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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017 or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number 000-27969 
Immersion Corporation
(Exact name of registrant as specified in its charter)
Delaware
  
94-3180138
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification No.)
50 Rio Robles
San Jose, California 95134
(Address of principal executive offices, zip code)
(408) 467-1900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
  
Name of Each Exchange on which Registered
Common Stock, $0.001 par value
  
The Nasdaq Stock Market LLC
Preferred Stock Purchase Rights
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes [    ]  No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [    ]  No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]        No [    ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [x]  No [    ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [ x ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  [    ]
 
 
 
Accelerated filer  [x]
Non-accelerated filer  [    ] (Do not check if a  smaller reporting company)
 
Smaller reporting company  [    ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [    ]  No [x]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was $141,739,100 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person whom owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares of common stock outstanding at February 20, 2018 is 29,462,117.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2018 Annual Meeting are incorporated by reference into Part III hereof.



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IMMERSION CORPORATION
2017 FORM 10-K ANNUAL REPORT
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Forward-looking Statements
In addition to historical information this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). The forward-looking statements involve risks and uncertainties. Forward-looking statements are frequently identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements which refer to expectations, projections, or other characterizations of future events, or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and those described elsewhere in this report, and those described in our other reports filed with the Securities and Exchange Commission (“SEC”). We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

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PART I
Item 1.   Business
Overview
Immersion Corporation (“Immersion”) is a premier licensing company focused on the creation, design, development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully as they engage with products and experience the digital world around them. We are the torchbearers of haptics and our mission is to innovate touch technology that informs, humanizes, and excites while working with customers and industry partners to bring these tactile experiences to consumers. Our technologies are designed to facilitate the creation of high-quality haptic experiences, enable their widespread distribution, and ensure that their playback is optimized for end users. Our primary business is currently in the mobility, gaming, and automotive markets, but we believe our technology is broadly applicable and see opportunities in evolving new markets, including entertainment, social content, virtual and augmented reality, and wearables. In recent years, we have seen a trend towards broad market adoption of haptic technology, and estimate our technology is now in more than 3 billion devices worldwide. As other companies follow our leadership in recognizing how important tactile feedback can be in people's digital lives, we expect the opportunity to license our intellectual property (“IP”) will continue to expand.
We have adopted a hybrid business model, under which we provide advanced tactile software, related tools and technical assistance designed to help integrate our patented technology into our customers’ products or enhance the functionality of our patented technology, and offer licenses to our patented technology to our customers. Our licenses enable our customers to deploy haptically-enabled devices, content and other offerings, which they typically sell under their own brand names. In 2017, we and our wholly-owned subsidiaries increased our issued or pending patents by 400 to more than 2,800 patents worldwide as of December 31, 2017. Our patents cover a wide range of digital technologies and include many of the ways in which touch-related technology can be incorporated into and between hardware products and components, systems software, application software, and digital content. We believe that our IP is relevant to many of the most important and cutting-edge ways in which haptic technology is and can be deployed, including in connection with Basic Haptic mobile interfaces and user interactions, in association with pressure and other sensing technologies, as part of video and interactive content offerings, as related to virtual and augmented reality experiences, and in connection with advanced actuation technologies and techniques.
We were incorporated in 1993 in California and reincorporated in Delaware in 1999. We consummated our initial public offering on November 12, 1999.
Our Business Strategy
Our goal is to continue to be the technology and market leader in haptics and drive the adoption of our touch technology across markets and applications to improve user experiences in the digital realm. Key aspects of our strategy include:
Innovate: Develop and patent our innovative technology to provide haptics in mobile, gaming, automotive, wearable, virtual and augmented reality, content, and other products and services to transform user experiences with unique and customizable tactile effects.
Drive Adoption: Communicate the advantages of our patented innovations and technologies to the relevant customers in target end markets and encourage their adoption through demonstrations and incorporation in the offerings of world-class companies.
Monetize: License our technology to customers for use in the creation, distribution and playback of high quality haptic experiences in various products, services and markets.
Expand Markets and Applications: Work closely with component suppliers, chip vendors, systems integrators, content enablers and other partners to broaden the use of haptics within our current core markets and to expand it into emerging markets, such as wearables and virtual and augmented reality.
We rely on the skills and talent of our employees to successfully execute our strategy through ongoing innovation, licensing activities, and collaboration with customers and partners to ensure that high quality tactile experiences are brought to market. Accordingly, we seek to hire and retain employees with world class haptic expertise, as well as the executive management and operating personnel required to successfully execute our business strategies. To attract these high caliber employees, we have created an environment and culture that fosters and supports research, development, and innovation in breakthrough technologies with significant opportunities for broad industry adoption through licensing. We believe we have created a compelling company for inventive and entrepreneurial technology professionals who are able to work within our collaborative and supportive corporate environment to innovate and execute on our opportunities and drive strong growth.
We derive the majority of our revenue from the licensing of our software and patents. Parties licensed to our IP regard that act as an investment-one which is devalued when unlicensed parties use our IP. Litigation against unlicensed third parties as a

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strategy is a last step after all other avenues for resolution have been exhausted. If unlicensed parties continue to ship products that use our technology solutions or intellectual property without fairly remunerating us, litigation is the proper public step to protect our intellectual property and assets, as well as inform existing licensees that we are protecting their investment.
Haptics and Its Benefits
While the digital world offers many advanced technologies and capabilities, it often fails to provide us with the meaningful touch experiences that inform and enrich our real-world interactions. As we experience the physical world in our everyday lives, we rely on our sense of touch to provide us with reassuring context and confirmation, to bring us closer to one another through rich communications, and to enjoy entertainment, sports and other activities through realistic engagement. Without these tactile qualities, our digital experiences can feel flat and ineffective, pale reflections of the real world.
Immersion haptic technologies breathe life back into digital experiences, restoring the missing elements of confirmation, realism and rich communication to the digital world and help realize our Vision - “With touch, we make people’s digital lives more personal, vivid, and meaningful”:
Confirmation: Today’s touchscreens, touch pads, and other touch surfaces can lack the physical feedback that is provided by mechanical keyboards and switches and that we need to fully understand the context of our interactions. By providing users with intuitive and unmistakable tactile confirmation as they push virtual buttons and scroll through lists, haptics can instill confidence, increase input speed, reduce errors and help improve safety. This is especially important in environments that involve distractions, such as automotive and commercial applications, where audio or visual confirmation is insufficient.
Realism: Haptics can inject a sense of realism into user experiences by exciting the senses and allowing the user to become immersed in the action and nuance of the application. For example, in haptically-enhanced videos, mobile games and simulations that integrate audio-visual content with tactile sensations, users can literally feel guns recoil, engines revving, and the crack of a baseball bat crushing a home run. As another example, medical students and doctors can practice performing cardiac procedures by using simulation systems that realistically recreate the forces that would be encountered in navigating pacing leads through a beating heart.
Rich Communications: When humans communicate through touch, they are better able to establish emotional connections and feelings of closeness. In mobile devices and wearables, haptics can enhance voice, chat and video applications by creating a sense of physical presence, allowing for more personal and engaging communications between users. Moreover, haptics can offer users a discreet and unobtrusive way of exchanging meaningful information without disruptive audio or visual feedback.
We believe these features of our haptic technology are broadly applicable to a number of markets and devices. By continuing to enhance these features through further research and development, we believe we will serve as a strategic partner for our customers and partners in helping them develop a more compelling user experience for consumers.
Our Offerings
We provide software, IP and haptic expertise to our customers through a variety of different offerings, including software licenses, patent licenses, and combined licenses that cover both software and patents. In most cases, our software licenses include services, design tools and software development kits (“SDKs”), as well as licenses to our patents to the extent necessary to implement the licensed software, with the specific rights and restrictions to the applicable patents described in the license agreements. When we offer patent licenses, we provide the customer with a defined right to use our patented innovations in its own products by allowing it to use specified aspects of our broad international patent portfolio, subject to limitations by specific field of use and other restrictions. In certain cases, we also provide our patent licensees with enablement tools such as reference designs and prototypes, technical and design services as well as other assistance and support.
Our agreements are typically structured with fixed, variable or a mix of fixed and variable royalty and/or license payments over certain defined periods, as well as, in certain cases, fees for support or other services.
Software Offerings
We generally license our software as part of Immersion TouchSense-branded offerings that are intended to address the needs of our target markets. Our TouchSense offerings include haptic creation, deployment and playback software, SDKs, developer and enablement tools and documentation, technical and design services, as well as support.
TouchSense Lite and TouchSense Premium: Targeted to the mobile device, wearables, and consumer electronics markets, TouchSense software development kits consist of solutions enabling the design of tactile effects used in device interfaces and applications, and enhancing the playback of haptic content. Our toolkits enable original equipment manufacturers (“OEMs”) and their suppliers to easily add customized haptic experiences to their own branded devices and other products. Our offerings include TouchSense Lite and TouchSense Premium for Mobile and Wearable OEMs.

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TouchSense Software Development Kits: Targeted to mobile game developers, application developers, platform providers, and content creators, TouchSense Software Development Kits consist of design tools, integration software and effect libraries that allow for the design, encoding and playback of tactile effects in mobile content, including games, ads and video. TouchSense Software Development Kits offer high fidelity tactile effects to augment and enhance mobile content, while ensuring quality playback within consumer devices. Our offerings include TouchSense Software Development Kit for Mobile Games and for Mobile Videos.
TouchSense Force: TouchSense Force is the suite of offerings for the PC/Console gaming/virtual reality markets. It is targeted at developers, peripheral manufacturers, and platforms.  The suite consists of design tools, APIs, reference designs, and firmware that aim to set the standard for haptics in gaming and virtual reality by providing advanced next generation haptic solutions that enable consistent haptic experiences on existing vibration based controllers and enable new tactile gaming experiences.
Patent Licenses
Through more than twenty years of innovative research, development and business activity, we have built a far-reaching and deep portfolio of patents covering many of the foundational aspects and commercial applications of haptic technology. We have implemented formal policies and procedures governing how we create, protect and maintain our IP assets, and devote substantial resources to ensure that our IP coverage of the haptic landscape is as comprehensive as possible. Our growing portfolio now includes more than 2,800 worldwide issued or pending patents, which support our TouchSense offerings, protect our business activities and prospects, and represent an important independent licensing and revenue channel for us. We believe that our IP is relevant to many of the most important ways in which haptic technology is and can be deployed, including in connection with mobile interfaces and user interactions, in association with pressure and other sensing technologies, related to virtual and augmented reality experiences, and in connection with advanced actuation technologies and techniques, to name a few.
Haptic Expertise
We frequently offer our expertise to licensees to help them design and integrate touch effects into their products. This expertise includes engineering and integration services, design kits for prototyping, authoring tools, and application programming interfaces (“APIs”).
Engineering and Integration Services: We offer engineering assistance, including technical and design assistance and integration services that allow our licensees to incorporate our touch-enabling solutions and technologies into their products at a reasonable cost and within a shortened time frame, allowing them to bring products to market quickly by using our years of haptic development and solution deployment expertise. We offer product development solutions including software libraries, design, prototype creation, technology transfer, actuator selection, component sourcing, SDKs, sample source code, comprehensive documentation, and other engineering services. In addition, we help ensure a quality end-user experience by offering testing and certification services to a number of licensees and ecosystem participants such as actuator vendors.
Design Kits for Prototyping: We offer several design kits for customers to use for technology evaluation, internal evaluation, usability testing, and focus group testing. The kits include components and documentation that designers, engineers, and system integrators need for prototyping tactile effects into existing or sample products and applications.
Authoring Tools: In addition to TouchSense Haptic Development Kits, we license authoring tools that enable haptic designers and software developers in other markets, such as console gaming, to quickly design and incorporate customized touch feedback into their applications. Authoring tools allow designers to create, modify, experience, and save or restore haptic effects for a haptically-enabled device.
Application Programming Interfaces: Our APIs provide haptic-effect generation capability. This allows designers and software programmers to focus on adding haptic effects to their applications instead of struggling with the mechanics of programming real-time algorithms and handling communications between computers and devices. Some of our haptic APIs are device independent (for example, they work with scroll wheels, rotary knobs, 2D joysticks, and other devices) to allow flexibility and reusability. Others are crafted to meet the needs of a particular customer or industry.
Platform Independent Solutions: Our software driver and API technologies have been designed to be easily ported to a variety of operating systems including Android, Tizen, Linux, and Windows.
Markets
Mobile Communications, Wearables, and Consumer Electronics: We offer TouchSense Lite and TouchSense Premium and patent licenses, as well as haptic expertise, to OEMs in the mobile device, wearables, and consumer electronics markets. In addition, certain of our integrated circuit partners preload their integrated circuits with certain of our less fully-featured TouchSense software and offer these integrated circuits to OEMs in the mobile device market.
Our licensees currently include some of the top makers of mobile devices in the world, including LG Electronics, Lenovo, Fujitsu, HTC, Panasonic, Meizu, and Onkyo, as well as integrated circuit manufacturers such as Texas Instruments.

