Immersion
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K[x]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2017 or[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission File Number 000-27969 Immersion Corporation(Exact name of registrant as specified in its charter)Delaware 94-3180138(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)50 Rio RoblesSan 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 Name of Each Exchange on which RegisteredCommon Stock, $0.001 par value The Nasdaq Stock Market LLCPreferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act:NoneIndicate 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 be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during 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 filingrequirements 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 Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes [x] No [ ]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 thebest 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 thisForm 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. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer [ ] Accelerated filer [x]Non-accelerated filer [ ] (Do not check if a smaller reporting company) 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, 2017, the last business day of theregistrant’s most recently completed second fiscal quarter, was $141,739,100 (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 theregistrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusivedetermination for other purposes. Number of shares of common stock outstanding at February 20, 2018 is 29,462,117.DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive Proxy Statement for the 2018 Annual Meeting are incorporated by reference into Part III hereof.Table of ContentsIMMERSION CORPORATION2017 FORM 10-K ANNUAL REPORTTABLE OF CONTENTSPART IPageItem 1.Business4Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments20Item 2.Properties20Item 3.Legal Proceedings21Item 4.Mine Safety Disclosures27PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities28Item 6.Selected Financial Data30Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations31Item 7A.Quantitative and Qualitative Disclosures About Market Risk40Item 8.Financial Statements and Supplementary Data42Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure74Item 9A.Controls and Procedures74Item 9B.Other Information74PART III Item 10.Directors, Executive Officers and Corporate Governance76Item 11.Executive Compensation76Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters76Item 13.Certain Relationships and Related Transactions, and Director Independence76Item 14.Principal Accounting Fees and Services76PART IV Item 15.Exhibits, Financial Statement Schedules77Signatures82Table of ContentsForward-looking StatementsIn addition to historical information this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (“the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Theforward-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-lookingstatements. 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 thosedescribed elsewhere in this report, and those described in our other reports filed with the Securities and Exchange Commission (“SEC”). We caution younot 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 updatethese forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and inour other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.3Table of ContentsPART IItem 1. BusinessOverviewImmersion Corporation (“Immersion”) is a premier licensing company focused on the creation, design, development, and licensing of innovative haptictechnologies 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 thetorchbearers of haptics and our mission is to innovate touch technology that informs, humanizes, and excites while working with customers and industrypartners to bring these tactile experiences to consumers. Our technologies are designed to facilitate the creation of high-quality haptic experiences, enabletheir widespread distribution, and ensure that their playback is optimized for end users. Our primary business is currently in the mobility, gaming, andautomotive markets, but we believe our technology is broadly applicable and see opportunities in evolving new markets, including entertainment, socialcontent, virtual and augmented reality, and wearables. In recent years, we have seen a trend towards broad market adoption of haptic technology, andestimate our technology is now in more than 3 billion devices worldwide. As other companies follow our leadership in recognizing how important tactilefeedback 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 helpintegrate our patented technology into our customers’ products or enhance the functionality of our patented technology, and offer licenses to our patentedtechnology to our customers. Our licenses enable our customers to deploy haptically-enabled devices, content and other offerings, which they typically sellunder their own brand names. In 2017, we and our wholly-owned subsidiaries increased our issued or pending patents by 400 to more than 2,800 patentsworldwide as of December 31, 2017. Our patents cover a wide range of digital technologies and include many of the ways in which touch-related technologycan be incorporated into and between hardware products and components, systems software, application software, and digital content. We believe that our IPis relevant to many of the most important and cutting-edge ways in which haptic technology is and can be deployed, including in connection with BasicHaptic mobile interfaces and user interactions, in association with pressure and other sensing technologies, as part of video and interactive content offerings,as related to virtual and augmented reality experiences, and in connection with advanced actuation technologies and techniques.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 StrategyOur goal is to continue to be the technology and market leader in haptics and drive the adoption of our touch technology across markets andapplications to improve user experiences in the digital realm. Key aspects of our 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 andencourage 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 tobroaden the use of haptics within our current core markets and to expand it into emerging markets, such as wearables and virtual and augmented reality.We rely on the skills and talent of our employees to successfully execute our strategy through ongoing innovation, licensing activities, andcollaboration with customers and partners to ensure that high quality tactile experiences are brought to market. Accordingly, we seek to hire and retainemployees with world class haptic expertise, as well as the executive management and operating personnel required to successfully execute our businessstrategies. To attract these high caliber employees, we have created an environment and culture that fosters and supports research, development, andinnovation in breakthrough technologies with significant opportunities for broad industry adoption through licensing. We believe we have created acompelling company for inventive and entrepreneurial technology professionals who are able to work within our collaborative and supportive corporateenvironment to innovate and execute on our opportunities and drive strong growth.We derive the majority of our revenue from the licensing of our software and patents. Parties licensed to our IP regard that act as an investment-one whichis devalued when unlicensed parties use our IP. Litigation against unlicensed third parties as a4Table of Contentsstrategy is a last step after all other avenues for resolution have been exhausted. If unlicensed parties continue to ship products that use our technologysolutions or intellectual property without fairly remunerating us, litigation is the proper public step to protect our intellectual property and assets, as well asinform existing licensees that we are protecting their investment.Haptics and Its BenefitsWhile the digital world offers many advanced technologies and capabilities, it often fails to provide us with the meaningful touch experiences thatinform 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 withreassuring context and confirmation, to bring us closer to one another through rich communications, and to enjoy entertainment, sports and other activitiesthrough 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 richcommunication 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 andswitches and that we need to fully understand the context of our interactions. By providing users with intuitive and unmistakable tactile confirmation as theypush virtual buttons and scroll through lists, haptics can instill confidence, increase input speed, reduce errors and help improve safety. This is especiallyimportant 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 andnuance of the application. For example, in haptically-enhanced videos, mobile games and simulations that integrate audio-visual content with tactilesensations, users can literally feel guns recoil, engines revving, and the crack of a baseball bat crushing a home run. As another example, medical studentsand doctors can practice performing cardiac procedures by using simulation systems that realistically recreate the forces that would be encountered innavigating pacing leads through a beating heart.Rich Communications: When humans communicate through touch, they are better able to establish emotional connections and feelings of closeness. Inmobile devices and wearables, haptics can enhance voice, chat and video applications by creating a sense of physical presence, allowing for more personaland engaging communications between users. Moreover, haptics can offer users a discreet and unobtrusive way of exchanging meaningful informationwithout disruptive audio or visual feedback.We believe these features of our haptic technology are broadly applicable to a number of markets and devices. By continuing to enhance these featuresthrough further research and development, we believe we will serve as a strategic partner for our customers and partners in helping them develop a morecompelling user experience for consumers.Our OfferingsWe provide software, IP and haptic expertise to our customers through a variety of different offerings, including software licenses, patent licenses, andcombined 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 theapplicable patents described in the license agreements. When we offer patent licenses, we provide the customer with a defined right to use our patentedinnovations in its own products by allowing it to use specified aspects of our broad international patent portfolio, subject to limitations by specific field ofuse and other restrictions. In certain cases, we also provide our patent licensees with enablement tools such as reference designs and prototypes, technical anddesign services as well as other assistance and support.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.Software OfferingsWe generally license our software as part of Immersion TouchSense-branded offerings that are intended to address the needs of our target markets. OurTouchSense offerings include haptic creation, deployment and playback software, SDKs, developer and enablement tools and documentation, technical anddesign services, as well as support.TouchSense Lite and TouchSense Premium: Targeted to the mobile device, wearables, and consumer electronics markets, TouchSense softwaredevelopment kits consist of solutions enabling the design of tactile effects used in device interfaces and applications, and enhancing the playback of hapticcontent. Our toolkits enable original equipment manufacturers (“OEMs”) and their suppliers to easily add customized haptic experiences to their ownbranded devices and other products. Our offerings include TouchSense Lite and TouchSense Premium for Mobile and Wearable OEMs.5Table of ContentsTouchSense 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 oftactile effects in mobile content, including games, ads and video. TouchSense Software Development Kits offer high fidelity tactile effects to augment andenhance mobile content, while ensuring quality playback within consumer devices. Our offerings include TouchSense Software Development Kit for MobileGames and for Mobile Videos.TouchSense Force: TouchSense Force is the suite of offerings for the PC/Console gaming/virtual reality markets. It is targeted at developers, peripheralmanufacturers, and platforms. The suite consists of design tools, APIs, reference designs, and firmware that aim to set the standard for haptics in gaming andvirtual reality by providing advanced next generation haptic solutions that enable consistent haptic experiences on existing vibration based controllers andenable new tactile gaming experiences.Patent LicensesThrough more than twenty years of innovative research, development and business activity, we have built a far-reaching and deep portfolio of patentscovering many of the foundational aspects and commercial applications of haptic technology. We have implemented formal policies and proceduresgoverning how we create, protect and maintain our IP assets, and devote substantial resources to ensure that our IP coverage of the haptic landscape is ascomprehensive as possible. Our growing portfolio now includes more than 2,800 worldwide issued or pending patents, which support our TouchSenseofferings, protect our business activities and prospects, and represent an important independent licensing and revenue channel for us. We believe that our IPis relevant to many of the most important ways in which haptic technology is and can be deployed, including in connection with mobile interfaces and userinteractions, in association with pressure and other sensing technologies, related to virtual and augmented reality experiences, and in connection withadvanced actuation technologies and techniques, to name a few.Haptic ExpertiseWe frequently offer our expertise to licensees to help them design and integrate touch effects into their products. This expertise includes engineering andintegration 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 ourlicensees to incorporate our touch-enabling solutions and technologies into their products at a reasonable cost and within a shortened time frame, allowingthem to bring products to market quickly by using our years of haptic development and solution deployment expertise. We offer product developmentsolutions 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 certificationservices to a number of licensees and ecosystem participants such as actuator vendors.Design Kits for Prototyping: We offer several design kits for customers to use for technology evaluation, internal evaluation, usability testing, and focusgroup testing. The kits include components and documentation that designers, engineers, and system integrators need for prototyping tactile effects intoexisting or sample products and applications.Authoring Tools: In addition to TouchSense Haptic Development Kits, we license authoring tools that enable haptic designers and software developersin other markets, such as console gaming, to quickly design and incorporate customized touch feedback into their applications. Authoring tools allowdesigners 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 onadding haptic effects to their applications instead of struggling with the mechanics of programming real-time algorithms and handling communicationsbetween computers and devices. Some of our haptic APIs are device independent (for example, they work with scroll wheels, rotary knobs, 2D joysticks, andother devices) to allow flexibility and reusability. Others are crafted to meet the needs of a particular customer or industry.Platform Independent Solutions: Our software driver and API technologies have been designed to be easily ported to a variety of operating systemsincluding Android, Tizen, Linux, and Windows.MarketsMobile Communications, Wearables, and Consumer Electronics: We offer TouchSense Lite and TouchSense Premium and patent licenses, as well ashaptic expertise, to OEMs in the mobile device, wearables, and consumer electronics markets. In addition, certain of our integrated circuit partners preloadtheir 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, HTC, Panasonic,Meizu, and Onkyo, as well as integrated circuit manufacturers such as Texas Instruments.6Table of ContentsFor the years ended December 31, 2017, 2016, and 2015, respectively, 49%, 57%, and 62% of our total revenues were generated from OEMs andintegrated circuit customers in the mobile communications market.Console and PC Gaming: We have licensed our patents directly to Microsoft and Nintendo for use in their console gaming products. Additionally, wehave licensed our patents to third party gaming peripheral manufacturers and distributors for use in spinning mass and force feedback devices such ascontrollers, steering wheels and joysticks, to be used with PC platforms running on Microsoft Windows and other operating systems, as well as in connectionwith video game consoles made by Microsoft, Sony, Nintendo and others. Our gaming licensees include Bensussen Deutsch & Associates, Guillemot,Logitech, Microsoft, Performance Designed Products, and Razer.For the years ended December 31, 2017, 2016, and 2015, respectively, 30%, 24%, and 24% of our total revenues were generated from customers in thePC 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, 2017, 2016, and 2015, respectively, 15%, 7%, and 7% 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, StrykerMedical (formerly MAKO Surgical), and SOFAR.For the years ended December 31, 2017, 2016, and 2015, respectively, 6%, 12%, and 7% of our total revenues were from medical customers.SalesOur sales are seasonal. Seasonal fluctuations have impacted our overall revenue trends in the past.We employ a consolidated direct sales force in the United States, Europe, and Asia to license our software and patents across our target markets andaugment 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 15 of our consolidated financial statements and relatedfinancial information in Item 8. Financial Statements and Supplementary Data.CompetitionOur biggest source of competition derives from decisions made by internal design groups at our OEM and other customers, as well as potentialcustomers. We expect that these internal design groups will continue to make choices regarding whether to implement haptics or not, as well as the extent oftheir haptic investment and whether to develop their own haptic solutions.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 toimplement or that enables products with higher performance or additional features. In some cases, the customer may elect not to include haptics in itsproducts or other offerings due to the higher costs associated with incorporating haptics.The principal competitive factors impacting our business are the strength of the patents underlying our technology, as well as the technological expertiseand 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 highlycompetitive. 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 andaccess to retail shelf space, advertising, promotional programs, and brand recognition. Touch-related benefits in some of these markets may be viewed simplyas enhancements and compete with non-touch-enabled technologies.Research and DevelopmentOur success depends on our ability to invent and improve our technologies in a timely manner; to design and develop software to meet specificationsbased on research and our understanding of customer needs and expectations; to offer tools and technology that enable high-quality, end-to-end hapticexperiences, from the time of creation to the time of playback; and to collaborate with our licensees who are integrating our technologies into theirs.7Table of ContentsEngineering: We have assembled a multi-disciplinary team of highly skilled engineers and scientists with the experience required for development oftouch-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 thatstrengthen 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-mail technical support and onsitetraining. 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 andprove the value of haptics in their field of interest, creating main competitive differentiator and value-added solutions. This team continues to generatepatents, 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 improvedapplications of haptics. We have unique expertise in haptics, usability, content creation, and interface design. Our team works with existing and potentialpartners to help them determine the best implementation of haptics in their specific application. This team works on the cutting edge of new user interfaceparadigms using haptics, resulting in an ongoing generation of patents, actively contributing to the development of new IP for us.For the years ended December 31, 2017, 2016, and 2015, research and development expenses were $11.8 million, $13.4 million, and $14.8 millionrespectively.Intellectual PropertyWe believe that IP protection is crucial to our business. We rely on a combination of patents, copyrights, trade secrets, trademarks, nondisclosureagreements with employees and third parties, licensing arrangements, and other contractual agreements with third parties to protect our IP. We maintain andsupport 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 thatpatents will be issued from the patent applications that we have filed or may file. Our issued patents may be challenged, invalidated, or circumvented, andclaims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or anycommercial advantage. Our position and revenue resulting from licensing our patents can also be affected by the expiration of patents and our ability topersuade licensees that other patents in our portfolio continue to be relevant.At the end of 2017, we and our wholly owned subsidiaries had over 2,800 currently issued or pending patents worldwide that cover various aspects ofour 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 fromthe 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 expiringin 2007.Financial Information about Industry Segments and Geographic AreasWe manage our operations and allocate resources as a single reporting segment. Additional information about our business segments and geographicareas is incorporated herein by reference to Note 15 of our consolidated financial statements and related financial information in Item 8. Financial Statementsand Supplementary Data.Investor InformationYou can access financial and other information in the Investor Relations section of our web site at www.immersion.com. We make available, on our Website, 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 reportsfiled or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically orotherwise furnishing it to the SEC.The charters of our audit committee, our compensation committee, and our nominating/corporate governance committee, our Code of Business Conductand Ethics (including code of ethics provisions that apply to our principal executive officer, principal financial officer, controller, and senior financialofficers), our Corporate Governance Principles and our Stock Ownership Policy8Table of Contentsare also available at our web site under “Corporate Governance.” These items are also available to any stockholder who requests them by calling +1408.467.1900.The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that fileelectronically with the SEC at www.sec.gov.EmployeesAs of December 31, 2017, following a restructure of certain of our operations, we had 81 full-time and part-time employees, including 36 in research anddevelopment, 13 in sales and marketing, and 32 in legal, finance, and administration. We also use independent contractors. None of our employees arerepresented by a labor union, and we consider our employee relations to be positive.Executive OfficersThe following table sets forth information regarding our executive officers as of February 20, 2018.NamePosition with the CompanyAgeCarl SchlachteInterim Chief Executive Officer and Chairman of the Board of Directors54Nancy ErbaChief Financial Officer51Anne Marie PetersGeneral Counsel and Senior Vice President IP Licensing and Legal Affairs47Carl Schlachte was named our interim Chief Executive Officer in November 2017. Mr. Schlachte has served as a member of our board of directors sinceJune 2011, and has served as Chairman of our board of directors since July 2012. Mr. Schlachte is Chairman, President and CEO of Ventiva, Inc., whichdesigns and develops thermal management technologies for consumer applications in mobile computing, power electronics and LED lighting. From 2006 toDecember 2011, Mr. Schlachte was Chairman of the Board of MOSAID Technologies Incorporated, one of the world’s leading IP companies, focused on thelicensing and development of semiconductor and communications technologies. From 2004 to 2009, Mr. Schlachte was President and CEO of ARCInternational, a leading provider of multimedia solutions to semiconductor companies worldwide. From October 2010 to 2016, Mr. Schlachte served on theBoard of Peregrine Semiconductor Corp. Mr. Schlachte received a B.S. from Clemson University.Nancy Erba joined Immersion as Chief Financial Officer in September 2016. Prior to joining Immersion, Ms. Erba was Vice President, Financial Planningand Analysis of Seagate Technology from February 2015 to October 2015. Prior executive roles at Seagate Technology include Division CFO and VicePresident of Finance, for Strategic Growth Initiatives from 2013 to 2015, Vice President, Business Operations and Planning from 2009 to 2013, Division CFOand 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.Anne Marie Peters has been at Immersion since December 2008 serving as General Counsel and Corporate Secretary. In July 2016, Ms. Peters’ role wasexpanded to include leading Immersion’s patent licensing portion of our business. From 1998 to 2008, Ms. Peters was an associate, and then corporatepartner at Morrison & Foerster LLP. Prior to practicing law, Ms. Peters held positions in the diagnostic manufacturing field at Chiron Corporation. Ms. Petersholds a Bachelor in Molecular and Cell Biology from the University of California, Berkeley, a Master of Business Administration from the Graduate Schoolof Management at the University of California, Davis, and a Juris Doctor degree from the University of California, Davis School of Law. Ms. Peters wasadmitted to the California State Bar in 1999.9Table of ContentsItem 1A. Risk FactorsYou should carefully consider the following risks and uncertainties, as well as other information in this report and our other SEC filings, inconsidering our business and prospects. If any of the following risks or uncertainties actually occurs, our business, financial condition, or results ofoperations could be materially adversely affected. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertaintiesof which we are unaware or that we currently believe are immaterial could also materially adversely affect our business, financial condition, or results ofoperations. 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.”Company RisksIf we are unable to enter into new and renewed licensing arrangements with our existing licensees and with 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 orrenewed licensing arrangements will cause our operating results to suffer. Further, upon adoption of ASC 606, we will have a substantial portion of revenuefrom our fixed license fee contracts recognized up front, with the remainder recognized over time which relates to our future performance obligations to betransferred during the contract term. Previously, our fixed license fee revenue was usually recognized ratably over time in accordance with revenuerecognition guidance under ASC 605. This change in accounting policy for fixed license fees revenue will further provide less predictability in our revenuewhen compared to historical periods. We face numerous risks in obtaining new or renewed licenses on terms consistent with our business objectives and inmaintaining, expanding, and supporting our relationships with our current licensees. These risks include:•difficulties in persuading device manufacturers to take a license or renew a license to our intellectual property without the expenditure ofsignificant resources;•difficulties in persuading existing customers that they still need a license to the portfolio as individual patents expire or become limited in scope,declared unenforceable or invalidated;•reluctance of device manufacturers to take a license or renew a license to our intellectual property because other larger device manufacturers are notlicensed;•difficulties in entering into or renewing gaming licenses if video game console makers choose not to license third parties to make peripherals fortheir new consoles, if video console makers no longer require peripherals to play video games, if video console makers no longer utilize technology inthe peripherals that are covered by our patents or if the overall market for video consoles deteriorates substantially;•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 developmentand other strategies;•difficulties in persuading existing licensees who compensate us for including our software in certain of their touch-enabled products to also licenseand 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 ourtechnologies; and•inability of current or prospective licensees to ship certain devices if they are involved in IP infringement claims by third parties that ultimatelyprevent 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.Three customers accounted for 20%, 18% and 11% of our total revenues, respectively, for the year ended December 31, 2017, as compared to the yearsended December 31, 2016 and 2015 where Samsung Electronics and two other customers together accounted for 60% and 64% of our total revenues,respectively. In the quarter ended September 30, 2016, we entered into an additional amendment to our License Agreement with Samsung pursuant to whichwe 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 ofsuch products in exchange for $19 million. We have not entered into a renewal agreement with Samsung for any products released after December10Table of Contents31, 2015, and on August 3, 2017, we filed a patent infringement suit against Samsung in the U.S. District Court in the Eastern District of Texas. See Part I,Item 3, "Legal Proceedings". Because we have not renewed our agreement with Samsung, there is no assurance that Samsung will continue to generate similarrevenue in any future period; and even if we were to renew our agreement with Samsung, our revenue could be adversely impacted by recalls or poorlyperforming mobile devices.In addition, we cannot be certain that other customers that have accounted for significant revenue in past periods, individually or as a group, willcontinue to generate similar revenue in any future period.