Immersion
Annual Report 2018

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, 2018 or[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission File Number 000-38334Immersion 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 every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles). 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.Large accelerated filer [ ] Accelerated filer [x]Non-accelerated filer [ ] Smaller reporting company [ ] Emerging Growth Company [ ]If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anynew or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨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, 2018, the last business day of theregistrant’s most recently completed second fiscal quarter, was $284,594,233 (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, 2019 is 30,854,570.DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive Proxy Statement for the 2019 Annual Meeting are incorporated by reference into Part III hereof.Table of ContentsIMMERSION CORPORATION2018 FORM 10-K ANNUAL REPORTTABLE OF CONTENTSPART IPageItem 1.Business4Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments20Item 2.Properties20Item 3.Legal Proceedings20Item 4.Mine Safety Disclosures29PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities30Item 6.Selected Financial Data32Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7A.Quantitative and Qualitative Disclosures About Market Risk44Item 8.Financial Statements and Supplementary Data45Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure76Item 9A.Controls and Procedures76Item 9B.Other Information77PART III Item 10.Directors, Executive Officers and Corporate Governance79Item 11.Executive Compensation79Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters79Item 13.Certain Relationships and Related Transactions, and Director Independence79Item 14.Principal Accounting Fees and Services79PART IV Item 15.Exhibits, Financial Statement Schedules80Signatures85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 theleading experts in haptics and our focus on innovation allows us to deliver world-class intellectual property ("IP") and technology that enables the creation ofproducts that delight end users. Our technologies are designed to facilitate the creation of high-quality haptic experiences, enable their widespreaddistribution, and ensure that their playback is optimized. Our primary business is currently in the mobility, gaming, and automotive markets, but we believeour technology is broadly applicable and see opportunities in evolving new markets, including entertainment, social content, virtual and augmented reality,wearables, as well as residential, commercial, and industrial Internet of Things ("IoT"). In recent years, we have seen a trend towards broad market adoption ofhaptic technology, and estimate our technology is now in more than 3 billion devices worldwide. As other companies follow our leadership in recognizinghow important tactile feedback can be in people's digital lives, we expect the opportunity to license our IP and technologies will continue to expand.We have adopted a business model under which we provide advanced tactile software, related tools and technical assistance designed to help integrateour patented technology into our customers’ products or enhance the functionality of our patented technology, and offer licenses to our patented technologyto our customers. Our licenses enable our customers to deploy haptically-enabled devices, content and other offerings, which they typically sell under theirown brand names. In 2018, we and our wholly-owned subsidiaries increased our issued or pending patents by 600 to more than 3,400 patents worldwide as ofDecember 31, 2018. Our patents cover a wide range of digital technologies and include many of the ways in which touch-related technology can beincorporated into and between hardware products and components, systems software, application software, and digital content. We believe that our IP isrelevant to many of the most important and cutting-edge ways in which haptic technology is and can be deployed, including in connection with mobileinterfaces and user interactions, in association with pressure and other sensing technologies, as part of video and interactive content offerings, as related tovirtual 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.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. Our strategy is founded upon the ability to:Innovate: Develop and patent our innovative technology to provide haptics in mobile, gaming, automotive, wearable, virtual and augmented reality, andother 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.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,4Table of Contentswe rely on our sense of touch to provide us with reassuring context and confirmation, to bring us closer to one another through rich communications, and toenjoy entertainment, sports and other activities through realistic engagement. Without these tactile qualities, our digital experiences can feel flat andineffective, 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,buttons, and switches and that we need to fully understand the context of our interactions. By providing users with intuitive and unmistakable tactileconfirmation as they push virtual buttons and scroll through lists, haptics can instill confidence, increase input speed, reduce errors and help improve safety.This is especially important in environments that involve distractions, such as automotive and commercial applications, where audio or visual confirmationis 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.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 enabling technology, IP and haptic expertise to our customers through a variety of different offerings, including technology licenses, patentlicenses, and combined licenses that cover both technology and patents. In most cases, our technology licenses include services, design tools, referencedesigns, and software development kits (“SDKs”), as well as licenses to our patents to the extent necessary to implement the licensed software, with thespecific rights and restrictions to the applicable patents described in the license agreements. When we offer patent licenses, we provide the customer with adefined right to use our patented innovations in its own products by allowing it to use specified aspects of our broad international patent portfolio, subject tolimitations by specific field of use and other restrictions. In certain cases, we also provide our patent licensees with enablement tools such as referencedesigns and prototypes, technical and design 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.Technology OfferingsWe generally license our technology 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 and support services.Targeted at manufacturers of mobile devices, wearables, gaming consoles/peripherals, automotive experiences, consumer electronics and their suppliers,our haptic reference implementations and reference designs consist of solutions enabling the design of tactile effects used in device interfaces andapplications, and enhancing the playback of haptic content. Our offerings consist of design tools, application programming interfaces ("APIs"), referencedesigns, and firmware enabling the easy addition of new, customized haptic experiences to branded devices and other products.Our SDKs are targeted at content and application developers and platforms, and consist of design tools, integration software and effect libraries thatallow for the design, encoding and playback of tactile effects in content. The SDKs offer high-fidelity tactile effects to augment and enhance content, whileensuring quality playback within consumer devices.Patent LicensesThrough more than 25 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 now5Table of Contentsincludes more than 3,400 worldwide issued or pending patents, which support our TouchSense offerings, protect our business activities and prospects, andrepresent an important independent licensing and revenue channel for us. We believe that our IP is relevant to many of the most important ways in whichhaptic technology is and can be deployed, including in connection with mobile interfaces and user interactions, in association with pressure and othersensing technologies, related to virtual and augmented reality experiences, and in connection with advanced actuation technologies and techniques, to namea 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 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, and 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 patent licenses, as well as hapticexpertise, to OEMs in the mobile device, wearables, and consumer electronics markets. In addition, certain of our integrated circuit partners preload theirintegrated 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 Apple, LG Electronics, Google, Fujitsu, Sony, andPanasonic, as well as integrated circuit manufacturers such as Texas Instruments.For the years ended December 31, 2018, 2017, and 2016, 81%, 49%, and 57%, respectively, of our total revenues were generated from OEMs andintegrated circuit customers in the mobile communications market.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, Bosch, Preh, Panasonic Automotive Systems, SMK Corporation, and Tokai Rika.For the years ended December 31, 2018, 2017, and 2016, 13%, 15%, and 7%, respectively, of our total revenues were from automotive customers.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, and Razer.For the years ended December 31, 2018, 2017, and 2016, 5%, 30%, and 24%, respectively, of our total revenues were generated from customers in the PCand console gaming markets.6Table of ContentsMedical: We offer patent licenses to the medical market. Our current licensees include CAE Healthcare, Laerdal Medical A/S, and Transenterix.For the years ended December 31, 2018, 2017, and 2016, 1%, 6%, and 12%, respectively, 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 and Asia to license our software and patents across our target markets and augment thatsales force via partnerships and licensing agreements with component suppliers and system integrators.Additional information about significant customers is incorporated herein by reference to Note 16 of our consolidated financial statements and 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, haptic integrated circuit manufacturers, and othercustomers, as well as potential customers. We expect that these internal design groups will continue to make choices regarding whether to implement hapticsor not, as well as the extent of their 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 continue to invent and improve our technologies in a timely manner; to design and develop software to meetspecifications based on research and our understanding of customer needs and expectations; to offer tools and technology that enable high-quality, end-to-end haptic experiences, from the time of creation to the time of playback; and to collaborate with our licensees who are integrating our technologies intotheirs.Engineering: 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 that strengthen 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.7Table of ContentsOur team works with existing and potential partners to help them determine the best implementation of haptics in their specific application. This team workson the cutting edge of new user interface paradigms using haptics, resulting in an ongoing generation of patents, actively contributing to the development ofnew IP for us.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.As of December 31, 2018, we and our wholly owned subsidiaries had over 3,400 currently issued or pending patents worldwide that cover variousaspects of our technologies. The duration of our issued patents is determined by the laws of the country of issuance and for the United States is typically 17years from the date of issuance of the patent or 20 years from the date of filing of the patent application resulting in the patent. Some of our U.S. patentsbegan expiring in 2007.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 Policy are also available at our web site under “Corporate Governance.” These itemsare also available to any stockholder who requests them by calling +1 408.467.1900.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, 2018, following a restructure of certain of our operations, we had 64 full-time employees.Executive OfficersThe following table sets forth information regarding our executive officers as of February 20, 2019.NamePosition with the CompanyAgeRamzi HaidamusChief Executive Officer54Nancy ErbaChief Financial Officer52Anne Marie PetersGeneral Counsel and Senior Vice President IP Licensing and Legal Affairs48Ramzi Haidamus was named our President and Chief Executive Officer in January 2019. He also serves as a member of the Board. Mr. Haidamus hassubstantial leadership, strategic planning and business development experience in technology and IP monetization. Previously, he was president of NokiaTechnologies group from 2014 to 2016, where he led the growth of the existing patent licensing division and the formation of its digital media, digital healthand brand licensing divisions. From 1996 to 2014, Mr. Haidamus held numerous positions at Dolby Laboratories, Inc. From 2002 to 2006, he was also thefounder, CEO, and President of Via Licensing Corp., a patent pool licensor. From 2017 to January 2019, he served as Chairman of the8Table of ContentsAdvisory Board of UKL Tech Hub Accelerator, and in 2018, he served as a member of the Advisory Board of Keyssa, a secure high-speed data transferdeveloper. Mr. Haidamus is a member of the Academy of Motion Picture Arts and Sciences, a member on the investment committee of Berytech, a Lebaneseventure capital firm and a member of the Board of Trustees of World Affairs Council, a non-profit, nonpartisan forum for the public to join leading foreignpolicy and international relations experts to discuss and debate global issue. He received a B.S. and M.S. in Electrical Engineering from University of thePacific. Nancy Erba joined as our Chief Financial Officer in September 2016. Prior to joining us, Ms. Erba was Vice President, Financial Planning and Analysis ofSeagate Technology from February 2015 to October 2015. Prior executive roles at Seagate Technology, a data storage company, include Division CFO andVice President of Finance, for Strategic Growth Initiatives from 2013 to 2015, Vice President, Business Operations and Planning from 2009 to 2013, DivisionCFO and Vice President of Finance of the Consumer Solutions Division from 2008 to 2009 and Vice President, Corporate Development from 2006 to 2008.Ms. Erba holds a B.A. in Mathematics from Smith College and a M.B.A. from Baylor University.Anne Marie Peters joined us in 2008 serving as General Counsel and Corporate Secretary. In July 2016, Ms. Peters’ role was expanded to include leadingour patent licensing portion of our business. From 1998 to 2008, Ms. Peters was an associate, and then corporate partner, at Morrison & Foerster LLP. Prior topracticing law, Ms. Peters held positions in the diagnostic manufacturing field at Chiron Corporation a biotechnology company that was acquired byNovartis International AG. Ms. Peters holds a B.A. in Molecular and Cell Biology from the University of California, Berkeley, a M.B.A. from the GraduateSchool of Management at the University of California, Davis, and a J.D. degree from the University of California, Davis School of Law.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. We also face numerous risks in obtaining new or renewed licenses on termsconsistent with our business objectives and in maintaining, expanding, and supporting our relationships with our current licensees. These risks include:•difficulties in persuading device manufacturers to take a license or 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 game console makers no longer require peripherals to play video games, if video game console makers no longer utilizetechnology in the peripherals that are covered by our patents or if the overall market for video game consoles deteriorates substantially;•the competition we may face from third parties, including 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.Further, with the adoption of the new revenue standard, Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers, ("ASC606"), effective January 1, 2018, we recognize a substantial portion of revenue from our fixed license fee contracts up front, with the remainder recognizedover time, which relates to our future performance obligations to be transferred during the contract term. Previously, our fixed license fee revenue wastypically recognized ratably over time in accordance with revenue recognition guidance under ASC 605, Revenue Recognition ("ASC 605"). This change inaccounting policy provides less predictability in our revenue when compared to historical periods.A limited number of customers account for a significant portion of our revenue, and the loss of major customers could harm our operating results.One customer, Apple Inc., accounted for 69% of our total revenues for the year ended December 31, 2018, as compared to the year ended December 31,2017 where three customers accounted for 20%, 18% and 11% of our total revenues, and to the year ended December 31, 2016 where Samsung Electronics("Samsung") accounted for 60% of our total revenues. Additionally, in the quarter ended September 30, 2016, we entered into an additional amendment toour License Agreement with Samsung pursuant to which we agreed to permit Samsung to exercise its rights to continue to sell products that were licensedunder the agreement as of December 31, 2015 for the life of such products in exchange for $19 million. We have not entered into a renewal agreement10Table of Contentswith Samsung for any products released after December 31, 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 noassurance that Samsung will continue to generate similar revenue in any future period.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.Our current or any future litigation, arbitration and administrative proceedings to enforce or defend our intellectual property rights and to defend ourlicensing practices are 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 U.S. patents. On March 8, 2018, we added an additional U.S. patent tothe litigation against Samsung, and on February 25, 2019, we initiated patent infringement litigation against Samsung Electronics GmbH in Germanyalleging that certain Samsung touchscreen phones infringe one of our German patents. Due to the inherent uncertainties of litigation and administrativeproceedings, we cannot accurately predict how these proceedings will ultimately be resolved. We anticipate that currently pending or any future legalproceedings will continue to be costly, given the significant resources available to our current adverse parties, and that future legal proceedings will result inadditional legal expenses, resulting in the decrease of cash available for other parts of our business, and there can be no assurance that we will be successfulor be able to recover the costs we incur in connection with the legal proceedings. Although protecting our intellectual property is a fundamental part of ourbusiness, at times, our legal proceedings have diverted, and could continue to divert, the efforts and attention of some of our key management and personnelaway from our licensing transactions and other aspects of our business. As a result, until such time as it is resolved or concluded, litigation, arbitration andadministrative proceedings could cause our technology to be perceived as less valuable in the marketplace, which could reduce our sales and adversely affectour business. Further, any unfavorable outcome could adversely affect our business. For additional background on our litigation, please see Part I, Item 3,“Legal Proceedings.”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 and Motorola may be unsuccessful or may result in one or more of the patents asserted becoming limited inscope, 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; and11Table of Contents•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 and Motorola 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.Potential patent and litigation reform legislation, potential United States Patent and Trademark Office ("USPTO") and international patent rulechanges, potential legislation affecting mechanisms for patent enforcement and available remedies, and potential changes to the intellectual propertyrights policies of worldwide standards bodies, as well as rulings in legal proceedings may affect our investments in research and development and ourstrategies for patent prosecution, licensing and enforcement and could have a material adverse effect on our licensing business as well as our business as awhole. 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 United States International Trade Commission (the “USITC”) hasperiodically been introduced in Congress. Any potential changes in the law, the IP rights policies of standards bodies or other developments that reduce thenumber of forums available or the type of relief available in such forums (such as injunctive relief), restrict permissible licensing practices (such as our abilityto license on a worldwide portfolio basis) or that otherwise cause us to seek alternative forums (such as arbitration or state court), would make it more difficultfor us to enforce our patents, whether in adversarial proceedings or in negotiations. Because we have historically depended on the availability of certainforms of legal process to enforce our patents and obtain fair and adequate compensation for our investments in research and development and theunauthorized 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 USITC and U.S. courts, including the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit, have taken someactions that have been viewed as unfavorable to patentees. Decisions that occur in U.S. or in international forums may change the law applicable to variouspatent law issues, such as, for example, patentability, validity, patent exhaustion, patent misuse, remedies, permissible licensing practices, claim construction,and damages, in ways that are detrimental to the abilities of patentees to enforce patents and obtain damages awards.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 a material adverse effect 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 financial results.As a small company, we may not have the resources to reach every company who is introducing or planning to introduce haptics into the market. Inaddition, as a small company, we have limited engineering resources that may make it difficult to support every type of haptic implementation with oursoftware offerings or to introduce new technologies in a timely manner. In the instances where a potential customer is not using our software but implementsunlicensed haptic capability, we may need to seek to enforce our intellectual property. If the customer is unwilling to enter into a license agreement, we mayelect to pursue litigation which would harm our relationship with the potential customer and could harm our relationships with other licensees or our abilityto gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation,choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and could have a negative impact on our financial results.We also license our software and/or patents to semiconductor manufacturers who incorporate our technologies into their integrated circuits for use incertain electronic devices. While our relationships with these semiconductor manufacturers increase our distribution channels by leveraging their saleschannels, this could introduce confusion into our licensing model which has traditionally been focused on licensing the OEM. In the event that thesemiconductor manufacturers do not recognize the need to license our technologies or in the event we do not correctly structure our licensing programs toavoid patent exhaustion or implied licenses, we could negatively impact our business and financial results.12Table of ContentsWe had an accumulated deficit of $99 million as of December 31, 2018 and may not return to consistent profitability in the future.As of December 31, 2018, we had an accumulated deficit of $99 million. We need to generate significant ongoing revenues 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.