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For the years ended December 31, 2017, 2016, and 2015, respectively, 49%, 57%, and 62% of our total revenues were generated from OEMs and integrated circuit customers in the mobile communications market.
Console and PC Gaming: We have licensed our patents directly to Microsoft and Nintendo for use in their console gaming products. Additionally, we have licensed our patents to third party gaming peripheral manufacturers and distributors for use in spinning mass and force feedback devices such as controllers, steering wheels and joysticks, to be used with PC platforms running on Microsoft Windows and other operating systems, as well as in connection with video game consoles made by Microsoft, Sony, Nintendo and others. Our gaming licensees include Bensussen Deutsch & Associates, Guillemot, Logitech, Microsoft, Performance Designed Products, and Razer.
For the years ended December 31, 2017, 2016, and 2015, respectively, 30%, 24%, and 24% of our total revenues were generated from customers in the PC and console gaming markets.
Automotive: We offer patent licenses and assistance such as reference designs, prototypes and enablement services to automotive makers and suppliers. Our current licensees include ALPS Electric Co., Continental, Marquardt, Panasonic Automotive Systems, SMK Corporation, and Tokai Rika.
For the years ended December 31, 2017, 2016, and 2015, respectively, 15%, 7%, and 7% of our total revenues were from automotive customers.
Medical: We offer patent licenses to the medical market. Our current licensees include CAE Healthcare, Laerdal Medical A/S, Simbionix, Stryker Medical (formerly MAKO Surgical), and SOFAR.
For the years ended December 31, 2017, 2016, and 2015, respectively, 6%, 12%, and 7% of our total revenues were from medical customers.
Sales
Our sales are seasonal. Seasonal fluctuations have impacted our overall revenue trends in the past.
We employ a consolidated direct sales force in the United States, Europe, and Asia to license our software and patents across our target markets and augment that sales force via partnerships and licensing agreements with component suppliers and system integrators.
Additional information about significant customers is incorporated herein by reference to Note 15 of our consolidated financial statements and related financial information in Item 8. Financial Statements and Supplementary Data.
Competition
Our biggest source of competition derives from decisions made by internal design groups at our OEM and other customers, as well as potential customers. We expect that these internal design groups will continue to make choices regarding whether to implement haptics or not, as well as the extent of their haptic investment and whether to develop their own haptic solutions.
In the event we have granted a license to our patent portfolio to a customer, its internal design group may design technology that is less expensive to implement or that enables products with higher performance or additional features. In some cases, the customer may elect not to include haptics in its products or other offerings due to the higher costs associated with incorporating haptics.
The principal competitive factors impacting our business are the strength of the patents underlying our technology, as well as the technological expertise and design innovation and the use, reliability and cost-effectiveness of our software solutions. We believe we compete favorably in all these areas.
Our competitive position is also impacted by the competitive positions of our licensees’ products and other offerings. Our licensees’ markets are highly competitive. We believe that the principal competitive factors in our licensees’ markets include price, performance, user-centric design, ease-of-use, quality, and timeliness of products, as well as the licensee’s responsiveness, capacity, technical abilities, established customer relationships, distribution channels and access to retail shelf space, advertising, promotional programs, and brand recognition. Touch-related benefits in some of these markets may be viewed simply as enhancements and compete with non-touch-enabled technologies.
Research and Development
Our success depends on our ability to invent and improve our technologies in a timely manner; to design and develop software to meet specifications based on research and our understanding of customer needs and expectations; to offer tools and technology that enable high-quality, end-to-end haptic experiences, from the time of creation to the time of playback; and to collaborate with our licensees who are integrating our technologies into theirs.

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Engineering: We have assembled a multi-disciplinary team of highly skilled engineers and scientists with the experience required for development of touch-enabling technology. The team’s experience includes skills related to mechanical engineering, electrical engineering, embedded systems and firmware, control techniques, software, quality control, haptic content design, and project and process management. This team continues to generate patents that strengthen our IP position.
Application Engineering and Technical Support: We may provide application engineering and technical support during integration of our touch-enabling technology into customer products and other offerings, including content. To facilitate the validation and adoption of touch-enabling technology, we have developed various design kits. These kits may include actuators, mounting suggestions, controller boards, software libraries, programming examples, and documentation. Our application engineers support customer use of these design kits, including through phone and e-mail technical support and onsite training. This team continues to generate patents that strengthen our IP position.
Research: We have multi-disciplinary expertise in usability and multimodal user interface design, actuator design, sensors, integration, material science, real-time simulation algorithms, control, and software development. Our research team works with existing and potential partners to help them assess and prove the value of haptics in their field of interest, creating main competitive differentiator and value-added solutions. This team continues to generate patents, actively contributing to the strength of our IP position.
User Experience: We have a dedicated team of user interaction specialists, focusing on user research and design to enable new and improved applications of haptics. We have unique expertise in haptics, usability, content creation, and interface design. Our team works with existing and potential partners to help them determine the best implementation of haptics in their specific application. This team works on the cutting edge of new user interface paradigms using haptics, resulting in an ongoing generation of patents, actively contributing to the development of new IP for us.
For the years ended December 31, 2017, 2016, and 2015, research and development expenses were $11.8 million, $13.4 million, and $14.8 million respectively.
Intellectual Property
We believe that IP protection is crucial to our business. We rely on a combination of patents, copyrights, trade secrets, trademarks, nondisclosure agreements with employees and third parties, licensing arrangements, and other contractual agreements with third parties to protect our IP. We maintain and support an active program to protect our IP, primarily through the filing of patent applications and the defense of issued patents against infringement.
Our failure to obtain or maintain adequate protection for our IP rights for any reason could hurt our competitive position. There is no guarantee that patents will be issued from the patent applications that we have filed or may file. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. Our position and revenue resulting from licensing our patents can also be affected by the expiration of patents and our ability to persuade licensees that other patents in our portfolio continue to be relevant.
At the end of 2017, we and our wholly owned subsidiaries had over 2,800 currently issued or pending patents worldwide that cover various aspects of our technologies. The duration of our issued patents is determined by the laws of the country of issuance and for the United States is typically 17 years from the date of issuance of the patent or 20 years from the date of filing of the patent application resulting in the patent. Some of our U.S. patents began expiring in 2007.
Financial Information about Industry Segments and Geographic Areas
We manage our operations and allocate resources as a single reporting segment. Additional information about our business segments and geographic areas is incorporated herein by reference to Note 15 of our consolidated financial statements and related financial information in Item 8. Financial Statements and Supplementary Data.
Investor Information
You can access financial and other information in the Investor Relations section of our web site at www.immersion.com. We make available, on our Web site, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
The charters of our audit committee, our compensation committee, and our nominating/corporate governance committee, our Code of Business Conduct and Ethics (including code of ethics provisions that apply to our principal executive officer, principal financial officer, controller, and senior financial officers), our Corporate Governance Principles and our Stock Ownership Policy

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are also available at our web site under “Corporate Governance.” These items are also available to any stockholder who requests them by calling +1 408.467.1900.
The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Employees
As of December 31, 2017, following a restructure of certain of our operations, we had 81 full-time and part-time employees, including 36 in research and development, 13 in sales and marketing, and 32 in legal, finance, and administration. We also use independent contractors. None of our employees are represented by a labor union, and we consider our employee relations to be positive.
Executive Officers
The following table sets forth information regarding our executive officers as of February 20, 2018.
Name
Position with the Company
Age
Carl Schlachte
Interim Chief Executive Officer and Chairman of the Board of Directors
54
Nancy Erba
Chief Financial Officer
51
Anne Marie Peters
General Counsel and Senior Vice President IP Licensing and Legal Affairs
47
Carl Schlachte was named our interim Chief Executive Officer in November 2017. Mr. Schlachte has served as a member of our board of directors since June 2011, and has served as Chairman of our board of directors since July 2012. Mr. Schlachte is Chairman, President and CEO of Ventiva, Inc., which designs and develops thermal management technologies for consumer applications in mobile computing, power electronics and LED lighting. From 2006 to December 2011, Mr. Schlachte was Chairman of the Board of MOSAID Technologies Incorporated, one of the world’s leading IP companies, focused on the licensing and development of semiconductor and communications technologies. From 2004 to 2009, Mr. Schlachte was President and CEO of ARC International, a leading provider of multimedia solutions to semiconductor companies worldwide. From October 2010 to 2016, Mr. Schlachte served on the Board of Peregrine Semiconductor Corp. Mr. Schlachte received a B.S. from Clemson University.
Nancy Erba joined Immersion as Chief Financial Officer in September 2016. Prior to joining Immersion, Ms. Erba was Vice President, Financial Planning and Analysis of Seagate Technology from February 2015 to October 2015. Prior executive roles at Seagate Technology include Division CFO and Vice President of Finance, for Strategic Growth Initiatives from 2013 to 2015, Vice President, Business Operations and Planning from 2009 to 2013, Division CFO and Vice President of Finance of the Consumer Solutions Division from 2008 to 2009 and Vice President, Corporate Development from 2006 to 2008. Ms. Erba holds a Bachelor of Arts in Mathematics from Smith College and a Master of Business Administration from Baylor University.
Anne Marie Peters has been at Immersion since December 2008 serving as General Counsel and Corporate Secretary. In July 2016, Ms. Peters’ role was expanded to include leading Immersion’s patent licensing portion of our business. From 1998 to 2008, Ms. Peters was an associate, and then corporate partner at Morrison & Foerster LLP. Prior to practicing law, Ms. Peters held positions in the diagnostic manufacturing field at Chiron Corporation. Ms. Peters holds a Bachelor in Molecular and Cell Biology from the University of California, Berkeley, a Master of Business Administration from the Graduate School of Management at the University of California, Davis, and a Juris Doctor degree from the University of California, Davis School of Law. Ms. Peters was admitted to the California State Bar in 1999.


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Item 1A.   Risk Factors
You should carefully consider the following risks and uncertainties, as well as other information in this report and our other SEC filings, in considering our business and prospects. If any of the following risks or uncertainties actually occurs, our business, financial condition, or results of operations could be materially adversely affected. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are unaware or that we currently believe are immaterial could also materially adversely affect our business, financial condition, or results of operations. In any case, the trading price of our common stock could decline, and you could lose all or part of your investment. See also the Forward-looking Statements discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Company Risks
If we are unable to enter into new and renewed licensing arrangements with our existing licensees and with additional third-parties for our touch-enabling technologies, our royalty and license revenue may not grow and could decline.
Our revenue growth is largely dependent on our ability to enter into new and renew existing licensing arrangements. Our failure to enter into new or renewed licensing arrangements will cause our operating results to suffer. Further, upon adoption of ASC 606, we will have a substantial portion of revenue from our fixed license fee contracts recognized up front, with the remainder recognized over time which relates to our future performance obligations to be transferred during the contract term. Previously, our fixed license fee revenue was usually recognized ratably over time in accordance with revenue recognition guidance under ASC 605. This change in accounting policy for fixed license fees revenue will further provide less predictability in our revenue when compared to historical periods. We face numerous risks in obtaining new or renewed licenses on terms consistent with our business objectives and in maintaining, expanding, and supporting our relationships with our current licensees. These risks include:
difficulties in persuading device manufacturers to take a license or renew a license to our intellectual property without the expenditure of significant resources;
difficulties in persuading existing customers that they still need a license to the portfolio as individual patents expire or become limited in scope, declared unenforceable or invalidated;
reluctance of device manufacturers to take a license or renew a license to our intellectual property because other larger device manufacturers are not licensed;
difficulties in entering into or renewing gaming licenses if video game 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;
the competition we may face from third parties and/or the internal design teams of existing and potential licensees;
difficulties in achieving and maintaining consumer and market demand or acceptance for our products;
difficulties in persuading third parties to work with us, to rely on us for critical technology, and to disclose to us proprietary product development and other strategies;
difficulties in persuading existing licensees who compensate us for including our software in certain of their touch-enabled products to also license and compensate us for our patents that cover other touch-enabled products of theirs that do not include our software;
challenges in demonstrating the compelling value of our technologies and challenges associated with customers’ ability to easily implement our technologies; and
inability of current or prospective licensees to ship certain devices if they are involved in IP infringement claims by third parties that ultimately prevent them from shipping products or that impose substantial royalties on their products;
A limited number of customers account for a significant portion of our revenue, and the loss of major customers could harm our operating results.
Three customers accounted for 20%, 18% and 11% of our total revenues, respectively, for the year ended December 31, 2017, as compared to the years ended December 31, 2016 and 2015 where Samsung Electronics and two other customers together accounted for 60% and 64% of our total revenues, respectively. In the quarter ended September 30, 2016, we entered into an additional amendment to our License Agreement with Samsung pursuant to which we agreed to permit Samsung to exercise its rights to continue to sell products that were licensed under the agreement as of December 31, 2015 for the life of such products in exchange for $19 million. We have not entered into a renewal agreement with Samsung for any products released after December

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31, 2015, and on August 3, 2017, we filed a patent infringement suit against Samsung in the U.S. District Court in the Eastern District of Texas. See Part I, Item 3, "Legal Proceedings". Because we have not renewed our agreement with Samsung, there is no assurance that Samsung will continue to generate similar revenue in any future period; and even if we were to renew our agreement with Samsung, our revenue could be adversely impacted by recalls or poorly performing mobile devices.
In addition, we cannot be certain that other customers that have accounted for 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, or if a customer decides that our intellectual property is no longer relevant and stops paying us royalties, our revenue could decline if we are unable to replace the lost revenue with revenue from other sources. In addition, if potential customers or customers with expiring agreements view the loss of one of our major customers as an indicator of the value of our software and/or the strength of our intellectual property, they may choose not to take or renew a license which could adversely affect our operating results.
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;
effective patent protection may not be available in every country, particularly in Asia, where we or our licensees do business; and
our pending litigation against Samsung, Motorola, and Fitbit may be unsuccessful or may result in one or more of the patents asserted becoming limited in scope, declared unenforceable or invalidated.
In addition, our patents will continue to expire according to their terms which may have an adverse effect on our business. For example, certain of our U.S. gaming patents expired in 2015, and as a result, Sony has ceased paying royalties for sales. 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, and we are currently in litigation against Samsung, Motorola, and Fitbit for patent infringement. We may need to continue to initiate legal proceedings in the future. Any legal or administrative proceeding initiated by us to protect or enforce our IP rights has, and may in the future result in substantial legal expenses and risk, could lead to counterclaims and adverse rulings affecting our patents, and may divert our management’s time and attention away from our other business operations, which could significantly harm our business.
Our current or any future litigation, arbitration and administrative proceedings to enforce or defend our intellectual property rights and to defend our licensing practices is expensive, disruptive, and time consuming, and will continue to be, until resolved, and regardless of whether we are ultimately successful, could adversely affect our business.
We have been in the past and are currently a party to various legal proceedings with companies that have significantly greater financial resources than us to enforce or defend our intellectual property rights and to defend our licensing practices. For example, on August 3, 2017, we initiated patent infringement litigation against Samsung and Motorola claiming that they are infringing five of our US patents. Due to the inherent uncertainties of litigation and administrative proceedings, we cannot accurately predict how these proceedings will ultimately be resolved. We anticipate that currently pending or any future legal proceedings will continue to be costly, given the significant resources available to our current adverse parties, and that future

