10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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)
 
(I.R.S. Employer
Identification No.)
50 Rio Robles, San Jose, California 95134
(Address of principal executive offices)(Zip Code)
(408) 467-1900
(Registrant’s telephone number, including area code)
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  ý     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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
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 Exchange Act).    Yes  ¨    No  ý
Number of shares of common stock outstanding at October 22, 2015: 28,284,981.



Table of Contents

IMMERSION CORPORATION
INDEX
 
 
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 


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Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
33,167

 
$
14,380

Short-term investments
 
33,990

 
42,981

Accounts and other receivables (net of allowances for doubtful accounts of $22 and $28)
 
1,503

 
3,021

Deferred income taxes
 
2,921

 
9,377

Prepaid expenses and other current assets
 
3,022

 
845

Total current assets
 
74,603

 
70,604

Property and equipment, net
 
4,778

 
1,207

Deferred income tax assets
 
21,458

 
25,419

Prepaid income taxes
 
7,495

 

Intangibles and other assets, net
 
269

 
291

Total assets
 
$
108,603

 
$
97,521

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
1,539

 
$
669

Accrued compensation
 
3,631

 
1,906

Other current liabilities
 
1,639

 
2,225

Deferred revenue
 
12,664

 
7,779

Total current liabilities
 
19,473

 
12,579

Long-term deferred revenue
 
3,983

 
7,827

Other long-term liabilities
 
752

 
512

Total liabilities
 
24,208

 
20,918

Contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock and additional paid-in capital — $0.001 par value; 100,000,000 shares authorized; 34,795,372 and 34,225,778 shares issued, respectively; 28,284,981 and 27,715,387 shares outstanding, respectively
 
210,939

 
204,876

Accumulated other comprehensive income
 
111

 
102

Accumulated deficit
 
(81,086
)
 
(82,806
)
Treasury stock at cost: 6,510,391 shares
 
(45,569
)
 
(45,569
)
Total stockholders’ equity
 
84,395

 
76,603

Total liabilities and stockholders’ equity
 
$
108,603

 
$
97,521

See accompanying Notes to Condensed Consolidated Financial Statements.


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Table of Contents

IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Royalty and license
 
$
13,944

 
$
11,714

 
$
45,895

 
$
38,473

Development, services, and other
 
369

 
337

 
928

 
845

Total revenues
 
14,313

 
12,051

 
46,823

 
39,318

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of amortization of intangibles shown separately below)
 
117

 
104

 
347

 
325

Sales and marketing
 
3,198

 
2,238

 
11,078

 
7,638

Research and development
 
3,471

 
2,718

 
10,697

 
8,782

General and administrative
 
6,241

 
5,274

 
21,253

 
17,745

Amortization of intangibles
 
3

 
15

 
18

 
55

Total costs and expenses
 
13,030

 
10,349

 
43,393

 
34,545

Operating income
 
1,283

 
1,702

 
3,430

 
4,773

Interest and other income (expense)
 
(84
)
 
(30
)
 
(63
)
 
107

Income before provision for income taxes
 
1,199

 
1,672

 
3,367

 
4,880

Provision for income taxes
 
(1,015
)
 
(599
)
 
(1,647
)
 
(1,774
)
Net income
 
$
184

 
$
1,073

 
$
1,720

 
$
3,106

Basic net income per share
 
$
0.01

 
$
0.04

 
$
0.06

 
$
0.11

Shares used in calculating basic net income per share
 
28,190

 
28,505

 
28,027

 
28,420

Diluted net income per share
 
$
0.01

 
$
0.04

 
$
0.06

 
$
0.11

Shares used in calculating diluted net income per share
 
29,134

 
29,351

 
28,893

 
29,355

Other comprehensive income
 
 
 
 
 
 
 
 
Change in unrealized gains on short-term investments
 
5

 
3

 
9

 
5

Total other comprehensive income
 
5

 
3

 
9

 
5

Total comprehensive income
 
$
189

 
$
1,076

 
$
1,729

 
$
3,111

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Cash flows provided by operating activities:
 
 
 
 
Net income
 
$
1,720

 
$
3,106

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of property and equipment
 
772

 
364

Amortization of intangibles
 
18

 
55

Stock-based compensation
 
4,245

 
4,058

Allowance for doubtful accounts
 
(6
)
 
3

Loss on disposal of equipment
 
10

 
19

Changes in operating assets and liabilities:
 
 
 
 
Accounts and other receivables
 
1,524

 
(2,397
)
Deferred income taxes
 
10,417

 
1,539

Prepaid income taxes
 
(7,495
)
 

Prepaid expenses and other current assets
 
(2,177
)
 
(395
)
Other operating assets
 
(24
)
 
(20
)
Accounts payable
 
870

 
337

Accrued compensation and other current liabilities
 
1,072

 
(3,209
)
Income taxes payable
 
97

 
35

Deferred revenue
 
1,041

 
(336
)
Other long-term liabilities
 
240

 
(77
)
Net cash provided by operating activities
 
12,324

 
3,082

Cash flows provided by investing activities:
 
 
 
 
Purchases of short-term investments
 
(28,972
)
 
(37,960
)
Proceeds from maturities of short-term investments
 
38,000

 
42,000

Purchases of property and equipment
 
(4,383
)
 
(734
)
Net cash provided by investing activities
 
4,645

 
3,306

Cash flows provided by (used in) financing activities:
 
 
 
 
Issuance of common stock under employee stock purchase plan
 
367

 
381

Exercise of stock options
 
1,451

 
1,229

Purchases of treasury stock
 

 
(11,995
)
Net cash provided by (used in) financing activities
 
1,818

 
(10,385
)
Net increase (decrease) in cash and cash equivalents
 
18,787

 
(3,997
)
Cash and cash equivalents:
 
 
 
 
Beginning of period
 
14,380

 
14,136

End of period
 
$
33,167

 
$
10,139

Supplemental disclosure of cash flow information
 
 
 
 
Cash paid for taxes
 
$
136

 
$
46

Supplemental disclosure of noncash operating, investing, and financing activities
 
 
 
 
Amounts accrued for property and equipment
 
$
30

 
$
8

Release of Restricted Stock Units and Awards under company stock plan
 
$
2,771

 
$
3,745

See accompanying Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

IMMERSION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
1.    SIGNIFICANT ACCOUNTING POLICIES

Description of Business
Immersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware in 1999. It is an intellectual property (“IP”) and software licensing company focused on the creation, design, development, and licensing of patented haptic innovations and software that allow people to use their sense of touch more fully when operating a wide variety of digital devices.
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Immersion Corporation and its wholly-owned subsidiaries: Immersion Canada Corporation; Immersion International, LLC; Immersion Medical, Inc.; Immersion Japan K.K.; Immersion Ltd.; Immersion Software Ireland Ltd.; Haptify, Inc.; Immersion (Shanghai) Science & Technology Company, Ltd.; and Immersion Technology International Ltd. All intercompany accounts, transactions, and balances have been eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, and cash flows, in conformity with GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2014. In the opinion of management, all adjustments consisting of only normal and recurring items necessary for the fair presentation of the financial position and results of operations for the interim periods presented have been included.
The results of operations for the three months and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year.
Segment Information
The Company develops, licenses, and supports a wide range of software and IP that more fully engage users’ sense of touch when operating digital devices. The Company focuses on the following target application areas: mobility and consumer electronics, automotive, gaming, commercial and industrial, and medical. The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM allocates resources to and assesses the performance of the Company using information about its financial results as one operating and reporting segment.
Revenue Recognition
The Company recognizes revenues in accordance with applicable accounting standards, including ASC 605-10-S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”); and ASC 985-605, “Software-Revenue Recognition” (“ASC 985-605”). The Company derives its revenues from two principal sources: royalty and license fees, and development contract and service fees. As described below, management judgments, assumptions, and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue for any period based on the judgments and estimates made by management. Specifically, in connection with each transaction, the Company must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. The Company applies these criteria as discussed below.


6

Table of Contents

Persuasive evidence of an arrangement exists. For a license arrangement, the Company requires a written contract, signed by both the customer and the Company.
Delivery has occurred. The Company delivers software to customers physically and also delivers software electronically. For electronic deliveries, delivery occurs when the Company provides the customer access codes or “keys” that allow the customer to take immediate possession of the software.
The fee is fixed or determinable. The Company’s arrangement fee is based on the use of standard payment terms, which are those that are generally 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 fees, which is done on a customer-by-customer basis pursuant to the Company’s credit review policy. The Company typically sells to customers with whom there is a history of successful collection. For new customers, the Company evaluates the customer’s financial condition and ability to pay. If it is determined that collectibility is not probable based upon the credit review process or the customer’s payment history, revenue is recognized when payment is received.
Royalty and license revenue — The Company licenses its patents and software to customers in a variety of industries such as mobility, gaming, automotive, and medical devices. Certain of these are variable fee arrangements where the royalties earned by the Company are based on unit or sales volumes of the respective licensees. The Company also enters into fixed license fee arrangements. The terms of the royalty agreements generally require licensees to give notification of royalties due to the Company within 3045 days of the end of the quarter during which their related sales occur. As the Company is unable to reliably estimate the licensees’ sales in any given quarter to determine the royalties due to it, the Company recognizes royalty revenues based on royalties reported by licensees and when all revenue recognition criteria are met. Certain royalties are based upon customer shipments or revenues and could be subject to change and may result in out of period adjustments. The Company recognizes fixed license fee revenue for licenses when earned under the terms of the agreements, which is generally recognized on a straight-line basis over the expected term of the license.
Development, services, and other revenue — Development, services, and other revenue are composed of engineering services (engineering services and/or development contracts), and in limited cases, post contract customer support (“PCS”). Engineering services revenues are recognized under the proportional performance accounting method based on 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. Revenue from PCS is typically recognized over the period of the ongoing obligation, which is generally consistent with the contractual term.
Multiple element arrangements — The Company enters into multiple element arrangements in which customers purchase time-based non-exclusive licenses that cannot be resold to others, which include a combination of software and/or IP licenses, engineering services, and in limited cases PCS. For arrangements that are software based and include software and engineering services, the services are generally not essential to the functionality of the software, and customers may purchase engineering services to facilitate the adoption of the Company’s technology, but they may also decide to use their own resources or appoint other engineering service organizations to perform these services. For arrangements that are in substance subscription arrangements, the entire arrangement fee is recognized ratably over the contract term, subject to any limitations related to extended payment terms. For arrangements involving upfront fees for services and royalties earned by the Company based on unit or sales volumes of the respective licensees, and the services are performed ratably over the arrangement or are front-end loaded, the upfront fees are recognized ratably over the contract term and royalties based on unit or sales volume are recognized when they become fixed and determinable. As the Company is unable to reliably estimate the licensees’ sales in any given quarter to determine the royalties due to it, the Company recognizes per unit or sales volume driven royalty revenues based on royalties reported by licensees and when all revenue recognition criteria are met.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers: Topic 606” (“ASU 2014-09”) which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date”, which deferred the effective date of ASU 2014-09 for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date.

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Table of Contents

Accordingly, ASU 2014-09 is effective for the Company in the first quarter of fiscal 2018. The standard permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption through a cumulative adjustment, and the Company is in the process of determining the method of adoption and evaluating the impact on its consolidated financial statements.

