemented formal policies and procedures governing how we create, protect and
maintain our IP assets, and devote substantial resources to ensure that our IP coverage of the haptic landscape is as
comprehensive as possible. Our growing portfolio now includes more than 2,400 worldwide issued or pending patents,
which support our TouchSense offerings, protect our business activities and prospects, and represent an important
independent licensing and revenue channel for us. We believe that our IP is relevant to many of the most important
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, related to virtual and augmented reality experiences, and in connection with advanced actuation
technologies and techniques, to name a few.
Haptic Expertise
We frequently offer our expertise to licensees to help them design and integrate touch effects into their products.
This expertise includes engineering and integration services, design kits for prototyping, authoring tools, and
application programming interfaces (“APIs”).
Engineering and Integration Services: We offer engineering assistance, including technical and design assistance
and integration services that allow our licensees to incorporate our touch-enabling solutions and technologies into
their products at a reasonable cost and within a shortened time frame, allowing them to bring products to market
quickly by using our years of haptic development and solution deployment expertise. We offer product development
solutions including software libraries, design, prototype creation, technology transfer, actuator selection, component
sourcing, SDKs, sample source code, comprehensive documentation, and other engineering services. In addition, we
help ensure a quality end-user experience by offering testing and certification services to a number of licensees and
ecosystem participants such as actuator vendors.
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Design Kits for Prototyping: We offer several design kits for customers to use for technology evaluation, internal
evaluation, usability testing, and focus group testing. The kits include components and documentation that designers,
into existing or sample products and applications.
engineers, and system integrators need for prototyping tactile effects
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Authoring Tools: In addition to TouchSense Haptic Development Kits, we license authoring tools that enable
haptic designers and software developers in other markets, such as console gaming, to quickly design and
incorporate customized touch feedback into their applications. Authoring tools allow designers to create, modify,
experience, and save or restore haptic effects for a haptically-enabled device.
Application Programming Interfaces: Our APIs provide haptic-effect generation capability. This allows designers
and software programmers to focus on adding haptic effects to their applications instead of struggling with the
mechanics of programming real-time algorithms and handling communications between computers and devices. Some
of our haptic APIs are device independent (for example, they work with scroll wheels, rotary knobs, 2D joysticks, and
other devices) to allow flexibility and reusability. Others are crafted to meet the needs of a particular customer or
industry.
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Platform Independent Solutions: Our software driver and API technologies have been designed to be easily ported
to a variety of operating systems including Android, Tizen, Linux, and Windows.
Markets
Mobile Communications, Wearables, and Consumer Electronics: We offer TouchSense Lite and TouchSense
Premium and patent licenses, as well as haptic expertise, to OEMs in the mobile device, wearables, and consumer
electronics markets. In addition, certain of our integrated circuit partners preload their integrated circuits with certain
of our less fully-featured TouchSense software and offer these integrated circuits to OEMs in the mobile device market.
Our licensees currently include some of the top makers of mobile devices in the world, including LG Electronics,
Lenovo, Fujitsu, Gionee, HTC, Huawei, Kyocera, Panasonic, Meizu, Meitu, and Toshiba, as well as integrated circuit
manufacturers such as Texas Instruments.
Mobile Applications: In addition to working with device manufacturers, we provide our TouchSense Software
Development Kits to application developers, and other content ecosystem participants to enable them to easily
incorporate tactile effects into mobile games, advertisements and other content. Our licensees include Bandai Namco,
Gameloft, GSN Games, Perfect World, Rockstar, Rovio Entertainment, TenCent, and Ubisoft.
Mobile Advertising: We work with leading brands, media and creative agencies, mobile ad networks and
publishers to promote and license our technology for the mobile advertising market. Our offering, TouchSense Ads,
includes our TouchSense Software Development Kit as well as a Haptic Ad Service to cater to the market for ads that
are viewed in mobile browsers (HTML5).
For the years ended December 31, 2016, 2015, and 2014, respectively, 57%, 62%, and 60% of our total revenues
were generated from OEMs and integrated circuit customers in the mobile communications market.
Console and PC Gaming: We have licensed our patents directly to Microsoft, Nintendo, and Sony Computer
Entertainment for use in their console gaming products. Additionally, we have licensed our patents to third party
gaming peripheral manufacturers and distributors for use in spinning mass and force feedback devices such as
controllers, steering wheels and joysticks, to be used with PC platforms running on Microsoft Windows and other
operating systems, as well as in connection with video game consoles made by Microsoft, Sony, Nintendo and others.
Our gaming licensees include Bensussen Deutsch & Associates, Guillemot, Logitech, Mad Catz, Microsoft,
Performance Designed Products, Razer, and Sony.
For the years ended December 31, 2016, 2015, and 2014, respectively, 24%, 24%, and 27% of our total
revenues were generated from customers in the PC and console gaming markets.
Automotive: We offer patent licenses and assistance such as reference designs, prototypes and enablement services
to automotive makers and suppliers. Our current licensees include ALPS Electric Co., Continental, Marquardt,
Panasonic Automotive Systems, SMK Corporation, and Tokai Rika.
For the years ended December 31, 2016, 2015, and 2014, respectively, 7%, 7%, and 5% of our total revenues
were from automotive customers.
Medical: We offer patent licenses to the medical market. Our current licensees include CAE Healthcare, Laerdal
Medical A/S, Simbionix, Stryker Medical (formerly MAKO Surgical), and SOFAR.
For the years ended December 31, 2016, 2015, and 2014, respectively, 12%, 7%, and 8% of our total revenues
were from medical customers.
Sales
Our sales are seasonal. Seasonal fluctuations have impacted our overall revenue trends in the past.
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We employ a consolidated direct sales force in the United States, Europe, and Asia to license our software and
patents across our target markets and augment that sales force via partnerships and licensing agreements with
component suppliers and system integrators.
Additional information about significant customers is incorporated herein by reference to Note 16 of our
consolidated financial statements and related financial information in Item 8. Financial Statements and Supplementary
Data.
Competition
Our biggest source of competition derives from decisions made by internal design groups at our OEM and other
ill continue to make choices
customers, as well as potential customers. We expect that these internal design groups w
regarding whether to implement haptics or not, as well as whether to develop their own haptic solutions.
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In the event we have granted a license to our patent portfolio to a customer, its internal design group may design
technology that is less expensive to implement or that enables products with higher performance or additional features.
In some cases, the customer may elect not to include haptics in its products or other offerings due to the higher costs
associated with incorporating haptics.
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The principal competitive factors impacting our business are the strength of the patents underlying our technology,
as well as the technological expertise and design innovation and the use, reliability and cost-effectiveness of our
software solutions. We believe we compete favorably in all these areas.
Our competitive position is also impacted by the competitive positions of our licensees’ products and other
offerings. Our licensees’ markets are highly competitive. We believe that the principal competitive factors in our
licensees’ markets include price, performance, user-centric design, ease-of-use, quality, and timeliness of products, as
well as the licensee’s responsiveness, capacity, technical abilities, established customer relationships, distribution
channels and access to retail shelf space, advertising, promotional programs, and brand recognition. Touch-related
benefits in some of these markets may be viewed simply as enhancements and compete with non-touch-enabled
technologies.
Research and Development
Our success depends on our ability to invent and improve our technologies in a timely manner; to design and
develop software to meet specifications based on research and our understanding of customer needs and expectations;
to offer tools and technology that enable high-quality, end-to-end haptic experiences, from the ti
me of creation to the
time of playback; and to collaborate with our licensees who are integrating our technologies into theirs.
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Engineering: We have assembled a multi-disciplinary team of highly skilled engineers and scientists with the
experience required for development of touch-enabling technology. The team’s experience includes skills related to
mechanical engineering, electrical engineering, embedded systems and firmware, control techniques, software, quality
control, haptic content design, and project and process management. This team continues to generate patents that
strengthen our IP position.
Application Engineering and Technical Support: We may provide application engineering and technical support
during integration of our touch-enabling technology into customer products and other offerings, including content. To
facilitate the validation and adoption of touch-enabling technology, we have developed various design kits. These kits
may include actuators, mounting suggestions, controller boards, software libraries, programming examples, and
documentation. Our application engineers support customer use of these design kits, including through phone and e-
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mail technical support and onsite training. This team continues to generate patents that strengthen our IP position.
Research: We have multi-disciplinary expertise in usability and multimodal user interface design, actuator design,
sensors, integration, material science, real-time simulation algorithms, control, and software development. Our
research team works with existing and potential partners to help them assess and prove the value of haptics in their
field of interest, creating main competitive differentiator and value added solutions. This team continues to generate
patents, actively contributing to the strength of our IP position.
User Experience: We have a dedicated team of user interaction specialists, focusing on user research and design
to enable new and improved applications of haptics. We have unique exper
tise in haptics, usability, content creation,
and interface design. Our team works with existing and potential partners to help them determine the best
implementation of haptics in their specific application. This team works on the cutting edge of new user interface
paradigms using haptics, resulting in an ongoing generation of patents, actively contributing to the development of
new IP for us.
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For the years ended December 31, 2016, 2015, and 2014, research and development expenses were $13.4 million,
$14.8 million, and $11.8 million respectively.
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Intellectual Property
We believe that IP protection is crucial to our business. We rely on a combination of patents, copyrights, trade
secrets, trademarks, nondisclosure agreements with employees and third parties, licensing arrangements, and other
contractual agreements with third parties to protect our IP. We maintain and support an active program to protect our
IP, primarily through the filing of patent applications and the defense of issued patents against infringement.
Our failure to obtain or maintain adequate protection for our IP rights for any reason could hurt our competitive
position. There is no guarantee that patents will be issued from the patent applications that we have filed or may file.
Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient
scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial
advantage. Our position and revenue resulting from licensing our patents can also be affected by the expiration of
patents and our ability to persuade licensees that other patents in our portfolio continue to be relevant.
At the end of 2016, we and our wholly owned subsidiaries had over 2,400 currently issued or pending patents
worldwide that cover various aspects of our technologies. The duration of our issued patents is determined by the laws
of the country of issuance and for the United States is typically 17 years from the date of issuance of the patent or 20
years from the date of filing of the patent application resulting in the patent. Some of our U.S. patents began expiring
in 2007.
Financial Information about Industry Segments and Geographic Areas
We manage our operations and allocate resources as a single reporting segment. Additional information about our
business segments and geographic areas is incorporated herein by reference to Note 16 of our consolidated financial
statements and related financial information in Item 8. Financial Statements and Supplementary Data.
Investor Information
You can access financial and other information in the Investor Relations section of our web site at
www.immersion.com. We make available, on our Web site, free of charge, copies of our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC.
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The charters of our audit committee, our compensation committee, and our nominating/corporate governance
committee, our Code of Business Conduct and Ethics (including code of ethics provisions that apply to our principal
executive officer, principal financial officer, controller, and senior financial officers), our Corporate Governance
Principles and our Stock Ownership Policy are also available at our web site under “Corporate Governance.” These
items are also available to any stockholder who requests them by calling +1
408.467.1900.
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The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information
regarding issuers that file electronically with the SEC at www.sec.gov.
Employees
As of December 31, 2016, we had 132 full-time and part-time employees, including 54 in research and
development, 42 in sales and marketing, and 36 in legal, finance, and administration. We also use independent
contractors. None of our employees are represented by a labor union, and we consider our employee relations to be
positive.
Executive Officers
The following table sets forth information regarding our executive officers as of February 22, 2017.
Name
Victor Viegas
Nancy Erba
Anne Marie Peters
Mahesh Sundaram
Position with the Company
Chief Executive Officer and Member of the Board of Directors
Chief Financial Officer
General Counsel and Senior Vice President IP Licensing and Legal Affairs
Vice President, Worldwide Sales and Customer Support
Age
59
50
46
46
Victor Viegas was named our Chief Executive Officer in April 2010, and served as our Interim Chief Financial
Officer from December 2011 until May 2012 and from February 2016 to September 2016. He served as our Interim
Chief Executive Officer from October 2009 to April 2010, and has served as a member of the board of directors since
9
October 2002. Mr. Viegas was our Chief Executive Officer from October 2002 through April 2008, and President from
February 2002 through April 2008. Mr. Viegas was also Chairman of the board of directors from October 2007 to
February 2009. Mr. Viegas also served as Chief Financial Officer until February 2005, having joined us in August
1999 as Chief Financial Officer, Vice President, Finance. From June 1996 to August 1999, he served as Vice President,
Finance and Administration and Chief Financial Officer of Macrovision Corporation, a developer and licensor of video
and software copy protection technologies. From October 1986 to June 1996, he served as Vice President of Finance
and Chief Financial Officer of Balco Incorporated, a manufacturer of advanced automotive service equipment. He
holds a B.S. in Accounting and an M.B.A. from Santa Clara University. Mr. Viegas is also a Certified Public
Accountant in the State of California, on inactive status.
Nancy Erba joined Immersion as Chief Financial Officer in September 2016. Prior to joining Immersion, Ms.
Erba was Vice President, Financial Planning and Analysis of Seagate Technology from February 2015 to October
2015. Prior executive roles at Seagate Technology include Division CFO and Vice President of Finance, for Strategic
Growth Initiatives from 2013 to 2015, Vice President, Business Operations and Planning from 2009 to 2013, Division
CFO and Vice President of Finance of the Consumer Solutions Division from 2008 to 2009 and Vice President,
Corporate Development from 2006 to 2008. Ms. Erba holds a Bachelor of Arts in Mathematics from Smith College
and a Master of Business Administration from Baylor University.
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Anne Marie Peters has been at Immersion since December 2008 serving as General Counsel and Corporate
Secretary. In July 2016, Ms. Peters’ role was expanded to include leading Immersion’s patent licensing portion of our
business. From 1998 to 2008, Ms. Peters was an associate, and then corporate partner at Morrison & Foerster LLP.
Prior to practicing law, Ms. Peters held positions in the diagnostic manufacturing field at Chiron Corporation. Ms.
Peters holds a Bachelor in Molecular and Cell Biology from the University of California, Berkeley, a Master of
Business Administration from the Graduate School of Management at the University of California, Davis, and a Juris
Doctor degree from the University of California, Davis School of Law. Ms. Peters was admitted to the California State
Bar in 1999.
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Mahesh Sundaram joined Immersion in October 2014. He is responsible for leading our worldwide sales and
customer support organization to support the growing opportunities of Immersion technology. Prior to joining
Immersion, Mr. Sundaram was Vice President, Asia Pacific of Dolby Laboratories, a developer of audio, imaging and
voice technologies for cinema, home theaters, PCs, mobile phones, and games, from October 2008 to October 2014.
Mr. Sundaram also served as a Director of Consumer Electronics Market Segment at Dolby Laboratories, from July
2006 to September 2008. From January 1996 to November 2003, he managed product marketing for Intel, one of the
largest manufacturers of semiconductors for PCs, servers, phones, tablets, and consumer electronic devices, where he
was responsible for product marketing and bringing new products and technologies to market in the Asia Pacific
region. Mr. Sundaram holds a Bachelor of Engineering in electrical engineering from University of Mumbai.
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Item 1A. Risk Factors
You should carefully consider the following risks and uncertainties, as well as other information in this report
and our other SEC filings, in considering our business and prospects. If any of the following risks or uncertainties
actually occurs, our business, financial condition, or results of operations could be materially adversely affected. The
following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are
unaware or that we currently believe are immaterial could also materially adversely affect our business, financial
condition, or results of operations. In any case, the trading price of our common stock could decline, and you could
lose all or part of your investment. See also the Forward-looking Statements discussion
in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
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Company Risks
If we are unable to enter into new and renewed licensing arrangements with our existing licensees and with
ii
additional third-parties for our touch-enabling technologies, our royalty and license revenue may not grow and
could decline.
Our revenue growth is largely dependent on our ability to enter into new and renew existing licensing
arrangements. Our failure to enter into new or renewed licensing arrangements will cause our operating results to
suffer. We face numerous risks in obtaining new or renewed licenses on terms consistent with our business objectives
and in maintaining, expanding, and supporting our relationships with our current licensees. These risks include:
•
•
•
•
•
•
•
•
•
•
•
difficulties in persuading device manufacturers to take a license or rene
without the expenditure of significant resources;
ff
w a license to our intellectual property
difficulties in persuading existing customers that they still need a license to the portfolio
expire or become limited in scope, declared unenforceable or invalidated;
d
as individual patents
reluctance of device manufacturers to take a license or renew a license to our intellectual property because other
larger device manufacturers are not licensed;
difficulties in entering into or renewing gaming licenses if video game console makers choose not to license third
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parties to make peripherals for their new consoles, if video console makers no longer require peripherals to play
video games, if video console makers no longer utilize technology in the peripherals that are covered by our patents
or if the overall market for video consoles deteriorates substantially;
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reluctance of content developers or distributors, mobile device manufacturers, and service providers to sign license
agreements without a critical mass of other such inter-dependent supporters of the mobile device industry also
having a license, or without enough similar devices in the market that incorporate our technologies;
the competition we may face from third parties and/or the internal design teams of existing and potential
licensees;
difficulties in achieving and maintaining consumer and market demand or acceptance for our products;
difficulties in persuading third parties to work with us, to rely on us for critical technology, and to disclose to us
proprietary product development and other strategies;
difficulties in persuading existing licensees who compensate us for including our software in certain of their touch-
enabled products to also license and compensate us for our patents that cover other touch-enabled products of
theirs that do not include our software;
challenges in demonstrating the compelling value of our technologies and challenges associated with customers’
ability to easily implement our technologies; and
inability of current or prospective licensees to ship certain devices if they are involved in IP infringement claims
by third parties that ultimately prevent them from shipping products or that impose substantial royalties on their
products;
A limited number of customers account for a significant portion of our revenue, and the loss of major
customers could harm our operating results.
Samsung Electronics accounted for approximately 33%, 32%, and 38% of our total revenues for the years ended
December 31, 2016, 2015, and 2014, respectively. Two other customers each accounted for 14% and 13% of our
revenues in 2016, for 18% and 14% of our revenues in 2015, and for 17% and 12% in 2014. In the quarter ended
September 30, 2016, we entered into an additional amendment to our License Agreement with Samsung pursuant to
which we agreed to permit Samsung to exercise its rights to continue to sell products that were licensed under the
agreement as of December 31, 2015 for the life of such products in exchange for $19 million. We have not entered
11
into a renewal agreement with Samsung for any products released after December 31, 2015, including the Samsung
Note 7, which is currently being recalled by Samsung. Because we have not renewed our agreement with Samsung,
there is no assurance that Samsung will continue to generate similar revenue in any future period; and even if we were
to renew our agreement with Samsung, our revenue could be adversely impacted by recalls or poorly performing
mobile devices.
In addition, we cannot be certain that other customers that have accounted for
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individually or as a group, will continue to generate similar revenue in any future period.
significant revenue in past periods,
If we fail to renew or lose a major customer or group of customers, or if a customer decides that our intellectual
property is no longer relevant and stops paying us royalties, our revenue could decline if we are unable to replace the
lost revenue with revenue from other sources. In addition, if potential customers or customers with expiring
agreements view the loss of one of our major customers as an indicator of the value of our software and/or the strength
of our intellectual property, they may choose not to take or renew a license which could adversely affect our operating
results.
Our current or any future litigation, arbitration and administrative proceedings to enforce or defend our
intellectual property rights and to defend our licensing practices is expensive, disruptive, and time consuming, and
will continue to be, until resolved, and regardless of whether we are ultimately successful, could adversely affect
our business.
We have been in the past and are currently a party to various legal proceedings with companies that have
significantly greater financial resources than us to enforce or defend our intellectual property rights and to defend our
licensing practices. For example, in 2016, we initiated patent infringement litigation against Apple and AT&T
Mobility for infringement of seven patents, and Apple filed for inter partes review on each of the seven patents. We
also initiated arbitration against Sony claiming that they are infringing one of our US patents. Due to the inherent
uncertainties of litigation, arbitration and administrative proceedings, we cannot accurately predict how these
proceedings will ultimately be resolved. We anticipate that currently pending or any future legal proceedings will
continue to be costly, given the significant resources available to
our current adverse parties, and that future legal
proceedings will result in additional legal expenses, resulting in the decrease of cash available for other parts of our
business, and there can be no assurance that we will be successful or be able to recover the
costs we incur in connection
with the legal proceedings. Although protecting our intellectual property is a fundamental part of our business, at
times, our legal proceedings have diverted, and could continue to divert, the efforts and attention of some of our key
management and personnel away from our licensing transactions. As a result, until such time as it is resolved or
concluded, litigation, arbitration and administrative proceedings could cause our technology to be perceived as less
valuable in the marketplace, which could reduce our sales and adversely affect our business. Further, any unfavorable
outcome could adversely affect our business. For additional background on our litigation, please see Part I, Item 3,
“Legal Proceedings”.
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If we fail to protect and enforce our IP rights or if we fail to continuously develop or acquire successful
innovations and obtain patents on these innovations, our ability to license our technologies and generate revenues
would be impaired.
Our business depends on generating revenues by licensing our IP rights and by customers selling products that
incorporate our technologies. We rely on our significant patent portfolio to protect our proprietary rights. If we are not
able to protect and enforce those rights, our ability to obtain future licenses or maintain current licenses and royalty
revenue could be impaired. In addition, if a court or patent office were to limit the scope, declare unenforceable, or
invalidate any of our patents, current licensees may refuse to make royalty payments, or they may choose to challenge
one or more of our patents. It is also possible that:
•
•
•
•
our pending patent applications may not result in the issuance of patents;
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our patents may not be broad enough to protect our proprietary rights;
effective patent protection may not be available in every country, particularly in Asia,
do business; and
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where we or our licensees
our pending litigation against Apple and AT&T Mobility may be unsuccessful or may result in one or more of the
patents asserted becoming limited in scope, declared unenforceable or invalidated.
In addition, our patents will continue to expire according to their terms which may have an adverse effect on our
business. For example, certain of our U.S. gaming patents expired in 2015, and as a result, Sony has ceased paying
royalties for sales made in the U.S. We have asserted a U.S. patent against Sony and we are currently in arbitration.
See “Legal Proceedings”. Our failure to continuously develop or acquire successful innovations and obtain patents on
those innovations could significantly harm our business, financial condition, results of operations, or cash flows. In
12
addition, we also rely on licenses, confidentiality agreements, other contractual agreements, and copyright, trademark,
and trade secret laws to establish and protect our proprietary rights. It is possible that:
•
•
laws and contractual restrictions may not be sufficient to prevent misapprop
others from developing similar technologies; and
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riation of our technologies or deter
policing unauthorized use of our patented technologies, trademarks, and other pr
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expensive, and time-consuming, within and particularly outside of the United States.
oprietary rights would be difficult,
We have in the past initiated legal proceedings to protect our intellectual property and may need to continue to do
so in the future, and we are currently in litigation against Apple and AT&T Mobility for patent infringement. We may
need to continue to initiate legal proceedings in the future. Any legal or administrative proceeding initiated by us to
protect or enforce our IP rights has, and may in the future result in substantial legal expenses and risk, could lead to
counterclaims and adverse rulings affecting our patents, and may divert our management’s time and attention away
from our other business operations, which could significantly harm our business.
Potential patent and litigation reform legislation, potential USPTO and international patent rule changes,
potential legislation affecting mechanisms for patent enforcement and available remedies, and potential changes
to the intellectual property rights (“IPR”) policies of worldwide standards bodies, as well as rulings in legal
proceedings may affect our investments in research and development and our strategies for patent prosecution,
licensing and enforcement and could have a material adverse effect on our licensing business as well as our
business as a whole.
ll
Potential changes to certain U.S. and international patent laws, rules and regulations may occur in the future,
some or all of which may affect our research and development investments, patent prosecution costs, the scope of
future patent coverage we secure, remedies that we may be entitled to in patent litigation, and attorneys’ fees or other
remedies that could be sought against us, and may require us to reevaluate and modify our research and development
activities and patent prosecution, licensing and enforcement strategies.
Similarly, legislation designed to reduce the jurisdiction and remedial authority of the USITC has periodically
been introduced in Congress. Any potential changes in the law, the IPR policies of standards bodies or other
developments that reduce the number of forums available or the type of relief available in such forums (such as
injunctive relief), restrict permissible licensing practices (such as our ability to license on a worldwide portfolio basis)
or that otherwise cause us to seek alternative forums (such as arbitration or state court), would make it more difficult
for us to enforce our patents, whether in adversarial proceedings or in negotiations. Because we have historically
depended on the availability of certain forms of legal process to enforce our patents and obtain fair and adequate
compensation for our investments in research and development and the unauthorized use of our intellectual property,
developments that undermine our ability to do so could have a negative impact on future licensing efforts.