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legal proceedings will result in additional legal expenses, resulting in the decrease of cash available for other parts of our business, and there can be no assurance that we will be successful or be able to recover the costs we incur in connection with the legal proceedings. Although protecting our intellectual property is a fundamental part of our business, at times, our legal proceedings have diverted, and could continue to divert, the efforts and attention of some of our key management and personnel away from our licensing transactions and other aspects of our business. As a result, until such time as it is resolved or concluded, litigation, arbitration and administrative proceedings could cause our technology to be perceived as less valuable in the marketplace, which could reduce our sales and adversely affect our business. Further, any unfavorable outcome could adversely affect our business. For additional background on our litigation, please see Part I, Item 3, “Legal Proceedings”.
Potential patent and litigation reform legislation, potential USPTO and international patent rule changes, potential legislation affecting mechanisms for patent enforcement and available remedies, and potential changes to the intellectual property rights (“IPR”) policies of worldwide standards bodies, as well as rulings in legal proceedings may affect our investments in research and development and our strategies for patent prosecution, licensing and enforcement and could have a material adverse effect on our licensing business as well as our business as a whole.     
Potential changes to certain U.S. and international patent laws, rules and regulations may occur in the future, some or all of which may affect our research and development investments, patent prosecution costs, the scope of future patent coverage we secure, remedies that we may be entitled to in patent litigation, and attorneys’ fees or other remedies that could be sought against us, and may require us to reevaluate and modify our research and development activities and patent prosecution, licensing and enforcement strategies.
Similarly, legislation designed to reduce the jurisdiction and remedial authority of the USITC has periodically been introduced in Congress.  Any potential changes in the law, the IPR policies of standards bodies or other developments that reduce the number of forums available or the type of relief available in such forums (such as injunctive relief), restrict permissible licensing practices (such as our ability to license on a worldwide portfolio basis) or that otherwise cause us to seek alternative forums (such as arbitration or state court), would make it more difficult for us to enforce our patents, whether in adversarial proceedings or in negotiations.  Because we have historically depended on the availability of certain forms of legal process to enforce our patents and obtain fair and adequate compensation for our investments in research and development and the unauthorized use of our intellectual property, developments that undermine our ability to do so could have a negative impact on future licensing efforts. 
Rulings in our legal proceedings as well as those of third parties may affect our strategies for patent prosecution, licensing and enforcement.  For example, in recent years, the United States International Trade Commission (the “USITC”) and U.S. courts, including the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit, have taken some actions that have been viewed as unfavorable to patentees. Decisions that occur in U.S. or in international forums may change the law applicable to various patent law issues, such as, for example, patentability, validity, patent exhaustion, patent misuse, remedies, permissible licensing practices, claim construction, and damages, in ways that are detrimental to the abilities of patentees to enforce patents and obtain damages awards.
We continue to monitor and evaluate our strategies for prosecution, licensing and enforcement with regard to these developments; however, any resulting change in such strategies may have an adverse impact on our business and financial condition.
If companies choose to implement haptics without our software or a license to our patents, we could have to expend significant resources to enforce or defend our intellectual property rights and to defend our licensing practices which may have a negative impact on our business.
To sell our software, we must win competitive selection processes, known as “design wins,” before our haptic software technologies are included in our customers’ products. These selection processes can be lengthy and can require us to incur significant design and development expenditures with no assurance that we will be selected. As a small company, we may not have the resources to reach every company who is introducing or planning to introduce haptics into the market. In addition, as a small company, we have limited engineering resources that may make it difficult to support every type of haptic implementation with our software offerings or to introduce new technologies in a timely manner. In the instances where a potential customer is not using our software but implements unlicensed haptic capability, we may need to seek to enforce our intellectual property. If the customer is unwilling to enter into a license agreement, we may elect to pursue litigation which would harm our relationship with the customer and could harm our relationships with other licensees or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation, choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and could have a negative impact on our financial results.
We also license to semiconductor manufacturers who incorporate certain of our less fully-featured software into their integrated circuits for use in certain electronic devices. While our relationships with these semiconductor manufacturers increases our distribution channels by leveraging their sales channels, it is possible that customers may elect to implement haptics using less

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fully-featured software integrated circuit solutions rather than the higher-end solutions we offer directly, which may negatively impact our financial results. It is also possible that when a customer uses the integrated circuit, it is doing so in violation of our intellectual property rights and we may seek to enforce our IP.
Our restructuring efforts may not be successful, and may negatively impact our business.
In December 2017, we announced a restructuring of our business to exit the Mobile Advertising market, largely focus on IP licensing for the gaming and Virtual Reality ("VR")/Augmented Reality ("AR") markets, move to a mobile OEM licensing model for China, significantly reduce the size of our workforce and consolidate some of our operations. Consolidations and business restructurings involve numerous risks and uncertainties, including, but not limited to: the potential loss of key employees, customers and business partners; market uncertainty related to our future business plans; the incurrence of unexpected expenses or charges; diversion of management attention from other key areas of our business; negative impacts on employee morale; and other potential dislocations and disruptions to the business. In addition, if our business expands, it may be more difficult for us to attract additional personnel and develop the resources we would need to support a larger customer base. Accordingly, if we are unable to manage this consolidation and transition effectively, our overall business and operating results could be materially and adversely affected.
If we do not achieve increased tax benefits as a result of our recently implemented corporate restructuring, our financial condition and operating results could be adversely affected.
We completed a reorganization of our corporate organization in 2015. The purpose of this reorganization was to more closely align our corporate structure with the international nature of our business activities. This corporate restructuring activity is anticipated to allow us to reduce our overall effective tax rate through changes in how we develop and use our intellectual property and the structure of our international sales operations, including by entering into transfer-pricing arrangements that establish transfer prices for our 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 the tax position that we take. From time to time, we enter into license agreements with our licensees pursuant to which we may agree to indemnify a customer for certain taxes imposed on the customer by an applicable tax authority and related expense. On April 28, 2017, we received a letter from Samsung requesting that we reimburse Samsung with respect to withholding tax and penalties imposed on Samsung by the Korean tax authorities as a result of its determination that withholding taxes should have been withheld from certain payments made from Samsung to Immersion Software Limited. On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against us demanding that we reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. Samsung is requesting that we pay them the amount of KRW 7,841,324,165 (approximately $6.3 million) plus interest from and after May 2, 2017 plus the cost of the arbitration including legal fees. We deny liability, and have asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved. The arbitration panel conducted an initial status conference on February 7, 2018. On February 15, 2018, the arbitration panel denied the motion to stay and has proposed a procedural schedule with a hearing in July 2018.
In addition, on October 16, 2017, we received a letter from LG Electronics Inc. (“LGE”) requesting that we reimburse LGE with respect to withholding tax imposed on LGE by the Korean tax authorities following an investigation where the tax authority determined that LGE failed to withhold on LGE’s royalty payments to Immersion Software Ireland from 2012 to 2014. On November 3, 2017, Immersion filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes. In the event that it is determined that we are obligated to indemnify Samsung and/or LGE for such withholding taxes imposed by the Korean tax authorities, we would incur significant expenses. In addition, future changes to U.S. or non-U.S. tax laws, including legislation to reform U.S. or other countries' taxation of international business activities, could negatively impact the anticipated tax benefits of 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 tax provisions, as well as on our achieving our forecasted revenue growth rates. If the intended tax treatment is not accepted by the applicable taxing authorities, changes in tax law negatively impact the structure or we do not operate our business consistent with the intended reorganization and applicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the reorganization and our future operating results and financial condition may be negatively impacted.
Our international operations subject us to additional risks and costs.
We currently have sales personnel in Japan, Korea, and China. International revenues accounted for approximately 78% of our total revenue in 2017. International operations are subject to a number of difficulties, risks, and special costs, including:
compliance with multiple, conflicting and changing governmental laws and regulations;

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laws and business practices favoring local competitors;
foreign exchange and currency risks;
changing import and export restrictions, duties, tariffs, quotas and other barriers;
difficulties staffing and managing foreign operations;
difficulties and expense in establishing and enforcing IP rights;
business risks, including fluctuations in demand for our technologies and products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions;
multiple conflicting tax laws and regulations;
political and economic instability; and
the possibility of an outbreak of hostilities or unrest in markets where major customers are located, including Korea.
Our international operations could also increase our exposure to international laws and regulations, which are subject to change. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation, differing or inconsistent government interpretation, and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls, or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business. Our international operations could also increase our exposure to complex international tax rules and regulations. Changes in, or interpretations of, tax rules and regulations may adversely affect our income tax provision. In addition, our operations outside the United States may be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment, including the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments by our employees, vendors, or agents.
We had an accumulated deficit of $172 million as of December 31, 2017, and may not return to consistent profitability in the future.
As of December 31, 2017, we had an accumulated deficit of $172 million. We need to generate significant ongoing revenue to return to consistent profitability. We will continue to incur expenses as we:
incur costs related to litigation;
increase our sales and marketing efforts;
engage in research and develop our technologies; and
protect and enforce our IP;
If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, we may not return to profitability.
The terms in our agreements may be construed by our licensees in a manner that is inconsistent with the rights that we have granted to other licensees, or in a manner that may require us to incur substantial costs to resolve conflicts over license terms.
We have entered into, and we expect to continue to enter into, agreements pursuant to which our licensees are granted rights to our technology and our IP. These rights may be granted in certain fields of use, or with respect to certain market sectors or product categories, and may include exclusive rights or sublicensing rights. We refer to the license terms and restrictions in our agreements, including, but not limited to, field of use definitions, market sector, and product category definitions, collectively as “License Provisions.”
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,

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and may have an adverse effect on the results of our operations. Further, although our agreements generally give us the right to audit books and records of our licensees, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our licensees’ businesses. Pursuant to our license compliance program, we audit certain licensees to review the accuracy of the information contained in their royalty reports in an effort to decrease the risk of our not receiving royalty revenues to which we are entitled, but we cannot give assurances that such audits will be effective.
In addition, after we enter into an agreement, it is possible that markets and/or products, or legal and/or regulatory environments, will evolve in an unexpected manner. As a result, in any agreement, we may have granted rights that will preclude or restrict our exploitation of new opportunities that arise after the execution of the agreement.
We may not be able to continue to derive significant revenues from makers of peripherals for popular video gaming platforms.
A significant portion of our gaming royalty revenues comes from third-party peripheral makers who make licensed gaming products designed for use with popular video game console systems from Microsoft, Sony, and Nintendo. Video game console systems are closed, proprietary systems, and video game console system makers typically impose certain requirements or restrictions on third-party peripheral makers who wish to make peripherals that will be compatible with a particular video game console system. If third-party peripheral makers cannot or are not allowed to satisfy these requirements or restrictions, our gaming royalty revenues could be significantly reduced. Furthermore, should a significant video game console maker choose to omit touch-enabling capabilities from its console systems or somehow restrict or impede the ability of third parties to make touch-enabling peripherals, it could lead our gaming licensees to stop making products with touch-enabling capabilities, thereby significantly reducing our gaming royalty revenues. Also, if the gaming industry changes such that mobile or other platforms increase in popularity at the expense of traditional video game consoles, our gaming royalty revenues could be substantially reduced if we are unable to enter into replacement arrangements enabling us to license our software or IP in connection with gaming on such mobile or other platforms. Although Immersion has a significant software and IP position with respect to Virtual Reality peripherals and systems, the market may not become large enough to generate material revenues. Finally, as some of our litigated patents have expired related to video game peripherals, our gaming royalty revenues will likely decline until we are successful in proving the relevance of our IP for this market.
Because we have a fixed payment license with Microsoft, our royalty revenue from licensing in the gaming market and other consumer markets 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 or any other haptic related product. Microsoft has a significant share of the market for touch-enabled console gaming computer peripherals and is pursuing other consumer markets such as mobile devices, tablets, personal computers, and virtual and augmented reality. Microsoft has significantly greater financial, sales, and marketing resources, as well as greater name recognition and a larger customer base than some of our other licensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other licensees in these market segments may decline.
Automobiles incorporating our touch-enabling technologies are subject to lengthy product development periods, making it difficult to predict when and whether we will receive royalties for these product types.
The product development process for automobiles is very lengthy, sometimes longer than four years. We may not earn royalty revenue on our automotive device technologies unless and until products featuring our technologies are shipped to customers, which may not occur until several years after we enter into an agreement with a manufacturer or a supplier to a manufacturer. Throughout the product development process, we face the risk that a manufacturer or supplier may delay the incorporation of, or choose not to incorporate, our technologies into its products, making it difficult for us to predict the royalties we may receive, if any. After the product launches, our royalties still depend on market acceptance of the vehicle, or the option packages if our technology is an option (for example, a navigation unit), which is likely to be determined by many factors beyond our control.
We have little or no control or influence on our licensees’ design, manufacturing, quality control, promotion, distribution, or pricing of their products incorporating our touch-enabling technologies, upon which we generate royalty revenue.
A key part of our business strategy is to license our software and IP to companies that manufacture and sell products incorporating our touch-enabling technologies. For the years ended December 31, 2017, 2016, and 2015, 97%, 98%, and 97% of our total revenues were royalty and license revenues, respectively. We do not control or influence the design, manufacture, quality control, promotion, distribution, or pricing of products that are 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