2.    FAIR VALUE MEASUREMENTS
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.
The types of instruments valued based on quoted market prices in active markets include money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations, or alternative pricing sources 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. The Company had no Level 3 instruments as of September 30, 2015 and December 31, 2014.
Financial instruments measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 are classified based on the valuation technique in the table below:
 
 
September 30, 2015
 
 
 
 
Fair value measurements using
 
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$

 
$
33,990

 
$

 
$
33,990

Money market accounts
 
22,025

 

 

 
22,025

Total assets at fair value
 
$
22,025

 
$
33,990

 
$

 
$
56,015

The above table excludes $11.1 million of cash held in banks.
 
 
 
December 31, 2014
 
 
 
 
Fair value measurements using
 
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$

 
$
42,981

 
$

 
$
42,981

Money market accounts
 
11,524

 

 

 
11,524

Total assets at fair value
 
$
11,524

 
$
42,981

 
$

 
$
54,505


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Table of Contents

The above table excludes $2.9 million of cash held in banks.
U.S. Treasury securities are classified as short-term investments, and money market accounts are classified as cash equivalents on the Company’s condensed consolidated balance sheets.
Short-term Investments
 
 
 
September 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
 
 
(In thousands)
U.S. Treasury securities
 
$
33,980

 
$
10

 
$

 
$
33,990

Total
 
$
33,980

 
$
10

 
$

 
$
33,990

 
 
December 31, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
 
 
(In thousands)
U.S. Treasury securities
 
$
42,980

 
$
1

 
$

 
$
42,981

Total
 
$
42,980

 
$
1

 
$

 
$
42,981

The contractual maturities of the Company’s available-for-sale securities on September 30, 2015 and December 31, 2014 were all due within one year. There were no transfers of instruments between Level 1 and 2 during the three months and nine months ended September 30, 2015 and the year ended December 31, 2014.

3.    ACCOUNTS AND OTHER RECEIVABLES
 
 
 
September 30, 2015
 
December 31, 2014
 
 
(In thousands)
Trade accounts receivable
 
$
856

 
$
2,708

Receivables from vendors and other
 
647

 
313

Accounts and other receivables
 
$
1,503

 
$
3,021


4.    PROPERTY AND EQUIPMENT
 
 
 
September 30, 2015
 
December 31, 2014
 
 
(In thousands)
Computer equipment and purchased software
 
$
3,537

 
$
3,418

Machinery and equipment
 
916

 
688

Furniture and fixtures
 
1,361

 
852

Leasehold improvements
 
3,838

 
1,295

Total
 
9,652

 
6,253

Less accumulated depreciation
 
(4,874
)
 
(5,046
)
Property and equipment, net
 
$
4,778

 
$
1,207



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Table of Contents

5.    INTANGIBLES AND OTHER ASSETS
 
 
September 30, 2015
 
December 31, 2014
 
 
(In thousands)
Purchased patents and other purchased intangible assets
 
$
4,605

 
$
4,605

Less: Accumulated amortization of purchased patents and other purchased intangibles
 
(4,597
)
 
(4,579
)
Purchased patents and other purchased intangible assets, net
 
8

 
26

Other assets
 
261

 
265

Intangibles and other assets, net
 
$
269

 
$
291

The Company amortizes its intangible assets related to purchased patents, over their estimated useful lives, generally 10 years from the purchase date. Amortization of intangibles was as follows:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
 
(In thousands)
Amortization of intangibles
 
$
3

 
$
15

 
$
18

 
$
55

The table below includes estimated remaining annual amortization expense for purchased patents as of September 30, 2015.
 
 
 
 
Estimated
Amortization
Expense
 
(In thousands)
Remainder of 2015
$
2

2016
6

Total
$
8


6.    OTHER CURRENT LIABILITIES
 
 
 
September 30, 2015
 
December 31, 2014
 
 
(In thousands)
Accrued legal
 
$
651

 
$
1,065

Accrued services
 
204

 
518

Income taxes payable
 
166

 
69

Other current liabilities
 
618

 
573

Total other current liabilities
 
$
1,639

 
$
2,225


7.     LONG-TERM DEFERRED REVENUE
Long-term deferred revenue consisted of the following:
 
 
September 30, 2015
 
December 31, 2014
 
 
(In thousands)
Deferred revenue for Sony Computer Entertainment
 
$
2,710

 
$
7,051

Other deferred revenue
 
1,273

 
776

Long-term deferred revenue
 
$
3,983

 
$
7,827



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Deferred revenue for Sony Computer Entertainment represents deferred license revenue where payments have been received in advance of revenue recognition.

8.    STOCK-BASED COMPENSATION
Stock Options and Awards
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 time based options, market condition based options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock-based or cash-based awards to employees, officers, directors, and consultants. Under this program, stock options may be granted at prices not less than the fair market value on the date of grant for stock options. These options generally vest over four years and expire from five to ten years from the date of grant. In addition to time based vesting, market condition based options are subject to a market condition: the closing price of the Company stock must exceed a certain level for a number of trading days within a specified timeframe or the options will be cancelled before the expiration of the options. Restricted stock generally vests over one year. RSUs generally vest over three years. Awards granted other than an option or stock appreciation right reduce the common stock shares available for grant under the program by 1.75 shares for each share issued.
 
 
 
September 30, 2015
Common stock shares available for grant
1,332,298

Common stock options outstanding
3,804,069

Restricted stock awards outstanding
21,356

Restricted stock units outstanding
516,956

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 September 30, 2015, 603,558 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 nine months ended September 30, 2015 are listed below. Shares purchased under the ESPP for the nine months ended September 30, 2014 are 38,298. 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.
 
 
 
 
Nine Months Ended September 30, 2015
Shares purchased under ESPP
45,820

Average price of shares purchased under ESPP
$
8.00

Intrinsic value of shares purchased under ESPP
$
160,000


11

Table of Contents

Summary of Standard Stock Options
The following table sets forth the summary of activity with respect to standard stock options granted under the Company’s stock option plans for the nine months ended September 30, 2015 and year ended December 31, 2014:
 
 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Beginning outstanding balance
 
3,486,157

 
3,227,167

Granted
 
491,520

 
604,620

Exercised
 
(214,466
)
 
(205,744
)
Forfeited
 
(109,222
)
 
(102,454
)
Expired
 
(49,920
)
 
(37,432
)
Ending outstanding balance
 
3,604,069

 
3,486,157

Aggregate intrinsic value of options exercised
 
$
1,045,000

 
$
1,125,000

Weighted average fair value of options granted
 
4.50

 
4.93


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 these standard stock options outstanding at September 30, 2015 and December 31, 2014 is summarized below:
 
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
(In millions)
December 31, 2014
 
 
 
 
 
 
 
 
Options outstanding
 
3,486,157

 
$
8.30

 
4.85
 
$
6.6

Options vested and expected to vest using estimated forfeiture rates
 
3,319,308

 
8.21

 
4.80
 
6.6

Options exercisable
 
2,023,024

 
7.18

 
4.26
 
6.0

September 30, 2015
 
 
 
 
 
 
 
 
Options outstanding
 
3,604,069

 
$
8.42

 
4.43
 
$
11.4

Options vested and expected to vest using estimated forfeiture rates
 
3,437,670

 
8.33

 
4.35
 
11.1

Options exercisable
 
2,164,658

 
7.53

 
3.68
 
8.9

Summary of Market Condition Based Stock Options
The following table sets forth activity with respect to market condition based stock options granted under the Company’s stock option plans for the nine months ended September 30, 2015 and year ended December 31, 2014:
 
 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Beginning outstanding balance
 
50,000

 

Granted
 
150,000

 
50,000

Exercised
 

 

Forfeited and cancelled
 

 

Ending outstanding balance
 
200,000

 
50,000

Aggregate intrinsic value of options exercised
 
$

 
$

Weighted average fair value of options granted
 
3.64

 
5.71

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.

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Information regarding these market condition based stock options outstanding at September 30, 2015 and December 31, 2014 is summarized below:
 
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
(In millions)
December 31, 2014
 
 
 
 
 
 
 
 
Options outstanding
 
50,000

 
$
11.94

 
6.15

 
$

Options vested and expected to vest using estimated forfeiture rates
 
45,430

 
11.94

 
6.15

 

Options exercisable
 

 

 

 

September 30, 2015
 
 
 
 
 
 
 
 
Options outstanding
 
200,000

 
$
9.05

 
6.17

 
$
0.5

Options vested and expected to vest using estimated forfeiture rates
 
180,300

 
9.12

 
6.15

 
0.4

Options exercisable
 

 

 

 

Summary of Restricted Stock Units
RSU activity for the nine months ended September 30, 2015 and year ended December 31, 2014 was as follows:
 
 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Beginning outstanding balance
 
564,891

 
668,056

Awarded
 
281,290

 
265,630

Released
 
(273,944
)
 
(317,970
)
Forfeited
 
(55,281
)
 
(50,825
)
Ending outstanding balance
 
516,956

 
564,891

Weighted average grant date fair value of RSUs granted
 
$
8.16

 
$
11.35

Total fair value of RSUs released
 
2,338,000

 
3,491,000

Information regarding RSUs outstanding at September 30, 2015 and December 31, 2014 is summarized below:
 
 
Number of
Shares
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
(In millions)
December 31, 2014
 
 
 
 
 
 
RSUs outstanding
 
564,891

 
0.84
 
$
5.3

RSUs vested and expected to vest using estimated forfeiture rates
 
502,411

 
0.80
 
4.8

September 30, 2015
 
 
 
 
 
 
RSUs outstanding
 
516,956

 
1.10
 
$
5.8

RSUs vested and expected to vest using estimated forfeiture rates
 
425,164

 
1.06
 
4.8


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Summary of Restricted Stock Awards
Restricted stock award activity for the nine months ended September 30, 2015 and year ended December 31, 2014 was as follows:
 
 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Beginning outstanding balance
 
35,364

 
44,000

Awarded
 
21,356

 
35,364

Released
 
(35,364
)
 
(44,000
)
Forfeited
 

 

Ending outstanding balance
 
21,356

 
35,364

Weighted average grant date fair value of restricted stock awarded
 
$
12.26

 
$
10.97

Total fair value of restricted stock awards released
 
434,000

 
483,000

Stock Plan Assumptions
The assumptions used to value option grants under the Company’s stock plans were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Standard Stock Options
 
 
 
 
 
 
 
 
Expected life (in years)
 
4.6

 
4.7

 
4.7

 
4.7

Volatility
 
56
%
 
57
%
 
56
%
 
57
%
Interest rate
 
1.5
%
 
1.5
%
 
1.4
%
 
1.4
%
Dividend yield
 
N/A

 
N/A

 
N/A

 
N/A


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Market Condition Based Stock Options
 
 
 
 
 
 
 
 
Expected life (in years)
 
N/A
 
N/A
 
7.0

 
7.0

Volatility
 
N/A
 
N/A
 
65
%
 
66
%
Interest rate
 
N/A
 
N/A
 
1.9
%
 
2.2
%
Dividend yield
 
N/A
 
N/A
 
N/A

 
N/A

 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Employee Stock Purchase Plan
 
 
 
 
 
 
 
 
Expected life (in years)
 