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 have experienced turnover in our senior management. Our Chief Executive Officer recently joined us in January 2019. This lack of managementcontinuity and turnover amongst our employees, which we have experienced recently, could result in operational and administrative inefficiencies and addedcosts, which could adversely impact our results of operations, stock price and customer relationships, and could make recruiting for future managementpositions more difficult. We believe that our future success will also depend largely on our ability to attract, integrate, and retain sales, support, marketing,and research and development personnel. We must successfully integrate any new senior management and other new personnel within our organization inorder to achieve our operating objectives, and changes in other key positions may temporarily affect our financial performance and results of operations asnew employees become familiar with our business. Additionally, competition for such personnel is intense, and we may not be successful in attracting,integrating, and retaining such personnel. Given the protracted nature of, if, how, and when we collect royalties on new contracts, it may be difficult to craftcompensation plans that will attract and retain the level of salesmanship needed to secure these contracts. Additionally, our compensation packages need tobe competitive in the Silicon Valley where the stock component of compensation is an important factor that candidates and employees consider. Some of ourexecutive officers and key employees hold stock options with exercise prices that may be above the current market price of our common stock or that arelargely vested. Each of these factors may impair our ability to retain the services of our executive officers and key employees.If we do not achieve increased tax benefits as a result of our 2015 corporate reorganization, our financial condition and operating results could beadversely 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 reorganization activity is anticipated to allow us to reduce our overalleffective tax rate through changes in how we develop and use our intellectual property and the structure of our international sales operations, including byentering into 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, includinglegal fees. We deny liability and have asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved. Thearbitration panel conducted a hearing on the matter and a draft award has been submitted by the arbitral tribunal to the International Court of Arbitration of13Table of Contentsthe International Chamber of Commerce. The Secretariat of the International Chamber of Commerce has set the deadline for rendering the final award toFebruary 28, 2019.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, we filed an appeal with the Korea Tax Tribunal regarding theirfindings with respect to the withholding taxes. In the event that it is determined that we are obligated to indemnify Samsung and/or LGE for such withholding taxes imposed by the Korean taxauthorities, 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 othercountries' taxation of international business activities, could negatively impact the anticipated tax benefits of the reorganization.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 (for sample, changes currently anticipated arising from the agreementrecently reached by the Competent Authorities of Ireland and Malta) , or we do not operate our business consistent with the intended reorganization andapplicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the reorganization and our future operating resultsand financial condition may be negatively impacted.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 licenseesor 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 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 or that create a dispute as towhich products are covered by the license and subject to a royalty payment. Many of our customers report royalties to us based on their shipments or theirrevenues and their interpretation and allocation of contracted royalty rates. It is possible that the originally reported royalties could differ materially fromthose determined by either a customer self-reported correction or from an audit we have performed. These interpretations may also cause disagreementsarising during customer audits, may lead to claims or litigation, and may have an adverse effect on the results of our operations. Further, although ouragreements generally give us the right to audit books and records of our licensees, audits can be expensive, time consuming, and may not be cost justifiedbased on our understanding of our licensees’ businesses. Pursuant to our license compliance program, we audit certain licensees to review the accuracy of theinformation contained in their royalty reports in an effort to decrease the risk of our not receiving royalty revenues to which we are entitled, but we cannotgive 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.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 23% of our total revenues in 2018.International operations are subject to a number of difficulties, risks, and special costs, including:•compliance with multiple, conflicting and changing governmental laws and regulations;•laws and business practices favoring local competitors;•foreign exchange and currency risks;•changing import and export restrictions, duties, tariffs, quotas and other barriers;•difficulties staffing and managing foreign operations;•difficulties and expense in establishing and enforcing IP rights internationally;14Table of Contents•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 and changing 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 internationally. Our international operations could alsoincrease our exposure to complex international tax rules and regulations. Changes in, or interpretations of, tax rules and regulations may adversely affect ourincome tax provision. In addition, our operations outside the United States may be affected by changes in trade protection laws, policies and measures, andother regulatory requirements affecting trade and investment, including the U.S. Foreign Corrupt Practices Act and local laws prohibiting corrupt paymentsby our employees, vendors, or agents.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 videogame industry changes such that mobile or other platforms increase in popularity at the expense of traditional video game consoles, our gaming royaltyrevenues could be substantially reduced if we are unable to enter into replacement arrangements enabling us to license our software or IP in connection withgaming on such mobile or other platforms. Although we have a significant software and IP position with respect to VR peripherals and systems, the marketmay not become large enough to generate material revenues. Finally, as some of our litigated patents have expired related to video game peripherals, ourgaming 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 VR and AR. Microsofthas significantly greater financial, sales, and marketing resources, as well as greater name recognition and a larger customer base than some of our otherlicensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other licensees in these market segments may decline.Automobiles incorporating our touch-enabling technologies are subject to lengthy product development periods, making it difficult to predict 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.15Table of ContentsWe 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, 2018, substantially all of our total revenues were royalty and license revenues, as compared to 97% and 98%for the years ended December 31, 2017 and 2016, respectively. We do not control or influence the design, manufacture, quality control, promotion,distribution or pricing of products that are manufactured and sold by our licensees, nor can we control consolidation within an industry which could eitherreduce the number of licensable products available or reduce royalty rates for the combined licensees. In addition, we generally do not have commitmentsfrom our licensees that they will continue to use our technologies in current or future products. As a result, products incorporating our technologies may notbe brought to market, achieve commercial acceptance or otherwise generate meaningful royalty revenue for us. For us to generate royalty and licenserevenue, licensees that pay us per-unit royalties must manufacture and distribute products incorporating our touch-enabling technologies in a timely fashionand generate consumer demand through marketing and other promotional activities. If our licensees’ products fail to achieve commercial success, or if theirproducts are recalled because of quality control problems or if they do not timely ship products incorporating our touch-enabling technologies or fail toachieve 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, computer malware and cyber attacks have become moreprevalent and sophisticated. These threats and attempts, which might be related to industrial or other espionage, include covertly introducing malware suchas viruses, worms and other malicious software programs to our computers and networks and impersonating authorized users, among others. These threats areconstantly evolving, making it increasingly difficult to successfully defend against them or implement adequate protective measures. We might be unawareof an incident or its magnitude and effects. These attacks may create system disruptions or cause shutdowns, theft, unauthorized use or publication of ourintellectual property and/or confidential business information, which could harm our competitive position and reputation, reduce the value of our investmentin research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any future security breach results ininappropriate disclosure of our customers' confidential information, we may incur liability.In addition, our business involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk ofloss of this information, litigation, regulatory inquiries or actions, and possible liability. Our security measures or those of third parties involved in thestorage or transfer of data may be breached as a result of third-party action, employee error, malfeasance or otherwise, during data transfers, and could result insomeone obtaining unauthorized access to our data or our customers’ data. Additionally, third parties may attempt to fraudulently induce employees orcustomers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data.Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launchedagainst a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our customers may authorizethird party technology providers, to access their customer data. Because we do not control the transmissions between our customers and third-partytechnology providers, or the processing of such data by third-party technology providers, we cannot ensure the complete integrity or security of suchtransmissions or processing. Any security breach or perceived security breach could result in a loss of confidence in the security of our service, damage ourreputation, 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.16Table of ContentsWe 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 ways that would require suchproprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which theselicenses may be interpreted and enforced is therefore subject to some uncertainty. We often take steps to disclose source code for which disclosure is requiredunder an open source license, but it is possible that we have made or will make mistakes in doing so, which could negatively impact our brand or ouradoption in the community, or could expose us to additional liability. In addition, we rely on multiple software programmers to design our proprietaryproducts and technologies. Although we take steps to ensure that our programmers (both internal and outsourced) do not include open source software inproducts and technologies we intend to keep proprietary, we cannot be certain that open source software is not incorporated into products and technologieswe intend to keep proprietary. In the event that portions of our proprietary technology are determined to be subject to an open source license, or areintentionally released under an open source license, we could be required to publicly release the relevant portions of our source code, which could reduce oreliminate 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.Our technologies are complex and may contain undetected errors, which could harm our reputation and future sales.Any failure to provide high quality and reliable technologies, whether caused by our own failure or failures of our suppliers or customers, could damageour reputation and reduce demand for our technologies. Our technologies have in the past contained, and may in the future contain, undetected errors ordefects. These errors or defects may increase as our technologies are introduced into new devices, markets and applications, including the automotive market,or as new versions are released. Some errors in our technologies may only be discovered after a customer’s product incorporating our technologies has beenshipped to customers. Undiscovered vulnerabilities in our technologies or products could expose our customers to hackers or other unscrupulous third partieswho develop and deploy viruses, worms and other malicious software programs that could attached our products or technologies. Any errors or defectsdiscovered in our technologies after commercial release could result in product recalls, loss of revenue, loss of customers, and increased service and warrantycosts, 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.17Table of ContentsThe 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:•the establishment or loss of licensing relationships;•the timing and recognition of payments under fixed and/or up-front fee 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; and18Table of Contents•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 Financial Accounting Standards Board ("FASB") and the SEC change certainguidance governing the form and content of registrants’ external financial statements, or update their previous interpretations with regard to the applicationof certain General Accepted Accounting Principles ("GAAP"). Such change in GAAP or their interpretation can have a significant effect on our reportedfinancial condition and/or results of operations. If applicable to us, we would be required to apply a new or revised guidance, which may result inretrospective adjustments to our financial statements, and change the way we account for certain transaction than under the existing guidance. Changes inGAAP and reporting standards could substantially change our reporting practices in a number of areas, including revenue recognition and recording of assetsand liabilities, and consequently affect our reported financial condition or results of operations.For example, on January 1, 2018, we adopted the new revenue standard ASC 606. The adoption has affected our revenue recognition model for bothfixed fee license revenue and per-unit royalty revenue derived from our new and existing contracts with licensees. Under the new standard, if a fixed feelicense agreement contains both performance obligations to transfer rights to our patent portfolio as it exists when the contract is executed as well as rights toour patent portfolio as it evolves throughout the contract term, we are required to allocate the fixed fee between the two performance obligations which couldresult in the recognition of a substantial majority of the fixed fee as revenue upon the execution of the license agreement. Prior to the adoption, as a historicalpractice applied by many licensing companies, we recognized fixed license fees ratably over the contract term. In addition, our previous accounting practicewas to recognize revenue from per-unit royalty agreements in the period in which the related royalty report was received from our licensees, generally onequarter in arrears from the period in which the underlying sales occurred (i.e. on a "quarter-lag"). Under ASC 606, we are required to record per-unit royaltyrevenue in the same period in which the licensee’s underlying sales occur. As we generally do not receive the per-unit licensee royalty reports for sales duringa given quarter within the time frame that allows us to adequately review the reports and include the actual amounts in our quarterly results for such quarter,we accrue the related revenue based on estimates of our licensees’ underlying sales, subject to certain contractual terms on our ability to estimate suchamounts. As a result of accruing per-unit royalty revenue for the quarter based on estimates, adjustments will be required in the following quarter to true uprevenue to the actual amounts reported by its licensees. Such changes 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 anticipated fluctuations in operating results; announcements of technical innovations;announcements regarding litigation in which we are involved; the acquisition or loss of customers; changes by game console manufacturers to not includetouch-enabling capabilities in their products; new products or new contracts; sales or the perception in the market of possible sales of large number of sharesof our common stock by insiders or others; stock repurchase activity; changes in securities analysts’ recommendations; personnel changes; changingcircumstances regarding competitors or their customers; governmental regulatory action or inaction; developments with respect to patents or proprietaryrights; inclusion in or exclusion from various stock indices; increased tariffs and international trade disputes; and general market conditions. In the past,following periods of volatility in the market price of a company’s securities, securities class action litigation has been initiated against that company.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 of19Table of Contentsshares of our common stock will be repurchased to satisfy the market’s expectations. Furthermore, there can be no assurance that any repurchases conductedunder the plan will be made at the best possible price. The existence of a stock repurchase program could also cause our stock price to be higher than it wouldbe in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, we are permitted to and could discontinueour stock repurchase program at any time and any such discontinuation 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 2020;•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 February 2024.We also lease office space in Seocho-gu, Seoul, Korea; Shanghai, China; Tokyo, Japan; Mriehel, Birkirkara, Malta; and Dublin, Ireland.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 sought 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 allegedinfringement of the same patents.20Table of ContentsThe complaints asserted 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 asserted 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 USPTO. We responded to the allegations of Respondents during the investigation on the procedural schedule set 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 infringed certain of our patents, including patents covering pressure-related haptics.In the May 2016 ITC complaint, we sought an exclusion order preventing the importation, sale for importation, and sale after importation of infringingApple devices into the United States by the defendants and appropriate cease and desist orders. In the U.S. District Court suit, we alleged infringement of thesame patents.The complaints asserted 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”The complaints also asserted 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 was designated Inv. No. 337-TA-1004 (“1004 Investigation”). On June 9, 2016, the Chief ALJ entered an order consolidating the 990 and1004 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 October21Table of Contents18, 2016, and the evidentiary hearing for April 27-May 5, 2017. On July 12, 2016, the Chief ALJ entered the procedural schedule in the consolidatedInvestigation.The procedural schedule in the Investigation included, among other things, deadlines for the parties to conduct three required settlement conferences. OnJuly 26, 2016, representatives for Immersion and Respondent AT&T conducted their first settlement conference. On July 28, 2016, representatives forImmersion and Respondent Apple conducted their first settlement conference. The parties did not reach an agreement to settle the dispute underlying theInvestigation at that time.In September 2016, Respondent Apple released additional products, including the iPhone 7 and 7 plus and the Apple Watch Series 2. We serveddiscovery 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, we filed our opposition to the motion. On December 27, 2016,the Commission Investigative Staff submitted a response to the motion stating that the Staff supports the motion. On April 6, 2017, the Chief ALJ issued anorder 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 Watch productsdo not infringe the ’356 patent and Apple’s iPhone 6, 6 Plus and SE products do not infringe the ’051 patent; and•that claims 2-5, 10-12, and 15-17 of the ’507 patent are invalid under 35 U.S.C. § 112 for failing to comply with the written description requirement.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 ’356 patent, and (4) the Apple iPhone 6, 6 Plus, and SE products solely with respect tothe ’051 patent. Immersion also stated in the motion its position that the request for termination as to the withdrawn allegations rendered Respondentsmotion for summary determination on these particular issues moot. On February 9, 2017 the Chief ALJ issued an order granting partial termination of theInvestigation as to certain asserted claims of the ’356 patent and the ’051 patent as described 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 3,22Table of Contents13, and 23 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, we announced that we reached a settlement with Apple resolving the Investigation. On January 30, 2018, the Chief ALJ issued anOrder Extending Target Date By Two Months in which he extended the target date two months in order to allow the parties sufficient time to prepare andsubmit a joint motion to terminate the investigation. The Chief ALJ also issued an order staying and suspending all dates and deadlines. On February 8,2018, the parties submitted to the ITC a Joint Motion to Terminate Based on Settlement. The parties also requested confidential treatment of the settlementagreement. 