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Rulings in our legal proceedings as well as those of third parties may affect our strategies for patent prosecution,
licensing and enforcement. For example, in recent years, the United States International Trade Commission (the
“USITC”) and U.S. courts, including the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit,
have taken some actions that have been viewed as unfavorable to patentees. Decisions that occur in U.S. or in
international forums may change the law applicable to various patent law issues, such as, for example, patentability,
validity, patent exhaustion, patent misuse, remedies, permissible licensing practices, claim construction, and damages,
in ways that are detrimental to the abilities of patentees to enforce patents and obtain damages awards.
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We continue to monitor and evaluate our strategies for prosecution, licensing and enforcement with regard to
these developments; however, any resulting change in such strategies may have an adverse impact on our business
and financial condition.
If companies choose to implement haptics without our software or a license to our patents, we could have to
expend significant resources to enforce or defend our intellectual property rights and to defend our licensing
practices which may have a negative impact on our business.
o
Haptics is becoming more commonplace in the marketplace today. To sell our software, we must win competitive
selection processes, known as “design wins,” before our haptic technologies are included in our customers’ products.
These selection processes can be lengthy and can require us to incur significant design and development expenditures
with no assurance that we will be selected. As a small company, we may not have the resources to reach every company
who is introducing or planning to introduce haptics into the market. In addition, as a small company, we have limited
engineering resources that may make it difficult to support every type of haptic implementation with our software
offerings or to introduce new technologies in a timely manner. In the instances where a potential customer is not using
our software but implements unlicensed haptic capability, we may need to seek to enforce
our intellectual property. If
the customer is unwilling to enter into a license agreement, we may elect to pursue litigation which would harm our
relationship with the customer and could harm our relationships with other licensees or our ability to gain new
aa
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customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a
result of such litigation, choose not to adopt our technologies. In addition, these legal proceedings could be very
expensive and could have a negative impact on our financial results.
We also license to semiconductor manufacturers who incorporate certain of our less fully-featured software into
their integrated circuits for use in certain electronic devices. While our relationships with these semiconductor
manufacturers increases our distribution channels by leveraging their sales channels, it is possible that customers may
elect to implement haptics using less fully-featured software integrated circuit solutions rather than the higher-end
solutions we offer directly, which may negatively impact our financial results. It is also possible that when a customer
uses the integrated circuit, it is doing so in violation of our intellectual property rights and we may seek to enforce our
IP.
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Our international operations subject us to additional risks and costs.
We currently have sales personnel in Japan, Korea, and China. International revenues accounted for approximately
74% of our revenue in 2016. International operations are subject to a number of difficulties, risks, and special costs,
including:
•
•
•
•
•
•
•
compliance with multiple, conflicting and changing governmental laws and regulations;
laws and business practices favoring local competitors;
foreign exchange and currency risks;
changing import and export restrictions, duties, tariffs, quotas and other barriers;
difficulties staffing and managing foreign operations;
difficulties and expense in establishing and enforcing IP rights;
business risks, including fluctuations in demand for our technologies and products and the cost and effort to
conduct international operations and travel abroad to promote international distribution and overall global
economic conditions;
• multiple conflicting tax laws and regulations;
•
•
political and economic instability; and
the possibility of an outbreak of hostilities or unrest in markets where major customers are located,
including Korea.
Our international operations could also increase our exposure to international laws and regulations, which are
subject to change. If we cannot comply with foreign laws and regulations, which are often complex and subject to
variation, differing or inconsistent government interpretation, and unexpected changes, we could incur unexpected
costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products
or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price
controls, or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us
to conduct our business. Our international operations could also increase our exposure to complex international tax
rules and regulations. Changes in, or interpretations of, tax rules and regulations may adversely affect our income tax
provision. In addition, our operations outside the United States may be affected by changes in trade protection laws,
policies and measures, and other regulatory requirements affecting trade and investment, including the Foreign
Corrupt Practices Act and local laws prohibiting corrupt payments by our employees, vendors, or agents.
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If we fail to successfully manage our new content and media initiative, our results of operations could be
negatively impacted.
We seek to find new applications and markets for our technologies. We have invested and continue to invest
significant resources in the development of technologies and software related to enhancing mobile content with
haptics. For example, we have announced the introduction of haptics-enabled mobile game applications from well-
known publishers and haptics-enabled advertisements and movie trailers. Market acceptance of these new
technologies and software offerings will be dependent in part on our ability to show that mobile content enhanced
with haptics generates greater levels of consumer engagement, improves customer acquisition and retention measures,
increases monetization, improves long-term content recall and generates more positive levels of enjoyment and brand
sentiment. While our early pilot and user studies are encouraging, such data is preliminary and may be inaccurate or
may not be accepted by third parties. If we are unable to successfully develop these new offerings, our results of
operations could be negatively impacted. In addition, if we fail to properly manage the licensing of rights in our OEM
and content businesses, we may inadvertently impair our ability to monetize our technology in one of these businesses
and our results of operations would be negatively impacted.
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We had an accumulated deficit of $119 million as of December 31, 2016, and may not return to profitability in
the future.
As of December 31, 2016, we had an accumulated deficit of $119 million. We need to generate significant ongoing
revenue to return to consistent profitability. We will continue to incur expenses as we:
•
•
•
•
incur costs related to litigation;
increase our sales and marketing efforts;
engage in research and develop our technologies; and
protect and enforce our IP;
If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, we
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may not return to profitability.
The terms in our agreements may be construed by our licensees in a manner that is inconsistent with the rights
that we have granted to other licensees, or in a manner that may require us to incur substantial costs to resolve
conflicts over license terms.
We have entered into, and we expect to continue to enter into, agreements pursuant to which our licensees are
granted rights to our technology and our IP. These rights may be granted in certain fields of use, or with respect to
certain market sectors or product categories, and may include exclusive rights or sublicensing rights. We refer to the
license terms and restrictions in our agreements, including, but not limited to, field of use definitions, market sector,
and product category definitions, collectively as “License Provisions.”
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Due to the continuing evolution of market sectors, product categories, and licensee business models, and to the
compromises inherent in the drafting and negotiation of License Provisions, our licensees may interpret License
Provisions in their agreements in a way that is different from our interpretation of such License Provisions, or in a
h
way that is in conflict with the rights that we have granted to other licensees. Such inte
rpretations by our licensees
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may lead to claims that we have granted rights to one licensee that are inconsistent with the rights that we have granted
to another licensee. Many of our customers report royalties to us based on their shipments or their revenues and their
interpretation and allocation of contracted royalty rates. It is possible that the originally reported royalties could differ
materially from those determined by either a customer self-reported correction or from an audit we have performed.
These interpretations may also cause disagreements arising during customer audits, may lead to claims or litigation,
and may have an adverse effect on the results of our operations. Further, although our agreements generally give us
the right to audit books and records of our licensees, audits can be expensive, time consuming, and may not be cost
justified based on our understanding of our licensees’ businesses. Pursuant to our license compliance program, we
audit certain licensees to review the accuracy of the information contained in their royalty reports in an effort to
decrease the risk of our not receiving royalty revenues to which we are entitled, but we cannot give assurances that
such audits will be effective.
In addition, after we enter into an agreement, it is possible that markets and/or products, or legal and/or regulatory
environments, will evolve in an unexpected manner. As a result, in any agreement, we may have granted rights that
will preclude or restrict our exploitation of new opportunities that arise after the execution of the agreement.
We may not be able to continue to derive significant revenues from makers of peripherals for popular video
gaming platforms.
A significant portion of our gaming royalty revenues comes from third-party peripheral makers who make
licensed gaming products designed for use with popular video game console systems from Microsoft, Sony, and
Nintendo. Video game console systems are closed, proprietary systems, and video game console system makers
typically impose certain requirements or restrictions on third-party peripheral makers who wish to make peripherals
that will be compatible with a particular video game console system. If third-party peripheral makers cannot or are
not allowed to satisfy these requirements or restrictions, our gaming royalty revenues could be significantly reduced.
Furthermore, should a significant video game console maker choose to omit touch-enabling capabilities from its
console systems or somehow restrict or impede the ability of third parties to make touch-enabling peripherals, it could
lead our gaming licensees to stop making products with touch-enabling capabilities, thereby significantly reducing
our gaming royalty revenues. Also, if the gaming industry changes such that mobile or other platforms increase in
popularity at the expense of traditional video game consoles, our gaming royalty revenues could be substantially
reduced if we are unable to enter into replacement arrangements enabling us to license our software or IP in connection
with gaming on such mobile or other platforms. Finally, as some of our litigated patents have expired related to video
game peripherals, we may need to persuade our licensees that other patents in our portfolio continue to be relevant
which could result in the expenditure of significant resources and/or failure to persuade the licensee of the relevance
of the patents. See Legal Proceedings.
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Because we have a fixed payment license with Microsoft, our royalty revenue from licensing in the gaming
market and other consumer markets has previously declined and may further do so if Microsoft increases its volume
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of sales of touch-enabled products at the expense of our other licensees.
Under the terms of our present agreement with Microsoft, Microsoft receives a royalty-free, perpetual, irrevocable
license (including sublicense rights) to our worldwide portfolio of patents. This license permits Microsoft to make,
use, and sell hardware, software, and services, excluding specified products, covered by our patents. We will not
receive any further revenues or royalties from Microsoft under our current agreement with Microsoft, including with
respect to Microsoft’s Xbox One gaming product or any other haptic related product. Microsoft has a significant share
of the market for touch-enabled console gaming computer peripherals and is pursuing other consumer markets such
as mobile devices, tablets, personal computers, and virtual and augmented reality. Microsoft has significantly greater
financial, sales, and marketing resources, as well as greater name recognition and a larger customer base than some of
our other licensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other
licensees in these market segments may decline.
Automobiles incorporating our touch-enabling technologies are subject to lengthy product development
periods, making it difficult to predict when and whether we will receive royalties for these product types.
The product development process for automobiles is very lengthy, sometimes longer than four years. We may not
earn royalty revenue on our automotive device technologies unless and until products featuring our technologies are
shipped to customers, which may not occur until several years after we enter into an agreement with a manufacturer
or a supplier to a manufacturer. Throughout the product development process, we face the risk that a manufacturer or
supplier may delay the incorporation of, or choose not to incorporate, our technologies into its products, making it
difficult for us to predict the royalties we may receive, if any. After the product launches, our royalties still depend on
market acceptance of the vehicle or the option packages if our technology is an option (for example, a navigation unit)
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which is likely to be determined by many factors beyond our control.
We have little or no control or influence on our licensees’ design, manufacturing, quality control, promotion,
distribution, or pricing of their products incorporating our touch-enabling technologies, upon which we generate
royalty revenue.
A key part of our business strategy is to license our software and IP to companies that manufacture and sell
products incorporating our touch-enabling technologies. For the years ended December 31, 2016, 2015, and 2014,
98%, 97%, and 98% of our total revenues were royalty and license revenues, respectively. We do not control or
influence the design, manufacture, quality control, promotion, distribution, or pricing of products that are
manufactured and sold by our licensees, nor can we control consolidation within an industry which could either reduce
the number of licensable products available or reduce royalty rates for the combined licensees. In addition, we
generally do not have commitments from our licensees that they will continue to use our technologies in current or
future products. As a result, products incorporating our technologies may not be brought to market, achieve
commercial acceptance, or otherwise generate meaningful royalty revenue for us. For us to generate royalty and
license revenue, licensees that pay us per-unit royalties must manufacture and distribute products incorporating our
touch-enabling technologies in a timely fashion and generate consumer demand through marketing and other
promotional activities. If our licensees’ products fail to achieve commercial success, or if their products are recalled
because of quality control problems or if they do not ship products incorporating our touch-enabling technologies in
a timely fashion or fail to achieve strong sales, our revenues will not grow and could decline.
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If we do not achieve increased tax benefits as a result of our recently implemented corporate restructuring,
our financial condition and operating results could be adversely affected.
We completed a reorganization of our corporate organization in 2015. The purpose of this reorganization was to
more closely align our corporate structure with the international nature of our business activities. This corporate
restructuring activity is anticipated to allow us to reduce our overall effective tax rate through
changes in how we
develop and use our intellectual property and the structure of our international sales operations, including by entering
into transfer-pricing arrangements that establish transfer prices for our interc
ompany transactions.
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There can be no assurance that the taxing authorities of the jurisdictions in which we operate or to which we are
otherwise deemed to have sufficient tax nexus will not challenge the restructuring or the tax position that we take. In
addition, future changes to U.S. or non-U.S. tax laws, including legislation to reform U.S. or other countries' taxation
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of international business activities, could negatively impact the anticipated tax benef
its of the restructuring.
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Any benefits to our tax rate will also depend on our ability to operate our business in a manner consistent with
the reorganization of our corporate organization and applicable tax provisions, as well as on our achieving our
forecasted revenue growth rates. If the intended tax treatment is not accepted by the applicable taxing authorities,
changes in tax law negatively impact the structure or we do not operate our business consistent with the intended
16
reorganization and applicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a
result of the reorganization and our future operating results and financial condition may be negatively impacted.
Our business may suffer if third parties assert that we violate their IP rights.
Third parties have previously claimed and may in the future claim that we or our customers are infringing upon
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their IP rights. Even if we believe that such claims are without merit or that we are not responsible for them under the
indemnification or other terms of our customer license agreements, they can be time-consuming and costly to defend
against and may divert management’s attention and resources away from our business. Furthermore, third parties
making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further
develop or commercialize some or all of our software technologies or services in the United States and abroad. Claims
of IP infringement also might require us to enter into costly settlement or license agreements or pay costly damage
awards. Even if we have an agreement that provides for a third party to indemnify us against such costs, the
indemnifying party may be unable or unwilling to perform its contractual obligations.
We license some technologies from third parties. We must rely upon the owners of these technologies for
information on the origin and ownership of the technologies. As a result, our exposure to infringement claims may
increase. We generally obtain representations as to the origin and ownership of acquired or licensed technologies and
indemnification to cover any breach of these representations. However, representations may not be accurate and
indemnification may not provide adequate compensation for breach of the representations. If we cannot or do not
license the infringed IP at all or on reasonable terms, or substitute similar technology from another source, our
business, financial position, results of operations or cash flows could suffer.
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Our business and operations could suffer in the event of security breaches.
Attempts by others to gain unauthorized access to our information technology systems are becoming more
sophisticated. These attempts, which might be related to industrial or other espionage, include covertly introducing
malware to our computers and networks and impersonating authorized users, among others. We might be unaware of
an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or
confidential business information could harm our competitive position and reputation, reduce the value of our
investment in research and development and other strategic initiatives or otherwise adversely affect our business. To
the extent that any future security breach results in inappropriate disclosure of our customers' confidential information,
we may incur liability.
In addition, our business involves the storage and transmission of customers’ proprietary information, and security
breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures
may be breached as a result of third-party action, employee error, malfeasance or otherwise, during transfer of data,
and result in someone obtaining unauthorized access to our data or our customers’ data. Additionally, third parties may
attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names,
passwords or other information in order to gain access to our data or our customers’ data. Because the techniques used
to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative
measures. In addition, our customers may authorize third party technology providers, to access their customer data.
Because we do not control the transmissions between our customers and third-party technology providers, or the
processing of such data by third-party technology providers, we cannot ensure the complete integrity or security of
such transmissions or processing. Any security breach could result in a loss of confidence in the security of our service,
damage our reputation, lead to legal liability and negatively impact our future sales.
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If we are unable to develop open source compliant products, our ability to license our technologies and
generate revenues would be impaired.
We have seen, and believe that we will continue to see, an increase in customers requesting that we develop
products that will operate in an “open source” environment. Developing open source compliant products without
imperiling the IP rights upon which our licensing business depends may prove difficult under certain circumstances,
thereby placing us at a competitive disadvantage for new product designs. Some of our proprietary technologies
incorporate open source software that may be subject to open source licenses. These open source licenses may require
that source code subject to the license be released or made available to the public. Such open
source licenses may
mandate that software developed based on source code that is subject to the open source license, or combined in
specific ways with such open source software, become subject to the open source license. We take steps to ensure that
proprietary software we do not wish to disclose is not combined with, or does not incorporate, open source software
in ways that would require such proprietary software to be subject to an open source license. However, few courts
have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is
therefore subject to some uncertainty. We often take steps to disclose source code for which disclosure is required
under an open source license, but it is possible that we have made or will make mistakes in doing so, which could
negatively impact our brand or our adoption in the community, or could expose us to additional liability. In addition,
u
t
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we rely on multiple software programmers to design our proprietary products and technologies. Although we take
steps to ensure that our programmers (both internal and outsourced) do not include open source software in products
and technologies we intend to keep proprietary, we cannot be certain that open source software is not incorporated
into products and technologies we intend to keep proprietary. In the event that
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portions of our proprietary technology
are determined to be subject to an open source license, or are intentionally released under an open source license, we
could be required to publicly release the relevant portions of our source code, which could reduce or eliminate our
ability to commercialize our products and technologies. As a result, our revenues may not grow and could decline.
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Our business depends in part on access to third-party platforms and technologies, and if the access is
withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change, our
business and operating results could be adversely affected.
Many of our current and future software technologies are designed for use with third-party platforms and
technologies. Our business relies on our access to these platforms and technologies of third parties, which can be
withdrawn, denied or not be available on terms acceptable to us.
Our access to third-party platforms and technologies may require paying royalties or other amounts, which lowers
our margins, or may otherwise be on terms that are not acceptable to us. In addition, the third-party platforms or
technologies used to interact with our software technologies can be delayed in production or can change in ways that
negatively impact the operation of our software.
If we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not
available on terms acceptable to us, or if the platforms or technologies are delayed or change, our business and
operating results could be adversely affected.
The uncertain economic and political environment could reduce our revenues and could have an adverse effect
on our financial condition and results of operations.
The current global economic conditions and political climate could materially hurt our business in a number of
ways, including longer sales and renewal cycles, exchange rate volatility, delays in adoption of our products or
technologies or those of our customers, increased risk of competition, higher taxes and tariffs on goods incorporating
out technologies, higher overhead costs as a percentage of revenue, delays in signing or failing to sign customer
agreements or signing customer agreements with reduced royalty rates. In additi
on, our customers, potential
customers, and business partners would likely face similar challenges, which could materially and adversely affect the
level of business they conduct with us or the sales volume of products that include our technology.
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f
We might be unable to retain or recruit necessary personnel, which could slow the development and deployment
of our technologies.
Our technologies are complex, and we rely upon the continued service of our existing personnel to support
licensees, enhance existing technologies, and develop new technologies. Accordingly, our ability to develop and
deploy our technologies and to sustain our revenue growth depends upon the continued service of our management
and other key personnel, many of whom would be difficult to replace. Furthermore, we believe that there are a limited
number of engineering and technical personnel that are experienced in haptics. Management and other key employees
may voluntarily terminate their employment with us at any time without notice. The loss of management or key
personnel could delay product development cycles or otherwise harm our business.
We believe that our future success will also depend largely on our ability to attract, integrate, and retain sales,
support, marketing, and research and development personnel. Competition for such personnel is intense, and we may
not be successful in attracting, integrating, and retaining such personnel. Given the protracted nature of, if, how, and
when we collect royalties on new design contracts, it may be difficult to craft compensation plans that will attract and
retain the level of salesmanship needed to secure these contracts. Additionally, our compensation packages need to be
competitive in the Silicon Valley where the stock component of compensation is an important factor that candidates
and employees consider. We have not increased the amount of shares available for issuan
ce under our equity incentive
plans since 2014 and it is possible that our current pool of shares under our plans will not be sufficient to recruit and
retain executive officers and key employees and if we are unable to obtain stockholder approval of any future increases
in the share pool, we may be unable to attract and retain key personnel. Finally, some of our executive officers and
key employees hold stock options with exercise prices that may be above the current market price of our common
stock or that are largely vested. Each of these factors may impair our ability to retain the services of our executive
officers and key employees.
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Our technologies are complex and may contain undetected errors, which could harm our reputation and future
sales.
Any failure to provide high quality and reliable technologies, whether caused by our own failure or failures of
our suppliers or customers, could damage our reputation and reduce demand for our technologies. Our technologies
18
have in the past contained, and may in the future contain, undetected errors or defects. Some errors in our technologies
may only be discovered after a customer’s product incorporating our technologies has been shipped to customers. Any
errors or defects discovered in our technologies after commercial release could result in product recalls, loss of
revenue, loss of customers, and increased service and warranty costs, any of which could adversely affect our business.
Catastrophic events, such as natural disasters, war, and acts of terrorism could disrupt the business of our
customers, which could harm our business and results of operations.
The production processes and operations of our customers are susceptible to the occurrence of catastrophic events,
such as natural disasters, war, and acts of terrorism, all of which are outside of our control. Any such events could
cause a serious business disruption to our customers’ ability to manufacture, distribute and sell products incorporating
our touch-enabling technologies, which may adversely affect our business and results of operation.
If our facilities were to experience catastrophic loss, our operations would be seriously harmed.
Our facilities could be subject to a catastrophic loss such as fire, flood, earthquake, power outage, or terrorist
activity. A substantial portion of our research and development activities, our corporate headquarters, and other critical
business operations are located near major earthquake faults in San Jose, California, an area with a history of seismic
events. An earthquake at or near our facilities could disrupt our operations and result in large expenses to repair and
replace the facility. While we believe that we maintain insurance sufficient to cover most long-term potential losses at
our facilities, our existing insurance may not be adequate for all possible losses including losses due to earthquakes.
If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate
financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating
results, our ability to operate our business and our stock price.
We have in the past had material weaknesses in our internal control over financial reporting. Ensuring that we
have adequate internal financial and accounting controls and procedures in place to produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Any failure
on our part to remedy identified material weaknesses, or any additional delays or errors in our financial reporting
controls or procedures, could cause our financial reporting to be unreliable and could have a material adverse effect
on our business, results of operations, or financial condition and could have a substantial adverse impact on the trading
price of our common stock.
We do not expect that our internal control over financial reporting will prevent or detect all errors and all fraud.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that
all control issues and instances of fraud, if any, within our company
will have been detected.
nn
The nature of some of our products may also subject us to export control regulation by the U.S. Department
of State and the Department of Commerce. Violations of these regulations can result in monetary penalties and
denial of export privileges.
Our sales to customers or sales by our customers to their end customers in some areas outside the United States
tt
could be subject to government export regulations or restrictions that prohibit us or our licensees from selling to
customers in some countries or that require us or our licensees to obtain licenses or approvals to export such products
internationally. Delays or denial of the grant of any required license or approval, or changes to the regulations, could
make it difficult or impossible to make sales to foreign customers in some countries and could adversely affect our
revenue. In addition, we could be subject to fines and penalties for violation of these export regulations if we were
found in violation. Such violation could result in penalties, including prohibiting us from exporting our products to
one or more countries, and could materially and adversely affect our business.
Investment Risks
Our quarterly revenues and operating results are volatile, and if our future results are below the expectations
of public market analysts or investors, the price of our common stock is likely to decline.
Our revenues and operating results are likely to vary significantly from quarter to quarter due to a number of
factors, many of which are outside of our control and any of which could cause the price of our common stock to
decline.
These factors include:
•
•
the establishment or loss of licensing relationships;
the timing and recognition of payments under fixed and/or up-front license agreements, as well as other multi-
element arrangements;
19
•
•
•
•
•
•
seasonality in the demand for our technologies or products or our licensees’ products;
the timing of our expenses, including costs related to litigation, stock-based awards, acquisitions of
technologies, or businesses;
developments in and costs of pursuing or settling any pending litigation;
the timing of introductions and market acceptance of new technologies and products and product
enhancements by us, our licensees, our competitors, or their competitors;
the timing of work performed under development agreements; and
errors in our licensees’ royalty reports, and corrections and true-ups to royalty payments and royalty rates
from prior periods.
Changes in financial accounting standards, policies or practices may have adverse, unexpected financial
reporting implications and affect our reported results of operations.
A change in accounting standards, policies, or practices, such as the new revenue accounting standard that will
become effective for us in 2018, ASU No. 2014-09 “Revenue from Contracts with Customers: Topic 606”, can have
a significant effect on our reported results and may affect our reporting of transactions. New accounting
pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future.
Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or
the way we conduct our business.