0.5

 
0.5

 
0.5

 
0.5

Volatility
 
53
%
 
46
%
 
48
%
 
43
%
Interest rate
 
0.2
%
 
0.1
%
 
0.1
%
 
0.1
%
Dividend yield
 
N/A

 
N/A

 
N/A

 
N/A


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Compensation Costs
Total stock-based compensation recognized in the condensed consolidated statements of income and comprehensive income is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
 
(In thousands)
Statement of Income Classifications
 
 
 
 
 
 
 
 
Sales and marketing
 
$
302

 
$
230

 
$
853

 
$
784

Research and development
 
276

 
265

 
1,036

 
1,008

General and administrative
 
698

 
636

 
2,356

 
2,266

Total
 
$
1,276

 
$
1,131

 
$
4,245

 
$
4,058


As of September 30, 2015, there was $7.8 million related to stock options, restricted stock awards, and RSUs of unrecognized compensation cost, adjusted for estimated forfeitures, granted to the Company’s employees and directors. This cost will be recognized over an estimated weighted-average period of approximately 2.64 years for standard options, 3.17 years for market condition based options, 1.83 years for RSUs, and 0.68 years for restricted stock awards. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

9.    STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income are included in the table below.
 
 
Nine Months Ended September 30, 2015
 
 
Unrealized Gains
and Losses on
Available-for Sale
Securities
 
Foreign
Currency
Items
 
Total
 
 
(In thousands)
Beginning balance
 
$
1

 
$
101

 
$
102

Other comprehensive income before reclassifications
 
9

 

 
9

Amounts reclassified from accumulated other comprehensive income
 

 

 

Net current period other comprehensive income
 
9

 

 
9

Ending Balance
 
$
10

 
$
101

 
$
111

Stock Repurchase Program
On November 1, 2007, the Company announced its Board of Directors’ authorized the repurchase of up to $50 million of the Company’s common stock (“Stock Repurchase Program”). In addition, on October 22, 2014, our board of directors authorized another $30 million under the share repurchase program. The Company may repurchase its stock for cash in the open market in accordance with applicable securities laws. The timing of and amount of any stock repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase authorization has no expiration date, does not require the Company to repurchase a specific number of shares, and may be modified, suspended, or discontinued at any time.
There were no stock repurchases during the three months and nine months ended September 30, 2015. During the three months and nine months ended September 30, 2014, the Company repurchased 534,849 and 1,151,143 shares for $5.0 million and $12.0 million at an average cost of $9.36 and $10.42, respectively, net of transaction costs, through open market repurchases. These amounts are classified as treasury stock on the Company’s condensed consolidated balance sheet. As of September 30, 2015, the program remains available with approximately $34.4 million that may yet be purchased under it.


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10.    INCOME TAXES
Income tax provisions consisted of the following:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
 
(In thousands)
Income before provision for income taxes
 
$
1,199

 
$
1,672

 
$
3,367

 
$
4,880

Provision for income taxes
 
(1,015
)
 
(599
)
 
(1,647
)
 
(1,774
)
Effective tax rate
 
84.7
%
 
35.8
%
 
48.9
%
 
36.4
%
The provision for income tax for the three months ended September 30, 2015 and 2014 resulted primarily from the Company’s federal and foreign tax recognized at statutory rates, adjusted for the tax impact of nondeductible permanent items including stock-based compensation and foreign withholding taxes. The provision for income tax for the three months ended September 30, 2015 also includes non-cash tax expense on intercompany profit that resulted from the sale of certain IP rights to one of the Company's foreign subsidiaries as part of the Company's reoganization of its international operations during the period. Discrete items recognized for the three months ended September 30, 2015 include an increase to the valuation allowance for certain of the Company's deferred tax assets.
On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing arrangement. Based on the findings of the U.S. Tax Court, the Company has concluded that it is more likely than not that the IRS will uphold the U.S. Tax Court ruling and accordingly has excluded stock-based compensation from intercompany charges during the period. The Company will continue to monitor ongoing developments and potential impacts to its condensed consolidated financial statements.

As of September 30, 2015, the Company had unrecognized tax benefits under ASC 740 “Income Taxes”, of approximately $5.9 million including interest of $80,000. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, was $2.1 million. The Company expects to release reserves and record an immaterial tax benefit due to the expiration of applicable statutes of limitations during the next 12 months. The Company’s policy is to account for interest and penalties related to uncertain tax positions as a component of income tax provision.
Net deferred income taxes were $24.4 million as of September 30, 2015, consisting primarily of federal net operating loss carryforwards and timing differences between book and tax. Because the Company had net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state, and foreign taxing authorities may examine the Company’s tax returns for all years from 1998 through the current period.
The Company maintains a valuation allowance of $8.0 million against certain of its deferred tax assets, including federal, state, and certain foreign deferred tax assets. The Company has determined there is not sufficient evidence to support the release of the valuation allowance against these federal, state and foreign deferred tax assets.

11.    NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock and RSUs. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential shares including unvested restricted stock, RSUs, and stock options using the treasury stock method. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income per share:

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands except
per share amounts)
 
(in thousands except
per share amounts)
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
184

 
$
1,073

 
$
1,720

 
$
3,106

Denominator:
 
 
 
 
 
 
 
 
Shares used in computation of basic net income per share (weighted average common shares outstanding)
 
28,190

 
28,505

 
28,027

 
28,420

Dilutive potential common shares:
 
 
 
 
 
 
 
 
Restricted Stock and RSUs
 
177

 
188

 
223

 
262

Stock options
 
767

 
658

 
643

 
673

Shares used in computation of diluted net income per share
 
29,134

 
29,351

 
28,893

 
29,355

Basic net income per share
 
$
0.01

 
$
0.04

 
$
0.06

 
$
0.11

Diluted net income per share
 
$
0.01

 
$
0.04

 
$
0.06

 
$
0.11

The Company includes the underlying market condition stock options in the calculation of diluted earnings per share if the performance condition has been satisfied as of the end of the reporting period and excludes such options if the performance condition has not been met. The Company has excluded the shares related to the market condition stock options from the calculations in all periods presented.
For the three months and nine months ended September 30, 2015, options to purchase approximately 917,000 and 1.8 million shares of common stock, respectively, with exercise prices greater than the average fair market value of the Company’s stock of $12.13 and $10.78 per share, respectively, were not included in the calculation because the effect would have been anti-dilutive.
For the three months and nine months ended September 30, 2014, options to purchase approximately 1.6 million and 1.5 million shares of common stock, respectively, with exercise prices greater than the average fair market value of the Company’s stock of $11.27 and $11.11 per share, respectively, were not included in the calculation because the effect would have been anti-dilutive.

12.    CONTINGENCIES
From time to time, the Company receives claims from third parties asserting that the Company’s technologies, or those of its licensees, infringe on the other parties’ IP rights. Management believes that these claims are without merit. Additionally, periodically, the Company is involved in routine legal matters and contractual disputes incidental to its normal operations. In management’s opinion, the resolution of such matters will not have a material adverse effect on the Company’s condensed consolidated financial condition, results of operations, or liquidity.

In the normal course of business, the Company provides indemnifications of varying scope to customers against claims of IP infringement made by third parties arising from the use of the Company’s IP, technology, or products. Historically, costs related to these guarantees have not been significant, and the Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements involve risks and uncertainties. Forward-looking statements are 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” and “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 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.

OVERVIEW
We are a premier IP and software licensing company focused on the creation, design, development, and licensing of patented haptic innovations and software that allow people to use their sense of touch more fully when operating a wide variety of digital devices. Our mission is to innovate touch technology that informs, humanizes, and excites while working with customers and partners to bring these tactile experiences to consumers. While we believe that our innovations are broadly applicable, we are currently focusing our marketing and business development activities on the following target markets: mobile devices, wearables, and consumer mobile entertainment and other content; console gaming; automotive; medical; and commercial. We manage these market areas under one operating and reportable segment.
In our target markets, we license our software and IP to customers for use in products sold under their own brand names. We and our wholly-owned subsidiaries hold more than 2,000 issued or pending patents in the U.S. and other countries, covering a wide range of digital technologies, including many of the ways in which touch-related technology can be incorporated into and between hardware products, systems software, application software and digital content.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed 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, income taxes, short-term investments, 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.

Our critical accounting policies and estimates are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain. There have been no material changes during the nine months ended September 30, 2015 to the items we disclosed as our critical accounting policies and estimates in our Management Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, except as included below:

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.

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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 condensed consolidated financial statements.
Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render inaccurate our current assumptions, judgments, and estimates of recoverable net deferred tax assets. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Certain portions of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings but only to the extent that we generate sufficient United States based income.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in, our estimates related to, or our interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. The United States, countries in the European Union and other countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals. These potential changes could adversely affect our effective tax rates or result in other costs to us.
See Note 10 to the condensed consolidated financial statements for further information concerning income taxes.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
The following discussion and analysis includes our results of operations for the three months and nine months ended September 30, 2015 and 2014.
Overview
Total revenue increased by 19% for the three months ended September 30, 2015 compared to the three months ended September 30, 2014, driven by a 19% increase in royalty and license revenue. The increase in royalty and license revenue for the three-month period was primarily due to increased revenue from our mobility and gaming licensees and to a lesser extent increases in royalty and license revenue from our medical and automotive licensees. Total revenue increased by 19% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, driven by a 19% increase in royalty and license revenue. The increase in royalty and license revenue for the nine-month period was primarily due to increased revenue from our mobility and automotive licensees, partially offset by decreases in revenue from our gaming licensees.
Our net income was $184,000 for the three months ended September 30, 2015 as compared to net income of $1.1 million for the three months ended September 30, 2014. The decrease in net income was primarily due to a) increased operating expenses of $2.7 million primarily due to increased compensation, benefits, and other related costs of $2.0 million mainly from increased headcount and increased legal and professional fees of $349,000, as well as b) a $416,000 increase in provision for income taxes resulting from the increase in our valuation allowance, partially offset by c) a $2.2 million increase in royalty and license revenue. Our net income was $1.7 million for the nine months ended September 30, 2015 as compared to net income of $3.1 million for the nine months ended September 30, 2014. The decrease in net income was primarily due to increased operating expenses of $8.8 million mainly due to increased compensation, benefits, and other related costs of $5.4 million

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primarily from increased headcount and increased legal and professional fees of $2.0 million, partially offset by a $7.4 million increase in royalty and license revenue.
In 2015, we expect royalty and license revenue, mainly from our mobility line of business, to be the major component of our revenue as our technology continues to be included in more of our licensees’ products, and as we continue to execute our patent licensing program relating to the use of a simple form of haptics that we sometimes refer to as “Basic Haptics.” IP litigation may cause us to expend significant financial resources in the future and may have an adverse effect on the results of our operations. Additionally, our success could be limited by various factors, including global economic conditions, 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 Part II, Item 1A – “Risk Factors.”
 