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 stopspaying us royalties, our revenue could decline if we are unable to replace the lost revenue with revenue from other sources. In addition, if potential customersor 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 ourintellectual property, they may choose not to take or renew a license which could adversely affect our operating results.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 theseinnovations, 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 onour 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 ormaintain current licenses and royalty revenue could be impaired. In addition, if a court or patent office were to limit the scope, declare unenforceable, orinvalidate 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 alsopossible that:•our pending patent applications may not result in the issuance of patents;•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, where we or our licensees do business; and•our pending litigation against Samsung, Motorola, and Fitbit may be unsuccessful or may result in one or more of the patents asserted becominglimited 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 ourU.S. gaming patents expired in 2015, and as a result, Sony has ceased paying royalties for sales. Our failure to continuously develop or acquire successfulinnovations and obtain patents on those innovations could significantly harm our business, financial condition, results of operations, or cash flows. Inaddition, we also rely on licenses, confidentiality agreements, other contractual agreements, and copyright, trademark, and trade secret laws to establish andprotect our proprietary rights. It is possible that:•laws and contractual restrictions may not be sufficient to prevent misappropriation of our technologies or deter others from developing similartechnologies; and•policing unauthorized use of our patented technologies, trademarks, and other proprietary rights would be difficult, expensive, and time-consuming, within and particularly outside of the United States.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 currentlyin litigation against Samsung, Motorola, and Fitbit for patent infringement. We may need to continue to initiate legal proceedings in the future. Any legal oradministrative 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 leadto 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.Our current or any future litigation, arbitration and administrative proceedings to enforce or defend our intellectual property rights and to defend ourlicensing practices is expensive, disruptive, and time consuming, and will continue to be, until resolved, and regardless of whether we are ultimatelysuccessful, 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 usto enforce or defend our intellectual property rights and to defend our licensing practices. For example, on August 3, 2017, we initiated patent infringementlitigation against Samsung and Motorola claiming that they are infringing five of our US patents. Due to the inherent uncertainties of litigation andadministrative proceedings, we cannot accurately predict how these proceedings will ultimately be resolved. We anticipate that currently pending or anyfuture legal proceedings will continue to be costly, given the significant resources available to our current adverse parties, and that future11Table of Contentslegal proceedings will result in additional legal expenses, resulting in the decrease of cash available for other parts of our business, and there can be noassurance that we will be successful or be able to recover the costs we incur in connection with the legal proceedings. Although protecting our intellectualproperty 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 ofour key management and personnel away from our licensing transactions and other aspects of our business. As a result, until such time as it is resolved orconcluded, litigation, arbitration and administrative proceedings could cause our technology to be perceived as less valuable in the marketplace, whichcould reduce our sales and adversely affect our business. Further, any unfavorable outcome could adversely affect our business. For additional background onour litigation, please see Part I, Item 3, “Legal Proceedings”.Potential patent and litigation reform legislation, potential USPTO and international patent rule changes, potential legislation affecting mechanismsfor 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 andenforcement and could have a material adverse effect on our licensing business as well as our business as a whole. 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 researchand development investments, patent prosecution costs, the scope of future patent coverage we secure, remedies that we may be entitled to in patentlitigation, and attorneys’ fees or other remedies that could be sought against us, and may require us to reevaluate and modify our research and developmentactivities 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. Anypotential changes in the law, the IPR policies of standards bodies or other developments that reduce the number of forums available or the type of reliefavailable in such forums (such as injunctive relief), restrict permissible licensing practices (such as our ability to license on a worldwide portfolio basis) orthat 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 inadversarial proceedings or in negotiations. Because we have historically depended on the availability of certain forms of legal process to enforce our patentsand 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. Rulings in our legal proceedings as well as those of third parties may affect our strategies for patent prosecution, licensing and enforcement. Forexample, 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 ininternational forums may change the law applicable to various patent law issues, such as, for example, patentability, validity, patent exhaustion, patentmisuse, remedies, permissible licensing practices, claim construction, and damages, in ways that are detrimental to the abilities of patentees to enforce patentsand obtain damages awards.We continue to monitor and evaluate our strategies for prosecution, licensing and enforcement with regard to these developments; however, anyresulting 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 ordefend our intellectual property rights and to defend our licensing practices which may have a negative impact on our business.To sell our software, we must win competitive selection processes, known as “design wins,” before our haptic software technologies are included in ourcustomers’ products. These selection processes can be lengthy and can require us to incur significant design and development expenditures with no assurancethat 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 intothe market. In addition, as a small company, we have limited engineering resources that may make it difficult to support every type of haptic implementationwith our software offerings or to introduce new technologies in a timely manner. In the instances where a potential customer is not using our software butimplements unlicensed haptic capability, we may need to seek to enforce our intellectual property. If the customer is unwilling to enter into a licenseagreement, we may elect to pursue litigation which would harm our relationship with the customer and could harm our relationships with other licensees orour ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of suchlitigation, choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and could have a negative impact on ourfinancial results.We also license to semiconductor manufacturers who incorporate certain of our less fully-featured software into their integrated circuits for use in certainelectronic devices. While our relationships with these semiconductor manufacturers increases our distribution channels by leveraging their sales channels, itis possible that customers may elect to implement haptics using less12Table of Contentsfully-featured software integrated circuit solutions rather than the higher-end solutions we offer directly, which may negatively impact our financial results. Itis 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 ourIP.Our restructuring efforts may not be successful, and may negatively impact our business.In December 2017, we announced a restructuring of our business to exit the Mobile Advertising market, largely focus on IP licensing for the gaming andVirtual Reality ("VR")/Augmented Reality ("AR") markets, move to a mobile OEM licensing model for China, significantly reduce the size of our workforceand consolidate some of our operations. Consolidations and business restructurings involve numerous risks and uncertainties, including, but not limited to:the potential loss of key employees, customers and business partners; market uncertainty related to our future business plans; the incurrence of unexpectedexpenses or charges; diversion of management attention from other key areas of our business; negative impacts on employee morale; and other potentialdislocations and disruptions to the business. In addition, if our business expands, it may be more difficult for us to attract additional personnel and developthe resources we would need to support a larger customer base. Accordingly, if we are unable to manage this consolidation and transition effectively, ouroverall business and operating results could be materially and adversely affected.If we do not achieve increased tax benefits as a result of our recently implemented corporate restructuring, our financial condition and operatingresults 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 corporatestructure with the international nature of our business activities. This corporate restructuring activity is anticipated to allow us to reduce our overall effectivetax rate through changes in how we develop and use our intellectual property and the structure of our international sales operations, including by enteringinto transfer-pricing arrangements that establish transfer prices for our intercompany transactions.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 taxnexus will not challenge the restructuring or the tax position that we take. From time to time, we enter into license agreements with our licensees pursuant towhich we may agree to indemnify a customer for certain taxes imposed on the customer by an applicable tax authority and related expense. On April 28,2017, we received a letter from Samsung requesting that we reimburse Samsung with respect to withholding tax and penalties imposed on Samsung by theKorean tax authorities as a result of its determination that withholding taxes should have been withheld from certain payments made from Samsung toImmersion Software Limited. On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against usdemanding that we reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. Samsung is requesting that we paythem the amount of KRW 7,841,324,165 (approximately $6.3 million) plus interest from and after May 2, 2017 plus the cost of the arbitration including legalfees. We deny liability, and have asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved. The arbitrationpanel conducted an initial status conference on February 7, 2018. On February 15, 2018, the arbitration panel denied the motion to stay and has proposed aprocedural schedule with a hearing in July 2018.In addition, on October 16, 2017, we received a letter from LG Electronics Inc. (“LGE”) requesting that we reimburse LGE with respect to withholdingtax imposed on LGE by the Korean tax authorities following an investigation where the tax authority determined that LGE failed to withhold on LGE’sroyalty payments to Immersion Software Ireland from 2012 to 2014. On November 3, 2017, Immersion filed an appeal with the Korea Tax Tribunal regardingtheir findings with respect to the withholding taxes. In the event that it is determined that we are obligated to indemnify Samsung and/or LGE for suchwithholding taxes imposed by the Korean tax authorities, we would incur significant expenses. In addition, future changes to U.S. or non-U.S. tax laws,including legislation to reform U.S. or other countries' taxation of international business activities, could negatively impact the anticipated tax benefits of therestructuring.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 corporateorganization and applicable tax provisions, as well as on our achieving our forecasted revenue growth rates. If the intended tax treatment is not accepted bythe applicable taxing authorities, changes in tax law negatively impact the structure or we do not operate our business consistent with the intendedreorganization and applicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the reorganization and ourfuture operating results and financial condition may be negatively impacted.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 78% of our total revenue in 2017.International operations are subject to a number of difficulties, risks, and special costs, including:•compliance with multiple, conflicting and changing governmental laws and regulations;13Table of Contents•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 andtravel 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 complywith foreign laws and regulations, which are often complex and subject to variation, differing or inconsistent government interpretation, and unexpectedchanges, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our productsor levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls, or other restrictions on foreigncurrencies or trade barriers, any of which could make it more difficult for us to conduct our business. Our international operations could also increase ourexposure to complex international tax rules and regulations. Changes in, or interpretations of, tax rules and regulations may adversely affect our income taxprovision. In addition, our operations outside the United States may be affected by changes in trade protection laws, policies and measures, and otherregulatory requirements affecting trade and investment, including the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments by ouremployees, vendors, or agents.We had an accumulated deficit of $172 million as of December 31, 2017, and may not return to consistent profitability in the future.As of December 31, 2017, we had an accumulated deficit of $172 million. We need to generate significant ongoing revenue to return to consistentprofitability. 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 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 ourIP. 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 orsublicensing rights. We refer to the license terms and restrictions in our agreements, including, but not limited to, field of use definitions, market sector, andproduct category definitions, collectively as “License Provisions.”Due to the continuing evolution of market sectors, product categories, and licensee business models, and to the compromises inherent in the drafting andnegotiation of License Provisions, our licensees may interpret License Provisions in their agreements in a way that is different from our interpretation of suchLicense Provisions, or in a way that is in conflict with the rights that we have granted to other licensees. Such interpretations by our licensees may lead toclaims 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 reportroyalties to us based on their shipments or their revenues and their interpretation and allocation of contracted royalty rates. It is possible that the originallyreported royalties could differ materially from those determined by either a customer self-reported correction or from an audit we have performed. Theseinterpretations may also cause disagreements arising during customer audits, may lead to claims or litigation,14Table of Contentsand 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 ourlicensees, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our licensees’ businesses. Pursuant to ourlicense compliance program, we audit certain licensees to review the accuracy of the information contained in their royalty reports in an effort to decrease therisk 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 anunexpected manner. As a result, in any agreement, we may have granted rights that will preclude or restrict our exploitation of new opportunities that ariseafter 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 usewith popular video game console systems from Microsoft, Sony, and Nintendo. Video game console systems are closed, proprietary systems, and video gameconsole system makers typically impose certain requirements or restrictions on third-party peripheral makers who wish to make peripherals that will becompatible with a particular video game console system. If third-party peripheral makers cannot or are not allowed to satisfy these requirements orrestrictions, 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 ourgaming licensees to stop making products with touch-enabling capabilities, thereby significantly reducing our gaming royalty revenues. Also, if the gamingindustry changes such that mobile or other platforms increase in popularity at the expense of traditional video game consoles, our gaming royalty revenuescould be substantially reduced if we are unable to enter into replacement arrangements enabling us to license our software or IP in connection with gamingon such mobile or other platforms. Although Immersion has a significant software and IP position with respect to Virtual Reality peripherals and systems, themarket may not become large enough to generate material revenues. Finally, as some of our litigated patents have expired related to video game peripherals,our gaming royalty revenues will likely decline until we are successful in proving the relevance of our IP for this market.Because we have a fixed payment license with Microsoft, our royalty revenue from licensing in the gaming market and other consumer markets haspreviously declined and may further do so if Microsoft increases its volume 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) toour 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 withrespect to Microsoft’s Xbox One gaming product or any other haptic related product. Microsoft has a significant share of the market for touch-enabledconsole gaming computer peripherals and is pursuing other consumer markets such as mobile devices, tablets, personal computers, and virtual andaugmented reality. Microsoft has significantly greater financial, sales, and marketing resources, as well as greater name recognition and a larger customer basethan some of our other licensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other licensees in these marketsegments may decline.Automobiles incorporating our touch-enabling technologies are subject to lengthy product development periods, making it difficult to predict whenand 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 ourautomotive device technologies unless and until products featuring our technologies are shipped to customers, which may not occur until several years afterwe enter into an agreement with a manufacturer or a supplier to a manufacturer. Throughout the product development process, we face the risk that amanufacturer or supplier may delay the incorporation of, or choose not to incorporate, our technologies into its products, making it difficult for us to predictthe 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 ourtechnology is an option (for example, a navigation unit), 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 productsincorporating 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-enablingtechnologies. For the years ended December 31, 2017, 2016, and 2015, 97%, 98%, and 97% 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 manufacturedand sold by our licensees, nor can we control consolidation within an industry which could either reduce the number of licensable products available orreduce royalty rates for15Table of Contentsthe combined licensees. In addition, we generally do not have commitments from our licensees that they will continue to use our technologies in current orfuture products. As a result, products incorporating our technologies may not be brought to market, achieve commercial acceptance, or otherwise generatemeaningful royalty revenue for us. For us to generate royalty and license revenue, licensees that pay us per-unit royalties must manufacture and distributeproducts incorporating our touch-enabling technologies in a timely fashion and generate consumer demand through marketing and other promotionalactivities. If our licensees’ products fail to achieve commercial success, or if their products are recalled because of quality control problems or if they do notship products incorporating our touch-enabling technologies in a timely fashion or fail to achieve strong sales, our revenues will not grow and could decline.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 their IP rights. Even if we believe thatsuch 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 betime-consuming and costly to defend against and may divert management’s attention and resources away from our business. Furthermore, third partiesmaking 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 ofour software technologies or services in the United States and abroad. Claims of IP infringement also might require us to enter into costly settlement orlicense agreements or pay costly damage awards. Even if we have an agreement that provides for a third party to indemnify us against such costs, theindemnifying 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 thetechnologies. As a result, our exposure to infringement claims may increase. We generally obtain representations as to the origin and ownership of acquiredor licensed technologies and indemnification to cover any breach of these representations. However, representations may not be accurate and indemnificationmay 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, orsubstitute similar technology from another source, our business, financial position, results of operations or cash flows could suffer.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 berelated to industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, amongothers. We might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/orconfidential business information could harm our competitive position and reputation, reduce the value of our investment in research and development andother strategic initiatives or otherwise adversely affect our business. To the extent that any future security breach results in inappropriate disclosure of ourcustomers' 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 ofloss 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, thirdparties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other informationin order to gain access to our data or our customers’ data. Because the techniques used to obtain unauthorized access, or to sabotage systems, changefrequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequatepreventative measures. In addition, our customers may authorize third party technology providers, to access their customer data. Because we do not controlthe transmissions between our customers and third-party technology providers, or the processing of such data by third-party technology providers, we cannotensure the complete integrity or security of such transmissions or processing. Any security breach could result in a loss of confidence in the security of ourservice, damage our reputation, lead to legal liability and negatively impact our future sales.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 “opensource” environment. Developing open source compliant products without imperiling the IP rights upon which our licensing business depends may provedifficult under certain circumstances, thereby placing us at a competitive disadvantage for new product designs. Some of our proprietary technologiesincorporate open source software that may be subject to open source licenses. These open source licenses may require that source code subject to the licensebe 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 opensource license, or combined in specific ways with such open source software, become subject to the open source license. We take steps to ensure thatproprietary software we do not wish to disclose is not combined with, or does not incorporate, open source software in ways16Table of Contentsthat would require such proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and themanner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We often take steps to disclose source code forwhich 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 negativelyimpact our brand or our adoption in the community, or could expose us to additional liability. In addition, we rely on multiple software programmers todesign our proprietary products and technologies. Although we take steps to ensure that our programmers (both internal and outsourced) do not include opensource software in products and technologies we intend to keep proprietary, we cannot be certain that open source software is not incorporated into productsand technologies we intend to keep proprietary. In the event that portions of our proprietary technology are determined to be subject to an open sourcelicense, or are intentionally released under an open source license, we could be required to publicly release the relevant portions of our source code, whichcould reduce or eliminate our ability to commercialize our products and technologies. As a result, our revenues may not grow and could decline.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 termsacceptable 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 accessto 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 onterms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our software technologies can be delayed inproduction 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 ifthe 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 resultsof operations.The current global economic conditions and political climate could materially hurt our business in a number of ways, including longer sales and renewalcycles, exchange rate volatility, delays in adoption of our products or technologies or those of our customers, increased risk of competition, higher taxes andtariffs on goods incorporating out technologies, higher overhead costs as a percentage of revenue, delays in signing or failing to sign customer agreements orsigning customer agreements with reduced royalty rates. In addition, our customers, potential customers, and business partners would likely face similarchallenges, which could materially and adversely affect the level of business they conduct with us or the sales volume of products that include ourtechnology.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, anddevelop new technologies. Accordingly, our ability to develop and deploy our technologies and to sustain our revenue growth depends upon the continuedservice of our management and other key personnel, many of whom would be difficult to replace. Furthermore, we believe that there are a limited number ofengineering and technical personnel that are experienced in haptics. Management and other key employees may voluntarily terminate their employment withus 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 anddevelopment personnel. In addition, our Chief Executive Officer, Vice President, Worldwide Sales and Customer Support, and Vice President of Engineeringhave left our company and we may need to recruit and retain permanent replacements for these executives. Competition for such personnel is intense, and wemay not be successful in attracting, integrating, and retaining such personnel. Given the protracted nature of, if, how, and when we collect royalties on newdesign 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 factorthat candidates and employees consider. Some of our executive officers and key employees hold stock options with exercise prices that may be above thecurrent 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 officersand key employees.17Table of ContentsOur 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 damageour reputation and reduce demand for our technologies. Our technologies have in the past contained, and may in the future contain, undetected errors ordefects. 