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the combined licensees. In addition, we generally do not have commitments from our licensees that they will continue to use our technologies in current or future products. As a result, products incorporating our technologies may not be brought to market, achieve commercial acceptance, or otherwise generate meaningful royalty revenue for us. For us to generate royalty and license revenue, licensees that pay us per-unit royalties must manufacture and distribute products incorporating our touch-enabling technologies in a timely fashion and generate consumer demand through marketing and other promotional activities. If our licensees’ products fail to achieve commercial success, or if their products are recalled because of quality control problems or if they do not ship products incorporating our touch-enabling technologies in a timely fashion or fail to achieve strong sales, our revenues will not grow and could decline.
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 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.
Our business and operations could suffer in the event of security breaches.
Attempts by others to gain unauthorized access to our information technology systems are becoming more sophisticated. These attempts, which might be related to industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, among others. We might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position and reputation, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any future security breach results in inappropriate disclosure of our customers' confidential information, we may incur liability.
In addition, our business involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, employee error, malfeasance or otherwise, during transfer of data, and result in someone obtaining unauthorized access to our data or our customers’ data. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers’ data. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our customers may authorize third party technology providers, to access their customer data. Because we do not control the transmissions between our customers and third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the complete integrity or security of such transmissions or processing. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, lead to legal liability and negatively impact our future sales.
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

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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.
Our business depends in part on access to third-party platforms and technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change, our business and operating results could be adversely affected.
Many of our current and future software technologies are designed for use with third-party platforms and technologies. Our business relies on our access to these platforms and technologies of third parties, which can be withdrawn, denied or not be available on terms acceptable to us.
Our access to third-party platforms and technologies may require paying royalties or other amounts, which lowers our margins, or may otherwise be on terms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our software technologies can be delayed in production or can change in ways that negatively impact the operation of our software.
If we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies are delayed or change, our business and operating results could be adversely affected.
The uncertain economic and political environment could reduce our revenues and could have an adverse effect on our financial condition and results of operations.
The current global economic conditions and political climate could materially hurt our business in a number of ways, including longer sales and renewal cycles, exchange rate volatility, delays in adoption of our products or technologies or those of our customers, increased risk of competition, higher taxes and tariffs on goods incorporating out technologies, higher overhead costs as a percentage of revenue, delays in signing or failing to sign customer agreements or signing customer agreements with reduced royalty rates. In 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. In addition, our Chief Executive Officer, Vice President, Worldwide Sales and Customer Support, and Vice President of Engineering have left our company and we may need to recruit and retain permanent replacements for these executives. Competition for such personnel is intense, and we may not be successful in attracting, integrating, and retaining such personnel. Given the protracted nature of, if, how, and when we collect royalties on new design contracts, it may be difficult to craft compensation plans that will attract and retain the level of salesmanship needed to secure these contracts. Additionally, our compensation packages need to be competitive in the Silicon Valley where the stock component of compensation is an important factor that candidates and employees consider. Some of our executive officers and key employees hold stock options with exercise prices that may be above the current market price of our common stock or that are largely vested. Each of these factors may impair our ability to retain the services of our executive officers and key employees.

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

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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 or policies may affect our reported financial condition or results of operations and, in certain cases, could cause a decline and/or fluctuations in the price of our common stock.
From time to time, financial and accounting standard setters such as the FASB and the SEC change certain guidance governing the form and content of registrants’ external financial statements, or update their previous interpretations with regard to the application of certain General Accepted Accounting Principles ("GAAP"). Such change in GAAP or their interpretation can have a significant effect on our reported financial condition and/or results of operations. If applicable to Immersion, we would be required to apply a new or revised guidance, which may result in retrospective adjustments to our financial statements, and change the way we account for certain transaction than under the existing guidance. Changes in GAAP and reporting standards could substantially change our reporting practices in a number of areas, including revenue recognition and recording of assets and liabilities, and consequently affect our reported financial condition or results of operations.
For example, in May 2014, the FASB issued ASU 2014-09 that, once adopted by us on January 1, 2018, are expected to significantly impact the timing we recognize revenue for new and existing contracts with licensees. Under the new standard, we expect to recognize a substantial majority of license fees under a fixed-fee license agreement paid upfront upon entry into the agreement, as opposed to recognizing the license fees ratably over the term of the agreement, which has been the historical practice applied by many licensing companies, including Immersion.  For Immersion, this will impact the revenue recognition of potentially all of our existing fixed-fee patent license agreements, including certain fixed-fee agreements that cover both our current technologies and future technologies that are added to our portfolio during the term of the license. In addition, our current practice, which is shared by many licensing companies, of reporting revenues from per-unit based royalty agreements one quarter in arrears, will no longer be accepted under the new revenue standard. Instead we will be expected to estimate unit-based royalty revenues each quarter in order to report such revenue in the period in which the underlying sales occurred, which will require adjustments to be recorded in the next reporting period to true up royalty revenue based on the actual amounts reported by our licensees. Such changes to our reporting practices are expected to significantly affect our reported financial condition and/or results of operations, potentially causing the amount of revenue we recognize to vary dramatically from quarter to quarter, and even year to year, depending on the timing of entry into license agreements and whether such agreements have fixed-fee or per-unit royalty terms. In addition, these changes to our reporting practices and the resulting fluctuations in our reported revenue could cause a decline and/or fluctuations in the price of our common stock.
Our business is subject to changing regulations regarding corporate governance and other compliance areas that will increase both our costs and the risk of noncompliance.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, and the rules and regulations of The NASDAQ Stock Market and other regulations that may be enacted from time-to-time. The requirements of these and other rules and regulations have increased and we expect will continue to increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems and resources.
Our stock price may fluctuate regardless of our performance.
The stock market has experienced extreme volatility that often has been unrelated or disproportionate to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance. The market price of our common stock has been, and in the future could be, significantly affected by factors such as: actual or anticipated

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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 continue to be made under the program, nor is there any assurance that a sufficient number of shares of our common stock will be repurchased to satisfy the market’s expectations. Furthermore, there can be no assurance that any repurchases conducted under the plan will be made at the best possible price. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, we are permitted to and could discontinue our stock repurchase program at any time and any such discontinuation could cause the market price of our stock to decline.
Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our board of directors or management, including the following:
our board of directors is classified into three classes of directors with staggered three-year terms which will be phased out over time through 2019;
only our chairperson of the board of directors, a majority of our board of directors or 10% or greater stockholders are authorized to call a 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;
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and
we have implemented a stockholder rights plan.
In addition, certain provisions of Delaware law may discourage, delay, or prevent someone from acquiring or merging with us. These provisions could limit the price that investors might be willing to pay in the future for shares.

Item 1B.   Unresolved Staff Comments
None.

Item 2.  Properties
We lease a facility in San Jose, California of approximately 42,000 square feet, which serves as our corporate headquarters and includes our sales, marketing, administration, and research and development functions. The lease for this facility expires in April 2023 and we have an option to renew through April 2028.
We lease a facility in Montreal, Quebec, Canada of approximately 10,000 square feet, for our subsidiary, Immersion Canada Corporation. The facility is used for research and development and administration functions. The lease for this property expires in December 2018.

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We also lease office space in Seocho-gu, Seoul, Korea; Shanghai, China; Beijing, China; Tokyo, Japan; Mriehel, Birkirkara, Malta; and Dublin, Ireland.
We believe that our existing facilities are adequate to meet our current needs.

Item 3.  Legal Proceedings
Immersion Corporation vs. Apple, Inc., AT&T Inc., and AT&T Mobility LLC
On February 11, 2016, we filed a complaint against Apple, Inc. ("Apple"), AT&T, Inc. ("AT&T"), and AT&T Mobility LLC ("AT&T Mobility") with the U.S. International Trade Commission (the “ITC”) and a complaint against Apple, AT&T and AT&T Mobility in the U.S. District Court for the District of Delaware alleging that the Apple iPhone 6, iPhone 6 Plus, iPhone 6s, iPhone 6s Plus, Apple Watch, Apple Watch Sport and Apple Watch Edition infringe certain of our patents that cover haptic feedback systems and methods.
In the February 2016 ITC complaint, we are seeking an exclusion order preventing the importation, sale for importation, and sale after importation of infringing Apple devices into the United States by the defendants and appropriate cease and desist orders. In the U.S. District Court suit, we are alleging infringement of the same patents.
The complaints assert infringement by the Apple iPhone 6, Apple iPhone 6 Plus, Apple iPhone 6s, Apple iPhone 6s Plus, Apple Watch, Apple Watch Sport and Apple Watch Edition of the following two Immersion patents:
U.S. Patent No. 8,619,051(the '051 patent): "Haptic Feedback System with Stored Effects"
U.S. Patent No. 8,773,356 (the ‘356 patent): "Method and Apparatus for Providing Tactile Sensations"
The complaints also assert infringement by the iPhone 6s and iPhone 6s Plus of the following Immersion patent:
U.S. Patent No. 8,659,571(the '571 patent): "Interactivity Model for Shared Feedback on Mobile Devices"
On March 14, 2016, the ITC issued a Notice of Institution of Investigation stating that the ITC instituted an investigation to investigate our allegations of infringement with respect to the '051, '356, and '571 patents and determine whether violations of section 337 of the Tariff Act of 1930 have occurred. The investigation bears the designation Inv. No. 337-TA-990 ("990 Investigation"). On April 6, 2016, the Chief Administrative Law Judge (“ALJ”) entered an order terminating Respondent AT&T from the investigation, based on the stipulation and joint motion of the parties to terminate AT&T in a manner that preserved our ability to obtain discovery and compliance with any relief the ITC may order. On April 4, 2016, Respondents Apple and AT&T Mobility served responses to the complaint denying the material allegations of the complaint and alleging affirmative defenses, including among others that the asserted patents are not infringed, invalid and unenforceable. Respondents also alleged that the ‘356 patent is unenforceable for alleged inequitable conduct before the United States Patent and Trademark Office. We responded to the allegations of Respondents during the investigation on the procedural schedule set by the Chief ALJ.
On March 21, 2016, pursuant to 28 U.S.C. § 1659(a), the U.S. District Court entered an order staying the U.S. District Court case pending a final determination in the ITC investigation.
On May 5, 2016, we filed another complaint against Apple, AT&T and AT&T Mobility with the ITC and a complaint against Apple, AT&T and AT&T Mobility in the U.S. District Court for the District of Delaware alleging that the Apple iPhone 6s, iPhone 6s Plus, MacBook and MacBook Pro with Retina Display infringe certain of our patents, including patents covering pressure-related haptics.
In the May 2016 ITC complaint, we are seeking an exclusion order preventing the importation, sale for importation, and sale after importation of infringing Apple devices into the United States by the defendants and appropriate cease and desist orders. In the U.S. District Court suit, we are alleging infringement of the same patents.
The complaints assert against Apple, AT&T and AT&T Mobility claims of infringement by the Apple iPhone 6s and Apple iPhone 6s Plus of the following three Immersion patents:
U.S. Patent No. 8,749,507 (the '507 patent), "Systems and Methods for Adaptive Interpretation of Input from a Touch-Sensitive Input Device”;
U.S. Patent No. 7,808,488 (the '488 patent), "Method and Apparatus for Providing Tactile Sensations”
U.S. Patent No. 8,581,710 (the '710 patent), "Systems and Methods for Haptic Confirmation of Commands”

