10-K 1 d274200d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011 or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission File Number 000-27969

 

 

Immersion Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   94-3180138
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

30 Rio Robles

San Jose, California 95134

(Address of principal executive offices, zip code)

(408) 467-1900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on which Registered

Common Stock, $0.001 par value

  The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes [    ]  No [x]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [    ]  No [x]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]        No [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [x]  No [    ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [x]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  [    ]

    Accelerated filer  [x]

Non-accelerated filer   [    ] (Do not check if a smaller reporting company)

  Smaller reporting company  [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [    ]  No[x]

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was $174,596,058 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person whom owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares of common stock outstanding at February 24, 2012: 27,880,980.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2012 Annual Meeting are incorporated by reference into Part III hereof.

 

 

 


Table of Contents

IMMERSION CORPORATION

2011 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

PART I    Page  

Item 1.

 

Business

     3   

Item 1A.

 

Risk Factors

     14   

Item 1B.

 

Unresolved Staff Comments

     28   

Item 2.

 

Properties

     28   

Item 3.

 

Legal Proceedings

     29   

Item 4.

 

Mine Safety Disclosures

     31   
PART II   

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     31   

Item 6.

 

Selected Financial Data

     33   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     47   

Item 8.

 

Financial Statements and Supplementary Data

     48   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     82   

Item 9A.

 

Controls and Procedures

     82   

Item 9B.

 

Other Information

     82   
PART III   

Item 10.

 

Directors, Executive Officers and Corporate Governance

     84   

Item 11.

 

Executive Compensation

     84   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     84   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     84   

Item 14.

 

Principal Accounting Fees and Services

     84   
PART IV   

Item 15.

 

Exhibits, Financial Statement Schedules

     85   

Signatures

     89   

 

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Forward-looking Statements

In addition to historical information this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). The forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements which refer to expectations, projections, or other characterizations of future events, or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” “Risk Factors” and those described elsewhere in this report, and those described in our other reports filed with the Securities and Exchange Commission (“SEC”). We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

PART I

Item 1.   Business

Overview

Immersion Corporation is a leading provider of haptic technologies that allow people to use their sense of touch more fully when operating a wide variety of digital devices. To achieve this heightened interactivity, we develop and market or license a wide range of software technologies and products. While we believe that our technologies are broadly applicable, we are currently focusing our marketing and business development activities on the following target markets: mobile communications & consumer electronics, automotive, gaming, commercial and industrial, and medical.

Prior to April 2010, we managed these markets under two operating and reportable segments: 1) the Touch Line of Business and 2) the Medical Line of Business. In March 2010, we sold certain assets of the Endoscopy, Endovascular, and Laparoscopy medical simulation product lines. See Note 11 of the consolidated financial statements. As a result, our business has been consolidated into a single segment and we now operate primarily under a licensing model. As such, we no longer report on a segment basis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as the notes to the consolidated financial statements for further information.

In our target markets we license our technologies to manufacturers who use them in products sold under their own brand names. We and our wholly owned subsidiaries hold more than 1,200 issued or pending patents in the U.S. and other countries, covering various aspects of hardware and software technologies.

Immersion Corporation was incorporated in 1993 in California and reincorporated in Delaware in 1999. We consummated our initial public offering on November 12, 1999.

Our Business Strategy

Our goal is to continue to be the technology and market leader in haptic technologies and drive the adoption of our touch technologies across markets and applications to improve the user experience with digital devices and systems. Key aspects of our strategy include:

Extending our Technology Leadership Position: We and our wholly owned subsidiaries have a global technology portfolio of over 1200 issued or pending patents. We intend to leverage this technology portfolio,

 

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know-how and expertise to extend our leadership position in the haptics and user interface markets. We aim to do this by taking a system-level approach to innovation, which will require us to continuously evolve our technology to provide natural and realistic touch effects, while also inventing new contexts in which users experience haptics. We plan to do this by continuing our investment in research and engineering activities and also through expanding our relationships with technology partners and alliances as well as through potential technology acquisitions.

Continuing our Licensing Business Model: We believe the licensing business model is one that provides us with the flexibility to leverage various distribution channels to extend the reach of haptics technology into a broad number of markets. This commitment to a licensing business model will allow us to focus our energy on technology leadership and innovation and provide our customers, licensees and partners with compelling haptic technology and experiences.

Capitalizing on the Trend of Touch Screens in Mobile and Other Markets: The proliferation of touch screen device designs is a trend that we believe is aligned with the value proposition of haptics. Through our technology innovation efforts, our sales and distribution channels and our marketing efforts, we will look to capitalize upon this movement toward touch screen devices by offering existing and new customers haptic solutions that enhance the user experience with touch screen devices.

Expanding Our Customer Relationships: We plan to strengthen and expand our top tier customer relationships in our target markets to develop new haptic experiences that are the most advanced solutions in the market. We plan to do this by developing technology and tools that simplify haptic integration for our customers, as well as offering development tools that extend access to haptic effects to third parties and developers, increasing the accessibility of haptic technology to a broader ecosystem of partners.

Haptics and Its Benefits

In the world of mobile devices, computers, consumer electronics, and digital devices and controls, meaningful haptic (touch) information is limited or missing. For example, when dialing a number or entering text on a conventional touchscreen, users feel only the touchscreen surface, without the subtle, yet confirming sensation they expect from mechanical switches and keyboards.

To supply richer, more meaningful haptic feedback — also known as force feedback, touch feedback, or tactile feedback — electronic input/output devices can be made to generate physical forces. Immersion’s programmable haptic technologies embedded in many types of devices can give users physical sensations appropriate to the situation. We believe the programmability of our haptic products is a key differentiator over purely electro-mechanical systems and can drive the further adoption of cost effective and more reliable digital devices. A programmable device can supply a tactile response appropriate to the context of operation for systems and devices of many types. Programmability also supplies more flexibility in the types of responses that are possible, in upgradeability, in consistent performance that will not degrade over time, and in the potential for personalized settings. Multiple mechanical controls can be consolidated into one versatile programmable control that can save space and improve ergonomics. Conversely, one programmable control device can be implemented to cover many different types of controls with context-appropriate touch feedback, which can reduce or simplify parts in a device.

With Immersion’s haptics, users can feel as though they are interacting with different textures and mass, compliant springs, solid barriers, deep or shallow detents. They can feel the force or resistance as they push a virtual button, scroll through a list or encounter the end of a menu. In a video or mobile game, users can feel the gun recoil, the engine rev, or the crack of the bat meeting the ball. When simulating the placement of cardiac pacing leads, a user can feel the forces that would be encountered when navigating the leads through a beating heart, providing a more realistic experience of performing this procedure. These forces are created by actuators, such as motors, which are built into devices such as joysticks, steering wheels, gamepads, personal music players, mobile phones, robotic surgical systems and medical training simulators. Actuators can also be designed

 

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into devices used in automotive, industrial, medical, or retail kiosk and point-of-sale systems, such as digital switches, rotary controls, touchscreens, and touch surfaces. These actuators are combined with software elements to control the actuator behavior to create the haptic sensation.

Understanding that a user experience is the result of a confluence of software and enabling hardware, Immersion has taken a system-level approach to technology development: continuously developing a foundational expertise in haptic technology to provide natural and realistic touch effects while also inventing new contexts in which users experience haptics. Immersion’s patented technologies include software elements, such as real-time software algorithms and authoring tools, and specialized hardware elements, such as motors, sensors, transmissions and control electronics. Together, these software and hardware elements enable tactile sensations that are context appropriate within the applications, creating a compelling user experience. We believe our haptic solutions offer the following benefits:

 

   

Improved Usability: By restoring the mechanical feel of buttons and controls in devices, our haptic technology provides critical tactile feedback that enhances device usability.

   

Realism: Haptics injects a sense of realism into user experiences, allowing the user to feel the action and nuance of the application. This is particularly relevant in applications that rely on only visual and audio inputs. The addition of tactile feedback provides additional context that translates into a sense of realism for the user.

   

Ease of Integration: Our solutions take a system-level approach that provides our customers with resources in the mechanical integration of haptics as well as the operating system and application integration. At the mechanical level, our solutions come with in-depth design recommendations, as well as a vetted community of approved component vendors. At the OS and application level, we provide integration tools to improve the usability of haptic effects in the device, as well as customization tools for developers to insert or create their own haptic effects.

We believe these features of our haptic technology are broadly applicable to a number of markets and devices. By continuing to enhance these features through further research and development, we believe we will serve as a strategic partner for our customers and partners in helping them develop a more compelling user experience for consumers.

Our Solutions

Our goal is to improve the way people interact with digital devices by engaging their sense of touch. Our core competencies include our understanding of how interactions should feel and our knowledge of how to use technology to achieve that feeling. Our strength in both of these areas has resulted in many novel applications.

We believe that our touch-enabled products and technologies give users a more complete, intuitive, enjoyable, and realistic experience. Our patented designs include software elements such as real-time software algorithms and authoring tools, and specialized hardware elements, such as motors, sensors, transmissions, and control electronics. Together, these software and hardware elements enable tactile sensations that are context-appropriate within the application.

We have developed haptic systems for many types of hardware input/output devices such as gamepads, joysticks, mobile phones, rotary controls, touchscreens, and flexible and rigid endoscopy devices for medical simulations.

We have developed many mechanisms and recommended design solutions to convey forces to the user’s hands or body. These include vibro-tactile actuators, direct-, belt-, gear-, or cable-driven mechanisms and other proprietary devices that supply textures and vibration, resistance, and damping forces to the user.

To develop our real-time electronic actuator controllers, we had to address challenges such as size, accuracy, resolution, frequency, latency requirements, power consumption, and cost. Our control solutions include both

 

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closed-loop and open-loop control schemes. In closed-loop control, the firmware reads inputs from the input/output devices, and then calculates and applies the output forces in real time based on the input data. In open-loop control, a triggering event will activate the firmware to calculate and send the output signal to the actuator in real time.

We have developed many software solutions for various operating systems and computing platforms including personal computers, automotive, and mobile handset operating systems. Our inventions include control algorithms for efficiently driving relevant families of actuators (such as spinning mass actuators, linear actuators, and piezo-electric systems) as well as several generations of authoring tools for creating, visualizing, modifying, archiving, and experiencing haptic feedback.

Licensed Solutions

In our target application areas, such as mobile phones, video console gaming, consumer electronics, medical simulation and surgical robotic systems and automotive controls, we license our technologies to OEMs or their suppliers who then include our technologies in products sold under their own brand names. We license our technology solutions under the TouchSense brand, and have developed a family of TouchSense solutions that are intended to address the needs of our target markets.

TouchSense 1000: Targeted to the commercial and industrial and automotive markets, the TouchSense 1000 family offers haptic effects for touch screens, touch panels, and touch surfaces that is optimized for strength in demanding applications and extreme environments.

TouchSense 2000: Targeted to mass market consumer electronic devices such as microwaves, cameras and tablet PCs, the TouchSense 2000 family provides haptic effects for touch screens and touch panels, providing pre-designed haptic effects and UI support along with design recommendations oriented for mass market devices.

TouchSense 3000: Targeted to the mobile communications and consumer electronics market, the TouchSense 3000 family provides precise actuator control to single actuator designs, making it an easy to implement solution that enables over 100 haptic effects.

TouchSense 4000: Building off the TouchSense 3000 family, the TouchSense 4000 family also targets the mobile communications and consumer electronics market by providing controls for higher-fidelity haptic designs which utilize multiple actuators. The TouchSense 4000 family offers a higher level of control, creating the opportunity for an increased number of haptic effects with finer resolution.

TouchSense 5000: Targeted to the mobile communications and consumer electronics market, the TouchSense 5000 family offers haptic controls for high-fidelity piezo and/or smart actuators, creating crisp, realistic and nuanced haptic effects.

TouchSense 6000: Targeted to the gaming and automotive market, the TouchSense 6000 family provides force feedback control for wheels, joysticks and rotary switches.

IP Licensing: While our primary approach is to sell solutions, we also offer Intellectual Property (“IP”) and technology licenses to those customers who wish to develop their own proprietary haptic implementations. Immersion licenses its IP across all of its target markets.

For both our IP and TouchSense licensees, we offer our expertise to help them design and integrate touch effects into their products. This expertise includes turn-key engineering and integration services, design kits for prototyping, authoring tools, application programming interfaces, and the development of hardware and software technologies that are compatible with industry standards. Also, as of February 2011, our TouchSense customers can license our MOTIV Development Platform, a software development program designed to improve the mobile user experience through haptics.

Turn-key Engineering and Integration Services — We offer engineering assistance, including technical and design assistance and integration services that allow our licensees to incorporate our touch-enabling products and

 

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technologies into their products at a reasonable cost and in a shortened time frame. This allows them to get to market quickly by using our years of haptic development and solution deployment expertise. We offer product development solutions including product software libraries, design, prototype creation, technology transfer, actuator selection, component sourcing, development/integration kits, sample source code, comprehensive documentation, and other engineering services. In addition, we help ensure a quality end-user experience by offering testing and certification services to a number of licensees.

Design Kits for Prototyping — We offer several design kits for customers to use for technology evaluation, internal evaluation, usability testing, and focus group testing. The kits include components and documentation that designers, engineers, and system integrators need for prototyping TouchSense touch feedback into an existing or sample product.

Authoring Tools — We license authoring tools that enable haptic designers and software developers to quickly design and incorporate custom touch feedback into their own applications. Authoring tools allow designers to create, modify, experience, and save or restore haptic effects for a haptic device. The tools are the equivalent of a computer-aided design application for haptics. Our authoring tools support vibro-tactile haptic devices (such as mobile phones, touchscreens, and vibro-tactile gaming peripherals), as well as kinesthetic haptic devices (such as rotary devices, 2D devices, and joysticks). Various haptic effect parameters can be defined and modified, and the result immediately experienced. Our authoring tools run on mainstream operating systems such as Microsoft Windows.

Application Programming Interfaces or (“APIs”) — Our APIs provide haptic-effect generation capability. This allows designers and software programmers to focus on adding haptic effects to their applications instead of struggling with the mechanics of programming real-time algorithms and handling communications between computers and devices. Some of our haptic APIs are device independent (for example, they work with scroll wheels, rotary knobs, 2D joysticks, and other devices) to allow flexibility and reusability. Others are crafted to meet the needs of a particular customer or industry.

Platform Independent Solutions — Our software driver and API technology have been designed to be easily ported to a variety of operating systems including Windows, Windows CE, REX (from QUALCOMM), and various Linux platforms including Android, Maemo and VxWorks.

Products and Markets

Mobile Communications and Consumer Electronics — We developed TouchSense solutions for the mobile phone market and a variety of consumer electronics.

The TouchSense Solution for mobile phones for handset OEMs, operators, and application developers includes a TouchSense Player, a vibration playback system that is embedded in the phone, and a TouchSense software toolkit, including a PC-based composition tool for creating haptic effects for inclusion in content and applications. Haptic effects can be used in alerts, e-mail, games, messages, ringtones, touchscreen interactions, and other user interface features to add information or identification, signal status or message arrival, and heighten interest or fun. With a TouchSense-enabled phone, users can send and receive a wide range of vibro-tactile haptic effects independently from or in synchronicity with audio, video, and application program content.

Our licensees currently include the top three of ten makers of mobile phones by volume in the world: Nokia, Samsung, and LG Electronics plus others such as Pantech Co., Ltd., Toshiba, and KTF Technologies Inc. Since its launch in the first handset in 2005, our TouchSense technology has shipped in nearly 400 million handsets. Notable product announcements during 2011 from our licensees include the N9 mobile phone from Nokia, as well as the Galaxy S II and Note smartphones from Samsung, and the LG Optimus Black mobile phone. Additionally in September 2011, Fujitsu became the first OEM to come to market with the MOTIV Integrator product, in the F-12C smartphone, which also incorporated Immersion’s TouchSense 3000 software. We continue to evolve our technology to improve the haptic experience and add value to our licensees, and intend to

 

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work with emerging haptic enablement technologies to develop superior haptic effects for the mobile environment. Examples of this initiative include the announcement of the MOTIV Integrator product for OEMs in February 2011, which provides an improved user experience through the automated integration of haptic effects into the Android OS, and the March 2011 announcement of the MOTIV SDK which enables 3rd party Android application developers to natively design haptic effects into their applications. We intend to expand the capabilities of the MOTIV Integrator and MOTIV SDK to offer new features that create compelling haptic experiences to our OEMs and the application development community.

For the years ended December 31, 2011, 2010, and 2009, respectively, 44%, 36%, and 29% of our total revenues were generated from mobile communications.

At Mobile World Congress in February 2011, Samsung announced the expansion of its Android-based tablet product line with the Samsung 10.1 Tab, which incorporates Immersion’s haptic feedback technology. In 2011, Toshiba introduced the Thrive tablet product line, which consists of the 7” and 10” tablet devices which incorporate Immersion’s TouchSense 3000 technology. In October, 2011, Fujitsu became the first tablet manufacturer to incorporate Immersion’s MOTIV platform along with its TouchSense 3000 software, in their ARROWS Tab. Finally, in January 2012, Pantech became the first device manufacturer to ship Immersion’s High Definition TouchSense 5000 product, in their Element Tab, which also shipped with Immersion’s MOTIV Integrator.

Gaming Devices — We have licensed our TouchSense intellectual property to Microsoft Corporation for use in its gaming products and to Sony Computer Entertainment Inc. for use in its legacy and current PlayStation console gaming products. We have also licensed our TouchSense intellectual property to over a dozen gaming peripheral manufacturers and distributors, including Logitech and Mad Catz, Inc., to bring haptic technology to PC platforms including Microsoft Windows operating systems, as well as to video game consoles.

In the video game console peripheral market, we have licensed our intellectual property for use in hundreds of spinning mass tactile feedback devices and force feedback devices such as steering wheels and joysticks to various manufacturers including Alliance Sales and Distribution Inc., Bensussen Deutsch & Associates Inc.(“BDA”), Datel Design & Inc., dreamGear LLC, Gemini Industries, Inc., Griffin Marketing and Promotions, Inc., Guillemot Corporation, Hori (U.S.A.), Inc., Intec, Inc., Katana Game Accessories PTE Ltd., Logitech Inc., Mad Catz, Inc., Microsoft Corporation, NYKO Technologies, Inc., Performance Designed Products (“PDP”) (formerly Electro Source LLC) , Razer PTE Ltd, Sony, Sunflex USA Inc., and Uniq Limited. These products are designed to work with one or more video game consoles including the Xbox and Xbox 360 from Microsoft; the PlayStation, PlayStation 2, and PlayStation 3 from Sony; and the N64, GameCube, and Wii from Nintendo. Currently, products sold to consumers using TouchSense technology include PC joysticks, steering wheels, and gamepads from various licensees.

For the years ended December 31, 2011, 2010, and 2009, respectively, 31%, 24%, and 19% of our total revenues were generated from PC and console gaming revenues.

In the arcade entertainment market, our products include steering wheel and joystick control electronics that provide industrial strength and quality force feedback that enable very realistic simulations.

In the casino and bar-top amusement market, we signed an agreement with 3M Touch Systems Inc. in 2005 that allows it to manufacture and distribute its 3M MicroTouch® touch screens with our TouchSense technology.

Automotive — We have developed TouchSense technology for rotary controls, touchscreens, and touch surfaces appropriate for use in automobiles. TouchSense rotary technology can consolidate the control of multiple systems into a single module that provides the appropriate feel for each function. This allows the driver convenient access to many systems and supplies context-sensitive cues for operation. TouchSense touchscreen and touch surface technology provides tactile feedback for an otherwise unresponsive surface such as an all digital switch or touchscreen. Programmable haptic touchscreen, touch surface, and rotary controls of many types can be used to provide a space-saving, aesthetic look and a confirming response for the driver that can help reduce glance time.