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 enteredan order entitled “Initial Determination Granting Joint Motion to Terminate The Investigation Based On A Settlement Agreement.” The Chief ALJ foundgood cause to terminate the investigation based on the settlement and granted the parties’ motion to terminate the investigation. The Chief ALJ also grantedthe parties’ motion to limit service of the confidential settlement agreement to only Apple and Immersion (and not to counsel for AT&T).On March 15, 2018, the ITC issued a notice stating that the ITC has determined not to review the Chief ALJ’s decision granting the motion to terminatethe investigation based on settlement. As a result of this decision and the underlying settlement agreement, the ITC proceedings have concluded.As noted above, on January 29, 2018, we announced that we reached a settlement with Apple resolving the above-described litigation. As part of thesettlement, the parties agreed to submit joint stipulations in the District Court actions to dismiss those actions in their entirety with prejudice. On February 6,2018, the Parties filed the Stipulations of Dismissal with the District Court. In addition to requesting the dismissal of the action with prejudice, thestipulations provide that each party shall bear its own fees and costs. On February 7, 2018, the District Court issued orders dismissing the above-describedlitigation pursuant to the stipulations of the parties.On July 7, 2016, Apple filed in the USPTO a petition for inter partes review ("IPR")of the ’051 patent. The petition bears Case No. IPR2016-01371. Thepetition challenged the patentability of certain claims of the ’051 patent in light of alleged prior art references. On October 13, 2016, we filed a PatentOwner’s Preliminary Response responding to the petition’s challenges to patentability of claims of the ’051 patent. On January 11, 2017, the Patent Trial andAppeal Board (“PTAB”) issued a decision denying the Petition and declining to institute the IPR. On February 10, 2017, Apple submitted in the USPTO asecond IPR petition challenging the patentability of certain claims of the ’051 patent in light of alleged 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. On August 25, 2017, the PTAB issued a decision denyingApple’s petition and declining to institute the second IPR.On July 7, 2016, Apple filed in the USPTO a petition for IPR of the ’571 patent. The petition bears Case No. IPR2016-01372. The petition challenged thepatentability 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 Responseresponding to the petition’s challenges to patentability of claims of the ’571 patent. On January 11, 2017, the PTAB issued its decision instituting the IPR oncertain grounds raised in the Petition. The PTAB’s decision also declined to institute the IPR as to certain claims of the ’571 patent. The PTAB set a scheduleof 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 Responseon August 4, 2017. On August 31, 2017, we submitted a Motion for Observation regarding the testimony of Apple’s expert on cross-examination atdeposition. Apple responded to these observations on September 5, 2017. On October 5, 2017, the PTAB conducted the Oral Hearing in this IPR. On January10, 2018, the PTAB issued a Final Written Decision finding claims 1-4, 6, 23-26, and 28 of the ’571 patent unpatentable. On February 1, 2018, the partiesemailed the PTAB and requested authorization to file a joint motion to vacate final decision and terminate proceeding in IPR2016-1372 in light of thesettlement between the parties. On February 2, 2018, the PTAB denied the parties’ request to file such a motion. On March 14, 2018, Immersion filed with theUSPTO and the U.S. Court of Appeal for the Federal Circuit notices of appeal from the PTAB’s final written decision in IPR2016-1372 for the ’571 patent. OnMarch 27, 2018, Immersion filed in the Federal Circuit the required Certificates of Interest and Docketing Statements. Apple also filed in the Federal Circuitnotices stating that it will not be participating in the appeals. On April 23, 2018, the USPTO filed the certified list of documents that comprise the record inIPR2016-1372. Our opening brief in the appeal was due on June 22, 2018. On May 10, 2018, we filed a motion seeking a 30-day extension to file the briefand the motion was granted on May 11, 2018. The USPTO entered a notice of intervention on April 25, 2018. On July 6, 2018 Immersion filed an unopposedmotion to voluntarily dismiss its appeal. The Federal Circuit granted Immersion’s motion and dismissed the appeal on July 9, 2018. On or about February 12,2017, Apple submitted in the USPTO a second IPR petition challenging the patentability of certain claims of the ’571 patent in light of alleged prior artreferences. This Petition bears Case No. IPR2017-00896.23Table of ContentsWe 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 petitionand declining to institute the second IPR.On July 8, 2016, Apple filed in the USPTO a petition for IPR of the ’356 patent. The petition bears Case No. IPR2016-01381. The petition challenged thepatentability 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 Responseresponding to the petition’s challenges to patentability of claims of the ’356 patent. On January 11, 2017, the PTAB issued its decision instituting the IPR oncertain grounds raised in the Petition. The PTAB set a schedule of certain due dates in the IPR. On May 31, 2017, we submitted our Patent Owner’s Responseto the IPR. Apple filed its Reply to the Patent Owner’s Response on July 28, 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 1-3, 5, 7, 9-13, 15, 17, 19-23, 25, and26 of the ’356 patent unpatentable. On January 10, 2018, Apple submitted to the Chief ALJ in the ITC proceeding a Notice of Supplemental AuthorityRegarding the ’356 Patent to inform the Chief ALJ of the PTAB's decision in this IPR. On February 1, 2018, the parties emailed the PTAB and requestedauthorization to file a joint motion to vacate final decision and terminate proceeding in IPR2016-1381 in light of the settlement between the parties. OnFebruary 2, 2018, the PTAB denied the parties’ request to file such a motion. On March 14, 2018, Immersion filed with the USPTO and the U.S. Court ofAppeal for the Federal Circuit notices of appeal from the PTAB's final written decision in IPR2016-1381 for the ’356 patent. On March 27, 2018, Immersionfiled in the Federal Circuit the required Certificates of Interest and Docketing Statements. Apple also filed in the Federal Circuit notices stating that it will notbe participating in the appeals. On April 23, 2018, the USPTO filed the certified list of documents that comprise the record in IPR2016-01381. Our openingbrief in the appeal was due on June 22, 2018. On May 10, 2018, we filed a motion seeking a 30-day extension to file the brief and the motion was granted onMay 11, 2018. The USPTO entered a notice of intervention on April 25, 2018. On July 6, 2018 Immersion filed an unopposed motion to voluntarily dismissits appeal. The Federal Circuit granted Immersion’s motion and dismissed the appeal on July 9, 2018. On or about February 12, 2017, Apple submitted in theUSPTO a second IPR petition challenging the patentability of certain claims of the ’356 patent in light of alleged 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 August 17, 2017, the PTAB issued a decision denyingApple’s petition and declining to institute the second IPR.On August 12, 2016, Apple filed in the USPTO a petition for IPR of the ’710 patent. The petition bears Case No. IPR2016-01603. The petitionchallenged the patentability of certain claims of the ’710 patent in light of alleged prior art references. On November 28, 2016, we filed a Patent Owner’sPreliminary Response responding to the petition’s challenges to patentability of claims of the ’710 patent. On February 23, 2017, the PTAB issued itsdecision instituting the IPR on certain grounds raised in the petition. The PTAB set a schedule of certain due dates in the IPR. On June 28, 2017, wesubmitted our Patent Owner’s Response in the IPR. Apple filed its Reply to the Patent Owner’s Response on August 24, 2017. On October 16, 2017, wesubmitted a Motion for Observation regarding testimony of Apple’s expert on cross-examination at deposition. On November 16, 2017, the PTAB conductedthe Oral Hearing in this IPR. On February 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motion to terminate IPR2016-1603in light of the settlement between the parties. On February 2, 2018, the PTAB granted the request. On February 8, 2018, the parties filed a joint motion toterminate the IPR. The parties also requested confidential treatment of the settlement agreement. On February 12, 2018, the PTAB granted the parties’ jointmotion to terminate the IPR as well as the parties’ joint request for confidential treatment of the settlement agreement. On or about May 4, 2017, Applesubmitted in the USPTO a second IPR petition challenging the patentability of certain claims of the ’710 patent in light of alleged prior art references. ThisIPR bears Case No. 2017-01368. We filed our Patent Owner’s Preliminary Response on August 24, 2017. On November 7, 2017, the PTAB issued a decisiondenying Apple’s petition and declining to institute the second IPR.On September 12, 2016, Apple filed in the USPTO a petition for IPR of the ’507 patent. The petition bears Case No. IPR2016-01777. The petitionchallenged the patentability of certain claims of the ’507 patent in light of alleged prior art references. On December 27, 2016, we filed a Patent Owner’sPreliminary Response responding to the petition’s challenges to patentability of claims of the ’507 patent. On March 23, 2017, the PTAB issued its decisiondenying the Petition and declining to institute the IPR. On May 9, 2017, Apple submitted in the USPTO a second IPR petition challenging the patentabilityof 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 PreliminaryResponse on August 9, 2017. On November 2, 2017, the PTAB issued a decision denying Apple’s petition and declining to institute the second IPR.On September 23, 2016, Apple filed in the USPTO a petition for IPR of the ’260 patent. The petition bears Case No. IPR2016-01884. The petitionchallenged the patentability of certain claims of the ’260 patent in light of alleged prior art references. On January 4, 2017, we filed a Patent Owner’sPreliminary Response responding to the petition’s challenges to patentability of claims of the ’260 patent. In response to a request of the Petitioner, thePTAB also authorized the parties to file Reply and Sur-Reply briefs on certain issues. Petitioner filed a Reply Brief on January 31, 2017. We filed our PatentOwner’s Sur-Reply brief on February 14, 2017. On April 3, 2017, the PTAB issued a decision instituting the IPR on certain grounds raised in the petition. ThePTAB 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 thePatent Owner’s Response on October 10, 2017. The Oral Hearing took place on January 10, 2018. On24Table of ContentsFebruary 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motion to terminate IPR2016-1884 in light of the settlementbetween the parties. On February 2, 2018, the PTAB granted the request. On February 8, 2018, the parties filed a joint motion to terminate the IPR. The partiesalso requested confidential treatment of the settlement agreement. On March 22, 2018, the PTAB issued a decision granting the joint motion to terminate.The PTAB also granted the joint motion to treat the underlying settlement agreement as confidential business information and kept separate from the rest ofthe file. On or about May 4, 2017, Apple submitted in the USPTO a second IPR petition challenging the patentability of certain claims of the ’260 patent inlight of alleged prior art references. This IPR bears Case No. 2017-01369. We filed our Patent Owner’s Preliminary Response on August 24, 2017. OnNovember 21, 2017, the PTAB issued a decision denying Apple’s petition and declining to institute the second IPR.On September 29, 2016, Apple filed in the USPTO a petition for IPR of the ’488 patent. The petition bears Case No. IPR2016-01907. The petitionchallenged the patentability of certain claims of the ’488 patent in light of alleged prior art references. On January 5, 2017, we filed a Patent Owner’sPreliminary Response responding to the petition’s challenges to patentability of claims of the ’488 patent. In response to a request of the Petitioner, thePTAB 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-Replybrief on February 14, 2017. On April 3, 2017, the PTAB issued a decision instituting the IPR on certain grounds raised in the petition. The Board set aschedule of certain due dates in the IPR. On July 3, 2017, we filed our Patent Owner’s Response in the IPR. Apple filed its Reply to the Patent Owner’sResponse on October 10, 2017. The Oral Hearing took place on January 10, 2018. On February 1, 2018, the parties emailed the PTAB and requestedauthorization to file a joint motion to terminate IPR2016-1907 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. On March 22, 2018, the PTAB issued a decision granting the joint motion to terminate. The PTAB also granted the joint motion to treat theunderlying settlement agreement as confidential business information and kept separate from the rest of the file. On or about May 4, 2017, Apple submittedin the USPTO a second IPR petition challenging the patentability of certain claims of the ’488 patent in light of alleged prior art references. This IPR bearsCase No. 2017-01371. We filed our Patent Owner’s Preliminary Response on August 24, 2017. On November 21, 2017, the PTAB issued a decision denyingApple’s petition 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 sought 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. The Beijing High People’s Court has approved thewithdrawal of this case.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 infringed three of our Chinese patents. The three patents at issue were Chinese 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. Thereafter, the reseller defendant, Rui Jin Lin (Dalian) InformationTechnology Co., Ltd. filed an objection to the Court’s jurisdiction. The court held an inter-party hearing on April 11, 2018 to discuss, among other things,whether to incorporate Rui Jin Lin as a defendant along with Runtong, and the Court affirmed its jurisdiction over the reseller defendant.Relatedly, Petitions for Invalidation were filed with the Patent Reexamination Board by FitBit for Chinese Patent Nos. CN101305416B,CN102160366B, and CN102187647B. A hearing for FitBit’s Petition for Invalidation of Chinese Patent No. CN102160366B took place on April 16, 2018, ahearing for Chinese Patent No. CN101305416B took place on April 26, 2018, and a hearing for Chinese Patent No. CN102187647B took place on June 13,2018. On June 29, 2018, the Patent Reexamination Board invalidated Chinese Patent No. CN102160366B.On July 8, 2018, we reached a global settlement with Fitbit, and requested to withdraw the patent litigation suit in the Shanghai Intellectual PropertyCourt on July 17, 2018. The Shanghai Intellectual Property Court granted the request on July 30, 2018. Fitbit requested withdrawal of the remaininginvalidity petitions on July 11, 2018. The Patent Reexamination Board granted the withdrawal motion with respect to CN101305416B on July 13, 2018 andwith respect to CN102187647B on July 24, 2018, and as a result, both patents remain valid.25Table of ContentsImmersion 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 were U.S. Patent No. 8,351,299, entitled “Apparatus and Method for Providing Condition-Based Vibrotactile Feedback”; No. 8,059,105, entitled “Haptic Feedback for Touchpads and Other Touch Controls”; and No. 8,638,301, entitled “Systemsand Methods for Transmitting Haptic Messages.” Generally, these U.S. patents cover “touch-feedback” - or haptic feedback - devices, systems and methods.Fitbit devices alleged to infringe include the Fitbit Flex, Fitbit Flex 2, Fitbit Alta, Fitbit Alta HR, Fitbit Charge, Fitbit Charge 2, Fitbit Charge HR, FitbitBlaze and Fitbit Surge. We served Fitbit with the Complaint, among other papers, on July 11, 2017. On October 4, 2017, in lieu of answering, Fitbit filed aMotion 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 partiesattended an Initial Case Management Conference on October 18, 2017. The claim construction hearing was originally scheduled for May 10, 2018, and thetrial date was originally scheduled for May 6, 2019. On November 1, 2017, we filed our response to Fitbit’s motion to dismiss. On February 8, 2018, theparties 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. The Court denied Fitbit’s Motion to Dismiss under 35 USC101 with respect to the ’105 Patent and ’299 Patent, but granted with respect to the ’301 Patent, leaving two patents-in-suit remaining. On March 19, 2018,Fitbit filed an Answer and Counterclaims, seeking declaratory judgment of invalidity and non-infringement for each of the patents-in-suit. Immersionanswered Fitbit’s counterclaims on April 9, 2018. The parties exchanged proposed claim constructions and exchanged claim construction briefs in April2018. Fitbit alleged that two of the claim terms were indefinite, and that the asserted claims were therefore invalid. The claim construction hearing took placeon June 21, 2018, but the Court did not issue a final order.On July 8, 2018, we reached a global settlement with Fitbit, and jointly requested dismissal, without prejudice, of each party’s claims for relief, with eachparty bearing its own fees and costs. The Court issued an Order on July 9, 2018, granting the joint motion for dismissal.On February 7, 2018, Fitbit filed in the USPTO two petitions for IPR the ’105 patent (Case Nos. IPR2018-00588 and IPR2018-00590); a petition for IPRof the ’299 patent (Case No. IPR2018-00591); and two petitions for IPR of the ’301 patent (Case Nos. IPR2018-00592 and IPR2018-00593). The last days forthe Patent Trial and Appeal Board to decide whether to institute IPR are August 15, 23, and September 17, 2018, respectively. As discussed above, on July 8,2018, we reached a global settlement with Fitbit, and on July 18, Fitbit requested permission to withdraw each of the petitions for IPR. On July 23, 2018 thePatent Trial and Appeal Board authorized the parties to file a Joint Motion to Dismiss the Petitions, a true copy of any agreement settling their disputeregarding the patents at issue, and a Joint Request that the Settlement Agreement be Treated as Business Confidential Information, pursuant to 37 C.F.R. §317 and 37 C.F.R. § 42.74. On July 26, 2018 the parties jointly filed Motions to Terminate/Dismiss Petitions for each IPR and a Joint Request that theSettlement Agreement be Treated as Business Confidential Information, and on August 1, 2018, the Patent Trial and Appeal Board granted such motions andrequest.Immersion Corporation vs. Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (C.A. No. 17-cv-572)On August 3, 2017, we filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (collectively, “Samsung”) in theU.S. 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 (the ’846 patent): “Haptic Feedback for Touchpads and Other Touch Controls”U.S. Patent No 7,969,288 (the ’288 patent): “Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device”U.S. Patent No 9,323,332 (the ’332 patent): “Force Feedback System Including Multi-Tasking Graphical Host Environment”U.S. Patent No 7,982,720 (the ’720 patent): “Haptic Feedback for Touchpads and Other Touch Controls”U.S. Patent No 8,031,181 (the ’181 patent): “Haptic Feedback for Touchpads and Other Touch Controls”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. On March 5, 2018, the Court issued an order resetting the first day of jury selection for February 19, 2019.26Table of ContentsOn March 8, 2018, we filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (collectively, “Samsung”) in theU.S. District Court for the Eastern District of Texas alleging that the Accused Phones infringe U.S. Patent No 8,619,051, entitled “Haptic Feedback Systemwith Stored Effects,” which covers haptic feedback systems and methods. In the complaint, we are seeking to stop Samsung from further infringement as wellas the recovery of damages.Samsung filed a response to the Complaint on April 20, 2018. On April 27, 2018, Samsung filed a motion to consolidate this case with the previously-filed case that we filed on August 3, 2017. On May 11, 2018, we filed an opposition to the motion to consolidate. On June 8, 2018, the Court grantedSamsung’s motion to consolidate this case with the previously-filed case. On July 10, 2018, the Court entered a new scheduling order for the consolidatedcases, setting the claim construction hearing for October 9, 2018, and the first day of jury selection for May 6, 2019. On July 24, 2018, we filed an amendedcomplaint in the consolidated cases. On September 4, 2018, the Court moved the first day of jury selection to May 13, 2019. On October 15, 2018, the Courtissued its Claim Construction Memorandum and Order. The first day of jury selection is scheduled for May 13, 2019. On or about February 19, 2019,the parties agreed to a mediation conference for March 21, 2019.Samsung Petitions for Inter Partes Review (USPTO)On August 6, 2018, Samsung filed in the USPTO two petitions for IPR of the ’846 patent (Case Nos. IPR2018-01467 and IPR2018-01468). In each of theIPR petitions, Samsung asserts that certain claims of the ’846 patent are invalid over alleged prior art patents and publications. Immersion filed PatentOwner’s Preliminary Responses in IPR2018-01467 and in IPR2018-01468 on November 21, 2018. On February 20, 2019, the USPTO entered DecisionsGranting Institution of IPR in Case Nos. IPR2018-01467 and IPR2018-01468, both concerning U.S. Patent No. 6,429,846. The USPTO also issuedScheduling Orders in both cases, scheduling the Patent Owner Responses for May 20, 2019, the hearing on both petitions for November 18, 2019, and thedue date for the Final Written Decisions of February 20, 2020.On August 6, 2018, Samsung filed in the USPTO two petitions for IPR of the ’720 patent (Case Nos. IPR2018-01469 and IPR2018-01470). In each of theIPR petitions, Samsung asserts that certain claims of the ’720 patent are invalid over alleged prior art patents and publications. Immersion filed PatentOwner’s Preliminary Responses in both IPR2018-01469 and IPR2018-01470 on December 10, 2018; and the last day for the PTAB to decide whether toinstitute such IPRs of the ’720 patent is March 10, 2019.On August 6, 2018, Samsung filed in the USPTO a petition for IPR of the ’288 patent (Case No. IPR2018-01499). In the IPR petition, Samsung assertsthat certain claims of the ’288 patent are invalid over alleged prior art patents and publications. Immersion filed a Patent Owner’s Preliminary Response onDecember 11, 2018; the last day for the PTAB to decide whether to institute such IPR of the ’288 patent is March 11, 2019.On August 6, 2018, Samsung filed in the USPTO two petitions for IPR of the ’181 patent (Case Nos. IPR2018-01500 and IPR2018-01501). In each of theIPR petitions, Samsung asserts that certain claims of the ’181 patent are invalid over alleged prior art patents and publications. Immersion filed PatentOwner’s Preliminary Responses in both IPR2018-01500 and IPR2018-01501 on January 5, 2019; and the last day for the PTAB to decide whether to institutesuch IPRs of the ’181 patent is April 5, 2019.On August 6, 2018, Samsung filed in the USPTO a petition for IPR of the ’332 patent (Case No. IPR2018-01502). In the IPR petition, Samsung assertsthat certain claims of the ’332 patent are invalid over alleged prior art patents and publications. Immersion filed a Patent Owner’s Preliminary Response onJanuary 5, 2019; and the last day for the PTAB to decide whether to institute such IPR of the ’332 patent is April 5, 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 U.S.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 “Motorola 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 Motorola 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”27Table of ContentsU.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. On November 18, 2018, the Court issued an oral order changing the trial date to October 7, 2019.On February 5, 2018, the Court entered an order setting a mediation conference for August 7, 2018. The mediation conference was rescheduled toOctober 8, 2018 at the request of the parties. The mediation conference was conducted on October 8, 2018 as rescheduled, but did not result in a settlement.On October 25, 2018, the Court issued its Claim Construction Memorandum and Order.Samsung 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 October 18, 2018, the Korea Tax Tribunal held a hearing and on November 19, 2018, theKorea Tax Tribunal issued its ruling in which it decided not to accept Immersion’s arguments with respect to the Korean tax authorities’ assessment ofwithholding tax and penalties imposed on Samsung. We filed an appeal with the Korea Administrative Court on February 15, 2019.