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The complaints also assert against Apple claims of infringement by the Apple MacBook and Apple MacBook Pro with Retina display of Immersion’s U.S. Patent No. 7,336,260 (the '260 patent), "Method and Apparatus for Providing Tactile Sensations.”
On May 9, 2016, Immersion and AT&T entered into a stipulation to terminate AT&T as a Proposed Respondent, on the same terms to which the parties agreed to terminate AT&T from the 990 Investigation.
On June 6, 2016, the ITC issued a Notice of Institution of Investigation stating that the ITC instituted an investigation to investigate our allegations of infringement with respect to the '507, '488, '710, and '260 patents and determine whether violations of section 337 of the Tariff Act of 1930 have occurred. The investigation bears the designation Inv. No. 337-TA-1004 ("1004 Investigation"). On June 9, 2016, the Chief ALJ entered an order consolidating the 990 and 1004 Investigations. On June 15, 2016, the Chief ALJ granted a joint motion by the parties to stay the 990 Investigation deadlines until a new procedural schedule could be entered in the consolidated Investigation.
On June 16, 2016, pursuant to 28 U.S.C. § 1659(a), the U.S. District Court entered an order staying the U.S. District Court case pending a final determination in the ITC investigation.
On June 27, 2016, Respondents Apple and AT&T Mobility served responses to the complaint denying the material allegations of the complaint and alleging affirmative defenses, including among others that the asserted patents are not infringed, invalid and unenforceable. Respondents also alleged that the '710 patent is unenforceable for alleged inequitable conduct before the United States Patent Office. We responded to the allegations of Respondents during the investigation on the procedural schedule set by the Chief ALJ. On June 29, 2016, the Chief ALJ entered an order setting the Markman hearing in the consolidated case for October 18, 2016, and the evidentiary hearing for April 27-May 5, 2017. On July 12, 2016, the Chief ALJ entered the procedural schedule in the consolidated Investigation.
The procedural schedule in the Investigation included, among other things, deadlines for the parties to conduct three required settlement conferences. On July 26, 2016, representatives from the Company and Respondent AT&T conducted their first settlement conference. On July 28, 2016, representatives for the Company and Respondent Apple conducted their first settlement conference. The parties did not reach an agreement to settle the dispute underlying this Investigation.
In September 2016, Respondent Apple released additional products, including the iPhone 7 and 7 plus and the Apple Watch Series 2. The Company has served discovery responses and contentions identifying these newly released products as products at issue in the Investigation.
On October 18, 2016, the Chief ALJ conducted a Markman hearing with respect to the construction of terms of the Asserted Patents. The Chief ALJ indicated at the hearing that a ruling could be expected in approximately three months.
On December 15, 2016, Respondents filed a motion for summary determination that the asserted claims 1 and 2 of the ’260 patent are invalid under 35 U.S.C. § 101 for an alleged failure to recite patentable subject matter. On December 27, 2016, the Company filed its opposition to the motion. On December 27, 2016, the Commission Investigative Staff submitted a response to the motion stating that the Staff supports the motion. On April 6, 2017, the Chief ALJ issued an order denying the motion.
On January 18, 2017, the parties participated in a one-day mediation session. The parties did not reach an agreement to resolve the dispute at the mediation.
On February 1, 2017, Respondents Apple and AT&T filed three motions for summary determination on certain issues in the Investigation. In particular, the motions requested that Chief ALJ determine:
that prosecution history estoppel precludes Immersion from asserting that the accused products and the technical domestic industry products satisfy certain limitations of the asserted patents under the doctrine of equivalents;
that (1) Respondents do not infringe claims 7 and 17 of the ’356 patent and claims 7, 11 and 15 of the ’051 patent; and (2) the Apple Watch products do not infringe the ’356 patent and Apple’s iPhone 6, 6 Plus and SE products do not infringe the ’051 patent; and
that claims 2-5, 10-12, and 15-17 of the ’507 patent are invalid under 35 U.S.C. § 112 for failing to comply with the written description requirement.
On February 2, 2017, Chief ALJ Bullock issued his Markman ruling, Order No. 27 Construing the Terms of the Asserted Claims. The Chief ALJ adopted Immersion’s proposed constructions for some disputed terms. On other terms, the Chief ALJ adopted constructions that Respondents or Staff had proposed, and on other terms the Chief ALJ fashioned his own construction.
On February 3, 2017, Immersion brought an unopposed motion for partial termination of the investigation with respect to certain contentions that were no longer being pursued. These include Immersion’s allegations of infringement as to (1) claims 7 and 17 of the ’356 patent, (2) claims 7, 11, and 15 of the ’051 patent, (3) the Apple Watch products solely with respect to the ’356

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patent, and (4) the Apple iPhone 6, 6 Plus, and SE products solely with respect to the ’051 patent. Immersion also stated in the motion its position that the request for termination as to the withdrawn allegations rendered Respondents motion for summary determination on these particular issues moot. On February 9, 2017 the Chief ALJ issued an order granting partial termination of the Investigation as to certain asserted claims of the ’356 patent and the ’051 patent as described above.
On February 10, 2017, Respondents filed a notice of withdrawal of their motion for summary determination as to the particular contentions under the ’356 patent and ’051 patent that had been withdrawn during the Investigation. On February 13, 2017, Immersion filed its oppositions to those motions for summary determination that remained pending. On February 14 and 16, 2017, the Chief ALJ issued orders denying each of Respondents’ motions for summary determination.
On March 21, 2017, Immersion brought an unopposed motion for partial termination of the investigation with respect to all claims of the ’571 patent and claims 7-10 of the ’710 patent. On March 23, 2017, the Chief ALJ issued an order granting partial termination as to the ’571 patent and certain claims of the ’710 patent as described above. On March 23, 2017, the Chief ALJ also issued a notice that the evidentiary hearing would begin on April 27, 2017 and conclude on May 4, 2017 (as opposed to May 5, 2017).
The evidentiary hearing with respect to the consolidated investigation by the United States International Trade Commission bearing the designation Inv. No. 337-TA-990/1004 commenced on April 27, 2017 and concluded on May 4, 2017. On May 31, 2017, the parties and the Office of Unfair Import Investigations ("OUII") Staff submitted their initial post-hearing briefs, and on June 7, 2017, the parties and OUII Staff submitted their post-hearing reply briefs. Before submitting these briefs, we provided a notice on May 11, 2017 that we would not be pursuing in our Post-Hearing Brief claims 3, 13, and 23 of the '356 patent. On October 20, 2017, Immersion brought an unopposed motion for partial termination of the investigation with respect to claims 3, 13, and 23 of the ’356 patent. On October 23, 2017, the Chief ALJ issued an order granting partial termination as to claims 3, 13, and 23 of the ’356 patent as described above.
The due date for the Chief ALJ’s initial determination was scheduled for August 11, 2017. On July 13, 2017, the Chief ALJ entered an order extending the due date for the Chief ALJ's initial determination from August 11, 2017 to November 13, 2017 and extending the target date for the completion of the investigation from December 11, 2017 to March 12, 2018. On October 30, 2017, the Chief ALJ issued an order extending the final initial determination date to no later than the close of business on January 31, 2018 and the final determination date to no later than May 31, 2018. On January 29, 2018, we announced that we reached a settlement with Apple resolving the investigation. On January 30, 2018, the Chief ALJ issued an Order Extending Target Date By Two Months in which he extended the target date two months in order to allow the parties sufficient time to prepare and submit a joint motion to terminate the investigation. The Chief ALJ also issued an order staying and suspending all dates and deadlines. On February 8, 2018, the parties submitted to the ITC a Joint Motion to Terminate Based on Settlement. The parties also requested confidential treatment of the settlement agreement. On February 13, 2018, the OUII Staff filed a response expressing the Staff’s support for the motion. On February 20, 2018, the Chief ALJ entered an order entitled “Initial Determination Granting Joint Motion to Terminate The Investigation Based On A Settlement Agreement.” The Chief ALJ found good cause to terminate the investigation based on the settlement and granted the parties’ motion to terminate the investigation. The Chief ALJ also granted the parties’ motion to limit service of the confidential settlement agreement to only Apple and Immersion (and not to counsel for AT&T).
On July 7, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '051 patent. The petition bears Case No. IPR2016-01371. The petition challenges the patentability of certain claims of the '051 patent in light of alleged prior art references. On October 13, 2016, we filed a Patent Owner's Preliminary Response responding to the petition's challenges to patentability of claims of the '051 patent. On January 11, 2017, the Patent Trial and Appeal Board ("PTAB" or "Board") issued a decision denying the Petition and declining to institute the IPR on February 10, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’051 patent in light of alleged prior art references. This Petition bears Case No. IPR2017-00887. We filed our Patent Owner's Preliminary Response in this IPR on May 30, 2017. On August 25, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On July 7, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '571 patent. The petition bears Case No. IPR2016-01372. The petition challenges the patentability of certain claims of the '571 patent in light of alleged prior art references. On October 13, 2016, we filed a Patent Owner's Preliminary Response responding to the petition's challenges to patentability of claims of the '571 patent. On January 11, 2017, the PTAB issued its decision instituting the IPR on certain grounds raised in the Petition. The Board’s decision also declined to institute the IPR as to certain claims of the ’571 patent. The Board set a schedule of certain due dates in the IPR. On May 31, 2017, we submitted our Patent Owner’s Response to the IPR. Apple filed its Reply to the Patent Owner's Response on August 4, 2017. On August 31, 2017, we submitted a Motion for Observation regarding the testimony of Apple's expert on cross-examination at deposition. Apple responded to these observations on September 5, 2017. On October 5, 2017, the PTAB conducted the Oral Hearing in this IPR. On January 10, 2018, the PTAB issued a Final Written Decision finding claims 1-4, 6, 23-26, and 28 of the ’571 patent unpatentable. On February 1,

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2018, the parties emailed the PTAB and requested authorization to file a joint motion to vacate final decision and terminate proceeding in IPR2016-1372 in light of the settlement between the parties. On February 2, 2018, the PTAB denied the parties’ request to file such a motion. We are currently considering whether to appeal the decision to the U.S. Court of Appeals for the Federal Circuit. A notice of appeal is due March 14, 2018. On or about February 12, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’571 patent in light of alleged prior art references. This Petition bears Case No. IPR2017-00896. We filed our Patent Owner's Preliminary Response in this IPR on May 22, 2017. On August 17, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On July 8, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '356 patent. The petition bears Case No. IPR2016-01381. The petition challenges the patentability of certain claims of the '356 patent in light of alleged prior art references. On October 12, 2016, we filed a Patent Owner's Preliminary Response responding to the petition's challenges to patentability of claims of the '356 patent. On January 11, 2017, the PTAB issued its decision instituting the IPR on certain grounds raised in the Petition. The Board set a schedule of certain due dates in the IPR. On May 31, 2017, we submitted our Patent Owner's Response to the IPR. Apple filed its Reply to the Patent Owner's Response on July 28, 2017. On August 31, 2017, we submitted a Motion for Observation regarding the testimony of Apple's expert on cross-examination at deposition. Apple responded to these observations on September 5, 2017. On October 5, 2017, the PTAB conducted the Oral Hearing in this IPR. On January 10, 2018, the PTAB issued a Final Written Decision finding claims 1-3, 5, 7, 9-13, 15, 17, 19-23, 25, and 26 of the ’356 patent unpatentable. On January 10, 2018, Apple submitted to the Chief ALJ in the ITC proceeding a Notice of Supplemental Authority Regarding the ’356 Patent to inform the Chief ALJ of the Board’s decision in this IPR. On February 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motion to vacate final decision and terminate proceeding in IPR2016-1381 in light of the settlement between the parties. On February 2, 2018, the PTAB denied the parties’ request to file such a motion. We are currently considering whether to appeal the decision to the U.S. Court of Appeals for the Federal Circuit. A notice of appeal is due March 14, 2018. On or about February 12, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’356 patent in light of alleged prior art references. This IPR bears Case No. 2017-00897. We filed our Patent Owner's Preliminary Response in this IPR on May 22, 2017. On August 17, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On August 12, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '710 patent. The petition bears Case No. IPR2016-01603. The petition challenges the patentability of certain claims of the '710 patent in light of alleged prior art references. On November 28, 2016, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’710 patent. On February 23, 2017, the PTAB issued its decision instituting the IPR on certain grounds raised in the petition. The Board set a schedule of certain due dates in the IPR. On June 28, 2017, we submitted our Patent Owner's Response in the IPR. Apple filed its Reply to the Patent Owner's Response on August 24, 2017. On October 16, 2017, we submitted a Motion for Observation regarding testimony of Apple's expert on cross-examination at deposition. On November 16, 2017, the PTAB conducted the Oral Hearing in this IPR. The matter is now submitted to the PTAB and pending decision. The PTAB’s decision is due by February 23, 2018, within one year of the institution of the IPR. On February 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motion to terminate IPR2016-1603 in light of the settlement between the parties. On February 2, 2018, the PTAB granted the request. On February 8, 2018, the parties filed a joint motion to terminate the IPR. The parties also requested confidential treatment of the settlement agreement. On February 12, 2018, the PTAB granted the parties’ joint motion to terminate the IPR as well as the parties’ joint request for confidential treatment of the settlement agreement. On or about May 4, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ‘710 patent in light of alleged prior art references. This IPR bears Case No. 2017-01368. We filed our Patent Owner's Preliminary Response on August 24, 2017. On November 7, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On September 12, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '507 patent. The petition bears Case No. IPR2016-01777. The petition challenges the patentability of certain claims of the '507 patent in light of alleged prior art references. On December 27, 2016, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’507 patent. On March 23, 2017, the Board issued its decision denying the Petition and declining to institute the IPR. On May 9, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ’507 patent in light of alleged prior art references. This IPR bears Case No. 2017-01310. We filed our Patent Owner's Preliminary Response on August 9, 2017. On November 2, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On September 23, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '260 patent. The petition bears Case No. IPR2016-01884. The petition challenges the patentability of certain claims of the '260 patent in light of alleged prior art references. On January 4, 2017, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’260 patent. In response to a request of the Petitioner, the Board also