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 increasedservice 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 businessand 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 actsof 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 ourresearch 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 repairand replace the facility. While we believe that we maintain insurance sufficient to cover most long-term potential losses at our facilities, our existinginsurance 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 couldbe 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 andaccounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to bere-evaluated frequently. Any failure on our part to remedy identified material weaknesses, or any additional delays or errors in our financial reporting controlsor procedures, could cause our financial reporting to be unreliable and could have a material adverse effect on our business, results of operations, or financialcondition 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 welldesigned and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherentlimitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that allcontrol issues and instances of fraud, if any, within our company will have been detected.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 could be subject to government exportregulations 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 orapprovals to export such products internationally. Delays or denial of the grant of any required license or approval, or changes to the regulations, could makeit difficult or impossible to make sales to foreign customers in some countries and could adversely affect our revenue. In addition, we could be subject tofines and penalties for violation of these export regulations if we were found in violation. Such violation could result in penalties, including prohibiting usfrom exporting our products to one or more countries, and could materially and adversely affect our business.Investment RisksOur 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 ourcontrol and any of which could cause the price of our common stock to decline.These factors include:18Table of Contents•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;•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, ourcompetitors, 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 or policies may affect our reported financial condition or results of operations and, in certain cases, couldcause a decline and/or fluctuations in the price of our common stock.From time to time, financial and accounting standard setters such as the FASB and the SEC change certain guidance governing the form and content ofregistrants’ external financial statements, or update their previous interpretations with regard to the application of certain General Accepted AccountingPrinciples ("GAAP"). Such change in GAAP or their interpretation can have a significant effect on our reported financial condition and/or results ofoperations. If applicable to Immersion, we would be required to apply a new or revised guidance, which may result in retrospective adjustments to ourfinancial statements, and change the way we account for certain transaction than under the existing guidance. Changes in GAAP and reporting standardscould substantially change our reporting practices in a number of areas, including revenue recognition and recording of assets and liabilities, andconsequently affect our reported financial condition or results of operations.For example, in May 2014, the FASB issued ASU 2014-09 that, once adopted by us on January 1, 2018, are expected to significantly impact the timingwe recognize revenue for new and existing contracts with licensees. Under the new standard, we expect to recognize a substantial majority of license feesunder a fixed-fee license agreement paid upfront upon entry into the agreement, as opposed to recognizing the license fees ratably over the term of theagreement, which has been the historical practice applied by many licensing companies, including Immersion. For Immersion, this will impact the revenuerecognition of potentially all of our existing fixed-fee patent license agreements, including certain fixed-fee agreements that cover both our currenttechnologies and future technologies that are added to our portfolio during the term of the license. In addition, our current practice, which is shared by manylicensing companies, of reporting revenues from per-unit based royalty agreements one quarter in arrears, will no longer be accepted under the new revenuestandard. Instead we will be expected to estimate unit-based royalty revenues each quarter in order to report such revenue in the period in which theunderlying sales occurred, which will require adjustments to be recorded in the next reporting period to true up royalty revenue based on the actual amountsreported by our licensees. Such changes to our reporting practices are expected to significantly affect our reported financial condition and/or results ofoperations, potentially causing the amount of revenue we recognize to vary dramatically from quarter to quarter, and even year to year, depending on thetiming of entry into license agreements and whether such agreements have fixed-fee or per-unit royalty terms. In addition, these changes to our reportingpractices and the resulting fluctuations in our reported revenue could cause a decline and/or fluctuations in the price of our common stock.Our business is subject to changing regulations regarding corporate governance and other compliance areas that will increase both our costs and therisk 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 ofThe NASDAQ Stock Market and other regulations that may be enacted from time-to-time. The requirements of these and other rules and regulations haveincreased 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. Thesemarket fluctuations may cause our stock price to decline regardless of our performance. The market price of our common stock has been, and in the futurecould be, significantly affected by factors such as: actual or anticipated19Table of Contentsfluctuations in operating results; announcements of technical innovations; announcements regarding litigation in which we are involved; the acquisition orloss of customers; changes by game console manufacturers to not include touch-enabling capabilities in their products; new products or new contracts; salesor 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 insecurities analysts’ recommendations; personnel changes; changing circumstances regarding competitors or their customers; governmental regulatory actionor 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 thatcompany.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 repurchaseswill 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 to satisfythe market’s expectations. Furthermore, there can be no assurance that any repurchases conducted under the plan will be made at the best possible price. Theexistence 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 potentiallyreduce the market liquidity for our stock. Additionally, we are permitted to and could discontinue our stock repurchase program at any time and any suchdiscontinuation could cause the market price of our stock to decline.Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of ourcommon 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 ofdirectors or management, including the following:•our board of directors is classified into three classes of directors with staggered three-year terms which will be phased out over time through 2019;•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 specialmeeting of stockholders;•our stockholders can only take action at a meeting of stockholders and not by written consent;•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 beissued without stockholder approval;•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting ofstockholders; and•we have implemented a stockholder rights plan.In addition, certain provisions of Delaware law may discourage, delay, or prevent someone from acquiring or merging with us. These provisions couldlimit the price that investors might be willing to pay in the future for shares.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesWe 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 throughApril 2028.We lease a facility in Montreal, Quebec, Canada of approximately 10,000 square feet, for our subsidiary, Immersion Canada Corporation. The facility isused for research and development and administration functions. The lease for this property expires in December 2018.20Table of ContentsWe also lease office space in Seocho-gu, Seoul, Korea; Shanghai, China; Beijing, China; Tokyo, Japan; Mriehel, Birkirkara, Malta; and Dublin, Ireland.We believe that our existing facilities are adequate to meet our current needs.Item 3. Legal ProceedingsImmersion Corporation vs. Apple, Inc., AT&T Inc., and AT&T Mobility LLCOn 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 theU.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 ofDelaware alleging that the Apple iPhone 6, iPhone 6 Plus, iPhone 6s, iPhone 6s Plus, Apple Watch, Apple Watch Sport and Apple Watch Edition infringecertain 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 ofinfringing Apple devices into the United States by the defendants and appropriate cease and desist orders. In the U.S. District Court suit, we are alleginginfringement 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 WatchSport 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 allegationsof infringement with respect to the '051, '356, and '571 patents and determine whether violations of section 337 of the Tariff Act of 1930 have occurred. Theinvestigation bears the designation Inv. No. 337-TA-990 ("990 Investigation"). On April 6, 2016, the Chief Administrative Law Judge (“ALJ”) entered anorder terminating Respondent AT&T from the investigation, based on the stipulation and joint motion of the parties to terminate AT&T in a manner thatpreserved our ability to obtain discovery and compliance with any relief the ITC may order. On April 4, 2016, Respondents Apple and AT&T Mobilityserved responses to the complaint denying the material allegations of the complaint and alleging affirmative defenses, including among others that theasserted patents are not infringed, invalid and unenforceable. Respondents also alleged that the ‘356 patent is unenforceable for alleged inequitable conductbefore the United States Patent and Trademark Office. We responded to the allegations of Respondents during the investigation on the procedural scheduleset by the Chief ALJ.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 finaldetermination 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&TMobility 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 RetinaDisplay 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 ofinfringing Apple devices into the United States by the defendants and appropriate cease and desist orders. In the U.S. District Court suit, we are alleginginfringement 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 thefollowing 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”21Table of ContentsThe complaints also assert against Apple claims of infringement by the Apple MacBook and Apple MacBook Pro with Retina display of Immersion’sU.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 partiesagreed 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 ofinfringement 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 consolidating the 990and 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 proceduralschedule could be 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 finaldetermination 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 andalleging affirmative defenses, including among others that the asserted patents are not infringed, invalid and unenforceable. Respondents also alleged thatthe '710 patent is unenforceable for alleged inequitable conduct before the United States Patent Office. We responded to the allegations of Respondentsduring the investigation on the procedural schedule set by the Chief ALJ. On June 29, 2016, the Chief ALJ entered an order setting the Markman hearing inthe 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 proceduralschedule in the consolidated Investigation.The procedural schedule in the Investigation included, among other things, deadlines for the parties to conduct three required settlement conferences. OnJuly 26, 2016, representatives from the Company and Respondent AT&T conducted their first settlement conference. On July 28, 2016, representatives forthe Company and Respondent Apple conducted their first settlement conference. The parties did not reach an agreement to settle the dispute underlying thisInvestigation.In September 2016, Respondent Apple released additional products, including the iPhone 7 and 7 plus and the Apple Watch Series 2. The Company hasserved 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 ALJindicated 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 35U.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 December27, 2016, the Commission Investigative Staff submitted a response to the motion stating that the Staff supports the motion. On April 6, 2017, the Chief ALJissued an order denying 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 themediation.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 satisfycertain 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 Watchproducts 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 descriptionrequirement.On February 2, 2017, Chief ALJ Bullock issued his Markman ruling, Order No. 27 Construing the Terms of the Asserted Claims. The Chief ALJ adoptedImmersion’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 wereno 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 ’35622Table of Contentspatent, 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 therequest for termination as to the withdrawn allegations rendered Respondents motion for summary determination on these particular issues moot. On February9, 2017 the Chief ALJ issued an order granting partial termination of the Investigation as to certain asserted claims of the ’356 patent and the ’051 patent asdescribed above.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 forsummary determination that remained pending. On February 14 and 16, 2017, the Chief ALJ issued orders denying each of Respondents’ motions forsummary determination.On March 21, 2017, Immersion brought an unopposed motion for partial termination of the investigation with respect to all claims of the ’571 patent andclaims 7-10 of the ’710 patent. On March 23, 2017, the Chief ALJ issued an order granting partial termination as to the ’571 patent and certain claims of the’710 patent as described above. On March 23, 2017, the Chief ALJ also issued a notice that the evidentiary hearing would begin on April 27, 2017 andconclude on May 4, 2017 (as opposed to May 5, 2017).The evidentiary hearing with respect to the consolidated investigation by the United States International Trade Commission bearing the designation Inv.No. 337-TA-990/1004 commenced on April 27, 2017 and concluded on May 4, 2017. On May 31, 2017, the parties and the Office of Unfair ImportInvestigations ("OUII") Staff submitted their initial post-hearing briefs, and on June 7, 2017, the parties and OUII Staff submitted their post-hearing replybriefs. Before submitting these briefs, we provided a notice on May 11, 2017 that we would not be pursuing in our Post-Hearing Brief claims 3, 13, and 23 ofthe '356 patent. On October 20, 2017, Immersion brought an unopposed motion for partial termination of the investigation with respect to claims 3, 13, and23 of the ’356 patent. On October 23, 2017, the Chief ALJ issued an order granting partial termination as to claims 3, 13, and 23 of the ’356 patent asdescribed above.The due date for the Chief ALJ’s initial determination was scheduled for August 11, 2017. On July 13, 2017, the Chief ALJ entered an order extendingthe due date for the Chief ALJ's initial determination from August 11, 2017 to November 13, 2017 and extending the target date for the completion of theinvestigation from December 11, 2017 to March 12, 2018. On October 30, 2017, the Chief ALJ issued an order extending the final initial determination dateto no later than the close of business on January 31, 2018 and the final determination date to no later than May 31, 2018. On January 29, 2018, weannounced that we reached a settlement with Apple resolving the investigation. On January 30, 2018, the Chief ALJ issued an Order Extending Target DateBy Two Months in which he extended the target date two months in order to allow the parties sufficient time to prepare and submit a joint motion toterminate the investigation. The Chief ALJ also issued an order staying and suspending all dates and deadlines. On February 8, 2018, the parties submitted tothe ITC a Joint Motion to Terminate Based on Settlement. The parties also requested confidential treatment of the settlement agreement. On February 13,2018, the OUII Staff filed a response expressing the Staff’s support for the motion. On February 20, 2018, the Chief ALJ entered an order entitled “InitialDetermination Granting Joint Motion to Terminate The Investigation Based On A Settlement Agreement.” The Chief ALJ found good cause to terminate theinvestigation based on the settlement and granted the parties’ motion to terminate the investigation. The Chief ALJ also granted the parties’ motion to limitservice of the confidential settlement agreement to only Apple and Immersion (and not to counsel for AT&T).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 CaseNo. 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, thePatent Trial and Appeal Board ("PTAB" or "Board") issued a decision denying the Petition and declining to institute the IPR on February 10, 2017, Applesubmitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’051 patent in light ofalleged prior art references. This Petition bears Case No. IPR2017-00887. We filed our Patent Owner's Preliminary Response in this IPR on May 30, 2017. OnAugust 25, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second 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 CaseNo. 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, thePTAB 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 certainclaims of the ’571 patent. The Board set a schedule of certain due dates in the IPR. On May 31, 2017, we submitted our Patent Owner’s Response to the IPR.Apple filed its Reply to the Patent Owner's Response on August 4, 2017. On August 31, 2017, we submitted a Motion for Observation regarding thetestimony of Apple's expert on cross-examination at deposition. Apple responded to these observations on September 5, 2017. On October 5, 2017, the PTABconducted the Oral Hearing in this IPR. On January 10, 2018, the PTAB issued a Final Written Decision finding claims 1-4, 6, 23-26, and 28 of the ’571patent unpatentable. On February 1,23Table of Contents2018, the parties emailed the PTAB and requested authorization to file a joint motion to vacate final decision and terminate proceeding in IPR2016-1372 inlight of the settlement between the parties. On February 2, 2018, the PTAB denied the parties’ request to file such a motion. We are currently consideringwhether to appeal the decision to the U.S. Court of Appeals for the Federal Circuit. A notice of appeal is due March 14, 2018. 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 inlight of alleged prior art references. This Petition bears Case No. IPR2017-00896. We filed our Patent Owner's Preliminary Response in this IPR on May 22,2017. On August 17, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.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 CaseNo. 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, thePTAB issued its decision instituting the IPR on certain grounds raised in the Petition. The Board set a schedule of certain due dates in the IPR. On May 31,2017, we submitted our Patent Owner's Response to the IPR. Apple filed its Reply to the Patent Owner's Response on July 28, 2017. On August 31, 2017, wesubmitted a Motion for Observation regarding the testimony of Apple's expert on cross-examination at deposition. Apple responded to these observations onSeptember 5, 2017. On October 5, 2017, the PTAB conducted the Oral Hearing in this IPR. On January 10, 2018, the PTAB issued a Final Written Decisionfinding claims 1-3, 5, 7, 9-13, 15, 17, 19-23, 25, and 26 of the ’356 patent unpatentable. On January 10, 2018, Apple submitted to the Chief ALJ in the ITCproceeding a Notice of Supplemental Authority Regarding the ’356 Patent to inform the Chief ALJ of the Board’s decision in this IPR. On February 1, 2018,the parties emailed the PTAB and requested authorization to file a joint motion to vacate final decision and terminate proceeding in IPR2016-1381 in lightof the settlement between the parties. On February 2, 2018, the PTAB denied the parties’ request to file such a motion. We are currently considering whetherto appeal the decision to the U.S. Court of Appeals for the Federal Circuit. A notice of appeal is due March 14, 2018. On or about February 12, 2017, Applesubmitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’356 patent in light ofalleged prior art references. This IPR bears Case No. 2017-00897. We filed our Patent Owner's Preliminary Response in this IPR on May 22, 2017. On August17, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.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 bearsCase No. IPR2016-01603. The petition challenges the patentability of certain claims of the '710 patent in light of alleged prior art references. On November28, 2016, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’710 patent. On February23, 2017, the PTAB issued its decision instituting the IPR on certain grounds raised in the petition. The Board set a schedule of certain due dates in the IPR.On June 28, 2017, we submitted our Patent Owner's Response in the IPR. Apple filed its Reply to the Patent Owner's Response on August 24, 2017. OnOctober 16, 2017, we submitted a Motion for Observation regarding testimony of Apple's expert on cross-examination at deposition. On November 16, 2017,the PTAB conducted the Oral Hearing in this IPR. The matter is now submitted to the PTAB and pending decision. The PTAB’s decision is due by February23, 2018, within one year of the institution of the IPR. On February 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motionto terminate IPR2016-1603 in light of the settlement between the parties. On February 2, 2018, the PTAB granted the request. On February 8, 2018, theparties filed a joint motion to terminate the IPR. The parties also requested confidential treatment of the settlement agreement. On February 12, 2018, thePTAB granted the parties’ joint motion to terminate the IPR as well as the parties’ joint request for confidential treatment of the settlement agreement. On orabout May 4, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claimsof the ‘710 patent in light of alleged prior art references. This IPR bears Case No. 2017-01368. We filed our Patent Owner's Preliminary Response on August24, 2017. On November 7, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.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 petitionbears Case No. IPR2016-01777. The petition challenges the patentability of certain claims of the '507 patent in light of alleged prior art references. OnDecember 27, 2016, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’507 patent. OnMarch 23, 2017, the Board issued its decision denying the Petition and declining to institute the IPR. On May 9, 2017, Apple submitted in the United StatesPatent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’507 patent in light of alleged prior art references.This IPR bears Case No. 2017-01310. We filed our Patent Owner's Preliminary Response on August 9, 2017. On November 2, 2017, the PTAB issued adecision denying Apple's petition and declining to institute the second IPR.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 petitionbears Case No. IPR2016-01884. The petition challenges the patentability of certain claims of the '260 patent in light of alleged prior art references. OnJanuary 4, 2017, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’260 patent. Inresponse to a request of the Petitioner, the Board also24Table of Contentsauthorized 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’sSur-Reply brief on February 14, 2017. On April 3, 2017, the Board issued a decision instituting the IPR on certain grounds raised in the petition. The Boardhas set a schedule of certain due dates in the IPR. On July 3, 2017, we submitted our Patent Owner’s Response in the IPR. Apple filed its Reply to the PatentOwner's Response on October 10, 2017. The Oral Hearing took place on January 10, 2018. The matter is now submitted to the PTAB and pending decision.The PTAB’s decision is due by April 3, 2018, within one year of the institution of the IPR. On February 1, 2018, the parties emailed the PTAB and requestedauthorization to file a joint motion to terminate IPR2016-1884 in light of the settlement between the parties. On February 2, 2018, the PTAB granted therequest. On February 8, 2018, the parties filed a joint motion to terminate the IPR. The parties also requested confidential treatment of the settlementagreement. The PTAB has not yet ruled on the joint motion. On or about May 4, 2017, Apple submitted in the United States Patent and Trademark Office asecond IPR petition challenging the patentability of certain claims of the ‘260 patent in light of alleged prior art references. This IPR bears Case No. 2017-01369. We filed our Patent Owner's Preliminary Response on August 24, 2017. On November 21, 2017, the PTAB issued a decision denying Apple's petitionand declining to institute the second IPR.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 petitionbears Case No. IPR2016-01907. The petition challenges the patentability of certain claims of the '488 patent in light of alleged prior art references. OnJanuary 5, 2017, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’488 patent. Inresponse 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. On April 3, 2017, the Board issued a decision instituting the IPR on certain grounds raisedin the petition. The Board has set a schedule of certain due dates in the IPR. On July 3, 2017, we filed our Patent Owner's Response in the IPR. Apple filed itsReply to the Patent Owner's Response on October 10, 2017. The Oral Hearing took place on January 10, 2018. The matter is now submitted to the PTAB andpending decision. The PTAB’s decision is due by April 3, 2018, within one year of the institution of the IPR. On February 1, 2018, the parties emailed thePTAB and requested authorization to file a joint motion to terminate IPR2016-1907 in light of the settlement between the parties. On February 2, 2018, thePTAB granted the request. On February 8, 2018, the parties filed a joint motion to terminate the IPR. The parties also requested confidential treatment of thesettlement agreement. The PTAB has not yet ruled on the joint motion. On or about May 4, 2017, Apple submitted in the United States Patent and TrademarkOffice a second IPR petition challenging the patentability of certain claims of the ‘488 patent in light of alleged prior art references. This IPR bears Case No.2017-01371. We filed our Patent Owner's Preliminary Response on August 24, 2017. On November 21, 2017, the PTAB issued a decision denying Apple'spetition and declining to institute the second IPR.On October 26, 2017, we filed a patent infringement lawsuit in the Beijing High People’s Court against Apple Computer Trading (Shanghai) Co., Ltd.,Apple Electronic Product Commerce (Beijing) Co., Ltd., and Apple Trading (Shanghai) Co., Ltd. alleging that the iPhone 6s, iPhone 6s Plus, iPhone 7,iPhone 7 Plus, iPhone 8 and iPhone 8 Plus infringe our Chinese patents ZL02821854.X and ZL200810008845.X. We are seeking a permanent injunctionpreventing the importation, sale and offering for sale of the iPhone products noted above in China as well as damages. As noted above, on January 29, 2018,we announced that we reached a settlement with Apple resolving the above-described litigation. This case is now in the process of being withdrawn from thecourt.Although we believe we have strong claims, the outcome of litigation and the pending IPRs is inherently uncertain.Immersion Corporation v. FitBit and Runtong International Trade Co., Ltd. (Shanghai Intellectual Property Court)On June 29, 2017, local counsel for Immersion filed a patent infringement lawsuit against Fitbit, Inc. (“Fitbit”) in the Shanghai Intellectual PropertyCourt alleging that Fitbit has infringed three of our China patents. The three patents at issue are China Patent No. CN101305416B, entitled “methods andsystems for providing haptic messaging to handheld communication devices”; No. CN102187647B, entitled “systems and methods for mapping messagecontents to virtual physical properties for sending vibrotactile messaging”; and No. CN102160366B, entitled “systems and methods for transmitting hapticmessages.” The Shanghai Intellectual Property Court accepted the case on July 7, 2017. Notices for Invalidation have been filed for China Patent Nos.CN101305416B and CN102160366B, and responses are due February 28 and 23, 2018, respectively.Immersion Corporation v. Fitbit, Inc., Case No. 5:17-cv-03886-LHK (N.D. Cal.)On July 10, 2017, we filed a patent infringement lawsuit against Fitbit in the U.S. District Court for the Northern District of California alleging that Fitbithas infringed three of our U.S. Patents. The three patents at issue are U.S. Patent No. 8,351,299, which covers “Apparatus and Method for ProvidingCondition-Based Vibrotactile Feedback”; No. 8,059,105, entitled “Haptic Feedback for Touchpads and Other Touch Controls”; and No. 8,638,301, for“Systems and Methods for Transmitting Haptic Messages.” Generally, these U.S. patents cover “touch-feedback” - or haptic feedback - devices, systems andmethods. Fitbit devices alleged to infringe include the Fitbit Flex, Fitbit Flex 2, Fitbit Alta, Fitbit Alta HR, Fitbit Charge, Fitbit Charge 2, Fitbit25Table of ContentsCharge HR, Fitbit Blaze and Fitbit Surge. We served Fitbit with the Complaint, among other papers, on July 11, 2017. On October 4, 2017, in lieu ofanswering, Fitbit filed a Motion to Dismiss pursuant to 12(b)(6) based on 35 USC § 101. The hearing on Fitbit’s Motion to Dismiss was set for February 15,2018. The parties attended an Initial Case Management Conference on October 18, 2017. The claim construction hearing has been scheduled for May 10,2018, and the trial date has been scheduled for May 6, 2019. On November 1, 2017, we filed our response to Fitbit’s motion to dismiss. On February 8, 2018,the parties participated in Court-ordered mediation of the U.S. district court case. On February 13, 2018, the Court took Fitbit’s Motion to Dismiss undersubmission without oral argument and vacated the hearing previously set for February 15, 2018.On February 7, 2018, Fitbit filed in the United States Patent and Trademark Office two petitions for inter partes review (IPR) of the ‘105 patent (Case Nos.IPR2018-00588 and IPR2018-00590); a petition for inter partes review of the ‘299 patent (Case No. IPR2018-00591); and two petitions for inter partesreview of the ‘301 patent (Case Nos. IPR2018-00592 and IPR2018-00593). The Patent Owner’s Preliminary Responses for Immersion to respond to thepetitions’ challenges (Case Nos. IPR2018-00588 and IPR2018-00590) to patentability of the claims of the ‘105 patent are due May 15, 2018. The last day forthe Patent Trial and Appeal Board to decide whether to institute such IPR is August 15, 2018.Immersion Corporation vs. Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc.On August 3, 2017, we filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (collectively, “Samsung”) in theUnited States District Court for the Eastern District of Texas alleging that certain Samsung touchscreen phones, including those phones that Samsung had notcommenced commercially producing, distributing and selling before January 1, 2016 (the “Accused Phones”), infringe certain of our patents that coverhaptic feedback systems and methods. In the complaint, we are seeking to stop Samsung from further infringement as well as the recovery of damages. Thecomplaints assert infringement by the Accused Phones of the following patents:U.S. Patent No 6,429,846: "Haptic Feedback for Touchpads and Other Touch Controls"U.S. Patent No 7,969,288: "Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device"U.S. Patent No 9,323,332: “Force Feedback System Including Multi-Tasking Graphical Host Environment”U.S. Patent No 7,982,720: "Haptic Feedback for Touchpads and Other Touch Controls"U.S. Patent No 8,031,181: "Haptic Feedback for Touchpads and Other Touch Controls"Samsung filed a response to the Complaint on October 24, 2017.On December 15, 2017, the Court issued a Docket Control Order setting the claim construction hearing for August 15, 2018 and the first day of juryselection for February 4, 2019.Immersion Corporation vs. Motorola Mobility LLC and Motorola Mobility Holdings LLCOn August 3, 2017, we filed a complaint against Motorola Mobility LLC and Motorola Mobility Holdings LLC (collectively, “Motorola”) in the UnitedStates District Court for the District of Delaware alleging that certain Motorola touchscreen phones, including the Moto G4, Moto G4 Play, Moto G4 Plus,Moto G5, Moto G5 Plus, Moto Z, Moto Z Force and Moto Z Play (the “Accused Phones”), infringe certain of our patents that cover haptic feedback systemsand methods. In the complaint, we are seeking to stop Motorola from further infringement as well as the recovery of damages. The complaints assertinfringement by the Accused Phones of the following patents:U.S. Patent No 6,429,846: "Haptic Feedback for Touchpads and Other Touch Controls"U.S. Patent No 7,969,288: "Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device"U.S. Patent No 9,323,332: “Force Feedback System Including Multi-Tasking Graphical Host Environment”U.S. Patent No 7,982,720: "Haptic Feedback for Touchpads and Other Touch Controls"U.S. Patent No 8,031,181: "Haptic Feedback for Touchpads and Other Touch Controls"On September 25, 2017, Motorola filed its Answer to the Complaint.On December 5, 2017, the Court issued a Scheduling Order setting the claim construction hearing for September 12, 2018, and the trial date forSeptember 23, 2019.26Table of ContentsSamsung Electronics Co. v. Immersion Corporation and Immersion Software Ireland LimitedOn April 28, 2017, we received a letter from Samsung requesting that we reimburse Samsung with respect to withholding tax and penalties imposed onSamsung by the Korean tax authorities following an investigation where the tax authority determined that Samsung failed to withhold taxes on Samsung’sroyalty payments to Immersion Software Ireland from 2012 to 2016. On July 12, 2017, we filed an appeal with the Korea Tax Tribunal regarding theirfindings with respect to the withholding taxes and penalties.On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against us demanding that we reimburseSamsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. Samsung is requesting that we pay Samsung the amount of KRW7,841,324,165 (approximately $6.3 million) plus interest from and after May 2, 2017, plus the cost of the arbitration including legal fees. We deny liability,and have asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved. The arbitration panel conducted aninitial status conference on February 7, 2018. The International Chamber of Commerce denied our motion to postpone the arbitration, and has circulated adraft procedural schedule that would set the hearing date for July 23, 2018. We believe that there are valid defenses to all of the claims from the Korean taxauthorities and that Samsung’s claims are without merit. We intend to vigorously defend against these claims and as a result, we have concluded that thelikelihood of a material charge resulting from this claim is remote. In the event Samsung were to prevail in the arbitration in advance of the conclusion of theappeal with the Korea Tax Tribunal, we could be required to make a payment to Samsung even though it would later be reimbursed should we prevail in theappeal.We cannot predict the ultimate outcome of the above-mentioned actions, and we are unable to estimate any potential liability we may incur. Please alsorefer to our disclosures in Contingencies, Note 14 to the Consolidated Financial Statements.Item 4. Mine Safety DisclosuresNot applicable.27Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is traded on the Nasdaq Global Market under the symbol “IMMR.” The following table sets forth, for the periods indicated, the highand low sales prices for our common stock on such market. High LowFiscal year ended December 31, 2017 Fourth Quarter$8.50 $5.87Third Quarter$8.96 $6.61Second Quarter$9.17 $7.99First Quarter$11.67 $8.05Fiscal year ended December 31, 2016 Fourth Quarter$11.92 $7.01Third Quarter$8.49 $6.24Second Quarter$8.53 $5.90First Quarter$11.45 $6.63On February 20, 2018, the closing price was $9.79 per share and there were 79 holders of record of our common stock. Because many of such shares areheld by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these recordholders.On December 26, 2017, our Board declared a dividend of one right (a “Right”) for each of our issued and outstanding shares of common stock, par value$0.001 per share. The dividend was paid to the stockholders of record at the close of business on January 8, 2018 (the “Record Date”). Each Right entitles theholder to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock (the “Preferred Stock”) ata price of $30.00 (the “Exercise Price”), subject to certain adjustments. Please refer to the description of such rights in our Form 8-K filed on December 27,2017 which is incorporated by reference.Dividend PolicyWe have never declared or paid any cash dividends on our common stock and we frequently evaluate uses of our cash. We do not anticipate paying cashdividends in the foreseeable future. We currently intend to retain any earnings to fund future growth, product development, and operations.Company Stock Performance GraphThe information contained in the Performance Graph shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to theliabilities of Section 18 of the Exchange Act, as amended, except to the extent that we specifically incorporate it by reference into a document filed underthe 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, 2012 andending on December 31, 2017, in Immersion’s common stock, and in the NASDAQ Composite and the RDG Technology Composite indices, andreinvestment of dividends, if any.The comparison below is based on historical data, and Immersion cautions that the stock price performance shown in the graph is not indicative of, norintended to forecast, the potential future performance of Immersion’s common stock. Information used in the graph was obtained from a source believed to bereliable, but Immersion is not responsible for any errors or omissions in such information.28Table of Contents December 31, 2012 2013 2014 2015 2016 2017Immersion Corporation$100 $151 $138 $170 $155 $103NASDAQ Composite100 142 162 173 187 242RDG Technology Composite100 133 155 161 181 248Securities Authorized for Issuance under Equity Compensation PlansThe information concerning our equity compensation plans is incorporated by reference herein to Note 6 to our consolidated financial statements.29Table of ContentsItem 6. Selected Financial DataThe following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this AnnualReport on Form 10-K. The selected consolidated statement of operations data for each of the years ended December 31, 2017, 2016, and 2015 and theconsolidated balance sheet data as of December 31, 2017 and 2016 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, 2014 and2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements whichare not included in this report. Years Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except per share data)CONSOLIDATED STATEMENTS OFOPERATIONS DATA: Revenues$35,013 $57,086 $63,393 $52,937 $47,470Costs and expenses80,435 72,349 58,674 46,970 43,866Operating income (loss)(45,422) (15,263) 4,719 5,967 3,604Income tax benefit (provision) from continuingoperations(480) (25,521) (1,591) (2,196) 36,483Income (loss) from continuing operations(45,291) (40,030) 2,858 4,123 40,155Income from discontinued operations— 649 — — —Net income (loss)(45,291) (39,381) 2,858 4,123 40,155Basic net income (loss) per share: Continuing operations$(1.55) $(1.39) $0.10 $0.15 $1.42Discontinued operations— 0.02 — — —Total$(1.55) $(1.37) $0.10 $0.15 $1.42Shares used in calculating basic net income (loss) pershare29,179 28,759 28,097 28,246 28,190Diluted net income (loss) per share: Continuing operations$(1.55) $(1.39) $0.10 $0.14 $1.37Discontinued operations— 0.02 — — —Total$(1.55) $(1.37) $0.10 $0.14 $1.37Shares used in calculating diluted net income (loss) pershare29,179 28,759 29,015 29,144 29,338 December 31, 2017 2016 2015 2014 2013 (In thousands)CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments$46,538 $89,772 $64,931 $57,361 $71,112Working capital28,980 73,008 53,749 58,025 64,249Total assets51,975 103,767 105,415 97,521 110,575Total stockholders’ equity9,657 55,340 86,615 76,603 80,67130Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe 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 meaningof Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act, as amended. The forward-looking statements involve risks anduncertainties. Forward-looking statements are frequently identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” andother similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements, which refer toexpectations, projections, or other characterizations of future events or circumstances, are forward-looking statements. Actual results could differmaterially 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,”those described elsewhere in this report, and those described in our other reports filed with the SEC. We caution you not to place undue reliance on theseforward-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 theseforward-looking statements that could occur after the filing of this report.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidatedfinancial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenuerecognition, stock-based compensation, short-term investments, patents and intangible assets, income taxes, contingencies, and litigation. We base ourestimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results maydiffer 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 ourconsolidated financial statements:Revenue RecognitionWe 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-RevenueRecognition” (“ASC 985-605”). We derive our revenues from two principal sources: royalty and license fees, and development contract and service fees. Asdescribed below, management judgments, assumptions, and estimates must be made and used in connection with the revenue recognized in any accountingperiod. Material differences may result in the amount and timing of our revenue for any period based on the judgments and estimates made by ourmanagement. Specifically, in connection with each transaction, we must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery hasoccurred, (iii) the fee is fixed or determinable, and (iv) collectability is probable. We apply these criteria as discussed below.•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 electronically. Delivery occurs when we provide the customer access codes or “keys” that allow thecustomer 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 tothe majority of customers. For transactions involving extended payment terms, we deem these fees not to be fixed or determinable for revenuerecognition 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 pursuantto our credit review policy. We typically sell to customers with whom we have a history of successful collection. For new customers, weevaluate the customer’s financial condition and ability to pay. If we determine that collectability is not probable based upon our credit reviewprocess 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. Revenues that are derived from the sale of a licensee's products that incorporate our IP are classified as royalty revenues. The terms ofthe 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 theirrelated 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 royaltyrevenues based on31Table of Contentsroyalties reported by licensees and when all revenue recognition criteria are met. Certain royalties could be subject to change and may result in out of periodadjustments depending on the specific terms of the arrangement. We also enter into fixed license fee arrangements. We recognize fixed license fee revenuewhen 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 (engineeringservices and/or development contracts), and in limited cases, post contract customer support (“PCS”). Engineering services revenues are recognized under theproportional performance accounting method based on the completion of the work to be performed or completed performance method. A provision for losseson contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Revisions in estimates are reflected inthe period in which the conditions become known. To date, such losses have not been significant. Revenue from PCS is typically recognized over the periodof the ongoing obligation, which is generally consistent with the contractual term.Multiple element arrangements — We enter into multiple element arrangements in which customers purchase time-based non-exclusive licensesthat cannot be resold to others, which include a combination of software and/or IP licenses, engineering services, and in limited cases, PCS. For arrangementsthat are software based with an engineering services component, the services are generally not essential to the functionality of the software, and customersmay purchase engineering services from the Company to facilitate the adoption of our technology, but they may choose to use their own resources or appointother engineering service organizations to perform these services. For arrangements that are in substance subscription arrangements, the entire arrangementfee is recognized ratably over the contract term, subject to any limitations related to extended payment terms. For arrangements involving upfront fees forservices and royalties earned by us based on units sold or sales volumes of the respective licensed products, and the services are performed ratably over thearrangement or are front-end loaded, the upfront fees are recognized ratably over the contract term, and royalties based on units sold or sales volume arerecognized when they become fixed and determinable. As we are unable to reliably estimate the licensees’ sales in any given quarter to determine theroyalties due to us, we recognize per unit or sales volume driven royalty revenues based on royalties reported by licensees and when all revenue recognitioncriteria are met.Stock-based CompensationStock-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 basisover 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-optionapproach to determine the fair value of standard stock options and Employee Stock Purchase Plan (“ESPP”) shares. All share-based payment awards areamortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expenserecognized at fair value includes the impact of estimated forfeitures. We estimate future forfeitures at the date of grant and revise the estimates if necessary, insubsequent periods if actual forfeitures differ from these estimates. The determination of the fair value of stock-based payment awards on the date of grantusing an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variablesinclude actual and projected employee stock option exercise behaviors that impact the expected term, our expected stock price volatility over the term of theawards, risk-free interest rate, and expected dividends.We use the Monte-Carlo Simulation model to value our stock options with a market condition. Valuation techniques such as the Monte-CarloSimulation model have been developed to value path-dependent awards. The Monte-Carlo Simulation model is a generally accepted statistical techniqueused, 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 fullytransferable, 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 thefair 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 beworthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financialstatements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant dateand reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy ofthe 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 usea different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect ouroperating results.32Table of ContentsSee Note 6 to the consolidated financial statements for further information regarding stock-based compensation.Accounting for Income TaxesWe use the asset and liability method of accounting for income taxes as prescribed in ASC 740, Income Taxes. Under this method, income tax expense isrecognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expectedfuture tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes, tax losses, and credit carryforwards. This method requires a reduction of the carrying amounts of deferred tax assets by a valuationallowance if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuationallowances for deferred tax assets is assessed periodically based on the ASC 740 more-likely-than-not realization ("MLTN") threshold criterion. Thisassessment considers matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, andresults of recent operations. The evaluation of the recoverability of the deferred tax assets requires that the Company weigh all positive and negativeevidence 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 theevidence is commensurate with the extent to which it can be objectively verified.Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws including the 2017 TaxCuts and Jobs Act (the "Tax Act"), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign anddomestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged bytax authorities. Although we believe our judgments, assumptions, and estimates are reasonable, changes in tax laws or our interpretation of tax laws and anyfuture 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 futuretaxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income infuture 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 financialposition 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 foreignearnings 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 providefor U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. Ourincome tax rate depends in part on the extent to which our foreign earnings may be taxed by the U.S. through new provisions under the Tax Act such as thenew GILTI tax or as a result of our indefinite reinvestment assertion. Indefinite reinvestment is determined by management’s judgment about and intentionsconcerning our future operations.Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected bychanges 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 regulationsin 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 inthe valuation of our deferred tax assets and liabilities. Countries in the European Union and other countries where we do business have been consideringchanges 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 10 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 particulartransaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’sjudgment in selecting any available alternative would not produce a materially different result.Results of OperationsOverview of 2017Revenues for 2017 were $35.0 million, a decrease of $22.1 million, or 39%, versus 2016. The decrease in total revenue was primarily caused by a one-time fee of $19.0 million from Samsung that we recognized as license revenue in 2016, along with decreased revenue from medical and gaming markets.These decreases were partially offset by increased revenue from our automotive customers.33Table of ContentsNet loss for 2017 was $45.3 million, compared to net loss of $39.4 million for 2016. The increase of $5.9 million in net loss was primarily related to adecrease of $22.1 million in total revenue, an increase of $8.1 million in operating expenses mainly driven by higher legal expenses from our continuingefforts to protect and preserve our IP including our recently settled and concluded litigation against Apple and AT&T Mobility, and a decrease of $649,000in income from discontinued operations related to a transaction recognized during 2016 that did not recur in 2017. These factors were partially offset by adecrease of $25.0 million in income tax provision caused by a non-cash valuation allowance charge of $28.1 million in 2016. We recorded the charge in thefourth quarter of 2016 against our deferred tax assets that resulted in a tax provision of $25.5 million for 2016 as compared to $480,000 for 2017. See Note 10to the consolidated financial statements for additional information on our income taxes.In 2018, we expect royalty and license revenue, mainly from mobility customers, to remain the major component of our revenue as our technologycontinues to be included in our licensees’ products and as we continue to execute our licensing program in the mobility market. Our gaming royalty andlicense revenue could be adversely impacted in 2018 by the expiration of several gaming patents in 2016. Revenue from certain contracts may also decreasedue to timing and uncertainty associated with their renewals. IP litigation may continue to cause us to expend significant financial resources in the future andmay have an adverse effect on the results of our operations. Additionally, our success could be limited by various factors, including global economicconditions, foreign currency exchange rates, the timely release of our new products and our licensees’ products, continued market acceptance of our productsand technology, and the introduction of new products by existing or new competitors and adverse rulings affecting our patents. For a further discussion ofthese and other risk factors, see Item 1A, “Risk Factors.”The following table sets forth our consolidated statements of income data as a percentage of total revenues: Years Ended December 31, 2017 2016 2015Revenues: Royalty and license97.4 % 98.2 % 97.3 %Development, services, and other2.6 1.8 2.7Total revenues100.0 100.0 100.0Costs and expenses: Cost of revenues0.6 0.3 0.7Sales and marketing38.6 25.6 23.2Research and development33.6 23.5 23.3General and administrative152.4 77.3 45.4Restructuring Costs4.6 — —Total costs and expenses229.8 126.7 92.6Operating income (loss)(129.7) (26.7) 7.4Interest and other income1.0 1.4 0.3Other expense0.8 (0.1) (0.7)Income (loss) from continuing operations before provision for income taxes(127.9) (25.4) 7.0Provision for income taxes from continuing operations(1.4) (44.7) (2.5)Income (loss) from continuing operations(129.3) (70.1) 4.5Income from discontinued operations, net of tax— 1.1 —Net income (loss)(129.3)% (69.0)% 4.5 %Revenues 2017 $ Change % Change 2016 $ Change % Change 2015($ in thousands) Royalty and license$34,089 $(21,941) (39)% $56,030 $(5,647) (9)% $61,677Development, services,and other924 (132) (13)% 1,056 (660) (38)% 1,716Total revenue$35,013 $(22,073) (39)% $57,086 $(6,307) (10)% $63,39334Table of Contents2017 Compared to 2016Royalty and license revenue - Royalty revenue represents variable royalties earned from licensees’ usage or sales under per-unit royalty arrangements.License revenue represents fixed fees charged for our IP and software based on fixed-fee arrangements. Royalty and license revenue for 2017 was $34.1million, a decrease of $21.9 million, or 39%, compared to $56.0 million for 2016.Variable royalty revenue decreased by $4.1 million, or 16%, to $21.5 million for the year ended December 31, 2017, compared to $25.6 million for theyear ended December 31, 2016. The decrease was primarily caused by expired contracts with certain OEMs and decreased volume from our gaming, mobilityand medical customers.Fixed payment license revenue decreased by $17.8 million, or 59%, to $12.6 million for the year ended December 31, 2017, compared to $30.4 millionfor the year ended December 31, 2016. The decrease was mainly derived from decreased mobility license revenue, which was primarily caused by a one-timefee of $19.0 million from Samsung recognized as license fee in 2016. The decrease in fixed payment license revenue was also related to decreased medicallicense revenue which was primarily due to a non-recurring license fee of $3.0 million recognized in 2016, and decreased gaming license revenue due to anexpired contract with a certain OEM. These decreases were partially offset by increased license fees from our new and existing OEM customers in mobilityand gaming markets that we recognized in 2017.Royalty and license revenue from mobility customers decreased by 48% primarily due to a one-time fee of $19.0 million from Samsung recognized in2016 and decreased royalties from our mobility customers. The decreases were partially offset by increased license fees from our new and existing OEMmobility customers that we recognized in 2017. We anticipate that our mobility business will continue to be the primary revenue stream in 2018.Royalty and license revenue from gaming customers decreased by 23% primarily due to decreased gaming license fees mainly caused by expiredcontracts with certain OEMs and decreased gaming royalty revenue as a result of lower volume of sales that drove down the per-unit royalty revenue during2017. This decrease was partially offset by increased license fees from certain of our gaming customers. Revenue from gaming customers can fluctuate basedupon consumer gaming preferences, the timing of introductions of new gaming console systems, the timing of new products from third party peripheralmakers that are our licensees, and the recognition by gaming customers of the relevance of our IP.Royalty and license revenue from automotive customers increased 28% primarily attributable to new license agreements entered into with automotiveOEMs during 2017 that drove up automotive license revenue by over 100% compared to 2016. Automotive royalty revenue increased, at a smaller scale, by10% during 2017 compared to 2017. The increase in automotive royalty and license revenue reflects increasing recognition of our haptic technologyincorporated in automotive products. We anticipate that our automotive business will continue to grow in 2018.Royalty and license revenue decreased by 70% from medical customers primarily due to a non-recurring license fee of $3.0 million recognized in 2016,and decreased medical royalty revenue due to expired contracts with certain 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 includedin products and we continue our efforts to monetize our IP. We typically experience seasonally higher revenue from our gaming and mobility customers dueto the reporting of holiday sales in the first calendar quarter compared to other calendar quarters. Our gaming royalty and license revenue could be adverselyimpacted in 2018 by the expiration of several gaming patents in 2016. Revenue may also decrease due to timing and a lack of contract renewals.Development, services, and other revenue - Development, services, and other revenue is comprised primarily of development work, implementationsupport, and other contract engineering services provided to customers. Development, services, and other revenue for 2017 decreased by $132,000, or 13%,versus 2016, mainly due to a non-recurring service fees from contracts completed in the prior year. We continue to focus our engineering resources ondevelopment efforts that leverage our existing sales and channel distribution capabilities. Accordingly, we do not expect development, services, and otherrevenue to be a significant part of total revenues in the future.Geographically, revenues generated in North America, Europe, and Asia during 2017 represented 22%, 15%, and 63%, respectively, of our total revenueas compared to 32%, 8%, and 60%, respectively, for 2016. Revenue attributable to North America as a percentage of total revenue decreased primarily due todecreased license revenue from gaming and medical. Revenue attributable to Europe as a percentage of total revenue increased primarily due to increasedroyalty revenue from gaming and automotive. Revenue attributable to Asia as a percentage of total revenue for 2017 remained flat compared to 2016.2016 Compared to 201535Table of ContentsRoyalty and license revenue — Royalty and license revenue for 2016 was $56.0 million, a decrease of $5.6 million, or 9%, compared to $61.7 million for2015.