 
September 30,
 
Change
 
% Change
REVENUES
 
2015
 
2014
 
 
 
 
 
 
(In thousands)
 
 
 
 
Three months ended:
 
 
 
 
 
 
 
 
Royalty and license
 
$
13,944

 
$
11,714

 
$
2,230

 
19
%
Development, services, and other
 
369

 
337

 
32

 
9
%
Total Revenues
 
$
14,313

 
$
12,051

 
$
2,262

 
19
%
Nine months ended:
 
 
 
 
 
 
 
 
Royalty and license
 
$
45,895

 
$
38,473

 
$
7,422

 
19
%
Development, services, and other
 
928

 
845

 
83

 
10
%
Total Revenues
 
$
46,823

 
$
39,318

 
$
7,505

 
19
%

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Royalty and license revenue — Royalty and license revenue is composed of royalties earned on sales by our licensees and license fees charged for our IP. The increase in royalty and license revenue for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was primarily due to increases in royalty and license revenue from our mobility and gaming licensees and to a lesser extent increases from our medical and automotive licensees.
Variable royalty revenue based on shipping volumes and per unit prices increased to $6.2 million for the three months ended September 30, 2015 from $4.2 million for the three months ended September 30, 2014, primarily due to increased sales volumes from our gaming customers and the timing of revenue recognition. Fixed payment license revenue increased to $7.7 million for the three months ended September 30, 2015 from $7.5 million for the three months ended September 30, 2014, primarily due to increased license fees from our new mobility customers in Asia.
Royalty and license revenue from mobility customers increased by 14%, primarily due to the timing of revenue recognition and to a lesser extent increases in royalty and license revenue from new and existing customers in Asia. We anticipate that the mobility line of business will continue to be of primary importance as mobile device manufacturers continue to recognize the value of our IP and technology and as we expand our presence in Asia.

Royalty and license revenue from gaming customers increased by 19%, primarily due to increased sales by our licensees of products containing our technology. Revenue from gaming customers can fluctuate based upon consumer gaming preferences, the timing of introductions of new gaming console systems, and the timing of new products from third party peripheral makers that are our licensees. This revenue can also be affected by the expiration of certain of our patents related to gaming and our ability to persuade licensees that other patents in our portfolio continue to be relevant.
Royalty and license revenue from medical customers increased by 56%, primarily due to increased sales volumes from our licensees and the timing of revenue recognition.
Royalty and license revenue from automotive customers increased by 43%, primarily due to timing of revenue recognition.
We expect royalty and license revenue to be the major component of our future revenue as our technology continues to be included in more products and as we continue our efforts to monetize our IP. We typically experience seasonally higher revenue

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from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter compared to other calendar quarters.
We categorize our geographic information into three major regions: North America, Europe and Asia. In the three months ended September 30, 2015, revenue generated in North America, Europe and Asia represented 24%, 7% and 69% of total revenue, respectively, compared to 23%, 3% and 74% of total revenues, respectively, for the three months ended September 30, 2014. The shift in revenues among regions was mainly due to an increase in royalty and license revenue in Europe mainly due to increased revenue from our gaming, automotive and medical customers. The increase in royalty and license revenue in North America was mainly due to increased revenue from our mobility and gaming customers. Royalty and license revenue increased in Asia primarily due to an increase from our new mobility customers as well as our gaming customers. The increase in royalty and license revenue in Asia was relatively less than the increases in North America and Europe, resulting in a decrease in the percentage of revenue attributed to Asia as a part of total revenue.
 
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Royalty and license revenue — The increase in royalty and license revenue for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily due to increases in royalty and license revenue from our mobility and automotive licensees partially offset by decreases in royalty and license revenue from our gaming licensees.

Variable royalty revenue based on shipping volumes and per unit prices increased to $21.1 million for the nine months ended September 30, 2015 from $15.7 million for the nine months ended September 30, 2014, primarily due to higher royalty rates from our mobility customers and to a smaller degree, the timing of revenue recognition. Also to a lesser extent, there were increased sales volumes by our automotive and medical licensees, partially offset by a decreased level of sales by our gaming licensees. Fixed payment license revenue increased to $24.8 million for the nine months ended September 30, 2015 from $22.8 million for the nine months ended September 30, 2014, mainly due to a non-recurring license fee from a completed contract of $2.0 million.

Royalty and license revenue from mobility customers increased by 30%, primarily due to a non-recurring license fee from a completed contract of $2.0 million along with higher royalty rates and to a lesser extent increased revenue from our new and existing customers in Asia.

Royalty and license revenue from automotive customers increased by 59%, due to our technology being incorporated in an increased volume of vehicles sold by both new and existing licensees and to a lesser extent the timing of revenue recognition.

Royalty and license revenue from gaming customers decreased by 5%, primarily due to decreased sales from our licensees.

In the nine months ended September 30, 2015, revenue generated in North America, Europe and Asia represented 27%, 5% and 68% of total revenues, respectively, compared to 30%, 3% and 67% of total revenues, respectively, for the nine months ended September 30, 2014. The shift in revenues among regions was mainly due to an increase in royalty and license revenue in Asia primarily due to increased revenue from our mobility licensees. The increase in royalty and license revenue in Europe was primarily due to increased revenue from our automotive customers. The increase in royalty and license revenue in North America was primarily due to an increase in royalty revenue from our mobility and gaming licensees. The increase in royalty and license revenue in North America was relatively less than the increases in Asia and Europe, resulting in the decrease in the percentage of revenues attributed to North America as a part of total revenue.


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September 30,
 
Change
 
% Change
OPERATING EXPENSES
 
2015
 
2014
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
Three months ended:
 
 
 
 
 
 
 
 
Sales and marketing
 
$
3,198

 
$
2,238

 
$
960

 
43
 %
% of total revenue
 
22
%
 
19
%
 
3
%
 
 
Research and development
 
$
3,471

 
$
2,718

 
$
753

 
28
 %
% of total revenue
 
24
%
 
23
%
 
1
%
 
 
General and administrative
 
$
6,241

 
$
5,274

 
$
967

 
18
 %
% of total revenue
 
44
%
 
44
%
 
%
 
 
Amortization of intangibles
 
$
3

 
$
15

 
$
(12
)
 
(80
)%
% of total revenue
 
%
 
%
 
%
 
 
Nine months ended:
 
 
 
 
 
 
 
 
Sales and marketing
 
$
11,078

 
$
7,638

 
$
3,440

 
45
 %
% of total revenue
 
24
%
 
19
%
 
5
%
 
 
Research and development
 
$
10,697

 
$
8,782

 
$
1,915

 
22
 %
% of total revenue
 
23
%
 
22
%
 
1
%
 
 
General and administrative
 
$
21,253

 
$
17,745

 
$
3,508

 
20
 %
% of total revenue
 
45
%
 
45
%
 
%
 
 
Amortization of intangibles
 
$
18

 
$
55

 
$
(37
)
 
(67
)%
% of total revenue
 
%
 
%
 
%
 
 
Sales and Marketing — Our sales and marketing expenses are composed primarily of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and an allocation of facilities costs. The increase in sales and marketing expense for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily due to a $776,000 increase in compensation, benefits, and other related costs mainly due to increased headcount. We expect that sales and marketing expenses will continue to increase in 2015 as we continue to invest in sales and marketing to further our focus on increasing market acceptance for our touch technologies and expanding our focus on the content and media business.
    
The increase in sales and marketing expense for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 was primarily due to a) increased compensation, benefits, and other related costs of $2.2 million, mainly due to increased headcount; b) increased marketing, advertising, and public relations costs of $783,000 mainly due to current marketing initiatives and tradeshows; and c) increased consulting services costs of $248,000 mainly due to sales initiatives in the period.
Research and Development — Our research and development expenses are composed primarily of employee compensation and benefits, consulting fees, tooling and supplies, and an allocation of facilities costs. The increase in research and development expenses for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily due to a $539,000 increase in compensation, benefits, and other related costs mainly due to increased headcount. We believe that continued significant investment in research and development is critical to our future success, and we expect to make increased investments in areas of research and technology development to support future growth including investment in our content and media business.

The increase in research and development expenses for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 was primarily due to a $1.5 million increase in compensation, benefits, and other related costs and a $177,000 increase in travel costs, mainly due to increased headcount.
General and Administrative — Our general and administrative expenses are composed primarily of employee compensation and benefits, legal and professional fees, external legal costs for patents, office supplies, travel, and an allocation of facilities costs. The increase in general and administrative expenses for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily due to a $651,000 increase in compensation, benefits, and other related costs, mainly due to increased headcount, and a $349,000 increase in legal and professional fees. The increased legal and professional fees were primarily due to an $897,000 increase in professional services and licensing related legal expenses and a $142,000 increase in patent related legal costs, partially offset by a $690,000 decrease in litigation expense

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relating to ongoing and completed litigation. Our general and administrative expenses will continue to be significant as we manage our business and strategic opportunities and continue to file, maintain, license, and enforce our IP and contractual rights and defend any lawsuits brought against us, or we initiate litigation against others to enforce our IP or contractual rights.

The increase in general and administrative expenses for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 was primarily due to increased legal and professional fees of $2.0 million and increased compensation, benefits, and other related costs of $1.7 million mainly due to increased headcount. The increased legal and professional fees were primarily due to a $2.8 million increase in professional services and licensing related legal expenses, partially offset by a $714,000 decrease in litigation expense and a $128,000 decrease in patent related legal costs.

 
 
September 30,
 
Change
 
% Change
PROVISION FOR TAXES
 
2015
 
2014
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
Three months ended:
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
(1,015
)
 
$
(599
)
 
$
(416
)
 
69
 %
Income before provision for income taxes
 
1,199

 
1,672

 
 
 
 
Effective tax rate
 
84.7
%
 
35.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended:
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
(1,647
)
 
$
(1,774
)
 
$
127

 
(7
)%
Income before provision for income taxes
 
3,367

 
4,880

 
 
 
 
Effective tax rate
 
48.9
%
 
36.4
%
 
 
 
 
Provision for Income Taxes — During the three months ended September 30, 2015, we continued with the reorganization of our international operations which commenced in the prior period and is expected to be complete by December 2015. The purpose of this reorganization is to more closely align our corporate structure with the international nature of our business activities and includes an international structure that, among other things, consists of research and development cost-sharing arrangements, certain licenses and other contractual arrangements between us and our wholly owned foreign subsidiaries. The nature of the transactions to be undertaken in the reorganization include changes to our legal entity structure, to more closely align the structure with the international nature of our business activities, the transfer of certain IP rights to one of our foreign subsidiaries, and the implementation of contractual agreements, including research and development cost-sharing arrangements, between the U.S. entity and its wholly owned foreign subsidiaries. There were no other expenses incurred, in relation to the reorganization described above, outside of those related to income taxes.
We expect that this reorganization will result in a lower percentage of pre-tax income being subject to U.S. federal statutory tax rate. However, the realization of any expected tax benefits is contingent upon numerous factors, including our ability to achieve our projected revenue and earnings both domestically and in the various countries in which the reorganization took place and the judgments of tax authorities in several jurisdictions which may impact our ability to realize the benefits from this reorganization. A change in these factors in future periods relative to our current assumptions may result in additional income tax expense being recorded in future filings.
In 2015, we expect to use a 35% tax rate to record the federal portion of our income tax provision expense, but expect there to be a limited cash impact as we will use our net operating losses and other deferred tax assets that have been carried forward to reduce taxes paid in cash. Although we expect to reduce taxes paid in cash, our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent actual earnings are lower than anticipated in countries that have lower statutory rates and higher in countries that have higher statutory rates.
For the three months ended September 30, 2015 we recorded a provision for income taxes of $1.0 million yielding an effective tax rate of 84.7% For the three months ended September 30, 2014, we recorded a provision for income taxes of $599,000 yielding an effective tax rate of 35.8% . The effective tax rates used for each year were estimated based upon a forecast of our full year results and include the tax impact of nondeductible permanent items, including stock-based compensation and foreign withholding taxes, incurred for the period. The provision for income tax for the three months ended September 30, 2015 also includes tax expense on intercompany profits resulting from the sale of certain IP rights to one of our foreign subsidiaries as part of the reorganization of our international operations during the period.The change in tax provision results primarily from the effects of the above described reorganization, including an increase to the valuation allowance for certain deferred tax assets and, to a lesser extent, the change in income before provision for income taxes.