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 $6.9 million) plus interest from and after May 2, 2017, plus the cost of the arbitration including legal fees. We deny liability,and asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved. The arbitration panel conducted an initialstatus conference on February 7, 2018. The International Chamber of Commerce denied our motion to postpone the arbitration, and on March 2, 2018, issueda Procedural Order setting the hearing date for July 23, 2018. We filed our Statement of Defense and Counterclaim on April 16, 2018. A short discovery phasefollowed, and each side produced documents in May. Samsung filed its Reply to our Statement of Defense on June 11, 2018, and we filed our Reply on June25, 2018. The evidentiary hearing took place in Hawaii July 23-24, 2018. The parties submitted supplemental legal authorities on August 8, 2018, andsubmitted cost submissions on October 15, 2018. On August 15, 2018, the Secretariat of the International Court of Arbitration of the International Chamberof Commerce extended the time for rendering the final award until October 31, 2018. On October 31, 2018, the Secretariat of the International Court ofArbitration of the International Chamber of Commerce again extended the time for rendering the final award until November 30, 2018. On November 8, 2018,the Secretariat of the International Court of Arbitration of the International Chamber of Commerce again extended the time for rendering the final award untilDecember 31, 2018. On December 6, 2018, the Secretariat of the International Court of Arbitration of the International Chamber of Commerce again extendedthe time for rendering the final award until January 31, 2019. On January 8, 2019, the Secretariat of the International Court of Arbitration of the InternationalChamber of Commerce informed us that it had received on that day a draft award submitted by the arbitration tribunal, and that it would scrutinize the draft atone of its next sessions. On January 31, 2019, the International Chamber of Commerce reported to the parties that it had approved the draft award submittedby the arbitral tribunal, and would notify the award to the parties once the arbitral tribunal has considered the Court’s comments, finalized the award andsigned it. Also on January 31, 2019, the Secretariat of the International Chamber of Commerce again extended the time for rendering the final award untilFebruary 28, 2019.We believe that there are valid defenses to all of the claims from the Korean tax authorities and that Samsung’s claims are without merit. We intend tovigorously defend against these claims and as a result, we have concluded that the likelihood of a material charge resulting from this claim is remote. In theevent Samsung were to prevail in the arbitration in advance of the conclusion of the appeal with the Korea Administrative Court, we could be required tomake a payment to Samsung even though it would later be reimbursed should we prevail in the appeal.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 15 to the consolidated financial statements.Immersion Corporation vs. Samsung (China) Investment Co., Ltd., Huizhou Samsung Electronics Co., Ltd and Fujian Province Min Xin HouseholdElectrical Appliances Technology Service Co., Ltd. (Fuzhou Intellectual Property Court - Case: Min 01 Min Chu No. 342 (2018))28Table of ContentsOn March 8, 2018, we filed a complaint against Samsung (China) Investment Co., Ltd. (“Samsung China”), Huizhou Samsung Electronics Co., Ltd.(“Samsung Huizhou”) (together with Samsung China, “Samsung”), and Fujian Province Min Xin Household Electrical Appliances Technology Service Co.,Ltd. in the Fuzhou Intermediate Court in Fuzhou, China alleging that certain Samsung touchscreen phones, including the Galaxy S8, S8+, and Note8,infringe three Immersion Chinese patents. The three patents at issue, covering haptic feedback systems and methods in electronic devices, are Chinese PatentNo. ZL02821854.X, entitled “Method and Apparatus for Providing Tactile Feedback Sensations”; Chinese Patent No. ZL201210005785.2, entitled “Methodand Apparatus for Providing Tactile Feedback Sensations”; and Chinese Patent No. ZL201310253562.2, entitled “Method and Apparatus for ProvidingTactile Feedback Sensations.” Immersion’s complaint seeks to stop defendants from using patented methods during manufacturing; to stop defendants frommanufacturing, offering to sell, selling, or jointly selling infringing products; as well as the recovery of damages. The Fuzhou Intellectual Property Courtaccepted the case on March 8, 2018. Samsung China filed a jurisdictional objection on April 10, 2018 in which it asked the court to move the case toBeijing IP court. Samsung Huizhou filed a jurisdictional objection on April 10, 2018 in which it asked the court to move the case to Guangzhou IP court. OnMay 8, 2018, the court rejected both jurisdictional objections. Samsung Huizhou and Samsung China appealed and the pretrial conference originallyscheduled for June 14-15, 2018 was postponed pending a ruling from the Fujian High Court. On September 20, 2018 the Fujian High Court rejected thejurisdictional objection appeals. Samsung China and Samsung Huizhou filed Petitions for Invalidation on April 16, 2018 with the Chinese Patent Office(“SIPO”) for all three patents. Samsung China and Samsung Huizhou supplemented their petitions in May, and we responded on June 1, 2018. A hearing onthe petition for Chinese Patent No. ZL02821854.X occurred on July 18, 2018. Hearings on the petitions for Chinese Patent No. ZL201210005785.2 andChinese Patent No. ZL201310253562.2 occurred on September 28, 2018. Trial was originally scheduled for November 12, and 14, 2018; the FuzhouIntellectual Property Court granted Immersion's request to postpone trial but did not set revised dates. The Company and Samsung each submitted evidencefor use at trial on or before October 26, 2018. The Patent Reexamination Board of SIPO issued invalidation decisions against Chinese Patent No.ZL02821854.X on November 21, 2018, against Chinese Patent No. ZL201310253562.2 on November 14, 2018, and against Chinese Patent No.ZL201210005785.2 on November 15, 2018, declaring all three Chinese patents invalid. The Company filed an application to withdraw its complaint fromthe Fuzhou Intermediate Court on December 10, 2018, and received the ruling that allows Immersion to withdraw the case from the Fuzhou IntermediateCourt on December 29, 2018. The Company intends to appeal the invalidation decisions, and pre-registered the appeals against the invalidation decisionswith the Beijing IP Court on February 14, 2019. Based on the pre-registration, the Company will have three months to further prepare the notarization andlegalization for the procedural documents, and then officially file the appeals before May 14, 2019 with the Beijing IP Court.Immersion Corporation vs. Samsung Electronics GmbHOn February 25, 2019, we filed a patent infringement lawsuit against Samsung Electronics GmbH in Mannheim District Court in Germany alleging thatcertain Samsung touchscreen phones infringe German Patent 602008058897.1 (EP Patent 2463752), a counterpart of U.S. Patent No. 8,619,051, “HapticFeedback System with Stored Effects,” which patent is being asserted against Samsung Electronics America, Inc. and Samsung Electronics Co., Ltd. and waspreviously asserted against Apple, Inc. In the complaint, we are seeking injunctive relief, a claim for accounting, declaratory judgment on liability fordamages and additional remedies such as destruction and costs.Item 4. Mine Safety DisclosuresNot applicable.29Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information, Holders of Record and DividendsOur common stock is traded on the Nasdaq Global Market under the symbol “IMMR.”As of February 20, 2019, there were 72 holders of record of our common stock.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. Each Right entitles the holder to purchasefrom the Company one one-thousandth of a share of our Series B Junior Participating Preferred Stock at a price of $30.00, subject to certain adjustments. Noshares were issued in connection with this Right, and the Rights expired on December 26, 2018.We do not anticipate paying cash dividends in the foreseeable future.Unregistered Sales of SecuritiesDuring the period covered by this Annual Report on Form 10-K, we have not sold any equity securities that were not registered under the Securities Actof 1933, as amended.Purchases of Equity SecuritiesDuring the year ended December 31, 2018, there were no purchases of our common stock by or on behalf of us or any of our affiliated purchasers, as suchterm is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended.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, 2013 andending on December 31, 2018, 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.30Table of Contents December 31, 2013 2014 2015 2016 2017 2018Immersion Corporation$100 $91 $112 $102 $68 $86NASDAQ Composite100 115 123 133 172 166RDG Technology Composite100 118 122 138 189 190Securities Authorized for Issuance under Equity Compensation PlansThe information concerning our equity compensation plans is incorporated by reference herein to Note 7 to our consolidated financial statements.31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, 2018, 2017, and 2016 and theconsolidated balance sheet data as of December 31, 2018 and 2017 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, 2015 and2014 and the consolidated balance sheet data as of December 31, 2016, 2015 and 2014 are derived from our audited consolidated financial statements whichare not included in this Annual Report on Form 10-K. Effective January 1, 2018, we adopted ASC 606 using the modified retrospective transaction method.As a result, adjustments were recorded to certain line items on our financial statements as of January 1, 2018, and the financial data as of and for the yearended December 31, 2018 presented in the tables below were prepared in accordance with ASC 606. The financial data for the other years in the tables below(other than 2018) were as originally reported under the previous revenue standard ASC 605. The adoption had a material impact on our reported revenuerecognition for which disclosure has been made within Note 2 of the consolidated financial statements included in this Annual Report on Form 10-K.32Table of Contents Years Ended December 31, 2018 2017 2016 2015 2014 (in thousands, except per share data)CONSOLIDATED STATEMENTS OF OPERATIONS DATA:Revenues$110,979 $35,013 $57,086 $63,393 $52,937Costs and expenses57,878 80,435 72,349 58,674 46,970Operating income (loss)53,101 (45,422) (15,263) 4,719 5,967Income tax provision from continuing operations(392) (480) (25,521) (1,591) (2,196)Income (loss) from continuing operations54,343 (45,291) (40,030) 2,858 4,123Income from discontinued operations— — 649 — —Net income (loss)54,343 (45,291) (39,381) 2,858 4,123Basic net income (loss) per share: Continuing operations$1.78 $(1.55) $(1.39) $0.10 $0.15Discontinued operations— — 0.02 — —Total$1.78 $(1.55) $(1.37) $0.10 $0.15Shares used in calculating basic net income (loss) pershare30,459 29,179 28,759 28,097 28,246Diluted net income (loss) per share: Continuing operations$1.73 $(1.55) $(1.39) $0.10 $0.14Discontinued operations— — 0.02 — —Total$1.73 $(1.55) $(1.37) $0.10 $0.14Shares used in calculating diluted net income (loss) pershare31,407 29,179 28,759 29,015 29,144 As of December 31, 2018 2017 2016 2015 2014 (in thousands)CONSOLIDATED BALANCE SHEET DATA:Cash, cash equivalents, and short-term investments$124,918 $46,538 $89,772 $64,931 $57,361Working capital120,480 28,980 73,008 53,749 58,025Total assets145,995 51,975 103,767 105,415 97,521Total stockholders’ equity99,660 9,657 55,340 86,615 76,60333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 U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates and assumptions, including those related to revenue recognition, stock-based compensation, short-term investments, patents andintangible assets, income taxes, contingencies, and litigation. We base our estimates and assumptions on historical experience and on various other factorsthat we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.We believe the following are our most critical accounting policies as they require our significant judgments and estimates in the preparation of ourconsolidated financial statements:Revenue RecognitionOur revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenue earned fromdevelopment, services and other revenue. On January 1, 2018, we adopted ASC 606 using the modified retrospective transition method. The new revenuestandard has been applied to all contracts that were not completed as of the date of adoption. Although all of our revenues in the periods presented have beenderived from contracts with customers, revenues for the year ended December 31, 2018 have been recognized in accordance with ASC 606 while revenues forthe other periods presented have been recognized under the previous revenue standard ASC 605.Fixed fee license revenueIn applying ASC 606, we are required to recognize revenue from a fixed fee license agreement when we have satisfied our performance obligations,which typically occurs upon the transfer of rights to our technology upon the execution of the license agreement. However, in certain contracts, we grant alicense to our existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolves throughout the contract term.For such arrangements, we have concluded that it has two separate performance obligations:•Performance Obligation A: to transfer rights to our patent portfolio as it exists when the contract is executed;•Performance Obligation B: to transfer rights to our patent portfolio as it evolves over the term of the contract, including access to new patentapplications that the licensee can benefit from over the term of the contract.Under our previous accounting practices under ASC 605, fixed license fees were generally recognized on a straight-line basis over the contract term. As aresult of the adoption of ASC 606, if a fixed fee license agreement contains only Performance Obligation A, we will recognize most or all of the revenue fromthe agreement at the inception of the contract. For fixed fee license agreements that contain both Performance Obligation A and B, we will be required toallocate the transaction price based on the standalone price for each of the two performance obligations. We have developed a process, and establishedinternal controls around such process, to estimate standalone prices related to Performance Obligation A and B using a number of factors primarily related tothe attributes of our patent portfolio. Once the transaction price is allocated, the portion of the transaction price allocable to Performance Obligation A will berecognized in the quarter the license agreement is signed and the customer can benefit from rights provided in the contract, and the portion allocable toPerformance Obligation B will be recognized on a straight-line basis over the contract term. For such contracts, a contract liability account will be establishedand34Table of Contentsincluded within "deferred revenue" on the consolidated balance sheet. As the rights and obligations in a contract are interdependent, contract assets andcontract liabilities that arise in the same contract have been presented on a net basis.Historically, certain of our license agreements contained fixed fees related to past infringements for which the fixed fees were recognized as revenue orrecorded as a deduction to its operating expense in the quarter the license agreement was signed. After the adoption of ASC 606, we will recognize revenuefrom such fixed fees related to past infringements in the same manner in the quarter the license agreement is signed.Payments for fixed fee license contracts typically are due in full within 30 to 45 days from execution of the contract. From time to time, we enter into afixed fee license contract with payments due in a number of installments payable throughout the contract term. In such cases, we will determine if asignificant financing component exists and if it does, we will recognize more or less revenue and corresponding interest expense or income, as appropriate.Per-unit Royalty revenueUnder our previous accounting practices under ASC 605, we recognized revenue from per-unit royalty agreements in the period in which the relatedroyalty report was received from our licensees, generally one quarter in arrears from the period in which the underlying sales occurred (i.e. on a "quarter-lag").ASC 606 requires an entity to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. As we generally do notreceive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows us to adequately review the reports and includethe actual amounts in our quarterly results for such quarter, we accrue the related revenue based on estimates of our licensees’ underlying sales, subject tocertain constraints on our ability to estimate such amounts. Our estimates are developed based on a combination of available data including, but not limitedto, approved customer forecasts, a lookback at historical royalty reporting for each of its customers, and industry information available for the licensedproducts.As a result of accruing per-unit royalty revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true uprevenue to the actual amounts reported by its licensees. The true-ups represent the difference between per-unit royalty based on actual sales reported by ourlicensees in a quarter-lag, and the estimate of per-unit royalty that was reported in the same quarter the underlying sales occurred.Certain of our per-unit royalty agreements contains a minimum royalty provision which sets forth minimum amounts to be received by us during thecontract term. Per our previous accounting policy under ASC 605, such minimum royalties were recognized as revenue at the end of each reporting period(usually a calendar year) if the actual royalties reported by the customer for that reporting period were below the minimum threshold set forth in the contract.Under ASC 606, minimum royalties are considered a fixed transaction price to which we will have an unconditional right once all other performanceobligations are satisfied. Therefore, we recognize all minimum royalties as revenue at the inception of the license agreement, or in the period in which allremaining revenue recognition criteria have been met. We will establish contract assets for the unbilled minimum royalties on a contract basis. Such contractasset balance will be reduced by the actual royalties reported by the licensee during the contract term until fully utilized, after which point any excess per-unit royalties reported will be recognized as revenue. As the rights and obligations in a contract are interdependent, contract assets and contract liabilitiesthat arise in the same contract have been presented on a net basis.Payments of per-unit royalties typically are due within 30 to 60 days from the end of the calendar quarter in which the underlying sales took place.Development, services, and other revenueWith little change from our previous accounting practices related to development, service and other revenue, we will continue to recognize revenue fromthis stream when we have satisfied service obligations. Consistent with our previous accounting practices under ASC 605, the performance obligation relatedto our development, service and other revenue is satisfied over a period of time, and such revenue is recognized evenly over the period of performanceobligation, which is generally consistent with the contractual term.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-option approach todetermine the fair value of standard stock options and Employee Stock Purchase Plan (“ESPP”) shares. All share-based payment awards are amortized on astraight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized atfair value includes the impact of estimated forfeitures. We estimate future forfeitures at the date of grant and revise the estimates if necessary, in subsequentperiods if actual35Table of Contentsforfeitures differ from these estimates. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing modelis affected by our stock price as well as other business assumptions. These variables include actual and projected employee stock option exercise behaviorsthat impact the expected term, our expected stock price volatility over the term of the awards, 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.If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use adifferent valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect ouroperating results.See Note 7 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 U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Certain portions of our foreign earnings for thecurrent fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the United States, we provide for U.S.income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. 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 Global Intangible Low-Taxed Income ("GILTI") tax or as a result of our indefinite reinvestment assertion. Indefinite reinvestment is determined bymanagement’s judgment about and intentions concerning 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. Forexample, in November 2018, Ireland and Malta reached a Competent Authority Agreement ("Agreement") expected to take effect in 2019. This Agreementand other potential changes could adversely affect our effective tax rates or result in other costs to us.36Table of ContentsSee Note 11 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 our application.Results of OperationsOverview of 2018Total revenues for 2018 were $111.0 million, an increase of $76.0 million, or 217%, versus 2017. The increase was primarily driven by the $71.0 millionincrease in fixed fee license revenue and the $5.5 million increase in per-unit royalty revenue.Net income for 2018 was $54.3 million as compared to a net loss of $45.3 million for 2017. The $99.6 million change was mainly related to the $76.0million increase in total revenues and the $22.6 million decrease in operating expenses for 2018 compared to 2017.As discussed above, we adopted the new revenue standard, ASC 606, effective January 1, 2018. Consistent with the modified retrospective transactionmethod, our results of operations for periods prior to the adoption of ASC 606 remain unchanged. As a result, the change in total revenues from 2017 to 2018included a component of accounting policy change arising from the adoption of ASC 606. For 2018, the impact of the adoption included $68.1 millionrelated to fixed fee license agreements and $8.5 million related to per-unit royalty agreements which would not have been reported as revenue under theprevious revenue standard. For a further discussion about the impact of the adoption, see Note 2 to the consolidated financial statements included in thisAnnual Report on Form 10-K.In 2019, we expect royalty and license revenue, mainly from our 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. However, we expect thetiming and structure of new license agreements may cause a decrease in our 2019 mobility revenue compared to 2018. Our gaming royalty and licenserevenue could be adversely impacted in 2019 by the expiration of several gaming patents in 2015. Revenue from certain contracts may also decrease due totiming and uncertainty associated with their renewals. IP litigation may continue to cause us to expend significant financial resources in the future and mayhave an adverse effect on the results of our operations. Additionally, our success could be limited by various factors, including global economic conditions,foreign currency exchange rates, the timely release of our new products and our licensees’ products, continued market acceptance of our products andtechnology, and the introduction of new products by existing or new competitors and adverse rulings affecting our patents. For a further discussion of theseand 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:37Table of Contents Years Ended December 31, 2018 2017 2016 (as a percentage of total revenues)Revenues: Fixed fee license revenue75.3 % 36.0 % 53.3 %Per-unit royalty revenue24.3 61.4 44.9Total royalty and license revenue99.6 97.4 98.2Development, services, and other0.4 2.6 1.8Total revenues100.0 100.0 100.0Costs and expenses: Cost of revenues0.2 0.6 0.3Sales and marketing5.5 38.6 25.6Research and development8.8 33.6 23.5General and administrative37.7 152.4 77.3Restructuring costs— 4.6 —Total costs and expenses52.2 229.8 126.7Operating income (loss)47.8 (129.8) (26.7)Interest and other income1.7 1.0 1.4Other expense(0.2) 0.9 (0.1)Income (loss) from continuing operations before provision for income taxes49.3 (127.9) (25.4)Provision for income taxes from continuing operations(0.4) (1.4) (44.7)Income (loss) from continuing operations48.9 (129.3) (70.1)Income from discontinued operations, net of tax— — 1.1Net income (loss)48.9 % (129.3)% (69.0)%Revenues 2018 $ Change % Change 2017 $ Change % Change 2016 (dollars in thousands)Fixed fee license revenue$83,573 $70,998 565 % $12,575 $(17,814) (59)% $30,389Per-Unit royalty revenue$26,984 $5,470 25 % $21,514 $(4,127) (16)% $25,641Total royalty and license revenue$110,557 $76,468 224 % $34,089 $(21,941) (39)% $56,030Development, services, and other422 (502) (54)% 924 (132) (13)% 1,056Total revenues$110,979 $75,966 217 % $35,013 $(22,073) (39)% $57,0862018 Compared to 2017Presented in the table below is disclosure of the impact of adoption of ASC 606 on our revenues for 2018 in accordance with ASC 606 compared to2017. We believe that this additional information is vital during the transition year to allow readers of our financial statements to compare revenues for 2018to 2017 given the use of the modified retrospective method of adoption. For a further discussion about the impact of the adoption, see Note 2 to theconsolidated financial statements included in this Annual Report on Form 10-K.38Table of Contents 2018 2017 $Change % Change Change due toASC 606Adoption OtherOperationalChanges Total Change (dollars in thousands)Fixed fee license revenue $83,573 $12,575 $70,998 565 % $68,094 $2,904 $70,998Per-unit royalty revenue 26,984 21,514 5,470 25 % 8,482 (3,012) 5,470Total royalty and licenserevenue 110,557 34,089 76,468 224 % 76,576 (108) 76,468Development, services, andother 422 924 (502) (54)% — (502) (502)Total revenues $110,979 $35,013 $75,966 217 % $76,576 $(610) $75,966Royalty and license revenue - Royalty and license revenue is composed of per unit royalties earned based on usage or net sales by licensees and fixedpayment license fees charged for our IP and software. Royalty and license revenue for the year ended December 31, 2018 increased by $76.5 million, or224%, compared to $34.1 million for the year ended December 31, 2017. Excluding the impact of adoption of ASC 606, royalty and license revenue for theyear ended December 31, 2018 would be $108,000 lower than the reported royalty and license revenue for the year ended December 31, 2017.Per-unit royalty revenue increased by $5.5 million, or 25%, from $21.5 million for the year ended December 31, 2017 to $27.0 million for the year endedDecember 31, 2018. Per-unit royalty revenue for the year ended December 31, 2018 would be $3.0 million lower, if reported under ASC 605, than per-unitroyalty revenue for the year ended December 31, 2017. The $8.5 million change due to ASC 606 adoption was primarily related to minimum royaltiesrecognized as revenue at the inception of certain license agreements entered into in 2018 that contain minimum royalty provision. Under ASC 606, minimumroyalties are considered a fixed transaction price that we will have an unconditional right once all other performance obligations, if any, are satisfied. Per ourprevious accounting policy under ASC 605, such minimum royalties were recognized as revenue at the end of each reporting period (usually a calendar year)if the actual royalties reported by the customer for that reporting period were below the minimum threshold set forth in the contract.Fixed fee license revenue increased $71.0 million, or 565%, from $12.6 million for the year ended December 31, 2017 to $83.6 million for the yearended December 31, 2018. Excluding the impact of adoption of ASC 606, fixed fee license revenue for the year ended December 31, 2018 would be $2.9million higher than fixed fee license revenue for the year ended December 31, 2017 resulting from new customer contracts entered into in 2018.We expect royalty and license revenue to continue to be a major component of our future revenue as our technology is included in products and wesucceed in our efforts to monetize our IP. Our fixed fee license revenue could fluctuate depending upon the timing of execution of new fixed license feearrangements under ASC 606. We also anticipate that our royalty revenue will fluctuate relative to our customers unit shipments. We historically experiencedseasonally higher royalty revenue from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter compared toother calendar quarters. Due to the elimination of the one-quarter lag in reporting royalty income, we now expect to experience this seasonal impact in thefourth calendar quarter. We anticipate a continuous reduction in royalty and license revenue in the future from our medical customers as a percentage of ourconsolidated royalty and license revenue, as this line of business is a less significant portion of our market focus. Refer to Note 1 and Note 2 to theconsolidated financial statements for our revised revenue recognition policies and the impact of the adoption of ASC 606.Development, services and other revenue - Development, services, and other revenue for the year ended December 31, 2018 decreased by $502,000, or54%, compared to $924,000 for the year ended December 31, 2017, primarily due to certain non-recurring service fees from customer contracts completed in2017. As discussed in Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K, the adoption of ASC 606 has littleimpact on the way we recognize development, service and other revenue. Consistent with our previous accounting practices under ASC 605, the performanceobligation related to our development, service and other revenue is satisfied over a period of time, and such revenue is recognized evenly over the period ofperformance obligation, which is generally consistent with the contractual term.Geographically, revenues generated in North America, Asia, and Europe for the year ended December 31, 2018 represented 77%, 12%, and 11%,respectively, of our total revenue as compared to 22%, 63%, and 15%, respectively, for the year ended December 31, 2017. The increase in revenueattributable to North America as a percentage of total revenue was primarily driven by increased revenues from mobility customers, including Apple, partiallyoffset by decreased revenues from gaming and automotive customers in North America. The decrease in revenue attributable to Asia as a percentage of totalrevenue was caused by declining revenues from mobility, gaming and automotive customers in the region. Revenue attributable to Europe as a percentage oftotal revenue for 2018 remained flat compared to 2017.39Table of Contents2017 Compared to 2016Royalty and license revenue — Royalty and license revenue for 2017 was $34.1 million, a decrease of $21.9 million, or 39%, compared to $56 millionfor 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.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.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 2016.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.Development, services, and other revenue — Development, services, and other revenue for 2017 decreased by $132,000, or 13%, versus 2016, mainlydue to a non-recurring service fees from contracts completed in the prior year.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 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.Expenses2018 $ Change % Change 2017 $ Change % Change 2016 (dollars in thousands)Sales and marketing$6,118 $(7,398) (55)% $13,516 $(1,097) (8)% $14,613Research and development9,727 (2,032) (17)% 11,759 (1,629) (12)% 13,388General and administrative41,815 (11,528) (22)% 53,343 9,192 21 % 44,151Restructuring Costs— (1,620) (100)% 1,620 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 $7.4 million, or 55%, for 2018 as compared to 2017 primarily due to decreases of $5.1 million in compensation, benefits, and other related costs,$924,000 in marketing and advertising costs, and $785,000 in travel costs. The decreases in compensation, benefits, and other related costs as well as travelcosts were primarily40Table of Contentsdue to reduced headcount following our restructuring actions in December 2017. We believe that continued investment in sales and marketing is critical toour future success, and we expect to continue making targeted investments to expand market acceptance for our touch technologies across the markets weserve.Sales and marketing expenses decreased $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, partially offset 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 lower bonus and commissions due to lower revenue achievements andreduced headcount in 2017 as compared to 2016. The decrease of $462,000 in consulting and outside services was mainly related to our reduced spending onthe content and media business.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 $2.0 million, or 17%, during 2018 as compared to 2017.The decrease was primarily related to decreases of $673,000 in compensation, benefits, and other related costs and $252,000 in travel cost as a result ofreduced headcount following our restructuring actions in December 2017. In addition, outside services expense for research and development decreased$736,000 reflecting our redirected development efforts. We believe that continued investment in research and development is critical to our future success,and we expect to continue making targeted investments in areas of research and technology development to support future growth in key markets.Research and development expenses decreased by $1.6 million, or 12%, during 2017 as compared to 2016. The decrease was primarily due to a $1.9million decrease in compensation, benefits, and other related costs resulted from decreased headcount, partially offset by a $648,000 increase in outsideservices 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 2018 decreased$11.5 million, or 22%, as compared to 2017 primarily due to a $12.7 million decrease in legal expense, partially offset by a $1.3 million increase incompensation, benefits, and other related costs mainly caused by higher stock compensation expense. The decrease in legal expenses was primarily due to$15.2 million decrease in litigation expense as we settled and concluded litigation against Apple and AT&T Mobility and Fitbit in 2018, partially offset by a$2.2 million increase in patent related legal, filing, and maintenance 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 millionincrease in legal expense, a $757,000 increase in compensation, benefits, and other related costs primarily caused by severance accruals and stockcompensation expense that we recorded in the fourth quarter of 2017 in connection with the departure of the former CEO, and a $340,000 increase inprofessional and outside services. The increase in legal expense was primarily driven by an $8.1 million increase in litigation expense relating to ongoinglitigations including our recently settled and concluded litigation with Apple and AT&T Mobility, a $966,000 increase in patent related legal, filing, andmaintenance costs, and an $884,000 increase in general legal services, partially offset by a $2.4 million decrease in license fee expenses.Interest and Other Income, Other Expense 2018 $ Change % Change 2017 $ Change % Change 2016 (dollars in thousands)Interest and other income$1,832 $1,495 444 % $337 $(480) (59)% $817Other income (expense)$(198) $(472) (172)% $274 $337 (535)% $(63)Interest and Other Income - Interest and other income consists primarily of interest income from cash and cash equivalents and short-term investments,interest on notes receivable, translation exchange rate gains and other income. Interest and other income increased $1.5 million primarily driven by higherinvestment income earned during the year ended December 31, 2018 compared to the year ended December 31, 2017. Interest and other income decreased in2017 compared to 2016 primarily due to a non-recurring other income of $550,000 received in the third quarter of 2016.Other Income (Expense) - Other income (expense) consist primarily of translation gain (loss) from exchange rate fluctuations. We recorded $198,000other expense for 2018 as a result of exchange rate losses from our foreign subsidiaries, compared to $274,000 other income for 2017 and $63,000 otherexpense for 2016.41Table of ContentsProvision for Income Taxes from Continuing Operations 2018 $ Change % Change 2017 $ Change % Change 2016 (dollars in thousands)Provision for income taxes fromcontinuing operations$(392) $88 (18)% $(480) $25,041 (98)% $(25,521)Income (loss) from continuingoperations before provision forincome taxes54,735 (44,811) (14,509)Effective tax rate0.7% (1.1)% (175.9)%For 2018, we recorded a provision for income taxes from continuing operations of $392,000 yielding an effective tax rate of 0.7%. The 2018 provisionreflects estimated foreign taxes and foreign withholding tax expense. Based upon our assessment as of December 31, 2018 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. As ofDecember 31, 2018, the aggregating balance of our deferred tax assets totaled $24.7 million with a valuation allowance of $24.4 million, resulting in a netdeferred tax asset balance of $295,000.On December 22, 2017, the Tax Act was passed into law. Among other changes, the Tax Act reduces the US federal corporate income tax rate from 35%to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxeson certain foreign sourced earnings. In addition, the Act introduced the Base Erosion and Anti-Abuse Tax (the “BEAT”), which creates a new tax on certainrelated-party payments. Some provisions of the Tax Act began to impact us in 2017, while other provisions impact us beginning in 2018.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the federal taxrate change and other tax effects of the Tax Act. SAB 118 provided 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 connection with our adoption of the Tax Act and inconsideration of SAB 118, the following updates have been made to our income tax provision. In the fourth quarter of 2017, we recorded a $12.9 millionreduction to deferred tax assets and related valuation allowance in connection with the re-measurement of certain deferred tax assets and liabilities, resultingin no impact to our results of operations. We estimated that no current tax expense should be recorded in connection with the transition tax on the mandatorydeemed repatriation of foreign earnings, a provisional estimate at December 31, 2017. We completed our analysis of the impacts of the Tax Act in the fourthquarter of 2018 and determined there were no significant adjustments to the provisional tax amounts recorded in the fourth quarter of 2017.For the GILTI provisions of the Tax Act, we completed our assessment during the fourth quarter of 2018 and, effective January 1, 2018, elected anaccounting policy to record GILTI as period costs if and when incurred. Additionally, we concluded that we have not met the threshold requirements of theBEAT. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of topics,is expected to be issued. In accordance with ASC 740, we will recognize any effects of the guidance in the period that such guidance is issued.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. We continued to maintain a full valuation allowance against our state and certain of ourforeign net deferred tax assets. As of December 31, 2017, the aggregating balance of our deferred tax assets, after recording the impact of the tax rate changedescribed above, totaled $38.1 million with a valuation allowance of $37.7 million, resulting in a net deferred tax asset balance of $401,000.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.Prior to the year ended December 31, 2016, we maintained a valuation allowance only against certain of our U.S. federal and foreign deferred tax assetsas we concluded that it was more likely than not that certain of these U.S. federal deferred tax assets would be utilized. We also determined that a valuationallowance was needed against our state and certain other foreign deferred tax assets as there was not sufficient evidence to support the release of the valuationallowance 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 taxasset42Table of Contentsbalance 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 cash taxpayments when taxable income is reported.We also maintain liabilities for uncertain tax positions. As of December 31, 2018, we had unrecognized tax benefits under ASC 740 of approximately$4.6 million, which includes the impact of the change in tax rates described above which was recorded in 2017, and there was no applicable interest. Thetotal amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $97,000. We released reserves totaling $310,000 in 2016including interest and recorded a tax benefit due to the receipt of a tax refund related to the settlement with a taxing authority.Discontinued OperationsIncome from discontinued operations, net of taxes, was zero for the year ended December 31, 2018 and 2017, compared to $649,000 in the year endedDecember 31, 2016 which amount represents the final payment, net of tax, received from the sales of the 3D product line that occurred in the year endedDecember 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, 2018, our cash, cash equivalents, and short-term investments totaled $124.9 million, an increase of $78.4 million from $46.5 millionon December 31, 2017.Cash provided by (used in) operating activities - Net cash provided by operating activities was $69.9 million during 2018 compared to $43.8 millioncash used in operating activities during 2017. The $113.8 million change was primarily driven by $99.6 million increase from $45.3 million net loss for 2017to $54.3 million net income for 2018 and $27.0 million increase in the year-over-year change in deferred revenue, partially offset by $7.0 million increase inthe year-over-year change in other non-current assets, $4.2 million increase in the year-over-year changes in prepaid expenses and other current assets, and$3.7 million decrease in the year-over-year change in accounts payable. The increases in the year-over-year changes in deferred revenue and other non-current assets primarily reflected the effect of the adoption of ASC 606 on January 1, 2018. Cash provided by operating activities was also affected by anincrease in non-cash charges of $2.6 million primarily related to higher stock-based compensation expense incurred for 2018 compared to 2017.Cash provided by investing activities — Net cash provided by investing activities during 2018 was $8.2 million, a decrease of $2.9 million compared to$11.1 million cash provided by investing activities during 2017. Net cash provided by investing activities during 2018 consisted of maturities of short-terminvestments of $26.0 million. This was partially offset by purchases of short-term investments of $17.7 million and purchases of property, plant andequipment of $74,000. Net cash provided by investing activities during 2017 consisted of maturities of short-term investments of $35.0 million. This waspartially offset by purchases of short-term investments of $23.8 million and purchases of property, plant, and equipment of $125,000.Cash provided by financing activities — Net cash provided by financing activities during 2018 was $8.2 million, an increase of $7.7 million comparedto $0.5 million net cash provided by financing activities during 2017. Net cash provided by financing activities during 2018 consisted primarily of exercisesof stock options of $8.0 million and the issuance of common stock under the ESPP of $218,000. Net cash provided by financing activities during 2017consisted primarily of exercises of stock options of $518,000 and the issuance of common stock under the ESPP of $328,000, partially offset by repurchasesof treasury stock of $328,000.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 $124.9 million as of December 31, 2018, 9% 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, 2018 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.”43Table of ContentsSummary 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, 2018 (in thousands):Contractual ObligationsTotal Less Than1 Year 1-3 Years 3-5 Years More Than5 YearsOperating Leases$4,780 $1,168 $3,139 $473 $—At December 31, 2018, we had a liability for unrecognized tax benefits totaling $4.6 million including interest of $18,000, none of which could bepayable in cash. We did not have any other significant non-cancellable purchase commitments as of December 31, 2018.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 $95.4 million as of December 31, 2018, 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 $28,000 in the fair value of our cashequivalents and short-term investments as of December 31, 2018.We 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 rate risk.Foreign Currency Exchange Rates — A substantial majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars.However, we do incur certain operating costs for our foreign operations in other currencies, but these operations are limited in scope and thus we are 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.44Table of ContentsItem 8. Financial Statements and Supplementary DataIMMERSION CORPORATIONINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm46Consolidated Balance Sheets as of December 31, 2018 and 201747Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017, and 201648Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017, and 201649Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 201650Notes to Consolidated Financial Statements5145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, 2018and 2017, 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, 2018, 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, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019, expressed an unqualified opinion on theCompany’s internal control over financial reporting.Change in Accounting PrinciplesAs discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers duringthe year ended December 31, 2018 due to the adoption of the new revenue standard (Accounting Standard Codification No. 606 “Revenue from Contractswith Customers”). The Company adopted the new revenue standard using the modified retrospective approach effective January 1, 2018.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, 2019We have served as the Company's auditor since 1997.46Table of ContentsIMMERSION CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands, except number of shares and per share amounts) December 31, 2018 2017ASSETSCurrent assets: Cash and cash equivalents$110,988 $24,622Short-term investments13,930 21,916Accounts and other receivables1,051 806Prepaid expenses and other current assets9,856 736Total current assets135,825 48,080Property and equipment, net2,343 3,150Deferred income tax assets295 401Other assets, net7,532 344Total assets$145,995 $51,975LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Accounts payable$3,612 $6,647Accrued compensation3,948 4,133Other current liabilities3,194 3,896Deferred revenue4,591 4,424Total current liabilities15,345 19,100Long-term deferred revenue30,203 22,303Other long-term liabilities787 915Total liabilities46,335 42,318Commitments and contingencies (Notes 14 and 15) Stockholders’ equity: Common stock and additional paid-in capital – $0.001 par value; 100,000,000 shares authorized; 37,652,498and 35,950,518 shares issued, respectively; 30,829,351 and 29,263,828 shares outstanding, respectively246,415 228,046Accumulated other comprehensive income116 99Accumulated deficit(98,521) (171,616)Treasury stock at cost: 6,823,147 and 6,686,690 shares, respectively(48,350) (46,872)Total stockholders’ equity99,660 9,657Total liabilities and stockholders’ equity$145,995 $51,975See notes to consolidated financial statements.47Table of ContentsIMMERSION CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(In thousands, except per share amounts) Years Ended December 31, 2018 2017 2016Revenues: Royalty and license$110,557 $34,089 $56,030Development, services, and other422 924 1,056Total revenues110,979 35,013 57,086Costs and expenses: Cost of revenues218 197 197Sales and marketing6,118 13,516 14,613Research and development9,727 11,759 13,388General and administrative41,815 53,343 44,151Restructuring costs— 1,620 —Total costs and expenses57,878 80,435 72,349Operating income (loss)53,101 (45,422) (15,263)Interest and other income1,832 337 817Other income (expense)(198) 274 (63)Income (loss) from continuing operations before provision for income taxes54,735 (44,811) (14,509)Provision for income taxes from continuing operations(392) (480) (25,521)Income (loss) from continuing operations54,343 (45,291) $(40,030)Income from discontinued operations, net of tax— — 649Net income (loss)$54,343 $(45,291) $(39,381)Basic net income (loss) per share: Continuing operations$1.78 $(1.55) $(1.39)Discontinued operations— — 0.02Total$1.78 $(1.55) $(1.37)Shares used in calculating basic net income (loss) per share30,459 29,179 28,759Diluted net income (loss) per share: Continuing operations$1.73 $(1.55) $(1.39)Discontinued operations— — 0.02Total$1.73 $(1.55) $(1.37)Shares used in calculating diluted net income (loss) per share31,407 29,179 28,759Other comprehensive income (loss), net of tax Change in unrealized gains (losses) on short-term investments17 (16) 8Foreign currency translation adjustments— — 21Total other comprehensive income (loss)17 (16) 29Total comprehensive income (loss)$54,360 $(45,307) $(39,352)See notes to consolidated financial statements.48Table of ContentsIMMERSION CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands, except number of shares) Common Stock andAdditional Paid-In Capital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit Treasury Stock TotalStockholders’Equity Shares Amount Shares Amount Balances at January 1, 201634,845,310 $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) $9,657Net income 54,343 54,343Unrealized gain (loss) on available-for-sale securities, net oftaxes 17 17Issuance of stock for ESPP purchase26,689 218 218Exercise of stock options, net of shares withheld for employeetaxes1,452,306 9,465 136,457 (1,478) 7,987Release of restricted stock units and awards, including relatedstock compensation222,985 2,806 2,806Stock based compensation for stock options 5,880 5,880Effect of change in accounting policy (2) 18,752 18,752Balances at December 31, 201837,652,498 $246,415 $116 $(98,521) 6,823,147 $(48,350) $99,660(1) Effect of early adoption of ASU 2016-16 "Income Taxes: Topic 740, Intra-Entity Transfers of Assets Other Than Inventory" at the beginning of the first quarter of 2017. See Note11 for detail disclosures.