Our business is subject to changing regulations regarding corporate governance an
dd
d other compliance areas
that will increase both our costs and the risk of noncompliance.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act
of 2002, and the rules and regulations of The NASDAQ Stock Market and other regulations that may be enacted from
time-to-time. The requirements of these and other rules and regulations have increased and we expect will continue to
increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-
consuming and costly, and may also place undue strain on our personnel, systems and resources.
Our stock price may fluctuate regardless of our performance.
The stock market has experienced extreme volatility that often has been unrelated or disproportionate to the
performance of particular companies. These market fluctuations may cause our stock price to decline regardless of
our performance. The market price of our common stock has been, and in the future could be, significantly affected
by factors such as: actual or anticipated fluctuations in operating results; announcements of technical innovations;
announcements regarding litigation in which we are involved; the acquisition or loss of customers; changes by game
console manufacturers to not include touch-enabling capabilities in their products; new products or new contracts;
sales or the perception in the market of possible sales of large number of shares of our common stock by insiders or
others; stock repurchase activity; changes in securities analysts’ recommendations; personnel changes; changing
circumstances regarding competitors or their customers; governmental regulatory action or inaction; developments
with respect to patents or proprietary rights; inclusion in or exclusion from various stock indices; and general market
conditions. In the past, following periods of volatility in the market price of a company’s securities, securities class
action litigation has been initiated against that company.
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ff
Our stock repurchase program could affect our stock price and add volatility.
Any repurchases pursuant to our stock repurchase program could affect our stock price and add volatility. There
can be no assurance that any repurchases will continue to be made under the program, nor is there any assurance that
a sufficient number of shares of our common stock will be repurchased
the market’s
expectations. Furthermore, there can be no assurance that any repurchases conducted under the plan will be made at
the best possible price. The existence of a stock repurchase program could also cause our stock price to be higher than
it would be in the absence of such a program and could potentially reduce the market liquidity for our
stock. Additionally, we are permitted to and could discontinue our stock repurchase program at any time and any such
discontinuation could cause the market price of our stock to decline.
to satisfy
Provisions in our charter documents and Delaware law could prevent or delay a change in control, which
could reduce the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change
of control or changes in our board of directors or management, including the following:
•
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our board of directors is classified into three classes of directors with staggered three-year terms which will
be phased out over time;
20
•
•
•
•
•
only our chairperson of the board of directors, a majority of our board of directors or 10% or greater
stockholders are authorized to call a special meeting of stockholders;
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our stockholders can only take action at a meeting of stockholders and not
by written consent;
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vacancies on our board of directors can be filled only by our board of directors and not by our stockholders;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be
established and shares of which may be issued without stockholder approval; and
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders.
In addition, certain provisions of Delaware law may discourage, delay, or prevent someone from acquiring or
merging with us. These provisions could limit the price that investors might be willing to pay in the future for shares.
ll
We may engage in acquisitions that could dilute stockholders’ interests, divert management attention, or cause
integration problems.
As part of our business strategy, we have in the past and may in the future, acquire businesses or IP that we feel
could complement our business, enhance our technical capabilities, or increase our IP portfolio. The pursuit of
potential acquisitions may divert the attention of management and cause us to incur vari
ous expenses in identifying,
investigating, and pursuing suitable acquisitions, whether or not they are consummated.
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If we consummate acquisitions through the issuance of our securities, our stockholders could suffer significant
dilution. Acquisitions could also create risks for us, including:
•
•
•
•
•
•
•
•
unanticipated costs associated with the acquisitions;
use of substantial portions of our available cash to consummate the acquisitions;
a
diversion of management’s attention from other business concerns;
difficulties in assimilation of acquired personnel or operations;
failure to realize the anticipated benefits of acquired IP or other assets;
charges associated with amortization of acquired assets or potential charges for write-down of assets or
goodwill associated with unsuccessful acquisitions;
potential IP infringement or other claims related to acquired businesses, assets, product lines, or
technologies; and
potential costs associated with failed acquisition efforts.
Any acquisitions, even if successfully completed, might not generate significant additional revenue or provide
any benefit to our business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease a facility in San Jose, California of approximately 42,000 square feet, which serves as our corporate
headquarters and includes our sales, marketing, administration, and research and development functions. The lease
for this facility expires in April 2023 and we have an option to renew through April 2028.
We lease a facility in Montreal, Quebec, Canada of approximately 10,000 square feet, for our subsidiary,
Immersion Canada Corporation. The facility is used for research and development and administration functions. The
lease for this property expires in December 2018.
We also lease office space in Seocho-gu, Seoul, Korea; Shanghai, China; Beijing, China; Zhonghe City, Taipei,
Taiwan; Tokyo, Japan; Mriehel, Birkirkara, Malta; and Dublin, Ireland.
We believe that our existing facilities are adequate to meet our current needs.
Item 3. Legal Proceedings
Immersion Corporation vs. Apple, Inc., AT&T Inc., and AT&T Mobility LLC
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On February 11, 2016, we filed a complaint against Apple, Inc. ("Apple"), AT&T, Inc. ("AT&T"), and AT&T
Mobility LLC ("AT&T Mobility") with the U.S. International Trade Commission (the “ITC”) and a complaint against
Apple, AT&T and AT&T Mobility in the U.S. District Court for the District of Delaware alleging that the Apple iPhone
6, iPhone 6 Plus, iPhone 6s, iPhone 6s Plus, Apple Watch, Apple Watch Sport and Apple Watch Edition infringe certain
of our patents that cover haptic feedback systems and methods.
In the February 2016 ITC complaint, we are seeking an exclusion order preventing the importation, sale for
importation, and sale after importation of infringing Apple devices into the United States by the defendants and
appropriate cease and desist orders. In the U.S. District Court suit, we are alleging infringement of the same patents.
The complaints assert infringement by the Apple iPhone 6, Apple iPhone 6 Plus, Apple iPhone 6s, Apple iPhone
6s Plus, Apple Watch, Apple Watch Sport and Apple Watch Edition of the following two Immersion patents:
U.S. Patent No. 8,619,051(the '051 patent): "Haptic Feedback System with Stored Effects"
U.S. Patent No. 8,773,356 (the ‘356 patent): "Method and Apparatus for Providing Tactile Sensations"
The complaints also assert infringement by the iPhone 6s and iPhone 6s Plus of the following Immersion patent:
U.S. Patent No. 8,659,571(the '571 patent): "Interactivity Model for Shared Feedback on Mobile Devices"
On March 14, 2016, the ITC issued a Notice of Institution of Investigation stating that the ITC instituted an
investigation to investigate our allegations of infringement with respect to the '051, '356, and '571 patents and
The investigation bears the
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determine whether violations of section 337 of the Tariff Act of 1930 have occurred.
designation Inv. No. 337-TA-990 ("990 Investigation"). On April 6, 2016, the Chief Administrative Law Judge
(“ALJ”) entered an order terminating Respondent AT&T from the investigation, based on the stipulation and joint
motion of the parties to terminate AT&T in a manner that preserved our ability
to obtain discovery and compliance
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with any relief the ITC may order. On April 4, 2016, Respondents Apple and AT&T Mobility served responses to the
complaint denying the material allegations of the complaint and alleging affirmative defenses, including among others
that the asserted patents are not infringed, invalid and unenforceable. Respondents also alleged that the ‘356 patent is
unenforceable for alleged inequitable conduct before the United States Patent and Trademark Office. We will respond
to the allegations of Respondents during the investigation on the procedural schedule set by the Chief ALJ. The
proceedings in the ITC with respect to Apple and AT&T Mobility are ongoing, and the parties are in the process of
conducting discovery.
On March 21, 2016, pursuant to 28 U.S.C. § 1659(a), the U.S. District Court entered an order staying the U.S.
District Court case pending a final determination in the ITC investigation.
On May 5, 2016, we filed another complaint against Apple, AT&T and AT&T Mobility with the ITC and a
complaint against Apple, AT&T and AT&T Mobility in the U.S. District Court for the District of Delaware alleging
that the Apple iPhone 6s, iPhone 6s Plus, MacBook and MacBook Pro with Retina Display infringe certain of our
patents, including patents covering pressure-related haptics.
In the May 2016 ITC complaint, we are seeking an exclusion order preventing the importation, sale for
importation, and sale after importation of infringing Apple devices into the United States by the defendants and
appropriate cease and desist orders. In the U.S. District Court suit, we are alleging infringement of the same patents.
The complaints assert against Apple, AT&T and AT&T Mobility claims of infringement by the Apple iPhone 6s
and Apple iPhone 6s Plus of the following three Immersion patents:
U.S. Patent No. 8,749,507 (the '507 patent), "Systems and Methods for Adaptive Interpretation of Input from a
Touch-Sensitive Input Device”
U.S. Patent No. 7,808,488 (the '488 patent), "Method and Apparatus for Providing Tactile Sensations”
U.S. Patent No. 8,581,710 (the '710 patent), "Systems and Methods for Haptic Confirmation of Commands”
The complaints also assert against Apple claims of infringement by the Apple MacBook and Apple MacBook Pro
with Retina display of Immersion’s U.S. Patent No. 7,336,260 (the '260 patent), "Method and Apparatus for Providing
Tactile Sensations”
On May 9, 2016, Immersion and AT&T entered into a stipulation to terminate AT&T as a Proposed Respondent,
on the same terms to which the parties agreed to terminate AT&T from the 990 Investigation.
On June 6, 2016, the ITC issued a Notice of Institution of Investigation stating that the ITC instituted an
investigation to investigate our allegations of infringement with respect to the '507, '488, '710, and '260 patents and
determine whether violations of section 337 of the Tariff Act of 1930 have occurred. The investigation bears the
designation Inv. No. 337-TA-1004 ("1004 Investigation"). On June 9, 2016, the Chief ALJ entered an order
22
consolidating the 990 and 1004 Investigations. On June 15, 2016, the Chief ALJ granted a joint motion by the parties
to stay the 990 Investigation deadlines until a new procedural schedule is entered in the consolidated Investigation.
On June 16, 2016, pursuant to 28 U.S.C. § 1659(a), the U.S. District Court entered an order staying the U.S.
District Court case pending a final determination in the ITC investigation.
On June 27, 2016, Respondents Apple and AT&T Mobility served responses to the complaint denying the material
allegations of the complaint and alleging affirmative defenses, including among others that the asserted patents are
not infringed, invalid and unenforceable. Respondents also alleged that the '710 patent is unenforceable for alleged
inequitable conduct before the United States Patent Office. We will respond to the allegations of Respondents during
the investigation on the procedural schedule set by the Chief ALJ. On J
une 29, 2016, the Chief ALJ entered an order
setting the Markman hearing in the consolidated case for October 18, 2016, and the evidentiary hearing for April 27-
May 5, 2017. On July 12, 2016, the Chief ALJ entered the procedural schedule in the consolidated Investigation.
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The procedural schedule in the Investigation includes, among other things, deadlines for the parties to conduct
three required settlement conferences. On July 26, 2016, representatives from the Company and Respondent AT&T
conducted their first settlement conference. On July 28, 2016, representatives for the Company and Respondent Apple
conducted their first settlement conference. The parties did not reach an agreement to settle the dispute underlying this
Investigation.
In September 2016, Respondent Apple released additional products, including the iPhone 7 and 7 plus and the
Apple Watch Series 2. The Company has served discovery responses and contentions identifying these newly released
products as products at issue in the Investigation.
On October 18, 2016, the Chief ALJ conducted a Markman hearing with respect to the construction of terms of
the Asserted Patents. The Chief ALJ indicated at the hearing that a ruling could be expected in approximately three
months.
On December 15, 2016, Respondents filed a motion for summary determination that the asserted claims 1 and 2
of the ’260 patent are invalid under 35 U.S.C. § 101 for an alleged failure to recite patentable subject matter. On
December 27, 2016, the Company filed its opposition to the motion. On December 27, 2016, the Commission
Investigative Staff submitted a response to the motion stating that the Staff supports the motion. The Chief ALJ has
not issued a decision on the motion.
On January 18, 2017, the parties participated in a one-day mediation session. The parties did not reach an
agreement to resolve the dispute at the mediation.
On February 1, 2017, Respondents Apple and AT&T filed three motions for summary determination on certain
issues in the Investigation. In particular, the motions requested that Chief ALJ determine:
•
that prosecution history estoppel precludes Immersion from asserting that the accused products and the
technical domestic industry products satisfy certain limitations of the asserted patents under the doctrine of
equivalents;
•
that (1) Respondents do not infringe claims 7 and 17 of the ’356 patent and claims 7, 11 and 15 of the ’051
patent; and (2) the Apple Watch products do not infringe the ’356 patent and Apple’s iPhone 6, 6 Plus and SE products
do not infringe the ’051 patent; and
•
that claims 2-5, 10-12, and 15-17 of the ’507 patent are invalid under 35 U.S.C. § 112 for failing to comply
with the written description requirement.
k
On February 2, 2017, Chief ALJ Bullock issued his Markman ruling, Order No. 27 Construing the Terms of the
Asserted Claims. The Chief ALJ adopted Immersion’s proposed constructions for some disputed terms. On other
terms, the Chief ALJ adopted constructions that Respondents or Staff had proposed, and on other terms the Chief ALJ
fashioned his own construction.
On February 3, 2017, Immersion brought an unopposed motion for partial termination of the investigation with
respect to certain contentions that were no longer being pursued. These include Immersion’s allegations of
infringement as to (1) claims 7 and 17 of the ’356 patent, (2) claims 7, 11, and 15 of the ’051 patent, (3) the Apple
Watch products solely with respect to the ’356 patent, and (4) the Apple iPhone 6, 6 Plus, and SE products solely with
respect to the ’051 patent. Immersion also stated in the motion its position that the request for termination as to the
withdrawn allegations rendered Respondents motion for summary determination on these particular issues moot. On
February 9, 2017 the Chief ALJ issued an order granting partial termination of th
e Investigation as to certain asserted
claims of the ’356 patent and the ’051 patent as described above.
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On February 10, 2017, Respondents filed a notice of withdrawal of their motion for summary determination as to
the particular contentions under the ’356 patent and ’051 patent that had been withdrawn during the Investigation. On
February 13, 2017, Immersion filed its oppositions to those motions for summary determination that remained
23
pending. On February 14 and 16, 2017, the Chief ALJ issued orders denying each of Respondents’ motions for
summary determination.
The proceedings in the ITC with respect to Apple and AT&T Mobility are ongoing. The parties have conducted
extensive fact and expert discovery and are in the process of completing discovery and preparing materials for the
hearing set to begin on April 27, 2017. The Company is preparing its contentions and expects to respond to the
allegations of Respondents during the investigation on the procedural schedule set by the Chief ALJ.
On July 7, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review
of the '051 patent. The petition bears Case No. IPR2016-01371. The petition challenges the patentability of certain
claims of the '051 patent in light of alleged prior art references. On October 13, 2016, we filed a patent owner’s
preliminary response responding to the petition's challenges to patentability of claims of the '051 patent. On January
11, 2017, the Patent Trial and Appeal Board issued a decision denying the Petition and declining to institute the IPR.
On July 7, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review
of the '571 patent. The petition bears Case No. IPR2016-01372. The petition challenges the patentability of certain
claims of the '571 patent in light of alleged prior art references. On October 13, 2016, we filed a patent owner’s
preliminary response responding to the petition's challenges to patentability of claims of the '571 patent. On January
11, 2017, the Patent Office’s Patent Trial and Appeal Board issued its decision instituting the IPR on certain grounds
raised in the Petition. The Board’s decision also declined to institute the IPR as to certain claims of the ’571 patent.
The Board has set a schedule of certain due dates in the IPR, including an April 24, 2017 due date for the patent
owner’s response. On or about February 12, 2017, Apple submitted in the United States Patent and Trademark Office
a second IPR petition challenging the patentability of certain claims of the ’571 patent in light of alleged prior art
references. Our preliminary patent owner’s response is due within three months of the filing of this new petition.
On July 8, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review
of the '356 patent. The petition bears Case No. IPR2016-01381. The petition challenges the patentability of certain
claims of the '356 patent in light of alleged prior art references. On October 12, 2016, we filed a patent owner’s
preliminary response responding to the petition's challenges to patentability of claims of the '356 patent. On January
11, 2017, the Patent Office’s Patent Trial and Appeal Board issued its decision instituting the IPR on certain grounds
raised in the Petition. The Board has set a schedule of certain due dates in the IPR, including an April 24, 2017 due
date for the patent owner’s response. On or about February 12, 2017, Apple submitted in the United States Patent and
Trademark Office a second IPR petition challenging the patentability of certain claims of the ’356 patent in light of
alleged prior art references. Our preliminary patent owner’s response is due within three months of the filing of this
new petition.
a
On August 12, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes
review of the '710 patent. The petition bears Case No. IPR2016-01603. The petition challenges the patentability of
certain claims of the '710 patent in light of alleged prior art references. On November 28, 2016, we filed a patent
owner’s preliminary response responding to the petition’s challenges to patentability of claims of the ’710 patent. On
February 23, 2017, the Patent Office’s Patent Trial and Appeal Board issued its decision instituting the IPR on certain
grounds released in the petition. The Board has set a schedule of certain due dates in the IPR, including a May 24,
2017 due date for the Patent Owners’ response.
n
On September 12, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes
review of the '507 patent. The petition bears Case No. IPR2016-01777. The petition challenges the patentability of
certain claims of the '507 patent in light of alleged prior art references. On December 27, 2016, we filed a patent
owner’s preliminary response responding to the petition’s challenges to patentability of claims of the ’507 patent. The
Board’s decision on whether to institute the IPR is due within ninety days of the filing of our response.
On September 23, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes
review of the '260 patent. The petition bears Case No. IPR2016-01884. The petition challenges the patentability of
certain claims of the '260 patent in light of alleged prior art references. On January 4, 2017, we filed a patent owner’s
preliminary response responding to the petition’s challenges to patentability of claims of the ’260 patent. The Board’s
decision on whether to institute the IPR is due within ninety days of the filing of our response. In response to a request
of the Petitioner, the Board also authorized the parties to file Reply and Sur-Reply briefs on certain issues. Petitioner
filed a Reply Brief on January 31, 2017. We filed our Patent Owner’s Sur-Reply brief on February 14, 2017.
On September 29, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes
review of the '488 patent. The petition bears Case No. IPR2016-01907. The petition challenges the patentability of
certain claims of the '488 patent in light of alleged prior art references. On January 5, 2017, we filed a patent owner’s
preliminary response responding to the petition’s challenges to patentability of claims of the ’488 patent. The Board’s
decision on whether to institute the IPR is due within ninety days of the filing of our response. In response to a request
of the Petitioner, the Board authorized the parties to file Reply and Sur-Reply briefs. Petitioner filed a Reply Brief on
January 31, 2017. We filed our patent owner’s Sur-Reply brief on February 14, 2017.
24
Although we believe we have strong claims, the outcome of litigation is inherently uncertain.
Furthermore, Apple and AT&T Mobility have significant resources and therefore, this litigation could be
protracted.
Amit Agarwal v. Immersion Corporation
On March 29, 2016, Amit Agarwal, an individual, filed in the United States Patent and Trademark Office a petition
for inter partes review of U.S. Patent No. 8,773,356 entitled: "Method and Apparatus for Providing Tactile
Sensations." The petition bears Case No. IPR2016-00807. The petition challenges the patentability of certain claims
of the ’356 patent in light of alleged prior art references. On July 6, 2016, we filed a patent owner's preliminary
response responding to the petition's challenges to patentability of claims of the '356 patent. On September 19, 2016,
the Patent Office's Patent Trial and Appeal Board denied the Petition and declined to institute further proceedings.
Immersion Corporation vs. Motorola Mobility, Inc., Motorola Mobility Holdings, Inc., HTC Corporation, HTC
America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation, and
Brightpoint, Inc.
On February 7, 2012, we filed a complaint against Motorola with the ITC alleging that certain Motorola mobile
electronic devices, including smartphones and cellular phones, infringe six of our patents that cover various uses of
haptic effects in connection with touchscreens (the “ITC Complaint”). We amended the ITC Complaint on March 2,
2012 to add the following parties: HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.)
Corporation, Exedea, Inc., Brightstar Corporation and Brightpoint, Inc. We subsequently withdrew HTC America
Holding, Inc., HTC (B.V.I.) Corporation, Exedea, Brightstar, and Brightpoint from the ITC Complaint. The ITC
instituted an investigation against Motorola Mobility, Inc., Motorola Mobility Holdings, Inc., HTC Corporation, and
HTC America, Inc. on April 2, 2012.
On March 2, 2012, we filed a complaint against HTC Corporation, HTC America Holding, Inc., HTC America,
Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation and Brightpoint, Inc. (collectively, “HTC”) in
the U.S. District Court for the District of Delaware (the “HTC Delaware Complaint”) alleging that certain of HTC’s
mobile electronic devices, including smartphones and cellular phones, infringed si
x of our patents that cover various
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uses of haptic effects. The HTC Delaware Complaint covered the same patents as the ITC Complaint. The HTC
Delaware Complaint sought damages and injunctive relief. The parties stipulated to stay the case pending the
completion of the ITC investigation.
The HTC Delaware Complaint asserted infringement of the following patents:
U.S. Patent No 6,429,846 (the ‘846 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
U.S. Patent No 7,969,288 (the ‘288 patent): “Force Feedback System Including Multi-Tasking Graphical Host
Environment and Interface Device”
U.S. Patent No 7,982,720 (the ‘720 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
U.S. Patent No 8,031,181 (the ‘181 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
U.S. Patent No 8,059,105 (the ‘105 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
HTC asserted that the patents are not infringed, are invalid, and are unenforceable.
On November 21, 2012, we entered into a confidential settlement agreement with Motorola. On January 15, 2013,
the Administrative Law Judge issued an Initial Determination terminating the ITC investigation as to Motorola. On
March 15, 2013, we dismissed the Motorola Delaware Complaint.
On March 12, 2013, we filed motions to suspend the procedural schedule and to terminate the ITC investigation
against HTC. The Administrative Law Judge issued an order granting the motion to suspend the procedural schedule
on March 19, 2013 and issued an Initial Determination terminating the ITC investigation as to HTC on March 27,
2013. The decision became final on April 26, 2013.
We requested that the U.S. District Court for the District of Delaware re-open the case against HTC filed in that
Court, and the case was reopened on May 1, 2013. We filed an amended complaint on May 3, 2013. HTC answered
the amended complaint on June 28, 2013, stating affirmative defenses of (1) non-infringement, (2) invalidity,
(3) prosecution history estoppel, (4) equitable estoppel, exhaustion, license, and/or waiver, (5) intervening rights,
(6) unclean hands, (7) patent misuse, (8) inequitable conduct based on ’720 patent reexamination, (9) inequitable
conduct (’846 patent family), (10) inequitable conduct (’288 patent), (11) double patenting, (12) failure to comply
with 35 U.S.C. § 120, and (13) failure to mark / failure to mitigate.
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On October 3, 2014, HTC filed five motions with the Court: (1) motion to exclude the testimony of our damages
expert; (2) motion for partial summary judgment shortening the damages period for U.S. Patent Nos. 7,969,288;
25
7,982,720, and 8,031,18; (3) motion for summary judgment of invalidity of U.S. Patent Nos. 8,059,105; 8,031,181;
and 7,982,720; (4) motion for summary judgment of non-infringement of U.S. Patent No. 7,969,288, and; (5) motion
for summary judgment of non-infringement of U.S. Patent Nos. 6,429,846; 7,982,720; 8,031,181; and 8,059,105. A
hearing on claim construction and the latter three motions was held on November 25, 2014. A hearing on the first
motion was held on January 30, 2015. On February 11, 2015, the Court issued rulings on claim construction and on
four of HTC’s five motions. The Court denied the motion for summary judgment of non-infringement of the ’288
patent (because the Court found the ’720 and ’181 patents invalid as anticipated, it did not address HTC’s arguments
with regard to these patents); granted in part the motion for summary judgment of non-infringement of
the ’846, ’720, ’181, and ’105 patents, finding that the HTC’s products do not literally infringe the ’846, and ’105
patents; and granted the motions for partial summary judgment shortening the damages period of the ’288 patent, and
for summary judgment of invalidity of the ’105, ’181, and ’720 patents. On February 24, 2015 the Court denied in
part and granted in part the first motion, ruling that our damages expert may testify about reasonable royalties but not
about lost profits.