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For the nine months ended September 30, 2015 we recorded a provision for income taxes of $1.6 million yielding an effective tax rate of 48.9%. For the nine months ended September 30, 2014, we recorded a provision for income taxes of $1.8 million yielding an effective tax rate of 36.4%. The effective tax rates used for each year were estimated based upon a forecast of our full year results and include the tax impact of nondeductible permanent items, including stock-based compensation and foreign withholding taxes, incurred for the period. The provision for income tax for the nine months ended September 30, 2015 also includes tax expense on intercompany profits that resulting from the sale of certain IP rights to one of our foreign subsidiaries as part of the reorganization of our international operations during the period. The change in tax provision results primarily from the effects of the above described reorganization and the change in income before provision for income taxes.
As of September 30, 2015, we recorded deferred charges related to the deferral of income tax expense on intercompany profits that resulted from the sale of our IP rights described above. The deferred charges are included in the "prepaid expenses and other current assets" and "prepaid income tax" lines of the condensed consolidated balance sheets in the amounts of $2.0 million and $7.5 million, respectively. The deferred charges are amortized as a component of income tax expense over the five-year economic life of the intellectual property. During the three months and the nine months ended September 30, 2015, we amortized approximately $500,000 of these deferred charges.
We also maintain liabilities for uncertain tax positions. We expect to release reserves and record an immaterial tax benefit due to the expiration of the applicable statute of limitations during the next 12 months. As of September 30, 2015, we had unrecognized tax benefits under ASC 740 "Income Taxes", of approximately $5.9 million including interest of $80,000. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $2.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents, and short-term investments consist primarily of money market funds and 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.
On September 30, 2015, our cash, cash equivalents, and short-term investments totaled $67.2 million, an increase of $9.8 million from $57.4 million on December 31, 2014.
Cash provided by operating activities
Net cash provided by operating activities during the nine months ended September 30, 2015 was $12.3 million, an increase of $9.2 million from the $3.1 million provided by operating activities during the nine months ended September 30, 2014. Cash provided by operating activities during the nine months ended September 30, 2015 was primarily the result of our net income of $1.7 million, an increase of $10.4 million due to a change in deferred income taxes due to their use to reduce tax obligations, an increase of $1.5 million due to a change in accounts receivable mainly as a result of the timing of invoices and cash collections, an increase of $1.1 million due to a change in accrued compensation and other liabilities mainly from an increase in accruals for compensation and benefit related items, and an increase of $1.0 million in deferred revenue mainly due to additional upfront payments from customers. These increases were partially offset by a decrease of $7.5 million due to additional prepaid income taxes and a decrease of $2.2 million due to a change in prepaid expenses and other current assets. Cash provided by operating activities during the current period was also affected by noncash charges of $5.0 million, including $4.2 million of noncash stock-based compensation and $790,000 in depreciation and amortization.
Cash provided by investing activities
Net cash provided by investing activities during the nine months ended September 30, 2015 was $4.6 million, an increase of $1.3 million compared to the $3.3 million provided by investing activities during the nine months ended September 30, 2014. Net cash provided by investing activities was due to the maturation of short-term investments of $38.0 million, partially offset by purchases of short-term investments of $29.0 million and purchases of property and equipment of $4.4 million.
Cash provided by (used in) financing activities
Net cash provided by financing activities during the nine months ended September 30, 2015 was $1.8 million compared to $10.4 million used in financing activities during the nine months ended September 30, 2014, an increase in cash provided of

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$12.2 million. Net cash provided by financing activities during the current period consisted primarily of exercises of stock options and the issuance of common stock under our ESPP of $1.8 million.
We believe that our cash, cash equivalents, and short-term investments will be sufficient to meet our working capital needs for at least the next twelve months. We will continue to invest in, protect, and defend our extensive IP portfolio, which is expected to result in the continued use of cash. On November 1, 2007, our board of directors authorized a share repurchase program of $50 million and on October 22, 2014 authorized another $30 million. At September 30, 2015, there was $34.4 million remaining under the share repurchase program. We anticipate that capital expenditures for property and equipment for the year ended December 31, 2015 will be less than $5.0 million. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled “Risk Factors”. Additionally, if we acquire businesses, patents, or technology, our cash or capital requirements could increase substantially. In the event of such an acquisition, or should any unanticipated circumstances arise that significantly increase our capital requirements, we may elect to raise additional capital through debt or equity financing. Any of these events could result in substantial dilution to our stockholders. There is no assurance that such additional capital will be available on terms acceptable to us, if at all.
SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We presented our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2014. Our principal commitments as of September 30, 2015 consisted of obligations under operating leases. There have been no material changes in those obligations during the nine months ended September 30, 2015.
As of September 30, 2015, we had a liability for unrecognized tax benefits totaling $5.9 million including interest of $80,000, of which approximately $2.1 million could be payable in cash. We expect to release reserves and record an immaterial tax benefit due to the expiration of statute of limitations during the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the condensed consolidated financial statements for information regarding the effect of new accounting pronouncements on our financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Changes in these factors may cause fluctuations in our earnings and cash flows. We evaluate and manage the exposure to these market risks as follows:
Cash Equivalents and Short-term Investments — We had cash equivalents and short-term investments of $56.0 million as of September 30, 2015, which are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of our cash equivalents and short-term investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $233,000 in the fair value of our cash equivalents and short-term investments as of September 30, 2015.
We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our cash equivalents and short-term investment portfolios. The primary objective of our policies is to preserve principal while at the same time maximizing yields, without significantly increasing risk. Our policy’s guidelines also limit exposure to loss by limiting the sums we can invest in any individual security and restricting investments to securities that meet certain defined credit ratings. We do not use derivative financial instruments in our investment portfolio to manage interest rate risk.
Foreign Currency Exchange Rates — A substantial majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we do incur certain operating costs for our foreign operations in other currencies but these operations are limited in scope and thus we are not materially exposed to foreign currency fluctuations. Additionally we have some reliance on international revenues that are subject to the risks of fluctuations in currency exchange rates. Because a substantial majority of our international revenues, as well as expenses, are typically denominated in U.S. dollars, a strengthening of the U.S. dollar could cause our 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 and we do not expect to have such arrangements in the foreseeable future.

ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation as of September 30, 2015, our management with the participation of our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes to internal controls over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any within Immersion, have been detected.

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PART II

OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Immersion Corporation vs. Motorola Mobility, Inc., Motorola Mobility Holdings, Inc., HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation, and Brightpoint, Inc.
On February 7, 2012, we filed a complaint against Motorola with the 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”). We amended the ITC Complaint on March 2, 2012 to add the following parties: HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation and Brightpoint, Inc. We subsequently withdrew HTC America Holding, Inc., HTC (B.V.I.) Corporation, Exedea, Brightstar, and Brightpoint from the ITC Complaint. The ITC instituted an investigation against Motorola Mobility, Inc., Motorola Mobility Holdings, Inc., HTC Corporation, and HTC America, Inc. on April 2, 2012.
On March 2, 2012, we filed a complaint against HTC Corporation, HTC America Holding, Inc., HTC America, Inc., HTC (B.V.I.) Corporation, Exedea, Inc., Brightstar Corporation and Brightpoint, Inc. (collectively, “HTC”) in the U.S. District Court for the District of Delaware (the “HTC Delaware Complaint”) alleging that certain of HTC’s mobile electronic devices, including smartphones and cellular phones, infringed six of our patents that cover various uses of haptic effects. The HTC Delaware Complaint covered the same patents as the ITC Complaint. The HTC Delaware Complaint sought damages and injunctive relief. The parties stipulated to stay the case pending the completion of the ITC investigation.
The HTC Delaware Complaint asserted infringement of the following patents:
U.S. Patent No 6,429,846 (the ‘846 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
U.S. Patent No 7,969,288 (the ‘288 patent): “Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device”
U.S. Patent No 7,982,720 (the ‘720 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
U.S. Patent No 8,031,181 (the ‘181 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
U.S. Patent No 8,059,105 (the ‘105 patent): “Haptic Feedback for Touchpads and Other Touch Controls”
HTC asserted that the patents are not infringed, are invalid, and are unenforceable.
On November 21, 2012, we entered into a confidential settlement agreement with Motorola. On January 15, 2013, the Administrative Law Judge issued an Initial Determination terminating the ITC investigation as to Motorola. On March 15, 2013, we dismissed the Motorola Delaware Complaint.
On March 12, 2013, we filed motions to suspend the procedural schedule and to terminate the ITC investigation against HTC. The Administrative Law Judge issued an order granting the motion to suspend the procedural schedule on March 19, 2013 and issued an Initial Determination terminating the ITC investigation as to HTC on March 27, 2013. The decision became final on April 26, 2013.
We requested that the U.S. District Court for the District of Delaware re-open the case against HTC filed in that Court, and the case was reopened on May 1, 2013. We filed an amended complaint on May 3, 2013. HTC answered the amended complaint on June 28, 2013, stating affirmative defenses of (1) non-infringement, (2) invalidity, (3) prosecution history estoppel, (4) equitable estoppel, exhaustion, license, and/or waiver, (5) intervening rights, (6) unclean hands, (7) patent misuse, (8) inequitable conduct based on ’720 patent reexamination, (9) inequitable conduct (’846 patent family), (10) inequitable conduct (’288 patent), (11) double patenting, (12) failure to comply with 35 U.S.C. § 120, and (13) failure to mark / failure to mitigate.
On October 3, 2014, HTC filed five motions with the Court: (1) motion to exclude the testimony of Immersion’s damages expert; (2) motion for partial summary judgment shortening the damages period for U.S. Patent Nos. 7,969,288; 7,982,720, and 8,031,18; (3) motion for summary judgment of invalidity of U.S. Patent Nos. 8,059,105; 8,031,181; and 7,982,720; (4) motion