(2) Effect of adoption of ASC 606 effective January 1, 2018. See Note 2 for detail disclosures.See notes to consolidated financial statements.49Table of ContentsIMMERSION CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended December 31, 2018 2017 2016Cash flows provided by (used in) operating activities: Net income (loss)$54,343 $(45,291) $(39,381)Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: Depreciation and amortization of property and equipment855 968 910Stock-based compensation8,686 6,102 6,111Deferred income taxes109 (32) 24,274Loss on disposal of equipment26 1 19Income from discontinued operations— — (649)Changes in operating assets and liabilities: Accounts and other receivables(245) 576 (171)Prepaid income taxes— — 1,998Prepaid expenses and other current assets(4,015) 141 (86)Other assets(7,188) (197) (275)Accounts payable(3,035) 696 5,322Accrued compensation and other current liabilities(887) (1,111) 967Deferred revenue21,406 (5,575) 23,090Other long-term liabilities(131) (107) (87)Net cash provided by (used in) operating activities69,924 (43,829) 22,042Cash flows provided by investing activities: Purchases of short-term investments(17,693) (23,807) (32,813)Proceeds from maturities of short-term investments26,004 35,000 40,000Purchases of property and equipment(74) (125) (343)Proceeds from discontinued operations— — 1,000Net cash provided by investing activities8,237 11,068 7,844Cash flows provided by financing activities: Issuance of common stock under employee stock purchase plan218 328 307Exercise of stock options, net of shares withheld for employee taxes7,987 518 2,388Purchases of treasury stock— (328) (729)Net cash provided by financing activities8,205 518 1,966Net increase (decrease) in cash and cash equivalents86,366 (32,243) 31,852Cash and cash equivalents: Beginning of year24,622 56,865 25,013End of year$110,988 $24,622 $56,865Supplemental disclosure of cash flow information: Cash paid for taxes$151 $191 $(419)Supplemental disclosure of noncash operating, investing, and financing activities: Amounts accrued for property and equipment$— $— $22Cashless option exercise under company stock plan$1,478 $— $177Release of Restricted Stock Units and Awards under company stock plan$2,806 $2,661 $2,257See notes to consolidated financial statements.50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 business model under which it provides advanced tactile software,related tools, and technical assistance designed to help integrate its patented technology into its customers’ products or enhance the functionality of itspatented technology to certain customers; and offers licenses to the Company's patented technology to other customers.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 with U.S.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 the accumulated other comprehensive income within stockholders’ equity.The Company recognizes an impairment charge in the consolidated statement of operations and comprehensive income (loss) when a decline in value isjudged to be other than temporary based on the specific identification method. Other-than-temporary impairment charges may exist when the Company hasthe intent to sell the security, will more likely than not be required to sell the security, or does not expect to recover the principal.Property and 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 RecognitionIn May 2014, the FASB issued an Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers (Topic 606)" ("AccountingStandard Codification 606", "ASC 606"), which superseded most prior revenue recognition guidance under ASC Topic 605, "Revenue Recognition" ("ASC605") including industry-specific guidance. The underlying principle of ASC 606 is that an entity will recognize revenue to depict the transfer of promisedgoods or services to customers at an amount that the entity expects to be entitled in exchange for those goods or services. The new standard51Table of Contentsprovides a five-step analysis of transactions to determine when and how revenue is recognized, and shall be applied retrospectively to each period presentedor as a cumulative-effect adjustment as of the date of adoption if the modified retrospective transition method is elected. The new standard also requiresenhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.The Company adopted the new revenue standard effective January 1, 2018 using the modified retrospective transition method where the cumulativeeffect of the initial application is recognized as an adjustment to the opening balance of the accumulated deficit at January 1, 2018, the date of adoption.Therefore, comparative prior periods have not been adjusted and continue to be presented under ASC 605. Refer to Note 2 to the consolidated financialstatements for the Company's revised revenue recognition accounting policy and a summary of the impact of adoption of ASC 606.Deferred RevenueDeferred revenue consists of amounts that have been invoiced or paid, but have not been recognized as revenue. The amounts are primarily derived fromthe Company's fixed license fee agreements under which the Company is obliged to transfer both rights to its patent portfolio that exists when the contract isexecuted ("Performance Obligation A"), and rights to its patent portfolio as it evolves over the contract term ("Performance Obligation B"). Refer to Note 2 tothe consolidated financial statements for detail discussion.Deferred revenue that will be recognizable during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recordedas 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 (in thousands): Year ended December 31, 2018 2017 2016Advertising expense$67 $221 $102Research 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 7 for further information regarding the Company’s stock-based compensationassumptions and expenses.Comprehensive Income (Loss)Comprehensive income (loss) includes net income (loss) as well as other items of comprehensive income (loss). The Company’s other comprehensiveincome (loss) consists of foreign currency translation adjustments and unrealized gains (losses) on short term investments, net of tax.Use of Estimates52Table of ContentsThe preparation of consolidated financial statements and related disclosures in accordance with U.S. GAAP and pursuant to the rules and regulations ofthe Securities and Exchange Commission ("SEC") requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities 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, and revenue recognition.Actual results may differ materially from those estimates which were made based on the best information known to management at that time.Concentration of Credit 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 subject to a concentration of revenues given certain key licensees that contributed a significantportion of the Company's total revenue. See Note 16 for customer revenue concentration. The Company invests primarily in money market accounts andhighly liquid debt instruments purchased with an original or remaining maturity of greater than 90 days on the date of purchase. Deposits held with banksmay exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand. The Company licensestechnology primarily to companies in North America, Europe, and Asia. To reduce credit risk, management performs periodic credit evaluations of itscustomers’ financial condition. The Company periodically evaluates potential credit losses to ensure adequate reserves are maintained, but historically theCompany has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. Assuch, the Company had zero reserves for the years ended December 31, 2018 and December 31, 2017 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 PronouncementsAdoptedIn March 2018, the FASB issued ASU 2018-05 "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting BulletinNo. 118 (SEC Update)", which updates SEC guidance released in December 2017 when the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law.Additional information regarding the adoption of this ASU and its material impact on the Company's consolidated financial statements is contained in Note11 to the consolidated financial statements.In May 2017, the FASB issued ASU 2017-09 “Stock Compensation: Scope of Modification Accounting”. The ASU provides guidance on the types ofchanges to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718.For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2017. The Company adopted thestandard effective January 1, 2018. The adoption of this ASU did not have a material impact on its consolidated financial statements.53Table of ContentsIn 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 adopted the standard effective January 1,2018. The adoption of this ASU did not have a material impact on its consolidated financial statements.Not yet adoptedIn July 2018, the FASB issued ASU 2018-09 "Codification Improvement" ("ASU 2018-09"). This ASU amends a wide variety of Topics in theCodification issued by FASB with technical corrections, clarifications, and other minor improvements, and should eliminate the need for periodic agendarequests for narrow and incremental items. Many of the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018for public entities. The Company will adopt certain amendments in this ASU that are applicable, but does not expect a material impact on its consolidatedfinancial statements.In June 2018, the FASB issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based PaymentAccounting" ("ASU 2018-07"). The amendments in this ASU expand the scope of Topic 718 to include share-based payment transaction for acquiring goodsand services from nonemployees and supersede subtopic 505-50. For public entities, the guidance is effective for annual reporting periods beginning afterDecember 15, 2018 and interim periods within those fiscal years, and early adoption is permitted but no earlier than adoption of Topic 606. The Companywill adopt this ASU as of January 1, 2019 but does not expect a material impact on its consolidated financial statements.In February 2018, the FASB issued ASU 2018-02 "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain TaxEffects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). The amendments in this ASU allow a reclassification from accumulated othercomprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The guidance is effective for annual reporting periodsbeginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company will adopt this ASU as ofJanuary 1, 2019 but does not expect a material impact on its consolidated financial statements.In February 2016, the FASB issued ASU 2016-02 “Leases: Topic 842” (“ASU 2016-02” "Topic 842"), which supersedes the existing guidance for leaseaccounting in Topic 840, Leases. The FASB issued the ASU to increase transparency and comparability among organizations by recognizing lease assets andlease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under Topic 842, lessees are required to recognize a leaseliability and a right-of-use asset for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance of operating. Anentity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach for leasesthat exist or are entered into after the beginning of the earliest comparative period in the financial statements, and there are certain optional practicalexpedients that an entity may elect to apply. Full retrospective application is prohibited. In July 2018, the FASB issued ASU 2018-10 "CodificationImprovement to Topic 842, Leases" ("ASU 2018-10"). The FASB issued this separate ASU for the improvements related to ASC 2016-02 to increasestakeholders' awareness of the amendments and to expedite the improvements. In July 2018, the FASB issued ASU 2018-11 "Leases (Topic 842) TargetImprovement" ("ASU 2018-11"). This ASU introduces a lessee model that will bring most leases of property, plant and equipment onto the balance sheet. Itrequires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right of use asset” for all leases, although certain short-term leases are exempted from the standard. The ASU introduces two models for the subsequent measurement of the lease asset and liability, depending onwhether the lease qualifies as a “finance lease” or an “operating lease”. This distinction focuses on whether or not effective control of the asset is beingtransferred from the lessor to the lessee. The effective date and transition requirements for these ASUs will be same as the effective date and transitionrequirements in Topic 842. The Company will adopt Topic 842 and applicable amendments on January 1, 2019 using a modified retrospective approach. TheCompany does not anticipate this adoption will have a material impact on its financial statements. The Company expects to establish a lease asset andcorresponding lease liability of approximately $4 - $5 million upon adoption of the standard.2. REVENUE RECOGNITIONRevised Revenue Recognition Accounting PolicyOn January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method. The new revenue standard has been applied toall contracts that were not completed as of the date of adoption. To the extent that modifications occurred prior to the adoption of ASC 606, the Company hasreflected the aggregate impact of any modification when evaluating the impact of the adoption.The Company's revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenueearned from development, services and other revenue. The adoption of ASC 606 affected the Company's revenue recognition model for both fixed fee licenserevenue and per-unit royalty revenue presented as “royalty and54Table of Contentslicense revenue” on the Company’s consolidated statements of operations and comprehensive income (loss). Although all of the Company's revenues in theperiods presented have been derived from contracts with customers, revenues for the year ended December 31, 2018 have been recognized in accordance withASC 606 while revenues for the other periods presented have been recognized under the previous revenue standard ASC 605.Fixed fee license revenueIn applying ASC 606, the Company is required to recognize revenue from a fixed fee license agreement when it has satisfied its performance obligations,which typically occurs upon the transfer of rights to the Company's technology upon the execution of the license agreement. However, in certain contracts,the Company grants a license to its existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolvesthroughout the contract term. For such arrangements, the Company has concluded that it has two separate performance obligations:•Performance Obligation A: to transfer rights to the Company's patent portfolio as it exists when the contract is executed;•Performance Obligation B: to transfer rights to the Company's patent portfolio as it evolves over the term of the contract, including access to newpatent applications that the licensee can benefit from over the term of the contract.Under the Company's previous accounting practices under ASC 605, fixed license fees were generally recognized on a straight-line basis over thecontract term. As a result of the adoption of ASC 606, if a fixed fee license agreement contains only Performance Obligation A, the Company has recognizedmost or all of the revenue from the agreement at the inception of the contract. For fixed fee license agreements that contain both Performance Obligation Aand B, the Company has allocated the transaction price based on the standalone price for each of the two performance obligations. The Company hasdeveloped a process, and established internal controls around such process, to estimate standalone prices related to Performance Obligation A and B using anumber of factors primarily related to the attributes of its patent portfolio. Once the transaction price is allocated, the portion of the transaction priceallocable to Performance Obligation A has been recognized in the quarter the license agreement is signed and the customer can benefit from rights providedin the contract, and the portion allocable to Performance Obligation B has been recognized on a straight-line basis over the contract term. For such contracts,a contract liability account will be established and included within "deferred revenue" on the consolidated balance sheet. As the rights and obligations in acontract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis.Historically, certain of the Company's license agreements contained fixed fees related to past infringements for which the fixed fees were recognized asrevenue or recorded as a deduction to its operating expense in the quarter the license agreement was signed. After the adoption of ASC 606, the Company hasrecognized revenue from such fixed fees related to past infringements in the same manner in the quarter the license agreement is signed.Payments for fixed fee license contracts typically are due in full within 30 - 45 days from execution of the contract. From time to time, the Companyenters into a fixed fee license contract with payments due in a number of installments payable throughout the contract term. In such cases, the Company hasdetermined if a significant financing component exists and if it does, the Company will recognize more or less revenue and corresponding interest expense orincome, as appropriate.Per-unit Royalty revenueUnder the Company's previous accounting practices under ASC 605, it recognized revenue from per-unit royalty agreements in the period in which therelated royalty report was received from its licensees, generally one quarter in arrears from the period in which the underlying sales occurred (i.e. on a"quarter-lag"). ASC 606 requires an entity to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. As theCompany generally does not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows the Company toadequately review the reports and include the actual amounts in its quarterly results for such quarter, the Company accrues the related revenue based onestimates of its licensees’ underlying sales, subject to certain constraints on its ability to estimate such amounts. The Company’s estimates have beendeveloped based on a combination of available data including, but not limited to, approved customer forecasts, a lookback at historical royalty reporting foreach of its customers, and industry information available for the licensed products.As a result of accruing per-unit royalty revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true uprevenue to the actual amounts reported by its licensees. After the adoption of ASC 606, the Company has recorded adjustments to decrease revenue by$326,000 and $333,000 during the three months ended June 30 and September 30, 2018, respectively, and recorded an adjustment to increase revenue by$189,000 during the three months ended December 31, 2018. The adjustments represent the difference between per-unit royalty based on actual salesreported by the Company's licensees in a quarter-lag, and the estimate of per-unit royalty that was reported in the same quarter the underlying sales occurred.The Company had no adjustment recorded for the three months ended March 31, 2018.55Table of ContentsCertain of the Company's per-unit royalty agreements contains a minimum royalty provision which sets forth minimum amounts to be received by theCompany during the contract term. Per the Company's previous accounting policy under ASC 605, such minimum royalties were recognized as revenue at theend of each reporting period (usually a calendar year) if the actual royalties reported by the customer for that reporting period were below the minimumthreshold set forth in the contract. Under ASC 606, minimum royalties are considered a fixed transaction price to which the Company will have anunconditional right once all other performance obligations, if any, are satisfied. Therefore, the Company has recognized all minimum royalties as revenue atthe inception of the license agreement, or in the period in which all remaining revenue recognition criteria have been met. The Company has establishedcontract assets for the unbilled minimum royalties on a contract basis. Such contract asset balance has been reduced by the actual royalties reported by thelicensee during the contract term until fully utilized, after which point any excess per-unit royalties reported will be recognized as revenue. As the rights andobligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis.Payments of per-unit royalties typically are due within 30 to 60 days from the end of the calendar quarter in which the underlying sales took place.Development, services, and other revenueWith little change from its previous accounting practices related to development, service and other revenue, the Company continued to recognizerevenue from this stream when it has satisfied service obligations. Consistent with the Company’s previous accounting practices under ASC 605, theperformance obligation related to its development, service and other revenue is satisfied over a period of time, and such revenue has been recognized evenlyover the period of performance obligation, which is generally consistent with the contractual term.Adjustments upon Adoption of ASC 606The following table summarizes adjustments related to the Company's adoption of ASC 606 (in thousands) Balance at December 31,2017as Reportedunder ASC 605 Adjustmentfor Fixed FeeLicense Revenue * Elimination of Quarter-LagPer-Unit Royalties Total Adjustmentsupon Adoption ofASC 606 Balance at January1, 2018(ASC 606)Prepaid expenses and othercurrent assets $736 $4,996 $4,996 $5,732Deferred revenue - current (4,424) 1,766 1,766 (2,658)Long-term deferred revenue (22,303) 11,573 11,573 (10,730)Accumulated deficit 171,616 (13,339) (4,996) (18,335) 153,281* Adjustment for fixed fee license revenue includes both the recognition of Performance Obligation A upon the adoption of ASC 606, which had previously been deferred underASC 605, and the change in the transaction price allocated to Performance Obligation B and consequently the revenue recognized as of January 1, 2018.Disaggregated RevenueThe following table presents the disaggregation of the Company's revenue for the year ended December 31, 2018 under ASC 606. Revenues for the yearsended December 