We have licensed our TouchSense rotary technology for use in vehicle controls since 2002. Siemens VDO Automotive (now Continental AG) has licensed our technology for use in the high-end Volkswagen Phaeton

 

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sedan and Bentley cars. ALPS Electric Co., Ltd. (“ALPS”), which in February 2011 broadened and extended their licensing agreement to 2016, has produced a haptic rotary control that has been included in the Mercedes-Benz S-Class sedan. ALPS also produced a two-dimensional haptic control module called the Remote Touch controller in the Lexus RX 350 and 450h. These 2010 Lexus models were announced in November 2008 and launched in the U.S. in February 2009. Other licensees of TouchSense technology in the automotive industry include: Methode Electronics, Inc., a global designer and manufacturer of electronic component and subsystem devices; Visteon a leading global automotive supplier that designs, engineers, and manufactures innovative climate, interior, electronic, and lighting products for vehicle manufacturers; Volkswagen AG, Europe’s largest automaker; SMK Corporation of Tokyo, a global manufacturer of electromechanical components; Daesung Electric Co. Ltd., a leading Korean automotive original design manufacturer (ODM) and major supplier to Hyundai and Kia.; and Panasonic Corp. (formerly Sanyo Automedia), a leading supplier of factory installed automotive systems, such as integrated center stacks, for the Cadillac brand of General Motors cars.

For the years ended December 31, 2011, 2010, and 2009, respectively, 6%, 6%, and 6% of our total revenues were from automotive customers.

Medical — In March 2010, we sold certain assets of the endoscopy, endovascular, and laparoscopy medical simulation product lines. See Note 11 of the consolidated financial statements for a further discussion.

As a result of this sale of the majority of the medical products business to CAE in March 2010, we currently have a single remaining medical simulation product line, the Virtual IV system, which simulates needle-based procedures such as intravenous catheterization and phlebotomy, and is a jointly developed product with our partner Laerdal Medical A/S, who distributes this product on a world-wide basis.

We have developed and licensed numerous simulation technologies that can be used for medical training and testing. By enabling a medical simulator to more fully engage users’ sense of touch, our technologies can support realistic simulations that are effective in teaching medical students, doctors, and other health professionals what it feels like to perform a given procedure. The use of these simulators allows these professionals to perfect their practice in an environment that poses no risks to patients, where mistakes have no dire consequences, and where animal or cadaver use is unnecessary.

We have developed TouchSense technology for virtual simulators, touchscreens, and touch surfaces appropriate for use in medical simulation and surgical robotics. TouchSense simulation technology enhances motor skills training on medical tasks or techniques, such as suturing and knot tying, and restores the sense of “feel” to interaction such as navigating an airway or maneuvering through the colon, providing users with intuitive and unmistakable confirmation as they complete tasks or techniques. TouchSense touchscreen and touch surface technology provides tactile feedback for otherwise unresponsive surfaces such as an all digital switch or touchscreen. Programmable haptic touchscreen and touch surface controls of many types can be used to provide healthcare professionals with intuitive touch confirmation to deliver critical information in medical devices such as ultrasound machines and vital sign monitoring systems.

In 2009, we entered the robotic surgical market by licensing our TouchSense technology to MAKO Surgical Corp. In March 2010 we expanded our participation in the robotic surgical market by entering into a licensing agreement with SOFAR S.P.A. to incorporate our simulation technology in its ALF-X Laparoscopy telesurgical robot system. We intend to pursue additional licensees to further expand our licensing business into this market.

For the years ended December 31, 2011, 2010, and 2009, respectively 15%, 23%, and 41% of our total revenues were from the medical line of business. The decline in 2010 primarily reflects the decision to divest most of our medical product lines to CAE in March 2010.

Commercial and Industrial — We extended our reach into the commercial and industrial markets through licensing agreements with Densitron Inc. in 2009 and Tastitalia S.r.l. in 2010. While this market does not currently represent a material part of our business, it represents an opportunity for us to leverage our licensing business model to accelerate the adoption of haptics into new markets.

 

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Manufactured Products

Prior to the divesting of our medical products line of business in March 2010, we produced our products using both contracted and in-house manufacturing. Today, our product solutions are limited to components used for design kits and a single line of business that is manufactured on a “private” label basis for a customer, the Virtual IV system (see Products and Markets — Medical). These manufactured products no longer represent a material part of our business.

As previously announced in March of 2010, we divested most of our line of medical simulation products to CAE Healthcare USA Inc. (“CAE”). These products included our:

 

 

Endoscopy AccuTouch® System;

 

The CathLab VR System; and

 

LapVR System.

Additionally, as previously announced in late 2008, we divested our line of 3D products in 2009. These products included our:

 

 

MicroScribe® digitizers;

 

a 3D interaction product line; and

 

SoftMouse® 3D positioning device.

Sales and Distribution

Our sales have been seasonal with typically an increase in the first quarter reflecting holiday shipments of our customers with integrated Immersion technology. Both mobile phones and gaming products are subject to shipment increases in the fourth quarter which is reflected in our first quarter revenue. Seasonal fluctuations have not been extremely significant to our overall revenue trends in the past. With mobile phone sales potentially increasing, our business may become more seasonal as we leverage new products and have our technology in additional mobile phone designs.

In the PC and video console gaming, consumer electronics, mobility, and automotive markets, we establish licensing relationships through our business development efforts.

We have signed license agreements with mobile handset manufacturers for the incorporation of TouchSense technology into certain mobile phone handsets.

We employ a consolidated direct sales force in the United States, Europe, and Asia to license our TouchSense software products across our target markets and augment that sales force via partnerships and licensing agreements with component suppliers and system integrators.

In gaming, as part of our strategy to increase our visibility and promote our touch-enabling technology, our consumer-products licensees may also require our licensees to display the TouchSense technology logo on their end products.

In gaming, automotive, commercial and industrial, our touch screen and touch surface products are licensed to large system integrators and OEMs.

In the automotive market, we have licensed our technology to leading automotive component suppliers including Panasonic, Methode Electronics, Inc., ALPS, SMK Corporation, and Visteon as part of our strategy to speed adoption of our TouchSense technologies across the automotive industry. In the commercial and industrial market, we entered into licensing agreements with Densitron Inc. in 2009 and Tastitalia S.r.l. in 2010 as part of our strategy to leverage our licensing business model to broaden the reach of haptics into new markets.

In 2009, we began implementing a strategy to broaden and expand market penetration by licensing our TouchSense technology into several chip manufacturers with the goal that these licensees will broaden their

 

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product offerings with the addition of haptics. In 2011, we entered into licensing agreements with Microchip and Texas Instruments. Other chip manufacturer licensees include Atmel Corporation, Cypress Semiconductor Corporation, Renesas Technology America, Inc., and Imagis.

Competition

With respect to touch-enabled consumer products, we are aware of several companies that claim to possess touch feedback technology applicable to the consumer market. In addition, we are aware of several companies that currently market unlicensed touch feedback products in consumer markets.

The principal competitive factors are the strength of the intellectual property underlying the technology, the technological expertise and design innovation and the use, reliability and cost-effectiveness of the products. We believe we compete favorably in all these areas.

Several companies also currently market touch feedback products that are competitive to ours in non-consumer markets. These companies could also shift their focus to the consumer market. In addition, our licensees or other companies may develop products that compete with products employing our touch-enabling technologies, but are based on alternative technologies, or develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents. Many of our licensees, including Microsoft, LG Electronics, Logitech, Nokia, Samsung, and others have greater financial and technical resources upon which to draw in attempting to develop computer peripheral or mobile phone technologies that do not make use of our touch-enabling technologies.

For licensed applications, our competitive position is partially dependent on the competitive positions of our licensees that pay a license fee and/or royalty. Our licensees’ markets are highly competitive. We believe that the principal competitive factors in our licensees’ markets include price, performance, user-centric design, ease-of-use, quality, and timeliness of products, as well as the manufacturer’s responsiveness, capacity, technical abilities, established customer relationships, retail shelf space, advertising, promotional programs, and brand recognition. Touch-related benefits in some of these markets may be viewed simply as enhancements and compete with nontouch-enabled technologies.

Research and Development

Our success depends on our ability to invent, improve, and reduce the cost of our technologies in a timely manner; to design and develop products to meet specifications based on research and our understanding of customer needs and expectations; and to collaborate with our licensees who are integrating our technologies into theirs.

Immersion Engineering — We have assembled a multi-disciplinary team of highly skilled engineers and scientists with the experience required for development of touch-enabling technology. The team’s experience includes skills related to mechanical engineering, electrical engineering, embedded systems and firmware, control techniques, software, quality control, haptic content design, and project and process management.

Application Engineering and Technical Support — We may provide application engineering and technical support during integration of our touch-enabling technology into customer products. 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 onsite training.

Licensee Interaction — Typically, our development efforts in designing new systems, when the solution is not known beforehand, is structured using a multi-phase approach. Those phases are product definition, concept development, and detail design. In the process of the detail design phase, we work closely with technology partners and may transition the completion of the detail design phase to those partners to carry into the

 

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production design phases. Each phase includes formal design reviews and documentation. The development effort is contingent upon successful completion and acceptance of prior phases. This method helps ensure that the customer’s financial risk is minimized and that project deliverables remain consistent with the goals established in the product definition phase.

Product Development Process — In mid-2009, we transitioned from a product design process based on ISO 9001 guidance to the customer-focused Agile Scrum project management process. This process starts with the typical marketing and product requirement stages, with customer and project stakeholder feedback and review at frequent intervals during the development phase, ensuring that the product development team remains nimble and can react quickly to changes in market needs. The process is supported by documentation procedures and tools, design reviews, revision control, quality assurance testing, and formal product release procedures.

Research — We have a dedicated team of researchers and scientists, experts in haptics and multimodal systems, focusing on creating solutions to enable new markets and applications. We have multidisciplinary expertise in usability and multimodal user interface design, actuator design, sensors, integration, material science, real-time simulation algorithms, control, and software development. Our team is involved with existing and potential partners to help them assess and prove the value of haptics in their field of interest, creating main competitive differentiator and value added solutions. Our team continues to generate patent applications, actively contributing to the reinforcement of Immersion’s intellectual property (“IP”) position.

User Experience — We have a dedicated team of user interaction specialists, focusing on user research and design to enable new and improved applications of haptics. We have unique expertise in haptics, usability and interface design. Our team is involved with existing and potential partners to help them determine the best implementation of haptics in their specific application. This team works on the cutting edge of new user interface paradigms using haptics, resulting in an ongoing generation of patent applications, actively contributing to the development of new IP for us.

For the years ended December 31, 2011, 2010, and 2009, research and development expenses were $8.4 million, $8.7 million, and $12.5 million respectively. The decrease in research and development expense for the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to the divestiture of the medical simulation product lines.

Intellectual Property

We believe that intellectual property protection is crucial to our business. We rely on a combination of patents, copyrights, trade secrets, trademarks, nondisclosure agreements with employees and third parties, licensing arrangements, and other contractual agreements with third parties to protect our intellectual property.

Our failure to obtain or maintain adequate protection for our intellectual property rights for any reason could hurt our competitive position. There is no guarantee that patents will be issued from the patent applications that we have filed or may file. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage.

In August of 2011, we announced that we and our wholly owned subsidiaries reached a milestone of over 1,200 currently issued or pending patents in the U.S. and other countries that cover various aspects of our hardware and software technologies. Some of our U.S. patents have begun to expire starting in 2007. We amortize our patents over their estimated useful lives, generally 10 years. Where we believe it is appropriate, we will protect our intellectual property rights through the legal system.

Investor Information

You can access financial and other information in the Investor Relations section of our Web site at www.immersion.com. We make available, on our Web site, free of charge, copies of our annual report on

 

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Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

The charters of our audit committee, our compensation committee, and our nominating/corporate governance committee, and our Code of Business Conduct and Ethics (including code of ethics provisions that apply to our principal executive officer, principal financial officer, controller, and senior financial officers) are also available at our Web site under “Corporate Governance.” These items are also available to any stockholder who requests them by calling +1 408.467.1900.

The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Employees

As of December 31, 2011, we had 85 full-time and part-time employees, including 44 in research and development, 19 in sales and marketing, and 22 in legal, finance, and administration. We also use independent contractors. None of our employees are represented by a labor union, and we consider our employee relations to be positive.

Executive Officers

The following table sets forth information regarding our executive officers as of March 2, 2012.

 

Name    Position with the Company   Age

Victor Viegas

   Chief Executive Officer, Interim Chief Financial Officer, and member of the Board of Directors   54

Joseph LaValle

  

Vice President, Sales

  62

 

 

Mr. Viegas has served as Chief Executive Officer since October 2009 and as a member of the Board of Directors since October 2002 and as Interim Chief Financial Officer since December 2011. Mr. Viegas was our Chief Executive Officer from October 2002 through April 2008, and President from February 2002 through April 2008. Mr. Viegas was also Chairman of the Board of Directors from October 2007 to February 2009, and assumed the role of interim Chief Financial Officer as of December 2011. Mr. Viegas also served as Chief Financial Officer until February 2005, having joined us in August 1999 as Chief Financial Officer, Vice President, Finance. From June 1996 to August 1999, he served as Vice President, Finance and Administration and Chief Financial Officer of Macrovision Corporation, a developer and licensor of video and software copy protection technologies. From October 1986 to June 1996, he served as Vice President of Finance and Chief Financial Officer of Balco Incorporated, a manufacturer of advanced automotive service equipment. He holds a B.S. in Accounting and an M.B.A. from Santa Clara University. Mr. Viegas is also a Certified Public Accountant (inactive) in the State of California.

Joseph LaValle joined Immersion in August, 2009 as Vice President, Sales of the Touch Line of Business. Mr. LaValle was promoted to Vice President, Sales in August, 2010. From September 2008 through June, 2009, he served as Vice President of Sales at Telegent Systems. He served as Vice President of Sales at SiRF Technology Holdings, Inc. from September 2003 through September 2008. Mr. LaValle spent eight years on assignment in Hong Kong and Tokyo for Intel from May 1998 through August 2003 and Digital Equipment’s semiconductor division from October 1994 through May, 1998. Positions included Director of Asia Pacific Sales for Intel’s Communications Sales Organization, General Manager of the Communications and Embedded Sales Group at Intel Japan, and Director of Asia Pacific Sales for Digital Equipment. Mr. LaValle also held various sales and marketing management positions at 3M. He holds a Bachelor of Arts degree from Wabash College.

 

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Item 1A.   Risk Factors

You should carefully consider the following risks and uncertainties, as well as other information in this report and our other SEC filings, in considering our business and prospects. If any of the following risks or uncertainties actually occurs, our business, financial condition, or results of operations could be materially adversely affected. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are unaware or that we currently believe are immaterial could also materially adversely affect our business, financial condition, or results of operations. In any case, the trading price of our common stock could decline, and you could lose all or part of your investment. See also the Forward-looking Statements discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Company Risks

If we are unable to enter into new licensing arrangements with our existing licensees and with additional third-party manufacturers for our touch-enabling technologies, our royalty revenue may not grow.

Our revenue growth is largely dependent on our ability to enter into new licensing arrangements. Our failure to enter into new or renewal of licensing arrangements will cause our operating results to suffer. We face numerous risks in obtaining new licenses on terms consistent with our business objectives and in maintaining, expanding, and supporting our relationships with our current licensees. These risks include:

 

   

the lengthy and expensive process of building a relationship with potential licensees;

 

   

the competition we may face with the internal design teams of existing and potential licensees;

 

   

difficulties in persuading product manufacturers to work with us, to rely on us for critical technology, and to disclose to us proprietary product development and other strategies;

 

   

difficulties with persuading potential licensees who may have developed their own intellectual property or licensed intellectual property from other parties in areas related to ours to license our technology as we obtain new patents and develop new business revenue models versus continuing to develop their own intellectual property or license intellectual property from other parties;

 

   

challenges in demonstrating the compelling value of our technologies and challenges associated with customers’ ability to easily implement our technologies;

 

   

difficulties in persuading existing and potential licensees to bear the development costs and risks necessary to incorporate our technologies into their products;

 

   

difficulties in obtaining new licensees for yet-to-be commercialized technology because their suppliers may not be ready to meet stringent quality and parts availability requirements;

 

   

inability to sign new gaming licenses if the video console makers choose not to license third parties to make peripherals for their new consoles or if video console makers no longer require peripherals to play video games; and

 

   

reluctance of content developers, mobile phone manufacturers, and service providers to sign license agreements without a critical mass of other such inter-dependent supporters of the mobile phone industry also having a license, or without enough phones in the market that incorporate our technologies.

Our licensing cycle can be lengthy and costly and our marketing and licensing efforts may be unsuccessful.

The process of persuading customers to adopt and license our technologies can be lengthy and, even if successful, there can be no assurance that our technologies will be used in a product that is ultimately brought to

 

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market, achieve commercial acceptance, or result in significant royalties to us. We generally incur significant marketing and sales expenses prior to entering into our license agreements. The length of time it takes to establish a new licensing relationship can take many months or even years. In addition, any intellectual property litigation that we engage in will likely have an impact on our ability to enter into new licenses and renewals of licenses. As such, we may incur costs in any particular period before any associated revenue stream begins, if at all. If our marketing and sales efforts are very lengthy or unsuccessful, then we may face a material adverse effect on our business and results of operations as a result of delay or failure to obtain royalties.

Future revenue is difficult to predict for several reasons, and our failure to predict revenue accurately may cause our results to be below our expectations or those of analysts and result in our stock price declining.

Our lengthy and costly license negotiation cycle and any intellectual property litigation that we may engage in make our future revenue difficult to predict because we may not be successful in entering into licenses with our customers on our estimated timelines and we may be reliant on litigation timelines which are difficult to control for any results or settlements.

While some of our license agreements provide for fixed royalty payments, many of our license agreements provide for volume-based royalties, and may also be subject to adjustments based on volume. The sales volume and prices of our licensees’ products in any given period can be difficult to predict. As a result, our actual results may differ substantially from analyst estimates or our forecasts in any given quarter.

In addition, a portion of our revenue comes from development and support services provided to our licensees, or may be part of a multiple element arrangement contract. Depending upon the nature of the services or elements, all or a portion of the revenue may be recognized ratably over the support period or length of the contract, or may be recognized according to the proportional performance accounting method under GAAP. Contract revenue accounting may result in deferral of the service fees to the completion of the contract, or may be recognized over the period in which services are performed on a proportional performance basis and product development schedules for these projects may be changed or delayed. All of these factors make it difficult to predict future licensing revenue and may result in our results being below our previously announced guidance or analysts’ estimates which would likely cause our stock price to decline.

A limited number of customers account for a significant portion of our revenue, and the loss of major customers could harm our operating results.

Two customers accounted for approximately 33% and 24% of our total revenues for the year ended December 31, 2011 and 2010, respectively. Three customers accounted for approximately 34% of our total revenues for the year ended December 31, 2009. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or as a group, will continue to generate revenue in any future period. If we fail to renew or lose a major customer or group of customers, our revenue could decline if we are unable to replace revenue from other sources.

Litigation regarding intellectual property rights could be expensive, disruptive, and time consuming; could result in the impairment or loss of portions of our intellectual property; and could adversely affect our business.