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for summary judgment of non-infringement of U.S. Patent No. 7,969,288, and; (5) motion for summary judgment of non-infringement of U.S. Patent Nos. 6,429,846; 7,982,720; 8,031,181; and 8,059,105. A hearing on claim construction and the latter three motions was held on November 25, 2014. A hearing on the first motion was held on January 30, 2015. On February 11, 2015, the Court issued rulings on claim construction and on four of HTC’s five motions. The Court denied the motion for summary judgment of non-infringement of the ’288 patent (because the Court found the ’720 and ’181 patents invalid as anticipated, it did not address HTC’s arguments with regard to these patents); granted in part the motion for summary judgment of non-infringement of the ’846, ’720, ’181, and ’105 patents, finding that the HTC’s products do not literally infringe the ’846, and ’105 patents; and granted the motions for partial summary judgment shortening the damages period of the ’288 patent, and for summary judgment of invalidity of the ’105, ’181, and ’720 patents. On February 24, 2015 the Court denied in part and granted in part the first motion, ruling that our damages expert may testify about reasonable royalties but not about lost profits.
Trial was scheduled to begin on March 23, 2015. On March 23, 2015, we announced that we agreed to enter into a settlement and license agreement with HTC, resolving the patent infringement litigation, but preserving our right to appeal the invalidity ruling affecting three of our patents. Under the settlement and license agreement, HTC will pay an undisclosed amount of compensation for prior shipments of its devices containing Basic Haptics and an additional undisclosed amount of compensation for a license to continue to manufacture and sell devices with Basic Haptics. On March 31, 2015 the Court entered a Final Judgment providing that HTC does not infringe the ‘105, ‘181, and ‘720 patents solely because the Court ordered that HTC prevailed on its affirmative defense of invalidity, and dismissing our claims of infringement of the ‘846 and ‘288 patents pursuant to the settlement and license agreement. On April 21, 2015 we filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit. The appeal has been docketed as Case No. 15-1574.
In the U.S. Patent Office, HTC filed requests for ex-parte reexamination of three of our patents: the ‘288, ‘999, and ‘720 patents. Reexamination of the ’288 patent was requested on July 30, 2012. The U.S. Patent Office granted the request on October 24, 2012. Reexamination of the ’999 patent was requested on September 6, 2012. The U.S. Patent Office granted the request on November 26, 2012. Reexamination of the ’720 patent was requested on September 10, 2012. The U.S. Patent Office granted the request on November 28, 2012. On July 24, 2013, the U.S. Patent Office issued a Reexamination Certificate for the ’999 patent, after certain claims were cancelled and other claims were amended. On February 18, 2014, the U.S. Patent Office issued a Reexamination Certificate for the ’720 patent after certain claims were cancelled and other claims were amended. On February 10, 2014 the U.S. Patent Office issued a Reexamination Certificate for the ‘288 patent after certain claims were cancelled and claim 18 was amended.
We cannot predict the ultimate outcome of the above-mentioned federal action, and we are unable to estimate any potential liability we may incur.

ITEM 1A. RISK FACTORS
As previously discussed, our actual results could differ materially from our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition.

Company Risks
If we are unable to enter into new and renewed licensing arrangements with our existing licensees and with additional third-parties for our touch-enabling technologies, our royalty and license revenue may not grow and could decline.
Our revenue growth is largely dependent on our ability to enter into new and renewed licensing arrangements. Our failure to enter into new or renewed licensing arrangements will cause our operating results to suffer. We face numerous risks in obtaining new or renewed licenses on terms consistent with our business objectives and in maintaining, expanding, and supporting our relationships with our current licensees. These risks include:
 
the competition we may face from third parties and/or the internal design teams of existing and potential licensees;
difficulties in persuading third parties to work with us, to rely on us for critical technology, and to disclose to us proprietary product development and other strategies;
difficulties in persuading existing licensees who compensate us for including our software in certain of their touch-enabled products to also license and compensate us for our patents that cover other touch-enabled products of theirs that do not include our software;
challenges in demonstrating the compelling value of our technologies and challenges associated with customers’ ability to easily implement our technologies;

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difficulties in obtaining new licensees for yet-to-be commercialized technology because their suppliers may not be ready to meet stringent price, quality and parts availability requirements;
difficulties in entering into or renewing gaming licenses if video console makers choose not to license third parties to make peripherals for their new consoles, if video console makers no longer require peripherals to play video games, if video console makers no longer utilize technology in the peripherals that are covered by our patents or if the overall market for video consoles deteriorates substantially;
reluctance of content developers or distributors, mobile device manufacturers, and service providers to sign license agreements without a critical mass of other such inter-dependent supporters of the mobile device industry also having a license, or without enough similar devices in the market that incorporate our technologies; and
inability of current or prospective licensees to ship certain devices if they are involved in IP infringement claims by third parties that ultimately prevent them from shipping products or that impose substantial royalties on their products.
A limited number of customers account for a significant portion of our revenue, and the loss of major customers could harm our operating results.
Samsung Electronics accounted for approximately 32% and two other customers accounted for 18% and 14% of our total revenues, respectively, for the nine months ended September 30, 2015. Samsung Electronics accounted for approximately 38% and two other customers accounted for 17% and 10% of our total revenues, for the nine months ended September 30, 2014. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or as a group, will continue to generate similar 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 the lost revenue with revenue from other sources.

Future revenue is difficult to predict, and our failure to predict revenue accurately may cause our results to be below our expectations or those of investors and result in our stock price declining.
Our lengthy and costly license negotiation cycle and any IP litigation that we may engage in make the amount and/or timing of future revenue difficult to predict because we may not be successful in entering into or renewing licenses with our customers on our estimated timelines, and we may be reliant on litigation timelines, which are difficult to control, with unpredictable results.
Some of our license agreements provide for per-unit royalty payments 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. In addition, in certain product markets, we have entered into licensing agreements pursuant to which customers make fixed recurring payments to us in exchange for use of our IP and technology. As a result, a portion of the revenue we report each quarter results from the recognition of deferred revenue from fixed payments we have received from these customers during previous quarters. If we were to experience significant decline in our ability to renew these agreements or enter into new agreements that include fixed recurring payments, our reported financial results might not reflect such downturns until future periods. Moreover, to the extent our business model depends on fixed payments that we recognize over time, it may also be difficult for us to rapidly increase our revenues through additional sales in any period, as revenue from new customers will be recognized over multiple quarters. Additionally, if we have agreed that a customer may pay us a fixed amount for use of our IP and technology during a given time period, we may receive lower revenues than we would have received under a per unit royalty arrangement if the customer’s business grows or it otherwise performs better than we anticipated at the time we entered into our licensing agreement with the customer.
In addition, a portion of our revenue comes from development and support services provided to our licensees, or may be part of a contractual arrangement involving multiple elements. Depending upon the nature of the services or elements, all or a portion of the revenue may be recognized ratably over time or may be deferred in part or in whole.
All of these factors make it difficult to predict future revenue and may result in our revenue being below our previously announced guidance or analysts’ estimates, which would likely cause our stock price to decline.
Our international expansion efforts subject us to additional risks and costs.
We currently have sales personnel in Japan, Korea, Taiwan, China, and Switzerland and we intend to continue to expand our international activities, including continued investment in Asia. 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;

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foreign exchange and currency risks;
import and export restrictions, duties, tariffs, quotas and other barriers;
difficulties staffing and managing foreign operations;
difficulties and expense in establishing and enforcing IP rights;
business risks, including fluctuations in demand for our technologies and products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions;
multiple conflicting tax laws and regulations;
political and economic instability; and
the possibility of an outbreak of hostilities or unrest in markets where major customers are located, including Korea and Hong Kong.
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, differing or inconsistent government interpretation, and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls, or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business. Our international operations could also increase our exposure to complex international tax rules and regulations. Changes in, or interpretations of, tax rules and regulations may adversely affect our income tax provision. In addition, our operations outside the United States may be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment, including the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments by our employees, vendors, or agents.
The terms in our agreements may be construed by our licensees in a manner that is inconsistent with the rights that we have granted to other licensees, or in a manner that may require us to incur substantial costs to resolve conflicts over license terms.
We have entered into, and we expect to continue to enter into, agreements pursuant to which our licensees are granted rights to our technology and under our IP. These rights may be granted in certain fields of use, or with respect to certain market sectors or product categories, and may include exclusive rights or sublicensing rights. We refer to the license terms and restrictions in our agreements, including, but not limited to, field of use definitions, market sector, and product category definitions, collectively as “License Provisions.”
Due to the continuing evolution of market sectors, product categories, and licensee business models, and to the compromises inherent in the drafting and negotiation of License Provisions, our licensees may interpret License Provisions in their agreements in a way that is different from our interpretation of such License Provisions, or in a way that is in conflict with the rights that we have granted to other licensees. Such interpretations by our licensees may lead to claims that we have granted rights to one licensee that are inconsistent with the rights that we have granted to another licensee. Many of our customers report royalties to us based on their shipments or their revenues and their interpretation and allocation of contracted royalty rates. It is possible that the originally reported royalties could differ materially from those determined by either a customer self-reported correction or from an audit we have performed. These interpretations may also cause disagreements arising during customer audits, may lead to claims or litigation, and may have an adverse effect on the results of our operations. Further, although our agreements generally give us the right to audit books and records of our licensees, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our licensees’ businesses. Pursuant to our license compliance program, we audit certain licensees to review the accuracy of the information contained in their royalty reports in an effort to decrease the risk of our not receiving royalty revenues to which we are entitled, but we cannot give assurances that such audits will be effective.
In addition, after we enter into an agreement, it is possible that markets and/or products, or legal and/or regulatory environments, will evolve in an unexpected manner. As a result, in any agreement, we may have granted rights that will preclude or restrict our exploitation of new opportunities that arise after the execution of the agreement.

Competing technologies may harm our business.
One of our biggest sources of competition is derived from decisions made by internal design groups at our original equipment manufacturer (“OEM”) customers and potential OEM customers. These internal design groups typically make choices regarding whether to implement haptics or not, whether to use our software or other standard haptic capability (e.g., haptic capability offered by the Android operating system), or even whether to develop their own haptic solutions. In instances where the design team elects not to use our software but implements unlicensed haptic capability, we may seek to enforce our

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IP. If the OEM is unwilling to enter into a license agreement, we may elect to pursue litigation which would harm our relationship with the OEM and could harm our relationships with other licensees or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation, choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and could have a negative impact on our financial results.
In our OEM agreements, we typically grant licenses to our patent portfolio for one or more specified fields of use. Depending on the specific terms of our agreement with an OEM, the OEM’s internal design group may be able to develop technology that is less expensive to implement or that enables products with higher performance or additional features than our own technology and products. Many of these internal design groups have substantially greater resources, greater financial strength and lower cost structures than we do. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.
In addition to licensing OEMs directly, we also license to semiconductor manufacturers who incorporate certain of our less advanced technologies into their integrated circuits for use in certain electronic devices. While our relationships with these semiconductor manufacturers increases our distribution channels by leveraging their sales channels, it is possible that OEMs may elect to implement haptics using less advanced integrated circuit solutions rather than the higher-end solutions we offer directly, which may negatively impact our financial results.
Winning business is often subject to a competitive selection process that can be lengthy and requires us to incur significant expense, and we may not be selected.
In many cases, we must win competitive selection processes, known as “design wins,” before our haptic technologies are included in our customers’ products. These selection processes can be lengthy and can require us to incur significant design and development expenditures. 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 given product area, the loss of a design win may result in our failure to have haptics added to new generation products in that area. This can result in lost sales and could hurt our position in future competitive selection processes to the extent we are not perceived as being a technology leader.
After winning a product design for one of our customers, we may still experience delays in generating revenue as a result of lengthy customer development and design cycles. In addition, a change, 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, even if a design is introduced, if our customers fail to successfully market and sell their products, it could materially adversely affect our business, financial condition, and results of operations.
We are currently involved in appealing a judgment invalidating three of our patents; any final judgment invalidation or limiting of the scope of these patents could harm our business.
As more fully described under Part II, Item 1- “Legal Proceedings,” we are currently appealing a judgment invalidating three of our patents. We cannot predict the outcome of the appeal. If there is a final adverse ruling invalidating the patents, we could be prevented from enforcing, or earning future revenues from those patents, and the likelihood that customers will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be reduced. The resulting reduction in license fees and royalties could harm our business, consolidated financial position, results of operations or cash flows, or the trading price of our common stock.