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authorized the parties to file Reply and Sur-Reply briefs on certain issues. Petitioner filed a Reply Brief on January 31, 2017. We filed our Patent Owner’s Sur-Reply brief on February 14, 2017. On April 3, 2017, the Board issued a decision instituting the IPR on certain grounds raised in the petition. The Board has set a schedule of certain due dates in the IPR. On July 3, 2017, we submitted our Patent Owner’s Response in the IPR. Apple filed its Reply to the Patent Owner's Response on October 10, 2017. The Oral Hearing took place on January 10, 2018. The matter is now submitted to the PTAB and pending decision. The PTAB’s decision is due by April 3, 2018, within one year of the institution of the IPR. On February 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motion to terminate IPR2016-1884 in light of the settlement between the parties. On February 2, 2018, the PTAB granted the request. On February 8, 2018, the parties filed a joint motion to terminate the IPR. The parties also requested confidential treatment of the settlement agreement. The PTAB has not yet ruled on the joint motion. On or about May 4, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ‘260 patent in light of alleged prior art references. This IPR bears Case No. 2017-01369. We filed our Patent Owner's Preliminary Response on August 24, 2017. On November 21, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On September 29, 2016, Apple filed in the United States Patent and Trademark Office a petition for inter partes review of the '488 patent. The petition bears Case No. IPR2016-01907. The petition challenges the patentability of certain claims of the '488 patent in light of alleged prior art references. On January 5, 2017, we filed a Patent Owner's Preliminary Response responding to the petition’s challenges to patentability of claims of the ’488 patent. In response to a request of the Petitioner, the Board authorized the parties to file Reply and Sur-Reply briefs. Petitioner filed a Reply Brief on January 31, 2017. We filed our patent owner’s Sur-Reply brief on February 14, 2017. On April 3, 2017, the Board issued a decision instituting the IPR on certain grounds raised in the petition. The Board has set a schedule of certain due dates in the IPR. On July 3, 2017, we filed our Patent Owner's Response in the IPR. Apple filed its Reply to the Patent Owner's Response on October 10, 2017. The Oral Hearing took place on January 10, 2018. The matter is now submitted to the PTAB and pending decision. The PTAB’s decision is due by April 3, 2018, within one year of the institution of the IPR. On February 1, 2018, the parties emailed the PTAB and requested authorization to file a joint motion to terminate IPR2016-1907 in light of the settlement between the parties. On February 2, 2018, the PTAB granted the request. On February 8, 2018, the parties filed a joint motion to terminate the IPR. The parties also requested confidential treatment of the settlement agreement. The PTAB has not yet ruled on the joint motion. On or about May 4, 2017, Apple submitted in the United States Patent and Trademark Office a second IPR petition challenging the patentability of certain claims of the ‘488 patent in light of alleged prior art references. This IPR bears Case No. 2017-01371. We filed our Patent Owner's Preliminary Response on August 24, 2017. On November 21, 2017, the PTAB issued a decision denying Apple's petition and declining to institute the second IPR.
On October 26, 2017, we filed a patent infringement lawsuit in the Beijing High People’s Court against Apple Computer Trading (Shanghai) Co., Ltd., Apple Electronic Product Commerce (Beijing) Co., Ltd., and Apple Trading (Shanghai) Co., Ltd. alleging that the iPhone 6s, iPhone 6s Plus, iPhone 7, iPhone 7 Plus, iPhone 8 and iPhone 8 Plus infringe our Chinese patents ZL02821854.X and ZL200810008845.X. We are seeking a permanent injunction preventing the importation, sale and offering for sale of the iPhone products noted above in China as well as damages. As noted above, on January 29, 2018, we announced that we reached a settlement with Apple resolving the above-described litigation. This case is now in the process of being withdrawn from the court.
Although we believe we have strong claims, the outcome of litigation and the pending IPRs is inherently uncertain.
Immersion Corporation v. FitBit and Runtong International Trade Co., Ltd. (Shanghai Intellectual Property Court)
On June 29, 2017, local counsel for Immersion filed a patent infringement lawsuit against Fitbit, Inc. (“Fitbit”) in the Shanghai Intellectual Property Court alleging that Fitbit has infringed three of our China patents. The three patents at issue are China Patent No. CN101305416B, entitled “methods and systems for providing haptic messaging to handheld communication devices”; No. CN102187647B, entitled “systems and methods for mapping message contents to virtual physical properties for sending vibrotactile messaging”; and No. CN102160366B, entitled “systems and methods for transmitting haptic messages.” The Shanghai Intellectual Property Court accepted the case on July 7, 2017. Notices for Invalidation have been filed for China Patent Nos. CN101305416B and CN102160366B, and responses are due February 28 and 23, 2018, respectively.
Immersion Corporation v. Fitbit, Inc., Case No. 5:17-cv-03886-LHK (N.D. Cal.)
On July 10, 2017, we filed a patent infringement lawsuit against Fitbit in the U.S. District Court for the Northern District of California alleging that Fitbit has infringed three of our U.S. Patents. The three patents at issue are U.S. Patent No. 8,351,299, which covers “Apparatus and Method for Providing Condition-Based Vibrotactile Feedback”; No. 8,059,105, entitled “Haptic Feedback for Touchpads and Other Touch Controls”; and No. 8,638,301, for “Systems and Methods for Transmitting Haptic Messages.” Generally, these U.S. patents cover “touch-feedback” - or haptic feedback - devices, systems and methods. Fitbit devices alleged to infringe include the Fitbit Flex, Fitbit Flex 2, Fitbit Alta, Fitbit Alta HR, Fitbit Charge, Fitbit Charge 2, Fitbit

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Charge HR, Fitbit Blaze and Fitbit Surge. We served Fitbit with the Complaint, among other papers, on July 11, 2017. On October 4, 2017, in lieu of answering, Fitbit filed a Motion to Dismiss pursuant to 12(b)(6) based on 35 USC § 101. The hearing on Fitbit’s Motion to Dismiss was set for February 15, 2018. The parties attended an Initial Case Management Conference on October 18, 2017. The claim construction hearing has been scheduled for May 10, 2018, and the trial date has been scheduled for May 6, 2019. On November 1, 2017, we filed our response to Fitbit’s motion to dismiss. On February 8, 2018, the parties participated in Court-ordered mediation of the U.S. district court case. On February 13, 2018, the Court took Fitbit’s Motion to Dismiss under submission without oral argument and vacated the hearing previously set for February 15, 2018.
On February 7, 2018, Fitbit filed in the United States Patent and Trademark Office two petitions for inter partes review (IPR) of the ‘105 patent (Case Nos. IPR2018-00588 and IPR2018-00590); a petition for inter partes review of the ‘299 patent (Case No. IPR2018-00591); and two petitions for inter partes review of the ‘301 patent (Case Nos. IPR2018-00592 and IPR2018-00593). The Patent Owner’s Preliminary Responses for Immersion to respond to the petitions’ challenges (Case Nos. IPR2018-00588 and IPR2018-00590) to patentability of the claims of the ‘105 patent are due May 15, 2018. The last day for the Patent Trial and Appeal Board to decide whether to institute such IPR is August 15, 2018.
Immersion Corporation vs. Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc.
On August 3, 2017, we filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (collectively, “Samsung”) in the United States District Court for the Eastern District of Texas alleging that certain Samsung touchscreen phones, including those phones that Samsung had not commenced commercially producing, distributing and selling before January 1, 2016 (the “Accused Phones”), infringe certain of our patents that cover haptic feedback systems and methods. In the complaint, we are seeking to stop Samsung from further infringement as well as the recovery of damages. The complaints assert infringement by the Accused Phones of the following patents:
U.S. Patent No 6,429,846: "Haptic Feedback for Touchpads and Other Touch Controls"
U.S. Patent No 7,969,288: "Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device"
U.S. Patent No 9,323,332: “Force Feedback System Including Multi-Tasking Graphical Host Environment”
U.S. Patent No 7,982,720: "Haptic Feedback for Touchpads and Other Touch Controls"
U.S. Patent No 8,031,181: "Haptic Feedback for Touchpads and Other Touch Controls"
Samsung filed a response to the Complaint on October 24, 2017.
On December 15, 2017, the Court issued a Docket Control Order setting the claim construction hearing for August 15, 2018 and the first day of jury selection for February 4, 2019.
Immersion Corporation vs. Motorola Mobility LLC and Motorola Mobility Holdings LLC
On August 3, 2017, we filed a complaint against Motorola Mobility LLC and Motorola Mobility Holdings LLC (collectively, “Motorola”) in the United States District Court for the District of Delaware alleging that certain Motorola touchscreen phones, including the Moto G4, Moto G4 Play, Moto G4 Plus, Moto G5, Moto G5 Plus, Moto Z, Moto Z Force and Moto Z Play (the “Accused Phones”), infringe certain of our patents that cover haptic feedback systems and methods. In the complaint, we are seeking to stop Motorola from further infringement as well as the recovery of damages. The complaints assert infringement by the Accused Phones of the following patents:
U.S. Patent No 6,429,846: "Haptic Feedback for Touchpads and Other Touch Controls"
U.S. Patent No 7,969,288: "Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device"
U.S. Patent No 9,323,332: “Force Feedback System Including Multi-Tasking Graphical Host Environment”
U.S. Patent No 7,982,720: "Haptic Feedback for Touchpads and Other Touch Controls"
U.S. Patent No 8,031,181: "Haptic Feedback for Touchpads and Other Touch Controls"
On September 25, 2017, Motorola filed its Answer to the Complaint.
On December 5, 2017, the Court issued a Scheduling Order setting the claim construction hearing for September 12, 2018, and the trial date for September 23, 2019.

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Samsung Electronics Co. v. Immersion Corporation and Immersion Software Ireland Limited
On April 28, 2017, we received a letter from Samsung requesting that we reimburse Samsung with respect to withholding tax and penalties imposed on Samsung by the Korean tax authorities following an investigation where the tax authority determined that Samsung failed to withhold taxes on Samsung’s royalty payments to Immersion Software Ireland from 2012 to 2016.  On July 12, 2017, we filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes and penalties.
On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against us demanding that we reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities.  Samsung is requesting that we pay Samsung the amount of KRW 7,841,324,165 (approximately $6.3 million) plus interest from and after May 2, 2017, plus the cost of the arbitration including legal fees. We deny liability, and have asked the International Chamber of Commerce to postpone the arbitration until the tax appeal is resolved. The arbitration panel conducted an initial status conference on February 7, 2018. The International Chamber of Commerce denied our motion to postpone the arbitration, and has circulated a draft procedural schedule that would set the hearing date for July 23, 2018. We believe that there are valid defenses to all of the claims from the Korean tax authorities and that Samsung’s claims are without merit. We intend to vigorously defend against these claims and as a result, we have concluded that the likelihood of a material charge resulting from this claim is remote. In the event Samsung were to prevail in the arbitration in advance of the conclusion of the appeal with the Korea Tax Tribunal, we could be required to make a payment to Samsung even though it would later be reimbursed should we prevail in the appeal.
We cannot predict the ultimate outcome of the above-mentioned actions, and we are unable to estimate any potential liability we may incur. Please also refer to our disclosures in Contingencies, Note 14 to the Consolidated Financial Statements.

Item 4.   Mine Safety Disclosures
Not applicable.


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PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Market under the symbol “IMMR.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock on such market.
 
High
 
Low
Fiscal year ended December 31, 2017
 
 
 
Fourth Quarter
$
8.50

 
$
5.87

Third Quarter
$
8.96

 
$
6.61

Second Quarter
$
9.17

 
$
7.99

First Quarter
$
11.67

 
$
8.05

Fiscal year ended December 31, 2016
 
 
 
Fourth Quarter
$
11.92

 
$
7.01

Third Quarter
$
8.49

 
$
6.24

Second Quarter
$
8.53

 
$
5.90

First Quarter
$
11.45

 
$
6.63

On February 20, 2018, the closing price was $9.79 per share and there were 79 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
On December 26, 2017, our Board declared a dividend of one right (a “Right”) for each of our issued and outstanding shares of common stock, par value $0.001 per share. The dividend was paid to the stockholders of record at the close of business on January 8, 2018 (the “Record Date”). Each Right entitles the holder to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $30.00 (the “Exercise Price”), subject to certain adjustments. Please refer to the description of such rights in our Form 8-K filed on December 27, 2017 which is incorporated by reference.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and we frequently evaluate uses of our cash. We do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain any earnings to fund future growth, product development, and operations.
Company Stock Performance Graph
The information contained in the Performance Graph shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, as amended, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act, as amended, or the Exchange Act.
The graph below depicts a five-year comparison of cumulative total shareholder returns for Immersion common stock, the NASDAQ Composite Index, and the RDG Technology Composite Index. The graph assumes an investment of $100 for the five-year period commencing on December 31, 2012 and ending on December 31, 2017, in Immersion’s common stock, and in the NASDAQ Composite and the RDG Technology Composite indices, and reinvestment of dividends, if any.
The comparison below is based on historical data, and Immersion cautions that the stock price performance shown in the graph is not indicative of, nor intended to forecast, the potential future performance of Immersion’s common stock. Information used in the graph was obtained from a source believed to be reliable, but Immersion is not responsible for any errors or omissions in such information.


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http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12085971&doc=14
 
 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Immersion Corporation
$
100

 
$
151

 
$
138

 
$
170

 
$
155

 
$
103

NASDAQ Composite
100

 
142

 
162

 
173

 
187

 
242

RDG Technology Composite
100

 
133

 
155

 
161

 
181

 
248

Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference herein to Note 6 to our consolidated financial statements.