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 endedDecember 31, 2016, compared to $29.8 million for the year ended December 31, 2015. The decrease was primarily caused by decreased volume from ourgaming, 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 forthe 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 $2.0million 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 prioror during 2016, including our previous license agreement with Samsung that expired at the end of 2015. The decrease in mobility license revenue was furtheroffset 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.Royalty and license revenue from mobility customers decreased by 17% primarily due to a non-recurring license fee of $2.0 million from a completedcontract with a mobility customer in the prior year that did not recur in 2016, along with decreased recurring license revenue from our previous licenseagreements, including Samsung that expired at the end of 2015. In the first quarter of 2016, we filed an arbitration requesting that Samsung be ordered tocomply with its obligation under the Samsung License, including ceasing distributing devices previously licensed under the Samsung License and payingdamages suffered by us. On July 12, 2016, we entered into an amendment to the original agreement to permit Samsung to exercise Product Life Cycle WindDown Rights in exchange for a fee of $19.0 million which we recognized as license revenue during 2016 that partially offset the decreased mobility licenserevenue. Pursuant to the amendment, we agreed to terminate the arbitration proceedings and release each other for a variety of matters.Royalty and license revenue from gaming customers decreased by 9% primarily due to the decreased volume of sales by our licensees that drove downthe per-unit royalty revenue during 2016. This decrease was partially offset by increased license fees from new gaming customers.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 byreduced royalties from other medical customers.Development, services, and other revenue — Development, services, and other revenue for 2016 decreased by $660,000, or 38%, versus 2015, mainlydue to a decreased non-recurring service fees from contracts completed in prior year.Geographically, revenues generated in North America, Europe, and Asia during 2016 represented 32%, 8%, and 60%, respectively, of our total revenueas compared to 28%, 5%, and 67%, respectively, for 2015. Revenue attributable to North America as a percentage of total revenue increased primarily due toincreased license revenue from medical, partially offset by decreased royalty revenue from gaming and mobility. Revenue attributable to Europe as apercentage of total revenue increased primarily due to increased royalty revenue from gaming and automotive, partially offset by decreased royalty revenuefrom medical. Revenue attributable to Asia as a percentage of total revenue decreased primarily from decreased royalty and license revenue from mobilityand, to a lesser extent, decreased royalty revenue from gaming and automotive.Expenses2017 $ Change % Change 2016 $ Change % Change 2015($ in thousands) Sales and marketing$13,516 $(1,097) (8)% $14,613 $(61) — % $14,674Research and development11,759 (1,629) (12)% 13,388 (1,397) (9)% 14,785General and administrative53,343 9,192 21 % 44,151 15,396 54 % 28,755Restructuring Costs1,620 1,620 100 % — — — % —Sales and Marketing - Our sales and marketing expenses are composed 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 expensesdecreased $1.1 million, or 8%, for 2017 as compared to 2016 primarily due to decreases of $894,000 in compensation, benefits, and other related costs and$462,000 in consulting and outside services, partially36Table of Contentsoffset by an increase of $135,000 in travel costs. The decrease of $894,000 in compensation, benefits, and other related costs was primarily caused by lowerbonus and commissions due to lower revenue achievements and reduced headcount in 2017 as compared to 2016. The decrease of $462,000 in consultingand outside services was mainly related to our reduced spending on the content and media business. While we will continue to invest in sales and marketingto further market acceptance for our touch technologies, we anticipate that our sales and marketing expenses will decrease significantly in 2018 as a result ofthe restructuring actions taken in December 2017. See Note 8, Restructuring Costs, for details.Sales and marketing expense for 2016 was relatively flat as compared to 2015.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 $1.6 million, or 12%, during 2017 as compared to2016. The decrease was primarily due to a $1.9 million decrease in compensation, benefits, and other related costs resulted from decreased headcount,partially offset by a $648,000 increase in outside services expense as a reflection of our redirected development efforts. We believe that continued investmentin research and development is critical to our future success, and we expect to continue to make investments in areas of research and development to supportfuture growth.Research and development expenses decreased by $1.4 million, or 9%, during 2016 as compared to 2015. The decrease was primarily due to a $504,000decrease in compensation, benefits, and other related costs and a $216,000 decrease in travel costs, both resulted from decreased headcount, and a $661,000decrease in consulting services expense as a reflection of our redirected development efforts.General and Administrative - Our general and administrative expenses are primarily composed of employee compensation and benefits, legal andprofessional fees, external legal costs for patents, office supplies, travel, and allocated facilities costs. General and administrative expenses for 2017 increased$9.2 million, or 21%, as compared to 2016. The increase was primarily related to a $7.6 million increase in legal expense, a $757,000 increase incompensation, benefits, and other related costs primarily caused by severance accruals and stock compensation expense that we recorded in the fourth quarterof 2017 in connection with the departure of the former CEO, and a $340,000 increase in professional and outside services. The increase in legal expense wasprimarily driven by a $8.1 million increase in litigation expense relating to ongoing litigations including our recently settled and concluded litigation withApple and AT&T Mobility, a $966,000 increase in patent related legal, filing, and maintenance costs, and a $884,000 increase in general legal services,partially offset by a $2.4 million decrease in license fee expenses. Our general and administrative expenses will continue to be significant in 2018 as wemanage our business and strategic opportunities and continue to file, maintain, license, and enforce our IP and contractual rights, and defend any lawsuitsbrought against us or that we initiate against others to enforce our IP or contractual rights.General and administrative expenses for 2016 increased $15.4 million, or 54%, as compared to 2015. The increase was primarily related to a $15.2million increase in legal expense and a $1.0 million increase in compensation, benefits, and other related costs as a result of increased headcount and stockcompensation expense for 2016. The increased legal and professional fees were primarily due to a $13.9 million increase in litigation expense relating toongoing litigations including the recently settled and concluded litigation with Apple and AT&T Mobility, and a $1.2 million increase in patent relatedlegal, filing, and maintenance costs. These increases in general and administrative expenses were partially offset by a $676,000 decrease in professional andoutside services mainly due to reduced accounting and tax services as we completed the reorganization of our international operations in 2015.Interest and Other Income, Other Expense 2017 $ Change % Change 2016 $ Change % Change 2015($ in thousands) Interest and other income$337 $(480) (59)% $817 $640 362 % $177Other expense$274 $337 100 % $(63) $384 (86)% $(447)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 decreased in 2017 compared to 2016 primarily dueto a non-recurring other income of $550,000 received in the third quarter of 2016. Interest and other income increased in 2016 compared to 2015 primarilydue to that non-recurring other income of $550,000 received in the third quarter of 2016.37Table of ContentsOther Income (Expense) - Other income (expense) consist primarily of translation gain (loss) from exchange rate fluctuations. We recorded $274,000other income for 2017, compared to $63,000 other expense for 2016 as a result of exchange rate losses from our foreign subsidiaries. Other expense decreasedin 2016 compared to 2015 as a result of exchange rate gains from our foreign subsidiaries.Provision for Income Taxes from Continuing Operations 2017 $ Change % Change 2016 $ Change % Change 2015($ in thousands) Provision for income taxesfrom continuing operations$(480) $25,041 (98)% $(25,521) $(23,930) 1,504% $(1,591)Income (loss) fromcontinuing operationsbefore provision for incometaxes(44,811) (14,509) 4,449Effective tax rate(1.1)% (175.9)% 35.8%For 2017 we recorded a provision for income taxes from continuing operations of $480,000 yielding an effective tax rate of (1.1)%. The 2017 provisionreflects estimated foreign taxes and foreign withholding tax expense. Based upon our assessment as of December 31, 2017 of the realizability of our deferredtax assets, we continue to maintain a full valuation allowance against all of our federal and state, and certain of our foreign, net deferred tax assets.On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. Among other changes, the new legislation decreases thecorporate federal income tax rate from 35% to 21% effective January 1, 2018. Under U.S. GAAP, changes in tax rates and tax law typically are accounted forin the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the federal taxrate change and other tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Actenactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the incometax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certainincome tax effects of the Tax Act is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in itsfinancial statements. If a company cannot determine a provision estimate to be included in the financial statements, it should continue to apply ASC 740 onthe basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.In accordance with SAB 118, we recorded a $12.9 million reduction to deferred tax assets and related valuation allowance in connection with the re-measurement of certain deferred tax assets and liabilities, resulting in no impact to our results of operations. We estimated that no current tax expense shouldbe recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, a provisional estimate at December 31, 2017.Due to the complexity and timing of the issuance and subsequent enactment of the Tax Act, additional work is necessary to complete a more detailedanalysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. Because of the complexity ofthe new Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act, a provisional estimate could not be made as we have not yet completedour assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI asperiod costs if and when incurred.Given the significant complexity of the Act, anticipated guidance from the Internal Revenue Service about implementing the Act, and the potential foradditional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, our estimates may beadjusted in future periods. Any subsequent adjustment to estimates will be recorded to current tax expense in the quarter of 2018 when our analysis iscomplete and we are able to complete our accounting for all aspects of the Tax Act.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 2016provision reflects the increase in our deferred tax asset valuation allowance.38Table of ContentsPrior to the year ended December 31, 2016, we maintained a valuation allowance only against certain of our U.S. Federal and Foreign deferred taxassets 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 avaluation allowance was needed against our State and certain other Foreign deferred tax assets as there was not sufficient evidence to support the release ofthe 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 asadditional valuation allowance against our federal deferred tax assets, thereby establishing a full valuation allowance against these deferred tax assets as ofDecember 31, 2016. We continued to maintain a full valuation allowance against our state and certain of our foreign net deferred tax assets. As of December31, 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 taxasset balance of $359,000. The establishment of a valuation allowance has no effect on our ability to use the deferred tax assets in the future to reduce cashtax payments when taxable income is reported.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 impactof nondeductible permanent items, including stock-based compensation and foreign withholding taxes, incurred for the period. The provision for income taxfor 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 areorganization of our international operations. The purpose of this reorganization was to more closely align our corporate structure and income tax profilewith 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 thereorganization described above, outside of those related to income taxes.We also maintain liabilities for uncertain tax positions. We released reserves totaling $310,000 in 2016 including interest and recorded a tax benefitdue to the receipt of a tax refund related to the settlement with a taxing authority. As of December 31, 2017, we had unrecognized tax benefits under ASC 740"Income Taxes" of approximately $4.7 million, which includes the impact of the change in tax rates described above, 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 OperationsIncome from discontinued operations, net of taxes, was zero for the year ended December 31, 2017, compared to $649,000 in the year ended December31, 2016 which 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 ResourcesOur cash, cash equivalents, and short-term investments consist primarily of money market funds and U.S. treasury bills. All of our short-term investmentsare classified as available-for-sale. The securities are stated at market value, with unrealized gains and losses reported as a component of accumulated othercomprehensive income, within stockholders’ equity.As of December 31, 2017, our cash, cash equivalents, and short-term investments totaled $46.5 million, a decrease of $43.3 million from $89.8 millionon December 31, 2016.Cash provided by (used in) operating activities - Net cash used in operating activities was $43.8 million for 2017 compared to $22.0 million providedby operating activities in 2016. The $65.8 million change was primarily driven by $28.0 million change in long-term deferred revenue and customeradvances, $24.3 million change in deferred income taxes, $8.4 million decrease in working capital, and $5.9 million increase in net loss. The $28.0 millionchange in long-term deferred revenue and customer advance was mainly related to new billings for up-front licensee fees added in 2016 that we recognizedratably as revenue during 2017. The $24.3 million change in deferred income tax was primarily caused by a non-cash charge of $28.1 million recorded in thefourth quarter of 2016 to establish a full valuation allowance against our U.S. deferred tax assets, partially offset by additions to our deferred tax assetsrecorded in the period. Working capital is defined as current assets (excluding cash and cash equivalents) minus current liabilities. Working capital decreased$8.4 million in 2017 compared to 2016 due primarily to decreases in the year-over-year change in accounts payable and accrued compensation and othercurrent liabilities of $4.6 million and $2.4 million, respectively, and an increase in the year-over-year change in prepaid income taxes of $2.0 million.39Table of ContentsCash provided by (used in) investing activities — Net cash provided by investing activities during 2017 was $11.1 million, an increase of $3.3 millioncompared to $7.8 million cash provided by investing activities during 2016. Net cash provided by investing activities during 2017 consisted of maturities ofshort-term investments of $35.0 million. This was partially offset by purchases of short-term investments of $23.8 million and purchases of property, plant,and equipment of $125,000. Net cash provided by investing activities during 2016 was $7.8 million, compared to the $1.3 million cash used in investingactivities during 2015. Net cash provided by investing activities during 2016 consisted of maturities of short-term investments of $40.0 million and proceedsfrom sales of discontinued operations of $1.0 million. This was partially offset by purchases of short-term investments of $32.8 million and purchases ofproperty, plant, and equipment of $343,000.Cash provided by financing activities — Net cash provided by financing activities during 2017 was $518,000, a decrease of $1.4 million compared to$2.0 million net cash provided by financing activities during 2016. Net cash provided by financing activities during 2017 consisted primarily of exercises ofstock options of $518,000 and the issuance of common stock under the ESPP of $328,000, partially offset by repurchases of treasury stock of $328,000. Netcash provided by financing activities during 2016 was $2.0 million, an increase of $38,000 compared to $1.9 million net cash provided by financingactivities during 2015. Net cash provided by financing activities during 2016 consisted primarily of exercises of stock options of $2.4 million and theissuance of common stock under the ESPP of $307,000, partially offset by repurchases of treasury stock of $729,000.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 twelvemonths. Of our total cash, cash equivalents, and short-term investments of $46.5 million as of December 31, 2017, 17% was held by our foreign subsidiariesand subject to repatriation tax effects. Our intent is to permanently reinvest all of our earnings from foreign operations, and current plans do not anticipatethat we will need funds generated from foreign operations to fund our domestic operations. We will continue to invest in, protect, and defend our extensive IPportfolio, which is expected to result in the continued use of cash. At December 31, 2017 there was $33.4 million under our previously-approved sharerepurchase program. We anticipate that capital expenditures for property and equipment for the year ended December 31, 2018 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, “RiskFactors.”Summary Disclosures about Contractual Obligations and Commercial CommitmentsThe following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2017 (in thousands):Contractual ObligationsTotal Less Than1 Year 1-3 Years 3-5 Years More Than5 YearsOperating Leases$5,242 $1,306 $1,811 $1,815 $310At December 31, 2017, we had a liability for unrecognized tax benefits totaling $4.7 million including interest of $10,000, of which approximately $0could be payable in cash. We did not have any other significant non-cancellable purchase commitments as of December 31, 2017.Recent Accounting PronouncementsSee 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 RiskWe are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Changes in these factors may causefluctuations 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 $23.0 million as of December 31, 2017, whichare subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of our cash equivalents and short-terminvestments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximate $59,000 in the fair value of our cashequivalents and short-term investments as of December 31, 2017.40Table of ContentsWe limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our cash equivalents and short-terminvestment portfolios. The primary objective of our policies is to preserve principal while at the same time maximizing yields, without significantlyincreasing risk. Our policy’s guidelines also limit exposure to loss by limiting the sums we can invest in any individual security and restricting investmentsto securities that meet certain defined credit ratings. We do not use derivative financial instruments in our investment portfolio to manage interest raterisk.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 notmaterially exposed to foreign currency fluctuations. Additionally, we have some reliance on international revenues that are subject to the risks of fluctuationsin currency exchange rates. Because a substantial majority of our international revenues, as well as expenses, are typically denominated in U.S. dollars, astrengthening of the U.S. dollar could cause our licenses to become relatively more expensive to customers in a particular country, leading to a reduction insales or profitability in that country. We have no foreign exchange contracts, option contracts, or other foreign currency hedging arrangements and we do notexpect to have such arrangements in the foreseeable future.41Table of ContentsItem 8. Financial Statements and Supplementary DataIMMERSION CORPORATIONINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm43Consolidated Balance Sheets as of December 31, 2017 and 201644Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016, and 201545Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016, and 201546Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 201547Notes to Consolidated Financial Statements4842Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Immersion CorporationSan Jose, CaliforniaOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Immersion Corporation and subsidiaries (the “Company”) as of December 31, 2017and 2016, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three yearsin the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred toas the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, inconformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018, expressed an unqualified opinion on theCompany’s internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 27, 2018We have served as the Company's auditor since 1997.43Table of ContentsIMMERSION CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) December 31, 2017 2016ASSETSCurrent assets: Cash and cash equivalents$24,622 $56,865Short-term investments21,916 32,907Accounts and other receivables, net806 1,382Prepaid expenses and other current assets736 2,876Total current assets48,080 94,030Property and equipment, net3,150 4,016Deferred income tax assets401 359Prepaid income taxes— 4,997Other assets, net344 365Total assets$51,975 $103,767LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Accounts payable$6,647 $5,951Accrued compensation4,133 4,753Other current liabilities3,896 4,409Deferred revenue4,424 5,909Total current liabilities19,100 21,022Long-term deferred revenue22,303 26,393Other long-term liabilities915 1,012Total liabilities42,318 48,427Commitments and contingencies (Notes 13 and 14) Stockholders’ equity: Common stock and additional paid-in capital – $0.001 par value; 100,000,000 shares authorized; 35,950,518and 35,555,562 shares issued, respectively; 29,263,828 and 28,917,559 shares outstanding, respectively228,046 221,098Accumulated other comprehensive income99 115Accumulated deficit(171,616) (119,329)Treasury stock at cost: 6,686,690 and 6,638,003 shares, respectively(46,872) (46,544)Total stockholders’ equity9,657 55,340Total liabilities and stockholders’ equity$51,975 $103,767See notes to consolidated financial statements.44Table of ContentsIMMERSION CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(In thousands, except per share amounts) Years Ended December 31, 2017 2016 2015Revenues: Royalty and license$34,089 $56,030 $61,677Development, services, and other924 1,056 1,716Total revenues35,013 57,086 63,393Costs and expenses: Cost of revenues197 197 460Sales and marketing13,516 14,613 14,674Research and development11,759 13,388 14,785General and administrative53,343 44,151 28,755Restructuring costs1,620 — —Total costs and expenses80,435 72,349 58,674Operating income (loss)(45,422) (15,263) 4,719Interest and other income337 817 177Other expense274 (63) (447)Income (loss) from continuing operations before provision for income taxes(44,811) (14,509) 4,449Provision for income taxes from continuing operations(480) (25,521) (1,591)Income (loss) from continuing operations(45,291) (40,030) $2,858Income from discontinued operations, net of tax— 649 —Net income (loss)$(45,291) $(39,381) $2,858Basic net income (loss) per share: Continuing operations$(1.55) $(1.39) $0.10Discontinued operations0.00 0.02 0.00Total$(1.55) $(1.37) $0.10Shares used in calculating basic net income (loss) per share29,179 28,759 28,097Diluted net income (loss) per share: Continuing operations$(1.55) $(1.39) $0.10Discontinued operations0.00 0.02 0.00Total$(1.55) $(1.37) $0.10Shares used in calculating diluted net income (loss) per share29,179 28,759 29,015Other comprehensive income (loss), net of tax Change in unrealized gains (losses) on short-term investments(16) 8 (16)Foreign currency translation adjustments— 21 —Total other comprehensive income (loss)(16) 29 (16)Total comprehensive income (loss)$(45,307) $(39,352) $2,842See notes to consolidated financial statements.45Table of ContentsIMMERSION CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands, except Shares information) Common Stock andAdditional Paid-In Capital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit Treasury Stock TotalStockholders’Equity Shares Amount Shares Amount Balances at January 1, 201534,225,778 $204,876 $102 $(82,806) 6,510,391 $(45,569) $76,603Net income 2,858 2,858Unrealized gain (loss) on available-for-sale securities, net oftaxes (16) (16)Issuance of stock for ESPP purchase45,820 367 367Exercise of stock options, net of shares withheld for employeetaxes239,071 1,630 5,503 (69) 1,561Release of restricted stock units and awards, including relatedstock compensation334,641 3,059 3,059Tax benefit/(deficiency) from the stock incentive plans (228) (228)Stock based compensation for stock options 2,411 2,411Balances at December 31, 201534,845,310 $212,115 $86 $(79,948) 6,515,894 $(45,638) $86,615Net loss (39,381) (39,381)Unrealized gain (loss) on available-for-sale securities, net oftaxes 8 8Foreign currency translation adjustments 21 21Repurchase of stock 105,750 (729) (729)Issuance of stock for ESPP purchase45,825 307 307Exercise of stock options, net of shares withheld for employeetaxes395,515 2,565 16,359 (177) 2,388Release of restricted stock units and awards, including relatedstock compensation268,912 2,257 2,257Stock based compensation for stock options 3,854 3,854Balances at December 31, 201635,555,562 $221,098 $115 $(119,329) 6,638,003 $(46,544) $55,340Net loss (45,291) (45,291)Unrealized gain (loss) on available-for-sale securities, net oftaxes (16) (16)Repurchase of stock 48,687 (328) (328)Issuance of stock for ESPP purchase48,750 328 328Exercise of stock options, net of shares withheld for employeetaxes70,608 518 — — 518Release of restricted stock units and awards, including relatedstock compensation275,598 2,661 2,661Stock based compensation for stock options 3,441 3,441Effect of change in accounting policy (1) $(6,996) (6,996)Balances at December 31, 201735,950,518 $228,046 $99 $(171,616) 6,686,690 $(46,872) $9,657(1): Effect of early adoption of ASU2016-16 "Income Taxes: Topic 740, Intra-Entity Transfers of Assets Other Than Inventory" at the beginning of the first quarter of 2017. See Note10 for detail disclosures.See notes to consolidated financial statements.46Table of ContentsIMMERSION CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended December 31, 2017 2016 2015Cash flows provided by (used in) operating activities: Net income (loss)$(45,291) $(39,381) $2,858Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: Depreciation and amortization of property and equipment968 910 1,016Stock-based compensation6,102 6,111 5,470Deferred income taxes(32) 24,274 9,935Loss on disposal of equipment1 19 4Income from discontinued operations— (649) —Changes in operating assets and liabilities: Accounts and other receivables576 (171) 1,814Prepaid income taxes— 1,998 (6,995)Prepaid expenses and other current assets141 (86) (1,945)Intangibles and other assets(197) (275) (36)Accounts payable696 5,322 (19)Accrued compensation and other current liabilities(1,111) 967 3,750Deferred revenue(5,575) 23,090 (6,394)Other long-term liabilities(107) (87) 587Net cash provided by (used in) operating activities(43,829) 22,042 10,045Cash flows provided by (used in) investing activities: Purchases of short-term investments(23,807) (32,813) (44,910)Proceeds from maturities of short-term investments35,000 40,000 48,000Purchases of property and equipment(125) (343) (4,430)Proceeds from discontinued operations— 1,000 —Net cash provided by (used in) investing activities11,068 