31, 2017 and 2016 are presented in accordance with ASC 605.56Table of Contents Years Ended December 31, 2018 2017 2016 (in thousands)Fixed fee license revenue $83,573 $12,575 $30,389Per-Unit royalty revenue 26,984 21,514 25,641Total royalty and license revenue 110,557 34,089 56,030Development, services, and other 422 924 1,056Total revenues $110,979 $35,013 $57,086As of December 31, 2018, the Company had contract assets of $9.0 million included within prepaid expenses and other current assets, and $7.2 millionincluded within other non-current assets, net, on the consolidated balance sheet. The balance of these contract assets increased by $11.2 million from January1, 2018 to December 31, 2018, primarily related to certain contracts entered into during the year ended December 31, 2018 that included a minimum royaltyarrangement. The balance of the contract assets as of December 31, 2018 also included the Company's estimate of per-unit royalty related to the underlyingsales that occurred in the fourth quarter, 2018.Impact of Adoption of ASC 606Presented in the tables below is disclosure of the impact of adoption on the Company's consolidated statements of operations and comprehensive income(loss) for the year ended December 31, 2018, as well as consolidated balance sheet as of December 31, 2018 in accordance with the requirements of ASC 606.The Company believes that this additional information is vital during the transition year to allow readers of its financial statements to compare financialresults from the preceding financial years given the use of the modified retrospective method of adoption. The adoption of ASC 606 did not affect theCompany's reported total amounts of cash flows from operating, investing and financing activities. Therefore, tables for this separate financial statement havenot been provided.Amounts contained in the tables below are in thousands, except number of shares and per share amounts.57Table of Contents 2018 2017 2016 As Reported (ASC 606) Adjustments ASC 605 As Reported(ASC 605) As Reported (ASC605)Revenues: Fixed fee license revenue $83,573 $(68,094) $15,479 $12,575 $30,389Per-unit royalty revenue 26,984 (8,482) 18,502 21,514 25,641Total royalty and license revenue 110,557 (76,576) 33,981 34,089 56,030Development, services, and other 422 422 924 1,056Total revenues 110,979 (76,576) 34,403 35,013 57,086Total costs and operating expenses 57,878 57,878 80,435 72,349Operating income (loss) 53,101(76,576) (23,475) (45,422) (15,263)Interest and other income 1,634 — 1,634 611 754Income (loss) before provision for incometaxes 54,735 (76,576) (21,841) (44,811) (14,509)Provision for income taxes from continuingoperations (392) — (392) (480) (25,521)Income (loss) from continuing operations 54,343 (76,576) (22,233) (45,291) (40,030)Income (loss) from discontinuedoperations, net of tax — — — — 649Net income (loss) $54,343 $(76,576) $(22,233) $(45,291) $(39,381)Basic net income (loss) per share Continuing operations $1.78 $(2.51) $(0.73) $(1.55) $(1.39)Discontinued operations — — — — 0.02Total $1.78 $(2.51) $(0.73) $(1.55) $(1.37)Shares used in calculating basic net income(loss) per share 30,459 30,459 30,459 29,179 28,759Diluted net income (loss) per share Continuing operations $1.73 $(2.51) $(0.73) $(1.55) $(1.39)Discontinued operations — — — — 0.02Total $1.73 $(2.51) $(0.73) $(1.55) $(1.37)Shares used in calculating diluted netincome (loss) per share 31,407 30,459 30,459 29,179 28,759 December 31, 2018 December 31, 2017 As Reported (ASC 606) Adjustments ASC 605 As Reported(ASC 605)Prepaid expenses and other current assets $9,856 $(8,973) $883 $736Other assets, net 7,532 (7,231) 301 344Other current liabilities (3,194) 220 (2,974) (3,896)Deferred revenue - current (4,591) (10,040) (14,631) (4,424)Long-term deferred revenue (30,203) (70,126) (100,329) (22,303)Accumulated deficit $98,521 $95,329 $193,850 $171,616Contracted RevenueBased on contracts signed and payments received as of December 31, 2018, the Company expects to recognize $34.5 million revenue related toPerformance Obligation B under its fixed fee license agreements, which is satisfied over time, including $13.6 million over one to three years and $20.9million over more than three years.58Table of Contents3. FAIR VALUE DISCLOSURESCash Equivalents and Short-term InvestmentsThe financial instruments of the Company measured at fair value on a recurring basis are cash equivalents and short-term investments.The Company’s fixed income available-for-sale securities consist of high quality, investment grade securities. The Company values these securitiesbased on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1) or inputs other than quoted prices that areobservable either directly or indirectly (Level 2) in determining fair value.The types of instruments valued based on quoted market prices in active markets include mostly money market securities. Such instruments are generallyclassified within Level 1 of the fair value hierarchy.The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations, or alternative pricing sources withreasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy and include U.S. treasury securities.The types of instruments valued based on unobservable inputs which reflect the reporting entity’s own assumptions or data that market participantswould use in valuing an instrument are generally classified within Level 3 of the fair value hierarchy. As of December 31, 2018 and 2017, the Company didnot hold any Level 3 instruments.The Company had no other-than-temporary impairment charges recorded in the years ended December 31, 2018, 2017, and 2016.Financial instruments measured at fair value on a recurring basis as of December 31, 2018 and December 31, 2017 are listed in the tables below (inthousands): December 31, 2018 Total Fair value measurements using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs (Level 3) Assets: U.S. Treasury securities$— $13,930 $— $13,930Money market funds81,425 — — 81,425Total assets at fair value$81,425 $13,930 $— $95,355The above table excludes $29.6 million of cash held in banks. December 31, 2017 Total Fair value measurements using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs (Level 3) Assets: U.S. Treasury securities$— $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.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.59Table of ContentsShort-term Investments December 31, 2018 AmortizedCost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses Fair Value (in thousands)U.S. Treasury securities$13,936 $— $(6) $13,930Total$13,936 $— $(6) $13,930 December 31, 2017 AmortizedCost GrossUnrealizedHoldingGains GrossUnrealizedHoldingLosses Fair Value (in thousands)U.S. Treasury securities$21,939 $— $(23) $21,916Total$21,939 $— $(23) $21,916The contractual maturities of the Company’s available-for-sale securities on December 31, 2018 and December 31, 2017 were all due within one year.There were no transfers of instruments between Level 1 and 2 during the years ended December 31, 2018 and 2017.4. ACCOUNTS AND OTHER RECEIVABLES December 31, 2018 2017 (in thousands)Trade accounts receivable$645 $458Receivables from vendors and other406 348Accounts and other receivables$1,051 $8065. PROPERTY AND EQUIPMENT December 31, 2018 2017 (in thousands)Computer equipment and purchased software$3,167 $3,206Machinery and equipment821 834Furniture and fixtures1,113 1,274Leasehold improvements3,897 3,920Total8,998 9,234Less accumulated depreciation(6,655) (6,084)Property and equipment, net$2,343 $3,1506. OTHER CURRENT LIABILITIES60Table of Contents December 31, 2018 2017 (in thousands)Accrued legal$1,827 $2,202Income taxes payable204 219Other current liabilities1,163 1,475Total other current liabilities$3,194 $3,8967. STOCK-BASED COMPENSATIONStock Options and AwardsThe 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 Company may grant time based options, marketcondition based options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock-based or cash-based awards to employees, officers, directors, and consultants. Under this program, 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 four years and expire from seven to ten years from the date of grant. Inaddition to time based vesting, market condition based options are subject to a market condition: the closing price of the Company stock must exceed acertain level for a number of trading days within a specified timeframe or the options will be canceled before the expiration of the options. On June 2, 2017,the Company's stockholders approved an increase to the number of shares reserved for issuance by 3,476,850 shares. Restricted stock generally vests over oneyear. RSUs generally vest over 3 years. Awards granted other than an option or stock appreciation right shall reduce the common stock shares available forgrant by 1.75 shares for every share issued. December 31, 2018Common stock shares available for grant1,791,088Standard and market condition based stock options outstanding2,134,504Restricted stock awards outstanding54,667Restricted stock units outstanding1,090,752Employee 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, 2018, 724,822 shares had been purchased since the inception of the ESPP in 1999. The ESPP is considered a compensatory planand the Company is required to recognize compensation cost related to the fair value of the award purchased under the ESPP. Shares purchased under theESPP for the year ended December 31, 2018 are listed below. Shares purchased under the ESPP for the year ended December 31, 2017 were 48,750. Theintrinsic value listed below is calculated as the difference between the market value on the date of purchase and the purchase price of the shares. Year Ended December 31,2018Shares purchased under ESPP26,689Average price of shares purchased under ESPP$8.17Intrinsic value of shares purchased under ESPP$106,000Summary 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 31,2018, 2017, and 2016:61Table of Contents Number of Shares WeightedAverageExercise Price WeightedAverageFair ValueOf Options Granted AggregateIntrinsicValueof OptionsExercised(in thousands)Outstanding at January 1, 20163,596,533 $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 Granted207,500 $12.50 $5.82 Exercised(1,452,306) $6.52 $8,222Forfeited(78,390) $8.31 Expired(92,372) $11.93 Outstanding at December 31, 20181,862,423 $9.44 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 standard stock options outstanding at December 31, 2018, 2017, and 2016 is summarized below: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualLife (years) AggregateIntrinsicValue(in millions)December 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 $2.1December 31, 2018 Options outstanding1,862,423 $9.44 2.85 $0.8Options vested and expected to vest using estimatedforfeiture rates1,785,740 $9.40 2.74 $0.7Options exercisable1,396,171 $9.22 1.97 $0.5Additional information regarding standard options outstanding as of December 31, 2018 is as follows:62Table of Contents Options Outstanding Options ExercisableRange ofExercise Prices NumberOutstanding WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice NumberExercisable WeightedAverageExercisePrice$5.53 - $7.79 321,144 4.16 $7.21 189,149 $7.068.09 - 8.45 222,175 4.38 8.29 143,083 8.228.64 - 9.00 259,173 2.45 8.83 226,776 8.829.53 - 9.53 671,500 0.95 9.53 671,500 9.539.68 - 11.84 205,573 5.68 11.66 25,693 10.8711.94 - 12.20 100,963 1.51 11.94 100,963 11.9412.26 - 12.26 21,675 3.43 12.26 21,675 12.2612.38 - 12.38 4,320 3.87 12.38 3,420 12.3812.48 - 12.48 15,900 3.54 12.48 13,912 12.4815.25 - 15.25 40,000 6.54 15.25 — —$5.53 - $15.25 1,862,423 2.85 $9.44 1,396,171 $9.22Summary 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 canceled 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, 2018, 2017 and 2016. There were no activities for the year ended December 31, 2018. Numberof Shares WeightedAverageExercisePrice Weighted AverageFair Value Of OptionsGranted Aggregate Intrinsic Valueof Options Exercised(in thousands) Outstanding at January 1, 2016200,000 $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 Granted— Exercised— Forfeited— Expired— Outstanding at December 31, 2018272,081 $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, 2018, 2017 and 2016 is summarized below:63Table of Contents Number of Shares WeightedAverageExercise Price WeightedAverageRemainingContractualLife (years) AggregateIntrinsicValue(in millions) December 31, 2016 Options outstanding225,000 $8.39 5.50 $0.5Options vested and expected to vest using estimated forfeiturerates209,141 $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 estimated forfeiturerates272,081 $8.44 1.91 $—Options exercisable272,081 $8.44 1.91 $—December 31, 2018 Options outstanding272,081 $8.44 0.91 $0.1Options vested and expected to vest using estimated forfeiturerates272,081 $8.44 0.91 $0.1Options exercisable272,081 $8.44 0.91 $0.1Additional information regarding market condition based stock options outstanding as of December 31, 2018 is as follows: Options Outstanding Options ExercisableRange ofExercisePricesNumberOutstanding Weighted Average RemainingContractual Life (Years) WeightedAverageExercise Price NumberExercisable WeightedAverageExercise Price$8.09 - $8.09135,000 0.91 $8.09 135,000 $8.09 8.65 - 8.6584,581 0.91 $8.65 84,581 $8.65 9.00 - 9.0052,500 0.91 $9.00 52,500 $9.00$8.09 - $9.00272,081 0.91 $8.44 272,081 $8.44Summary of Restricted Stock UnitsRSU activity for the years ended December 31, 2018, 2017, and 2016 was as follows: Number of Shares Weighted AverageGrant Date Fair Value Fair Valueof Released RSU’s(in thousands) Outstanding at January 1, 2016487,423 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 Awarded957,443 $11.74 Released(178,447) $2,133Forfeited(197,124) Outstanding at December 31, 20181,090,752 64Table of ContentsInformation regarding RSU’s at December 31, 2018, 2017, and 2016 is summarized below: Number ofShares WeightedAverageRemainingContractualLife (years) AggregateIntrinsicValue(in millions) Fair Value(in millions) 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 December 31, 2018 RSUs outstanding1,090,752 0.67 $9.8 $9.8RSUs vested and expected to vest using estimated forfeiturerates959,209 0.56 $8.6 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, 2018, 2017, and 2016 was as follows: Number of Shares Weighted AverageGrant DateFair Value Total Fair Value of AwardsReleased(in thousands)Outstanding at January 1, 201621,356 $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 Awarded62,556 $13.32 Released(44,538) $8.65 $673Forfeited(7,889) $15.44 Outstanding at December 31, 201854,667 $13.02 Stock-based CompensationValuation and amortization methods — The Company uses the Black-Scholes-Merton option pricing model (“Black-Scholes model”), single-optionapproach to determine the fair value of standard stock options and ESPP shares. All share-based payment awards are amortized on a straight-line basis overthe requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value includes theimpact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates if necessary, in subsequent periods ifactual 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 the expected term, the Company’s expected stock price volatility over the term ofthe awards, risk-free interest rate, and expected dividends.Expected term — The Company estimates the expected term of options granted by calculating the average term from the Company’s historical stockoption exercise experience. The expected term of ESPP shares is the length of the offering period.65Table of ContentsExpected volatility — The Company estimates the volatility of its common stock taking into consideration its historical stock price movement and itsexpected future stock price trends based on known or anticipated events.Risk-free interest rate — The Company bases the risk-free interest rate that it uses in the option pricing model on U.S. Treasury zero-coupon issues withremaining 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 expected dividendyield 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 if actualforfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensationexpense only for those awards that are expected to vest.The Company uses the Monte-Carlo Simulation model to value the stock options with a market condition. Valuation techniques such as a Monte-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 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 2018 2017 2016Expected life (in years)4.4 4.6 4.5Interest rate3.0% 2.0% 1.2%Volatility55% 52% 56%Dividend yield—% —% —% Market Condition Based Stock Options 2018 (1) 2017 2016Expected life (in years)N/A 7.0 7.0Interest rateN/A 2.0% 1.6%VolatilityN/A 55% 59%Dividend yieldN/A —% —%(1) No market condition based stock options were granted during the year ended December 31, 2018. Employee Stock Purchase Plan 2018 2017 2016Expected life (in years)0.5 0.5 0.5Interest rate1.9% 0.9% 0.4%Volatility58% 48% 53%Dividend yield—% —% —%Total stock-based compensation recognized in the consolidated statements of income is as follows: Year Ended December 31, 2018 2017 2016Income Statement Classifications(in thousands)Sales and marketing$946 $1,025 $1,280Research and development1,948 981 1,297General and administrative5,792 4,096 3,534Total$8,686 $6,102 $6,111As of December 31, 2018, there was $6.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stockoptions, restricted stock awards and RSU’s granted to the Company’s employees and directors. This cost will be recognized over an estimated weighted-average period of approximately 2.47 years for standard options, 0.46 years66Table of Contentsfor restricted stock awards and 1.13 years for RSU’s. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.8. STOCKHOLDERS' EQUITYAccumulated Other Comprehensive Income (Loss)The changes in accumulated other comprehensive income (loss) are included in the table below. Year Ended December 31, 2018 Unrealized Gainsand Losses onAvailable-for SaleSecurities ForeignCurrencyItems Total (in thousands)Beginning balance$(23) $122 $99Amounts reclassified from accumulated other comprehensive income(loss)17 17Ending balance$(6) $122 $116Stock Repurchase ProgramOn November 1, 2007, the Company announced its Board authorized the repurchase of up to $50 million of the Company’s common stock. In addition,on October 22, 2014, the Board authorized another $30 million under the share repurchase program. The Company may repurchase its stock for cash in theopen market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share price, corporate andregulatory requirements, economic and market conditions, and other factors. The stock repurchase authorization has no expiration date, does not require theCompany to repurchase a specific number of shares, and may be modified, suspended, or discontinued at any time.There were no stock repurchases during the year ended December 31, 2018. During the year ended December 31, 2017, the Company repurchased 48,687shares for $328,000 at an average cost of $6.73 per share, net of transaction costs through 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.As of December 31, 2018, 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. No shares were issued in connectionwith this Right, and the Rights expired on December 26, 2018.9. 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 markets.The restructuring plan was expected to increase internal efficiencies through the consolidation of certain sites of operation and resulted in theelimination of approximately 56 positions, or 41%, of the worldwide employee base.67Table of ContentsFor 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 additionalrestructuring activities during the year ended December 31, 2018. The Company recorded $44,000 adjustments to the 2017 restructuring costs during thethree months ended March 31, 2018. There were no restructuring costs in 2016. Twelve months ended December 31, 2017 Employee Separation Costs Asset-Related Charges Other Total (in thousands)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.All accrued amounts related to the 2017 restructuring activities were paid during the first quarter of 2018. The following table presents a reconciliationof the restructuring reserve recorded within other current liabilities on the Company’s consolidated balance sheet as of December 31, 2018 (in thousands): EmployeeSeparation Costs Asset-Related Charges Other TotalBalance as of December 31, 2017 $1,522 $— $57 $1,579Adjustments (44) — (28) (72)Non-cash activity (10) — (29) (39)Cash payments (1,468) — — (1,468)Balance as of December 31, 2018 $— $— $— $—10. 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 it would recognize income from the notesreceivable when 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, 2018 and 2017.11. INCOME TAXESIncome tax provisions from continuing operations consisted of the following (in thousands): Year Ended December 31, 2018 2017 2016Income (loss) from continuing operations before provisions for income taxes$54,735 $(44,811) $(14,509)Provision for income taxes from continuing operations(392) (480) (25,521)Effective tax rate0.7% (1.1)% (175.9)%68Table of ContentsThe 2018 and 2017 provision for income tax from continuing operations resulted primarily from estimated foreign taxes and foreign withholding taxexpense. The 2016 provision for income tax from continuing operations resulted primarily from the application of a full federal valuation allowance againstdeferred tax assets.The Company reported pre-tax book income or loss from continuing operations of (in thousands): Year Ended December 31, 2018 2017 2016Domestic$49,509 $(23,994) $(14,656)Foreign5,226 (20,817) 147Total$54,735 $(44,811) $(14,509)The provisions for income taxes from continuing operations consisted of the following (in thousands): Year Ended December 31, 2018 2017 2016Current: U.S. federal$— $— $(1,649)State and local(3) (5) 859Foreign(331) (448) (442)Total current$(334) $(453) $(1,232)Deferred: U.S. federal— — (24,261)State and local— — —Foreign(58) (27) (28)Total deferred(58) (27) (24,289)Total provision for income taxes$(392) $(480) $(25,521)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. On July24, 2018, the U.S. Court of Appeals for the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court that had found certain Treasury regulations relatedto stock-based compensation to be invalid. On August 7, 2018, the U.S. Court of Appeals for the Ninth Circuit withdrew its July 24, 2018 opinion to allow areconstituted panel to confer on the decision. This reconstituted panel will reconsider the validity of the cost sharing regulations at issue. The regulations atissue require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as “qualified cost-sharing arrangements” and to avoid potential IRS adjustment. Although the IRS has appealed the decision, based on the findings of the US Tax Court, theCompany has concluded that it is more likely than not that the decision will be upheld and accordingly has excluded stock-based compensation fromintercompany charges during the period. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financialstatements.On December 22, 2017, the Tax Act was passed into law. Among other changes, the Tax Act reduces the US federal corporate income tax rate from 35%to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxeson certain foreign sourced earnings. In addition, the Act introduced the Base Erosion and Anti-Abuse Tax (the “BEAT”), which creates a new tax on certainrelated party payments. Some provisions of the Tax Act began to impact the Company in 2017, while other provisions impact the Company beginning in2018.