Intellectual property litigation, whether brought by us or by others against us, has caused us to expend, and may cause us to expend in future periods, significant financial resources as well as divert management’s time and efforts. From time to time, we initiate claims against third parties that we believe infringe our intellectual property rights. On February 7, 2012, we filed a complaint against Motorola Mobility, Inc. and Motorola Mobility Holdings, Inc. (together, “Motorola”) with the U.S. International Trade Commission and in a patent infringement complaint in the U.S. District Court for the District of Delaware which alleges that certain Motorola Android-based smartphones infringe six Immersion patents. On March 2, 2012, we added HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, and Exedea, Inc. (collectively, “HTC”) to the complaint in the U.S. International Trade Commission and filed a separate patent infringement

 

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complaint against HTC in the U.S. District Court for the District of Delaware. We intend to enforce our intellectual property rights vigorously and may initiate further litigation against parties that we believe are infringing our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and difficult to pursue in certain venues, and distracting to management and potential customers and could result in the impairment or loss of portions of our intellectual property. In addition, any litigation in which we are accused of infringement may cause product shipment delays, require us to develop non-infringing technologies, or require us to enter into royalty or license agreements even before the issue of infringement has been decided on the merits. If any litigation were not resolved in our favor, we could become subject to substantial damage claims from third parties and indemnification claims from our licensees. We could be enjoined from the continued use of the technologies at issue without a royalty or license agreement. Royalty or license agreements, if required, might not be available on acceptable terms, or at all. If a third party claiming infringement against us prevailed, and we were not able to develop non-infringing technologies or license the infringed or similar technologies on a timely and cost-effective basis, our expenses could increase and our revenues could decrease.

While we attempt to avoid infringing known proprietary rights of third parties, third parties may hold, or may in the future be issued, patents that could be infringed by our products or technologies. Any of these third parties might make a claim of infringement against us with respect to the products that we manufacture and the technologies that we license. From time to time, we have received letters from companies, several of which have significantly greater financial resources than we do, asserting that some of our technologies, or those of our licensees, infringe their intellectual property rights. Certain of our licensees may receive similar letters from these or other companies from time to time. Such letters or subsequent litigation may influence our licensees’ decisions whether to ship products incorporating our technologies. In addition, such letters may cause a dispute between our licensees and us over indemnification for the infringement claim. Any of these notices, or additional notices that we or our licensees could receive in the future from these or other companies, could lead to litigation against us, either regarding the infringement claim or the indemnification claim.

We have acquired patents from third parties and also license some technologies from third parties. We must rely upon the owners of the patents or the technologies for information on the origin and ownership of the acquired or licensed technologies. As a result, our exposure to infringement claims may increase. We generally obtain representations as to the origin and ownership of acquired or licensed technologies and indemnification to cover any breach of these representations. However, representations may not be accurate and indemnification may not provide adequate compensation for breach of the representations. Intellectual property claims against our licensees, or us, whether or not they have merit, could be time-consuming to defend, cause product shipment delays, require us to pay damages, harm existing license arrangements, or require us or our licensees to cease utilizing the technologies unless we can enter into licensing agreements. Licensing agreements might not be available on terms acceptable to us or at all. Furthermore, claims by third parties against our licensees could also result in claims by our licensees against us for indemnification.

The legal principles applicable to patents and patent licenses continue to change and evolve. Legislation and judicial decisions that make it easier for patent licensees to challenge the validity, enforceability, or infringement of patents, or make it more difficult for patent licensors to obtain a permanent injunction, obtain enhanced damages for willful infringement, or to obtain or enforce patents, may adversely affect our business and the value of our patent portfolio. Furthermore, our prospects for future revenue growth through our royalty and licensing based businesses could be diminished.

We had an accumulated deficit of $106 million as of December 31, 2011, have a history of losses, and may not achieve or maintain profitability in the future.

Since 1997, we have incurred losses in all but six quarters. As of December 31, 2011, we had an accumulated deficit of $106 million. We need to generate significant ongoing revenue to achieve and maintain consistent profitability. We anticipate that we will continue to incur expenses as we:

 

   

continue to develop our technologies;

 

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increase our sales and marketing efforts;

 

   

attempt to expand the market for touch-enabled technologies and products and change our business;

 

   

protect and enforce our intellectual property;

 

   

pursue strategic relationships;

 

   

incur costs related to pending litigation;

 

   

acquire intellectual property or other assets from third-parties; and

 

   

invest in systems and processes to manage our business.

If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, we may not achieve or maintain profitability.

We have little or no control or influence on our licensees’ design, manufacturing, promotion, distribution, or pricing of their products incorporating our touch-enabling technologies, upon which we generate royalty revenue.

A key part of our business strategy is to license our intellectual property to companies that manufacture and sell products incorporating our touch-enabling technologies. Sales of those products generate royalty and license revenue for us. For the years ended December 31, 2011, 2010 and 2009, 88%, 75% and 51%, respectively, of our total revenues were royalty and license revenues. We do not control or influence the design, manufacture, quality control, promotion, distribution, or pricing of products that are manufactured and sold by our licensees, nor can we control consolidation within an industry which could either reduce the number of licensing products available or reduce royalty rates for the combined licensees. In addition, we generally do not have commitments from our licensees that they will continue to use our technologies in current or future products. As a result, products incorporating our technologies may not be brought to market, achieve commercial acceptance, or otherwise generate meaningful royalty revenue for us. For us to generate royalty revenue, licensees that pay us per-unit royalties must manufacture and distribute products incorporating our touch-enabling technologies in a timely fashion and generate consumer demand through marketing and other promotional activities. If our licensees’ products fail to achieve commercial success or if products are recalled because of quality control problems or if our licensees do not ship products incorporating our touch-enabling technologies in a timely fashion or fail to achieve strong sales, our revenues will not grow and could decline.

We have limited engineering, customer service, technical support, quality assurance and operations resources to design and fulfill favorable product delivery schedules and sufficient levels of quality in support of our different product areas. Products and services may not be delivered in a timely way, with sufficient levels of quality, or at all, which may reduce our revenue.

Engineering, customer service, technical support, quality assurance, and operations resources are deployed against a variety of different projects and programs to provide sufficient levels of quality necessary for channels and customers. Success in various markets may depend on timely deliveries and overall levels of sustained quality and customer service. Failure to provide favorable product and program deliverables and quality and customer service levels, or provide them at all, may disrupt channels and customers, harm our brand, and reduce our revenues.

The uncertain economic environment could reduce our revenues and could have an adverse effect on our financial condition and results of operations.

The current economic conditions could materially hurt our business in a number of ways including, longer sales and renewal cycles, delays in adoption of our products or technologies, increased risk of competition, higher overhead costs as a percentage of revenue, delays in signing or failing to sign customer agreements, or signing customer agreements with reduced royalty rates. In addition, our customers, potential customers, and business partners are facing similar challenges, which could materially and adversely affect the level of business they conduct with us or in the level of sales of products that include our technology.

 

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Our business depends in part on access to third-party platforms or technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected.

Our product portfolio includes current and future products designed for use with third-party platforms or software. Our business in these categories relies on our access to the platforms of third parties, which can be withdrawn, denied or not be available on terms acceptable to us.

Our access to third-party platforms may require paying a royalty, which lowers our product margins, or may otherwise be on terms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our product portfolio can be delayed in production or can change without prior notice to us, which can result in our having lower margins.

If we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies are delayed or change without notice to us, our business and operating results could be adversely affected.

Because we have a fixed payment license with Microsoft, our royalty revenue from licensing in the gaming market and other consumer markets has previously declined and may further do so if Microsoft increases its volume of sales of touch-enabled gaming products and consumer 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 to our worldwide portfolio of patents. This license permits Microsoft to make, use, and sell hardware, software, and services, excluding specified products, covered by our patents. We will not receive any further revenues or royalties from Microsoft under our current agreement with Microsoft. Microsoft has a significant share of the market for touch-enabled console gaming computer peripherals and is pursuing other consumer markets such as mobile phones, PDAs, and portable music players. Microsoft has significantly greater financial, sales, and marketing resources, as well as greater name recognition and a larger customer base than some of our other licensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other licensees in these market segments might decline.

The market for certain touch-enabling technologies and touch-enabled products is at an early stage and if market demand does not develop, we may not achieve or sustain revenue growth.

The market for certain of our touch-enabling technologies and certain of our licensees’ touch-enabled products is at an early stage. If we and our licensees are unable to develop demand for our touch-enabling technologies and touch-enabled products, we may not achieve or sustain revenue growth. We cannot accurately predict the growth of the markets for these technologies and products, the timing of product introductions, or the timing of commercial acceptance of these products.

Even if our touch-enabling technologies and our licensees’ touch-enabled products are ultimately widely adopted, widespread adoption may take a long time to occur. The timing and amount of royalties and product sales that we receive will depend on whether the products marketed achieve widespread adoption and, if so, how rapidly that adoption occurs.

We expect that we will need to pursue extensive and expensive marketing and sales efforts to educate prospective licensees, component customers, and end users about the uses and benefits of our technologies and to persuade software developers to create software that utilizes our technologies. Negative product reviews or publicity about our company, our products, our licensees’ products, haptic features, or haptic technology in general could have a negative impact on market adoption, our revenue, and/or our ability to license our technologies in the future.

 

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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 come from third-party peripheral makers who make licensed gaming products designed for use with popular video game console systems from Microsoft, Sony, and Nintendo. Video game console systems are closed, proprietary systems, and video game console system makers typically impose certain requirements or restrictions on third-party peripheral makers who wish to make peripherals that will be compatible with a particular video game console system. If third-party peripheral makers cannot or are not allowed to obtain or satisfy these requirements or restrictions, our gaming royalty revenues could be significantly reduced. Furthermore, should a significant video game console maker choose to omit touch-enabling capabilities from its console system or somehow restrict or impede the ability of third parties to make touch-enabling peripherals, it may very well lead our gaming licensees to stop making products with touch-enabling capabilities, thereby significantly reducing our gaming royalty revenues.

If we fail to protect and enforce our intellectual property rights, our ability to license our technologies and generate revenues would be impaired.

Our business depends on generating revenues by licensing our intellectual property rights and by customers selling products that incorporate our technologies. We rely on our significant patent portfolio to protect our proprietary rights. If we are not able to protect and enforce those rights, our ability to obtain future licenses or maintain current licenses and royalty revenue could be impaired. In addition, if a court or the patent office were to limit the scope, declare unenforceable, or invalidate any of our patents, current licensees may refuse to make royalty payments, or they may choose to challenge one or more of our patents. It is also possible that:

 

   

our pending patent applications may not result in the issuance of patents;

 

   

our patents may not be broad enough to protect our proprietary rights; and

 

   

effective patent protection may not be available in every country, particularly in Asia, in which we or our licensees do business.

We also rely on licenses, confidentiality agreements, other contractual agreements, and copyright, trademark, and trade secret laws to establish and protect our proprietary rights. It is possible that:

 

   

laws and contractual restrictions may not be sufficient to prevent misappropriation of our technologies or deter others from developing similar technologies; and

 

   

policing unauthorized use of our patented technologies, trademarks, and other proprietary rights would be difficult, expensive, and time-consuming, within and particularly outside of the United States of America.

The terms in our agreements may be construed by our licensees in a manner that is inconsistent with the rights that we have granted to other licensees, or in a manner that may require us to incur substantial costs to resolve conflicts over license terms.

We have entered into, and we expect to continue to enter into, agreements pursuant to which our licensees are granted rights under our technology and intellectual property. These rights may be granted in certain fields of use, or with respect to certain market sectors or product categories, and may include exclusive rights or sublicensing rights. We refer to the license terms and restrictions in our agreements, including, but not limited to, field of use definitions, market sector, and product category definitions, collectively as “License Provisions.”

Due to the continuing evolution of market sectors, product categories, and licensee business models, and to the compromises inherent in the drafting and negotiation of License Provisions, our licensees may, at some time during the term of their agreements with us, interpret License Provisions in their agreements in a way that is different from our interpretation of such License Provisions, or in a way that is in conflict with the rights that we

 

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have granted to other licensees. Such interpretations by our licensees may lead to claims that we have granted rights to one licensee which are inconsistent with the rights that we have granted to another licensee. Several of our customers report royalties to us based on their shipments or their revenues and their interpretation and allocation of contracted royalty rates. It is possible that the originally reported royalties could differ materially from those determined by either a customer self-reported correction or from an Immersion audit. These interpretations may also cause disagreements arising during customer audits, may lead to claims or litigation of those claims, and may have an adverse affect on the results of our operations.

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 a manner that we did not foresee or was not foreseeable at the time we entered into the agreement. As a result, in any agreement, we may have granted rights that will preclude or restrict our exploitation of new opportunities that arise after the execution of the agreement.

If we fail to develop new or enhanced technologies for new applications and platforms, we may not be able to create a market for our technologies or our technologies may become obsolete, and our ability to grow and our results of operations might be harmed.

Our initiatives to develop new and enhanced technologies and to commercialize these technologies for new applications and new platforms may not be successful or timely. Any new or enhanced technologies, such as our MOTIV product, may not be favorably received by consumers and could damage our reputation or our brand. Expanding our technologies could also require significant additional expenses and strain our management, financial, and operational resources.

Moreover, technology products generally have relatively short product life cycles and our current products may become obsolete in the future. Our ability to generate revenues will be harmed if:

 

   

we fail to develop new technologies or products;

 

   

the technologies we develop infringe on third-party patents or other third-party rights;

 

   

our new technologies fail to gain market acceptance; or

 

   

our current products become obsolete or no longer meet new regulatory requirements.

Our ability to achieve revenue growth also depends on our continuing ability to improve and reduce the cost of our technologies, to improve their ease of integration in both hardware and software, and to introduce these technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, companies may not incorporate our technologies into their products and our revenue growth may be impaired.

The higher cost of products incorporating our touch-enabling technologies may inhibit or prevent their widespread adoption.

Mobile devices, tablets, touchscreens, personal computer and console gaming peripherals, and automotive and industrial controls incorporating our touch-enabling technologies can be more expensive than similar competitive products that are not touch-enabled. Although major manufacturers, such as ALPS Electric Co., BMW, LG Electronics, Logitech, Microsoft, Nokia, Samsung, and Sony have licensed our technologies, the greater expense of development and production of products containing our touch-enabling technologies, together with the higher price to the end customer, may be a significant barrier to their widespread adoption and sale. Accordingly, we may not receive a material amount of royalties from more expensive products.

If we are unable to develop open source compliant products, our ability to license our technologies and generate revenues would be impaired.

We have seen, and believe that we will continue to see, an increase in customers requesting that we develop products that will operate in an “open source” environment. Developing open source compliant products, without

 

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imperiling the intellectual property rights upon which our licensing business depends, may prove difficult under certain circumstances, thereby placing us at a competitive disadvantage for new product designs. As a result, our revenues may not grow and could decline.

Certain terms or rights granted in our license agreements or our development contracts may limit our future revenue opportunities.

While it is not our general practice to sign license agreements that provide exclusive rights for a period of time with respect to a technology, field of use, and/or geography, or to accept similar limitations in product development contracts, we have entered into such agreements in the past and may do so in the future. Although additional compensation or other benefits may be part of the agreement, the compensation or benefits may not adequately compensate us for the limitations or restrictions we have agreed to as that particular market develops. Over the life of the exclusivity period, especially in markets that grow larger or faster than anticipated, our revenue may be limited and less than what we could have achieved in the market with several licensees or additional products available to sell to a specific set of customers.

The markets in which we participate or may target in the future are intensely competitive, and if we do not compete effectively, our operating results could be harmed.

Our target markets are rapidly evolving and highly competitive. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets, and significantly greater resources than we do, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future. We believe that competition in these markets will continue to be intense and that competitive pressures will drive the price of our products and our licensees’ products downward. These price reductions, if not offset by increases in unit sales or productivity, will cause our revenues to decline. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our application suite to achieve or maintain more widespread market acceptance, any of which could harm our business.

We face competition from internal design teams of existing and potential OEM customers. In addition, as a result of their licenses to our patent portfolios, we could face competition from Microsoft and Sony. Our licensees or other third parties may also seek to develop products using our intellectual property or develop alternative designs that attempt to circumvent our intellectual property or that they believe do not require a license under our intellectual property. These potential competitors may have significantly greater financial, technical, and marketing resources than we do, and the costs associated with asserting our intellectual property rights against such products and such potential competitors could be significant. Moreover, if such alternative designs were determined by a court not to require a license under our intellectual property rights, competition from such unlicensed products could limit or reduce our revenues. We could also face competition from smaller start-up companies or new market entrants.

Additionally, if haptic technology gains market acceptance, more research by universities and/or corporations or other parties may be performed potentially leading to strong intellectual property positions by third parties in certain areas of haptics or the launch of haptics products before we commercialize our own technology.

Many of our current and potential competitors, including Microsoft, are able to devote greater resources to the development, promotion, and sale of their products and services. In addition, many of our competitors have established marketing relationships or access to larger customer bases, distributors, and other business partners. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Further, some potential customers,

 

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particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

Winning business is subject to a competitive selection process that can be lengthy and requires us to incur significant expense, and we may not be selected.

Our primary focus is on winning competitive bid selection processes, known as “design wins,” so that haptics will be included in our customers’ products. These selection processes can be lengthy and can require us to incur significant design and development expenditures. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. Because we typically focus on only a few customers in a product area, the loss of a design win can sometimes result in our failure to get haptics added to new generation products. This can result in lost sales and could hurt our position in future competitive selection processes because we may not be perceived as being a technology leader.

After winning a product design for one of our customers, we may still experience delays in generating revenue from our products as a result of the lengthy development and design cycle. In addition, a delay or cancellation of a customer’s plans could significantly adversely affect our financial results, as we may have incurred significant expense and generated no revenue. Finally, if our customers fail to successfully market and sell their equipment it could materially adversely affect our business, financial condition, and results of operations as the demand for our products falls.

Automobiles and medical devices incorporating our touch-enabling technologies are subject to lengthy product development periods, making it difficult to predict when and whether we will receive automotive and medical devices royalties.

The product development process for automobiles and medical devices is very lengthy, sometimes longer than four years. We may not earn royalty revenue on our automotive/medical devices technologies unless and until automobiles/medical devices featuring our technologies are shipped to customers, which may not occur until several years after we enter into an agreement with manufacturer or a supplier to a manufacturer. Throughout the product development process, we face the risk that a manufacturer or supplier may delay the incorporation of, or choose not to incorporate, our technologies into its automobiles/medical devices, making it difficult for us to predict the royalties we may receive, if any. After the product launches, our royalties still depend on market acceptance of the vehicle or the option packages if our technology is an option (for example, a navigation unit), which is likely to be determined by many factors beyond our control.

Our international expansion efforts subject us to additional risks and costs.

We currently have sales personnel in Finland, Japan, Korea, Switzerland, and Taiwan and we intend to expand our international activities into China and Europe. International operations are subject to a number of difficulties 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;

 

   

difficulty in collecting accounts receivable or longer payment cycles;

 

   

import and export restrictions and tariffs;

 

   

difficulties staffing and managing foreign operations;

 

   

difficulties and expense in enforcing intellectual property rights;

 

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business risks, including fluctuations in demand for our products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions;

 

   

multiple conflicting tax laws and regulations;

 

   

political and economic instability; and

 

   

an outbreak of hostilities in markets where major customers are located, including Korea.

Our international operations could also increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls, or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business.

We might be unable to retain or recruit necessary personnel, which could slow the development and deployment of our technologies.

Our technologies are complex and we rely upon the continued service of our existing personnel to support licensees, enhance existing technologies, and develop new technologies. Accordingly, our ability to develop and deploy our technologies and to sustain our revenue growth depends upon the continued service of our management and other key personnel, many of whom would be difficult to replace. Furthermore, we believe that there are a limited number of engineering and technical personnel that are experienced in haptics. Management and other key employees may voluntarily terminate their employment with us at any time upon short notice. The loss of management or key personnel could delay product development cycles or otherwise harm our business.

We believe that our future success will also depend largely on our ability to attract, integrate, and retain sales, support, marketing, and research and development personnel. In particular, we are in the process of recruiting a new Chief Financial Officer. Competition for such personnel is intense, and we may not be successful in attracting, integrating, and retaining such personnel. Given the protracted nature of if, how, and when we collect royalties on new design contracts, it may be difficult to craft compensation plans that will attract and retain the level of salesmanship needed to secure these contracts. Additionally some of our executive officers and key employees hold stock options with exercise prices above the current market price of our common stock or that are largely vested. Each of these factors may impair our ability to retain the services of our executive officers and key employees.