Trial was scheduled to begin on March 23, 2015. On March 23, 2015, we announced that we agreed to enter into
a settlement and license agreement with HTC, resolving the patent infringement litigation, but preserving our right to
appeal the invalidity ruling affecting three of our patents. Under the settlement and license agreement, HTC will pay
an undisclosed amount of compensation for prior shipments of its devices containing Basic Haptics and an additional
undisclosed amount of compensation for a license to continue to manufacture and sell devices with Basic Haptics. On
March 31, 2015 the Court entered a Final Judgment providing that HTC does not infringe the ‘105, ‘181, and ‘720
patents solely because the Court ordered that HTC prevailed on its affirmative defense of invalidity, and dismissing
our claims of infringement of the ‘846 and ‘288 patents pursuant to the settlement and license agreement. We appealed
the decision, and on June 21, 2016 the U.S. Court of Appeals for the Federal Circuit
issued an opinion reversing the
District Court’s decision.
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In the United States Patent and Trademark Office, HTC filed requests for ex-parte reexamination of three of our
patents: the ‘288, ‘999, and ‘720 patents. Reexamination of the ’288 patent was requested on July 30, 2012. The Patent
Office granted the request on October 24, 2012. Reexamination of the ’999 patent was requested on September 6,
2012. The Patent Office granted the request on November 26, 2012. Reexamination of the ’720 patent was requested
on September 10, 2012. The Patent Office granted the request on November 28, 2012. On July 24, 2013, the Patent
Office issued a Reexamination Certificate for the ’999 patent, after certain claims were cancelled and other claims
were amended. On February 18, 2014, the Patent Office issued a Reexamination Certificate for the ’720 patent after
certain claims were cancelled and other claims were amended. On February 10, 2014 the U.S. Patent Office issued a
Reexamination Certificate for the ‘288 patent after certain claims were cancelled and claim 18 was amended.
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Samsung Electronics America, Inc.
On December 31, 2015, our amended and restated license agreement (the “Samsung License”) with Samsung
expired. On January 13, 2016, we filed an Application for Emergency Measures with the International Chamber of
Commerce (“ICC”), asking that the ICC order Samsung to comply with its contractual obligations and enjoin Samsung
from selling devices previously licensed under the Samsung License. On January 25, 2016, we also filed an arbitration
demand with the ICC. The ICC appointed an Emergency Arbitrator, who on January 30, 2016 issued an Order denying
the Application for Emergency Measures. The Emergency Arbitrator ruled that under the Samsung License, we could
not file an arbitration demand until a 90-day negotiating period had passed, and that the 90 days began on December
4, 2015.
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Based on the Emergency Arbitrator’s Order, we withdrew our arbitration demand on February 1, 2016 and
refiled it on March 4, 2016, requesting that Samsung be ordered to comply with its obligations under the Samsung
License, including ceasing distributing devices previously licensed under the Samsung License and paying damages
suffered by us. On April 12, 2016, Samsung filed a response to our arbitration demand.
On July 12, 2016, Immersion Corporation, together with Immersion Software Ireland Limited, an Irish company
and a wholly owned subsidiary of Immersion, entered into an Amendment No. 4 (the “Amendment”) to the Samsung
License with Samsung. Pursuant to the Agreement, the parties agreed to amend Section 13.4(c) relating to the Product
Life Cycle Wind-Down Rights (as defined in the Agreement) to permit Samsung to exercise the Product Life Cycle
Wind-Down Rights for $19.0 million. The parties also agreed to terminate the arbitration proceedings relating to the
Product Life Cycle Wind-Down Rights and to release each other for a variety of matters. We also agreed not to bring
any judicial, administrative or other action against Samsung relating to the Amendment or patent infringement for a
period of time.
26
Sony Computer Entertainment America, Inc.
h
On October 2, 2014, we filed an arbitration demand with JAMS against Sony Computer Entertainment America,
LLC and Sony Computer Entertainment, Inc. (collectively, “Sony”). The issue to be resolved was whether Sony’s
DS4 Wireless Controller sold in Japan is covered by one of our Japanese patents and thus is a royalty-bearing product
under a 2007 license agreement between us and Sony. On January 20, 2016, the arbitrator ruled in our favor, finding
that Sony's DS4 Wireless Controllers manufactured, sold or distributed in Japan after April 8, 2014 were and are
‘royalty bearing’ products as defined by Paragraph 5.4 of the 2007 license agreement.
On February 19, 2016, we petitioned for confirmation of the award in the U.S. District Court for the Northern
District of California. On March 18, 2016, Sony opposed the petition to confirm the award and moved to vacate the
award. On April 26, 2016, the District Court issued an order granting our petition to confirm the arbitral award and
denying Sony’s motion to vacate the award. On May 26, 2016, Sony filed a Notice of Appeal to the U.S. Court of
Appeals for the Ninth Circuit. On January 31, 2017 Sony told us that it will dismiss the appeal.
On March 17, 2016, we filed an arbitration demand seeking a ruling that Sony game controllers sold in the
(the ‘288 patent) and
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United States are covered by U.S. Patent Nos. 6,686,901 (the ‘901 patent) and 7,969,288
therefore are royalty-bearing products under our license agreement with Sony. Sony filed a response on April 12, 2016.
The parties have agreed that the ‘288 patent will not be addressed in this arbitration proceeding, which will be limited
to the ‘901 patent. The parties have agreed on a retired judge who will serve as the single arbitrator.
The arbitrator originally scheduled a claim construction hearing for January 10, 2017. The hearing was
rescheduled to December 21, 2016, after the parties identified their proposed claims to be construed. The hearing was
completed on December 21, 2016, and the arbitrator issued a claim construction ruling on February 2, 2017. Fact
discovery is proceeding. A date for the arbitration hearing on the merits of the claim has not yet been scheduled.
We cannot predict the ultimate outcome of the above-mentioned federal and arbitral actions, and we are unable
to estimate any potential liability we may incur.
Item 4. Mine Safety Disclosures
Not applicable.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on the Nasdaq Global Market under the symbol “IMMR.” The following table sets
forth, for the periods indicated, the high and low sales prices for our common stock on such market.
Fiscal year ended December 31, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal year ended December 31, 2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
11.92 $
8.49
$
8.53 $
11.45 $
14.45 $
13.90 $
13.03 $
10.32 $
7.01
6.24
5.90
6.63
10.71
10.37
8.87
7.72
$
$
$
$
$
$
$
$
On February 22, 2017, the closing price was $11.65 per share and there were 85 holders of record of our common
stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable
to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and we do not anticipate paying cash
dividends in the foreseeable future. We currently intend to retain any earnings to fund future growth, product
development, and operations.
Company Stock Performance Graph
The information contained in the Performance Graph shall not be deemed to be “soliciting material” or “filed”
with the SEC or subject to the liabilities of Section 18 of the Exchange Act, as amended, except to the extent that we
specifically incorporate it by reference into a document filed under the Securities Act, as amended, or the Exchange
Act.
The graph below depicts a five-year comparison of cumulative total shareholder returns for Immersion common
stock, the NASDAQ Composite Index, and the RDG Technology Composite Index. The graph assumes an investment
of $100 for the five-year period commencing on December 31, 2011 and ending on December 31, 2016, in
Immersion’s common stock, and in the NASDAQ Composite and the RDG Technology Composite indices, and
reinvestment of dividends, if any.
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The comparison below is based on historical data, and Immersion cautions that the stock price performance shown
in the graph is not indicative of, nor intended to forecast, the potential future performance of Immersion’s common
stock. Information used in the graph was obtained from a source believed to be reliable, but Immersion is not
responsible for any errors or omissions in such information.
28
COMPARISON OF 5
PP
YEAR CUMULATIVE
AA
TOTALTT
RETURN*
Among Immersion Corporation, the NASDAQ Composite Index
and the RDG Technology Composite Index
TT
$250
$200
$150
$100
$50
$0
12/11
12/12
12/13
12/14
12/15
12/16
Immersion Corporation
NASDAQ Composite
RDG Technology Composite
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
2011
2012
2013
2014
2015
2016
Immersion Corprr oration
NASDAQ Composite
RDG Technology Composite
$
$
100
100
100
$
133
116
115
$
200
165
153
183
189
179
$
225 $
200
183
205
217
207
December 31,
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference herein to Note 9 to the
notes to our consolidated financial statements.
29
Item 6. Selected Financial Data
The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction
with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The selected
consolidated statement of operations data for each of the years ended December 31, 2016, 2015, and 2014 and the
consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial
statements and accompanying notes, included in this Annual Report on Form 10-K. The selected consolidated
statement of operations data for each of the years ended December 31, 2013 and 2012 and the consolidated balance
sheet data as of December 31, 2014, 2013 and 2012 are derived from our audited consolidated financial statements
which are not included in this report.
2016
Years Ended December 31,
2014
(In thousands, except per share data)
2015
2013
2012
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues
Costs and expenses
Operating income (loss)
Income tax benefit (provision) from
continuing operations
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Basic net income (loss) per share:
Continuing operations
Discontinued operations
Total
Shares used in calculating basic net income
(loss) per share
Diluted net income (loss) per share:
Continuing operations
Discontinued operations
Total
Shares used in calculating diluted net
income (loss) per share
$
57,086 $
72,349
(15,263)
63,393 $
58,674
4,719
52,937
46,970
5,967
$
47,470 $
43,866
3,604
32,169
38,897
(6,728)
(25,521)
(40,030)
649
(39,381)
(1,591)
2,858
—
2,858
(2,196)
4,123
—
4,123
36,483
40,155
(792)
(7,350)
—
153
40,155
(7,197)
$
$
$
$
(1.39) $
0.02
(1.37) $
0.10 $
—
0.10 $
0.15
—
0.15
$
$
1.42 $
—
1.42 $
(0.27)
0.01
(0.26)
28,759
28,097
28,246
28,190
27,735
(1.39) $
0.02
(1.37) $
0.10 $
—
0.10 $
0.14
—
0.14
$
$
1.37 $
—
(0.27)
0.01
1.37 $
(0.26)
28,759
29,015
29,144
29,338
27,735
2016
2015
December 31,
2014
(In thousands)
2013
2012
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents, and short-term
investments
Working capital
Total assets
Total stockholders’ equity
$
89,772 $
64,931 $
57,361
$
71,112 $
43,546
73,008
103,767
55,340
53,749
105,415
86,615
58,025
97,521
76,603
64,249
110,575
80,671
38,378
48,011
29,278
30
Item 7. Management’s Discussion and Analysis of Financial Condition and
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Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes
thereto.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-
looking statements within the meaning of Section 27A of the Securities Act,
as amended, and Section 21E of the
g
Exchange Act, as amended. The forward-looking statements involve risks and uncertainties. Forward-looking
statements are frequently identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,”
and other similar expressions. However, these words are not the only way we identify forward-looking statements. In
addition, any statements, which refer to expectations, projections, or other characterizations of future events or
circumstances, are forward-looking statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those set forth in Item 1A, “Risk Factors,”
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those described elsewhere in this report, and those described in our other repo
rts filed with the SEC. We caution you
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not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and
we undertake no obligation to release the results of any revisions to these forward-looking
statements that could occur
ii
after the filing of this report.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). The preparation of these consolidated financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions,
including those related to revenue recognition, stock-based compensation, short-term investments, patents and
intangible assets, income taxes, contingencies, and litigation. We base our estimates and assumptions on historical
experience and on various other factors that we believe to be reasonable under the circumstances, the 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.
We believe the following are our most critical accounting policies as they require our significant judgments and
estimates in the preparation of our consolidated financial statements:
Revenue Recognition
We recognize revenues in accordance with applicable accounting standards, including Accounting Standards
Codification (“ASC”) 605-10-S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element
Arrangements” (“ASC 605-25”); and ASC 985-605, “Software-Revenue Recognition” (“ASC 985-605”). We derive
our revenues from two principal sources: royalty and license fees, and development contract and service fees. As
described below, management judgments and estimates must be made and used in connection with the revenue
recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any
period based on the judgments and estimates made by our management. Specifically, in connection with each
transaction, we must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the fee is fixed or determinable, and (iv) collectability is probable. We apply these criteria as discussed below.
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• Persuasive evidence of an arrangement exists. For a license arrangement, we require a written
contract, signed by both the customer and us.
• Delivery has occurred. We deliver software to our customers physically and also electronically. For
•
electronic deliveries, delivery occurs when we provide the customer access codes or “keys” that allow
the customer to take immediate possession of the software.
The fee is fixed or determinable. Our arrangement fee is based on the use of standard payment terms
which are those that are generally offered to the majority of customers. For transactions involving
extended payment terms, we deem these fees not to be fixed or determinable for revenue recognition
purposes and revenue is deferred until the fees become due and payable.
• Collectability is probable. To recognize revenue, we must judge collectability of fees, which we do on
a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with
whom we have a history of successful collection. For new customers, we evaluate the customer’s
financial condition and ability to pay. If we determine that collectability is
not probable based upon
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our credit review process or the customer’s payment history, we recognize revenue when payment is
received.
Royalty and license revenue — We license our patents and software to customers in a variety of industries
such as mobility, gaming, automotive, and medical devices. Certain of these are variable fee arrangements where the
31
royalties earned by us are based on units sold or sales volumes of the respective licensed products. We also enter into
fixed license fee arrangements. The terms of the royalty agreements generally require licensees to give notification of
royalties due to us within 30 – 45 days of the end of the quarter during which their related sales occur. As we are
unable to reliably estimate the licensees’ sales in any given quarter to determine the royalties due to us, we recognize
royalty revenues based on royalties reported by licensees and when all revenue recognition criteria are met. Certain
royalties could be subject to change and may result in out of period adjustments depending on the specific terms of
the arrangement. We recognize fixed license fee revenue when earned under the terms of the agreements, which
generally results in recognition on a straight-line basis over the expected term of the license.
Development, services, and other revenue — Development, services, and other revenue are composed of
engineering services (engineering services and/or development contracts), and in limited cases, post contract customer
support (“PCS”). Engineering services revenues are recognized under the proportional performance accounting
method based on the completion of the work to be performed or completed performance method. A provision for
losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably
estimated. Revisions in estimates are reflected in the period in which the conditions beco
me known. To date, such
losses have not been significant. Revenue from PCS is typically recognized over the period of the ongoing obligation,
which is generally consistent with the contractual term.
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—
Multiple element arrangements — We enter into multiple element
arrangements in which customers
purchase time-based non-exclusive licenses that cannot be resold to others, which include a combination of software
and/or IP licenses, engineering services, and in limited cases, PCS. For arrangements that are software based with an
engineering services component, the services are generally not essential to the functio
nality of the software, and
customers may purchase engineering services from the Company to facilitate the adoption of our technology, but they
may choose to use their own resources or appoint other engineering service organizations to perform these services.
For arrangements that are in substance subscription arrangements, the entire arrangement fee is recognized ratably
over the contract term, subject to any limitations related to extended payment terms. For arrangements involving
upfront fees for services and royalties earned by us based on units sold or sales volumes of the respective licensed
products, and the services are performed ratably over the arrangement or are front-end loaded, the upfront fees are
recognized ratably over the contract term, and royalties based on units sold or sales volume are recognized when they
become fixed and determinable. As we are unable to reliably estimate the licensees’ sales in any given quarter to
determine the royalties due to us, we recognize per unit or sales volume driven royalty revenues based on royalties
reported by licensees and when all revenue recognition criteria are met.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as expense on a straight-line basis over the requisite service period, which is the vesting period.
Valuation and amortization methods — We use the Black-Scholes-Merton option pricing model (“Black-
Scholes model”), single-option approach to determine the fair value of standard stock options and Employee Stock
Purchase Plan (“ESPP”) shares. All share-based payment awards are amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense
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recognized at fair value includes the impact of estimated forfeitures. We estimate future forfeitures at the date of grant
riods if actual forfeitures differ from these estimates. The
and revise the estimates if necessary, in subsequent pe
determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These
variables include actual and projected employee stock option exercise behaviors
that impact the expected term, our
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expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.
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We use the Monte-Carlo Simulation model to value our stock options with a market condition. Valuation
techniques such as the Monte-Carlo Simulation model have been developed to value path-dependent awards. The
Monte-Carlo Simulation model is a generally accepted statistical technique used, in this instance, to simulate a range
of our future stock prices.
The Black-Scholes model was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable, characteristics not present in our option grants and ESPP shares.
Existing valuation models, including the Black-Scholes model and the Monte-Carlo Simulation, may not provide
reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates
of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual
values realized upon the exercise, expiration, early termination, or forfeiture of those stock-based payments in the
future. Certain stock-based payments, such as employee stock options, may expire and be worthless or otherwise result
in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial
statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values
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originally estimated on the grant date and reported in our financial statements. There currently is no market-based
mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these
valuation models, nor is there a means to compare and adjust the estimates to actual values.
If factors change and we employ different assumptions for estimating stock-based compensation expense
in future periods, or if we decide to use a different valuation model, the future periods may differ significantly from
what we have recorded in the current period and could materially affect our operating results.
See Note 9 to the consolidated financial statements for further information regarding stock-based compensation.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes as prescribed in ASC 740, Income Taxes.
Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current
year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, tax losses, and credit carryforwards. This method requires a reduction of the
carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than
not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets
is assessed periodically based on the ASC 740 more-likely-than-not realization ("MLTN") threshold criterion. This
assessment considers matters such as future reversals of existing taxable temporary differences, projected future
f
taxable income, tax-planning strategies, and results of recent operations. The evaluation of the recoverability of the
deferred tax assets requires that the Company weigh all positive and negative evidence to reach a conclusion that it is
more likely than not that all or some portion of the deferred tax assets w
ill not be realized. The weight given to the
evidence is commensurate with the extent to which it can be objectively verified.
r
Our judgments, assumptions, and estimates relative to the current provision for income tax take into account
current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted
by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures
involving tax positions that could be challenged by tax authorities. Although we believe our judgments, assumptions,
and estimates are reasonable, changes in tax laws or our interpretation of tax laws and any future tax audits could
significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account
predictions of the amount and category of future taxable income, such as income from operations or capital gains
income. Actual operating results and the underlying amount and category of income in future years could render
inaccurate our current assumptions, judgments, and estimates of recoverable net deferred tax assets. Any of the
assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from
our estimates, thus materially impacting our financial position and results of operations.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax
jurisdictions. Certain portions of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries.
In addition to providing for U.S. income taxes on earnings from the U.S., we provide for U.S. income taxes on the
ently reinvested outside the
aa
earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered perman
U.S. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign
earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by
any foreign income taxes paid on these earnings but only to the extent that we generate sufficient United States based
income.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax
rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes
in, our estimates related to, or our interpretation of, tax rules and regulations in the jurisdictions in which we do
business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, or by changes
in the valuation of our deferred tax assets and liabilities. The United States, countries in the European Union and other
countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations
and interpretations, including changes to tax laws applicable to corporate multinationals. These potential changes
could adversely affect our effective tax rates or result in other costs to us.
See Note 12 to the consolidated financial statements for further information concerning income taxes.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s
33
judgment in its application. There are also areas in which management’s judgment in selecting any available alternative
would not produce a materially different result.
Results of Operations
Overview of 2016
Revenues for 2016 were $57.1 million, a decrease of $6.3 million, or 10%, versus 2015. This decrease was
primarily related to a decrease of $5.6 million in royalty and license revenue, mostly in mobility and gaming markets,
due to a one-time licensing fee of $2.0 million recorded in 2015 that did not recur in 2016, and certain of license
agreements with our customers that expired prior or during 2016. The decreases in royalty and license revenue from
mobility and gaming markets were partially offset by an increase in medical market.
Net loss for 2016 was $39.4 million, compared to net income of $2.9 million for 2015. Net loss for fiscal year
2016 was primarily related to a non-cash valuation allowance charge of $28.1 million recorded in the fourth quarter
against our deferred tax assets, which resulted in an increase of $23.9 million in tax provision as compared to 2015.
Net loss for 2016 was also related to an increase of $13.9 million in operating expenses due mainly to higher litigation
expenses as our continuous effort to protect and preserve our IP, and a decrease of $6.3 million in total revenues
compared to the year ended December 31, 2015. These were partially offset by an increase of $1.0 million in other
income from continuing operations and $649,000 in income from discontinued operations, net of tax, recorded in the
second quarter of 2016. See Note 12 to the consolidated financial statements for additiona
l information on our income
aa
taxes.
x
In 2017, we expect royalty and license revenue, mainly from mobility customers, to remain the major component
of our revenue as our technology continues to be included in our licensees’ products and as we continue to execute
our patent licensing program in mobility market. Our gaming royalty and license revenue could be adversely impacted
in 2017 by the expiration of several gaming patents in 2016. Revenue may also decrease due to timing and uncertainty
associated with contract renewals. IP litigation, including our pending litigation with Apple and AT&T, may cause us
to expend significant financial resources in the future and may have an adverse effect on the results of our operations.
Additionally, our success could be limited by various factors, including global economic conditions, foreign currency
exchange rates, the timely release of our new products and our licensees’ products, continued market acceptance of
our products and technology, and the introduction of new products by existing or new competitors and adverse rulings
affecting our patents. For a further discussion of these and other risk factors, see Item 1A, “Risk Factors.”
34
The following table sets forth our consolidated statements of income data as a percentage of total revenues:
Revenues:
Royalty and license
Development, services, and other
Total revenues
Costs and expenses:
Cost of revenues (exclusive of amortization of intangibles
shown separately below)
Sales and marketing
Research and development
General and administrative
Amortization of intangibles
Total costs and expenses
Operating income (loss)
Interest and other income
Other expense
Income (loss) from continuing operations before provision for
income taxes
Provision for income taxes from continuing operations
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
Years Ended December 31,
2016
2015
2014
98.2%
1.8
100.0
0.3
25.6
23.5
77.3
—
126.7
(26.7)
1.4
(0.1)
(25.4)
(44.7)
(70.1 )
1.1%
(69.0 )
97.3%
2.7
97.9 %
2.1
100.0
100.0
0.7
23.2
23.3
45.4
—
92.6
7.4
0.3
(0.7)
7.0
(2.5)
4.5
—
4.5%
0.9
20.6
22.3
44.9
0.1
88.8
11.2
1.1
(0.4)
11.9
(4.1)
7.8
—
7.8 %
($ in thousands)
2016
$ Change
%
2015
$ Change % Change
2014
Royalty and license
Development, services,
and other
$
56,030 $
(5,647)
(9 )% $
61,677 $
9,873
19 % $ 51,804
1,056
(660)
(38 )%
1,716
583
51 %
1,133
Total revenue
$
57,086 $
(6,307)
(10 )% $
63,393 $
10,456
20 % $ 52,937
2016 Compared to 2015
Royalty and license revenue — Royalty and license revenue is comprised of variable royalties earned based on
usage by licensees and fixed payment license fees charged for our IP and software. Royalty and license revenue for
2016 was $56.0 million, a decrease of $5.6 million, or 9%, compared to $61.7 million for 2015.
Variable royalty revenue based on shipping volumes and per unit prices decreased by $4.2 million, or 14%, to
$25.6 million for the year ended December 31, 2016, compared to $29.8 million for the year ended December 31,
2015. The decrease was primarily caused by decreased volume from our gaming, mobility, and medical customers.
Fixed payment license revenue decreased by $1.5 million, or 5%, to $30.4 million for the year ended
December 31, 2016, compared to $31.9 million for the year ended December 31, 2015. The decrease was primarily
related to the decrease in mobility license revenue due to a one-time licensing fee of $2.0 million recorded in the
second quarter of 2015 that did not recur in 2016, and certain of our license agreements with our mobility customers
that expired prior or during 2016, including our previous license agreement with Samsung that expired at the end of
35
2015. The decrease in mobility license revenue was further offset by a non-recurring license fee of $3.0 million from
a medical customer and increased license fees from new gaming customers we signed during 2016.
y
Royalty and license revenue from mobility customers decreased by 17% primarily due to a non-recurring license
fee of $2.0 million from a completed contract with a mobility customer in the prior year
that did not recur in 2016,
along with decreased recurring license revenue from our previous license agreements, including Samsung that expired
at the end of 2015. In the first quarter of 2016, we filed an arbitration requesting that Samsung be ordered to comply
with its obligation under the Samsung License, including ceasing distributing devices previously licensed under the
Samsung License and paying damages suffered by us. On July 12, 2016, we entered into an amendment to the original
agreement to permit Samsung to exercise Product Life Cycle Wind Down Rights in exchange for a fee of $19.0 million
which we recognized as license revenue during 2016 that partially offset the decreased mobility license revenue.
Pursuant to the amendment, we agreed to terminate the arbitration proceedings and release each other for a variety of
matters. See Part I, Item 3. Legal Proceedings. We anticipate that our mobility business will continue to be the primary
revenue stream in 2017.