7,844 (1,340)Cash flows provided by financing activities: Issuance of common stock under employee stock purchase plan328 307 367Exercise of stock options, net of shares withheld for employee taxes518 2,388 1,561Purchases of treasury stock(328) (729) —Net cash provided by financing activities518 1,966 1,928Net increase (decrease) in cash and cash equivalents(32,243) 31,852 10,633Cash and cash equivalents: Beginning of year56,865 25,013 14,380End of year$24,622 $56,865 $25,013Supplemental disclosure of cash flow information: Cash paid for taxes$191 $(419) $156Supplemental disclosure of noncash operating, investing, and financing activities: Amounts accrued for property and equipment$— $22 $18Cashless option exercise under company stock plan$— $177 $69Release of Restricted Stock Units and Awards under company stock plan$2,661 $2,257 $3,059See notes to consolidated financial statements.47Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Significant Accounting PoliciesDescription of BusinessImmersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware in 1999. The company focuses on thecreation, design, development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully as they engage withproducts and experience the digital world around them. The Company has adopted a “hybrid” business model, under which it provides advanced tactilesoftware, related tools, and technical assistance to certain customers; and offers licenses to the Company's patented intellectual property (“IP”) to othercustomers.Principles of Consolidation and Basis of PresentationThe consolidated financial statements include the accounts of Immersion Corporation and its wholly-owned subsidiaries, Immersion CanadaCorporation; 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, andbalances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America (“GAAP”).Cash EquivalentsThe Company considers all highly liquid instruments purchased with an original or remaining maturity of less than three months at the date of purchaseto be cash equivalents.Short-term InvestmentsThe Company’s short-term investments consist primarily of U.S treasury bills with an original or remaining maturity of greater than 90 days on the dateof purchase. The Company classifies debt securities with readily determinable market values as “available-for-sale.” Even though the stated maturity dates ofthese 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 theyare reasonably expected to be realized in cash or sold within one year. These investments are carried at fair market value with unrealized gains and lossesconsidered to be temporary in nature reported as a separate component of other comprehensive income (loss) within stockholders’ equity.The Company recognizes an impairment charge in the consolidated statement of operations and comprehensive loss when a decline in value is judged tobe other than temporary based on the specific identification method. Other-than-temporary impairment charges may exist when the Company has the intentto sell the security, will more likely than not be required to sell the security, or does not expect to recover the principal.Property and EquipmentProperty 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 aretypically as follows:Computer equipment and purchased software3 yearsMachinery and equipment3-5 yearsFurniture and fixtures5 yearsLeasehold improvements are amortized over the shorter of the lease term or their estimated useful life.Long-lived AssetsThe Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of that assetmay 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 ofthe asset and its eventual disposition is less than its carrying amount. Measurement of an impairment loss for long-lived assets and certain identifiableintangible assets that management expects to hold and use is based on the fair value of the asset.Revenue RecognitionThe Company recognizes revenues in accordance with applicable accounting standards, including ASC 605-10-S99, “Revenue Recognition” (“ASC605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”), and ASC 985-605,48Table of Contents“Software-Revenue Recognition” (“ASC 985-605”). The Company derives its revenues from two principal sources: royalty and license fees, anddevelopment contract and service fees. As described below, management judgments, assumptions, and estimates must be made and used in connection withthe revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue for any period based on the judgmentsand estimates made by management. Specifically, in connection with each transaction, the Company must evaluate whether: (i) persuasive evidence of anarrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is probable. The Company applies these criteria asdiscussed below.•Persuasive evidence of an arrangement exists. For a license arrangement, the Company requires a written contract, signed by both the customerand the Company.•Delivery has occurred. The Company delivers software electronically. Delivery occurs when the Company provides the customer access codesor “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 aregenerally offered to the majority of customers. For transactions involving extended payment terms, the Company deems these fees not to befixed 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-customerbasis pursuant to the Company’s credit review policy. The Company typically sells to customers with whom there is a history of successfulcollection. For new customers, the Company evaluates the customer’s financial condition and ability to pay. If it is determined thatcollectability is not probable based upon the credit review process or the customer’s payment history, revenue is recognized when payment isreceived.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. Revenues that are derived from the sale of a licensee's products that incorporate the Company’s IP are classified as royaltyrevenues. The terms of the royalty agreements generally require licensees to give notification of royalties due to the Company within 30 – 45 days of the endof 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 theroyalties 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 Companyalso enters into fixed license fee arrangements. The Company recognizes fixed license fee revenue when earned under the terms of the agreements, whichgenerally 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 (engineeringservices and/or development contracts), and in limited cases, post contract customer support (“PCS”). Engineering services revenues are recognized under theproportional performance accounting method based on the completion of the work to be performed or completed performance method. A provision for losseson contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Revisions in estimates are reflected inthe period in which the conditions become known. To date, such losses have not been significant. Revenue from PCS is typically recognized over the periodof the ongoing obligation, which is generally consistent with the contractual term.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 usetheir own resources or appoint other engineering service organizations to perform these services. For arrangements that are in substance subscriptionarrangements, the entire arrangement fee is recognized ratably over the contract term, subject to any limitations related to extended payment terms. Forarrangements involving upfront fees for services and royalties earned by the Company based on units sold or sales volumes of the respective licensedproducts, 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 the Company is unable to reliably estimatethe licensees’ sales in any given quarter to determine the royalties due to it, the Company recognizes per unit or sales volume driven royalty revenues basedon royalties reported by licensees and when all revenue recognition criteria are met.Deferred RevenueDeferred revenue consists of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized asrevenue. The amounts are primarily related to our fixed fee contracts which are recognized ratably over49Table of Contentsthe license term (up to 10 years). Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remainingdeferred revenue is recorded as non-current.AdvertisingAdvertising 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, 2017 2016 2015 (In thousands)Advertising expense$221 $102 $265Research and DevelopmentResearch and development costs are expensed as incurred.Income TaxesThe Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount oftaxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences oftemporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Valuationallowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization isbelieved to be more likely than not.Software Development CostsCosts for the development of new software products and substantial enhancements to existing software products are expensed as incurred untiltechnological feasibility has been established, at which time any additional costs would be capitalized. The Company considers technological feasibility tobe established upon completion of a working model of the software. Because the Company believes its current process for developing software is essentiallycompleted concurrently with the establishment of technological feasibility, no costs have been capitalized to date.Stock-based CompensationStock-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 basisover the requisite service period, which is the vesting period. See Note 6 for further information regarding the Company’s stock-based compensationassumptions and expenses.Comprehensive IncomeComprehensive 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 EstimatesThe preparation of consolidated financial statements and related disclosures in accordance with U.S. GAAP and pursuant to the rules and regulations ofthe U.S. Securities and Exchange Commission (“SEC”) requires management to make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates include valuation of income taxes including uncertain tax provisions, revenue recognition, stock-based compensation, and accruals for other liabilities. Actual results may differ materially from those estimates which were made based on the bestinformation known to management at that time.Concentration of Credit RisksFinancial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents, short terminvestments, and accounts receivable. The Company is also subjected to a concentration of revenues given certain key licensees that contributed asignificant portion of the Company's total revenue. See Note 15 for customer revenue concentration. The Company invests primarily in money marketaccounts and highly liquid debt instruments purchased with an original or remaining maturity of greater than 90 days on the date of purchase. Deposits heldwith banks may exceed the amount50Table of Contentsof insurance provided on such deposits. Generally, these deposits may be redeemed upon demand. The Company licenses technology primarily to companiesin North America, Europe, and Asia. To reduce credit risk, management performs periodic credit evaluations of its customers’ financial condition. TheCompany periodically evaluates potential credit losses to ensure adequate reserves are maintained, but historically the Company has not experienced anysignificant losses related to individual customers or groups of customers in any particular industry or geographic area. As such, the Company had zeroreserves for the year ended December 31, 2017 and December 31, 2016 due to its low credit risk.Certain Significant Risks and UncertaintiesThe Company operates in multiple industries and its operations can be affected by a variety of factors. For example, management believes that changesin 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 lossof significant customers; fundamental changes in the technologies underlying the Company’s and its licensees’ products; market acceptance of theCompany’s and its licensees’ products under development; development of sales channels; litigation or other claims in which the Company is involved; theability to successfully assert its patent rights against others; the impact of changing economic conditions; the hiring, training, and retention of keyemployees; successful and timely completion of product and technology development efforts; and new product or technology introductions by competitors.Fair Value of Financial InstrumentsFinancial instruments consist primarily of cash equivalents, short-term investments, accounts receivable and accounts payable. Cash equivalents andshort term investments are stated at fair value based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levelsof price transparency. The recorded cost of accounts receivable and accounts payable approximate the fair value of the respective assets and liabilities.Foreign Currency TranslationThe functional currency of the Company’s foreign subsidiaries is U. S. dollars. Accordingly, gains and losses from the translation of the financialstatements of the foreign subsidiaries and foreign currency transaction gains and losses are included in earnings.Recent Accounting PronouncementsIn May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09 “Stock Compensation: Scopeof Modification Accounting” ("ASU 2017-09"). The ASU provides guidance on the types of changes to the terms or conditions of share-based paymentawards to which an entity would be required to apply modification accounting under ASC 718. For public business entities, the amendments in this updateare effective for annual periods beginning after December 15, 2017. The Company will adopt the standard in the first quarter of fiscal 2018, but does notexpect the adoption of ASU 2016-19 will have a material impact on its condensed consolidated financial statements.In December 2016, the FASB issued ASU 2016-19 “Technical Corrections and Improvements”. The amendments in this update affect a wide variety oftopics in the Accounting Standards Codification. For public business entities, the amendments in this update are effective for annual periods beginning afterDecember 15, 2017, and interim periods in the annual period beginning after December 15, 2018. The Company will adopt the standard in the first quarter offiscal 2018, but does not expect the adoption of ASU 2016-19 will have a material impact on its consolidated financial statements.In February 2016, the FASB issued ASU 2016-02 “Leases: Topic 842” (“ASU 2016-02”), which supersedes the existing guidance for lease accounting inTopic 840, Leases. The FASB issued the ASU to increase transparency and comparability among organizations by recognizing lease assets and leaseliabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires lessees to recognize a lease liability and aright-of-use asset for all leases. Lessor accounting remains largely unchanged. In September 2017, the FASB issued ASU 2017-13 "Revenue Recognition(Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)" ("ASU 2017-13)", which adds SECparagraphs to the new revenue and leases sections of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observermade at the July 20, 2017 EITF meeting, and supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and movesother paragraphs, upon adoption of ASC 606 or ASC 842. ASU2016-02 is effective for periods beginning after December 15, 2018, with early adoptionpermitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospectiveapproach. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements but has not elected toearly adopt the standard and would plan to implement the standard on January 1, 2019.In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers: Topic 606” (“ASU 2014-09”) which will supersede thecurrent revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific51Table of Contentsguidance. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers inan amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Further, the guidance requiresimproved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. InAugust 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date”, which deferred the effective date ofASU 2014-09 for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effectivedate. In March 2016, the FASB issued ASU 2016-08 "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" ("ASU2016-08") which provides updates to revenue recognition guidance relating to considerations for reporting revenue gross versus net. In April 2016, the FASBissued ASU 2016-10 "Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing" ("ASU 2016-10"), whichprovides updates to revenue recognition guidance relating to performance obligations and accounting for licensing revenue. In May 2016, the FASB issuedASU 2016-12 "Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12") whichprovides updates to revenue recognition guidance relating to scope and practical expedients for revenue recognition. In December 2016, the FASB issuedASU 2016-20 "Technical Corrections and Improvements to Topic 606" ("ASU 2016-20") which further provides updates to certain aspects of the revenuerecognition guidance. In September 2017, the FASB issued ASU 2017-13 "Revenue Recognition (Topic 605), Revenue from Contracts with Customers(Topic 606), Leases (Topic 840), and Leases (Topic 842)" ("ASU 2017-13)", which adds SEC paragraphs to the new revenue and leases sections of theAccounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the July 20, 2017 EITF meeting, and supersedescertain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC842. In November 2017, the FASB issued ASU2017-14 "Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic605), and Revenue from Contracts with Customers (Topic 606)" ("ASU 2017-14"). ASU 2017-14 amends SEC paragraphs pursuant to the SEC StaffAccounting Bulletin No. 116 and SEC Release No. 33-10403, which bring existing guidance into conformity with Topic 606, Revenue from Contracts withCustomers. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognizedas of the date of initial application (modified retrospective). The Company will adopt the new standard as of January 1, 2018 using the modified retrospectivemethod rather than full retrospective method.The Company's revenue is primarily comprised of per-unit royalty revenue and fixed fee license revenue, along with less significant revenue earned fromdevelopment, services, and other revenue. The expected impacts upon adoption and post-adoption for each revenue stream are as follows:Per-unit Royalty revenueUnder current GAAP, the Company recognizes per-unit royalty revenue when royalty reports are received from its customers (typically onequarter in arrears). The Company expects a shift in the method and timing by which it recognizes per-unit royalty revenue under the new standard, asthe Company will be required to estimate the amount of this revenue in the quarter when the customer sales transaction occurs. As a result, there willbe variances between the estimated per-unit royalty revenue and that based on the actual sales reported by its customers. The Company will berequired to adjust the estimate to reflect the actual sales upon receipt of royalty reports submitted by the licensees in the following quarter.Upon adoption of ASU 2014-09 on January 1, 2018, the Company will recognize the per-unit royalty revenue for customer transactions thatoccur in the fourth quarter of 2017 as an adjustment to accumulated deficit. Based on royalty reports received for the period and the estimates forthose not yet received, the Company has estimated the impact on accumulated deficit will be $5.2 million.The Company also expects a shift in the method and timing of revenue recognition for contracts with minimum royalty arrangements. Undercurrent GAAP, minimum royalties are recognized as revenue at the end of each reporting period (usually a calendar year) if the actual royaltiesreported by the customer for that reporting period are below the minimum royalty amount set forth in the contract. Under the new standard, minimumroyalties are considered a fixed transaction price to which the Company will have an unconditional right once all performance obligations aresatisfied. At the inception of a contract, the Company will be required to recognize all minimum royalties, since only the passage of time is requiredbefore payment of the minimum royalty is due.The Company determined that the contract asset to be established for the unbilled minimum royalties that exist as of January 1, 2018 will beimmaterial. After adoption, the Company will record its unconditional right to minimum royalties as contract asset at the inception of the contractwhere the license is granted to the licensee, and present any associated contract assets and contract liabilities under one contract on a net basis in thestatement of financial position.Fixed fee license revenue52Table of ContentsIn accordance with current GAAP, fixed fee license revenue historically has been recognized ratably over the term of the license agreement.Under the new standard, the Company will be required to recognize fixed fee license revenue when it satisfies its performance obligations, whichtypically occurs upon the transfer of rights to the Company's technology at the point in time a contract is executed, and/or the transfer of rights totechnology updates and/or new technologies developed over the contract term. In certain contracts, the Company provides to its customers access toboth the patent portfolio that exists as of the contract signing as well as future patents that are to be issued throughout the contract term. Inconsideration of ASU 2014-09, the Company has concluded that, for such arrangements, it has two separate performance obligations being (a)patents in existence when the contract is signed for which revenue will be recognized up front and (b) patents to be issued, finalized, or approvedover the contract term that will be made available to customers for which revenue will be recognized over the course of the contract term.In connection with the allocation of the transfer price between these two aforementioned performance obligations, the Company has developeda process to estimate the standalone price for each of the two performance obligations in these arrangements, considering a number of factorsprimarily based on the volume of the Company's patents outstanding as of the contract date as well as those which are expected to be filed andenforceable during the contract term. As of the date of this filing, the Company is in the process of finalizing this estimate and evaluating theperformance of certain controls over the information used therein, and expects to complete the determination of its estimate in the first quarter of2018.Upon review of the potential impact of this change in accounting, the Company has determined that the majority of its deferred revenue balanceas of December 31, 2017 relates to fixed fee license revenue, and expects that a substantial portion of this balance will be recorded as an adjustmentto accumulated deficit on January 1, 2018 upon adoption of ASU 2014-09.After adoption, the Company will account for and present any associated contract assets and contract liabilities under one contract on a netbasis in the statement of financial position.Development, services, and other revenueThe Company expects minimum changes on this revenue stream under the new standard. It will continue to recognize development, services,and other revenue when such service obligation is satisfied.The Company acknowledges that the conclusions are drawn from the specific facts and circumstances pertaining to its existing contracts. Withthe Company’s continuous evolution of technologies and its increasing ability to demonstrate the value of its innovations to licensees, theCompany will need to assess the application of ASU 2014-09 for each new contract entered after the adoption date, and determine the appropriaterevenue recognition on a case-by-case, industry-by-industry basis.2. Fair Value DisclosuresCash Equivalents and Short-term InvestmentsThe 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 securitiesbased 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 areobservable either directly or indirectly (Level 2) in determining fair value.The types of instruments valued based on quoted market prices in active markets include mostly money market securities. Such instruments are generallyclassified within Level 1 of the fair value hierarchy.The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations, or alternative pricing sources withreasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy and include U.S. treasury securities.The types of instruments valued based on unobservable inputs which reflect the reporting entity’s own assumptions or data that market participantswould use in valuing an instrument are generally classified within Level 3 of the fair value hierarchy. As of December 31, 2017 and 2016, the Company didnot hold any Level 3 instruments.The Company recorded no other than temporary impairment charges in the years ended December 31, 2017, 2016, and 2015.53Table of ContentsFinancial instruments measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 are listed in the table below: December 31, 2017 Total Fair value measurements using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs (Level 3) (In thousands)Assets: U.S. Treasury securities$— $21,916 $— $21,916Money market funds1,117 — — 1,117Total assets at fair value$1,117 $21,916 $— $23,033The above table excludes $23.5 million of cash held in banks. December 31, 2016 Total Fair value measurements using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs (Level 3) (In thousands)Assets: U.S. Treasury securities$— $32,907 $— $32,907Money market funds32,031 — — 32,031Total assets at fair value$32,031 $32,907 $— $64,938The above table excludes $24.8 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’sconsolidated balance sheets.Short-term Investments December 31, 2017 AmortizedCost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses Fair Value (In thousands)U.S. Treasury securities$21,939 $— $(23) $21,916Total$21,939 $— $(23) $21,91654Table of Contents December 31, 2016 AmortizedCost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses Fair Value (In thousands)U.S. Treasury securities$32,914 $— $(7) $32,907Total$32,914 $— $(7) $32,907The contractual maturities of the Company’s available-for-sale securities on December 31, 2017 and December 31, 2016 were all due within one year.There were no transfers of instruments between Level 1 and 2 during the years ended December 31, 2017 and 2016.3. Accounts and Other Receivables December 31, 2017 2016 (In thousands)Trade accounts receivable$458 $1,084Receivables from vendors and other348 298Accounts and other receivables$806 $1,3824. Property and Equipment December 31, 2017 2016 (In thousands)Computer equipment and purchased software$3,206 $3,489Machinery and equipment834 882Furniture and fixtures1,274 1,290Leasehold improvements3,920 3,917Total9,234 9,578Less accumulated depreciation(6,084) (5,562)Property and equipment, net$3,150 $4,0165. Other Current Liabilities December 31, 2017 2016 (In thousands)Accrued legal$2,202 $3,096Income taxes payable219 164Other current liabilities1,475 1,149Total other current liabilities$3,896 $4,4096. Stock-based CompensationThe Company’s equity incentive program is a long-term retention program that is intended to attract, retain, and provide incentives for talentedemployees, consultants, officers, and directors and to align stockholder and employee interests. The Company55Table of Contentsmay grant options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock-based orcash-based awards to employees, officers, directors, and consultants. Under these programs, stock options may be granted at prices not less than the fairmarket 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 additionto time based vesting, market condition based options are subject to a market condition: the closing price of the Company stock must exceed a certain levelfor a number of trading days within a specified timeframe or the options will be cancelled before their expiration. On June 2, 2017, the Company'sstockholders approved an increase to the number of shares reserved for issuance by 3,476,850 shares. Restricted stock generally vests over one year. RSUsgenerally vest over 3 years. Awards granted other than an option or stock appreciation right shall reduce the common stock shares available for grant by 1.75shares for every share issued. December 31, 2017Common stock shares available for grant3,254,051Standard and market condition based stock options outstanding3,550,072Restricted stock awards outstanding44,538Restricted stock units outstanding508,880Employee Stock Purchase PlanThe Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may purchase common stock through payrolldeductions 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 purchasedate. Participants may not purchase more than 2,000 shares in a six-month offering period or purchase stock having a value greater than $25,000 in anycalendar 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 theESPP. As of December 31, 2017, 698,133 shares had been purchased since the inception of the ESPP in 1999. Under ASC 718-10, the ESPP is considered acompensatory plan and the Company is required to recognize compensation cost related to the fair value of the award purchased under the ESPP. Sharespurchased under the ESPP for the year ended December 31, 2017 are listed below. Shares purchased under the ESPP for the year ended December 31, 2016were 45,825. The intrinsic value listed below is calculated as the difference between the market value on the date of purchase and the purchase price of theshares. Year EndedDecember 31,2017Shares purchased under ESPP48,750Average price of shares purchased under ESPP$6.74Intrinsic value of shares purchased under ESPP$136,000Summary of Standard Stock OptionsThe following table sets forth