Our current litigation is expensive, disruptive, and time consuming, and will continue to be, until resolved, and regardless of whether we are ultimately successful, could adversely affect our business.

We are currently a party to various legal proceedings. Due to the inherent uncertainties of litigation, we cannot accurately predict how these cases will ultimately be resolved. We anticipate that currently pending litigation will continue to be costly and that future litigation or investigations will result in additional legal expenses, and there can be no assurance that we will be successful or able to recover the costs we incur in connection with litigation or investigations. We expense litigation and investigatory costs as incurred, and only accrue for costs that have been incurred but not paid to the vendor as of the financial statement date. Litigation and investigations have diverted, and could continue to divert, the efforts and attention of some of our key management and personnel. As a result, until such time as it is resolved or concluded, litigation and investigations could adversely affect our business. Further, any unfavorable outcome could adversely affect our business. For additional background on this and our other litigation, please see Note 15 to the consolidated financial statements and Item 3 “Legal Proceedings”.

 

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Product liability claims could be time-consuming and costly to defend and could expose us to loss.

Our products or our licensees’ products may have flaws or other defects that may lead to personal or other injury claims. If products that we or our licensees sell cause personal injury, property injury, financial loss, or other injury to our or our licensees’ customers, the customers or our licensees may seek damages or other recovery from us. In addition, even though we have transitioned from the medical products business, we could face product liability claims for products that we have sold or that our successors may sell in the future. Defending any claims against us, regardless of merit, would be time-consuming, expensive to defend, and distracting to management, and could result in damages and injure our reputation, the reputation of our technology and services, and/or the reputation of our products, or the reputation of our licensees or their products. This damage could limit the market for our and our licensees’ products and harm our results of operations. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely affected.

In the past, manufacturers of peripheral products including certain gaming products such as joysticks, wheels, or gamepads, have been subject to claims alleging that use of their products has caused or contributed to various types of repetitive stress injuries, including carpal tunnel syndrome. While we have not experienced any product liability claims to date, we could face such claims in the future, which could harm our business and reputation. Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could limit or invalidate the provisions.

Our products are complex and may contain undetected errors, which could harm our reputation and future product sales.

Any failure to provide high quality and reliable products, whether caused by our own failure or failures of our suppliers or OEM customers, could damage our reputation and reduce demand for our products. Our products have in the past contained, and may in the future contain, undetected errors or defects. Some errors in our products may only be discovered after a product has been shipped to customers. Any errors or defects discovered in our products after commercial release could result in loss of revenue, loss of customers, and increased service and warranty costs, any of which could adversely affect our business.

Our customers may have difficulties obtaining the components necessary to manufacture haptic-based products, which could harm our business and results of operations.

In order to manufacture haptic-based products, our customers require components such as actuators and amplifiers. The inability of suppliers to deliver adequate supplies of these components could disrupt our customers’ production processes which would harm our business and results of operations. In addition, our newer products require new types of components that we expect will be developed and sold by our ecosystem partners. Failure of our ecosystem partners to bring these products to market in a timely fashion and at attractive price points may affect our ability to secure customers for these newer products which could harm our business and results of operations. Component suppliers to customers could also be affected by natural disasters and other similar events.

Catastrophic events, such as natural disasters, war, and acts of terrorism could disrupt the business of our customers, which could harm our business and results of operations.

The production processes and operations of our customers are susceptible to the occurrence of catastrophic events, such as natural disasters (including the recent earthquake and tsunami in Japan and extensive flooding in Thailand), war, and acts of terrorism, all of which are outside of our control. Any such events could cause a serious business disruption to our customers’ ability to manufacture, distribute and sell products incorporating our touch-enabling technologies upon which we generate royalty revenue, which disruption may adversely affect our business and results of operation.

 

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If our facilities were to experience catastrophic loss, our operations would be seriously harmed.

Our facilities could be subject to a catastrophic loss such as fire, flood, earthquake, power outage, or terrorist activity. A substantial portion of our research and development activities, operations, our corporate headquarters, and other critical business operations are located near major earthquake faults in San Jose, California, an area with a history of seismic events. An earthquake at or near our facilities could disrupt our operations and result in large expenses to repair and replace the facility. While we believe that we maintain insurance sufficient to cover most long-term potential losses at our facilities, our existing insurance may not be adequate for all possible losses.

We use contract manufacturers and may have difficulties obtaining the products that we need. This could harm our ability to meet our customers’ demand for our products.

We rely on a limited number of contract manufacturers and suppliers for our products. The inability of such contract manufacturers or suppliers to deliver adequate inventory could make it difficult to ship products ordered by our customers. We also have limited influence on contract manufacturers operations. There is risk that the manufacture, quality control, operations, controls, and distribution might not be up to our standards. The occurrence of any of these could harm our business and results of operations.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.

We have in the past had material weaknesses in our internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Any failure on our part to remedy identified material weaknesses, or any additional delays or errors in our financial reporting, could cause our financial reporting to be unreliable and could have a material adverse effect on our business, results of operations, or financial condition and could have a substantial adverse impact on the trading price of our common stock.

We do not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

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 export regulations or restrictions that prohibit us or our licensees from selling to customers in some countries or that require us to obtain licenses or approvals to export such products internationally. Delays or denial of the grant of any required license or approval, or changes to the regulations, could make it difficult or impossible to make sales to foreign customers in some countries and could adversely affect our revenue. In addition, we could be subject to fines and penalties for violation of these export regulations if we were found in violation. Such violation could result in penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.

Compliance with directives that restrict the use of certain materials may increase our costs and limit our revenue opportunities.

Our products and packaging must meet all safety, electrical, labeling, marking, or other requirements of the countries into which we ship products or our resellers sell our products. We have to assess each product and

 

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determine whether it complies with the requirements of local regulations or whether they are exempt from meeting the requirements of the regulations. If we determine that a product is not exempt and does not comply with adopted regulations, we will have to make changes to the product or its documentation if we want to sell that product into the region once the regulations become effective. Making such changes may be costly to perform and may have a negative impact on our results of operations. In addition, there can be no assurance that the national enforcement bodies of the regions adopting such regulations will agree with our assessment that certain of our products and documentation comply with or are exempt from the regulations. If products are determined not to be compliant or exempt, we will not be able to ship them in the region that adopts such regulations until such time that they are compliant, and this may have a negative impact on our revenue and results of operations.

Investment Risks

Our quarterly revenues and operating results are volatile, and if our future results are below the expectations of public market analysts or investors, the price of our common stock is likely to decline.

Our revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which could cause the price of our common stock to decline.

These factors include:

 

   

the establishment or loss of licensing relationships;

 

   

the timing and recognition of payments under fixed and/or up-front license agreements;

 

   

seasonality in the demand for our products or our licensees’ products;

 

   

the timing of our expenses, including costs related to litigation, stock-based awards, acquisitions of technologies, or businesses;

 

   

development in any pending litigation;

 

   

the timing of introductions and market acceptance of new products and product enhancements by us, our licensees, our competitors, or their competitors;

 

   

the timing of work performed under development agreements; and

 

   

corrections and true-ups to royalty rates from prior periods.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Our business is subject to changing regulations regarding corporate governance and other compliance areas that will increase both our costs and the risk of noncompliance.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of

 

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The NASDAQ Stock Market. The requirements of these rules and regulations have increased and we expect will continue to increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems and resources.

Our stock price may fluctuate regardless of our performance.

The stock market has experienced extreme volatility that often has been unrelated or disproportionate to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance. The market price of our common stock has been, and in the future could be, significantly affected by factors such as: actual or anticipated fluctuations in operating results; announcements of technical innovations; announcements regarding litigation in which we are involved; changes by game console manufacturers to not include touch-enabling capabilities in their products; new products or new contracts; sales or the perception in the market of possible sales of large number of shares of our common stock by insiders or others; stock repurchase activity; changes in securities analysts’ recommendations; personnel changes; changing circumstances regarding competitors or their customers; governmental regulatory action; developments with respect to patents or proprietary rights; inclusion in or exclusion from various stock indices; and general market conditions. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has been initiated against that company.

Our stock repurchase program could affect our stock price and add volatility.

Any repurchases pursuant to our stock repurchase program could affect our stock price and add volatility. There can be no assurance that any repurchases will actually be made under the program, nor is there any assurance that a sufficient number of shares of our common stock will be repurchased to satisfy the market’s expectations. Furthermore, there can be no assurance that any repurchases conducted under the plan will be made at the best possible price. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, we are permitted to and could discontinue our stock repurchase program at any time and any such discontinuation could cause the market price of our stock to decline.

Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of our common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our board of directors or management, including the following:

 

   

our board of directors is classified into three classes of directors with staggered three-year terms;

 

   

only our chairperson of the board of directors, a majority of our board of directors or 10% or greater stockholders are authorized to call a special meeting of stockholders;

 

   

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 be issued without stockholder approval; and

 

   

advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

In addition, certain provisions of Delaware law may discourage, delay, or prevent someone from acquiring or merging with us. These provisions could limit the price that investors might be willing to pay in the future for shares.

 

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We may engage in acquisitions that could dilute stockholders’ interests, divert management attention, or cause integration problems.

As part of our business strategy, we have in the past and may in the future, acquire businesses or intellectual property that we feel could complement our business, enhance our technical capabilities, or increase our intellectual property portfolio. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.

If we consummate acquisitions through the issuance of our securities, our stockholders could suffer significant dilution. Acquisitions could also create risks for us, including:

 

   

unanticipated costs associated with the acquisitions;

 

   

use of substantial portions of our available cash to consummate the acquisitions;

 

   

diversion of management’s attention from other business concerns;

 

   

difficulties in assimilation of acquired personnel or operations;

 

   

failure to realize the anticipated benefits of acquired intellectual property or other assets;

 

   

charges associated with amortization of acquired assets or potential charges for write-down of assets associated with unsuccessful acquisitions;

 

   

potential intellectual property infringement claims related to newly-acquired product lines; and

 

   

potential costs associated with failed acquisition efforts.

Any acquisitions, even if successfully completed, might not generate significant additional revenue or provide any benefit to our business.

As our business grows, such growth may place a significant strain on our management and operations and, as a result, our business may suffer.

We plan to continue expanding our business, and any significant growth could place a significant strain on our management systems, infrastructure and other resources. We will need to continue to invest the necessary capital to upgrade and improve our operational, financial and management reporting systems. If our management fails to manage our growth effectively, we could experience increased costs, declines in product quality, and/or customer satisfaction, which could harm our business.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

We lease a facility in San Jose, California of approximately 33,000 square feet, which serves as our corporate headquarters and includes our sales, marketing, administration, research and development, and distribution operations functions. The lease for this property expires in December 2016 and we have an option to renew through December 2021.

We lease a facility in Montreal, Quebec, Canada of approximately 6,416 square feet, for our subsidiary, Immersion Canada, Inc. The facility is used for research and development and administration functions. The lease for this property expires in October 2015.

 

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We also lease office space in Seocho-gu, Seoul, Korea; Espoo, Finland; and Zhonghe City, Taipei, Taiwan.

We believe that our existing facilities are adequate to meet our current needs.

Item 3.   Legal Proceedings

In re Immersion Corporation Initial Public Offering Securities Litigation

We are involved in legal proceedings relating to a class action lawsuit filed on November 9, 2001 in the U. S. District Court for the Southern District of New York, In re Immersion Corporation Initial Public Offering Securities Litigation, No. Civ. 01-9975 (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (S.D.N.Y.). The named defendants are Immersion and three of our current or former officers or directors (the “Immersion Defendants”), and certain underwriters of our November 12, 1999 initial public offering (“IPO”). Subsequently, two of the individual defendants stipulated to a dismissal without prejudice.

The operative amended complaint is brought on purported behalf of all persons who purchased our common stock from the date of our IPO through December 6, 2000. It alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the IPO did not disclose that: (1) the underwriters agreed to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriters; and (2) the underwriters arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The complaint also appears to allege that false or misleading analyst reports were issued. The complaint does not claim any specific amount of damages.

Similar allegations were made in other lawsuits challenging over 300 other initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes.

In September 2008, all of the parties to the lawsuits reached a settlement, subject to documentation and approval of the District Court. Subsequently, an underwriter defendant filed for bankruptcy and other underwriter defendants were acquired. On April 2, 2009, final documentation evidencing the settlement was presented to the District Court for approval. On October 6, 2009, the District Court approved the settlement, and the Court subsequently entered a judgment of dismissal. Under the judgment, the Immersion Defendants are not required to contribute to the settlement. Several notices of appeal have been filed by putative class members challenging the settlement. Subsequently, the District Court determined that none of the objectors had standing to appeal. One of the putative objectors filed a notice of appeal of the determination as to him. The Second Circuit Court of Appeals subsequently dismissed the final objection on January 9, 2012 and the litigation has concluded.

In re Immersion Corporation Securities Litigation

In September and October 2009, various putative shareholder class action and derivative complaints were filed in federal and state court against us and certain current and former Immersion directors and officers.

On September 2, 2009, a securities class action complaint was filed in the United States District Court for the Northern District of California against us and certain of our current and former directors and officers. Over the following five weeks, four additional class action complaints were filed. (One of these four actions was later voluntarily dismissed.) The securities class action complaints name us and certain current and former Immersion directors and officers as defendants and allege violations of federal securities laws based on our issuance of allegedly misleading financial statements. The various complaints assert claims covering the period from May 2007 through July 2009 and seek compensatory damages allegedly sustained by the purported class members.

On December 21, 2009, these class actions were consolidated by the court as In Re Immersion Corporation Securities Litigation. On the same day, the court appointed a lead plaintiff and lead plaintiff’s counsel. Following our restatement of financial statements, lead plaintiff filed a consolidated complaint on April 9, 2010. Defendants moved to dismiss the action on June 15, 2010 and that motion was granted with leave to amend on March 11,

 

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2011. Lead plaintiff filed an amended complaint on April 29, 2011. Defendants moved to dismiss the amended complaint on July 1, 2011. On December 16, 2011, the motion to dismiss was granted with prejudice and on December 19, 2011, judgment was entered in favor of defendants. On January 13, 2012, the plaintiffs filed a notice of appeal to the Ninth Circuit Court of Appeals.

In re Immersion Corporation Derivative Litigation

On September 15, 2009, a putative shareholder derivative complaint was filed in the United States District Court for the Northern District of California, purportedly on behalf of us and naming certain of our current and former directors and officers as individual defendants. Thereafter, two additional putative derivative complaints were filed in the same court.

The derivative complaints arise from the same or similar alleged facts as the federal securities actions and seek to bring state law causes of action on behalf of us against the individual defendants for breaches of fiduciary duty, gross negligence, abuse of control, gross mismanagement, breach of contract, waste of corporate assets, unjust enrichment, as well as for violations of federal securities laws. The federal derivative complaints seek compensatory damages, corporate governance changes, unspecified equitable and injunctive relief, the imposition of a constructive trust, and restitution. On November 17, 2009, the court consolidated these actions as In re Immersion Corporation Derivative Litigation and appointed lead counsel. The court has issued an order staying this action.

Kasmer v. Immersion Corporation

On May 5, 2010, an action was filed in Delaware Chancery Court by a shareholder seeking to enforce a demand to inspect certain of our records pursuant to Section 220 of the Delaware General Corporation Law, as a possible prelude to the shareholder bringing a derivative action. We filed our answer on June 14, 2010, questioning whether a proper purpose for the records inspection had been stated and raising other defenses concerning the scope of the demand, among other deficiencies. Following a one-day trial on December 2, 2010, the Court significantly narrowed the scope of the demand and we responded accordingly. On October 24, 2011, the shareholder filed a motion seeking to compel further responses to the demand. We believe that our responses complied with the Court’s ruling and have opposed the shareholder’s motion.

Immersion Corporation vs. Motorola Mobility, Inc., Motorola Mobility Holdings, Inc., HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation, and Brightpoint, Inc.

On February 7, 2012, we filed a complaint against Motorola with the U.S. International Trade Commission (the “ITC”) alleging that certain Motorola mobile electronic devices, including smartphones and cellular phones, infringe six of our patents that cover various uses of haptic effects in connection with touchscreens (the “ITC Complaint”). The ITC Complaint requests that the ITC institute an immediate investigation into Motorola’s unlicensed importation, sale for importation and/or sale after importation of mobile electronic devices, including smartphones and cellular phones, using haptic effects covered by our patents. The ITC Complaint further requests an exclusion order barring the importation, sale for importation and sale after importation of products that infringe our patents and cease and desist orders directing Motorola to cease importing, marketing, advertising, demonstrating, warehousing, distributing, selling, offering to sell and/or using mobile electronic devices incorporating haptic effects that infringe one or more of our patents. We amended the ITC Complaint on March 2, 2012 to add the following parties: HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation and Brightpoint, Inc.

On February 7, 2012, we filed a complaint against Motorola in the U.S. District Court for the District of Delaware (the “Motorola Delaware Complaint”) alleging that certain of Motorola’s mobile electronic devices, including smartphones and cellular phones, infringe six of our patents that cover various uses of haptic effects. The Motorola Delaware Complaint covers the same patents as the ITC Complaint. The Motorola Delaware Complaint seeks damages and injunctive relief.

 

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On March 2, 2012, we filed a complaint against HTC in the U.S. District Court for the District of Delaware (the “HTC Delaware Complaint”) alleging that certain of HTC’s mobile electronic devices, including smartphones and cellular phones, infringe six of our patents that cover various uses of haptic effects. The HTC Delaware Complaint covers the same patents as the ITC Complaint. The HTC Delaware Complaint seeks damages and injunctive relief.

The ITC Complaint, Motorola Delaware Complaint and HTC Delaware Complaint assert infringement of the following patents:

U.S. Patent No 6,429,846: “Haptic Feedback for Touchpads and Other Touch Controls”

U.S. Patent No 7,592,999: “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 7,982,720: “Haptic Feedback for Touchpads and Other Touch Controls”

U.S. Patent No 8,031,181: “Haptic Feedback for Touchpads and Other Touch Controls”

U.S. Patent No 8,059,105: “Haptic Feedback for Touchpads and Other Touch Controls”

Item 4.   Mine Safety Disclosures

Not applicable.

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Global Market under the symbol “IMMR.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock on such market.

 

    

High

    

Low

 

Fiscal year ended December 31, 2011

     

Fourth Quarter

   $ 7.39       $ 4.67   

Third Quarter

   $       10.66       $       5.85   

Second Quarter

   $ 8.74       $ 6.80   

First Quarter

   $ 7.81       $ 5.77   

Fiscal year ended December 31, 2010

     

Fourth Quarter

   $ 6.74       $ 5.20   

Third Quarter

   $ 6.00       $ 4.54   

Second Quarter

   $ 6.18       $ 3.50   

First Quarter

   $ 5.11       $ 3.93   

On February 24, 2012, the closing price was $6.14 per share and there were 127 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

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Issuer Repurchases of Equity Securities

Below is a summary of stock repurchases for the quarter ending December 31, 2011. See Note 10 of our consolidated financial statements for information regarding our stock repurchase program.

 

Program/Period (1)    Shares
  Repurchased  (2)  
     Average
Price Per

      Share     
     Approximate Dollar
Value that May
Yet Be Purchased

  Under the Program   
 

Beginning approximate dollar value available to be repurchased as of September 30, 2011

         $ 31,423,000   

October 1 — October 31, 2011

     77,328       $ 5.95      

November 1 — November 30, 2011

     804,233       $ 5.69      

December 1 — December 31, 2011

     227,222       $ 5.38      
  

 

 

       

Total shares repurchased

               1,108,783       $ 5.65         6,262,000   
  

 

 

       

 

 

 

Ending approximate dollar value that may be repurchased under the Program as of December 31, 2011

         $ 25,161,000   
        

 

 

 

 

 

 

(1)

On November 1, 2007, our Board of Directors authorized a share repurchase program of up to $50,000,000. This share repurchase authorization has no expiration date and does not require us to repurchase a specific number of shares. The timing and amount of any share repurchase will depend on the share price, corporate and regulatory requirements, economic and market conditions, and other factors. The repurchase authorization may be modified, suspended, or discontinued at any time.