Royalty and license revenue from gaming customers decreased by 9% primarily due to the decreased volume of
sales by our licensees that drove down the per-unit royalty revenue during 2016. This decrease was partially offset by
increased license fees from new gaming customers. Revenue from gaming customers can fluctuate based upon
consumer gaming preferences, the timing of introductions of new gaming console systems, the timing of new products
from third party peripheral makers that are our licensees, and the recognition by gaming customers of the relevance
of our IP.
Royalty and license revenue from automotive customers remained relatively flat compared to 2015.
Royalty and license revenue increased by 46% from medical customers primarily due to a non-recurring license
fee of $3.0 million partially offset by reduced royalties from other medical customers.
We expect royalty and license revenue to continue to be the major component of our future revenue sources as
our technology continues to be included in products and we continue our efforts to monetize our IP. We typically
experience seasonally higher revenue from our gaming and mobility customers due to the reporting of holiday sales
in the first calendar quarter compared to other calendar quarters. Our gaming royalty and license revenue could be
adversely impacted in 2017 by the expiration of several gaming patents in 2016. Revenue may also decrease due to
timing and a lack of contract renewals.
ff
Development, services, and other revenue — Development, services, and other revenue is comprised primarily
of development work, implementation support, and other contract engineering services provided to customers.
Development, services, and other revenue for 2016 decreased by $660,000, or 38%, versus 2015, mainly due to a
decreased non-recurring service fees from contracts completed in prior year. We continue to focus our engineering
resources on development efforts that leverage our existing sales and channe
l distribution capabilities. Accordingly,
t
we do not expect development, services, and other revenue to be a significant part of total revenues in the future.
Geographically, revenues generated in North America, Europe, and Asia during 2016 represented 32%, 8%, and
60%, respectively, of our total revenue as compared to 28%, 5%, and 67%, respectively, for 2015. Revenue attributable
to North America as a percentage of total revenue increased primarily due to increased license revenue from medical,
partially offset by decreased royalty revenue from gaming and mobility. Revenue attributable to Europe as a
percentage of total revenue increased primarily due to increased royalty revenue from gaming and automotive,
partially offset by decreased royalty revenue from medical. Revenue attributable to Asia as a percentage of total
revenue decreased primarily from decreased royalty and license revenue from mobility and, to a lesser extent,
decreased royalty revenue from gaming and automotive.
d
2015 Compared to 2014
Royalty and license revenue — The increase in royalty and license revenue from 2014 to 2015 was driven
primarily by increases from our mobility licensees and, to a lesser extent, by increases from our automotive, gaming,
and medical licensees.
e
Variable royalty revenue based on shipping volumes and per unit prices increased to $29.8 million for the year
ended December 31, 2015 from $21.6 million for the year ended December 31, 2014. The increase in 2015 variable
royalty revenue was primarily due to increased volume from our mobility customers and,
to a lesser extent, due to
higher royalty rates and timing of revenue recognition. Fixed payment license revenue increased to $31.9 million for
the year ended December 31, 2015 from $30.2 million for the year ended December 31, 2014, mainly due to a non-
recurring license fee from a completed contract of $2.0 million.
m
36
Royalty and license revenue from mobility customers increased by 23% primarily due to a non-recurring license
fee from a completed contract of $2.0 million and to a lesser extent increased volume from our new and existing
customers. We anticipate that our mobility business will continue to be of primary importance.
Royalty and license revenue from automotive customers increased by 53%, primarily due to our technology being
incorporated in an increased volume of vehicles sold by existing licensees and to a lesser extent the timing of revenue
recognition.
Royalty and license revenue from gaming customers increased by 5%, primarily due to increased sales by our
licensees of products containing our technology.
Royalty and license revenue also increased by 14% for medical customers primarily due to increased sales
volumes from our licensees and timing of revenue recognition; partially offset by decreased license fees.
Development, services, and other revenue — Development, services, and other revenue increased mainly due to
a non-recurring service fee from a completed contract of $0.6 million.
For 2015 revenues generated in North America, Europe, and Asia represented 28%, 5%, and 67%, respectively,
compared to 29%, 3%, and 68%, respectively, for 2014. The slight shift in revenues among regions was mainly due
to an increase in royalty and license revenue in Asia primarily due to an increase in royalty revenue from our mobility
and automotive licensees. The increase in royalty and license revenue in North America was primarily due to increased
revenue from our mobility and gaming customers. The increase in royalty and license revenue in Europe was primarily
due to increased revenue from our automotive, gaming, and medical customers. The increases in royalty and license
revenue in Asia and North America were relatively less than the increase in Europe, resulting in the decreases in these
regions as a percentage of revenues.
Expenses
($ in thousands)
2016
$ Change
%
Change
2015
$ Change
%
Change
2014
Sales and marketing
Research and development
General and administrative
Amortization of intangibles
$ 14,613 $
13,388
44,151
6
(61)
(1,397)
15,396
(14)
— % $ 14,674 $
(9 )%
54 %
(70 )%
14,785
28,755
20
3,778
2,992
5,001
(47)
35 % $ 10,896
11,793
25 %
23,754
21 %
67
(70 )%
g
Sales and Marketing — Our sales and marketing expenses are co
mposed primarily of employee compensation
and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds,
travel, and allocated facilities costs. Sales and marketing expense for 2016 was relatively flat as compared to 2015.
We expect that sales and marketing expenses will increase in 2017 as we continue to invest in sales and marketing to
further market acceptance for our touch technologies and expanding our focus on the content and media business.
ff
The increase in sales and marketing expense for 2015 as compared to 2014 was primarily due to increased
compensation, benefits, and other related costs of $2.8 million, mainly due to
increased headcount and benefits;
d
increased marketing and advertising expenses of $551,000 mainly due to marketing initiatives and tradeshows; and
increased consulting and outside services of $254,000 due to tradeshows and sales initiatives in 2015.
t
Research and Development — Our research and development expenses are composed primarily of employee
compensation and benefits, consulting fees, tooling and supplies, and allocated facilities costs. Research and
development expenses decreased by $1.4 million, or 9%, during 2016 as compared to 2015. The decrease was
primarily due to a $504,000 decrease in compensation, benefits, and other related costs and a $216,000 decrease in
travel costs, both resulted from decreased headcount, and a $661,000 decrease in consulting services expense as a
reflection of our redirected development efforts. We believe that continued investment in research and development
is critical to our future success, and we expect to continue to make investments in areas of research and development
to support future growth including our content and media business.
aa
37
The increase in research and development expenses for 2015 as compared to 2014 was primarily due to increased
compensation, benefits, and other related costs of $2.1 million, mainly due to increased headcount and benefits; and
increased consulting and outside services expense of $609,000, related to our investment in projects to continue
inventing and improving our haptic technologies.
General and Administrative — Our general and administrative expenses are primarily composed 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 for 2016 increased $15.4 million, or 54%, as compared
to 2015. The increase was primarily related to a $15.2 million increase in legal expense and a $1.0 million increase in
compensation, benefits, and other related costs as a result of increased headcount and stock compensation expense for
2016. The increased legal and professional fees were primarily due to a $13.9 million increase in litigation expense
relating to ongoing litigations including the current litigation with Apple and AT&T Mobility, and a $1.2 million
increase in patent related legal, filing, and maintenance costs. These increases in general and administrative expenses
were partially offset by a $676,000 decrease in professional and outside services mainly due to reduced accounting
and tax services as we completed the reorganization of our international operations in
2015. We do not believe that
uu
our general and administrative expenses will decrease significantly in 2017 as we manage our business and strategic
opportunities and continue to file, maintain, license, and enforce our IP and contractual rights, including in the current
litigation against Apple, and AT&T Mobility, and defend any lawsuits brought against us or that we initiate against
others to enforce our IP or contractual rights.
ff
The increase in general and administrative expenses for 2015 as compared to 2014 was primarily due to increased
legal and professional expenses of $2.7 million and increased compensation, benefits, and other related costs of $2.3
million. The increased legal and professional expenses were primarily due to increased professional services and
license fee expenses of $4.3 million, partially offset by decreased litigation expenses of $1.6 million relating to
ongoing and completed litigation. The increased compensation, benefits, and other related costs were mainly due to
increased headcount, benefits, and stock compensation expense.
f
Interest and Other Income
Other Expense
($ in thousands)
2016
$ Change
%
Change
2015
$ Change
%
Change
2014
Interest and other income $
$
Other expense
817 $
(63) $
640
384
362% $
(86 ) $
177 $
(447) $
(403)
(219)
(69 )% $
96 % $
580
(228)
Interest and Other Income — Interest and other income consists primarily of interest income from cash and cash
equivalents and short-term investments, interest on notes receivable, translation exchange rate gains and other income.
Interest and other income increased in 2016 compared to 2015 primarily attributable to non-recurring other income of
$550,000 received in the third quarter of 2016. Interest and other income decreased in 2015 compared to 2014 as a
result of a non-recurring gain of $344,000 in 2014 that did not recur in 2015.
Other Expense — Other expense consist primarily of translation loss from exchange rate fluctuations. Other
expense decreased in 2016 compared to 2015 as a result of exchange rate gains from our foreign subsidiaries. Other
expense increased in 2015 compared to 2014 as a result of exchange rate losses from our foreign subsidiaries.
38
Provision for Income Taxes from Continuing Operations
($ in thousands)
2016
$ Change
%
Change
2015
$ Change
%
Change
2014
Provision for income taxes
from continuing operations $ (25,521)
Income (loss) from
continuing operations
before provision for income
Effective tax rate
(14,509)
(175.9 )%
$ (23,930)
1,504% $ (1,591) $
605
(28 )% $ (2,196)
4,449
35.8%
6,319
34.8%
For 2016 we recorded a provision for income taxes from continuing operations of $25.5 million yielding an
effective tax rate of (175.9)%. The 2016 provision reflects the increase in our deferred tax asset valuation allowance.
Prior to the year ended December 31, 2016, we maintained a valuation allowance only against certain of our
U.S. Federal and Foreign deferred tax assets as we concluded that it was more likely than not that certain of these U.S.
Federal deferred tax assets would be utilized. We also determined that a valuation allowance was needed against our
State and certain other Foreign deferred tax assets as there was not sufficient evidence to support the release of the
valuation allowance against them.
Based on our fourth quarter of 2016 assessment of the realizability of our deferred tax assets, we recorded a
non-cash charge of $28.1 million as additional valuation allowance against our federal deferred tax assets, thereby
establishing a full valuation allowance against these deferred tax assets as of December 31, 2016. We continued to
maintain a full valuation allowance against our state and certain of our foreign net deferred tax assets. As of December
31, 2016, the aggregating balance of our deferred tax assets totaled $39.0 million with a valuation allowance of $38.7
million, resulting in a net deferred tax asset balance of $359,000. The valuation allowance of $38.7 million is
comprised of $29.5 million against our U.S. federal deferred tax assets and $9.2 million against our state and foreign
deferred tax assets. The establishment of a valuation allowance has no effect on our ability to use the deferred tax
assets in the future to reduce cash tax payments when taxable income is reported. As required by U.S. GAAP, we will
continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation
allowance will be adjusted accordingly, which could materially affect the Company's financial position and results of
operations.
For 2015 we recorded a provision for income taxes of $1.6 million yielding an effective tax rate of 35.8%. The
2015 provision included the tax impact of nondeductible permanent items, including stock-based compensation and
foreign withholding taxes, incurred for the period. The provision for income tax for 2015 also included tax expense
on intercompany profits resulting from the sale of certain IP rights to one of our foreign subsidiaries as part of the
reorganization described below. The change in tax provision results primarily from the effects of the above described
reorganization, including an increase to the valuation allowance against certain deferred tax assets and, to a lesser
extent, the change in income before provision for income taxes for each tax jurisdiction.
During the year ended December 31, 2015, we commenced and completed a reorganization of our international
operations. The purpose of this reorganization was to more closely align our corporate structure and income tax profile
with the international nature of our business activities. Steps taken to achieve the reorganization included making
changes to our legal entity structure, transferring certain IP rights to one of our foreign subsidiaries, and the
implementation of contractual agreements, including research and development cost-sharing arrangements, between
the U.S. entity and its wholly owned foreign subsidiaries. There were no other expenses incurred, in relation to the
reorganization described above, outside of those related to income taxes.
We expect that this reorganization will result in a lower percentage of pre-tax income being subject to U.S.
federal statutory tax rate over the long-term. However, our ability to realize the expected tax benefits of this
reorganization is contingent upon numerous factors, including our ability to achieve our projected revenue and
earnings both domestically and in the various countries in which the reorganization took place and the judgments of
tax authorities in several jurisdictions. A change in these factors in future periods relative to our current assumptions
may result in additional income tax expense and/or withholdings being recorded in future filings.
39
For 2014, we recorded a provision for income taxes of $2.2 million, yielding an effective tax rate of 34.8%. The
2014 tax provision resulted primarily from the decrease in deferred tax assets and foreign withholding tax expense.
We also maintain liabilities for uncertain tax positions. We released reserves totaling $310,000 in 2016 including
interest and recorded a tax benefit due to the receipt of a tax refund related to the settlement with a taxing authority as
noted above. As of December 31, 2016, we had unrecognized tax benefits under ASC 740 "Income Taxes" of
approximately $6.2 million and there was no applicable interest. The total amount of unrecognized tax benefits that
would affect our effective tax rate, if recognized, is $97,000.
Discontinued Operations
Discontinued Operations - Income from discontinued operations, net of taxes, of $649,000 in the year ended
December 31, 2016 is comprised of a final payment received from the sales of the 3D product line that occurred in
the year ended December 31, 2009.
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments consist primarily of money market funds and U.S. treasury
bills and government agency securities. All of our short-term investments are classified as available-for-sale. The
securities are stated at market value, with unrealized gains and losses reported as a component of accumulated other
comprehensive income, within stockholders’ equity.
As of December 31, 2016, our cash, cash equivalents, and short-term investments totaled $89.8 million, an
increase of $24.9 million from $64.9 million on December 31, 2015, primarily due to cash receipts from our customers.
Cash provided by operating activities - Net cash provided by operating activities was $22.0 million for 2016
compared to $10.0 million for 2015. The $12.0 million increase in net cash provided by operating activities was
primarily attributable to $29.2 million change in deferred revenue and customer advances, $14.3 million change in
deferred income taxes, and $11.7 million decrease in working capital, partially offset by the change from $2.9 million
net income for 2015 to $39.4 million net loss for 2016. The $29.2 million change in deferred revenue and customer
advance was mainly related to new billings for up-front licensee fees added in 2016 that have been deferred to be
recognized over the contract terms. The $14.3 million change in deferred income tax was primarily caused by a non-
cash charge of $28.1 million recorded in the fourth quarter of 2016 to estab
lish a full valuation allowance against our
U.S. deferred tax assets, partially offset by additions to our deferred tax assets recorded in the period. Working capital
is defined as current assets (excluding cash and cash equivalents) minus current liabilities. Working capital decreased
$11.7 million in 2016 compared to 2015 due primarily to the decreases in the year-over-year change in prepaid income
taxes and prepaid expense and other current assets of $9.0 million and $1.9 mill
ion, respectively, and an increase in
the year-over-year change in accounts payable of $5.3 million. This decrease was partially offset by an increase in the
year-over-year change in accounts receivable of $2.0 million and a decrease in the year-over-year change in accrued
compensation and other current liabilities of $2.4 million.
n
t
Cash provided by (used in) investing activities — Net cash provided by investing activities during 2016 was $7.8
million, compared to the $1.3 million cash used in investing activities during 2015. Net cash provided by investing
activities during 2016 consisted of maturities of short-term investments of $40.0 million and proceeds from sales of
discontinued operations of $1.0 million. This was partially offset by purchases of short-term investments of $32.8
million and purchases of property, plant, and equipment of $343,000. Net cash used in investing activities during 2015
was $1.3 million, compared to the $13.3 million net cash provided by investing activities during 2014. Net cash used
in investing activities during 2015 consisted of purchases of short-term investments of $44.9 million and purchases of
property, plant, and equipment of $4.4 million. This was partially offset by maturities of short-term investments of
$48.0 million.
Cash provided by (used in) financing activities — Net cash provided by financing activities during 2016 was $2.0
million, an increase of $38,000 compared to $1.9 million net cash provided during 2015. Net cash provided by
financing activities during 2016 consisted primarily of exercises of stock options of $2.4 million and the issuance of
common stock under the ESPP of $307,000, partially offset by repurchases of treasury stock of $729,000. Net cash
provided by financing activities during 2015 was $1.9 million, compared to $13.3 million used in financing activities
during 2014. Net cash provided by financing activities during 2015 consisted primarily of exercises of stock options
of $1.6 million and the issuance of common stock under the ESPP of $367,000.
We believe that our cash, cash equivalents, and short-term investments will be sufficient to meet our working
capital needs for at least the next twelve months. Of our total cash, cash equivalents, and short-term investments of
$89.8 million as of December 31, 2016, less than 10% 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
40
anticipate that we will need funds generated from foreign operations to fund our domestic operations. We will continue
to invest in, protect, and defend our extensive IP portfolio, which is expected to result in the continued use of cash. At
December 31, 2016 there was $33.7 million under our previously-approved share repurchase program. We anticipate
that capital expenditures for property and equipment for the year ended December 31, 2017 will be less than $1.0
million. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to
the risks detailed in Part I, Item 1A, “Risk Factors.” Additionally, if we acquire businesses, patents, or technology, our
cash or capital requirements could increase substantially. In the event of such an acquisition, or should any
unanticipated circumstances arise that significantly increase our capital requirements, we may elect to raise additional
capital through debt or equity financing. Any of these events could result in substantial dilution to our stockholders.
There is no assurance that such additional capital will be available on terms acceptable to us, if at all.
Summary Disclosures about Contractual Obligations and Commercial Commitments
The following table reflects a summary of our contractual cash obligations and other commercial commitments
as of December 31, 2016 (in thousands):
Contractual
Obligations
Operating Leases
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
$
6,453 $
1,281
$
2,180 $
1,762 $
1,230
At December 31, 2016, we had a liability for unrecognized tax benefits totaling $6.2 million including interest of
$2,000, of which approximately $97,000 could be payable in cash. We did not have any other significant non-
cancellable purchase commitments as of December 31, 2016.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements for information regarding the effect of new accounting
pronouncements on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.
Changes in these factors may cause fluctuations in our earnings and cash flows. We evaluate and manage the exposure
to these market risks as follows:
Cash Equivalents and Short-term Investments — We had cash equivalents and short-term investments of $89.8
million as of December 31, 2016, which are subject to interest rate fluctuations. An increase in interest rates could
adversely affect the market value of our cash equivalents and short-term investments. A hypothetical 100 basis point
increase in interest rates would result in a decrease of approximate $141,000 in the fair value of our cash equivalents
and short-term investments as of December 31, 2016.
We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines
for our cash equivalents and short-term investment portfolios. The primary objective of our policies is to preserve
principal while at the same time maximizing yields, without significantly increasing risk. Our policy’s guidelines also
limit exposure to loss by limiting the sums we can invest in any individual security and restricting investments to
securities that meet certain defined credit ratings. We do not use derivative financial instruments in our investment
portfolio to manage interest rate risk.
Foreign Currency Exchange Rates — A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, we do incur certain operating costs for our foreign operations in
other currencies but these operations are limited in scope and thus we are not
materially exposed to foreign currency
fluctuations. Additionally, we have some reliance on international revenues that are subject to the risks of fluctuations
in currency exchange rates. Because a substantial majority of our international revenues, as well as expenses, are
typically denominated in U.S. dollars, a strengthening of the U.S. dollar could cause our licenses to become relatively
more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. We
have no foreign exchange contracts, option contracts, or other foreign currency hedging arrangements and we do not
expect to have such arrangements in the foreseeable future.
d
ff
41
Item 8. Financial Statements and Supplementary Data
IMMERSION CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended
December 31, 2016, 2015, and 2014
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015, and
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
Page
43
44
45
46
47
48
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Immersion Corporation
San Jose, California
We have audited the accompanying consolidated balance sheets of Immersion Corporation and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and
comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
aa
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position
of Immersion Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
aa
(United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 3, 2017 expressed an unqualified opinion on the Company’s
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 3, 2017
43
IMMERSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts and other receivables (net of allowances for doubtful accounts of: $0 and
$15, respectively)
Prepaid expenses and other current assets
$
Total current assets
Property and equipment, net
Deferred income tax assets
Prepaid income taxes
Intangibles and other assets, net
Total assets
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued compensation
Other current liabilities
Deferred revenue
Total current liabilities
Long-term deferred revenue
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 8 and 15)
Stockholders’ equity:
Common stock and additional paid-in capital – $0.001 par value; 100,000,000
shares authorized; 35,555,562 and 34,845,310 shares issued, respectively;
28,917,559 and 28,329,416 shares outstanding, respectively
Accumulated other comprehensive income
Accumulated deficit
Treasury stock at cost: 6,638,003 and 6,515,894 shares, respectively
Total stockholders’ equitq
Total liabilities and stockholders’ equity
y
$
$
December 31,
2016
2015
56,865 $
32,907
1,382
2,876
94,030
4,016
359
4,997
365
103,767 $
5,951 $
4,753
4,409
5,909
21,022
26,393
1,012
48,427
25,013
39,918
1,213
2,790
68,934
4,589
24,633
6,995
264
105,415
650
4,840
2,999
6,696
15,185
2,516
1,099
18,800
221,098
212,115
115
(119,329)
(46,544)
55,340
103,767 $
86
(79,948)
(45,638)
86,615
105,415
44
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Revenues:
Royalty and license
Development, services, and other
Total revenues
Costs and expenses:
Years Ended December 31,
2016
2015
2014
$
56,030 $
1,056
57,086
61,677 $
1,716
63,393
51,804
1,133
52,937
Cost of revenues (exclusive of amortization of intangibles shown
separately below)
Sales and marketing
Research and development
General and administrative
Amortization of intangibles
Total costs and expenses
Operating income (loss)
Interest and other income
Other expense
Income (loss) from continuing operations before provision for income
taxes
Provision for income taxes from continuing operations
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
Basic net income (loss) per share:
Continuing operations
Discontinued operations
Total
Shares used in calculating basic net income (loss) per share
Diluted net income (loss) per share:
Continuing operations
Discontinued operations
Total
Shares used in calculating diluted net income (loss) per share
Other compmm rehensive income (loss), net of tax
Change in unrealized gains (losses) on short-term investments
Foreign currency translation adjustments
Total other compmm rehensive income (loss)
Total compmm rehensive income (loss)
$
$
$
$
$
$
191
14,613
13,388
44,151
6
72,349
(15,263)
817
(63)
(14,509)
(25,521)
(40,030)
649
(39,381) $
(1.39) $
0.02
(1.37) $
28,759
(1.39) $
0.02
(1.37) $
28,759
8
21
29
(39,352) $
440
460
14,674
14,785
28,755
20
58,674
4,719
177
(447)
4,449
(1,591)
2,858 $
—
2,858
$
10,896
11,793
23,754
67
46,970
5,967
580
(228)
6,319
(2,196)
4,123
—
4,123
$
$
0.10
0.00
0.10
28,097
0.15
0.00
0.15
28,246
$
0.10
0.00
0.14
0.00
$
0.10
29,015
0.14
29,144
(16)
—
(16)
2,842 $
(10)
—
(10)
4,113
See notes to consolidated financial statements.