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the federal taxrate change and other tax effects of the Tax Act. SAB 118 provided 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 connection with the Company's adoption of the Tax Act and inconsideration of SAB 118, the following updates have been made to the Company's income tax provision. In the fourth quarter of 2017, the Companyrecorded a $12.9 million reduction to deferred tax assets and related valuation allowance in connection with the re-measurement of certain deferred tax assetsand liabilities, resulting in no impact to its results of operations. The Company estimated that no current tax expense should be recorded in connection withthe transition tax on the mandatory deemed repatriation of foreign earnings, a provisional69Table of Contentsestimate at December 31, 2017. The Company completed its analysis of the impacts of the Tax Act in the fourth quarter of 2018 and determined there were nosignificant adjustments to the provisional tax amounts recorded in the fourth quarter of 2017.For the Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act, the Company completed its assessment during the fourth quarter of2018 and, effective January 1, 2018, elected an accounting policy to record GILTI as period costs if and when incurred. Additionally, the Companyconcluded that it is has not met the threshold requirements of the BEAT. Although the measurement period has closed, further technical guidance related tothe Tax Act, including final regulations on a broad range of topics, is expected to be issued. In accordance with Accounting Standards Codification (ASC)740, the Company will recognize any effects of the guidance in the period that such guidance is issued.Deferred 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 (in thousands): December 31, 2018 2017Deferred tax assets: Net operating loss carryforwards$4,968 $13,394State income taxes1 1Deferred revenue2,347 5,349Research and development and other credits9,590 11,447Reserves and accruals recognized in different periods3,734 3,088Basis difference in investment— 583Capitalized R&D expenses3,415 3,623Depreciation and amortization472 413Deferred rent160 183Other6 —Total deferred tax assets24,693 38,081Valuation allowance(24,398) (37,680)Net deferred tax assets295 401 Foreign credits(29) (43)Other(17) —Net deferred tax liabilities(46) (43)Net deferred taxes$249 $358The Company accounts for deferred taxes under ASC 740 which 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. As of December 31, 2018, based on its assessment of the realizability of itsdeferred tax assets, the Company continued to maintain a full valuation allowance against all of its federal and state, and certain of its foreign net deferred taxassets.As of December 31, 2018, the net operating loss carryforwards for federal and state income tax purposes were approximately $0 and $52.9 million,respectively. The state net operating losses begin to expire in 2028. The Company also has net operating loss carryforwards from Ireland of 2.4 million thatcan be carried forward indefinitely and do not expire. As of December 31, 2018, the Company had federal and state tax credit carryforwards of approximately$9.5 million and $2.3 million, respectively, available to offset future tax liabilities. The federal credit carryforwards will expire between 2019 and 2038 andthe California tax credits will carryforward indefinitely. In addition, as of December 31, 2018, the Company has Canadian research and development creditcarryforwards of $1.6 million, which will expire at various dates through 2038. These operating losses and credit carryforwards have not been reviewed by therelevant tax authorities and could be subject to adjustment upon examinations.Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses and creditcarryforwards if it experiences an “ownership change” as defined by IRC Section 382. Utilization of70Table of Contentsa portion of the Company’s federal net operating loss carryforward was limited in accordance with IRC Section 382, due to an ownership change thatoccurred during 1999. This limitation has fully lapsed as of December 31, 2010. As of December 31, 2018, the Company conducted an IRC Section 382analysis with respect to its net operating loss and credit carryforwards and determined there was no limitation. There can be no assurance that future issuancesof the Company’s securities will not trigger limitations under IRC Section 382 which could limit utilization of these tax attributes.For purposes of the reconciliation between the provision for income taxes at the statutory rate and the effective tax rate, a national U.S. 21% rate isapplied for 2018, the year in which the Tax Act took effect. For prior years presented in the table below, the national U.S. rate of 35%, the rate in effect priorto the Tax Act change, was applied for the reconciliation between the provision for income taxes at the statutory rate and the effective tax rate: 2018 2017 2016Federal statutory tax rate21.0 % 35.0 % 35.0 %Sale of IP rights to foreign subsidiary— %— % (13.8)%Foreign withholding0.1 %(0.2)% (1.2)%Stock compensation expense(1.0)%(2.0)% (6.6)%Foreign rate differential(1.5)%(17.0)% (1.2)%Prior year true-up items— %(0.1)% (0.3)%Tax reserves(1.3)%(0.1)% 1.8 %Loss on expiration of capital loss carryover1.1 %— % — %Credits(0.1)%0.4 % 1.6 %Other0.9 %— % (1.6)%2017 Tax Act impact1.1 % (28.7)% — %Valuation allowance(19.6)%11.6 % (193.4)%State refunds— % — % 3.8 %Effective tax rate0.7 % (1.1)% (175.9)%Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for applicableincome taxes has been provided thereon. Upon distribution of those earnings, the Company would be subject to withholding taxes payable to various foreigncountries. As of December 31, 2018, any foreign withholding taxes on the undistributed earnings of the Company’s foreign subsidiaries were immaterial.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 (in thousands): 2018 2017 2016Balance at beginning of year$4,672 $6,232 $6,285Gross increases for tax positions of prior years— — —Gross decreases for federal tax rate change for tax positions of prior years— (1,670) (22)Gross increases for tax positions of current year45 110 111Lapse of statute of limitations(106) — (142)Balance at end of year$4,611 $4,672 $6,232The 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, 2018, the Company accrued interest orpenalties related to uncertain tax positions in the amount of $18,000. As of December 31, 2018, 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.71Table of Contents12. 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, 2018 2017 2016 (In thousands, except per share amounts)Numerator: Income (loss) from continuing operations$54,343 $(45,291) $(40,030)Income from discontinued operations, net of tax$— $— $649Net income (loss) used in computing basic net income (loss) per share$54,343 $(45,291) $(39,381)Denominator: Shares used in computation of basic net income (loss) per share (weighted averagecommon shares outstanding)30,459 29,179 28,759Dilutive potential common shares: Stock options, ESPP, Restricted Stock and RSUs948 — —Shares used in computation of diluted net income (loss) per share31,407 29,179 28,759 Basic net income (loss) per share: Continuing Operations$1.78 $(1.55) $(1.39) Discontinued Operations$— $0.00 $0.02 Total$1.78 $(1.55) $(1.37) Diluted net income (loss) per share: Continuing Operations$1.73 $(1.55) $(1.39) Discontinued Operations$— $0.00 $0.02 Total$1.73 $(1.55) $(1.37)The 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, 2018, options to purchase approximately 0.4 million shares of common stock with an exercise price greater than theaverage fair market value of the Company’s stock of $11.37 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 wereexcluded from the computation of diluted net loss per share for the year ended December 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 17,50672Table of Contents13. 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 2018 and 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 every year. Year ended December 31, 2018 2017 2016 (in thousands)Company contribution to 401 (k) plan$141 $259 $17214. COMMITMENTSThe Company leases several of its facilities under non-cancelable operating lease arrangements that expire at various dates through 2024.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 (in thousands): Operating Leases2019$1,16820201,04920211,03120221,0592023450Thereafter23Total$4,780Rent expense was as follows (in thousands): Year ended December 31, 2018 2017 2016Rent expense$1,181 $1,307 $1,28315. 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.As discussed in Part II, Item 1 (Legal Proceedings), on April 28, 2017, the Company and Immersion Software Ireland Limited (collectively, “Immersion”)received a letter from Samsung Electronics Co. (“Samsung”) requesting that the Company73Table of Contentsreimburse Samsung with respect to withholding tax and penalties imposed on Samsung by the Korean tax authorities following an investigation where thetax authority determined that Samsung failed to withhold taxes on Samsung’s royalty payments to Immersion Software Ireland from 2012 to 2016. On July12, 2017, Immersion filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes and penalties. On October 18,2018, the Korea Tax Tribunal held a hearing and on November 19, 2018, the Korea Tax Tribunal issued its ruling in which it decided not to accept theCompany's arguments with respect to the Korean tax authorities’ assessment of withholding tax and penalties imposed on Samsung. We filed an appeal withthe Korea Administrative Court on February 15, 2019.On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against Immersion demanding that theCompany reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. The International Chamber of Commercehas set the deadline for rendering the final award to February 28, 2019. The Company denies liability, and, as discussed in Part II, Item 1 (Legal Proceedings),the arbitration matter is ongoing. The Company believes that there are valid defenses to all of the claims from the Korean tax authorities and that Samsung’sclaims are without merit. The Company intends to vigorously defend against these claims and as a result, Immersion has concluded that the likelihood of amaterial charge resulting from this claim is remote. In the event Samsung were to prevail in the arbitration in advance of the conclusion of the appeal with theKorea Administrative Court, the Company could be required to make a payment to Samsung even though it would later be reimbursed should the Companyprevail in the appeal.On October 16, 2017, the Company received a letter from LG Electronics Inc. (“LGE”) requesting that the Company 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, the Company filed an appeal with the Korea Tax Tribunalregarding their findings with respect to the withholding taxes. The Company believes that there are valid defenses to the claims raised by the Korean taxauthorities and that LGE’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 LGE to be remote.16. 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: Years Ended December 31, 2018 2017 2016Mobile, Wearables, and Consumer81% 48% 57%Gaming Devices5% 31% 24%Automotive13% 15% 7%Medical1% 6% 12%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: 74Table of Contents Years Ended December 31, 2018 2017 2016North America77% 22% 32%Europe11% 15% 8%Asia12% 63% 60%Total100% 100% 100%Geographic revenue as a percentage of total revenues by country was as follows: Years Ended December 31, 2018 2017 2016United States of America77% 22% 26%Japan* 39% 11%Korea* 18% 47%Other countries with less than 10% in a year23% 21% 16%Total100% 100% 100%* Represents less than 10% of the Company’s total revenue for the year presented.Long-lived Assets by CountryLong-lived assets include net property and equipment, intangibles, and other assets. The following is a summary of geographic long-lived assets as apercentage of total long-lived assets by country: December 31, 2018 2017United States of America91% 83%Canada8% 8%Rest of World1% 9%Total100% 100%Significant CustomersCustomers comprising 10% or greater of the Company’s net revenues are summarized as follows: Years Ended December 31, 2018 2017 2016Apple Inc.69% —% —%Samsung Electronics—% —% 33%Customer A—% 20% 13%Customer B* 18% 14%Customer C* 11% 2%Total69% 49% 62%* Represents less than 10% of the Company’s total revenue for the year presented.Customers comprising 10% or greater of the Company’s outstanding accounts and other receivable are summarized as follows: December 31, 2018 2017 2016Customer D55% —% —%Customer E36% —% —%Customer F—% 55% —%Customer G—% 26% 46%Customer B—% —% 18%Customer H—% —% 16%75Table of Contents17. 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, 2018 2018 2018 2018 2017 2017 2017 2017 (In thousands, except per share amounts)Revenues (1)$10,867 $8,552 $6,144 $85,416 $6,896 $11,863 $7,030 $9,224Gross profit10,839 8,491 6,050 85,381 6,857 11,802 6,976 9,181Operating income (loss)(3,546) (5,163) (8,295) 70,105 (12,216) (5,443) (14,911) (12,852)Income (loss) before provision fortaxes(3,063) (4,618) (7,920) 70,336 (12,109) (5,243) (14,746) (12,713)Benefit (provision) for income taxes(79) (22) 162 (453) (185) (44) (99) (152)Net income (loss)(3,142) (4,640) (7,758) 69,883 (12,294) (5,287) (14,845) (12,865)Basic net income (loss) per share (2)(0.10) (0.15) (0.25) 2.35 (0.42) (0.18) (0.51) (0.44)Shares used in calculating basic netincome (loss) per share30,814 30,780 30,527 29,700 29,250 29,245 29,193 29,024Diluted net income (loss) per share(2)(0.10) (0.15) (0.25) 2.29 (0.42) (0.18) (0.51) (0.44)Shares used in calculating diluted netincome (loss) per share30,814 30,780 30,527 30,566 29,250 29,245 29,193 29,024(1) Revenue increased significantly in the first quarter of 2018 primarily resulted from a change in accounting policy arising from the adoption of ASC606 effective January 1, 2018.(2) The quarterly earnings per share information is calculated separately for each period. Therefore, the sum of such quarterly per share amounts maydiffer from the total for the year.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, 2018, our management, with the participation of our 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 Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding requireddisclosure, 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 Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internalcontrols over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there areresource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, noevaluation 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 Chief Executive Officer and our ChiefFinancial Officer and affected by our board of directors and management to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with GAAP. Our management assessed the effectiveness of our internal controlover financial reporting as of76Table of ContentsDecember 31, 2018. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control — IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In performing the assessment, ourmanagement concluded that, as of December 31, 2018, our internal control over financial reporting is effective based on these criteria.Deloitte and Touche LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report 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 reportingIn conjunction with the adoption of ASC 606 effective January 1, 2018, we implemented internal controls during 2018 to ensure we have adequatelyevaluated our contracts and properly assessed the impact of the adoption on our financial statements. We do not expect significant changes to our internalcontrols over financial reporting due to the adoption of ASC 606.Item 9B. Other InformationNone.77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, 2018,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 31,2018, 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, 2018, of the Company and our report dated February 27, 2019, expressed an unqualifiedopinion on those financial statements and included an explanatory paragraph related to the Company’s change in method of accounting for revenue in fiscalyear 2018 due to the adoption of ASC 606.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, 201978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 2019 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 2019 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 2019 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 2019 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 2019 annual stockholders’ meeting.79Table of ContentsPART IVItem 15. Exhibits, Financial Statement SchedulesThe following documents are filed as part of this Form:1Financial Statements PageReport of Independent Registered Public Accounting Firm46Consolidated Balance Sheets47Consolidated Statements of Operations and Comprehensive Income (Loss)48Consolidated Statements of Stockholders’ Equity49Consolidated Statements of Cash Flows50Notes to Consolidated Financial Statements512Financial Statement SchedulesThe following financial statement schedule of Immersion Corporation for the years ended December 31, 2018, 2017, and 2016 is filed as part of thisAnnual Report and should be read in conjunction with the Consolidated Financial Statements of Immersion Corporation. PageSchedule II—Valuation and Qualifying Accounts86Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidatedfinancial statements or notes herein.3Exhibits:The following exhibits are filed herewith:80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* 1999 Employee Stock Purchase Plan and formof subscription agreement thereunder. S-1/A 333-86361 10.21 October 5, 1999 10.2# Settlement Agreement dated July 25, 2003 byand between Microsoft Corporation andImmersion Corporation. S-3 333-108607 10.3 September 8, 2003 10.3# License Agreement dated July 25, 2003 by andbetween Microsoft Corporation and ImmersionCorporation. S-3/A 333-108607 10.4 February 13, 2004 10.4 Letter Agreement dated March 18, 2004 by andbetween Microsoft Corporation and ImmersionCorporation. S-3/A 333-108607 10.10 March 25, 2004 10.5* Form of Indemnity Agreement. S-3/A 333-108607 10.11 March 25, 2004 10.6# 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 10.7* 2007 Equity Incentive Plan. 8-K 000-27969 99.1 June 12, 2007 10.8* Form of Stock Option Agreement (U.S.Participant) for 2007 Equity Incentive Plan. 8-K 000-27969 99.4 June 12, 2007 10.9* Form of Stock Option Agreement (Non-U.S.Participant) for 2007 Equity Incentive Plan. 8-K 000-27969 99.5 June 12, 2007 10.10* Settlement Agreement dated August 25, 2008by and between Microsoft Corporation andImmersion Corporation. 10-Q 000-27969 10.45 November 7, 2008 10.11* Employment Agreement dated October 21,2009 by and between Immersion Corporationand Victor Viegas. 10-K 000-27969 10.42 March 30, 2010 81Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 10.12* Form of 2018 Executive Incentive Plan. 10-Q 000-27969 May 7, 2010 10.13* Immersion Corporation 2011 Equity IncentivePlan 8-K 000-27969 10.1 June 7, 2017 10.14* Form of Stock Option Award Agreement forImmersion Corporation 2011 Equity IncentivePlan. 10-Q 000-27969 10.2 August 5, 2011 10.15* Form of Award Agreement (Restricted StockUnits) to the Immersion Corporation 2011Equity Incentive Plan. 10-Q 000-27969 10.3 August 5, 2011 10.16* Form of Restricted Stock Agreement forImmersion Corporation 2011 Equity IncentivePlan. 10-Q 000-27969 10.4 August 5, 2011 10.17 Office Lease between Carr NP Properties, L.L.C.,and Immersion Corporation dated September15, 2011. 10-Q 000-27969 10.2 November 7, 2011 10.18 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 10.19 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 10.20* 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 10.21 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 10.22 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 10.23* Offer Letter dated November 24, 2014 by andbetween Immersion Corporation and MaheshSundaram. 10-K 000-27969 10.34 February 27, 2015 10.24* Offer Letter dated August 22, 2016 by andbetween Immersion and Nancy Erba 8-K 000-27969 10.1 September 7, 2016 82Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewithForm File No. Exhibit Filing Date 10.25* Retention and Ownership Change Agreementdated August 22, 2016 by and betweenImmersion and Nancy Erba 8-K 000-27969 10.2 September 7, 2016 10.26# 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 10.27* Employment Agreement dated December 6,2017 between Immersion and Carl Schlachte 8-K 000-27969 10.1 December 12, 2017 10.28 Separation Agreement dated January 2, 2018between Immersion and Victor Viegas 8-K/A 000-27969 10.2 January 3, 2018 10.29 Separation Agreement dated December 27,2017 between Immersion and MaheshSundaram 8-K/A 000-27969 10.1 January 3, 2018 10.30 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 10.31# Settlement and License Agreement, betweenImmersion and Apple Inc., dated as of January26, 2018 10-Q/A 01-38334 10.2 July 31, 2018 10.32 Cooperation Agreement dated May 11, 2018 byand among Immersion Corporation and VIEXOpportunities Fund, LP - Series One, VIEXSpecial Opportunities Fund II, LP, VIEX GP,LLC, VIEX Special Opportunities GP II, LLC,VIEX Capital Advisors, LLC, and Eric Singer. 8-K 01-38334 10.1 May 11, 2018 10.33* Amended and Restated Retention andOwnership Change Agreement dated February26, 2018 by and between Immersion and NancyErba 10-Q 01-38334 10.4 May 11, 2018 10.34* Amended and Restated Retention andOwnership Change Agreement dated February26, 2018 by and between Immersion and AnneMarie Peters 10-Q 01-38334 10.6 May 11, 2018 10.35* Letter Agreement between ImmersionCorporation and Tom Lacey dated August 21,2018 8-K 01-38334 99.1 August 22, 2018 10.36* Employment Agreement between ImmersionCorporation and Tom Lacey dated October 29,2018 8-K 01-38334 10.1 October 30, 2018 10.37* Employment Agreement between Immersionand Ramzi Haidamus dated December 31, 2018 8-K 01-38334 10.1 January 7, 2019 83Table of ContentsExhibitNumber Exhibit Description Incorporated by Reference FiledHerewith 21.1 Subsidiaries of Immersion Corporation. X23.1 Consent of Independent Registered PublicAccounting Firm. X31.1 Certification of Ramzi Haidamus, 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 Ramzi Haidamus, 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. X101.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#Confidential treatment has been granted for portions of this exhibit by the SEC.*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.84Table of ContentsItem 16. Form 10-K SummaryNone.SIGNATURESPursuant 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, 2019 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 Ramzi Haidamus 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/ RAMZI HAIDAMUS Chief Executive Officer and Director (PrincipalExecutive Officer) February 27, 2019Ramzi Haidamus /S/ NANCY ERBA Chief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer) February 27, 2019Nancy Erba /S/ SHARON HOLT Chairman of the Board and Director February 27, 2019Sharon Holt /S/ TOM LACEY Director February 27, 2019Tom Lacey /S/ DAVID SUGISHITA Director February 27, 2019David Sugishita /S/ KENNETH TRAUB Director February 27, 2019Kenneth Traub /S/ JOHN VESCHI Director February 27, 2019John Veschi 85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, 2018 Allowance for doubtful accounts $— $—Year ended December 31, 2017 Allowance for doubtful accounts $— $— $— $—Year ended December 31, 2016 Allowance for doubtful accounts $15 $2 $17 $—86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, 2019, relating to the consolidated financial statements and consolidated financial statement scheduleof Immersion Corporation and subsidiaries (the “Company”), (which expresses an unqualified opinion and includes an explanatory paragraph related to theCompany’s change in method of accounting for revenue in fiscal year 2018 due to the adoption of ASC 606), and the effectiveness of the Company’s internalcontrol over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2018./s/ DELOITTE & TOUCHE LLPSan Jose, CaliforniaFebruary 27, 2019Exhibit 31.1CERTIFICATIONS PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Ramzi Haidamus, 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, 2019/s/ RAMZI HAIDAMUS Ramzi Haidamus 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, 2019/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, 2018 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Ramzi Haidamus, Chief Executive Officer of the Company, certify, pursuant to 18U.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/ RAMZI HAIDAMUS Ramzi Haidamus Chief Executive Officer February 27, 2019A 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, 2018 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, 2019A 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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