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Item 6.   Selected Financial Data
The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for each of the years ended December 31, 2017, 2016, and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial statements and accompanying notes, included in this Annual Report on Form 10-K. The selected consolidated statement of operations data for each of the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements which are not included in this report.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
Revenues
$
35,013

 
$
57,086

 
$
63,393

 
$
52,937

 
$
47,470

Costs and expenses
80,435

 
72,349

 
58,674

 
46,970

 
43,866

Operating income (loss)
(45,422
)
 
(15,263
)
 
4,719

 
5,967

 
3,604

Income tax benefit (provision) from continuing operations
(480
)
 
(25,521
)
 
(1,591
)
 
(2,196
)
 
36,483

Income (loss) from continuing operations
(45,291
)
 
(40,030
)
 
2,858

 
4,123

 
40,155

Income from discontinued operations

 
649

 

 

 

Net income (loss)
(45,291
)
 
(39,381
)
 
2,858

 
4,123

 
40,155

Basic net income (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(1.55
)
 
$
(1.39
)
 
$
0.10

 
$
0.15

 
$
1.42

Discontinued operations

 
0.02

 

 

 

Total
$
(1.55
)
 
$
(1.37
)
 
$
0.10

 
$
0.15

 
$
1.42

Shares used in calculating basic net income (loss) per share
29,179

 
28,759

 
28,097

 
28,246

 
28,190

Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(1.55
)
 
$
(1.39
)
 
$
0.10

 
$
0.14

 
$
1.37

Discontinued operations

 
0.02

 

 

 

Total
$
(1.55
)
 
$
(1.37
)
 
$
0.10

 
$
0.14

 
$
1.37

Shares used in calculating diluted net income (loss) per share
29,179

 
28,759

 
29,015

 
29,144

 
29,338

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and short-term investments
$
46,538

 
$
89,772

 
$
64,931

 
$
57,361

 
$
71,112

Working capital
28,980

 
73,008

 
53,749

 
58,025

 
64,249

Total assets
51,975

 
103,767

 
105,415

 
97,521

 
110,575

Total stockholders’ equity
9,657

 
55,340

 
86,615

 
76,603

 
80,671



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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act, as amended. The forward-looking statements involve risks and uncertainties. Forward-looking statements are frequently identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements, which refer to expectations, projections, or other characterizations of future events or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth in Item 1A, “Risk Factors,” those described elsewhere in this report, and those described in our other reports filed with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to release the results of any revisions to these forward-looking statements that could occur after the filing of this report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, stock-based compensation, short-term investments, patents and intangible assets, income taxes, contingencies, and litigation. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
We believe the following are our most critical accounting policies as they require our significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue Recognition
We recognize revenues in accordance with applicable accounting standards, including Accounting Standards Codification (“ASC”) 605-10-S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”), and ASC 985-605, “Software-Revenue Recognition” (“ASC 985-605”). We derive our revenues from two principal sources: royalty and license fees, and development contract and service fees. As described below, management judgments, 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 our revenue for any period based on the judgments and estimates made by our management. Specifically, in connection with each transaction, we must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is probable. We apply these criteria as discussed below.
Persuasive evidence of an arrangement exists. For a license arrangement, we require a written contract, signed by both the customer and us.
Delivery has occurred. We deliver software electronically. Delivery occurs when we provide the customer access codes or “keys” that allow the customer to take immediate possession of the software.
The fee is fixed or determinable. Our arrangement fee is based on the use of standard payment terms which are those that are generally offered to the majority of customers. For transactions involving extended payment terms, we deem these fees not to be fixed or determinable for revenue recognition purposes and revenue is deferred until the fees become due and payable.
Collectability is probable. To recognize revenue, we must judge collectability of fees, which we do on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For new customers, we evaluate the customer’s financial condition and ability to pay. If we determine that collectability is not probable based upon our credit review process or the customer’s payment history, we recognize revenue when payment is received.
Royalty and license revenue — We license our patents and software to customers in a variety of industries such as mobility, gaming, automotive, and medical devices. Revenues that are derived from the sale of a licensee's products that incorporate our IP are classified as royalty revenues. The terms of the royalty agreements generally require licensees to give notification of royalties due to us within 30 – 45 days of the end of the quarter during which their related sales occur. As we are unable to reliably estimate the licensees’ sales in any given quarter to determine the royalties due to us, we recognize royalty revenues based on

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royalties reported by licensees and when all revenue recognition criteria are met. Certain royalties could be subject to change and may result in out of period adjustments depending on the specific terms of the arrangement. We also enter into fixed license fee arrangements. We recognize fixed license fee revenue when earned under the terms of the agreements, which generally results in recognition on a straight-line basis over the expected term of the license.
Development, services, and other revenue — Development, services, and other revenue are composed of engineering services (engineering services and/or development contracts), and in limited cases, post contract customer support (“PCS”). Engineering services revenues are recognized under the proportional performance accounting method based on the completion of the work to be performed or completed performance method. A provision for losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Revisions in estimates are reflected in the period in which the conditions 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 — We enter into multiple element arrangements in which customers purchase time-based non-exclusive licenses that cannot be resold to others, which include a combination of software and/or IP licenses, engineering services, and in limited cases, PCS. For arrangements that are software based with an engineering services component, the services are generally not essential to the functionality of the software, and customers may purchase engineering services from the Company to facilitate the adoption of our technology, but they may choose to use their own resources or appoint other engineering service organizations to perform these services. For arrangements that are in substance subscription arrangements, the entire arrangement fee is recognized ratably over the contract term, subject to any limitations related to extended payment terms. For arrangements involving upfront fees for services and royalties earned by us based on units sold or sales volumes of the respective licensed products, and the services are performed ratably over the arrangement or are front-end loaded, the upfront fees are recognized ratably over the contract term, and royalties based on units sold or sales volume are recognized when they become fixed and determinable. As we are unable to reliably estimate the licensees’ sales in any given quarter to determine the royalties due to us, we recognize per unit or sales volume driven royalty revenues based on royalties reported by licensees and when all revenue recognition criteria are met.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
Valuation and amortization methods — We use the Black-Scholes-Merton option pricing model (“Black-Scholes model”), single-option approach to determine the fair value of standard stock options and Employee Stock Purchase Plan (“ESPP”) shares. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. We estimate future forfeitures at the date of grant and revise the estimates if necessary, in subsequent periods if actual forfeitures differ from these estimates. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include actual and projected employee stock option exercise behaviors that impact the expected term, our expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.
We use the Monte-Carlo Simulation model to value our stock options with a market condition. Valuation techniques such as the Monte-Carlo Simulation model have been developed to value path-dependent awards. The Monte-Carlo Simulation model is a generally accepted statistical technique used, in this instance, to simulate a range of our future stock prices.
The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and ESPP shares. Existing valuation models, including the Black-Scholes model and the Monte-Carlo Simulation, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination, or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire and be worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating results.

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See Note 6 to the consolidated financial statements for further information regarding stock-based compensation.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes as prescribed in ASC 740, Income Taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax losses, and credit carryforwards. This method requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the ASC 740 more-likely-than-not realization ("MLTN") threshold criterion. This assessment considers matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the recoverability of the deferred tax assets requires that the Company weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified.
Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws including the 2017 Tax Cuts and Jobs Act (the "Tax Act"), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our judgments, assumptions, and estimates are reasonable, changes in tax laws or our interpretation of tax laws and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render inaccurate our current assumptions, judgments, and estimates of recoverable net deferred tax assets. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Certain portions of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. Our income tax rate depends in part on the extent to which our foreign earnings may be taxed by the U.S. through new provisions under the Tax Act such as the new GILTI tax or as a result of our indefinite reinvestment assertion. Indefinite reinvestment is determined by management’s judgment about and intentions concerning our future operations.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected 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. 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 consolidated financial statements for further information concerning income taxes.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.
Results of Operations
Overview of 2017
Revenues for 2017 were $35.0 million, a decrease of $22.1 million, or 39%, versus 2016. The decrease in total revenue was primarily caused by a one-time fee of $19.0 million from Samsung that we recognized as license revenue in 2016, along with decreased revenue from medical and gaming markets. These decreases were partially offset by increased revenue from our automotive customers.

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Net loss for 2017 was $45.3 million, compared to net loss of $39.4 million for 2016. The increase of $5.9 million in net loss was primarily related to a decrease of $22.1 million in total revenue, an increase of $8.1 million in operating expenses mainly driven by higher legal expenses from our continuing efforts to protect and preserve our IP including our recently settled and concluded litigation against Apple and AT&T Mobility, and a decrease of $649,000 in income from discontinued operations related to a transaction recognized during 2016 that did not recur in 2017. These factors were partially offset by a decrease of $25.0 million in income tax provision caused by a non-cash valuation allowance charge of $28.1 million in 2016. We recorded the charge in the fourth quarter of 2016 against our deferred tax assets that resulted in a tax provision of $25.5 million for 2016 as compared to $480,000 for 2017. See Note 10 to the consolidated financial statements for additional information on our income taxes.
In 2018, we expect royalty and license revenue, mainly from mobility customers, to remain the major component of our revenue as our technology continues to be included in our licensees’ products and as we continue to execute our licensing program in the mobility market. Our gaming royalty and license revenue could be adversely impacted in 2018 by the expiration of several gaming patents in 2016. Revenue from certain contracts may also decrease due to timing and uncertainty associated with their renewals. IP litigation may continue to cause us to expend significant financial resources in the future and may have an adverse effect on the results of our operations. Additionally, our success could be limited by various factors, including global economic conditions, foreign currency exchange rates, the timely release of our new products and our licensees’ products, continued market acceptance of our products and technology, and the introduction of new products by existing or new competitors and adverse rulings affecting our patents. For a further discussion of these and other risk factors, see Item 1A, “Risk Factors.”
The following table sets forth our consolidated statements of income data as a percentage of total revenues:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
Royalty and license
97.4
 %
 
98.2
 %
 
97.3
 %
Development, services, and other
2.6

 
1.8

 
2.7

Total revenues
100.0

 
100.0

 
100.0

Costs and expenses:
 
 
 
 
 
Cost of revenues
0.6

 
0.3

 
0.7

Sales and marketing
38.6

 
25.6

 
23.2

Research and development
33.6

 
23.5

 
23.3

General and administrative
152.4

 
77.3

 
45.4

Restructuring Costs
4.6

 

 

Total costs and expenses
229.8

 
126.7

 
92.6

Operating income (loss)
(129.7
)
 
(26.7
)
 
7.4

Interest and other income
1.0

 
1.4

 
0.3

Other expense
0.8

 
(0.1
)
 
(0.7
)
Income (loss) from continuing operations before provision for income taxes
(127.9
)
 
(25.4
)
 
7.0

Provision for income taxes from continuing operations
(1.4
)
 
(44.7
)
 
(2.5
)
Income (loss) from continuing operations
(129.3
)
 
(70.1
)
 
4.5

Income from discontinued operations, net of tax

 
1.1

 

Net income (loss)
(129.3
)%
 
(69.0
)%
 
4.5
 %

Revenues
 
2017
 
$ Change
 
% Change
 
2016
 
$ Change
 
% Change
 
2015
($ in thousands)
 
Royalty and license
$
34,089

 
$
(21,941
)
 
(39
)%
 
$
56,030

 
$
(5,647
)
 
(9
)%
 
$
61,677

Development, services, and other
924

 
(132
)
 
(13
)%
 
1,056

 
(660
)
 
(38
)%
 
1,716

Total revenue
$
35,013

 
$
(22,073
)
 
(39
)%
 
$
57,086

 
$
(6,307
)
 
(10
)%
 
$
63,393


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2017 Compared to 2016
Royalty and license revenue - Royalty revenue represents variable royalties earned from licensees’ usage or sales under per-unit royalty arrangements. License revenue represents fixed fees charged for our IP and software based on fixed-fee arrangements. Royalty and license revenue for 2017 was $34.1 million, a decrease of $21.9 million, or 39%, compared to $56.0 million for 2016.
Variable royalty revenue decreased by $4.1 million, or 16%, to $21.5 million for the year ended December 31, 2017, compared to $25.6 million for the year ended December 31, 2016. The decrease was primarily caused by expired contracts with certain OEMs and decreased volume from our gaming, mobility and medical customers.
Fixed payment license revenue decreased by $17.8 million, or 59%, to $12.6 million for the year ended December 31, 2017, compared to $30.4 million for the year ended December 31, 2016. The decrease was mainly derived from decreased mobility license revenue, which was primarily caused by a one-time fee of $19.0 million from Samsung recognized as license fee in 2016. The decrease in fixed payment license revenue was also related to decreased medical license revenue which was primarily due to a non-recurring license fee of $3.0 million recognized in 2016, and decreased gaming license revenue due to an expired contract with a certain OEM. These decreases were partially offset by increased license fees from our new and existing OEM customers in mobility and gaming markets that we recognized in 2017.
Royalty and license revenue from mobility customers decreased by 48% primarily due to a one-time fee of $19.0 million from Samsung recognized in 2016 and decreased royalties from our mobility customers. The decreases were partially offset by increased license fees from our new and existing OEM mobility customers that we recognized in 2017. We anticipate that our mobility business will continue to be the primary revenue stream in 2018.
Royalty and license revenue from gaming customers decreased by 23% primarily due to decreased gaming license fees mainly caused by expired contracts with certain OEMs and decreased gaming royalty revenue as a result of lower volume of sales that drove down the per-unit royalty revenue during 2017. This decrease was partially offset by increased license fees from certain of our gaming customers. Revenue from gaming customers can fluctuate based upon consumer gaming preferences, the timing of introductions of new gaming console systems, the timing of new products from third party peripheral makers that are our licensees, and the recognition by gaming customers of the relevance of our IP.
Royalty and license revenue from automotive customers increased 28% primarily attributable to new license agreements entered into with automotive OEMs during 2017 that drove up automotive license revenue by over 100% compared to 2016. Automotive royalty revenue increased, at a smaller scale, by 10% during 2017 compared to 2017. The increase in automotive royalty and license revenue reflects increasing recognition of our haptic technology incorporated in automotive products. We anticipate that our automotive business will continue to grow in 2018.
Royalty and license revenue decreased by 70% from medical customers primarily due to a non-recurring license fee of $3.0 million recognized in 2016, and decreased medical royalty revenue due to expired contracts with certain medical customers.
We expect royalty and license revenue to continue to be the major component of our future revenue sources as our technology continues to be included in products and we continue our efforts to monetize our IP. We typically experience seasonally higher revenue from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter compared to other calendar quarters. Our gaming royalty and license revenue could be adversely impacted in 2018 by the expiration of several gaming patents in 2016. Revenue may also decrease due to timing and a lack of contract renewals.
Development, services, and other revenue - Development, services, and other revenue is comprised primarily of development work, implementation support, and other contract engineering services provided to customers. Development, services, and other revenue for 2017 decreased by $132,000, or 13%, versus 2016, mainly due to a non-recurring service fees from contracts completed in the prior year. We continue to focus our engineering resources on development efforts that leverage our existing sales and channel distribution capabilities. Accordingly, we do not expect development, services, and other revenue to be a significant part of total revenues in the future.
Geographically, revenues generated in North America, Europe, and Asia during 2017 represented 22%, 15%, and 63%, respectively, of our total revenue as compared to 32%, 8%, and 60%, respectively, for 2016. Revenue attributable to North America as a percentage of total revenue decreased primarily due to decreased license revenue from gaming and medical. Revenue attributable to Europe as a percentage of total revenue increased primarily due to increased royalty revenue from gaming and automotive. Revenue attributable to Asia as a percentage of total revenue for 2017 remained flat compared to 2016.
2016 Compared to 2015