the summary of standard stock option activity under the Company’s stock option plans for the years ended December 31,2017, 2016, and 2015:56Table of Contents Number of Shares WeightedAverageExercise Price WeightedAverageFair ValueOf Options Granted AggregateIntrinsicValueof OptionsExercised(In thousands)Outstanding at January 1, 20153,486,157 $8.30 Granted525,840 10.15 $4.56 Exercised(239,071) 6.82 $1,186Forfeited(116,425) 12.38 Expired(59,968) 13.75 Outstanding at December 31, 20153,596,533 8.45 Granted815,794 7.85 3.67 Exercised(395,515) 6.48 918Forfeited(344,541) 9.05 Expired(251,150) 8.87 Outstanding at December 31, 20163,421,121 8.44 Granted489,568 8.48 3.82 Exercised(70,608) 7.34 151Forfeited(361,687) 9.11 Expired(200,403) 15.04 Outstanding at December 31, 20173,277,991 7.99 The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’scommon stock for the options that were in-the-money.Information regarding standard stock options outstanding at December 31, 2017, 2016, and 2015 is summarized below: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualLife (years) AggregateIntrinsicValue(In millions)December 31, 2015 Options outstanding3,596,533 $8.45 4.23 $12.5Options vested and expected to vest using estimatedforfeiture rates3,452,487 8.36 4.16 12.3Options exercisable2,252,744 7.59 3.56 9.9December 31, 2016 Options outstanding3,421,121 $8.44 3.99 $9.0Options vested and expected to vest using estimatedforfeiture rates3,223,919 8.43 3.87 8.5Options exercisable2,131,268 8.22 3.10 6.4December 31, 2017 Options outstanding3,277,991 $7.99 2.88 $2.2Options vested and expected to vest using estimatedforfeiture rates3,175,002 7.99 2.78 2.2Options exercisable2,633,990 7.94 2.14 2.1Additional information regarding standard options outstanding as of December 31, 2017 is as follows:57Table of Contents Options Outstanding Options ExercisableRange ofExercise Prices NumberOutstanding WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice NumberExercisable WeightedAverageExercisePrice$3.72 - $3.72 938 1.54 $3.72 938 $3.723.85 - 3.85 600,000 1.87 3.85 600,000 3.854.95 - 6.66 374,068 4.13 6.34 263,312 6.236.86 - 8.09 405,525 4.66 7.82 206,030 7.838.13 - 8.65 386,949 4.00 8.54 196,434 8.568.70 - 9.19 378,506 2.51 9.04 279,659 9.109.20 - 9.20 44,300 0.54 9.20 44,300 9.209.53 - 9.53 734,000 1.97 9.53 734,000 9.539.61 - 12.48 336,414 2.64 11.82 292,026 11.9212.49 - 14.02 17,291 1.02 13.74 17,291 13.74$3.72 - $14.02 3,277,991 2.88 $7.99 2,633,990 $7.94Summary of Market Condition Based Stock OptionsIn 2014, the Company began granting options that are subject to both time-based vesting and a market condition. For these options, the closing price ofthe 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 seven-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 forthe years ended December 31, 2017, 2016 and 2015. Numberof Shares WeightedAverageExercisePrice WeightedAverageFair ValueOf OptionsGranted AggregateIntrinsicValueof OptionsExercised(In thousands) Outstanding at January 1, 201550,000 $11.94 Granted150,000 8.09 3.64 Exercised— Forfeited— Expired— Outstanding at December 31, 2015200,000 9.05 Granted75,000 9.00 3.68 Exercised— Forfeited(50,000) 11.94 Expired— Outstanding at December 31, 2016225,000 8.39 Granted120,830 8.65 3.12 Exercised— Forfeited(73,749) 8.64 Expired— Outstanding at December 31, 2017272,081 8.44 The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’scommon stock for the options that were in-the-money.Information regarding these market condition based stock options outstanding at December 31, 2017, 2016 and 2015 is summarized below:58Table of Contents Number of Shares WeightedAverageExercise Price WeightedAverageRemainingContractualLife (years) AggregateIntrinsicValue (In millions) December 31, 2015 Options outstanding200,000 $9.05 5.92 $0.5Options vested and expected to vest using estimatedforfeiture rates184,125 9.12 5.90 0.5Options exercisable— — 0.00 —December 31, 2016 Options outstanding225,000 $8.39 5.50 $0.5Options vested and expected to vest using estimatedforfeiture rates209,141 8.38 5.49 0.5Options exercisable65,625 8.09 5.17 0.2December 31, 2017 Options outstanding272,081 $8.44 1.91 $—Options vested and expected to vest using estimatedforfeiture rates272,081 8.44 1.91 —Options exercisable272,081 8.44 1.91 —Additional information regarding market condition based stock options outstanding as of December 31, 2017 is as follows: Options Outstanding Options ExercisableRange ofExercisePricesNumberOutstanding WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice NumberExercisable WeightedAverageExercisePrice$8.09 - $8.09135,000 1.91 $8.09 135,000 $8.09 8.65 - 8.6584,581 1.91 8.65 84,581 8.65 9.00 - 9.0052,500 1.91 9.00 52,500 9.00$8.09 - $9.00272,081 1.91 $8.44 272,081 $8.44Summary of Restricted Stock UnitsRSU activity for the years ended December 31, 2017, 2016, and 2015 was as follows: Number of Shares WeightedAverageGrant DateFair Value Fair Valueof ReleasedRSU’s(In thousands) Outstanding at January 1, 2015564,891 Awarded281,290 $8.16 Released(299,277) $2,626Forfeited(59,481) Outstanding at December 31, 2015487,423 Awarded320,880 8.67 Released(247,556) 2,118Forfeited(133,555) Outstanding at December 31, 2016427,192 Awarded483,015 8.46 Released(198,058) 1,991Forfeited(203,269) Outstanding at December 31, 2017508,880 59Table of ContentsInformation regarding RSU’s at December 31, 2017, 2016, and 2015 is summarized below: Number ofShares WeightedAverageRemainingContractualLife (years) AggregateIntrinsicValue (In millions) Fair Value(In millions) December 31, 2015 RSUs outstanding487,423 0.90 $5.7 $5.7RSUs vested and expected to vest using estimated forfeiturerates414,934 0.87 4.8 December 31, 2016 RSUs outstanding427,192 0.93 $4.5 $4.5RSUs vested and expected to vest using estimated forfeiturerates349,759 0.80 3.7 December 31, 2017 RSUs outstanding508,880 1.30 3.6 $3.6RSUs vested and expected to vest using estimated forfeiturerates414,847 1.16 2.9 The aggregate intrinsic value is calculated as the market value as of the end of the reporting period.Summary of Restricted Stock AwardsRestricted stock award activity for the years ended December 31, 2017, 2016, and 2015 was as follows: Number of Shares WeightedAverageGrant DateFair Value TotalFairValue ofAwardsReleased(In thousands)Outstanding at January 1, 201535,364 $10.97 Awarded21,356 12.26 Released(35,364) 10.97 $434Forfeited— Outstanding at December 31, 201521,356 12.26 Awarded77,540 6.52 Released(21,356) 12.26 139Forfeited— Outstanding at December 31, 201677,540 6.52 Awarded44,538 8.65 Released(77,540) 6.52 671Forfeited— Outstanding at December 31, 201744,538 8.65 Stock-based CompensationValuation 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 basisover the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value includesthe impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates if necessary, in subsequent periodsif 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 pricingmodel is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables includeactual and projected employee stock option exercise behaviors that impact the60Table of Contentsexpected 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 historicalstock option exercise experience. The expected term of ESPP shares is the length of the offering period.Expected volatility — The Company estimates the volatility of its common stock taking into consideration its historical stock price movementand 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-couponissues 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 future and therefore uses an expecteddividend yield of zero in the option-pricing model.Forfeitures — The Company is required to estimate future forfeitures at the time of grant and revise those estimates in subsequent periods ifactual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-basedcompensation 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 aMonte-Carlo Simulation model have been developed to value path-dependent awards. The Monte-Carlo Simulation model is a generally accepted statisticaltechnique 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: Standard Stock Options 2017 2016 2015Expected life (in years)4.6 4.5 4.7Interest rate2.0% 1.2% 1.4%Volatility52% 56% 56%Dividend yield—% —% —% Market Condition Based Stock Options 2017 2016 2015Expected life (in years)7.0 7.0 7.0Interest rate2.0% 1.6% 1.9%Volatility55% 59% 65%Dividend yield—% —% —% Employee Stock Purchase Plan 2017 2016 2015Expected life (in years)0.5 0.5 0.5Interest rate0.9% 0.4% 0.1%Volatility48% 53% 48%Dividend yield—% —% —%Total stock-based compensation recognized in the consolidated statements of income is as follows:61Table of Contents Year Ended December 31, 2017 2016 2015Income Statement Classifications(In thousands)Sales and marketing$1,025 $1,280 $1,116Research and development981 1,297 1,303General and administrative4,096 3,534 3,051Total$6,102 $6,111 $5,470As of December 31, 2017, there was $5.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stockoptions, restricted stock awards and RSU’s granted to the Company’s employees and directors. This cost will be recognized over an estimated weighted-average period of approximately 2.33 years for standard options, 0.42 years for restricted stock awards and 2.36 years for RSU’s. Total unrecognizedcompensation cost will be adjusted for future changes in estimated forfeitures.7. Stockholders’ EquityAccumulated Other Comprehensive Income (Loss)The changes in accumulated other comprehensive income (loss) are included in the table below. Year Ended December 31, 2017 Unrealized Gainsand Losses onAvailable-for SaleSecurities ForeignCurrencyItems Total (In thousands)Beginning balance$(7) $122 $115Other comprehensive income before reclassifications— — —Amounts reclassified from accumulated other comprehensiveincome (loss)(16) (16)Net current period other comprehensive income (loss)(16) — (16)Ending Balance$(23) $122 $99Stock Repurchase ProgramOn 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 itsstock 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, doesnot require the Company to repurchase a specific number of shares, and may be modified, suspended, or discontinued at any time.During the year ended December 31, 2017, the Company repurchased 48,687 shares for $328,000 at an average cost of $6.73 net of transaction coststhrough open market repurchases. During the year ended December 31, 2016, the Company repurchased 105,750 shares for $729,000 at an average cost of$6.90 per share, net of transaction costs through open market repurchases. There were no stock repurchases in 2015 under this stock repurchase program. Asof December 31, 2017, the program remains available with approximately $33.4 million that may yet be purchased under it.Stockholders Right PlanOn December 26, 2017, the Board declared a dividend of one right (a “Right”) for each of the Company's issued and outstanding shares of commonstock, par value $0.001 per share. The dividend was paid to the stockholders of record at the close of business on January 8, 2018 (the “Record Date”). EachRight entitles the holder to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock (the“Preferred Stock”) at a price of $30.00 (the “Exercise Price”), subject to certain adjustments and contingently issuable.62Table of Contents8. Restructuring CostsIn the fourth quarter of 2017, the Company executed a series of restructuring actions designed to sharpen the Company’s strategic focus and establish amore cost-efficient operating structure. The restructuring activities primarily focused on a reduction of the Company’s global workforce in conjunction withsteps taken to:•Significantly reduce the Company’s presence in China and focus its efforts on Mobile OEM licensing in that region;•Cease its Mobile Advertising activities; and•Narrow its focus in the Gaming and VR/AR markets on development efforts to bolster its IP licensing model in these marketsThe restructuring plan is expected to increase internal efficiencies through the consolidation of certain sites of operation and has resulted in theelimination of approximately 56 positions, or 41%, of the worldwide employee base.For the year ended December 31, 2017, the Company recorded restructuring expenses of $1.6 million. The following table summarizes the total expensesrecorded related to the 2017 restructuring activities reflected in the consolidated statements of operations by type of activity. There were no restructuringcosts in 2016 and 2015. Twelve months ended December 31, 2017(in Thousands) Employee Separation Costs Asset-Related Charges Other Total Restructuring $1,515 $22 $82 $1,620Employee separation costs are associated with worldwide headcount reductions. Asset-related charges consist primarily of accelerated depreciation costsrelated to the closure of one of the Company’s offices in China. Accelerated depreciation costs represent the difference between the depreciation expense asdetermined using the useful life of the assets prior to the restructuring activities and the revised useful life resulting from the restructuring activities. Otherexpenses consist primarily of lease termination expenses related to the closure of one of the Company’s offices in China.The following table presents a reconciliation of the restructuring reserve recorded within accrued liabilities on the Company’s consolidated balancesheet for year ended December 31, 2017: Twelve months ended December 31, 2017(in Thousands) Employee Separation Costs Asset-Related Charges Other Total Liability, beginning of period $— $— $— $—Charges 1,515 22 82 1,620Non-cash activity 7 (22) (25) (41)Liability end of period 1,522 — 57 1,579The Company expects to pay substantially all accrued amounts related to the 2017 restructuring activities in the first quarter of 2018.9. Discontinued OperationsDuring the year ended December 31, 2009, the Company sold its 3D product line including inventory, fixed assets, and intangibles and recorded a gainof 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 thenotes receivable as proceeds were received. The operations of the 3D product line were classified as discontinued operations in the period of the initial salestransactions. 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 $351,000. There were no discontinued operations during the years ended December 31, 2017 and 2015.63Table of Contents10. Income TaxesIncome tax provisions from continuing operations consisted of the following: Year Ended December 31, 2017 2016 2015 (In thousands)Income (loss) from continuing operations before provisions for income taxes$(44,811) $(14,509) $4,449Provision for income taxes from continuing operations(480) (25,521) (1,591)Effective tax rate(1.1)% (175.9)% 35.8%The 2017 provision for income tax from continuing operations resulted primarily from estimated foreign taxes and foreign withholding tax expense. The2016 provision for income tax from continuing operations resulted primarily from the application of a full federal valuation allowance against deferred taxassets. The 2015 provision for income tax from continuing operations resulted primarily from the Company’s federal and foreign tax recognized at statutoryrates, adjusted for the tax impact of non-deductible permanent items including stock-based compensation expenses and foreign withholding taxes. The 2015provision for income tax from continuing operations also includes non-cash tax expense based on intercompany profit that resulted from the sale of certain IPrights in 2015, and also includes an increase to the valuation allowance against certain of the Company’s deferred tax assets.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 assettransfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. This is an exception to theprinciple in ASC 740, Income Taxes, that generally requires comprehensive recognition of current and deferred income taxes. ASU 2016-16 allows areporting entity to 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 effectsof that transaction are eliminated in consolidation. The standard is effective for public business entities in fiscal years beginning after December 15, 2017,including interim periods within those years. Early adoption is permitted only in the first interim period of 2017. The Company elected to early adopt ASU2016-16 at the beginning of the first quarter of 2017 for the benefit of simplifying its accounting for intra-entity asset transfers. As required by the FASB inadopting the new standard, the company applied the ASU on a modified retrospective basis which resulted in a cumulative-effect adjustment to theaccumulated deficit as of January 1, 2017 for the recognition of the income tax consequences of intra-entity transfers that occurred prior to January 1, 2017.As such, previously issued balance sheets have not been retrospectively adjusted. The adoption resulted in the decrease of $7.0 million in the Company’sshort-term and long-term prepaid income taxes and a corresponding increase to the accumulated deficit on the Company’s condensed consolidated balancesheet as of January 1, 2017.In March 2016, the FASB issued ASU 2016-09 “Compensation - Stock Compensation: Topic 718” (“ASU 2016-09”) which simplifies several aspects ofthe accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, andclassification in the statement of cash flows. The standard is effective for periods beginning after December 15, 2016, with early adoption permitted. TheCompany elected to adopt ASU 2016-09 on a prospective basis beginning in the first quarter of 2017. Upon adoption, the “without” basis NOL deferred taxasset was adjusted for historical excess benefits to match the “with” basis NOL deferred tax asset, offset by the full valuation allowance. Subsequent to theadoption, all stock option activities are accounted for discretely in the quarter that occur. As a result of the adoption, the previously unrecognized US excesstax benefits of $3.5 million were recorded as a deferred tax asset which was fully offset by valuation allowance resulting in no impact to retained earnings.Additionally, due to the full valuation allowance on our federal deferred tax assets, no excess benefits have been reported discretely in the current year. Aspermitted by the ASU, the Company continues to use an estimated forfeiture rate in calculating stock based compensation expense.On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expensein an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensationfrom its intercompany cost sharing arrangement. On February 19, 2016, the IRS appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit.Although the IRS has appealed the decision, based on the findings of the US Tax Court, the Company has concluded that it is more likely than not that thedecision will be upheld and accordingly has excluded stock-based compensation from intercompany charges during the period. The Company will continueto monitor ongoing developments and potential impacts to its consolidated financial statements.The Company reported pre-tax book income or loss from continuing operations of:64Table of Contents Year Ended December 31, 2017 2016 2015 (In thousands)Domestic$(23,994) $(14,656) $21,160Foreign(20,817) 147 (16,711)Total$(44,811) $(14,509) $4,449The benefit or (provisions) for income taxes from continuing operations consisted of the following: Year Ended December 31, 2017 2016 2015 (In thousands)Current: United States federal$— $(1,649) $(1,426)State and local(5) 859 (12)Foreign(448) (442) (389)Total current$(453) $(1,232) $(1,827)Deferred: United States federal— (24,261) 585State and local— — —Foreign(27) (28) (349)Total deferred(27) (24,289) 236 $(480) $(25,521) $(1,591)In 2017, due to the adoption of ASU 2016-09, the Company's income tax payable was decreased by the tax benefit related to stock options. Prior to theadoption, in 2016 and 2015 the Company’s income tax payable was not decreased by the tax benefit related to stock options. In those years, the Companyincluded only the direct tax effects of employee stock incentive plans in calculating the benefit, which was recorded to additional paid-in capital.65Table of ContentsDeferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes, tax losses, and credit carryforwards. Significant components of the net deferred tax assetsand liabilities consisted of: December 31, 2017 2016 (In thousands)Deferred tax assets: Net operating loss carryforwards$13,394 $15,337State income taxes1 1Deferred revenue5,349 458Research and development and other credits11,447 11,418Reserves and accruals recognized in different periods3,088 5,397Basis difference in investment583 969Capitalized R&D expenses3,623 4,569Depreciation and amortization413 585Deferred rent183 306Other— 2Total deferred tax assets38,081 39,042Valuation allowance(37,680) (38,683)Net deferred tax assets401 359 Foreign credits(43) (33)Net deferred tax liabilities(43) (33)Net deferred taxes$358 $326On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. Among other changes, the new legislation decreases thecorporate federal income tax rate from 35% to 21% effective January 1, 2018. Under U.S. GAAP, changes in tax rates and tax law typically are accounted forin the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the federal taxrate change and other tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Actenactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the incometax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certainincome tax effects of the Tax Act is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in itsfinancial statements. If a company cannot determine a provision estimate to be included in the financial statements, it should continue to apply ASC 740 onthe basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.In accordance with SAB 118, the Company recorded a $12.9 million reduction to deferred tax assets and related valuation allowance in connection withthe re-measurement of certain deferred tax assets and liabilities, resulting in no impact to its results of operations. The Company estimated that no current taxexpense should be recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, a provisional estimate atDecember 31, 2017. Additional work is necessary to complete a more detailed analysis of our deferred tax assets and liabilities and our historical foreignearnings as well as potential correlative adjustments. For the Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act, a provisionalestimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basisdifferences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.Given the significant complexity of the Act, anticipated guidance from the Internal Revenue Service about implementing the Act, and the potential foradditional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, the Company’s estimatesmay be adjusted in future periods. Any subsequent adjustment to estimates will be recorded to current tax expense in the quarter of 2018 when theCompany’s analysis is complete and the Company is able to complete its accounting for all aspects of the Tax Act.The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes” (“ASC 740”) which requires a reduction of the carrying amounts ofdeferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not66Table of Contentsthat such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the ASC740 more-likely-than-not realization ("MLTN") threshold criterion. This assessment considers matters such as future reversals of existing taxable temporarydifferences, projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the recoverability of the deferred taxassets 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 thedeferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. As ofDecember 31, 2017, based on its assessment of the realizability of its deferred tax assets, the Company continued to maintain a full valuation allowanceagainst all of its federal and state, and certain of its foreign, net deferred tax assets.In the fourth quarter of 2016 the Company established a full valuation allowance against all of its net federal deferred tax assets. In performing itsanalysis, the Company considered both positive and negative evidence of the realizability of its deferred tax assets, and considered recent results ofoperations, scheduled reversals of deferred tax liabilities, projected future income, and available tax planning strategies. A significant piece of negativeevidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2016 (which arose in the Company’sfourth quarter of 2016). When performing the evaluation of the cumulative loss, the Company considered the book loss as reported, as well as permanentdifferences and one-time gains and losses not indicative of future business activities. The Company determined that the three-year cumulative lossconstitutes negative objective evidence, limiting the Company’s ability to consider other evidence, such as the Company’s projections for future growth. Asa result, the Company concluded that it would be appropriate to record a non-cash charge of $28.1 million as additional valuation allowance in the fourthquarter of 2016, thereby establishing a full valuation allowance against all of its net federal deferred tax assets. The Company continued to maintain a fullvaluation allowance on its state and certain of its foreign net deferred tax assets.As of December 31, 2017, the net operating loss carryforwards for federal and state income tax purposes were approximately $51.4 million and $53.2million, respectively. The federal net operating losses expire between 2019 and 2037 and the state net operating losses begin to expire in 2028. TheCompany also has net operating loss carryforwards from Ireland of $3.2 million that can be carried forward indefinitely and do not expire. As of December 31,2017, the Company had federal and state tax credit carryforwards of approximately $10.0 million and $2.1 million, respectively, available to offset future taxliabilities. The federal credit carryforwards will expire between 2018 and 2037 and the California tax credits will carryforward indefinitely. In addition, as ofDecember 31, 2017, the Company has Canadian research and development credit carryforwards of $1.7 million, which will expire at various dates through2037. These operating losses and credit carryforwards have not been reviewed by the relevant tax authorities and could be subject to adjustment uponexaminations.Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses and creditcarryforwards if it experiences an “ownership change” as defined by IRC Section 382. Utilization of a portion of the Company’s federal net operating losscarryforward was limited in accordance with IRC Section 382, due to an ownership change that occurred during 1999. This limitation has fully lapsed as ofDecember 31, 2010. As of December 31, 2017, the Company conducted an IRC Section 382 analysis with respect to its net operating loss and creditcarryforwards and determined there was no limitation. There can be no assurance that future issuances of the Company’s securities will not trigger limitationsunder IRC Section 382 which could limit utilization of these tax attributes.67Table of ContentsFor 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 isapplied as follows: 2017 2016 2015Federal statutory tax rate35.0 % 35.0 % 35.0 %Sale of IP rights to foreign subsidiary— % (13.8)% 22.5 %Benefit from foreign losses— % — % 7.8 %Foreign withholding(0.2)% (1.2)% 0.5 %Stock compensation expense(2.0)% (6.6)% 5.8 %Meals & entertainment— % — % 0.1 %Foreign rate differential(17.0)% (1.2)% (24.0)%Prior year true-up items(0.1)% (0.3)% 1.7 %Tax reserves(0.1)% 1.8 % 3.9 %Loss on foreign share transfer— % — % 5.9 %Credits0.4 % 1.6 % (35.5)%State Refunds— % 3.8 % — %Other— % (1.6)% 3.9 %2017 Tax Act impact - federal rate change(28.7)% — % — %Valuation allowance11.6 % (193.4)% 8.2 %Effective tax rate(1.1)% (175.9)% 35.8 %Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for federal andstate income taxes has been provided thereon. Upon distribution of those earnings, the Company would be subject to withholding taxes payable to variousforeign countries.Although the mandatory deemed repatriation tax has removed U.S. federal taxes on distributions to the U.S., the Company continues to evaluate theexpected manner of recovery to determine whether or not to continue to assert indefinite reinvestment on a part or all the foreign undistributed earnings. Thisrequires the Company to re-evaluate the existing short and long-term capital allocation its reinvestment policies in light of the 2017 Act and calculate the taxcost that is incremental to the deemed repatriation tax (e.g. foreign withholding, state income taxes) of repatriating cash to the U.S. While the provisional taxexpense for the year ended December 31, 2017 is based upon an assumption that foreign undistributed earnings are indefinitely reinvested, the Company’splan may change upon the completion of the analysis of the impact of the 2017 Act and completion of the calculation of the incremental tax effects on therepatriation of foreign undistributed earnings. In the event the Company determines not to continue to assert the permanent reinvestment of part or all offoreign undistributed earnings, such a determination could result in the accrual and payment of additional foreign, state and local taxes.The Company was unable to determine a reasonable estimate of the tax liability, if any, under the Tax Act for its remaining outside basis difference orevaluate how the Tax Act will affect its existing accounting position to indefinitely reinvest unremitted foreign earnings. The Company will continue toapply its existing accounting under ASC 740 for this matter.”The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuouslymonitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and otherinformation. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows: 2017 2016 2015 (In thousands)Balance at beginning of year$6,232 $6,285 $1,744Gross increases for tax positions of prior years— — 141Gross decreases for federal tax rate change for tax positions of prior years(1,670) (22) (15)Gross increases for tax positions of current year110 111 4,415Lapse of statute of limitations— (142) —Balance at end of year$4,672 $6,232 $6,28568Table of ContentsThe unrecognized tax benefits relate primarily to federal and state research and development credits and intercompany profit on the transfer of certain IPrights to one of the Company’s foreign subsidiaries as part of the Company’s tax reorganization described above. The Company’s policy is to account forinterest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2017, the Company accrued interest orpenalties related to uncertain tax positions in the amount of $10,000. As of December 31, 2017, the total amount of unrecognized tax benefits that wouldaffect the Company’s effective tax rate, if recognized, is $97,000.Because the Company has net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxingauthorities may examine the Company’s tax returns for all years from 1998 through the current period.11. Net Income (Loss) Per ShareBasic net income (loss) per share is computed using the weighted average number of common shares outstanding for the period, excluding unvestedrestricted stock and RSUs. Diluted net income (loss) per share is computed using the weighted average common shares outstanding for the period plusdilutive potential shares including assumed release of unvested restricted stock and RSUs, assumed exercise of stock options, and assumed issuance ofcommon stock under ESPP using the treasury stock method. The following is a reconciliation of the numerators and denominators used in computing basicand diluted net income (loss) per share: Years Ended December 31, 2017 2016 2015 (In thousands, except per share amounts)Numerator: Income (loss) from continuing operations$(45,291) $(40,030) $2,858 Income from discontinued operations, net of tax$— $649 $— Net income (loss) used in computing basic net income (loss) per share$(45,291) $(39,381) $2,858Denominator: Shares used in computation of basic net income (loss) per share (weighted averagecommon shares outstanding)29,179 28,759 28,097Dilutive potential common shares: Stock options, ESPP, Restricted Stock and RSUs— — 918Shares used in computation of diluted net income (loss) per share29,179 28,759 29,015 Basic net income (loss) per share: Continuing Operations$(1.55) $(1.39) $0.10 Discontinued Operations$— $0.02 $0.00 Total$(1.55) $(1.37) $0.10 Diluted net income (loss) per share: Continuing Operations$(1.55) $(1.39) $0.10 Discontinued Operations$— $0.02 $0.00 Total$(1.55) $(1.37) $0.10The Company includes the underlying market condition stock options in the calculation of diluted earnings per share if the performance condition hasbeen 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 theaverage 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.As of December 31, 2017 and 2016, the Company had securities outstanding that could potentially dilute basic earnings per share in the future, but thesewere excluded from the computation of diluted net loss per share for the year ended69Table of ContentsDecember 31, 2017 and 2016, since their effect would have been anti-dilutive. These outstanding securities consisted of the following: December 31, 2017 2016Standard and market condition stock options outstanding3,550,072 3,646,121Restricted stock awards outstanding44,538 77,540RSUs outstanding508,880 427,192ESPP14,425 17,50612. Employee Benefit PlanThe Company has a 401(k) tax-deferred savings plan under which eligible employees may elect to have a portion of their salary deferred and contributedto the 401(k) plan. Contributions may be matched by the Company at its discretion. The Company matched 50% of the employee’s contribution up to$4,000 for 2017 and 25% of the employee's contribution up to $3,000 for 2016. From 2008 to 2015, the Company matched 25% of the employee'scontribution up to $2,000 for every year. Year ended December 31, 2017 2016 2015 (In thousands)Company contribution to 401 (k) plan$259 $172 $12713. CommitmentsThe Company leases several of its facilities under non-cancelable operating lease arrangements that expire at 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 SanJose, 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 currentlease of a San Jose, California facility of approximately 42,000 square feet as of February 2015. The lease contains provisions for leasehold improvementincentives and expires as of April 2023 and can be extended to April 2028.Minimum future lease payments obligations are as follows: Operating Leases (In thousands) 20181,3062019943202086820218942022921Thereafter310Total$5,242Rent expense was as follows: Year ended December 31, 2017 2016 2015 (In thousands)Rent expense$1,307 $1,283 $1,29170Table of Contents14. ContingenciesFrom time to time, the Company receives claims from third parties asserting that the Company’s technologies, or those of its licensees, infringe on theother parties’ IP rights. Management believes that these claims are without merit. Additionally, periodically, the Company is involved in routine legalmatters and contractual disputes incidental to its normal operations. In management’s opinion, the resolution of such matters will not have a material adverseeffect on the Company’s consolidated financial condition, results of operations, or liquidity.In the normal course of business, the Company provides indemnification of varying scope to customers, most commonly to licensees in connection withlicensing arrangements that include our IP, although these provisions can cover additional matters. Historically, costs related to these guarantees have notbeen significant, and the Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.On April 28, 2017, Immersion Corporation and Immersion Software Ireland Limited (collectively, “Immersion”) received a letter from SamsungElectronics Co. (“Samsung”) requesting that Immersion reimburse Samsung with respect to withholding tax and penalties imposed on Samsung by theKorean tax authorities following an investigation where the tax authority determined that Samsung failed to withhold taxes on Samsung’s royalty paymentsto Immersion Software Ireland from 2012 to 2016. On July 12, 2017, Immersion filed an appeal with the Korea Tax Tribunal regarding their findings withrespect to the withholding taxes and penalties.On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against Immersion demanding thatImmersion reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. Samsung is requesting that Immersion paySamsung the amount of KRW 7,841,324,165 (approximately $6.3 million) plus interest from and after May 2, 2017, plus the cost of the arbitration includinglegal fees. The Company denies liability, and have asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved.The arbitration panel conducted an initial status conference on February 7, 2018. The panel denied our motion and has proposed a procedural schedule witha hearing in July 2018. Immersion believes that there are valid defenses to all of the claims from the Korean tax authorities and that Samsung’s claims arewithout merit. Immersion intends to vigorously defend against these claims and as a result, Immersion has concluded that the likelihood of a material chargeresulting from this claim is remote. In the event Samsung were to prevail in the arbitration in advance of the conclusion of the appeal with the Korea TaxTribunal, Immersion could be required to make a payment to Samsung even though it would later be reimbursed should Immersion prevail in the appeal.On October 16, 2017, Immersion received a letter from LG Electronics Inc. (“LGE”) requesting that Immersion reimburse LGE with respect towithholding tax imposed on LGE by the Korean tax authorities following an investigation where the tax authority determined that LGE failed to withhold onLGE’s royalty payments to Immersion Software Ireland from 2012 to 2014. On November 3, 2017, Immersion filed an appeal with the Korea Tax Tribunalregarding their findings with respect to the withholding taxes. Immersion believes that there are valid defenses to the claims raised by the Korean taxauthorities and that LG’s claims are without merit. The Company intends to vigorously defend itself against these claims and as a result, has concluded thatthe likelihood of a material charge resulting from the claim from LG to be remote.15. Segment Reporting, Geographic Information, and Significant CustomersSegment InformationThe Company develops, licenses, and supports a wide range of software and IP that more fully engage users’ sense of touch when operating digitaldevices. 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 onlyone 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 andassesses the performance of the Company using information about its revenue and operating loss. There is only one segment that is reported to management.Revenue by Market AreaThe following is a summary of revenues by market areas. Revenue as a percentage of total revenues by market was as follows:71Table of Contents Years Ended December 31, 2017 2016 2015Mobile, Wearables, and Consumer48% 57% 62%Gaming Devices31% 24% 24%Automotive15% 7% 7%Medical6% 12% 7%Total100% 100% 100%Revenue by RegionThe following is a summary of revenues by geographic areas. Revenues are broken out geographically by the location of the customer. Geographicrevenue as a percentage of total revenues by region was as follows: Years Ended December 31, 2017 2016 2015North America22% 32% 28%Europe15% 8% 5%Asia63% 60% 67%Total100% 100% 100%Geographic revenue as a percentage of total revenues by country was as follows: Years Ended December 31, 2017 2016 2015Japan39% 11% 14%United States of America22% 26% 27%Korea18% 47% 46%Countries of which none are more than 10% in a year21% 16% 13%Total100% 100% 100%Long-lived Assets by CountryThe 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: December 31, 2017 2016United States of America83% 83%Canada8% 8%Rest of World9% 9%Total100% 100%Significant CustomersCustomers comprising 10% or greater of the Company’s net revenues are summarized as follows: Years Ended December 31, 2017 2016 2015Samsung Electronics—% 33% 32%Customer B20% 13% 18%Customer C18% 14% 14%Customer D11% 2% —%Total49% 62% 64%Customers comprising 10% or greater of the Company’s outstanding accounts and other receivable are summarized as follows:72Table of Contents December 31, 2017 2016 2015Customer C* 18% *Customer E55% * * Customer F26% 46% 31%Customer G* 16% *Customer H* * 44%Customer I* * 11%* Represents less than 10% of the Company’s outstanding accounts and other receivables.16. 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, Sept 30, June 30, Mar 31, Dec 31, Sept 30, June 30, Mar 31, 2017 2017 2017 2017 2016 2016 2016 2016 (In thousands, except per share data)Revenues (1)$6,896 $11,863 $7,030 $9,224 $9,293 $26,306 $7,864 $13,623Gross profit6,857 11,802 6,976 9,181 9,235 26,255 7,805 13,600Operating income (loss)(12,216) (5,443) (14,911) (12,852) (11,208) 10,114 (9,561) (4,608)Income (loss) from continuingoperations before provision for taxes(12,109) (5,243) (14,746) (12,713) (11,363) 10,778 (9,528) (4,396)Benefit (provision) for income taxes(185) (44) (99) (152) (26,785) (3,760) 3,323 1,701Income (loss) from continuingoperations(12,294) (5,287) (14,845) (12,865) (38,148) 7,018 (6,205) (2,695)Net income from discontinuedoperations (net of tax)— — — — — — 649 —Net income (loss)(12,294) (5,287) (14,845) (12,865) (38,148) 7,018 (5,556) (2,695)Basic net income (loss) per share (2) Continuing operations (2)$(0.42) $(0.18) $(0.51) $(0.44) $(1.32) $0.24 $(0.22) $(0.09)Discontinued operations (2)— — — — — — 0.02 —Total (2)(0.42) (0.18) (0.51) (0.44) (1.32) 0.24 (0.20) (0.09)Shares used in calculating basic netincome (loss) per share29,250 29,245 29,193 29,024 28,860 28,849 28,834 28,493Diluted net income (loss) per share(2) Continuing operations (2)$(0.42) $(0.18) $(0.51) $(0.44) $(1.32) $0.24 $(0.22) $(0.09)Discontinued operations (2)— — — — — — 0.02 —Total (2)(0.42) (0.18) (0.51) (0.44) (1.32) 0.24 (0.20) (0.09)Shares used in calculating diluted netincome (loss) per share29,250 29,245 29,193 29,024 28,860 29,298 28,834 28,493(1) Revenue increased significantly in the third quarter of 2016 primarily related to the $19 million received from Samsung in July 2016, in exchange forProduct 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 differfrom the total for the year.17. Subsequent EventsOn January 26, 2018, the Company entered into a Settlement and License Agreement (the “Settlement and License Agreement”) with Apple, Inc.(“Apple”), pursuant to which the parties have agreed to terms for resolving all of their existing73Table of Contentsdisputes, and entered into a multi-year license agreement covering certain Immersion patents in exchange for cash with an option to extend the term until theexpiration of the last licensed patent. The terms of the agreement are confidential.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Control and ProceduresManagement’s Evaluation of Disclosure Controls and ProceduresBased 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, 2017, our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, have concluded that ourdisclosure 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 tobe 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 andcommunicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regardingrequired disclosure, and that such information is recorded, processed, summarized, and reported by us within the time periods specified in the SEC’s rules andinstructions for Form 10-K.Our management, including our Interim Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and proceduresor our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact thatthere 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 ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, our Interim Chief Executive Officer and ourChief Financial Officer and affected by our board of directors and management to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with GAAP. Our management assessed the effectiveness of our internal controlover financial reporting as of December 31, 2017. Management’s assessment of internal control over financial reporting was conducted using the criteria inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Inperforming the assessment, our management concluded that, as of December 31, 2017, our internal control over financial reporting is effective based on thesecriteria.Deloitte and Touche LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report onForm 10-K, has issued an attestation report on our internal control over financial reporting, which is included herein.Changes in internal control over financial reportingThere were no changes in our internal control over financial reporting during the three months ended December 31, 2017 that have materially affected orare reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.74Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Immersion CorporationSan Jose, CaliforniaOpinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Immersion Corporation and subsidiaries (the “Company”) as of December 31, 2017,based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 27, 2018, expressed an unqualifiedopinion on those financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal 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 asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 27, 201875Table of ContentsPART IIIThe 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 iscalled “Incorporation by Reference.” We intend to file our definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of thefiscal year covered by this report, and certain information therein is incorporated in this report by reference.Item 10. Directors, Executive Officers and Corporate GovernanceThe 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 remaininginformation required by Item 10 is incorporated by reference from the sections entitled “Election of Directors,” “Corporate Governance,” “Ownership of OurEquity Securities,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Audit Committee Report” in Immersion’s definitive Proxy Statementfor its 2018 annual stockholders’ meeting.Item 11. Executive CompensationThe information required by Item 11 is incorporated by reference from the sections entitled “Election of Directors,” “Director Compensation,”“Corporate Governance,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation Committee Interlocks and InsiderParticipation,” and “Executive Compensation” in Immersion’s definitive Proxy Statement for its 2018 annual stockholders’ meeting.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by Item 12 is incorporated by reference from the section entitled “Ownership of Our Equity Securities” and “EquityCompensation Plan Information” in Immersion’s definitive Proxy Statement for its 2018 annual stockholders’ meeting.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe 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 2018 annual stockholders’ meeting.Item 14. Principal Accounting Fees and ServicesThe information required by Item 14 is incorporated by reference from the section entitled “Ratification of Appointment of Independent RegisteredPublic Accounting Firm” in Immersion’s definitive Proxy Statement for its 2018 annual stockholders’ meeting.76Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules(a)The following documents are filed as part of this Form:1Financial Statements PageReport of Independent Registered Public Accounting Firm43Consolidated Balance Sheets44Consolidated Statements of Operations and Comprehensive Income (Loss)45Consolidated Statements of Stockholders’ Equity46Consolidated Statements of Cash Flows47Notes to Consolidated Financial Statements482Financial Statement SchedulesThe following financial statement schedule of Immersion Corporation for the years ended December 31, 2017, 2016, and 2015 is filed as part ofthis Annual Report and should be read in conjunction with the Consolidated Financial Statements of Immersion Corporation. PageSchedule II—Valuation and Qualifying Accounts83Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in theconsolidated financial statements or notes herein.3Exhibits:The following exhibits are filed herewith:77Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 3.1 Amended and Restated Bylaws of ImmersionCorporation, as adopted on October 31, 2016. 8-K 000-27969 3.1 November 4, 2016 3.2 Amended and Restated Certificate ofIncorporation of Immersion Corporation. 8-K 000-27969 3.1 June 2, 2017 3.3 Certificate of Designation of the Powers,Preferences and Rights of Series A RedeemableConvertible Preferred Stock. 8-K 000-27969 3.1 July 29, 2003 3.4 Certificate of Designations of Series BParticipating Preferred Stock of ImmersionCorporation 8-K 000-27969 3.1 December 27, 2017 4.1 Rights Agreement, dated as of December 27,2017, between Immersion Corporation as theCompany, and Computershare Trust Company,N.A. as Rights Agent 8-K 000-27969 4.1 December 27, 2017 10.1* 1997 Stock Option Plan and form of IncentiveStock Option Agreement and form ofNonqualified Stock Option Agreement. S-1/A 333-86361 10.2 November 5, 1999 10.2* 1999 Employee Stock Purchase Plan and formof subscription agreement thereunder. S-1/A 333-86361 10.21 October 5, 1999 10.3* Immersion Corporation 2000 HT Non-OfficerNonstatutory Stock Option Plan. 8-K 000-27969 2.4 October 13, 2000 10.4# Settlement Agreement dated July 25, 2003 byand between Microsoft Corporation andImmersion Corporation. S-3 333-108607 10.3 September 8, 2003 10.5# License Agreement dated July 25, 2003 by andbetween Microsoft Corporation and ImmersionCorporation. S-3/A 333-108607 10.4 February 13, 2004 10.6 Letter Agreement dated March 18, 2004 by andbetween Microsoft Corporation and ImmersionCorporation. 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# Agreement by and among Sony ComputerEntertainment America Inc., Sony ComputerEntertainment Inc., and Immersion Corporationdated March 1, 2007. 10-Q 000-27969 10.37 May 10, 2007 10.9* 2007 Equity Incentive Plan. 8-K 000-27969 99.1 June 12, 2007 10.10* Form of Stock Option Agreement (U.S.Participant) for 2007 Equity Incentive Plan. 8-K 000-27969 99.4 June 12, 2007 10.11* Form of Stock Option Agreement (Non-U.S.Participant) for 2007 Equity Incentive Plan. 8-K 000-27969 99.5 June 12, 2007 10.12* The Immersion Corporation 2008 EmploymentInducement Award Plan dated April 30, 2008. 10-Q 000-27969 10.38 August 8, 2008 78Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 10.13* Form of Stock Option Agreement for ImmersionCorporation 2008 Employment InducementAward Plan. 10-Q 000-27969 10.39 August 8, 2008 10.14* Settlement Agreement dated August 25, 2008by and between Microsoft Corporation andImmersion Corporation. 10-Q 000-27969 10.45 November 7, 2008 10.15* Form of RSU Agreement for ImmersionCorporation 2008 Employment InducementAward Plan. 8-K 000-27969 99.01 March 4, 2009 10.16* Employment Agreement dated October 21,2009 by and between Immersion Corporationand Victor Viegas. 10-K 000-27969 10.42 March 30, 2010 10.17* Form of 2010 Executive Incentive Plan. 10-Q 000-27969 May 7, 2010 10.18* Immersion Corporation 2011 Equity IncentivePlan 8-K 000-27969 10.1 June 7, 2017 10.19* Form of Stock Option Award Agreement forImmersion Corporation 2011 Equity IncentivePlan. 10-Q 000-27969 10.2 August 5, 2011 10.20* Form of Award Agreement (Restricted StockUnits) to the Immersion Corporation 2011Equity Incentive Plan. 10-Q 000-27969 10.3 August 5, 2011 10.21* Form of Restricted Stock Agreement forImmersion Corporation 2011 Equity IncentivePlan. 10-Q 000-27969 10.4 August 5, 2011 10.22 Office Lease between Carr NP Properties, L.L.C.,and Immersion Corporation dated September15, 2011. 10-Q 000-27969 10.2 November 7, 2011 10.23 Amendment No. 1, Effective as of August 1,2013, to Amended and Restated LicenseAgreement by and between Immersion SoftwareIreland Limited, Immersion Corporation, andSamsung Electronics Co., Ltd. Entered into asof January 1, 2013. 10-Q 000-27969 10.1 November 6, 2013 10.24 Amendment No. 2, Effective as of January 1,2013, to Amended and Restated LicenseAgreement by and between Immersion SoftwareIreland Limited, Immersion Corporation, andSamsung Electronics Co., Ltd. Entered into asof March 19, 2014. 10-Q 000-27969 10.1 May 6, 2014 10.25* 2011 Equity Incentive Plan (incorporated byreference to Annex A of Schedule 14A, File No.000-27969, filed on April 22, 2014). 10-Q 000-27969 10.1 August 1, 2014 10.26 Amendment No. 3, Effective as of January 1,2013, to Amended and Restated LicenseAgreement by and between Immersion SoftwareIreland Limited, Immersion Corporation, andSamsung Electronics Co., Ltd. entered into as ofAugust 14, 2014. 10-Q 000-27969 10.1 October 31, 2014 79Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 10.27 First Amendment to Office Lease datedNovember 12, 2014 by and between ImmersionCorporation and BSREP Rio Robles LLC 8-K 000-27969 10.1 November 14, 2014 10.28* Offer Letter dated November 24, 2014 by andbetween Immersion Corporation and MaheshSundaram. 10-K 000-27969 10.34 February 27, 2015 10.29* Offer Letter dated August 22, 2016 by andbetween Immersion and Nancy Erba 8-K 000-27969 10.1 September 7, 2016 10.30* Retention and Ownership Change Agreementdated August 22, 2016 by and betweenImmersion and Nancy Erba 8-K 000-27969 10.2 September 7, 2016 10.31# Amendment No. 4, Effective as of January 1,2013, to the Amended and Restated LicenseAgreement by and between Immersion SoftwareIreland Limited, Immersion Corporation, andSamsung Electronics Co., Ltd. Entered into asof July 11, 2016. 10-Q 000-27969 10.1 November 4, 2016 10.32* Employment Agreement dated December 6,2017 between Immersion and Carl Schlachte 8-K 000-27969 10.1 December 12, 2017 10.33 Separation Agreement dated January 2, 2018between Immersion and Victor Viegas 8-K/A 000-27969 10.2 January 3, 2018 10.34 Separation Agreement dated December 27,2017 between Immersion and MaheshSundaram 8-K/A 000-27969 10.1 January 3, 2018 10.35 Cooperation Agreement dated February 6, 2017by and among Immersion Corporation andVIEX Opportunities Fund, LP - Series One,VIEX Special Opportunities Fund II, LP, VIEXGP, LLC, VIEX Special Opportunities GP II,LLC, VIEX Capital Advisors, LLC, and EricSinger. 8-K 000-27969 10.1 February 7, 2017 21.1 Subsidiaries of Immersion Corporation. X23.1 Consent of Independent Registered PublicAccounting Firm. X31.1 Certification of Carl Schlachte, Interim ChiefExecutive Officer, pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002. X31.2 Certification of Nancy Erba, Chief FinancialOfficer, pursuant to Section 302 of theSarbanes-Oxley Act of 2002. X32.1+ Certification of Carl Schlachte, Interim ChiefExecutive Officer, pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002 X32.2+ Certification of Nancy Erba, Chief FinancialOfficer, pursuant to Section 906 of theSarbanes-Oxley Act of 2002. X80Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 101.INS XBRL Report Instance Document X101.SCH XBRL Taxonomy Extension Schema Document X101.CAL XBRL Taxonomy Calculation LinkbaseDocument X101.DEF XBRL Taxonomy Extension DefinitionLinkbase Document X101.LAB XBRL Taxonomy Label Linkbase Document X101.PRE XBRL Presentation Linkbase Document X#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 the Exchange Act, as amended, or 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.81Table of ContentsSIGNATURESPursuant 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 theundersigned thereunto duly authorized.Date: February 27, 2018 IMMERSION CORPORATION By /s/ NANCY ERBA Nancy Erba Chief Financial Officer andPrincipal Accounting Officer POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Carl Schlachte and NancyErba, 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 tothis Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and ExchangeCommission, 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 byvirtue 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 personson behalf of the Registrant and in the capacities and on the dates indicated.Name Title Date /s/ CARL SCHLACHTE Interim Chief Executive Officer and Director (PrincipalExecutive Officer) February 27, 2018Carl Schlachte /S/ NANCY ERBA Chief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer) February 27, 2018Nancy Erba /S/ JACK SALTICH Director February 27, 2018Jack Saltich /S/ DANIEL MCCURDY Director February 27, 2018Daniel McCurdy /S/ DAVID SUGISHITA Director February 27, 2018David Sugishita /S/ JOHN VESCHI Director February 27, 2018John Veschi /S/ SHARON HOLT Director February 27, 2018Sharon Holt 82Table of ContentsSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS Balance atBeginningof Period Charged toCosts andExpenses Deductions/Write-offs(Recoveries) Balance atEnd ofPeriod (In thousands)Year ended December 31, 2017 Allowance for doubtful accounts $— $—Year ended December 31, 2016 Allowance for doubtful accounts $15 $2 $17 $—Year ended December 31, 2015 Allowance for doubtful accounts $28 $(6) $7 $1583Exhibit 21.1SUBSIDIARIES OF IMMERSION CORPORATION Name Jurisdiction of Incorporation3285118 N.S. Inc. Nova Scotia, CanadaImmersion Canada Corporation Nova Scotia, CanadaImmersion Medical, Inc. Maryland, USAImmersion International, LLC Delaware, USAHaptify, Inc. Delaware, USAImmersion Software Ireland Limited IrelandImmersion Technology International Limited IrelandImmersion Japan, K.K. JapanImmersion Limited Hong KongImmersion (Shanghai) Science & Technology Co., Ltd. Shanghai, ChinaExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Immersion CorporationSan Jose, CaliforniaWe consent to the incorporation by reference in Registration Statement Nos. 333-175274, 333-157820, 333-150816, 333-145246, 333-219921 and 333-200983 on Form S-8 of our reports dated February 27, 2018, relating to the consolidated financial statements and consolidated financial statementschedule of Immersion Corporation and subsidiaries ( the “Company”) and the effectiveness of the Company’s internal control over financial reporting,appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2017./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 27, 2018Exhibit 31.1CERTIFICATIONS PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Carl Schlachte, certify that:I have reviewed this annual report on Form 10-K of Immersion Corporation;Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; andThe registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize, and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: February 27, 2018/s/ CARL SCHLACHTE Carl Schlachte Interim Chief Executive Officer Exhibit 31.2CERTIFICATIONS PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Nancy Erba, certify that:I have reviewed this annual report on Form 10-K of Immersion Corporation;Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; andThe registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize, and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: February 27, 2018/s/ NANCY ERBA Nancy Erba Chief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Immersion Corporation (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Carl Schlachte, Interim Chief Executive Officer of the Company, certify, pursuantto 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of theCompany./s/ CARL SCHLACHTE Carl Schlachte Interim Chief Executive Officer February 27, 2018A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Registrant andwill be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Immersion Corporation (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Nancy Erba, Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of theCompany./s/ NANCY ERBA Nancy Erba Chief Financial Officer February 27, 2018A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Registrant andwill be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

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