 

(2)

All shares were repurchased on the open market as part of the plan publicly announced on November 1, 2007. The repurchases were effected by a single broker in market transactions at prevailing market prices pursuant to a trading plan designed to satisfy the conditions of Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain any earnings to fund future growth, product development, and operations.

 

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Item 6.   Selected Financial Data

The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

 

     Years Ended December 31,  
    

2011

   

2010 (2)

   

2009 (2)

   

2008

   

2007

 
     (In thousands, except per share data)  

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

          

Revenues

         $30,635            $31,124            $27,725            $27,981        $30,140   

Costs and expenses (1)

     30,688        35,952        58,181        77,075        (93,138

Operating income (loss)

     (53     (4,828     (30,456     (49,094     123,278   

Income tax benefit (provision) from continuing operations

     (1,816     (1,501     310        (5,088     (12,850

Income (loss) from continuing operations

     (1,665     (6,057     (28,856     (50,258     116,027   

Gain (loss) from discontinued operations (net of tax)

     61        130        577        (732     1,059   

Net income (loss)

     (1,604     (5,927     (28,279     (50,990     117,086   

Basic net income (loss) per share

          

Continuing operations

     $ (0.06     $ (0.22     $ (1.03     $ (1.70     $4.19   

Discontinued operations

     0.00        0.01        0.02        (0.02     0.04   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (0.06     $ (0.21     $ (1.01     $ (1.72     $4.23   

Diluted net income (loss) per share

          

Continuing operations

     $ (0.06     $ (0.22     $ (1.03     $ (1.70     $3.68   

Discontinued operations

     0.00        0.01        0.02        (0.02     0.03   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (0.06     $ (0.21     $ (1.01     $ (1.72     $3.71   

Shares used in calculating net income (loss) per share

          

Basic

     28,564        28,113        27,973        29,575        27,662   

Diluted

     28,564        28,113        27,973        29,575        31,667   
     December 31,  
    

2011

   

2010

   

2009

   

2008

   

2007

 
     (In thousands)  

CONSOLIDATED BALANCE SHEET DATA:

          

Cash, cash equivalents, and short-term investments

     $56,285        $61,204        $63,728        $85,743        $138,112   

Working capital

     49,520        56,771        61,005        82,972        143,160   

Total assets

     74,679        80,875        87,834        113,587        167,931   

Total stockholders’ equity

     51,621        53,684        55,741        79,778        142,177   

 

 

(1) Results include litigation settlements, conclusions, and patent license income (expense) of $(20.8) million and $134.9 million, for 2008 and 2007, respectively.

(2) During 2009, we sold all of our 3D product line. On March 30, 2010, we divested certain medical simulation product lines. See Note 11 to the consolidated financial statements.

 

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements, which refer to expectations, projections, or other characterizations of future events or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth in Item 1A, “Risk Factors,” 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 these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to release the results of any revisions to these forward-looking statements that could occur after the filing of this report.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, stock-based compensation, short-term investments, patents and intangible assets, income taxes, contingencies, and litigation. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

We believe the following are our most critical accounting policies as they require our significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue Recognition

We recognize revenues in accordance with applicable accounting standards, including Accounting Standards Codification (“ASC”) 605-10-S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”); and ASC 985-605, “Software-Revenue Recognition” (“ASC 985-605”). We derive our revenues from three principal sources: royalty and license fees, product sales, and development contracts. As described below, management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period based on the judgments and estimates made by our management. Specifically, in connection with each transaction, we must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. We apply these criteria as discussed below.

 

   

Persuasive evidence of an arrangement exists: For a license arrangement, we require a written contract, signed by both the customer and us. For a stand-alone product sale, we require a purchase order or other form of written agreement with the customer.

   

Delivery has occurred. We deliver software and product to our customers physically and also deliver software electronically. For physical deliveries not related to software, our transfer terms typically include transfer of title and risk of loss at our shipping location. For electronic deliveries, delivery occurs when we provide the customer access codes or “keys” that allow the customer to take immediate possession of the software.

 

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The fee is fixed or determinable. Our arrangement fee is based on the use of standard payment terms which are those that are generally extended to the majority of customers. For transactions involving extended payment terms, we deem these fees not to be fixed or determinable for revenue recognition purposes and revenue is deferred until the fees become due and payable.

   

Collectibility is probable. To recognize revenue, we must judge collectibility of the arrangement fees, which we do on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For new customers, we evaluate the customer’s financial condition and ability to pay. If we determined that collectibility is not probable based upon our credit review process or the customer’s payment history, we recognize revenue when payment is received.

Royalty and license revenue — We license our portfolio of patents to customers in a variety of industries such as mobility, gaming and medical devices. A majority of these are variable fee arrangements where the royalties earned by us are based on unit or sales volumes of the respective licensees. We also enter into fixed license fee arrangements. However, the terms of the royalty agreements generally require licensees to give notification of royalties due to us within 30 — 45 days of the end of the quarter during which their related sales occur. As we are unable to estimate the licensees’ sales in any given quarter to determine the royalties due to us, we recognize royalty revenues based on royalties reported by licensees during the quarter and when all revenue recognition criteria are met. We recognize fixed license fee revenue for licenses to our intellectual property when earned under the terms of the agreements, which is generally recognized when all deliverables including services are completed or recognized on a straight-line basis over the expected term of the license. Certain royalties are based upon customer shipments or revenues and could be subject to change and may result in out of period adjustments.

Development contracts and other revenue — Development contracts and other revenue is comprised of professional services (consulting services and/or development contracts). Professional services revenues are recognized under the proportional performance accounting method based on physical completion of the work to be performed or completed performance method. A provision for losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Revisions in estimates are reflected in the period in which the conditions become known. To date, such losses have not been significant.

Multiple element arrangements — We enter into multiple element arrangements in which customers purchase a time-based license which include a combination of software and/or intellectual property licenses, professional services and in limited cases, post contract customer support. For arrangements that are software based and include software and professional services, the services are generally not essential to the functionality of the software, and customers may purchase consulting services to facilitate the adoption of our technology, but they may also decide to use their own resources or appoint other professional service organizations to perform these services. For these arrangements, including those with post contract customer support, revenue is recognized either over the period of the ongoing obligation which is generally consistent with the contractual term, or when all deliverables including services have been completed.

Product sales — We recognize revenue from the sale of products and the license of associated software if any, and expense all related costs of products sold, once delivery has occurred and customer acceptance, if required, has been achieved. We have determined that the license of software for the medical simulation products is incidental to the product as a whole. We typically grant our customers a warranty which guarantees that our products will substantially conform to our current specifications for generally twelve months from the delivery date pursuant to the terms of the arrangement. Historically, warranty-related costs have not been significant.

Cost of Revenues — Cost of revenues includes both cost of product sales and cost of development contract revenues. Cost of product sales consists primarily of contract manufacturing and other overhead costs. Cost of development contract revenue includes primarily labor related costs relating to these contracts.

Stock-based Compensation — Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

 

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Valuation and amortization method — We use the Black-Scholes model, single-option approach to determine the fair value of stock options, stock awards, and ESPP shares. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. We estimate future forfeitures at the date of grant and revise the estimates if necessary, in subsequent periods if actual forfeitures differ from these estimates. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include actual and projected employee stock option exercise behaviors that impact the expected term, our expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating results.

The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and ESPP shares. Existing valuation models, including the Black-Scholes model, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination, or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire and be worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

See Note 10 to the consolidated financial statements for further information regarding stock-based compensation.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization is believed to be more likely than not.

Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our judgments, assumptions, and estimates are reasonable, changes in tax laws or our interpretation of tax laws and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render inaccurate our current assumptions, judgments, and estimates of recoverable net deferred tax assets. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.

 

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Short-term Investments

Our short-term investments consist primarily of U.S. treasury bills and government agency securities purchased with an original or remaining maturity of greater than 90 days on the date of purchase. We classify all debt securities with readily determinable market values as “available-for-sale”. Even though the stated maturity dates of these debt securities may be one year or more beyond the balance sheet date, we have classified all debt securities as short-term investments as they are available for current operations and reasonably expected to be realized in cash or sold within one year. These investments are carried at fair market value, and using the specific identification method, any unrealized gains and losses considered to be temporary in nature are reported as a separate component of other comprehensive income (loss) within stockholders’ equity.

For debt securities in an unrealized loss position, we are required to assess whether (i) we have the intent to sell the debt security or (ii) it is more likely than not that we will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security must be recognized in earnings equal to the entire difference between its fair value and amortized cost basis.

For debt securities in an unrealized loss position which are deemed to be other-than-temporary where neither of the criteria in the paragraph above are present, the difference between the security’s then-current amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e. the credit loss component) and (ii) the amount of the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non-credit loss component is recognized in accumulated other comprehensive loss. The credit loss component is the excess of the amortized cost of the security over the best estimate of the present value of the cash flows expected to be collected from the debt security. The non-credit component is the residual amount of the other-than-temporary impairment.

When calculating the present value of expected cash flows to determine the credit loss component of the other-than-temporary impairment, we estimate the amount and timing of projected cash flows on a security-by-security basis. These calculations reflect our expectations of the performance of the underlying collateral and of the issuer to meet payment obligations as applicable. The expected cash flows are discounted using the effective interest rate of the security prior to any impairment. The amortized cost basis of a debt security is adjusted for credit losses recorded to earnings. The difference between the cash flows expected to be collected and the new cost basis is accreted to investment income over the remaining expected life of the security.

Further information about short-term investments may be found in Note 2 to the consolidated financial statements.

Patents and Intangible Assets

We have acquired patents and other intangible assets. In addition, we capitalize the external legal, filing, and continuation or annuity fees associated with patents and trademarks. We assess the recoverability of our intangible assets, and we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets that affect our consolidated financial statements. If these estimates or related assumptions change in the future, we may be required to record impairment charges for these assets. We amortize our intangible assets related to patents and trademarks, once they are issued, over their estimated useful lives, generally 10 years. Future changes in the estimated useful life could affect the amount of future period amortization expense that we will incur. During the year ended December 31, 2011, we capitalized costs associated with patents and trademarks of $3.3 million. Our total amortization expense (exclusive of impairments or abandonments of $415,000) for the same period was $1.0 million.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

 

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Results of Operations

Overview of 2011

We continued to invest in research, development, sales, and marketing in our key lines of business. Key events in the year were as follows:

 

   

We increased our royalty and license revenue by 16% and our overall revenue remained nearly flat with a decrease of 2% for the year ended December 31, 2011 compared to 2010. The increase in royalty and license revenue was mainly due to increased revenue primarily from our gaming and mobility licensees. The revenue decrease was primarily due to a 62% decrease in product sales primarily due to the divestiture of certain medical product lines to CAE in early 2010.

   

Our loss from continuing operations was $1.7 million for the year ended December 31, 2011 compared to a loss from continuing operations of $6.1 million for the year ended December 31, 2010. The decreased loss was primarily due to reduced ongoing expenses following the transfer of product lines to CAE in early 2010, reductions in personnel, and other cost savings measures.

In 2012, we expect royalty revenue to be the major component of our revenue as our technology continues to be included in more products. In addition, we may become subject to increased intellectual property litigation with our licensing model. Intellectual property litigation may likely cause us to expend significant financial resources in the future and have an adverse effect on the results of our operations. Additionally, our success could be limited by several factors, including global economic conditions, the timely release of our new products and our licensees’ products, continued market acceptance of our products and technology, and the introduction of new products by existing or new competitors. For a further discussion of these and other risk factors, see Item 1A — “Risk Factors.”

The following table sets forth our consolidated statements of operations data as a percentage of total revenues:

 

     Years Ended December 31,  
    

  2011  

   

  2010  

   

  2009  

 

Revenues:

      

Royalty and license

     87.9  %      74.7  %      51.2  % 

Product sales

     8.4        21.9        43.0   

Development contracts and other

     3.7        3.4        5.8   
  

 

 

   

 

 

   

 

 

 

Total revenues

           100.0              100.0              100.0   
  

 

 

   

 

 

   

 

 

 

Costs and expenses:

      

Cost of product sales (exclusive of amortization and impairment of intangibles shown separately below)

     4.1        9.3        29.9   

Sales and marketing

     23.1        25.8        48.1   

Research and development

     27.4        28.1        45.1   

General and administrative

     41.0        48.3        78.3   

Amortization and impairment of intangibles

     4.6        4.0        3.2   

Restructuring costs

     0.0        0.0        5.3   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     100.2        115.5        209.9   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (0.2)        (15.5)        (109.9)   

Change in fair value of warrant liability

     0.0        0.0        1.9   

Interest and other income

     0.7        0.9        2.8   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before provision for income taxes

     0.5        (14.6)        (105.2)   

Benefit (provision) for income taxes

     (5.9)        (4.8)        1.1   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (5.4)        (19.4)        (104.1)   

Discontinued operations, net of provision for income taxes

     0.2        0.4        2.1   
  

 

 

   

 

 

   

 

 

 

Net Loss

     (5.2)  %      (19.0)  %      (102.0)  % 
  

 

 

   

 

 

   

 

 

 

 

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Revenues

 

                  Percent                  Percent        
     2011      Change     Change     2010      Change     Change     2009  
     ($ in thousands)  

Royalty and license

   $ 26,916       $ 3,666        16   $     23,250       $     9,048        64   $     14,202   

Product sales

     2,583         (4,220     (62)     6,803         (5,121     (43)     11,924   

Development contracts and other

     1,136         65        6     1,071         (528     (33)     1,599   
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 

Total revenue.

   $ 30,635       $ (489     (2)   $ 31,124       $ 3,399        12   $ 27,725   
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

 

2011 Compared to 2010

Royalty and license revenue — Royalty and license revenue is comprised of royalties earned on sales by our licensees and license fees charged for our intellectual property portfolio. The increase in royalty and license revenue was due to increases in royalty and license revenue generated primarily from increases in the mobility, gaming, and medical lines of business, partially offset by decreases from our other licensees.

Royalty and license revenue increased by 25% for gaming customers mainly due to increases in royalties from new and existing customers due to increased units shipped by licensees, partially offset by decreases in certain true ups and other one-time payments that occurred primarily in the second quarter of 2010. We typically experience seasonally higher revenue from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter.

Royalty and license revenue increased by 21% for mobility customers primarily due to increases in units shipped and more widespread adoption of our technology in the mobility market. We also recorded approximately $820,000 as an increase in revenue as a result of customers self-reporting adjustments to previously reported amounts.

We expect royalty and license revenue to be the major component of our future revenue as we focus on our licensing model and as our technology continues to be included in more products.

Product sales — Product sales are comprised primarily of medical products, actuators, design kits, and integrated circuits. The decrease in product sales was due primarily to a $3.9 million decrease in medical product sales mainly due to the divesture of medical simulation product lines. On March 30, 2010 we entered into an agreement with CAE and sold certain assets and divested the Endoscopy, Endovascular, and Laparoscopy medical simulation product lines to CAE resulting in reduced medical product sales subsequent to that date. Revenue for the year ended December 31, 2010 for the divested medical product lines was approximately $4 million. We expect product sales for our remaining products will remain at reduced levels in 2012 primarily as a result of softer demand in this market.

Development contracts and other revenue — Development contracts and other revenue is comprised of revenue on commercial contracts. Development contracts and other revenue increased mainly due to an increase in contracted engineering services mainly from medical customers. We continue to transition our engineering resources from certain commercial development contract efforts to development efforts that focus on leveraging our existing sales and channel distribution capabilities. Accordingly, we do not expect development contract revenue to grow significantly in the future.

For the year ended December 31, 2011, revenues generated in North America, Europe, Far East, and Rest of the World represented 42%, 13%, 45%, and 0%, respectively, compared to 37%, 15%, 46%, and 2%, respectively, for the year ended December 31, 2010. The shift in revenues among regions was mainly due to a decrease in product sales in Europe, the Far East, and Rest of the World as a result of the divestiture of the medical simulation product lines. These decreases were partially offset by an increase in royalty and license revenue in the Far East. The increase in Far Eastern royalty and license revenue was primarily due to increased

 

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royalty and license revenue from licensees of mobile devices partially offset by a decrease in royalty and license revenue from other licensees. In addition, there was an increase in royalty and license revenue in North America partially offset by a decrease in product revenue in North America. The increase in North American royalty and license revenue was primarily due to increased royalty and license revenue from gaming and medical licensees. The decrease in North American product revenue was primarily as a result of the divestiture of the medical simulation product lines.

The total revenues of approximately $31 million in 2010 was comprised of approximately $4 million from medical product lines transferred to CAE and approximately $1 million of gaming royalty true ups, with the remainder of approximately $26 million representing current ongoing customers or business.

2010 Compared to 2009

Royalty and license revenue — The increase in royalty and license revenue was due to increases in royalty and license revenue generated primarily from mobility, gaming, integrated circuit and touchscreen, and medical licensees.

Royalty and license revenue increased by 51% for mobility customers primarily due to increases in units shipped. Our technology was included in more phone models and other devices which contributed to this increase.

Royalty and license revenue increased by 40% for gaming customers primarily due to increases in license fees from existing customers. Also contributing to the increase, during the second quarter of 2010 we benefitted from true-up payments in accordance with provisions of our contracts with certain customers in the gaming market. Based on our litigation conclusion and business agreement entered into with Sony Computer Entertainment in March 2007, we are continuing to recognize approximately $30.0 million as royalty and license revenue from March 2007 through March 2017, which amounts to approximately $750,000 per quarter.

Royalty and license revenue increased by $2.2 million for integrated circuit and touchscreen customers primarily due to royalty revenue from new customers.

Royalty and license revenue increased by $939,000 for medical customers primarily due to license revenue from new customers.

Product sales — The decrease in product sales was due primarily to a $4.9 million decrease in medical product sales arising mainly from the divesture of certain medical simulation product lines in the period ending March 31, 2010. Revenue for the years ended December 31, 2010 and 2009 for the three divested product lines were approximately $4 million and $6 million, respectively. Sales of our Virtual IV medical simulator product also declined by $1.6 million from $3.9 million to $2.3 million when compared to the same period in the prior year.

Development contracts and other revenue — Development contracts and other revenue decreased mainly due to a decrease in the number of individual development contracts and due to a decrease in contracted engineering services primarily from mobility and medical customers.

For the year ended December 31, 2010, revenues generated in North America, Europe, Far East, and Rest of the World represented 37%, 15%, 46%, and 2%, respectively, compared to 47%, 14%, 37%, and 2%, respectively, for the year ended December 31, 2009. The shift in revenues among regions was mainly due to a decrease in product sales in North America, Europe and the Far East as a result of the divestiture of certain medical simulation product lines. Product sales decreases were offset by an increase in royalty and license revenue in the Far East and Europe. Product sales decreases in North America were also partially offset by an increase in royalty and license revenue in North America. The increase in royalty and license revenue in Europe was primarily due to increased royalty and license revenue from licensees of mobile devices. The increase in royalty and license revenue in the Far East was primarily due to increased royalty and license revenue from licensees of mobile devices, manufacturers of integrated circuits, automotive licensees, and touchscreen licensees. The increase in royalty and license revenue in North America was primarily due to increased royalty and license revenue from gaming licensees, medical licensees, and touchscreen licensees.