45
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock and
Additional Paid-
In Capital
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Income (Loss)
Accumulated
Deficit
D fi it
Treasury Stock
Shares
Amount
Total
Stockholders’
Equity
80,671
4,123
(10)
(15,000)
381
1,304
3,976
(161)
1,319
76,603
2,858
(16)
367
3,059
(228)
2,411
86,615
(39,381)
8
21
(729)
307
Balances at January 1, 2014
33,619,766
$ 198,057
$
112
$
(86,929)
4,982,744
$ (30,569) $
4,123
(10)
1,527,647
(15,000)
Net income
Unrealized gain (loss) on available-
for-sale securities, net of taxes
Repurchase of stock
Issuance of stock for ESPP
purchase
Exercise of stock options
Release of restricted stock units and
awards, including related stock
compensation
Tax benefit/(deficiency) from the
stock incentive plans
Stock based compensation for stock
options
38,298
205,744
381
1,304
361,970
3,976
(161)
1,319
Balances at December 31, 2014
34,225,778
$ 204,876
$
102
$
(82,806)
6,510,391
$ (45,569) $
2,858
(16)
Net income
Unrealized gain (loss) on available-
for-sale securities, net of taxes
Issuance of stock for ESPP
purchase
Exercise of stock options, net of
shares withheld for employee taxes
Release of restricted stock units and
awards, including related stock
compensation
Tax benefit/(deficiency) from the
stock incentive plans
Stock based compensation for stock
options
45,820
367
239,071
1,630
334,641
3,059
(228)
2,411
5,503
(69)
1,561
Balances at December 31, 2015
34,845,310
$ 212,115
$
86
$
(79,948)
6,515,894
$ (45,638) $
Net loss
Unrealized gain (loss) on available-
for-sale securities, net of taxes
Foreign currency translation
adjustments
Repurchase of stock
Issuance of stock for ESPP
purchase
Exercise of stock options, net of
shares withheld for employee taxes
Release of restricted stock units and
awards, including related stock
compensation
Stock based compensation for stock
options
45,825
307
395,515
2,565
268,912
2,257
3,854
(39,381)
8
21
105,750
(729)
16,359
(177)
2,388
2,257
3,854
Balances at December 31, 2016
35,555,562
$ 221,098
$
115
$
(119,32)
6,638,003
$ (46,544) $
55,340
See notes to consolidated financial statements.
46
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2016
2015
2014
$
(39,381) $
2,858 $
4,123
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment
Amortization of intangibles
Stock-based compensation
Deferred income taxes
Allowance for doubtful accounts
Loss on disposal of equipment
Income from discontinued operations
Changes in operating assets and liabilities:
Accounts and other receivables
Prepaid income taxes
Prepaid expenses and other current assets
Intangibles and other assets
Accounts payable
Accrued compensation and other current liabilities
Deferred revenue
Other long-term liabilities
tt
Net cash provided by operating activities
Cash flows provided by (used in) investing activities:
Purchases of short-term investments
Proceeds from maturities of short-term investments
Purchases of property and equipment
Proceeds from discontinued operations
Net cash provided by (used in) investing activities
Cash flows provided by (used in) financing activities:
Issuance of common stock under empmm loyee stock purchase plan
Exercise of stock options, net of shares withheld for employee taxes
Purchases of treasury stock
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
r
End of year
Suppu
lemental disclosure of cash flow information:
Cash paid for taxes
Supplemental disclosure of noncash operating, investing, and
financing activities:
Amounts accrued for property and equipment
Cashless option exercise under compmm any stock plan
Release of Restricted Stock Units and Awards under company stock
plan
$
$
$
$
$
904
6
6,111
24,274
2
17
(649)
(171)
1,998
(86)
(275)
5,322
967
23,090
(87)
22,042
(32,813)
40,000
(343)
1,000
7,844
307
2,388
(729)
1,966
31,852
996
20
5,470
9,935
(6)
10
—
1,814
(6,995)
(1,945)
(36)
(19)
3,750
(6,394)
587
10,045
(44,910)
48,000
(4,430)
—
(1,340)
367
1,561
—
1,928
10,633
500
67
5,295
1,893
16
52
—
(2,439)
—
(155)
(39)
(10)
(2,241)
(6,755)
(16)
291
(42,953)
57,000
(779)
—
13,268
381
1,304
(15,000)
(13,315)
244
25,013
56,865
14,380
25,013 $
14,136
14,380
$
(419) $
156 $
47
60
—
22
177
2,257
$
$
$
18 $
69 $
3,059 $
3,976
See notes to consolidated financial statements.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
Immersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware
in 1999. The company focuses on the creation, design, development, and licensing of innovative haptic technologies
that allow people to use their sense of touch more fully as they engage with cutting-edge products and experience the
digital world around them. The Company has adopted a “hybrid” business model, under which it provides advanced
tactile software, related tools, and technical assistance to certain customers; and offers licenses to the Company's
patented intellectual property (“IP”) to other customers.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Immersion Corporation and its wholly-owned
subsidiaries, Immersion Canada Corporation; Immersion International, LLC; Immersion Medical, Inc.; Immersion
Japan K.K.; Immersion Ltd.; Immersion Software Ireland Ltd.; Haptify, Inc.; Immersion (Shanghai) Science &
Technology Company, Ltd.; and Immersion Technology International Ltd. All intercompany accounts, transactions,
and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”).
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original or remaining maturity of less
than three months at the date of purchase to be cash equivalents.
Short-term Investments
The Company’s short-term investments consist primarily of U.S treasury bills and government agency securities
purchased with an original or remaining maturity of greater than 90 days on the date of purchase. The Company
classifies debt securities with readily determinable market values as “available-for-sale.” Even though the stated
t
maturity dates of these debt securities may be one year or more beyond the balance sheet date, the Company has
classified all debt securities as short-term investments as they are reasonably expected to be realized in cash or sold
within one year. These investments are carried at fair market value with unrealized gains and losses considered to be
temporary in nature reported as a separate component of other comprehensive income (loss) within stockholders’
f
equity.
r
The Company recognizes an impairment charge in the consolidated statement of income when a decline in value
is judged to be other than temporary based on the specific identification method. Other-than-temporary impairment
charges may exist when the Company has the intent to sell the security, will more likely than not be required to sell
the security, or does not expect to recover the principal.
Property and Equipment
Property is stated at cost and is depreciated using the straight-line method over the estimated useful life of the
related asset. The estimated useful lives are typically as follows:
Computer equipment and purchased software
Machinery and equipment
Furniture and fixtures
3 years
3-5 years
5 years
Leasehold improvements are amortized over the shorter of the lease term or their estimated useful life.
Long-lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of that asset may not be recoverable. An impairment loss would be recognized when
the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. Measurement of an impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based on the fair value of the asset.
48
Revenue Recognition
The Company recognizes revenues in accordance with applicable accounting standards, including ASC 605-10-
S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”);
and ASC 985-605, “Software-Revenue Recognition” (“ASC 985-605”). The Company derives its revenues from two
principal sources: royalty and license fees, and development contract and service fees. As described below,
management judgments, assumptions, and estimates must be made and used in connection with the revenue recognized
in any accounting period. Material differences may result in the amount and timing of revenue for any period based
on the judgments and estimates made by management. Specifically, in connection with each transaction, the Company
must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed
or determinable, and (iv) collectability is probable. The Company applies these criteria as discussed below.
• Persuasive evidence of an arrangement exists. For a license arrangement, the Company requires a
written contract, signed by both the customer and the Company.
• Delivery has occurred. The Company delivers software and product to customers physically and also
•
delivers software electronically. For electronic deliveries, delivery occurs when the Company provides
the customer access codes or “keys” that allow the customer to take immediate possession of the
software.
The fee is fixed or determinable. The Company’s arrangement fee is based on the use of standard
payment terms, which are those that are generally offered to the majority of customers. For
transactions involving extended payment terms, the Company deems these fees not to be fixed or
determinable for revenue recognition purposes and revenue is deferred until the fees become due and
payable.
• Collectability is probable. To recognize revenue, the Company must judge collectability of fees, which
is done on a customer-by-customer basis pursuant to the Company’s credit review policy. The
Company typically sells to customers with whom there is a history of successful collection. For new
customers, the Company evaluates the customer’s financial condition and ability to pay. If it is
determined that collectability is not probable based upon the credit review process or the customer’s
payment history, revenue is recognized when payment is received.
Royalty and license revenue — The Company licenses its patents and software to customers in a variety
of industries such as mobility, gaming, automotive, and medical devices. Certain of these are variable fee arrangements
where the royalties earned by the Company are based on units sold or sales volumes of the respective licensed
products. The Company also enters into fixed license fee arrangements. The terms of the royalty agreements generally
require licensees to give notification of royalties due to the Company within 30 – 45 days of the end of the quarter
during which their related sales occur. As the Company is unable to reliably estimate the licensees’ sales in any given
quarter to determine the royalties due to it, the Company recognizes royalty revenues based on royalties reported by
licensees and when all revenue recognition criteria are met. Certain royalties could be subject to change and may result
in out of period adjustments depending on the specific terms of the arrangement. The Company recognizes fixed
license fee revenue when earned under the terms of the agreements, which generally results in recognition on a
straight-line basis over the expected term of the license.
Development, services, and other revenue — Development, services, and other revenue are composed of
engineering services (engineering services and/or development contracts), and in limited cases, post contract customer
support (“PCS”). Engineering services revenues are recognized under the proportional performance accounting
method based on the completion of the work to be performed or completed performance method. A provision for
losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably
estimated. Revisions in estimates are reflected in the period in which the conditions beco
me known. To date, such
losses have not been significant. Revenue from PCS is typically recognized over the period of the ongoing obligation,
which is generally consistent with the contractual term.
d
—
Multiple element arrangements — The Company enters into multiple
element arrangements in which
customers purchase time-based non-exclusive licenses that cannot be resold to others, which include a combination
of software and/or IP licenses, engineering services, and in limited cases, PCS. For arrangements that are software
based with an engineering services component, the services are generally not essential to the functionality of the
software, and customers may purchase engineering services from the Company to facilitate the adoption of the
Company’s technology, but they may choose to use their own resources or appoint other engineering service
organizations to perform these services. For arrangements that are in substance subscription arrangements, the entire
arrangement fee is recognized ratably over the contract term, subject to any limitations related to extended payment
terms. For arrangements involving upfront fees for services and royalties earned by the Company based on units sold
or sales volumes of the respective licensed products, and the services are performed ratably over the arrangement or
are front-end loaded, the upfront fees are recognized ratably over the contract term, and royalties based on units sold
y
rr
49
or sales volume are recognized when they become fixed and determinable. As the Company is unable to reliably
estimate the licensees’ sales in any given quarter to determine the royalties due to it, the Company recognizes per unit
or sales volume driven royalty revenues based on royalties reported by licensees and when all revenue recognition
criteria are met.
Deferred Revenue
Deferred revenue consists of amounts that have been invoiced and for which the Company has the right to bill,
but that have not been recognized as revenue. The amounts are primarily related to our fixed fee contracts which are
recognized ratably over the license term (up to 10 years). Deferred revenue that will be realized during the succeeding
12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
Advertising
Advertising costs (including obligations under cooperative marketing programs) are expensed as incurred and
included in sales and marketing expense. Advertising expense was as follows:
Year ended December 31,
2016
2015
(In thousands)
2014
Advertising expense
$
102
$
265
$
344
Research and Development
Research and development costs are expensed as incurred. The Company has sometimes generated revenues from
development contracts with commercial customers that have enabled it to accelerate its own product development
efforts. Such development revenues have only partially funded the Company’s product development activities, and
the Company generally retains ownership of the products developed under these arrangements. As a result, the
Company classifies all development costs related to these contracts as research and development expenses.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax
expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax
assets and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be
realized and are reversed at such time that realization is believed to be more likely than not.
Software Development Costs
Costs for the development of new software products and substantial enhancements to existing software products
are expensed as incurred until technological feasibility has been established, at which time any additional costs would
be capitalized. The Company considers technological feasibility to be established upon completion of a working model
of the software. Because the Company believes its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs have been capitalized to date.
u
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as expense on a straight-line basis over the requisite service period, which is the vesting period. See Note 9 for further
information regarding the Company’s stock-based compensation assumptions and expenses.
Comprehensive Income
Comprehensive income includes net income as well as other items of comprehensive income or loss. The
Company’s other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized
gains and losses on short term investments, net of tax.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in accordance with U.S. GAAP and
pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
50
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include valuation of short-term investments,
income taxes including uncertain tax provisions, revenue recognition, stock-based compensation, contingent liabilities
from litigation, and accruals for other liabilities. Actual results may differ materially from those estimates which were
made based on the best information known to management at that time.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of
cash, cash equivalents, short term investments, and accounts receivable. The Company invests primarily in money
market accounts and highly liquid debt instruments purchased with an original or remaining maturity of greater than
90 days on the date of purchase. Deposits held with banks may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand. The Company licenses technology primarily to
companies in North America, Europe, and Asia. To reduce credit risk, management performs periodic credit
evaluations of its customers’ financial condition. The Company maintains reserves for estimated potential credit
losses, but historically has not experienced any significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
Certain Significant Risks and Uncertainties
The Company operates in multiple industries and its operations can be affected by a variety of factors. For
example, management believes that changes in any of the following areas could have a negative effect on the
Company's future financial position and results of operations: the mix of revenues; the loss of significant customers;
fundamental changes in the technologies underlying the Company’s and its licensees’ products; market acceptance of
the Company’s and its licensees’ products under development; development of sales channels; litigation or other
claims in which the Company is involved; the ability to successfully assert its patent rights against others; the impact
of changing economic conditions; the hiring, training, and retention of key employees; successful and timely
completion of product and technology development efforts; and new product or technology introductions by
competitors.
Fair Value of Financial Instruments
Financial instruments consist primarily of cash equivalents, short-term investments, accounts receivable and
accounts payable. Cash equivalents and short term investments are stated at fair value based on quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The recorded
cost of accounts receivable and accounts payable approximate the fair value of the respective assets and liabilities.
Foreign Currency Translation
The functional currency of the Company’s foreign subsidiaries is U. S. dollars. Accordingly, gains and losses from
transaction gains and losses
the translation of the financial statements of the foreign subsidiaries and foreign currency
are included in earnings.
u
Recent Accounting Pronouncements
In December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-19 “Technical Corrections and Improvements”. The amendments in this update affect a wide variety
of topics in the Accounting Standards Codification. For public business entities
, the amendments in this update are
effective for annual periods beginning after December 15, 2017, and interim periods in the annual period beginning
after December 15, 2018. The Company will adopt the standard in the first quarter of fiscal 2018, but does not expect
the adoption of ASU 2016-19 will have a material impact on its consolidated financial statements.
mm
aa
In October 2016, the FASB issued ASU 2016-16 “Income Taxes: Topic 740, Intra-Entity Transfers of Assets Other
Than Inventory” (“ASU 2016-16”) which simplifies certain aspects of the income tax accounting for Intra-Entity
Transfers of Assets. Under current GAAP, the tax effects of intra-entity asset transfers (intercompany sales) are
deferred until the transferred asset is sold to a third party or otherwise recovere
d through use. This is an exception to
d
the principle in ASC 740, Income Taxes, that generally requires comprehensive recognition of current and deferred
income taxes. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. As a
result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when
the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The standard
is effective for periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting
periods. The Company is currently in the process of evaluating the effect of this standard on its consolidated financial
statements.
51
In March 2016, the FASB issued ASU 2016-09 “Compensation - Stock Compensation: Topic 718” (“ASU 2016-
09”) which simplifies several aspects of the accounting for share-based payment transactions, including income tax
consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows.
The standard is effective for periods beginning after December 15, 2016, with early adoption permitted. The Company
elected to adopt ASU 2016-09 in the first quarter of 2017 as required. As permitted by the ASU, the Company plans
to continue to use an estimated forfeiture rate. Further, the income tax impacts relative to this ASU are not expected
to have a significant impact on the Company’s consolidated financial statements due to the valuation allowance
recorded in the fourth quarter of 2016, which is discussed further in Note 12.
In February 2016, the FASB issued ASU 2016-02 “Leases: Topic 842” (“ASU 2016-02”), which supersedes the
existing guidance for lease accounting in Topic 840, Leases. The FASB issued the ASU to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing
key information about leasing arrangements. ASU 2016-02 requires lessees to recognize a lease liability and a right-
of-use asset for all leases. Lessor accounting remains largely unchanged. This ASU is effective for periods beginning
after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at
the beginning of the earliest period presented using a modified retrospective approach. The Company is currently in
the process of evaluating the impact of this standard on its consolidated financial statements.
n
In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers: Topic 606” (“ASU
2014-09”) which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition,
and most industry-specific guidance. The core principle of ASU 2014-09 is that an entity
should recognize revenue to
f
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. Further, the guidance requires improved
disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of
revenue that is recognized. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers:
Deferral of the Effective Date”, which deferred the effective date of ASU 2014-09 for periods beginning after
December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective
date. In March 2016, the FASB issued ASU 2016-08 "Revenue from Contracts with Customers (Topic 606), Principal
versus Agent Considerations" ("ASU 2016-08") which provides updates to revenue recognition guidance relating to
considerations for reporting revenue gross versus net. In April 2016, the FASB issued ASU 2016-10 "Revenue from
Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing" ("ASU 2016-10"), which
provides updates to revenue recognition guidance relating to performance obligations and accounting for licensing
revenue. In May 2016, the FASB issued ASU 2016-12 "Revenue from Contracts with Customers (Topic 606), Narrow-
Scope Improvements and Practical Expedients" ("ASU 2016-12") which provides updates to revenue recognition
guidance relating to scope and practical expedients for revenue recognition. In December 2016, the FASB issued ASU
2016-20 "Technical Corrections and Improvements to Topic 606" ("ASU 2016-20") which further provides updates
to certain aspects of the revenue recognition guidance. Accordingly, ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU
2016-12, and ASU 2016-20 amends certain aspects of the new revenue standard in ASU 2014-09. The amendments
may be applied retrospectively to each prior period (full retrospective) or retrospectively with the
cumulative effect
recognized as of the date of initial application (modified retrosp
ective). The Company has completed portions of its
implementation plan, and is continuing to evaluate the method of adoption and the impact this ASU and related
amendments and interpretations will have on its consolidated financial statements. Based on the procedures performed
to date, the Company has concluded that there will be a shift in the method and timing by which it recognizes its per-
unit royalty revenue. In accordance with current GAAP, the Company records this revenue when the royalty reports
are received from its customers (typically in arrears); however, under the new standard, the Company will be required
to estimate the amount of this revenue in the quarter when the sales actually occur. As a result, there will be variances
between the estimated per-unit royalty revenue and that based on the actual sales reported by its customers. The
Company has also concluded that it will not early adopt ASU 2014-09. Accordingly, the ASU will be effective for the
Company in the first quarter of 2018.
a
tt
2. Fair Value Disclosures
Cash Equivalents and Short-term Investments
The financial instruments of the Company measured at fair value on a recurring basis are cash equivalents and
short-term investments.
The Company’s fixed income available-for-sale securities consist of high quality, investment grade securities.
The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active
markets for identical assets (Level 1) or inputs other than quoted prices that are observable eith
er directly or indirectly
(Level 2) in determining fair value.
d
52
The types of instruments valued based on quoted market prices in active markets include mostly money market
securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
d
The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations,
or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of
the fair value hierarchy and include U.S. treasury securities and investment-grade corporate commercial paper.
The types of instruments valued based on unobservable inputs which reflect th
e reporting entity’s own
assumptions or data that market participants would use in valuing an instrument are generally classified within Level
3 of the fair value hierarchy. As of December 31, 2016 and 2015, the Company did not hold any Level 3 instruments.
a
t
The Company recorded no other than temporary impairment charges in the years ended December 31, 2016, 2015,
and 2014.
Financial instruments measured at fair value on a recurring basis as of December 31, 2016 and December 31,
2015 are listed in the table below:
December 31, 2016
Fair value measurements using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(In thousands)
Assets:
U.S. Treasury securities
Money market funds
Total assets at fair value
$
$
— $
32,031
32,031
$
32,907
—
32,907
$
$
—
—
—
$
$
32,907
32,031
64,938
The above table excludes $24.8 million of cash held in banks.
d
December 31, 2015
Fair value measurements using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(In thousands)
Assets:
U.S. Treasury securities
Money market funds
Total assets at fair value
$
$
— $
14,032
14,032
$
39,918 $
—
39,918
$
—
—
—
$
$
39,918
14,032
53,950
The above table excludes $11.0 million of cash held in banks.
U.S. Treasury securities are classified as short-term investments, and money market accounts are classified as
cash equivalents on the Company’s consolidated balance sheets.
53
Short-term Investments
December 31, 2016
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair Value
Amortized
Cost
U.S. Treasury securities
Total
$
$
32,914
32,914
$
$
Amortized
Cost
U.S. Treasury securities
Total
$
$
39,933
39,933
$
$
(In thousands)
— $
— $
December 31, 2015
(7) $
(7) $
32,907
32,907
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair Value
(In thousands)
— $
— $
(15) $
(15) $
39,918
39,918
The contractual maturities of the Company’s available-for-sale securities on December 31, 2016 and
December 31, 2015 were all due within one year. There were no transfers of instruments between Level 1 and 2 during
the years ended December 31, 2016 and 2015.
3. Accounts and Other Receivables
Trade accounts receivable
Receivables from vendors and other
Accounts and other receivables
Computer equipment and purchased software
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Total
Less accumulated depreciation
Property and equipment, net
t
December 31,
2016
2015
(In thousands)
1,084 $
298
1,382 $
935
278
1,213
December 31,
2016
2015
(In thousands)
3,489 $
882
1,290
3,917
9,578
(5,562)
4,016
$
3,564
923
1,361
3,838
9,686
(5,097)
4,589
$
$
$
$
54
5. Intangibles and Other Assets
Purchased patents and other purchased intangible assets
Less: Accumulated amortization of purchased patents and other
purchased intangibles
Purchased patents and other purchased intangible assets, net
Other assets
Intangibles and other assets, net
$
$
December 31,
2016
2015
(In thousands)
4,605 $
4,605
(4,605)
(4,599)
—
365
365 $
6
258
264
rchased patents over their estimated useful lives,
generally 10 years from the purchase date. The Company recorded $6,000, $20,000 and $67,000 in amortization of
purchased patents for the year ended December 31, 2016, 2015 and 2014, respectively.
6. Other Current Liabilities
Accrued legal
Accrued services
Income taxes payable
Other current liabilities
Total other current liabilities
Long-term deferred revenue consisted of the following:
Deferred revenue for Sony Computer Entertainment
Other deferred revenue
Long-term deferred revenue
December 31,
2016
2015
(In thousands)
3,096 $
473
164
676
4,409 $
1,458
849
129
563
2,999
December 31,
2016
2015
(In thousands)
— $
26,393
26,393 $
1,263
1,253
2,516
$
$
$
$
as of December 31, 2015 to $26.4 million as of
December 31, 2016. The increase was primarily attributable to new billings for up-front licensee fees added in 2016
that have been deferred to be recognized ratably over the contract terms.
55
8. Commitments
The Company leases several of its facilities under non-cancelable operating lease arrangements that expire at
aa
various dates through 2023.
On November 12, 2014, the Company entered into an amendment to the lease of its primary facilities. The
amendment terminated the prior lease of a San Jose, California facility of approximately 33,000 square feet as of May
2015, which had been scheduled to expire in December 2016. It also began the current lease of a San Jose, California
facility of approximately 42,000 square feet as of February 2015. The lease contains
provisions for leasehold
rr
improvement incentives and expires as of April 2023 and can be extended to April 2028.
Minimum future lease payments obligations are as follows:
2017
2018
2019
2020
2021
Thereafter
Total
Rent expense was as follows:
Operating Leases
(In thousands)
1,281
1,240
940
868
894
1,230
6,453
$
Rent expense
$
1,283
$
1,291 $
742
2016
Year ended December 31,
2015
(In thousands)
2014
9. Stock-based Compensation
The Company’s equity incentive program is a long-term retention program that is intended to attract, retain, and
align stockholder and employee
ff
provide incentives for talented employees, consultants, officers, and directors and to
interests. The Company may grant options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”),
performance shares, performance units, and other stock-based or cash-based awards to employees, officers, directors,
and consultants. Under these programs, stock options may be granted at prices not less than the fair market value on
the date of grant for stock options. These options generally vest over 4 years and expire from 5 to 10 years from the
date of grant. In addition to time based vesting, market condition based options are subject to a market condition: the
closing price of the Company stock must exceed a certain level for a number of trading days within a specified
timeframe or the options will be cancelled before their expiration. Restricted stock generally vests over one year. RSUs
aa
generally vest over 3 years. Awards granted other than an option or stock appreciation right shall reduce the common
stock shares available for grant by 1.75 shares for every share issued.
n
r
Common stock shares available for grant
t
Standard and market condition based stock options outstanding
Restricted stock awards outstanding
Restricted stock units outstanding
Employee Stock Purchase Plan
December 31,
2016
500,587
3,646,121
77,540
427,192
The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may
purchase common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value
of the Company’s stock at the beginning of the offering period or the purchase date. Participants may not purchase
56
more than 2,000 shares in a six-month offering period or purchase stock having a value greater than $25,000 in any
calendar year as measured at the beginning of the offering period. A total of 1,000,000 shares of common stock have
been reserved for issuance under the ESPP. As of December 31, 2016, 649,383 shares had been purchased since the
inception of the ESPP in 1999. Under ASC 718-10, the ESPP is considered a compensatory plan and the Company is
required to recognize compensation cost related to the fair value of the award purchased under the ESPP. Shares
purchased under the ESPP for the year ended December 31, 2016 are listed below. Shares purchased under the ESPP
for the year ended December 31, 2015 were 45,820. The intrinsic value listed below is calculated as the difference
between the market value on the date of purchase and the purchase price of the shares.