Our current or any future 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 have been in the past and 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 or any future litigation will continue to be costly and that future litigation will result in additional legal expenses, and there can be no assurance that we will be successful or be able to recover the costs we incur in connection with litigation. We expense litigation costs as incurred, and only accrue for costs that have been incurred but not paid to the vendor as of the financial statement date. Although protecting our intellectual property is a fundamental part of our business, at times, our litigation has diverted, and could continue to divert, the efforts and attention of some of our key management and personnel away from our licensing transactions. As a result, until such time as it is resolved or concluded, litigation could adversely affect our business. Further, any unfavorable outcome could adversely affect our business. For additional background on our litigation, please see Note 12

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to the condensed consolidated financial statements in Part I, Item 1- “Financial Statements and Supplementary Data” and Part II, Item 1- “Legal Proceedings”.
We may not be able to continue to derive significant revenues from makers of peripherals for popular video gaming platforms.
A significant portion of our gaming royalty revenues comes from third-party peripheral makers who make licensed gaming products designed for use with popular video game console systems from Microsoft, Sony, and Nintendo. Video game console systems are closed, proprietary systems, and video game console system makers typically impose certain requirements or restrictions on third-party peripheral makers who wish to make peripherals that will be compatible with a particular video game console system. If third-party peripheral makers cannot or are not allowed to satisfy these requirements or restrictions, our gaming royalty revenues could be significantly reduced. Furthermore, should a significant video game console maker choose to omit touch-enabling capabilities from its console systems or somehow restrict or impede the ability of third parties to make touch-enabling peripherals, it could lead our gaming licensees to stop making products with touch-enabling capabilities, thereby significantly reducing our gaming royalty revenues. Also, if the gaming industry changes such that mobile or other platforms increase in popularity at the expense of traditional video game consoles, our gaming royalty revenues could be substantially reduced if we are unable to enter into replacement arrangements enabling us to license our software or IP in connection with gaming on such mobile or other platforms. Finally, as some of our key patents expire related to video game peripherals, we may need to persuade our licensees that other patents in our portfolio continue to be relevant which could result in the expenditure of significant resources and/or failure to persuade the licensee of the relevance of the patents.
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 royalties for these product types.
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 device technologies unless and until products featuring our technologies are shipped to customers, which may not occur until several years after we enter into an agreement with a manufacturer or a supplier to a manufacturer. Throughout the product development process, we face the risk that a manufacturer or supplier may delay the incorporation of, or choose not to incorporate, our technologies into its products, making it difficult for us to predict the royalties we may receive, if any. After the product launches, our royalties still depend on market acceptance of the vehicle, the option packages if our technology is an option (for example, a navigation unit) or medical device, which is likely to be determined by many factors beyond our control.

If we fail to successfully manage our new content and media initiative, our results of operations could be negatively impacted.
We seek to find new applications and markets for our technologies. We have invested and continue to invest significant resources in the development of technologies and software related to enhancing mobile content with haptics. For example, we have recently announced the introduction of haptics-enabled mobile game applications from well-known publishers. Market acceptance of these new technologies and software offerings will be dependent in part on our ability to show that mobile content enhanced with haptics generates greater levels of consumer engagement, improves customer acquisition and retention measures, increases monetization, improves long-term content recall and generates more positive levels of enjoyment and brand sentiment. While our early pilot and user studies are encouraging, such data is preliminary and may be inaccurate or may not be accepted by third parties. While we do not anticipate any meaningful revenue associated with this initiative in 2015, if we are unable to successfully establish these new offerings, our results of operations could be negatively impacted. In addition, if we fail to properly manage the licensing of rights in our OEM and content businesses, we may inadvertently impair our ability to monetize our technology in one of these businesses and our results of operations would be negatively impacted.
We have little or no control or influence on our licensees’ design, manufacturing, quality control, promotion, distribution, or pricing of their products incorporating our touch-enabling technologies, upon which we generate royalty revenue.
A key part of our business strategy is to license our software and IP to companies that manufacture and sell products incorporating our touch-enabling technologies. For the nine months ended September 30, 2015 and 2014, 98% of our total revenues were royalty and license revenues, respectively. We do not control or influence the design, manufacture, quality control, promotion, distribution, or pricing of products that are manufactured and sold by our licensees, nor can we control consolidation within an industry which could either reduce the number of licensable products available or reduce royalty rates for the combined licensees. In addition, we generally do not have commitments from our licensees that they will continue to use our technologies in current or future products. As a result, products incorporating our technologies may not be brought to market, achieve commercial acceptance, or otherwise generate meaningful royalty revenue for us. For us to generate royalty

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and license revenue, licensees that pay us per-unit royalties must manufacture and distribute products incorporating our touch-enabling technologies in a timely fashion and generate consumer demand through marketing and other promotional activities. If our licensees’ products fail to achieve commercial success, or if their products are recalled because of quality control problems or if they do not ship products incorporating our touch-enabling technologies in a timely fashion or fail to achieve strong sales, our revenues will not grow and could decline.
If we fail to protect and enforce our IP rights or if we fail to continuously develop or acquire successful innovations and obtain patents on these innovations, our ability to license our technologies and generate revenues would be impaired.
Our business depends on generating revenues by licensing our IP rights and by customers selling products that incorporate our technologies. We rely on our significant patent portfolio to protect our proprietary rights. If we are not able to protect and enforce those rights, our ability to obtain future licenses or maintain current licenses and royalty revenue could be impaired. In addition, if a court or patent office were to limit the scope, declare unenforceable, or invalidate any of our patents, current licensees may refuse to make royalty payments, or they may choose to challenge one or more of our patents. It is also possible that:
 
our pending patent applications may not result in the issuance of patents;
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, where we or our licensees do business.
In addition, our patents will continue to expire according to their terms, including the expiration of several gaming patents in 2015. Our failure to continuously develop or acquire successful innovations and obtain patents on those innovations could significantly harm our business, financial condition, results of operations, or cash flows. In addition, we also rely on licenses, confidentiality agreements, other contractual agreements, and copyright, trademark, and trade secret laws to establish and protect our proprietary rights. It is possible that:
 
laws and contractual restrictions may not be sufficient to prevent 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.
We have in the past initiated legal proceedings to protect our intellectual property and may need to continue to do so in the future. Any legal or administrative proceeding initiated by us to protect or enforce our IP rights may result in substantial legal expenses and risk, could lead to counterclaims, and may divert our management’s time and attention away from our other business operations, which could significantly harm our business.
We had an accumulated deficit of $81 million as of September 30, 2015, have only recently achieved profitability, and may not maintain profitability in the future.
As of September 30, 2015, we had an accumulated deficit of $81 million. We need to generate significant ongoing revenue to maintain consistent profitability. We will continue to incur expenses as we:
 
engage in research and develop our technologies;
increase our sales and marketing efforts;
attempt to expand the market for touch-enabled technologies and products;
protect and enforce our IP;
expand our international presence;
incur costs related to litigation; and
acquire IP or other assets from third-parties.
If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, we may not maintain profitability.
We have limited engineering, customer service, technical support, quality assurance and operations resources to design and meet delivery schedules and to provide support for our various technologies and, as a result, we could fail to deliver software and services in a timely way, with sufficient levels of quality, or at all, which may reduce our revenue.
We deploy our limited engineering, customer service, technical support, quality assurance, and operations resources on a variety of different projects and programs intended to provide sufficient levels of quality necessary for channels and customers.

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Our success in various markets may depend on timely deliveries and overall levels of sustained quality and customer service. Our failure to provide high quality customer deliverables in a timely fashion or at all, or our failure to maintain sufficient customer service levels, could disrupt our customer relationships, harm our brand, and reduce our revenues.

Our business depends in part on access to third-party platforms and technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change, our business and operating results could be adversely affected.
Many of our current and future software technologies are designed for use with third-party platforms and technologies. Our business relies on our access to these platforms and technologies of third parties, which can be withdrawn, denied or not be available on terms acceptable to us.
Our access to third-party platforms and technologies may require paying royalties or other amounts, which lowers our margins, or may otherwise be on terms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our software technologies can be delayed in production or can change in ways that negatively impact the operation of our software.
If we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies are delayed or change, our business and operating results could be adversely affected.
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 products at the expense of our other licensees.
Under the terms of our present agreement with Microsoft, Microsoft receives a royalty-free, perpetual, irrevocable license (including sublicense rights) to our worldwide portfolio of patents. This license permits Microsoft to make, use, and sell hardware, software, and services, excluding specified products, covered by our patents. We will not receive any further revenues or royalties from Microsoft under our current agreement with Microsoft, including with respect to Microsoft’s Xbox One gaming product. Microsoft has a significant share of the market for touch-enabled console gaming computer peripherals and is pursuing other consumer markets such as mobile devices and tablets. Microsoft has significantly greater financial, sales, and marketing resources, as well as greater name recognition and a larger customer base than some of our other licensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other licensees in these market segments may decline.
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 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 or likelihood of these products achieving widespread commercial adoption.
We expect that we will need to continue 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 and content producers to create products that utilize our technologies. Negative product reviews or publicity about our company, our technologies, 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.
Our business may suffer if third parties assert that we violate their IP rights.
Third parties have previously claimed and may in the future claim that we or our customers are infringing upon their IP rights. Even if we believe that such claims are without merit or that we are not responsible for them under the indemnification or other terms of our customer license agreements, they can be time-consuming and costly to defend against and may divert management’s attention and resources away from our business. Furthermore, third parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our software technologies or services in the United States and abroad. Claims of IP infringement also might require us to enter into costly settlement or license agreements or pay costly damage awards. Even if we have an agreement that provides for a third

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party to indemnify us against such costs, the indemnifying party may be unable or unwilling to perform its contractual obligations.
We license some technologies from third parties. We must rely upon the owners of these technologies for information on the origin and ownership of the technologies. As a result, our exposure to infringement claims may increase. We generally obtain representations as to the origin and ownership of acquired or licensed technologies and indemnification to cover any breach of these representations. However, representations may not be accurate and indemnification may not provide adequate compensation for breach of the representations. If we cannot or do not license the infringed IP at all or on reasonable terms, or substitute similar technology from another source, our business, financial position, results of operations or cash flows could suffer.
Changes to U.S. patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office may adversely impact our business.
Our business relies in part on the uniform and historically consistent application of U.S. patent laws and regulations. There are numerous recent changes to the patent laws the rules of the U.S. Patent and Trademark Office, which may have a significant impact on our ability to protect our technology and enforce our IP rights. For example, on September 16, 2011, President Obama signed the Leahy-Smith America Invents Act, which codified significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent” to a “first inventor to file” system, limiting where a patentee may file a patent suit, requiring the apportionment of patent damages, replacing interference proceedings with derivation actions and creating a post-grant opposition process to challenge patents after they have been issued. The U.S. Patent and Trademark Office has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith America Invents Act, and many of the substantive changes to patent law associated with the Leahy-Smith America Invents Act, and in particular, the “first inventor to file” provisions. It is not clear what impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of our intellectual property. In addition, in recent years, the courts have interpreted U.S. patent laws and regulations differently, and in particular the U.S. Supreme Court has decided a number of patent cases and continues to actively review more patent cases than it has in the past. Some of these changes or potential changes may not be advantageous for us, and may make it more difficult to obtain adequate patent protection or to enforce our patents against parties using them without a license or payment of royalties. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights, and could have a deleterious effect on our licensing program and, therefore, the royalties we can collect.
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.
We derive a significant portion of our revenues from licenses and royalties from a relatively small number of key technologies. We devote significant engineering resources to develop new technologies to address the evolving needs of our customers and potential customers. To remain competitive, we must introduce new technologies in a timely manner and the market must adopt them. 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 may not be favorably received by our licensees, potential licensees, or consumers and could damage our reputation or our brand. Expanding and enhancing 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 technologies may become obsolete in the future. 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 revenues may not grow and could decline.