 

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Cost of Revenues

 

   

2011

    

Change

   

% Change

   

2010

    

Change

   

% Change

   

2009

 
    ($ in thousands)  

Cost of revenues

  $       1,255       $       (1,646     (57 )%    $       2,901       $       (5,388     (65 )%    $       8,289   

% of total revenues

    4%             9%             30%   

2011 compared to 2010 — Our cost of revenues consists primarily of direct materials, contract manufacturing, and overhead costs for product sales and labor related costs for development contracts and other. It excludes amortization and impairment or abandonment of intangibles. The divestiture of certain medical simulation product lines in 2010 was a major contributor to the overall reduction of cost of revenues in 2011 compared to 2010. Specifically, the decrease in cost of revenues for 2011 compared to 2010 was primarily due to decreased direct material costs, contract manufacturing, and related costs of $1.5 million and decreased freight costs of $177,000. The decrease in direct material, contract manufacturing, related costs, and freight expense of approximately 62% in 2011 compared to 2010 was mainly due to a similar decrease in product sales. We expect cost of revenues will remain at reduced levels for 2012 primarily as a result of expected softer demand for medical product sales in 2012.

2010 compared to 2009 — The divestiture of the Endoscopy, Endovascular, and Laparoscopy medical simulation product lines was a major contributor to the overall reduction of cost of revenues in 2010 compared to 2009. Specifically, the decrease in cost of revenues for 2010 as compared to 2009 was primarily due to decreased direct material costs and production costs of $1.5 million, reduced overhead costs of $1.0 million, decreased obsolescence expense of $632,000, decreased physical inventory write off costs of $630,000, decreased inventory scrap costs of $619,000, decreased freight costs of $331,000, reduced warranty and repair expense of $305,000 and reduced royalty expense of $173,000. The decrease in direct material, production costs, and freight expense of approximately 41% was mainly due to a similar decrease in product sales. Overhead costs decreased mainly as a result of reduced salary expense and the related overhead from the outsourcing of manufacturing during 2010 and the elimination of operations personnel in the second quarter of 2010. The decrease in obsolescence expense and inventory scrap costs was mainly due to a write-off of medical product parts that did not recur in 2010. The reduction of physical inventory write off costs consisted primarily of physical count to book adjustments of medical demonstration equipment inventory in the second quarter of 2009 that did not recur in 2010. The decrease in warranty and repair costs was mainly due to costs relating to medical products that did not recur in 2010. Year to date, cost of revenues decreased as a percentage of product revenue to 9% for 2010 from 30% for 2009. This decrease is mainly due to the result of the reduced medical physical inventory adjustment expense, the reduced warranty and repair expense, the decreased inventory write off of medical inventory parts, and the reduced overhead discussed above.

Expenses

 

                   Percent                    Percent         
    

2011

    

Change

    

Change

    

2010

    

Change

    

Change

    

2009

 
     ($ in thousands)  

Sales and marketing

   $ 7,085       $ (948)         (12)%       $ 8,033       $ (5,291)         (40)%       $ 13,324   

Research and development

     8,386         (352)         (4)%         8,738         (3,755)         (30)%         12,493   

General and administrative

       12,568         (2,475)         (16)%         15,043         (6,676)         (31)%           21,719   

Amortization and impairment of intangibles

     1,394                 157         13%         1,237                 343         38%         894   

Restructuring costs

     0         0         *         0         (1,462)         (100)%         1,462   

* Percentage not meaningful.

Sales and Marketing — Our sales and marketing expenses are comprised of employee compensation and benefits, sales commissions, advertising, trade shows, brochures, market development funds, travel, and an allocation of facilities costs. The decrease in sales and marketing expense for 2011 as compared to 2010 was

 

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primarily due to the divestiture of the medical simulation product lines, resulting in reduced ongoing expenses. Specifically, the decrease in overall sales and marketing expenses was mainly due to decreased compensation, benefits, and other related costs of $1.1 million primarily due to decreased sales and marketing headcount and decreased travel expense of $156,000 also due to decreased sales and marketing headcount, partially offset by increased marketing, advertising, and public relations costs of $396,000. We expect that other sales and marketing expenses will increase in absolute dollars as we continue to invest in sales and marketing to further our focus on building greater market acceptance for our touch technologies.

The decrease in sales and marketing expense for 2010 as compared to 2009 was primarily due to the divestiture of the medical simulation product lines. Specifically, the decrease in overall sales and marketing expenses was due to decreased compensation, benefits, and overhead of $2.6 million and decreased travel expense of $843,000, primarily due to decreased sales and marketing headcount. In addition we had decreased marketing, advertising, and public relations costs of $835,000, decreased consulting of $553,000 that was primarily used to supplement our sales and marketing staff, and a reduction in the loss on disposal of fixed assets of $497,000 primarily relating to the write-off of demonstration equipment in the second quarter of 2009 that did not recur in 2010.

Research and Development — Our research and development expenses are comprised primarily of employee compensation and benefits, consulting fees, tooling and supplies, and an allocation of facilities costs. The decrease in research and development expense for 2011 as compared to 2010 was primarily due to the divestiture of the medical simulation product lines partially offset by increased investment in research and development efforts. Specifically, the decrease in overall research and development expenses was primarily due to decreased compensation, benefits, and overhead of $575,000 due to reductions from the divestiture of the medical simulation product lines, partially offset by increased compensation, benefits, and overhead of $315,000 due to increased headcount. In addition, we had decreased consulting costs of $93,000. Although we have reduced our research and development expenses primarily due to the divestiture, we believe that continued significant investment in research and development efforts are critical to our future success, and we expect to make increased investments in areas of research and technology development to support future growth.

The decrease in research and development expense for 2010 as compared to 2009 was primarily due to the divestiture of the medical simulation product lines. Specifically, the decrease in overall research and development expenses was primarily due to decreased compensation, benefits, and overhead of $2.7 million mainly due to decreased headcount. In addition, we had decreased consulting costs of $831,000.

General and Administrative — Our general and administrative expenses are comprised primarily of employee compensation and benefits, legal and professional fees, office supplies, travel, and an allocation of facilities costs. The decrease in general and administrative expenses for 2011 as compared to the year ended December 31, 2010 was primarily due to decreased legal, professional, and license fee expenses of $2.7 million, partially offset by increased compensation, benefits, and other related costs of $256,000. The decreased legal and professional expenses were primarily due to decreased accounting, audit, legal and consulting costs mainly resulting from our internal investigation which was concluded in 2010. A decrease in litigation expenses as certain lawsuits were settled during 2010 also contributed to the overall reduction in legal and professional expenses. The increased compensation, benefits, and other related costs was primarily due to increased stock compensation expense mainly due to the timing of the expense of stock options granted and increased severance costs for terminated employees. We will continue to incur costs related to litigation which will cause our general and administrative expenses to increase in 2012 as we continue to assert our intellectual property and contractual rights and defend lawsuits brought against us.

The decrease in general and administrative expenses for 2010 as compared to 2009 was primarily due to decreased legal, professional, and license fee expenses of $4.5 million, decreased compensation, benefits, and overhead of $1.6 million, decreased general and administrative travel of $237,000 and decreased supplies and office expense of $190,000. The decreased legal and professional expenses were primarily due to decreased accounting, audit, legal and consulting costs resulting from our internal investigation in 2009, which was

 

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concluded in the first quarter of 2010. A decrease in litigation expenses as certain lawsuits have been settled also contributed to the overall reduction in legal and professional expenses. The decreased compensation, benefits, and overhead; decreased travel expense; and decreased supplies and office expense was primarily due to decreased general and administrative headcount.

Amortization, impairment, and abandonment of Intangibles — Our amortization, impairment, and abandonment of intangibles is comprised primarily of patent amortization and other intangible amortization along with impairment or write off of abandoned and expired patents. Amortization, impairment, and abandonment of intangibles increased from 2010 to 2011 mainly due to increased amortization due to the increased number of patents. Amortization, impairment, and abandonment of intangibles increased from 2009 to 2010 mainly due to the impairment and abandonment of certain patents.

Restructuring — There were no restructuring charges for 2011 or 2010, nor are any currently anticipated. Restructuring charges decreased from 2009 to 2010 as there were no restructuring charges incurred for the year ended December 31, 2010. Restructuring costs of $1.5 million for the year ended December 31, 2009 consisted primarily of severance benefits and move and close down of facility costs paid in connection with the reduction of workforce from our Montreal medical business operations and relocation of the Maryland medical business operations to San Jose. Restructuring costs in 2009 also included severance benefits paid as the result of the reduction of workforce due to business changes in our Touch segment.

Interest and Other Income

 

                   Percent                    Percent         
     2011      Change      Change      2010      Change      Change      2009  
     ($ in thousands)  

Change in fair value of warrant liability

   $ 0       $         0         *%       $ 0       $ (517)         (100)%       $ 517   

Interest and other income

         204       $ (68)         (25)%             272       $     (501)         (65)%             773   

 

* Percentage not meaningful.

Change in fair value of warrant liability — In January 2009, we adopted ASC 815-40, “Contracts in Entity’s own Equity”. For the year ended December 31, 2009, we had a gain from the change in fair value of the warrant liability of $517,000. There was no gain or loss from the change in fair value of the warrant liability for the years ended December 31, 2011 or 2010. We do not expect to have any further charges for a change in the fair value of the warrant liability since the warrants expired in December 2009.

Interest and Other Income — Interest and other income consist primarily of interest income from cash and cash equivalents and short-term investments, interest on notes receivable, accretion of interest income from Sony Computer Entertainment, and other income. Interest and other income decreased in 2011 compared to 2010 primarily as a result of decreased interest income mainly due to reduced interest rates on cash, cash equivalents, and short-term investments.

Interest and other income decreased in 2010 compared to 2009 primarily due to the reduction of accretion of interest income from Sony Computer Entertainment which was $0 in 2010 compared to $377,000 in 2009. This interest accretion was complete at the end of 2009 as payments were completed. Interest and other income also decreased as a result of decreased interest income due to a reduction in cash equivalents and short-term investments and reduced interest rates on cash, cash equivalents, and short-term investments.

 

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Benefit (Provision) for Taxes

 

                Percent                 Percent        
   

2011

   

Change

   

Change

   

2010

   

Change

   

Change

   

2009

 
    ($ in thousands)  

Benefit (provision) for income taxes

  $ (1,816   $   (315     (21 )%    $   (1,501   $   (1,811     584   $ 310   

Income (loss) from continuing operations before provision for income taxes

  $ 151          $ (4,556       $   (29,166

Effective tax rate

      1202.6         (32.9 )%          1.1

For the year ended December 31, 2011, we recorded a provision for income taxes of $1.8 million yielding an effective tax rate of 1202.6%. The current year tax provision is reflective of the recording of foreign withholding tax expense which has increased as a result of increased revenues in certain Asian countries. For the year ended December 31, 2010, we recorded a provision for income taxes of $1.5 million yielding an effective tax rate of (32.9)%. The 2010 year tax provision is also reflective of the recording of foreign withholding tax expense. For the year ended December 31, 2009, we recorded a benefit for income taxes of $310,000 yielding an effective tax rate of 1.1%. The tax benefit for 2009 is reflective of the recording of a benefit for the alternative minimum tax and net operating loss carrybacks, research and development monetization, offset in part by a valuation allowance on specific deferred tax assets and foreign withholding tax expense. As such, for each of these three years, the effective tax rate differs from the statutory rates, respectively.

Discontinued Operations

 

                Percent                 Percent        
   

2011

   

Change

   

Change

   

2010

   

Change

   

Change

   

2009

 
    ($ in thousands)  

Gain on sales from discontinued operations

  $     61      $     (68     (53 )%    $     129      $     (108     (46 )%    $     237   

Gain (loss) from discontinued operations

  $ 0      $ (1     (100 )%    $ 1      $ (339     (100 )%    $ 340   

Gain on sales from discontinued operations, net of tax, decreased for the year ended December 31, 2011 compared to the year ended December 31, 2010 due to a reduction in payments received from the sale of our 3D family of products. During 2009, we ceased operations of the 3D product line and sold our CyberGlove family of products, SoftMouse 3D positioning device family of products, and our Microscribe family of products, and recorded a gain on sale from discontinued operations. Accordingly, the operations of the 3D product line were classified as discontinued operations in the consolidated statement of operations.

Gain on sales from discontinued operations, net of tax, decreased for the year ended December 31, 2010 compared to the year ended December 31, 2009 due to a reduction in payments received from the sale of our 3D family of products. Gain (loss) from discontinued operations, net of tax, decreased for the year ended December 31, 2010 compared to the year ended December 31, 2009, primarily due to the shutdown of 3D operations in the quarter ended March 31, 2009 resulting in reduced sales volumes and costs and expenses associated with 3D operations after that period.

Segment Results

Through March 31, 2010, we managed our business under two operating and reportable segments: Touch and Medical. As discussed in Notes 11 and 16 of the consolidated financial statements, at March 30, 2010, we had divested our Endoscopy, Endovascular, and Laparoscopy product lines. We continue to sell a limited amount of product, but the primary focus of our business has changed from simulation product sales to primarily a licensing model under which we develop and license a wide range of haptic-related software and patented technologies that generate license and royalty revenue.

 

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As of April 1, 2010, we have reorganized into one segment and there is no longer separate management, development, operations, or administrative personnel specifically for medical operations or product lines.

As such, segment information previously reported under our Medical and Touch segments has been eliminated and all discussion of our business is included in discussions of our company as a whole.

Liquidity and Capital Resources

Our cash, cash equivalents, and short-term investments consist primarily of money market funds and U.S. treasury bills and government agency securities. All of our short-term investments are classified as available-for-sale. The securities are stated at market value, with unrealized gains and losses reported as a component of accumulated other comprehensive income, within stockholders’ equity.

As of December 31, 2011, our cash, cash equivalents, and short-term investments totaled $56.3 million, a decrease of $4.9 million from $61.2 million on December 31, 2010.

In March 2007, we concluded our patent infringement litigation against Sony Computer Entertainment and we received $97.3 million. Furthermore, we entered into a new business agreement under which, we were to receive twelve quarterly installments of $1.875 million for a total of $22.5 million beginning on March 31, 2007 and ending on December 31, 2009. To date, we received all twelve of these installments.

Cash provided by (used in) operating activities — Net cash provided by operating activities during 2011 was $2.4 million, an improvement of $4.2 million from the $1.8 million used in operating activities during 2010. Cash provided by operating activities during 2011 was primarily the result of an increase of $3.3 million due to a change in prepaid expenses and other current assets primarily reflecting a tax refund received. Cash provided by operating activities during 2011 was also affected by noncash charges and credits of $6.0 million, including $3.6 million of noncash stock-based compensation, $1.4 million in amortization and impairment or abandonment of intangibles, and $1.1 million in depreciation and amortization. These increases were partially offset by our net loss of $1.6 million, a decrease of $3.6 million due to a change in deferred revenue and customer advances, a decrease of $713,000 due to a change in accrued compensation and other current liabilities, a decrease of $567,000 due to a change in accounts receivable, a decrease of $266,000 due to a change in other long-term liabilities, and a decrease of $116,000 due to a changes in other assets and other items. Deferred revenue and customer advances decreased mainly due to the recognition of previously deferred revenue. Accrued compensation and other current liabilities changed due to a reduction in accrued compensation and the timing of payments. Accounts and other receivables increased primarily due an increase in other receivables primarily from a landlord lessor and others.

Net cash used in operating activities during 2010 was $1.8 million, an improvement of $16.5 million from the $18.3 million used in operating activities during 2009. Cash used in operating activities during 2010 was primarily the result of a net loss of $5.9 million, a decrease of $4.4 million due to a change in deferred revenue and customer advances mainly due to the recognition of previously deferred revenue, a decrease of $902,000 due to a change in accounts payable resulting from the divestiture of certain medical product lines and the timing of payments to vendors, and a decrease of $300,000 due to a changes in other assets and other items. These decreases were offset by an increase of $2.2 million due to a change in accounts receivable, an increase of $713,000 due to a change in inventories, an increase of $651,000 due to a change in prepaid expenses and other current assets, and an increase of $333,000 due to a change in accrued compensation and other current liabilities. Accounts receivable decreased primarily due to the divestiture of certain medical product lines along with successful collection efforts. Inventory decreased primarily reflecting the divestiture of certain medical product lines and streamlining operations. Prepaid expenses and other current assets changed primarily due to the recognition and reduction of certain deferred items. Accrued compensation and other current liabilities changed due to the divestiture of certain medical product lines and the timing of payments. Cash used in operating activities during 2010 was also affected by noncash charges and credits of $5.7 million, including $3.4 million of noncash stock-based compensation, $1.2 million in amortization and impairment of intangibles, and $1.1 million in depreciation and amortization.

 

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Cash used in investing activities — Net cash used in investing activities during 2011 was $3.3 million, compared to the $6.2 million used in investing activities during 2010, a decrease of $2.9 million. Net cash used in investing activities during 2011 consisted primarily of purchases of short-term investments of $48.9 million and a $3.3 million increase in intangibles primarily due to capitalization of external patent filing and application costs, partially offset by an increase in proceeds from maturities of available-for-sale investments of $49.0 million. Net cash used in investing activities during 2010 was $6.2 million, compared to the $26.9 million used in investing activities during 2009, a decrease of $20.7 million. Net cash used in investing activities during 2010 consisted of an increase in proceeds from maturities of available-for-sale investments of $44.0 million, offset by purchases of available-for-sale investments of $48.9 million; $2.3 million used to purchase intangible assets, primarily due to capitalization of external patent filing and application costs, and an increase of $345,000 used to purchase property and equipment, partially offset by net proceeds from the divestiture of certain medical product lines totaling $964,000.

Cash provided by (used in) financing activities — Net used in financing activities during 2011 was $4.0 million compared to $418,000 provided during 2010, or a $4.4 million increase in cash used compared to the prior year. Net cash used in financing activities for 2011 consisted primarily of repurchases of common stock of $6.5 million, partially offset by exercises of stock options and the issuance of common stock under the employee stock purchase plan of $2.4 million. Net cash provided by financing activities during 2010 was $418,000 compared to $278,000 provided during 2009, or a $140,000 increase from the prior year. Net cash provided by financing activities for 2010 consisted primarily of exercises of stock options and warrants.

We believe that our cash and cash equivalents will be sufficient to meet our working capital needs for at least the next twelve months. We will continue to protect and defend our extensive intellectual property portfolio, which is expected to result in the increased use of cash. Our Board has approved repurchases of our shares of common stock under the previously authorized Stock Repurchase Program which currently has $25.2 million remaining. We anticipate that capital expenditures for property and equipment for the year ended December 31, 2012 will be less than $1.5 million. We anticipate that capitalization of external patent filing and application costs for the year ended December 31, 2012 will be approximately $3.5 million. Cash flows from our discontinued operations have been included in our consolidated statement of cash flows with continuing operations within each cash flow category. The absence of cash flows from discontinued operations is not expected to affect our future liquidity or capital resources. Additionally, if we acquire businesses, patents, or products, our cash or capital requirements could increase substantially. In the event of such an acquisition, or should any unanticipated circumstances arise that significantly increase our capital requirements, we may elect to raise additional capital through debt or equity financing. Any of these events could result in substantial dilution to our stockholders. There is no assurance that such additional capital will be available on terms acceptable to us, if at all.

Summary Disclosures about Contractual Obligations and Commercial Commitments

The following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2011 (in thousands):

 

Contractual Obligations

  

Total

    

Less Than
1 Year

    

1-3 Years

    

3-5 Years

    

More Than
5 Years

 

  Operating Leases

   $   2,412       $   467       $   1,015       $   930       $       0   

  Purchase Obligations

     256         256         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

  Total

   $ 2,668       $ 723       $ 1,015       $ 930       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011, we had a liability for unrecognized tax benefits totaling $675,000 including interest of $47,000, of which approximately $247,000 could be payable in cash. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur. Settlement of such amounts could require the utilization of working capital.