Shares purchased under ESPP
Average price of shares purchased under ESPP
Intrinsic value of shares purchased under ESPP
Summary of Standard Stock Options
Year Ended
December 31, 2016
$
$
45,825
6.70
54,000
The following table sets forth the summary of standard stock option activity under the Company’s stock option
aa
plans for the years ended December 31, 2016, 2015, and 2014:
Outstanding at Januaryr 1, 2014
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2014
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
Number of Shares
Weighted
Average
Exercise Price
3,227,167
$
604,620
(205,744)
(102,454)
(37,432)
3,486,157
525,840
(239,071)
(116,425)
(59,968)
3,596,533
815,794
(395,515)
(344,541)
(251,150)
3,421,121
7.78
10.32
6.34
7.20
10.19
8.30
10.15
6.82
12.38
13.75
8.45
7.85
6.48
9.05
8.87
8.44
Weighted
Average
Fair Value
Of Options
Granted
Aggregate
Intrinsic
Value
of Options
Exercised
(In thousands)
$
4.93
$
1,125
4.56
3.67
1,186
918
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards
and the quoted price of the Company’s common stock for the options that were in-the-money.
57
Information regarding standard stock options outstanding at December 31, 2016, 2015, and 2014 is summarized
below:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(In millions)
Number of
Shares
3,486,157
$
3,319,308
2,023,024
3,596,533
$
3,452,487
2,252,744
3,421,121
$
3,223,919
2,131,268
8.30
8.21
7.18
8.45
8.36
7.59
8.44
8.43
8.22
4.85 $
4.80
4.26
4.23 $
4.16
3.56
3.99 $
3.87
3.10
6.6
6.6
6.0
12.
12.3
9.9
9.0
8.5
6.4
December 31, 2014
Options outstanding
Options vested and expected to vest
using estimated forfeiture rates
Options exercisable
December 31, 2015
Options outstanding
Options vested and expected to vest
using estimated forfeiture rates
Options exercisable
December 31, 2016
Options outstanding
Options vested and expected to vest
using estimated forfeiture rates
Options exercisable
Additional information regarding standard options outstanding as of December 31, 2016 is as follows:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$2.70 - $3.72
3.85 - 3.85
4.95 - 6.61
6.86 - 8.09
8.10 - 9.00
9.01 - 9.20
9.53 - 9.53
9.61 - 12.48
12.49 - 15.12
16.57 - 16.57
$2.70 - $16.57
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
2.21
2.87
4.91
6.00
4.55
3.91
3.18
5.01
2.05
0.74
3.99
$
$
2.80
3.85
6.27
7.79
8.75
9.18
9.53
11.89
14.22
16.57
8.44
9,438 $
600,000
190,479
87,802
131,372
178,480
519,374
220,735
93,588
100,000
2,131,268 $
2.80
3.85
6.08
7.91
8.47
9.17
9.53
11.95
14.37
16.57
8.22
Number
Outstanding
9,438
600,000
355,048
460,593
371,903
271,861
770,000
376,478
105,800
100,000
3,421,121
58
Summary of Market Condition Based Stock Options
In 2014, the Company began granting options that are subject to both time-based vesting and a market condition.
For these options, the closing price of the Company stock must exceed a certain level for a number of trading days
within a specified timeframe or the options will be cancelled before the seve
n year life of the options. The following
table sets forth the summary of the market condition based option activity under the Company’s stock option plans for
the years ended December 31, 2016 and 2015:
r
Weighted
Average
Exercise
Price
Weighted
Average
Fair Value
Of Options
Granted
Aggregate
Intrinsic
Value
of Options
Exercised
(In thousands)
5.71
3.64
3.68
$
—
—
—
11.94
—
—
—
11.94
8.09
9.05
9.00
—
11.94
—
8.39
Number
of Shares
— $
50,000
—
—
—
50,000
150,000
—
—
—
200,000
75,000
—
(50,000)
—
225,000
Outstanding at Januaryr 1, 2014
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2014
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards
and the quoted price of the Company’s common stock for the options that were in-the-money.
59
Information regarding these market condition based stock options outstanding at December 31, 2016 and 2015 is
r
summarized below:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(In millions)
Number
of Shares
50,000
$
11.94
6.15 $
45,430
—
11.94
—
6.15
0.0
200,000
$
9.05
5.92 $
184,125
—
9.12
—
5.90
0.0
225,000
$
8.39
5.50 $
209,141
65,625
8.38
8.09
5.49
5.17
—
—
—
0.5
0.5
—
0.5
0.5
0.2
December 31, 2014
Options outstanding
Options vested and expected to vest
using estimated forfeiture rates
Options exercisable
December 31, 2015
Options outstanding
Options vested and expected to vest
using estimated forfeiture rates
Options exercisable
December 31, 2016
Options outstanding
Options vested and expected to vest
using estimated forfeiture rates
Options exercisable
Additional information regarding market condition based stock options outstanding as of December 31, 2016 is
as follows:
Range of
Exercise
Prices
$8.09 - $8.09
9.00 - 9.00
$8.09 - $9.00
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
5.17
6.16
5.50
$
$
8.09
9.00
8.39
65,625 $
—
65,625 $
8.09
—
8.09
Number
Outstanding
150,000
75,000
225,000
60
Summary of Restricted Stock Units
RSU activity for the years ended December 31, 2016, 2015, and 2014 was as follows:
Outstanding at January 1, 2014
Awarded
Released
Forfeited
Outstanding at December 31, 2014
Awarded
Released
Forfeited
Outstanding at December 31, 2015
Awarded
Released
Forfeited
Outstanding at December 31, 2016
Weighted
Average
Grant Date
Fair Value
Fair Value
of Released
RSU’s
(In thousands)
$
11.35
$
3,491
8.16
8.67
2,626
2,118
Number of Shares
668,056
265,630
(317,970)
(50,825)
564,891
281,290
(299,277)
(59,481)
487,423
320,880
(247,556)
(133,555)
427,192
Information regarding RSU’s at December 31, 2016, 2015, and 2014 is summarized below:
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(In millions)
Fair Value
(In millions)
Number of
Shares
0.84 $
5.3
$
5.3
0.80
4.8
0.90 $
5.7 $
5.7
0.87
0.93
0.80
4.8
4.5 $
4.5
3.7
December 31, 2014
RSUs outstanding
RSUs vested and expected to vest using
estimated forfeiture rates
December 31, 2015
RSUs outstanding
RSUs vested and expected to vest using
estimated forfeiture rates
December 31, 2016
RSUs outstanding
RSUs vested and expected to vest using
estimated forfeiture rates
564,891
502,411
487,423
414,934
427,192
349,759
61
The aggregate intrinsic value is calculated as the market value as of the end of the reporting period.
Summary of Restricted Stock Awards
Restricted stock award activity for the years ended December 31, 2016, 2015, and 2014 was as follows:
Weighted
Average
Grant Date
Fair Value
Total
Fair
Value of
Awards
Released
(In thousands)
Number of Shares
$
44,000
35,364
(44,000)
—
35,364
21,356
(35,364)
—
21,356
77,540
(21,356)
—
77,540
14.09
10.97
14.09 $
10.97
12.26
10.97
12.26
6.52
12.26
6.52
483
434
139
Outstanding at Januaryr 1, 2014
Awarded
Released
Forfeited
Outstanding at December 31, 2014
Awarded
Released
Forfeited
Outstanding at December 31, 2015
Awarded
Released
Forfeited
Outstanding at December 31, 2016
Stock-based Compensation
Valuation and amortization methods — The Company uses the Black-Scholes-Merton option pricing
model (“Black-Scholes model”), single-option approach to determine the fair value of standard stock options and
ESPP shares. All share-based payment awards are amortized on a straight-line basis over the requisite service periods
of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value
includes the impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises
the estimates if necessary, in subsequent periods if actual forfeitures differ from these estimates. The determination of
the fair value of share-based payment awards on the date of grant using an option pricing model is affected by the
Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These
variables include actual and projected employee stock option exercise behaviors that impact the expected term, the
Company’s expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.
Expected term — The Company estimates the expected term of options granted by calculating the average
term from the Company’s historical stock option exercise experience. The expected term of ESPP shares is the length
of the offering period. The Company used the simplified method approved by the SEC to determine the expected term
for options granted prior to December 31, 2007.
Expected volatility — The Company estimates the volatility of its common stock taking into consideration
its historical stock price movement and its expected future stock price trends based on known or anticipated events.
Risk-free interest rate — The Company bases the risk-free interest rate that it uses in the option pricing
model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected dividend — The Company does not anticipate paying any cash dividends in the foreseeable
d
future and therefore uses an expected dividend yield of zero in the option-pricing model.
d
Forfeitures — The Company is required to estimate future forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are
expected to vest.
The Company uses the Monte-Carlo Simulation model to value the stock options with a market condition.
Valuation techniques such as a Monte-Carlo Simulation model have been developed to value path-dependent awards.
62
The Monte-Carlo Simulation model is a generally accepted statistical technique used, in this instance, to simulate a
range of future stock prices for the Company.
The assumptions used to value option grants under the Company’s stock plans are as follows:
Expected life (in years)
Interest rate
Volatility
Dividend yield
Expected life (in years)
Interest rate
Volatility
Dividend yield
Expected life (in years)
Interest rate
Volatility
Dividend yield
Standard Stock Options
2016
2015
2014
4.5
1.2%
56%
—%
4.7
1.4%
56%
—%
Market Condition Based Stock Options
2016
2015
2014
7.0
1.6%
59%
—%
7.0
1.9%
65%
—%
Employee Stock Purchase Plan
2016
2015
2014
0.5
0.4%
53%
—%
0.5
0.1%
48%
—%
4.7
1.4%
57%
—%
7.0
2.2%
66%
—%
0.5
0.1%
43%
—%
Total stock-based compensation recognized in the consolidated statements of income is as follows:
Income Statement Classifications
Sales and marketing
Research and development
General and administrative
Total
Year Ended December 31,
2016
2015
(In thousands)
2014
1,280 $
1,297
3,534
6,111 $
1,116 $
1,303
3,051
5,470 $
1,117
1,267
2,911
5,295
$
$
As of December 31, 2016, there was $6.6 million of unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock options, restricted stock awards and RSU’s granted to the Company’s
employees and directors. This cost will be recognized over an estimated weighted-average period of approximately
2.49 years for standard options, 2.50 years for market condition based options, 0.42 years for restricted stock awards
and 1.65 years for RSU’s. Total unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
63
10. Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) are included in the table below.
Year Ended December 31, 2016
Unrealized Gains
and Losses on
Available-for Sale
Securities
Foreign
Currency
Items
(In thousands)
Beginning balance
$
(15) $
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated
other comprehensive income (loss)
Net current period other comprehensive income
(loss)
Ending Balance
$
Stock Repurchase Program
8
—
8
(7) $
101
21
21
122
$
$
Total
86
29
—
29
115
On November 1, 2007, the Company announced its board of directors’ authorized the repurchase of up to $50
million of the Company’s common stock. In addition, on October 22, 2014, the board of directors authorized another
$30 million under the share repurchase program. The Company may repurchase its stock for cash in the open market
in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share
price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase
authorization has no expiration date, does not require the Company to repurchase a specific number of shares, and
may be modified, suspended, or discontinued at any time.
ff
During the year ended December 31, 2016, the Company repurchased 105,750 shares for $729,000 at an average
cost of $6.90 net of transaction costs through open market repurchases. There were no stock repurchases in 2015 under
this stock repurchase program. During the year ended December 31, 2014, the Company repurchased 1,527,647 shares
for $15.0 million at an average cost of $9.82 net of transaction costs through open market repurchases. These amounts
are classified as treasury stock on the Company’s consolidated balance sheet. As of December 31, 2016, the program
remains available with approximately $33.7 million that may yet be purchased under it.
11. Discontinued Operations
During the year ended December 31, 2009, the Company sold its 3D product line including inventory, fixed assets,
and intangibles and recorded a gain of discontinued operations of $187,000 at the time of the sales. Total initially
negotiated consideration for the sales was $2.7 million which comprised of $320,000 in cash paid in the year ended
December 31, 2009 and notes receivable of $2.4 million which were payable through the year ended December 31,
2013. Given the inherent uncertainty relative to the credit worthiness of the buyers, the Company concluded that they
would recognize income from the notes receivable as proceeds were received. The operations of the 3D product line
were classified as discontinued operations in the period of the initial sales transactions. In the year ended December 31,
2016, a final settlement payment of $1.0 million was received relative to these sales, resulting in a gain of $649,000
of discontinued operations, net of tax of $351,000. There were no discontinued operations during the years ended
December 31, 2014 and 2015.
64
12. Income Taxes
Income tax provisions from continuing operations consisted of the following:
2016
Year Ended December 31,
2015
(In thousands)
2014
Income (loss) from continuing operations before
provisions for income taxes
Provision for income taxes from continuing operations
Effective tax rate
$
(14,509) $
4,449
$
(25,521)
(175.9 )
(1,591)
35.8%
6,319
(2,196)
34.8%
The 2016 provision for income tax from continuing operations resulted primarily from the application of a full
federal valuation allowance against deferred tax assets. The 2015 provision for income tax from continuing operations
resulted primarily from the Company’s federal and foreign tax recognized at statutory rates, adjusted for the tax impact
of non-deductible permanent items including stock-based compensation expenses and foreign withholding taxes. The
2015 provision for income tax from continuing operations also includes non-cash tax expense based on intercompany
profit that resulted from the sale of certain IP rights in 2015, and also includes in increase to the valuation allowance
against certain of the Company’s deferred tax assets. The 2014 provision for income tax from continuing operations
resulted primarily from the decrease in deferred tax assets and foreign withholding tax expense.
aa
ff
On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment
t
of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S.
Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing
arrangement. On February 19, 2016, the IRS appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit.
Although the IRS has appealed the decision, based on the findings of the US Tax Court, the Company has concluded
that it is more likely than not that the decision will be upheld and accordingly has excluded stock-based compensation
from intercompany charges during the period. The Company will continue to monitor ongoing developments and
potential impacts to its consolidated financial statements.
The Company reported pre-tax book income or loss from continuing operations of:
Domestic
Foreign
Total
2016
Year Ended December 31,
2015
(In thousands)
$
$
(14,656)
147
(14,509)
$
$
21,160
(16,711)
4,449
$
$
2014
5,867
452
6,319
The benefit or (provisions) for income taxes from continuing operations consisted of the following:
Current:
United States federal
State and local
Foreign
Total current
Deferred:
United States federal
State and local
Foreign
Total deferred
2016
Year Ended December 31,
2015
(In thousands)
2014
$
$
$
$
(1,649)
859
(442)
(1,232)
$
(24,261)
—
(28)
(24,289)
(25,521)
65
$
(1,426)
(12)
(389)
(1,827)
585
—
(349)
236
(1,591)
$
$
$
(218)
(12)
(75)
(305)
(2,137)
—
246
(1,891)
(2,196)
In 2016, 2015, and 2014 the Company’s income tax payable was not decreased by the tax benefit related to stock
options. The Company includes only the direct tax effects of employee stock incentive plans in calculating this benefit,
which is recorded to additional paid-in capital.
Deferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax losses, and
ff
credit carryforwards. Significant components of the ne
t deferred tax assets and liabilities consisted of:
Deferred tax assets:
Net operating loss carryforwards
State income taxes
Deferred revenue
Research and development and other credits
Reserves and accruals recognized in different periods
Basis difference in investment
Capitalized R&D expenses
Depreciation and amortization
Deferred rent
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Foreign credits
Net deferred tax liabilities
Net deferred taxes
December 31,
2016
2015
(In thousands)
15,337
1
458
11,418
5,397
969
4,569
585
306
2
39,042
(38,683)
359
(33)
(33)
326
$
$
6,824
1
2,505
10,626
6,395
967
4,654
523
243
14
32,752
(8,119)
24,633
—
—
24,633
$
$
reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is
more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for
deferred tax assets is assessed periodically based on the ASC 740 more-likely-than-not realization ("MLTN") threshold
criterion. This assessment considers matters such as future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the
recoverability of the deferred tax assets requires that the Company weigh all positive and negative evidence to reach
a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The
weight given to the evidence is commensurate with the extent to which it can be objectively verified.
d
The Company considered both positive and negative evidence in its fourth quarter of 2016 analysis of the
realizability of its deferred tax assets. In performing this analysis, the Company considered recent results of
operations, scheduled reversals of deferred tax liabilities, projected future income, and available tax planning
strategies. A significant piece of negative evidence evaluated was the cumulative loss incurred by the Company over
the three-year period ended December 31, 2016 (which arose in the Company’s fourth quarter of 2016). When
performing the evaluation of the cumulative loss, the Company considered the book loss as reported, as well as
permanent differences and one-time gains and losses not indicative of future business activities. The Company
determined that the three-year cumulative loss constitutes negative objective evidence, limiting the Company’s ability
to consider other evidence, such as the Company’s projections for future growth. As a result, the Company concluded
that it would be appropriate to record a non-cash charge of $28.1 million as additional valuation allowance, thereby
establishing a full valuation allowance against all of its net federal deferred tax assets. The Company continued to
maintain a full valuation allowance on its state and certain of its foreign net deferred tax assets.
As of December 31, 2016, the net operating loss carryforwards for federal and state income tax purposes were
approximately $52.1 million and $52.5 million, respectively. The federal net operating losses expire between 2026
and 2036 and the state net operating losses begin to expire in 2028. Included in the Company’s net operating losses,
$9.6 million was associated with excess benefits related to stock compensation. The Company also has net operating
loss carryforwards from Ireland of $2.9 million that can be carried forward indefinitely and do not expire. As of
66
December 31, 2016, the Company had federal and state tax credit carryforwards of approximately $9.9 million and
$1.7 million, respectively, available to offset future tax liabilities. The federal credit carryforwards will expire between
2017 and 2036 and the California tax credits will carryforward indefinitely. In addition, as of December 31, 2016, the
Company has Canadian research and development credit carryforwards of $1.5 million, which will expire at various
dates through 2036. These operating losses and credit carryforwards have not been reviewed by the relevant tax
authorities and could be subject to adjustment upon examinations.
Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to
utilize its net operating losses and credit carryforwards if it experiences an “ownership change” as defined by IRC
Section 382. Utilization of a portion of the Company’s federal net operating loss carryforward was limited in
accordance with IRC Section 382, due to an ownership change that occurred during 1999. This limitation has fully
lapsed as of December 31, 2010. As of December 31, 2016, the Company conducted an IRC Section 382 analysis with
respect to its net operating loss and credit carryforwards and determined there was no limitation. There can be no
assurance that future issuances of the Company’s securities will not trigger limitations under IRC Section 382 which
could limit utilization of these tax attributes.
For purposes of the reconciliation between the provision for income taxes at the statutory rate and the effective
tax rate, a national U.S. 35% rate is applied as follows:
Federal statutory tax rate
Sale of IP rights to foreign subsidiary
Benefit from foreign losses
Foreign withholding
Stock compensation expense
Meals & entertainment
Foreign rate differential
Prior year true-up items
Tax reserves
Loss on foreign share transfer
Credits
State Refunds
Other
Valuation allowance
Effective tax rate
2016
2015
2014
35.0 %
(13.8 )%
— %
(1.2 )%
(6.6 )%
— %
(1.2 )%
(0.3 )%
1.8 %
— %
1.6 %
3.8 %
(1.6 )%
(193.4 )%
(175.9 )%
35.0 %
22.5 %
7.8 %
0.5 %
5.8 %
0.1 %
(24.0 )%
1.7 %
3.9 %
5.9 %
(35.5 )%
— %
3.9 %
8.2 %
35.8 %
35.0 %
— %
— %
3.5 %
3.8 %
0.1 %
(1.1 )%
(0.2 )%
0.8 %
— %
(5.7 )%
— %
(1.4 )%
— %
34.8 %
foreign subsidiaries are considered to be indefinitely reinvested and
accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.
The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment
and estimation and are continuously monitored by management based on the best information available, including
rr
changes in tax regulations, the outcome of relevant court cases, and other information. A reconciliation of the
beginning and ending amount of gross unrecognized tax benefits is as follows:
Balance at beginning of year
Gross increases for tax positions of prior years
Gross decreases for tax positions of prior years
Gross increases for tax positions of current year
Settlements
Lapse of statute of limitations
r
Balance at end of year
$
$
2016
2015
2014
6,285
—
(22)
111
—
(142)
6,232
(In thousands)
1,744
$
141
(15)
4,415
—
—
6,285
$
$
$
1,634
—
(4)
114
—
—
1,744
67
The unrecognized tax benefits relate primarily to federal and state research and development credits and
intercompany profit on the transfer of certain IP rights to one of the Company’s foreign subsidiaries as part of the
ount for interest and penalties related
Company’s tax reorganization described above. The Company’s policy is to acc
to uncertain tax positions as a component of income tax expense. As of December 31, 2016, the Company accrued
interest or penalties related to uncertain tax positions in the amount of $2,000. As of December 31, 2016, the total
amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, is $97,000.
a
Because the Company has net operating loss and credit carryforwards, there are open statutes of limitations in
which federal, state and foreign taxing authorities may examine the Company’s tax returns for all years from 1998
through the current period.
13. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding
for the period, excluding unvested restricted stock and RSUs. Diluted net income (loss) per share is computed using
the weighted average common shares outstanding for the period plus dilutive potential shares including assumed
release of unvested restricted stock and RSUs, assumed exercise of stock options, and assumed issuance of common
stock under ESPP using the treasury stock method. The following is a reconciliation of the numerators and
denominators used in computing basic and diluted net income (loss) per share:
Years Ended December 31,
2016
2014
(In thousands, except per share amounts)
2015
Numerator:
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss) used in computing basic net income (loss)
per share
Denominator:
Shares used in computation of basic net income (loss) per
share (weighted average common shares outstanding)
Dilutive potential common shares:
$
$
$
(40,030) $
649 $
2,858 $
— $
4,123
—
(39,381) $
2,858 $
4,123
28,759
28,097
28,246
Stock options, ESPP, Restricted Stock and RSUs
—
918
898
Shares used in computation of diluted net income (loss) per
share
28,759
29,015
29,144
Basic net income (loss) per share:
Continuing Operations
Discontinued Operations
Total
Diluted net income (loss) per share:
Continuing Operations
Discontinued Operations
Total
$
$
$
$
$
$
(1.39) $
0.02 $
(1.37) $
0.10 $
0.00 $
0.10 $
(1.39) $
0.02 $
(1.37) $
0.10 $
0.00 $
0.10 $
0.15
0.00
0.15
0.14
0.00
0.14
The Company includes the underlying market condition stock options in the calculation of diluted earnings per
share if the performance condition has been satisfied as of the end of the reporting period and excludes such options
if the performance condition has not been met.
For the year ended December 31, 2015, options to purchase approximately 1.2 million shares of common stock
with an exercise price greater than the average fair market value of the Company’s stock of $11.16 per share were not
included in the calculation because the effect would have been anti-dilutive.
68
For the year ended December 31, 2014, options to purchase approximately 1.6 million shares of common stock
with an exercise price greater than the average fair market value of the Company’s stock of $10.46 per share were not
included in the calculation because the effect would have been anti-dilutive.
As of December 31, 2016, the Company had securities outstanding that could potentially dilute basic earnings
per share in the future, but these were excluded from the computation of diluted net loss per share for the year ended
December 31, 2016 since their effect would have been anti-dilutive. These outstanding securities consisted of the
following:
Standard and market condition stock options outstanding
Restricted stock awards outstanding
RSUs outstanding
ESPP
December 31,
2016
3,646,121
77,540
427,192
17,506
14. Employee Benefit Plan
The Company has a 401(k) tax-deferred savings plan under which eligible employees may elect to have a portion
of their salary deferred and contributed to time, the Company receives claims from third parties asserting that
technologies of the Company, or its licensees, infringe on the other parties’ the 401(k) plan. Contributions may be
matched by the Company at its discretion. Beginning in January 2016, the Company matched 25% of the employee’s
contribution up to $3,000 for the year. From 2008 to 2015, the Company matched 25% of the employee's contribution
up to $2,000 for every year.