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, medical, and industrial controls incorporating our touch-enabling technologies can be more expensive than similar competitive products that are not touch-enabled. Although many OEMs have licensed our technologies, there is generally no commitment on their part to use our technologies in their devices. 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.

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If we are unable to develop open source compliant products, our ability to license our technologies and generate revenues would be impaired.
We have seen, and believe that we will continue to see, an increase in customers requesting that we develop products that will operate in an “open source” environment. Developing open source compliant products without imperiling the IP rights upon which our licensing business depends may prove difficult under certain circumstances, thereby placing us at a competitive disadvantage for new product designs. Some of our proprietary technologies incorporate open source software that may be subject to open source licenses. These open source licenses may require that source code subject to the license be released or made available to the public. Such open source licenses may mandate that software developed based on source code that is subject to the open source license, or combined in specific ways with such open source software, become subject to the open source license. We take steps to ensure that proprietary software we do not wish to disclose is not combined with, or does not incorporate, open source software in ways that would require such proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We often take steps to disclose source code for which disclosure is required under an open source license, but it is possible that we have made or will make mistakes in doing so, which could negatively impact our brand or our adoption in the community, or could expose us to additional liability. In addition, we rely on multiple software programmers to design our proprietary products and technologies. Although we take steps to ensure that our programmers (both internal and outsourced) do not include open source software in products and technologies we intend to keep proprietary, we cannot be certain that open source software is not incorporated into products and technologies we intend to keep proprietary. In the event that portions of our proprietary technology are determined to be subject to an open source license, or are intentionally released under an open source license, we could be required to publicly release the relevant portions of our source code, which could reduce or eliminate our ability to commercialize our products and technologies. As a result, our revenues may not grow and could decline.
The uncertain economic environment could reduce our revenues and could have an adverse effect on our financial condition and results of operations.
The current global economic conditions and political climate could materially hurt our business in a number of ways, including longer sales and renewal cycles, exchange rate volatility, delays in adoption of our products or technologies or those of our customers, increased risk of competition, higher 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 would likely face similar challenges, which could materially and adversely affect the level of business they conduct with us or the sales volume of products that include our technology.
We might be unable to retain or recruit necessary personnel, which could slow the development and deployment of our technologies.
Our technologies are complex, and we rely upon the continued service of our existing personnel to support licensees, enhance existing technologies, and develop new technologies. Accordingly, our ability to develop and deploy our technologies and to sustain our revenue growth depends upon the continued service of our management and other key personnel, many of whom would be difficult to replace. Furthermore, we believe that there are a limited number of engineering and technical personnel that are experienced in haptics. Management and other key employees may voluntarily terminate their employment with us at any time without notice. The loss of management or key personnel could delay product development cycles or otherwise harm our business.
We believe that our future success will also depend largely on our ability to attract, integrate, and retain sales, support, marketing, and research and development personnel. Competition for such personnel is intense, and we may not be successful in attracting, integrating, and retaining such personnel. Given the protracted nature of, if, how, and when we collect royalties on new design contracts, it may be difficult to craft compensation plans that will attract and retain the level of salesmanship needed to secure these contracts. Additionally, some of our executive officers and key employees hold stock options with exercise prices that may be above the current market price of our common stock or that are largely vested. Each of these factors may impair our ability to retain the services of our executive officers and key employees.
If we do not achieve increased tax benefits as a result of our recently implemented corporate restructuring, our financial condition and operating results could be adversely affected.
We are currently in the process of completing a reorganizing our corporate organization and expect to finalize this process by December 31, 2015. The purpose of this reorganization is to more closely align our corporate structure with the international nature of our business activities. This corporate restructuring activity is anticipated to allow us to reduce our overall effective tax rate through changes in how we develop and use our intellectual property and the structure of our

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international sales operations, including by entering into transfer-pricing arrangements that establish transfer prices for our intercompany transactions.
There can be no assurance that the taxing authorities of the jurisdictions in which we operate or to which we are otherwise deemed to have sufficient tax nexus will not challenge the restructuring or our tax position that we take. In addition, future changes to U.S. or non-U.S. tax laws, including legislation to reform U.S. or other countries' taxation of international business activities, could negatively impact the anticipated tax benefits of the restructuring.
Any benefits to our tax rate will also depend on our ability to operate our business in a manner consistent with the reorganization of our corporate organization and applicable taxing provisions and achieving our forecasted revenue growth rates. If the intended tax treatment is not accepted by the applicable taxing authorities, changes in tax law negatively impact the structure or we do not operate our business consistent with the intended reorganization and applicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the reorganization and our future operating results and financial condition may be negatively impacted.
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 in revenue or headcount 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.
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 damage, 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 line of business, we could face product liability claims for products that we have sold or that our successors have sold or may sell in the future. Defending any claims against us, regardless of merit, would be time-consuming, expensive, and distracting to management, and could result in damages and injure our reputation, the reputation of our technology, services, or 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 technologies are complex and may contain undetected errors, which could harm our reputation and future sales.
Any failure to provide high quality and reliable technologies, whether caused by our own failure or failures of our suppliers or OEM customers, could damage our reputation and reduce demand for our technologies. Our technologies have in the past contained, and may in the future contain, undetected errors or defects. Some errors in our technologies may only be discovered after a customer’s product incorporating our technologies has been shipped to customers. Any errors or defects discovered in our technologies after commercial release could result in product recalls, loss of revenue, loss of customers, and increased service and warranty costs, any of which could adversely affect our business.

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, if our customers choose to use lower quality actuators as a cost-saving measure, the technical performance of our software may be adversely affected which could also harm our

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business and results of operations. Certain of 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 and quality fashion at attractive prices may negatively 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, including losses due to earthquakes.
Catastrophic events, such as natural disasters, war, and acts of terrorism could disrupt the business of our customers, which could harm our business and results of operations.
The production processes and operations of our customers are susceptible to the occurrence of catastrophic events, such as natural disasters, war, and acts of terrorism, all of which are outside of our control. Any such events could cause a serious business disruption to our customers’ ability to manufacture, distribute and sell products incorporating our touch-enabling technologies, which may adversely affect our business and results of operation.
If our facilities were to experience catastrophic loss, our operations would be seriously harmed.
Our facilities could be subject to a catastrophic loss such as fire, flood, earthquake, power outage, or terrorist activity. A substantial portion of our research and development activities, our corporate headquarters, and other critical business operations are located near major earthquake faults in San Jose, California, an area with a history of seismic events. An earthquake at or near our facilities could disrupt our operations and result in large expenses to repair and replace the facility. While we believe that we maintain insurance sufficient to cover most long-term potential losses at our facilities, our existing insurance may not be adequate for all possible losses including losses due to earthquakes.
If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.
We have in the past had material weaknesses in our internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Any failure on our part to remedy identified material weaknesses, or any additional delays or errors in our financial reporting controls or procedures, could cause our financial reporting to be unreliable and could have a material adverse effect on our business, results of operations, or financial condition and could have a substantial adverse impact on the trading price of our common stock.
We do not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

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 or our licensees to obtain licenses or approvals to export such products internationally. Delays or denial of the grant of any required license or approval, or changes to the regulations, could make it difficult or impossible to make sales to foreign customers in some countries and could adversely affect our revenue. In addition, we could be subject to fines and penalties for violation of these export regulations if we were found in violation. Such violation could result in penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.
Investment Risks
Our quarterly revenues and operating results are volatile, and if our future results are below the expectations of public market analysts or investors, the price of our common stock is likely to decline.
Our revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which could cause the price of our common stock to decline.

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These factors include:
 
the establishment or loss of licensing relationships;
the timing and recognition of payments under fixed and/or up-front license agreements, as well as other multi-element arrangements;
seasonality in the demand for our technologies or products or our licensees’ products;
the timing of our expenses, including costs related to litigation, stock-based awards, acquisitions of technologies, or businesses;
developments in and costs of pursuing or settling any pending litigation;
the timing of introductions and market acceptance of new technologies and products and product enhancements by us, our licensees, our competitors, or their competitors;
the timing of work performed under development agreements; and
errors in our licensees’ royalty reports, and corrections and true-ups to royalty payments and royalty rates from prior periods.
Changes in financial accounting standards, policies or practices may have adverse, unexpected financial reporting implications and affect our reported results of operations.
A change in accounting standards, policies, or practices, such as the new revenue accounting standard that will become effective for us in 2018, ASU No. 2014-09 “Revenue from Contracts with Customers: Topic 606”, can have a significant effect on our reported results and may 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 Exchange Act, the Sarbanes-Oxley Act of 2002, and the rules and regulations of The NASDAQ Stock Market. The requirements of these and other rules and regulations have increased and we expect will continue to increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems and resources.
Our stock price may fluctuate regardless of our performance.
The stock market has experienced extreme volatility that often has been unrelated or disproportionate to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance. The market price of our common stock has been, and in the future could be, significantly affected by factors such as: actual or anticipated fluctuations in operating results; announcements of technical innovations; announcements regarding litigation in which we are involved; the acquisition or loss of customers; changes by game console manufacturers to not include touch-enabling capabilities in their products; new products or new contracts; sales or the perception in the market of possible sales of large number of shares of our common stock by insiders or others; stock repurchase activity; changes in securities analysts’ recommendations; personnel changes; changing circumstances regarding competitors or their customers; governmental regulatory action or inaction; developments with respect to patents or proprietary rights; inclusion in or exclusion from various stock indices; and general market conditions. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has been initiated against that company.
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.

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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.
We may engage in acquisitions that could dilute stockholders’ interests, divert management attention, or cause integration problems.
As part of our business strategy, we have in the past and may in the future, acquire businesses or IP that we feel could complement our business, enhance our technical capabilities, or increase our IP portfolio. The pursuit of potential acquisitions may divert the attention of management and cause us to incur 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 IP or other assets;
charges associated with amortization of acquired assets or potential charges for write-down of assets or goodwill associated with unsuccessful acquisitions;
potential IP infringement or other claims related to acquired businesses, assets, product lines, or technologies; and
potential costs associated with failed acquisition efforts.
Any acquisitions, even if successfully completed, might not generate significant additional revenue or provide any benefit to our business.
ITEM 6. EXHIBITS
The exhibits listed in the accompanying “Exhibit Index” are filed or incorporated by reference as part of this Form 10-Q.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 30, 2015
 
 
 
 
 
IMMERSION CORPORATION
 
 
 
 
By
/s/ Paul Norris
 
 
Paul Norris
 
 
Chief Financial Officer and Principal Accounting Officer

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EXHIBIT INDEX
 
 
 
 
Number
  
Description
 
 
31.1
  
Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2