 

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Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements for information regarding the effect of new accounting pronouncements on our financial statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Changes in these factors may cause fluctuations in our earnings and cash flows. We evaluate and manage the exposure to these market risks as follows:

Cash Equivalents, Short-term Investments, and Long-Term Investments — We have cash equivalents and short-term investments of $52.6 million as of December 31, 2011. These securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of our fixed income securities. A hypothetical 100 basis point increase in interest rates would result in an approximate $210,000 decrease in the fair value of our cash equivalents, short-term investments, and long-term investments as of December 31, 2011.

We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our cash equivalents and short-term investment portfolios. The primary objective of our policies is to preserve principal while at the same time maximizing yields, without significantly increasing risk. Our policy’s guidelines limit exposure to loss by limiting the sums we can invest in any individual security and restricting investment to securities that meet certain defined credit ratings. We do not use derivative financial instruments in our investment portfolio to manage interest rate risk.

Foreign Currency Exchange Rates — A substantial majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we do incur certain operating costs for our foreign operations in other currencies but these operations are limited in scope and thus we are not materially exposed to foreign currency fluctuations. Additionally we have some reliance on international and export sales that are subject to the risks of fluctuations in currency exchange rates. Because a substantial majority of our international and export revenues, as well as expenses, are typically denominated in U.S. dollars, a strengthening of the U.S. dollar could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. We have no foreign exchange contracts, option contracts, or other foreign currency hedging arrangements.

 

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Item 8.  Financial Statements and Supplementary Data

IMMERSION CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     49   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     50   

Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010, and 2009

     51   

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2011, 2010, and 2009

     52   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010, and 2009

     53   

Notes to Consolidated Financial Statements

     54   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Immersion Corporation

San Jose, California

We have audited the accompanying consolidated balance sheets of Immersion Corporation and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15 (a) 2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Immersion Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

March 5, 2012

 

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IMMERSION CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     December 31,  
    

2011

   

2010

 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 7,298      $ 12,243   

Short-term investments

     48,987        48,961   

Accounts and other receivables (net of allowances for doubtful accounts of:

    

2011 – $21; 2010 – $97)

     1,487        815   

Inventories

     423        406   

Deferred income taxes

     215        342   

Prepaid expenses and other current assets

     479        3,821   
  

 

 

   

 

 

 

Total current assets

     58,889        66,588   

Property and equipment, net

     1,737        1,931   

Intangibles and other assets, net

     14,053        12,356   
  

 

 

   

 

 

 

Total assets

   $ 74,679      $ 80,875   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 365      $ 393   

Accrued compensation

     2,830        3,507   

Other current liabilities

     2,054        1,488   

Deferred revenue and customer advances

     4,120        4,429   
  

 

 

   

 

 

 

Total current liabilities

     9,369        9,817   

Long-term deferred revenue

     13,229        16,494   

Deferred income tax liabilities

     215        342   

Other long-term liabilities

     245        538   
  

 

 

   

 

 

 

Total liabilities

     23,058        27,191   
  

 

 

   

 

 

 

Commitments and contingencies (Notes 9 and 15)

    

Stockholders’ equity:

    

Common stock and additional paid-in capital – $0.001 par value; 100,000,000 shares authorized; shares issued: December 31, 2011– 31,786,030 and December 31, 2010 – 31,016,812; shares outstanding: December 31, 2011 – 27,857,824 and December 31, 2010 – 28,228,603

     182,508        176,515   

Accumulated other comprehensive income

     118        120   

Accumulated deficit

     (106,157     (104,553

Treasury stock at cost: December 31, 2011-3,928,206 and December 31, 2010 - 2,788,209 shares

     (24,848     (18,398
  

 

 

   

 

 

 

Total stockholders’ equity

     51,621        53,684   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $         74,679      $         80,875   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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IMMERSION CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     Years Ended December 31,  
    

2011

   

2010

   

2009

 

Revenues:

      

Royalty and license

   $     26,916      $     23,250      $     14,202   

Product sales

     2,583        6,803        11,924   

Development contracts and other

     1,136        1,071        1,599   
  

 

 

   

 

 

   

 

 

 

Total revenues

     30,635        31,124        27,725   

Costs and expenses:

      

Cost of revenues (exclusive of amortization, impairment, and abandonment of intangibles shown separately below)

     1,255        2,901        8,289   

Sales and marketing

     7,085        8,033        13,324   

Research and development

     8,386        8,738        12,493   

General and administrative

     12,568        15,043        21,719   

Amortization, impairment, and abandonment of intangibles

     1,394        1,237        894   

Restructuring costs

     0        0        1,462   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     30,688        35,952        58,181   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (53     (4,828     (30,456

Change in fair value of warrant liability

     0        0        517   

Interest and other income

     204        272        773   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

     151        (4,556     (29,166

Benefit (provision) for income taxes

     (1,816     (1,501     310   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (1,665     (6,057     (28,856

Discontinued operations (Note 11) :

      

Gain on sales from discontinued operations, net of provision for income taxes of $39, $65 and $0

     61        129        237   

Gain from discontinued operations, net of provision for income taxes of $0, $0, and $216

     0        1        340   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,604   $ (5,927   $ (28,279
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share:

      

Continuing operations

   $ (0.06   $ (0.22   $ (1.03

Discontinued operations

     0.00        0.01        0.02   
  

 

 

   

 

 

   

 

 

 

Total

   $ (0.06   $ (0.21   $ (1.01
  

 

 

   

 

 

   

 

 

 

Shares used in calculating basic and diluted net loss per share

     28,564        28,113        27,973   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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IMMERSION CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

   

Common Stock and
Additional Paid-In Capital

          

Accumulated
Other
Comprehensive

Income

   

Accumulated

Deficit

   

  Treasury Stock  

   

Total
Stockholders’

Equity

   

Total

Comprehensive

Income (Loss)

 
   

Shares

   

Amount

    

Warrants

       

Shares

   

Amount

     

Balances at January 1, 2009

    30,674,045      $ 167,870       $ 1,731      $ 109      $ (71,543     2,786,563      $ (18,389   $ 79,778     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative effect of change in accounting principle

         (1,713               1,196            (517  

Net loss

             (28,279         (28,279   $ (28,279

Foreign currency translation adjustment

           11              11        11   

Unrealized gain (loss) on available-for-sale securities, net of taxes

           (54           (54     (54

Comprehensive loss

                   $ (28,322
                  

 

 

 

Issuance of stock for ESPP purchase

    30,376        134                   134     

Exercise of stock options

    71,207        145                   145     

Release of Restricted Stock Units

    10,528        64                   64     

Expiration of warrants

      7         (7             0     

Stock based compensation

      4,459                   4,459     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Balances at December 31, 2009

    30,786,156      $ 172,679       $ 11      $ 66      $ (98,626     2,786,563      $ (18,389   $ 55,741     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net loss

             (5,927         (5,927   $ (5,927

Unrealized gain (loss) on available-for-sale securities, net of taxes

           54              54        54   

Comprehensive loss

                   $ (5,873
                  

 

 

 

Repurchase of stock

               1,646        (9     (9  

Exercise of stock options

    130,135        427                   427     

Release of Restricted Stock Units

    100,521        469                   469     

Expiration of warrants

         (11             (11  

Stock based compensation

      2,940                   2,940     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Balances at December 31, 2010

    31,016,812      $ 176,515       $ 0      $ 120      $ (104,553     2,788,209      $ (18,398   $ 53,684     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net loss

             (1,604         (1,604   $ (1,604

Unrealized gain (loss) on available-for-sale securities, net of taxes

           (2           (2     (2

Comprehensive loss

                   $     (1,606
                  

 

 

 

Repurchase of stock

               1,139,997        (6,450     (6,450  

Issuance of stock for ESPP purchase

    28,702        145                   145     

Exercise of stock options

    560,132        2,293                   2,293     

Release of restricted stock units and awards

    180,384        1,323                   1,323     

Stock based compensation

      2,232                   2,232     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Balances at December 31, 2011

    31,786,030      $   182,508       $ 0      $   118      $ (106,157     3,928,206      $   (24,848   $   51,621     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

See notes to consolidated financial statements.

 

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IMMERSION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Years Ended December 31,  
   

2011

   

2010

   

2009

 

Cash flows from operating activities:

     

Net loss

  $ (1,604   $ (5,927   $ (28,279

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

     

Depreciation and amortization of property and equipment

    1,128        1,095        1,563   

Amortization and impairment or abandonment of intangibles

    1,394        1,237        894   

Stock-based compensation

    3,555        3,409        4,524   

Change in fair value of warrant liability

    0        0        (517

Allowance (recovery) for doubtful accounts

    (22     (40     (229

Loss on disposal of equipment

    (6     90        726   

Loss on divestiture

    0        43        0   

Gain on sales of discontinued operations

    (61     (129     (237

Changes in operating assets and liabilities:

     

Accounts and other receivables

    (567     2,213        3,355   

Inventories

    (17     713        1,395   

Deferred income taxes

    0        (94     63   

Prepaid expenses and other current assets

    3,342        651        (131

Other assets

    (116     (300     11   

Accounts payable

    (24     (902     (1,441

Accrued compensation and other current liabilities

    (713     333        (1,702

Income taxes payable

    (72     15        4   

Deferred revenue and customer advances

    (3,574     (4,394     1,398   

Other long-term liabilities

    (266     188        285   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    2,377        (1,799     (18,318
 

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities:

     

Purchases of available-for-sale investments

    (48,905     (48,854     (97,980

Proceeds from maturities of available-for-sale investments

    49,000        44,000        75,000   

Net proceeds from divestiture

    0        964        0   

Additions to intangibles

    (3,336     (2,321     (2,589

Proceeds from the sale of property and equipment

    0        160        0   

Purchases of property and equipment

    (169     (345     (1,569

Proceeds from sales of discontinued operations

    100        192        237   
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (3,310     (6,204     (26,901
 

 

 

   

 

 

   

 

 

 

Cash flows provided by (used in) financing activities:

     

Issuance of common stock under employee stock purchase plan

    145        0        134   

Exercise of stock options

    2,293        427        144   

Purchases of treasury stock

    (6,450     (9     0   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (4,012     418        278   
 

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (4,945     (7,585     (44,941

Cash and cash equivalents:

     

Beginning of year

    12,243        19,828        64,769   
 

 

 

   

 

 

   

 

 

 

End of year

  $ 7,298      $ 12,243      $ 19,828   
 

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

     

Cash paid (received) for taxes

  $ (3,302   $ (34   $ (54
 

 

 

   

 

 

   

 

 

 

Supplemental disclosure of noncash operating, investing, and financing activities:

     

Amounts accrued for property and equipment, and intangibles

  $ 1,222      $ 618      $ 351   
 

 

 

   

 

 

   

 

 

 

Release of Restricted Stock Units and Awards under company stock plan

  $     1,323      $         469      $           64   
 

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Significant Accounting Policies

Description of Business

Immersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware in 1999 and develops, manufactures, licenses, and supports a wide range of hardware and software technologies and products that enhance digital devices with touch interaction.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Immersion Corporation and its wholly-owned subsidiaries, Immersion Canada Inc., Immersion International, LLC, Immersion Medical, Inc., Immersion Japan K.K., Immersion Taiwan, and Haptify, Inc. All intercompany accounts, transactions, and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Cash Equivalents

The Company considers all highly liquid instruments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents.

Short-term Investments

The Company’s short-term investments consist primarily of U.S treasury bills and government agency securities purchased with an original or remaining maturity of greater than 90 days on the date of purchase. The Company classifies debt securities with readily determinable market values as “available-for-sale.” Even though the stated maturity dates of these debt securities may be one year or more beyond the balance sheet date, the Company has classified all debt securities as short-term investments as they are reasonably expected to be realized in cash or sold within one year. These investments are carried at fair market value with unrealized gains and losses considered to be temporary in nature reported as a separate component of other comprehensive income (loss) within stockholders’ equity.

The Company recognizes an impairment charge in the consolidated statement of operations when a decline in value is judged to be other than temporary based on the specific identification method. Other-than-temporary impairment charges may exist when the Company has the intent to sell the security, will more likely than not be required to sell the security, or does not expect to recover the principal.

Inventories

Inventories are stated at the lower of cost (on a standard cost basis which approximates cost on a first-in first-out basis) or market.

Property and Equipment

Property is stated at cost and is depreciated using the straight-line method over the estimated useful life of the related asset. The estimated useful lives are typically as follows:

 

Computer equipment and purchased software

     3 years   

Machinery and equipment

     3-5 years   

Furniture and fixtures

     5 years   

Leasehold improvements are amortized over the shorter of the lease term or their estimated useful life.

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Intangible Assets

Intangible assets with finite useful lives are amortized and intangible assets with indefinite lives are not amortized but rather are tested at least annually for impairment.

In addition to purchased intangible assets, the Company capitalizes the external legal and filing fees associated with its patents and trademarks. These costs are amortized utilizing the straight-line method, which approximates the pattern of consumption over the estimated useful lives of the respective assets, generally ten years. Amortization commences when a patent is granted.

Long-lived Assets

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of that asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset.

Revenue Recognition

The Company recognizes revenues in accordance with applicable accounting standards, including Accounting Standards Codification (“ASC”) 605-10-S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”); and ASC 985-605, “Software-Revenue Recognition” (“ASC 985-605”). The Company derives its revenues from three principal sources: royalty and license fees, product sales, and development contracts. As described below, management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue for any period based on the judgments and estimates made by management. Specifically, in connection with each transaction, the Company must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. The Company applies these criteria as discussed below.

 

   

Persuasive evidence of an arrangement exists: For a license arrangement, the Company requires a written contract, signed by both the customer and the Company. For a stand-alone product sale, the Company requires a purchase order or other form of written agreement with the customer.

   

Delivery has occurred. The Company delivers software and product to customers physically and also delivers software electronically. For physical deliveries not related to software, the transfer terms typically include transfer of title and risk of loss at the Company’s shipping location. For electronic deliveries, delivery occurs when the Company provides the customer access codes or “keys” that allow the customer to take immediate possession of the software.

   

The fee is fixed or determinable. The Company’s arrangement fee is based on the use of standard payment terms which are those that are generally extended to the majority of customers. For transactions involving extended payment terms, the Company deems these fees not to be fixed or determinable for revenue recognition purposes and revenue is deferred until the fees become due and payable.

   

Collectibility is probable. To recognize revenue, the Company must judge collectibility of the arrangement fees, which is done on a customer-by-customer basis pursuant to the credit review policy. The Company typically sells to customers with whom there is a history of successful collection. For new customers, the Company evaluates the customer’s financial condition and ability to pay. If it is determined that collectibility is not probable based upon the credit review process or the customer’s payment history, revenue is recognized when payment is received.

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Royalty and license revenue — The Company licenses its portfolio of patents to customers in a variety of industries such as mobility, gaming and medical devices. A majority of these are variable fee arrangements where the royalties earned by the Company are based on unit or sales volumes of the respective licensees. The Company also enters into fixed license fee arrangements. However, the terms of the royalty agreements generally require licensees to give notification of royalties due to the Company within 30 — 45 days of the end of the quarter during which their related sales occur. As the Company is unable to estimate the licensees’ sales in any given quarter to determine the royalties due to it, the Company recognizes royalty revenues based on royalties reported by licensees during the quarter and when all revenue recognition criteria are met. The Company recognizes fixed license fee revenue for licenses to intellectual property when earned under the terms of the agreements, which is generally recognized when all deliverables including services are completed or recognized on a straight-line basis over the expected term of the license. Certain royalties are based upon customer shipments or revenues and could be subject to change and may result in out of period adjustments.

Development contracts and other revenue — Development contracts and other revenue is comprised of professional services (consulting services and/or development contracts). Professional services revenues are recognized under the proportional performance accounting method based on physical completion of the work to be performed or completed performance method. A provision for losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Revisions in estimates are reflected in the period in which the conditions become known. To date, such losses have not been significant.

Multiple element arrangements — The Company enters into multiple element arrangements in which customers purchase a time-based license which include a combination of software and/or intellectual property licenses, professional services and in limited cases, post contract customer support. For arrangements that are software based and include software and professional services, the services are generally not essential to the functionality of the software, and customers may purchase consulting services to facilitate the adoption of the Company’s technology, but they may also decide to use their own resources or appoint other professional service organizations to perform these services. For these arrangements, including those with post contract customer support, revenue is recognized either over the period of the ongoing obligation which is generally consistent with the contractual term, or when all deliverables including services have been completed.

Product sales — The Company recognizes revenue from the sale of products and the license of associated software if any, and expenses all related costs of products sold, once delivery has occurred and customer acceptance, if required, has been achieved. The Company has determined that the license of software for its medical simulation products is incidental to the product as a whole. The Company typically grants to customers a warranty which guarantees that products will substantially conform to the Company’s current specifications for generally three to twelve months from the delivery date pursuant to the terms of the arrangement. Historically, warranty-related costs have not been significant.

Advertising

Advertising costs (including obligations under cooperative marketing programs) are expensed as incurred and included in sales and marketing expense. Advertising expense was as follows:

 

     Year ended December 31,  
    

2011

    

2010

    

2009

 
     (In thousands)  

Advertising expense

   $         192       $         13       $         78   
  

 

 

    

 

 

    

 

 

 

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Research and Development

Research and development costs are expensed as incurred. The Company has sometimes generated revenues from development contracts with commercial customers that have enabled it to accelerate its own product development efforts. Such development revenues have only partially funded the Company’s product development activities, and the Company generally retains ownership of the products developed under these arrangements. As a result, the Company classifies all development costs related to these contracts as research and development expenses.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization is believed to be more likely than not.

Software Development Costs

Certain of the Company’s products include software. Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. The Company considers technological feasibility to be established upon completion of a working model of the software and the related hardware. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

Stock-based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. See Note 10 for further information regarding the Company’s stock-based compensation assumptions and expenses.

Comprehensive Loss

Comprehensive loss includes net loss as well as other items of comprehensive income. The Company’s other comprehensive income consists of foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. The components of accumulated other comprehensive income are as below.

 

     December 31,  
    

2011

    

2010

    

2009

 
     (In thousands)  

Net unrealized gains (losses) on short-term investments

   $ 17       $ 19       $ (35

Foreign currency translation adjustment

           101               101               101   
  

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income

   $ 118       $ 120       $ 66   
  

 

 

    

 

 

    

 

 

 

Use of Estimates

The preparation of consolidated financial statements and related disclosures in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation

 

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of short-term investments, income taxes including uncertain tax provisions, revenue recognition, stock-based compensation, contingent liabilities from litigation, and accruals for other liabilities. Actual results could differ from those estimates.

Concentration of Credit Risks

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents, short term investments, and accounts receivable. The Company invests primarily in money market accounts and highly liquid debt instruments purchased with an original or remaining maturity of greater than 90 days on the date of purchase. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand. The Company sells products primarily to companies in North America, Europe, and the Far East. To reduce credit risk, management performs periodic credit evaluations of its customers’ financial condition. The Company maintains reserves for estimated potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.

Certain Significant Risks and Uncertainties

The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a negative effect on the Company in terms of its future financial position and results of operations: the mix of revenues; the loss of significant customers; fundamental changes in the technology underlying the Company’s products; market acceptance of the Company’s and its licensees’ products under development; development of sales channels; litigation or other claims in which the Company is involved; the ability to successfully assert its patent rights against others; the impact of changing economic conditions; the hiring, training, and retention of key employees; successful and timely completion of product and technology development efforts; and new product or technology introductions by competitors.

Fair Value of Financial Instruments

Financial instruments consist primarily of cash equivalents, short-term investments, accounts receivable and accounts payable. Cash equivalents and short term investments are stated at fair value based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The recorded cost of accounts receivable and accounts payable approximate the fair value of the respective assets and liabilities.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is U. S. dollars. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries and foreign currency transaction gains and losses are included in earnings.