Company contribution to 401 (k) plan
$
172
2016
Year ended December 31,
2015
(In thousands)
127
$
2014
$
106
15. Contingencies
From time to IP rights. In addition, the Company is involved in routine legal matters and contractual disputes
incidental to its normal operations. In management’s opinion, the resolution of such matters will not have a material
adverse effect on the Company’s consolidated financial condition, results of operations, or liquidity.
In the normal course of business, the Company provides indemnifications of varying scope to customers against
claims of IP infringement made by third parties arising from the use of the Company’s IP, technology, or products.
Historically, costs related to these guarantees have not been significant, and the Company is unable to estimate the
maximum potential impact of these guarantees on its future results of operations.
16. Segment Reporting, Geographic Information, and Significant Customers
Segment Information
The Company develops, licenses, and supports a wide range of software and IP that more fully engage users’
sense of touch when operating digital devices. The Company focuses on the following target application areas: mobile
devices, wearables, consumer, mobile entertainment and other content; console gaming; automotive; medical; and
commercial. The Company manages these application areas in one operating and reporting segment with only one set
of management, development, and administrative personnel.
The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM approves
budgets and allocates resources to and assesses the performance of the Company using information about its revenue
and operating loss. There is only one segment that is reported to management.
69
Revenue by Market Area
The following is a summary of revenues by market areas. Revenue as a percentage of total revenues by market
was as follows:
Mobile, Wearables, and Consumer
Gaming Devices
Automotive
Medical
Total
Years Ended December 31,
2016
2015
2014
57 %
24 %
7 %
12 %
100 %
62 %
24 %
7 %
7 %
100 %
60 %
27 %
5 %
8 %
100 %
The following is a summary of revenues by geographic areas. Revenues are broken out geographically by the
location of the customer. Geographic revenue as a percentage of total revenues by region was as follows:
North America
Europe
Asia
Total
United States of America
Korea
Japan
Countries of which none are more than 10% in a year
Total
Years Ended December 31,
2016
2015
2014
32 %
8 %
60 %
100 %
28 %
5 %
67 %
100 %
29 %
3 %
68 %
100 %
Years Ended December 31,
2016
2015
2014
26 %
47 %
11 %
16 %
100 %
27 %
46 %
14 %
13 %
100 %
27 %
51 %
10 %
12 %
100 %
The following is a summary of long-lived assets by country. Long-lived assets include net property and
equipment, intangibles, and other assets. Geographic long-lived assets as a percentage of total long-lived assets by
country were as follows:
United States of America
Canada
Rest of World
Total
December 31,
2016
2015
83 %
8 %
9 %
100 %
88 %
8 %
4 %
100 %
70
Significant Customers
Customers comprising 10% or greater of the Company’s net revenues are summarized as follows:
Samsung Electronics
Customer B
Customer C
Total
summarized as follows:
Customer C
Customer D
Customer E
Customer F
Years Ended December 31,
2016
2015
2014
33 %
13 %
14 %
60 %
32 %
18 %
14 %
64 %
2016
December 31,
2015
2014
14 %
*
36 %
13 %
*
35 %
24 %
*
38 %
17 %
12 %
67 %
66 %
16 %
*
*
* Represents less than 10% of the Company’s outstanding accounts and other receivables.
71
17. Quarterly Results of Operations (Unaudited)
The following table presents certain consolidated statement of operations data for the Company’s eight most
recent quarters:
Dec 31,
2016
Sept 30,
June 30,
Mar 31,
Dec 31,
Sept 30,
June 30, Mar 31,
2016
2016
2016
2015
2015
2015
2015
$
9,293
$
26,306
$
(In thousands, except per share data)
7,864
$ 13,623
16,570
$
$ 14,313
$ 16,223
$ 16,287
9,235
(11,208)
26,255
10,114
7,805
13,600
(9,561)
(4,608)
16,477
1,289
14,196
1,283
16,108
2,217
16,172
(70)
Revenues (1)
Gross profit
Operating income (loss)
Income (loss) from continuing
operations before provision for
taxes
Benefit (provision) for income
Income (loss) from continuing
operations
Net income from discontinued
operations (net of tax)
Net income (loss)
Basic net income (loss) per
share (2)
Discontinued operations (2)
Total (2)
Shares used in calculating basic
net income (loss) per share
Diluted net income (loss) per
share (2)
Continuing operations (2)
Discontinued operations (2)
Total (2)
Shares used in calculating
diluted net income (loss) per
share
(11,363)
(26,785)
10,778
(3,760)
(9,528)
(4,396)
3,323
1,701
(38,148)
7,018
(6,205)
(2,695)
—
(38,148)
—
7,018
649
—
(5,556)
(2,695)
1,082
56
1,138
—
1,138
1,199
(1,015)
184
—
184
2,263
(668)
1,595
—
1,595
(95)
36
(59)
—
(59)
—
—
—
Continuing operations (2)
$
(1.32) $
0.24
$
(0.22) $
(0.09)
$
0.04
$
0.01
$
0.06
$
—
(1.32)
—
0.24
0.02
(0.20)
—
(0.09)
—
0.04
—
0.01
—
0.06
28,860
28,849
28,834
28,493
28,305
28,190
28,070
27,818
$
(1.32) $
0.24
$
(0.22) $
(0.09)
$
0.04
$
0.01
$
0.06
$
—
(1.32)
—
0.24
0.02
(0.20)
—
(0.09)
—
0.04
—
0.01
—
0.06
—
—
—
28,860
29,298
28,834
28,493
29,322
29,134
28,906
27,818
(1) Revenue increased significantly in the third quarter of 2016 primarily related to the $19 million received from
Samsung in July, 2016, in exchange for Product Life Cycle Wind Down Rights.
(2) The quarterly earnings per share information is calculated separately for each period. Therefore, the sum of such
quarterly per share amounts may differ from the total for the year.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Control and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as amended) as of December 31, 2016, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report for the purpose of ensuring that the information required to
be disclosed by us in this Annual Report on Form 10-K is made known to them by others on a timely basis, and that
the information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, in order to allow timely decisions regarding required disclosure, and that such information is
recorded, processed, summarized, and reported by us within the time periods specified in the SEC’s rules and
instructions for Form 10-K.
72
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within Immersion have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed
by, or under the supervision of, our Chief Executive Officer and our Chief Financial Officer and affected by our board
of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the
aa
preparation of financial statements for external purposes in accordance with GAAP. Our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2016. Management’s assessment of
internal control over financial reporting was conducted using the criteria in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In performing
the assessment, our management concluded that, as of December 31, 2016, our internal control over financial reporting
is effective based on these criteria.
Deloitte and Touche LLP, the independent registered public accounting firm that audited our financial statements
included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial
reporting, which is included herein.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the three months ended
r
December 31, 2016 that have materially affected or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Immersion Corporation
San Jose, California
We have audited the internal control over financial reporting of Immersion Corporation and subsidiaries (the
“Company”) as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
tt
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control ba
sed on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
aa
ff
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control
over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
aa
(United States), the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2016 of the Company and our report dated March 3, 2017 expressed an unqualified opinion on those
financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 3, 2017
74
PART III
The SEC allows us to include information required in this report by referring to other documents or reports we
have already or will soon be filing. This is called “Incorporation by Reference.” We intend to file our definitive proxy
statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report,
and certain information therein is incorporated in this report by reference.
rr
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 with respect to executive officers is set forth in Part I of this Annual Report
on Form 10-K and the remaining information required by Item 10 is incorporated by reference from the sections
entitled “Election of Directors,” “Corporate Governance,” “Ownership of Our Equity Securities,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” and “Audit Committee Report” in Immersion’s definitive Proxy
Statement for its 2017 annual stockholders’ meeting.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the sections entitled “Election of
d
Directors,” “Director Compensation,” “Corporate Governance,” “Compensation Discussion and Analysis,”
“Compensation Committee Report,” “Compensation Committee Interlocks and In
sider Participation,” and “Executive
mm
Compensation” in Immersion’s definitive Proxy Statement for its 2017 annual stockholders’ meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is incorporated by reference from the section entitled “Ownership of Our
Equity Securities” and “Equity Compensation Plan Information” in Immersion’s definitive Proxy Statement for its
2017 annual stockholders’ meeting.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is incorporated by reference from the section entitled “Corporate
Governance” and “Related Person Transactions” in Immersion’s definitive Proxy Statement for its 2017 annual
stockholders’ meeting.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference from the section entitled “Ratification of
Appointment of Independent Registered Public Accounting Firm” in Immersion’s definitive Proxy Statement for its
2017 annual stockholders’ meeting.
75
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Form:
PART IV
1
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2
Financial Statement Schedules
Page
43
44
45
46
47
48
The following financial statement schedule of Immersion Corporation for the years ended December 31,
2016, 2015, and 2014 is filed as part of this Annual Report and should be read
d
in conjunction with the Consolidated
f
Financial Statements of Immersion Corporation.
Schedule II—Valuation and Qualifying Accounts
Page 82
Schedules not listed above have been omitted because the information required to be set forth therein is
not applicable or is shown in the consolidated financial statements or notes herein.
3
Exhibits:
The following exhibits are filed herewith:
76
Exhibit
Number
3.1
3.2
3.3
10.1*
10.2*
10.3*
10.4#
10.5#
10.6
Exhibit Description
Amended and Restated
Bylaws of Immersion
Corporation, as adopted on
October 31, 2016.
Amended and Restated
Certificate of Incorporation.
Certificate of Designation of
the Powers, Preferences and
Rights of Series A
Redeemable Convertible
Preferred Stock.
1997 Stock Option Plan and
form of Incentive Stock
Option Agreement and form
of Nonqualified Stock Option
Agreement.
1999 Employee Stock
Purchase Plan and form of
subscription agreement
thereunder.
Immersion Corporation 2000
HT Non-Officer Nonstatutory
Stock Option Plan.
Settlement Agreement dated
July 25, 2003 by and between
Microsoft Corporation and
Immersion Corporation.
License Agreement dated July
25, 2003 by and between
Microsoft Corporation and
Immersion Corporation.
Letter Agreement dated March
18, 2004 by and between
Microsoft Corporation and
Immersion Corporation.
Incorporated by Reference
Form
8-K
File No.
Exhibit
Filing Date
000-27969
3.1
November 4, 2016
Filed
Herewith
10-Q
000-27969
8-K
000-27969
3.1
3.1
August 14, 2000
July 29, 2003
S-1/A
333-86361
10.2
November 5, 1999
S-1/A
333-86361
10.21
October 5, 1999
8-K
000-27969
2.4
October 13, 2000
S-3
333-108607
10.3
September 8, 2003
S-3/A
333-108607
10.4
February 13, 2004
S-3/A
333-108607
10.10
March 25, 2004
10.7*
Form of Indemnity Agreement.
S-3/A
333-108607
10.11
March 25, 2004
10.8#
10.9*
Agreement by and among
Sony Computer Entertainment
America Inc., Sony Computer
Entertainment Inc., and
Immersion Corporation dated
March 1, 2007.
2007 Equity Incentive Plan.
10-Q
000-27969
10.37
May 10, 2007
8-K
000-27969
99.1
June 12, 2007
77
Exhibit
Number
10.10*
10.11*
10.12*
10.13*
10.14*
Exhibit Description
Form of Stock Option
Agreement (U.S. Participant)
for 2007 Equity Incentive
Plan.
Form of Stock Option
Agreement (Non-U.S.
Participant) for 2007 Equity
Incentive Plan.
The Immersion Corporation
2008 Employment Inducement
Award Plan dated April 30,
2008.
Form of Stock Option
Agreement for Immersion
Corporation 2008 Employment
Inducement Award Plan.
Settlement Agreement dated
August 25, 2008 by and
between Microsoft
Corporation and Immersion
Corprr oration.
10.15* Form of RSU Agreement for
Immersion Corporation 2008
Employment Inducement
Award Plan.
Incorporated by Reference
Form
8-K
File No.
Exhibit
Filing Date
000-27969
99.4
June 12, 2007
Filed
Herewith
8-K
000-27969
99.5
June 12, 2007
10-Q
000-27969
10.38
August 8, 2008
10-Q
000-27969
10.39
August 8, 2008
10-Q
000-27969
10.45 November 7, 2008
8-K
000-27969
99.01
March 4, 2009
10.16* Employment Agreement dated
10-K
000-27969
10.42
March 30, 2010
October 21, 2009 by and
between Immersion
Corporation and Victor Viegas.
10.17* Form of 2010 Executive
Incentive Plan.
10.18*
2011 Equity Incentive Plan.
10.19* Form of Stock Option Award
Agreement for Immersion
Corporation 2011 Equity
Incentive Plan.
10.20* Form of Award Agreement
(Restricted Stock Units) to the
Immersion Corporation 2011
Equity Incentive Plan.
10.21* Form of Restricted Stock
Agreement for Immersion
Corporation 2011 Equity
Incentive Plan.
10.22
Office Lease between Carr NP
Properties, L.L.C., and
Immersion Corporation dated
September 15, 2011.
10-Q
000-27969
May 7, 2010
10-Q
10-Q
000-27969
000-27969
10.1
10.2
August 5, 2011
August 5, 2011
10-Q
000-27969
10.3
August 5, 2011
10-Q
000-27969
10.4
August 5, 2011
10-Q
000-27969
10.2 November 7, 2011
78
Exhibit
Number
10.23
10.24
10.25*
10.26
10.27
Exhibit Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
Filed
Herewith
Amendment No. 1, Effective as of
August 1, 2013, to Amended and
Restated License Agreement by and
between Immersion Software Ireland
Limited, Immersion Corporation, and
Samsung Electronics Co., Ltd. Entered
into as of Januaryrr 1, 2013.
Amendment No. 2, Effective as of
January 1, 2013, to Amended and
Restated License Agreement by and
between Immersion Software Ireland
Limited, Immersion Corporation, and
Samsung Electronics Co., Ltd. Entered
into as of March 19, 2014.
2011 Equity Incentive Plan
(incorporated by reference to Annex A
of Schedule 14A, File No. 000-27969,
filed on April 22, 2014).
Amendment No. 3, Effective as of
January 1, 2013, to Amended and
Restated License Agreement by and
between Immersion Software Ireland
Limited, Immersion Corporation, and
Samsung Electronics Co., Ltd. entered
into as of August 14, 2014.
First Amendment to Office Lease dated
November 12, 2014 by and between
Immersion Corporation and BSREP
Rio Robles LLC
10-Q
000-27969
10.1 November 6, 2013
10-Q
000-27969
10.1
May 6, 2014
10-Q
000-27969
10.1
August 1, 2014
10-Q
000-27969
10.1
October 31, 2014
8-K
000-27969
10.1 November 14, 201
4
10.28* Offer Letter dated November 24, 2014
10-K
000-27969
10.34
February 27, 2015
by and between Immersion Corporation
and Mahesh Sundaram.
10.29* Offer Letter dated August 22, 2016 by
8-K
000-27969
10.1
September 7, 2016
and between Immersion and Nancy
Erba
10.30* Retention and Ownership Change
8-K
000-27969
10.2
September 7, 2016
Agreement dated August 22, 2016 by
and between Immersion and Nancy
Erba
10.31# Amendment No. 4, Effective as of
10-Q
000-27969
10.1 November 4, 2016
January 1, 2013, to the Amended and
Restated License Agreement by and
between Immersion Software Ireland
Limited, Immersion Corporation, and
Samsung Electronics Co., Ltd. Entered
into as of July 11, 2016.
79
X
X
X
X
X
X
X
X
X
X
X
X
Exhibit Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
Filed
Herewith
Exhibit
Number
21.1
23.1
31.1
31.2
32.1+
32.2+
Subsidiaries of Immersion
Corprr oration.
Consent of Independent Registered
Public Accounting Firm.
Certification of Victor Viegas, Chief
Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Nancy Erba, Chief
Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Victor Viegas, Chief
Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of Nancy Erba, Chief
Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
XBRL Report Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema
Document
101.CAL XBRL Taxonomy Calculation
Linkbase Document
101.DEF XBRL Taxonomy Extension
Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase
Document
101.PRE XBRL Presentation Linkbase
Document
#
*
+
Certain portions of this exhibit have been omitted and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 24b-2 as promulgated under the Exchange Act.
Constitutes a management contract or compensatory plan.
This certification is deemed not filed for purposes of section 18 of th
otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any
filing under the Securities Act, as amended, or the Exchange Act, as amended.
e Exchange Act, as amended, or
d
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March 3, 2017
IMMERSION CORPORATION
By
/s/ NANCY ERBA
Nancy Erba
Chief Financial Officer and
r
Principi al Accounting Og ffO iceff
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Victor Viegas and Nancy Erba, jointly and severally, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and
to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/S/ VICTOR VIEGAS
Victor Viegas
/S/ NANCY ERBA
Nancy Erba
/s/ CARL SCHLACHTE
Carl Schlachte
/S/ JACK SALTICH
Jack Saltich
/S/ DAVID HABIGER
David Habiger
/S/ DAVID SUGISHITA
David Sugishita
/S/ JOHN VESCHI
John Veschi
/S/ SHARON HOLT
Sharon Holt
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
Chief Executive Officer and Director
(Principal Executive Officer)
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and
(
Principal Accounting Officer)
Principal Accounting Officer)
p
Director
Director
Director
Director
Director
Director
81
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions/
Write-offs
(Recoveries)
Balance at
End of
Period
(In thousands)
Year ended December 31, 2016
Allowance for doubtful accounts
$
15
$
2 $
17 $
Year ended December 31, 2015
Allowance for doubtful accounts
Year ended December 31, 2014
Allowance for doubtful accounts
$
$
28
$
(6) $
7 $
9
$
16 $
(3) $
—
15
28
82
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Corporate Directory
CORPORATE LEGAL COUNSEL
Fenwick & West LLP
801 California Street
Mountain View, California 94041
USA
BOARD OF DIRECTORS
(cid:38)(cid:36)(cid:53)(cid:47)(cid:3)(cid:54)(cid:38)(cid:43)(cid:47)(cid:36)(cid:38)(cid:43)(cid:55)(cid:40)
Chairman, Immersion Corporation
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Ventiva, Inc.
(cid:48)(cid:36)(cid:43)(cid:40)(cid:54)(cid:43)(cid:3)(cid:54)(cid:56)(cid:49)(cid:39)(cid:36)(cid:53)(cid:36)(cid:48)
(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)
(cid:58)(cid:82)(cid:85)(cid:79)(cid:71)(cid:90)(cid:76)(cid:71)(cid:72)(cid:3)(cid:54)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:9)(cid:3)(cid:38)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)
Support
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
225 W. Santa Clara St., Suite 600
San Jose, California 95113
USA
TRANSFER AGENT
Computershare Investor Services
Company, N.A.
P.O. Box 30170
College Station, Texas 77842
USA
URL: www.computershare.com
STOCKHOLDER INFORMATION
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:519)(cid:86)(cid:3)(cid:564)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)
(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
Company’s annual reports on Form
10-K, quarterly reports on Form 10-
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(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:564)(cid:79)(cid:72)(cid:71)(cid:3)
(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:82)(cid:85)(cid:3)(cid:73)(cid:88)(cid:85)(cid:81)(cid:76)(cid:86)(cid:75)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)
available on the Company’s Web
site at: www.immersion.com.
MARKET INFORMATION –
COMMON STOCK
The Company’s Common Stock
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(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:68)(cid:86)(cid:71)(cid:68)(cid:84)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)
(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:522)(cid:918)(cid:48)(cid:48)(cid:53)(cid:523)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)
the Company’s initial public
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ANNUAL MEETING
The Immersion Corporation
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50 Rio Robles, San Jose, California
95134, USA.
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Director, Immersion Corporation
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Lake Partners
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SHARON HOLT
Director, Immersion Corporation
JACK SALTICH
Director, Immersion Corporation
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Director, Immersion Corporation
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Director, Immersion Corporation
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Hilco IP Merchang Banking
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Immersion Corporation
CORPORATE MANAGEMENT
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ROB LACROIX
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Human Resources
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CHRIS ULLRICH
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UX & Analytics
CORPORATE HEADQUARTERS
50 Rio Robles
San Jose, California 95134
USA
T: +1 408.467.1900
F: +1 408.467.1901
www.immersion.com
IMMERSION CANADA
(cid:23)(cid:21)(cid:19)(cid:19)(cid:3)(cid:54)(cid:87)(cid:16)(cid:47)(cid:68)(cid:88)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:37)(cid:79)(cid:89)(cid:71)(cid:17)(cid:15)(cid:3)(cid:54)(cid:88)(cid:76)(cid:87)(cid:72)(cid:3)(cid:20)(cid:20)(cid:19)(cid:24)
Montreal, Quebec H2W 2R2
(cid:38)(cid:68)(cid:81)(cid:68)(cid:71)(cid:68)
T: +1 514.987.9800
IMMERSION JAPAN K.K.
Otemachi Financial City
(cid:42)(cid:85)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:88)(cid:69)(cid:72)(cid:3)(cid:20)(cid:27)(cid:41)
1-9-2 Otemachi
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Japan
T: +81.3.6450.6302
IMMERSION KOREA
(cid:20)(cid:25)(cid:3)(cid:41)(cid:3)(cid:42)(cid:68)(cid:81)(cid:74)(cid:81)(cid:68)(cid:80)(cid:3)(cid:37)(cid:88)(cid:76)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)
(cid:22)(cid:28)(cid:25)(cid:3)(cid:54)(cid:72)(cid:82)(cid:70)(cid:75)(cid:82)(cid:16)(cid:71)(cid:68)(cid:72)(cid:85)(cid:82)
Seocho-gu, Seoul 06619
Korea
T: +82.2.21903700
IMMERSION LIMITED
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(cid:22)(cid:19)(cid:3)(cid:38)(cid:68)(cid:81)(cid:87)(cid:82)(cid:81)(cid:3)(cid:53)(cid:82)(cid:68)(cid:71)
Tsimshatsui, Kowloon
Hong Kong,
China
T: +1 659.815.0765
IMMERSION (SHANGHAI)
SCIENCE & TECHNOLOGY
CO., LTD
21F, Room 2105,
(cid:49)(cid:82)(cid:17)(cid:3)(cid:21)(cid:21)(cid:26)(cid:26)(cid:3)(cid:47)(cid:82)(cid:81)(cid:74)(cid:92)(cid:68)(cid:81)(cid:74)(cid:3)(cid:53)(cid:82)(cid:68)(cid:71)(cid:15)
(cid:51)(cid:88)(cid:71)(cid:82)(cid:81)(cid:74)(cid:3)(cid:49)(cid:72)(cid:90)(cid:3)(cid:36)(cid:85)(cid:72)(cid:68)
Shanghai, PRC,
China
IMMERSION (BEIJING)
Room 808 West Hanwei Plaza,
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Chaoyang District
Beijing, PRC,
China
IMMERSION SOFTWARE
IRELAND LTD.
(cid:22)(cid:85)(cid:71)(cid:3)(cid:41)(cid:79)(cid:82)(cid:82)(cid:85)(cid:15)(cid:3)(cid:56)(cid:79)(cid:92)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:43)(cid:82)(cid:88)(cid:86)(cid:72)(cid:15)
Foley Street
Dublin 1,
(cid:918)(cid:85)(cid:72)(cid:79)(cid:68)(cid:81)(cid:71)
T: +353.1.888.1004
IMMERSION TAIWAN
(cid:20)(cid:21)(cid:41)(cid:15)(cid:3)(cid:27)(cid:25)(cid:25)(cid:16)(cid:22)(cid:3)(cid:61)(cid:75)(cid:82)(cid:81)(cid:74)(cid:61)(cid:75)(cid:72)(cid:81)(cid:74)(cid:3)(cid:53)(cid:82)(cid:68)(cid:71)
New Taipei City
Zhonghe District (235)
Taiwan, R.O.C.
T: +1 866.9.3290.1330
IMMERSION TECHNOLOGY
INTERNATIONAL LTD.
(cid:50)(cid:605)(cid:70)(cid:72)(cid:3)(cid:21)(cid:24)(cid:15)(cid:3)
(cid:57)(cid:72)(cid:85)(cid:71)(cid:68)(cid:79)(cid:68)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:38)(cid:72)(cid:81)(cid:87)(cid:85)(cid:72)(cid:15)(cid:3)(cid:47)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:21)(cid:15)
LM Complex
Brewery Street, Mriehel BKR3000
Birkirkara
Malta
HAPTIFY, INC.
50 Rio Robles
San Jose, California 95134
USA
T: +1 408.467.1900
F: +1 408.467.1901
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