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (“FASB”) ratified Accounting Standards Update (“ASU”) 2009-13 (update to ASC 605), “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13 (update to ASC 605)”). This guidance addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 (update to ASC 605) requires companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 (update to ASC 605) was effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The

 

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Company adopted ASU 2009-13 (update to ASC 605) as of January 1, 2011, and its application had no impact on the Company’s consolidated financial statements as no material new agreements or materially modified contracts in the year ended December 31, 2011 came under this guidance.

In September 2009, the FASB ratified ASU 2009-14 (update to ASC 605), “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14 (update to ASC 605)”). ASU 2009-14 (update to ASC 605) provides guidance to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionally. ASC 2009-14 (update to ASC 605) had an effective date that is consistent with ASU 2009-13 (update to ASC 605) above. The Company adopted ASC 2009-14 (update to ASC 605) as of January 1, 2011, and its application had no impact on the Company’s consolidated financial statements as no material new agreements or materially modified contracts in the year ended December 31, 2011 came under this guidance.

In June 2011, the FASB ratified ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in equity. Under either choice, items that are reclassified from other comprehensive income to net income are required to be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. In December 2011 the FASB ratified ASU 2011-12 “Comprehensive Income (Topic 220): ASU 2011-12 defers those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. These amendments are effective for reporting periods beginning after December 15, 2011, and will be applied retrospectively. These amendments will change the manner in which the Company presents comprehensive income.

In May 2011, FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820)”. This ASU provides additional guidance on fair value disclosures. This guidance contains certain updates to the measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements including enhanced disclosure for: (1) the valuation processes used by the reporting entity; and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. This guidance will be effective for the Company on January 1, 2012. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

2.  Fair Value Disclosures

Cash Equivalents and Short-term Investments

The financial instruments of the Company measured at fair value on a recurring basis are cash equivalents and short-term investments.

The Company’s fixed income available-for-sale securities consist of high quality, investment grade securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1) or inputs other than quoted prices that are observable either directly or indirectly (Level 2) in determining fair value. However, the Company currently classifies all of its fixed income available-for-sale securities as having Level 2.

The types of instruments valued based on quoted market prices in active markets include most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

 

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The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy and include most U.S. treasury securities and most investment-grade corporate commercial paper.

The types of instruments valued based on unobservable inputs which reflect the reporting entity’s own assumptions or data that market participants would use in valuing an instrument are generally classified within Level 3 of the fair value hierarchy.

In January 2010, the FASB ratified ASU 2010-06 “Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and the level of disaggregation of assets or liabilities and the valuation techniques and inputs used to measure fair value. The Company adopted the updated guidance which was effective for the Company’s annual reporting period at December 31, 2009, with the exception of new Level 3 activity disclosures, which was adopted January 1, 2011. The adoption of this guidance did not have a material impact on its consolidated results of operations and financial condition.

Financial instruments measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010 are classified based on the valuation technique in the table below:

 

    December 31, 2011
Fair value measurements using
    Total  
    Quoted Prices in
Active Markets

for Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

 

(Level 3)

   
    (In thousands)        

Assets:

       

U.S. Treasury securities

  $ 0          $ 48,987        $ 0        $ 48,987     

Money market funds

    3,617          0          0        3,617     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at fair value

  $             3,617          $  48,987        $               0        $   52,604     
 

 

 

   

 

 

   

 

 

   

 

 

 

The above table excludes $3.7 million of cash held in banks.

 

     December 31, 2010
Fair value measurements using
     Total  
   Quoted Prices  in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

 

(Level 3)

    
           
           
           
           
     (In thousands)  

Assets:

           

U.S. Treasury securities

   $ 0       $ 48,961       $ 0         $ 48,961     

Money market funds

                 7,356         0         0         7,356     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 7,356       $   48,961       $             0         $     56,317     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subsequent to the issuance of the 2010 consolidated financial statements, the Company determined that $49.0 million of U.S. Treasury securities should have been classified as level 2 investments rather than level 1 in

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2010, as the company does not have access to active trading information on such securities. Accordingly, the Company has corrected the classification of the U.S. Treasury securities from level 1 to level 2 in the table above as of December 31, 2010.

The above table excludes $4.9 million of cash held in banks.

Short-term Investments

 

     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
     Fair Value  
     (In thousands)  

U.S. Treasury securities

   $   48,970       $         17       $           0       $   48,987    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 48,970       $ 17       $ 0       $ 48,987    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
     Fair Value  
     (In thousands)  

U.S. Treasury securities

   $   48,942       $ 19       $ 0       $   48,961    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 48,942       $         19       $           0       $ 48,961    
  

 

 

    

 

 

    

 

 

    

 

 

 

The contractual maturities of the Company’s available-for-sale securities on December 31, 2011 and December 31, 2010 were all due within one year.

3.  Accounts and Other Receivables

 

     December 31,  
         2011              2010      
     (In thousands)  

Trade accounts receivable

   $ 525       $ 459   

Receivables from vendors, lessor, and other

     962         356   
  

 

 

    

 

 

 

Accounts and other receivables

   $     1,487       $     815   
  

 

 

    

 

 

 

4.  Inventories

 

     December 31,  
         2011              2010      
     (In thousands)  

Raw materials and subassemblies

   $     167       $     281   

Finished goods

     256         125   
  

 

 

    

 

 

 

Inventories

   $ 423       $ 406   
  

 

 

    

 

 

 

 

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5.  Property and Equipment

 

     December 31,  
         2011             2010      
     (In thousands)  

Computer equipment and purchased software

   $ 3,696      $ 3,807   

Machinery and equipment

     882        815   

Furniture and fixtures

     533        630   

Leasehold improvements

     837        881   
  

 

 

   

 

 

 

Total

     5,948        6,133   

Less accumulated depreciation

     (4,211     (4,202
  

 

 

   

 

 

 

Property and equipment, net

   $     1,737      $     1,931   
  

 

 

   

 

 

 

6.  Intangibles and Other Assets

 

     December 31,  
         2011             2010      
     (In thousands)  

Patents and trademarks

   $   23,617      $   21,074   

Other assets

     204        295   
  

 

 

   

 

 

 

Gross intangibles and other assets

     23,821        21,369   

Accumulated amortization of patents and trademarks

     (9,768     (9,013
  

 

 

   

 

 

 

Intangibles and other assets, net

   $ 14,053      $ 12,356   
  

 

 

   

 

 

 

The Company amortizes its intangible assets related to patents and trademarks, over their estimated useful lives, generally 10 years from the date of issuance of the patents and trademarks. Amortization of intangibles excluding impairments or abandonments was as follows:

 

         Year ended December 31,      
    

2011

    

2010

    

2009

 
     (In thousands)  

Amortization of Intangibles - excluding impairments or abandonments

   $     979       $     810       $     827   
  

 

 

    

 

 

    

 

 

 

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The table below includes estimated remaining annual amortization expense for issued patents and trademarks as of December 31, 2011.

 

     Estimated
Amortization
Expense
 
       (In thousands)    

2012

   $ 899   

2013

     897   

2014

     757   

2015

     709   

2016

     631   

Thereafter

     1,508   
  

 

 

 

Total

   $       5,401   
  

 

 

 

Patents in process included in patents and trademarks were as follows:

 

     December 31,  
           2011                  2010        
     (In thousands)  

Patents in process

   $     8,448       $     7,382   
  

 

 

    

 

 

 

Upon issuance, in process patents will be amortized over their estimated useful lives, generally 10 years.

7.  Components of Other Current Liabilities and Deferred Revenue and Customer Advances

 

     December 31,  
           2011                  2010        
     (In thousands)  

Accrued legal

   $ 727       $ 543   

Income taxes payable

     23         55   

Other current liabilities

     1,304         890   
  

 

 

    

 

 

 

Total other current liabilities

   $     2,054       $     1,488   
  

 

 

    

 

 

 

Deferred revenue

   $ 4,046       $ 4,390   

Customer advances

     74         39   
  

 

 

    

 

 

 

Total deferred revenue and customer advances

   $ 4,120       $ 4,429   
  

 

 

    

 

 

 

8.  Long-term Deferred Revenue

Long-term deferred revenue consisted of the following:

 

    December 31,  
          2011                 2010        
    (In thousands)  

Deferred revenue for Sony Computer Entertainment

  $   12,634      $   15,632   

Other deferred revenue

    595        862   
 

 

 

   

 

 

 

Long-term deferred revenue

  $ 13,229      $ 16,494   
 

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9.  Commitments

The Company leases several of its facilities under noncancelable operating lease arrangements that expire at various dates through 2016.

On September 16, 2011, the Company entered into a Lease Termination Agreement effective as of December 31, 2011 with respect to the termination of the lease for its primary facilities of approximately 48,000 square feet in San Jose, California which was scheduled to expire in June 2014. Pursuant to that agreement, the Company will be paid a move incentive of $350,000, for vacating the premises which occurred in December 2011. The move incentive along with a write off of deferred rent of $294,000 has been credited to rent expense in 2011. On September 19, 2011, the Company entered into a new lease agreement for its primary facilities of approximately 33,000 square feet in San Jose, California. It contains provisions for leasehold improvement incentives of up to $10 per rentable square foot, and expires in December 2016 and can be extended to December 2021.

Minimum future lease payments and non-cancellable unconditional purchase obligations are as follows:

 

     Operating Leases     Purchase Obligations  
     (In thousands)  

2012

   $ 467      $ 256   

2013

     500        0   

2014

     514        0   

2015

     509        0   

2016

     422        0   

Thereafter

     0        0   
  

 

 

   

 

 

 

Total

   $                       2,412      $                        256   
  

 

 

   

 

 

 

Rent expense was as follows:

 

             Year ended December 31,           
    

2011

    

2010

    

2009

 
     (In thousands)  

Rent expense

   $         30       $         703       $         986   
  

 

 

    

 

 

    

 

 

 

10.  Stock-based Compensation

The Company’s equity incentive program is a long-term retention program that is intended to attract, retain, and provide incentives for talented employees, consultants, officers, and directors and to align stockholder and employee interests. The Company may grant options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock-based or cash-based awards to employees, officers, directors, and consultants. Under these programs, stock options may be granted at prices not less than the fair market value on the date of grant for stock options. These options generally vest over 4 years and expire from 5 to 10 years from the date of grant. Restricted stock generally vests over one year. RSUs generally vest over 3 years. On June 3, 2011, the Company’s stockholders approved the 2011 Equity Incentive Plan (the “2011” Plan) in which 2,300,000 shares were authorized. In addition, 400,000 shares were transferred from the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) and 2,279,263 shares were transferred from the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) for a total of 4,979,263 originally available for

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

grant under the 2011 Plan. Under the 2011 Plan, any award other than an option or stock appreciation right shall reduce the common stock shares available for grant by 1.75 shares for every share issued. The 2007 Plan and 2008 Plan have been terminated.

 

     December 31,  
    

2011

 

Common stock shares available for grant

     4,824,838   

Common stock options outstanding

     3,267,838   

Restricted stock awards outstanding

     18,000   

Restricted stock units outstanding

     407,765   

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may purchase common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Company’s stock at the beginning of the offering period or the purchase date. Participants may not purchase more than 2,000 shares in a six-month offering period or purchase stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period. A total of 1,000,000 shares of common stock have been reserved for issuance under the ESPP. As of December 31, 2011, 456,891 shares had been purchased since the inception of the ESPP in 1999. Under ASC 718-10, the ESPP is considered a compensatory plan and the Company is required to recognize compensation cost related to the fair value of the award purchased under the ESPP. Shares purchased under the ESPP for the year ended December 31, 2011 are listed below. No shares were purchased under the ESPP for the year ended December 31, 2010. The intrinsic value listed below is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

 

    

Year

Ended

December 31,

2011

 

Shares purchased under ESPP

     28,702   

Average price of shares purchased under ESPP

   $ 5.04   

Intrinsic value of shares purchased under ESPP

   $     74,566   

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Summary of Stock Options

The following table sets forth the summary of option activity under the Company’s stock option plans for the years ended December 31, 2011, 2010, and 2009:

 

    Number
of Shares
    Weighted
Average
Exercise Price
    Weighted
Average
Fair Value
Of Options
Granted
    Aggregate
Intrinsic
Value

of Options
Exercised
(In thousands)
 

Outstanding at January 1, 2009

    7,009,667        $9.13       

Granted

    2,066,533        3.69        $2.19     

Exercised

    (71,207     2.03          $174   

Cancelled

    (3,963,758     7.88       
 

 

 

       

Outstanding at December 31, 2009

    5,041,235        7.99       

Granted

    662,185        5.37        3.11     

Exercised

    (130,135     3.28          308   

Cancelled

    (1,572,759     11.67       
 

 

 

       

Outstanding at December 31, 2010

    4,000,526        6.26       
       

Granted

    429,963        7.11        4.07     

Exercised

    (560,132     4.09          2,485   

Cancelled

    (602,519     6.99       

Outstanding at December 31, 2011

    3,267,838        6.61       
 

 

 

       

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the options that were in-the-money.

Information regarding stock options outstanding at December 31, 2011, 2010, and 2009 is summarized below:

 

     Number of
Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (years)
     Aggregate
Intrinsic
Value
(In millions)
 

December 31, 2009

           

Options outstanding

     5,041,235       $         7.99         5.52       $ 1.8   

Options vested and expected to vest using
estimated forfeiture rates

     4,666,844         8.18         5.28         1.6   

Options exercisable

     3,247,607         9.25         3.78         1.0   

December 31, 2010

           

Options outstanding

     4,000,526       $ 6.26         6.39       $ 5.5   

Options vested and expected to vest using
estimated forfeiture rates

     3,798,092         6.32         6.25         5.1   

Options exercisable

     2,541,701         6.80         5.03         2.9   

December 31, 2011

           

Options outstanding

     3,267,838       $ 6.61         5.53       $         1.3   

Options vested and expected to vest using
estimated forfeiture rates

     3,151,950         6.62         5.44         1.3   

Options exercisable

     2,377,683         6.99         4.61         0.8   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Additional information regarding options outstanding as of December 31, 2011 is as follows:

 

    

Options Outstanding

    

Options Exercisable

 

Range of

Exercise

  Prices

  

Number
Outstanding

  

Weighted
Average
Remaining
Contractual
Life (Years)

  

Weighted
Average
Exercise

Price

    

Number
Exercisable

  

Weighted
Average
Exercise

Price

 

$1.28 - $3.81

   135,364    3.76    $     2.48       120,230    $       2.42   

    3.85 - 3.85

   600,000    7.87      3.85       325,000      3.85   

    4.03 - 5.10

   389,722    4.87      4.85       286,129      4.88   

    5.17 - 5.65

   356,228    7.04      5.55       185,858      5.55   

    5.71 - 6.61

   357,443    6.46      6.35       184,208      6.12   

    6.62 - 7.00

   551,919    2.57      6.96       520,869      6.97   

    7.02 - 8.61

   357,068    5.47      8.37       320,012      8.39   

  8.71 - 10.24

   328,094    5.04      9.18       243,377      9.17   

12.38 - 16.57

   187,000    5.77      15.49       187,000      15.49   

17.15 - 17.15

   5,000    5.78      17.15       5,000      17.15   
  

 

        

 

  

$1.28-$17.15

   3,267,838    5.53    $     6.61       2,377,683    $       6.99   
  

 

        

 

  

Summary of Restricted Stock Units

RSU activity for the years ended December 31, 2011, 2010, and 2009 was as follows:

 

     Number
    of Shares    
     Weighted
Average
Grant Date
    Fair Value     
       Fair Value
of Released

RSU’s
    (In thousands)    
 

Outstanding at January 1, 2009

     34,500           

Awarded

     292,287         $3.01        

Released

     (10,528           $55   

Forfeited

     (118,204        
  

 

 

         

Outstanding at December 31, 2009

     198,055           
          

Awarded

     363,928         5.58           315   
          

Released

     (69,021        
          

Forfeited

     (75,039        
  

 

 

         

Outstanding at December 31, 2010

     417,923           
          

Awarded

     243,908         6.61        
          

Released

     (159,384           1,163   
          

Forfeited

     (94,682        
  

 

 

         

Outstanding at December 31, 2011

     407,765           
          

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Information regarding RSU’s at December 31, 2011, 2010, and 2009 is summarized below:

 

     Number of
      Shares      
     Weighted
Average
Remaining
Contractual
    Life (years)     
     Aggregate
Intrinsic

Value
   (In millions)  
     Fair Value
  (In millions)  
 

December 31, 2009

           

RSUs outstanding

     198,055         1.21       $             0.9       $                 0.9   

RSUs vested and expected to vest using estimated forfeiture rates

     148,206         1.21       $ 0.7      

December 31, 2010

           

RSUs outstanding

     417,923         1.13       $ 2.8       $ 2.8   

RSUs vested and expected to vest using estimated forfeiture rates

     330,038         1.00       $ 2.2      

December 31, 2011

           

RSUs outstanding

     407,765         0.95       $ 2.1       $ 2.1   

RSUs vested and expected to vest using estimated forfeiture rates

     336,454         0.92       $ 1.7      

The aggregate intrinsic value is calculated as the market value as of the end of the reporting period.

Summary of Restricted Stock Awards

Restricted stock award activity for the years ended December 31, 2011, 2010, and 2009 was as follows:

 

     Number
    of Shares    
    Weighted
Average
Grant Date
Fair Value
     Total
Fair
Value
of Awards
Released
(In thousands)
 

Outstanding at January 1, 2009

     0        

Awarded

     27,000      $             2.70      

Released

     0         $ 0   

Forfeited

     0        
  

 

 

      

Outstanding at December 31, 2009

     27,000        2.70      

Awarded

     22,500        5.59      

Released

     (31,500     3.11             147   

Forfeited

     0        
  

 

 

      

Outstanding at December 31, 2010

     18,000        5.59      

Awarded

     30,000        6.61      

Released

     (21,000     5.74         159   

Forfeited

     (9,000     6.61      
  

 

 

      

Outstanding at December 31, 2011

     18,000        6.61      
  

 

 

      

 

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IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Stock-based Compensation

Valuation and amortization method — The Company uses the Black-Scholes-Merton option pricing model (“Black-Scholes model”), single-option approach to determine the fair value of stock options and ESPP shares. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates if necessary, in subsequent periods if actual forfeitures differ from these estimates. The determination of the fair value of share-based payment awards on the date of grant using an option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include actual and projected employee stock option exercise behaviors that impact the expected term, the Company’s expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.

Expected term — The Company estimates the expected term of options granted by calculating the average term from the Company’s historical stock option exercise experience. The expected term of ESPP shares is the length of the offering period. The Company used the simplified method approved by the SEC to determine the expected term for options granted prior to December 31, 2007.

Expected volatility — The Company estimates the volatility of its common stock taking into consideration its historical stock price movement and its expected future stock price trends based on known or anticipated events.

Risk-free interest rate — The Company bases the risk-free interest rate that it uses in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

Expected dividend — The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option-pricing model.

Forfeitures — The Company is required to estimate future forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

The assumptions used to value option grants and shares under the ESPP are as follows:

 

                     Options                         Employee Stock Purchase Plan    
    

2011

  

2010

  

2009

  

2011

  

2010

  

2009

Expected life (in years)

   4.5    5.2    5.5    0.5    0.5    0.5

Interest rate

   0.8%    1.4%    2.1%    0.2%    0.6%    0.4%

Volatility

   72%    68%    68%    45%    80%    109%

Dividend yield

   0.0%    0.0%    0.0%    0.0%    0.0%    0.0%

 

69


Table of Contents

IMMERSION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Total stock-based compensation recognized in the consolidated statements of operations is as follows:

 

    

Year Ended December 31,

 
    

2011

    

2010

    

2009

 

Income Statement Classifications

   (In thousands)  

Cost of product sales

   $ 0       $ 10       $ 162   

Sales and marketing

     526         722         853   

Research an