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Royalty and license revenue — Royalty and license revenue for 2016 was $56.0 million, a decrease of $5.6 million, or 9%, compared to $61.7 million for 2015.
Variable royalty revenue based on shipping volumes and per unit prices decreased by $4.2 million, or 14%, to $25.6 million for the year ended December 31, 2016, compared to $29.8 million for the year ended December 31, 2015. The decrease was primarily caused by decreased volume from our gaming, mobility, and medical customers.
Fixed payment license revenue decreased by $1.5 million, or 5%, to $30.4 million for the year ended December 31, 2016, compared to $31.9 million for the year ended December 31, 2015. The decrease was primarily related to the decrease in mobility license revenue due to a one-time licensing fee of $2.0 million recorded in the second quarter of 2015 that did not recur in 2016, and certain of our license agreements with our mobility customers that expired prior or during 2016, including our previous license agreement with Samsung that expired at the end of 2015. The decrease in mobility license revenue was further offset by a non-recurring license fee of $3.0 million from a medical customer and increased license fees from new gaming customers we signed during 2016.
Royalty and license revenue from mobility customers decreased by 17% primarily due to a non-recurring license fee of $2.0 million from a completed contract with a mobility customer in the prior year that did not recur in 2016, along with decreased recurring license revenue from our previous license agreements, including Samsung that expired at the end of 2015. In the first quarter of 2016, we filed an arbitration requesting that Samsung be ordered to comply with its obligation under the Samsung License, including ceasing distributing devices previously licensed under the Samsung License and paying damages suffered by us. On July 12, 2016, we entered into an amendment to the original agreement to permit Samsung to exercise Product Life Cycle Wind Down Rights in exchange for a fee of $19.0 million which we recognized as license revenue during 2016 that partially offset the decreased mobility license revenue. Pursuant to the amendment, we agreed to terminate the arbitration proceedings and release each other for a variety of matters.
Royalty and license revenue from gaming customers decreased by 9% primarily due to the decreased volume of sales by our licensees that drove down the per-unit royalty revenue during 2016. This decrease was partially offset by increased license fees from new gaming customers.
Royalty and license revenue from automotive customers remained relatively flat compared to 2015.
Royalty and license revenue increased by 46% from medical customers primarily due to a non-recurring license fee of $3.0 million partially offset by reduced royalties from other medical customers.
Development, services, and other revenue — Development, services, and other revenue for 2016 decreased by $660,000, or 38%, versus 2015, mainly due to a decreased non-recurring service fees from contracts completed in prior year.
Geographically, revenues generated in North America, Europe, and Asia during 2016 represented 32%, 8%, and 60%, respectively, of our total revenue as compared to 28%, 5%, and 67%, respectively, for 2015. Revenue attributable to North America as a percentage of total revenue increased primarily due to increased license revenue from medical, partially offset by decreased royalty revenue from gaming and mobility. Revenue attributable to Europe as a percentage of total revenue increased primarily due to increased royalty revenue from gaming and automotive, partially offset by decreased royalty revenue from medical. Revenue attributable to Asia as a percentage of total revenue decreased primarily from decreased royalty and license revenue from mobility and, to a lesser extent, decreased royalty revenue from gaming and automotive.

Expenses


2017
 
$ Change
 
% Change
 
2016
 
$ Change
 
% Change
 
2015
($ in thousands)
 
 
 
Sales and marketing
$
13,516

 
$
(1,097
)
 
(8
)%
 
$
14,613

 
$
(61
)
 
 %
 
$
14,674

Research and development
11,759

 
(1,629
)
 
(12
)%
 
13,388

 
(1,397
)
 
(9
)%
 
14,785

General and administrative
53,343

 
9,192

 
21
 %
 
44,151

 
15,396

 
54
 %
 
28,755

Restructuring Costs
1,620

 
1,620

 
100
 %
 

 

 
 %
 

Sales and Marketing - Our sales and marketing expenses are composed primarily of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and allocated facilities costs. Sales and marketing expenses decreased $1.1 million, or 8%, for 2017 as compared to 2016 primarily due to decreases of $894,000 in compensation, benefits, and other related costs and $462,000 in consulting and outside services, partially

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offset by an increase of $135,000 in travel costs. The decrease of $894,000 in compensation, benefits, and other related costs was primarily caused by lower bonus and commissions due to lower revenue achievements and reduced headcount in 2017 as compared to 2016. The decrease of $462,000 in consulting and outside services was mainly related to our reduced spending on the content and media business. While we will continue to invest in sales and marketing to further market acceptance for our touch technologies, we anticipate that our sales and marketing expenses will decrease significantly in 2018 as a result of the restructuring actions taken in December 2017. See Note 8, Restructuring Costs, for details.
Sales and marketing expense for 2016 was relatively flat as compared to 2015.
Research and Development - Our research and development expenses are composed primarily of employee compensation and benefits, consulting fees, tooling and supplies, and allocated facilities costs. Research and development expenses decreased by $1.6 million, or 12%, during 2017 as compared to 2016. The decrease was primarily due to a $1.9 million decrease in compensation, benefits, and other related costs resulted from decreased headcount, partially offset by a $648,000 increase in outside services expense as a reflection of our redirected development efforts. We believe that continued investment in research and development is critical to our future success, and we expect to continue to make investments in areas of research and development to support future growth.
Research and development expenses decreased by $1.4 million, or 9%, during 2016 as compared to 2015. The decrease was primarily due to a $504,000 decrease in compensation, benefits, and other related costs and a $216,000 decrease in travel costs, both resulted from decreased headcount, and a $661,000 decrease in consulting services expense as a reflection of our redirected development efforts.
General and Administrative - Our general and administrative expenses are primarily composed of employee compensation and benefits, legal and professional fees, external legal costs for patents, office supplies, travel, and allocated facilities costs. General and administrative expenses for 2017 increased $9.2 million, or 21%, as compared to 2016. The increase was primarily related to a $7.6 million increase in legal expense, a $757,000 increase in compensation, benefits, and other related costs primarily caused by severance accruals and stock compensation expense that we recorded in the fourth quarter of 2017 in connection with the departure of the former CEO, and a $340,000 increase in professional and outside services. The increase in legal expense was primarily driven by a $8.1 million increase in litigation expense relating to ongoing litigations including our recently settled and concluded litigation with Apple and AT&T Mobility, a $966,000 increase in patent related legal, filing, and maintenance costs, and a $884,000 increase in general legal services, partially offset by a $2.4 million decrease in license fee expenses. Our general and administrative expenses will continue to be significant in 2018 as 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 that we initiate against others to enforce our IP or contractual rights.
General and administrative expenses for 2016 increased $15.4 million, or 54%, as compared to 2015. The increase was primarily related to a $15.2 million increase in legal expense and a $1.0 million increase in compensation, benefits, and other related costs as a result of increased headcount and stock compensation expense for 2016. The increased legal and professional fees were primarily due to a $13.9 million increase in litigation expense relating to ongoing litigations including the recently settled and concluded litigation with Apple and AT&T Mobility, and a $1.2 million increase in patent related legal, filing, and maintenance costs. These increases in general and administrative expenses were partially offset by a $676,000 decrease in professional and outside services mainly due to reduced accounting and tax services as we completed the reorganization of our international operations in 2015.

Interest and Other Income, Other Expense
 
2017
 
$ Change
 
% Change
 
2016
 
$ Change
 
% Change
 
2015
($ in thousands)
 
 
 
 
 
 
 
 
 
Interest and other income
$
337

 
$
(480
)
 
(59
)%
 
$
817

 
$
640

 
362
 %
 
$
177

Other expense
$
274

 
$
337

 
100
 %
 
$
(63
)
 
$
384

 
(86
)%
 
$
(447
)
Interest and Other Income - Interest and other income consists primarily of interest income from cash and cash equivalents and short-term investments, interest on notes receivable, translation exchange rate gains and other income. Interest and other income decreased in 2017 compared to 2016 primarily due to a non-recurring other income of $550,000 received in the third quarter of 2016. Interest and other income increased in 2016 compared to 2015 primarily due to that non-recurring other income of $550,000 received in the third quarter of 2016.

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Other Income (Expense) - Other income (expense) consist primarily of translation gain (loss) from exchange rate fluctuations. We recorded $274,000 other income for 2017, compared to $63,000 other expense for 2016 as a result of exchange rate losses from our foreign subsidiaries. Other expense decreased in 2016 compared to 2015 as a result of exchange rate gains from our foreign subsidiaries.

Provision for Income Taxes from Continuing Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2017
 
$ Change
 
% Change
 
2016
 
$ Change
 
% Change
 
2015
($ in thousands)
 
 
 
Provision for income taxes from continuing operations
$(480)
 
$25,041
 
(98)%
 
$(25,521)
 
$(23,930)
 
1,504%
 
$(1,591)
Income (loss) from continuing operations before provision for income taxes
(44,811
)
 
 
 
 
 
(14,509)
 
 
 
 
 
4,449

Effective tax rate
(1.1
)%
 
 
 
 
 
(175.9
)%
 
 
 
 
 
35.8
%
For 2017 we recorded a provision for income taxes from continuing operations of $480,000 yielding an effective tax rate of (1.1)%. The 2017 provision reflects estimated foreign taxes and foreign withholding tax expense. Based upon our assessment as of December 31, 2017 of the realizability of our deferred tax assets, we continue to maintain a full valuation allowance against all of our federal and state, and certain of our foreign, net deferred tax assets.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. Among other changes, the new legislation decreases the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Under U.S. GAAP, changes in tax rates and tax law typically are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the federal tax rate change and other tax effects of the Tax Act.  SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes.  In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.  To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provision estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In accordance with SAB 118, we recorded a $12.9 million reduction to deferred tax assets and related valuation allowance in connection with the re-measurement of certain deferred tax assets and liabilities, resulting in no impact to our results of operations. We estimated that no current tax expense should be recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, a provisional estimate at December 31, 2017. Due to the complexity and timing of the issuance and subsequent enactment of the Tax Act, additional work is necessary to complete a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act, a provisional estimate could not be made as we have not yet completed our assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
Given the significant complexity of the Act, anticipated guidance from the Internal Revenue Service about implementing the Act, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, our estimates may be adjusted in future periods. Any subsequent adjustment to estimates will be recorded to current tax expense in the quarter of 2018 when our analysis is complete and we are able to complete our accounting for all aspects of the Tax Act.
For 2016 we recorded a provision for income taxes from continuing operations of $25.5 million yielding an effective tax rate of (175.9)%. The 2016 provision reflects the increase in our deferred tax asset valuation allowance.

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Prior to the year ended December 31, 2016, we maintained a valuation allowance only against certain of our U.S. Federal and Foreign deferred tax assets as we concluded that it was more likely than not that certain of these U.S. Federal deferred tax assets would be utilized. We also determined that a valuation allowance was needed against our State and certain other Foreign deferred tax assets as there was not sufficient evidence to support the release of the valuation allowance against them.
Based on our fourth quarter of 2016 assessment of the realizability of our deferred tax assets, we recorded a non-cash charge of $28.1 million as additional valuation allowance against our federal deferred tax assets, thereby establishing a full valuation allowance against these deferred tax assets as of December 31, 2016. We continued to maintain a full valuation allowance against our state and certain of our foreign net deferred tax assets. As of December 31, 2016, the aggregating balance of our deferred tax assets totaled $39.0 million with a valuation allowance of $38.7 million, resulting in a net deferred tax asset balance of $359,000. The establishment of a valuation allowance has no effect on our ability to use the deferred tax assets in the future to reduce cash tax payments when taxable income is reported.
For 2015 we recorded a provision for income taxes of $1.6 million yielding an effective tax rate of 35.8%. The 2015 provision included the tax impact of nondeductible permanent items, including stock-based compensation and foreign withholding taxes, incurred for the period. The provision for income tax for 2015 also included tax expense on intercompany profits resulting from the sale of certain IP rights to one of our foreign subsidiaries as part of a reorganization of our international operations. The purpose of this reorganization was to more closely align our corporate structure and income tax profile with the international nature of our business activities. Steps taken to achieve the reorganization included making changes to our legal entity structure, transferring certain IP rights to one of our foreign subsidiaries, and the implementation of contractual agreements, including research and development cost-sharing arrangements, between the U.S. entity and its wholly owned foreign subsidiaries. There were no other expenses incurred, in relation to the reorganization described above, outside of those related to income taxes.
We also maintain liabilities for uncertain tax positions. We released reserves totaling $310,000 in 2016 including interest and recorded a tax benefit due to the receipt of a tax refund related to the settlement with a taxing authority. As of December 31, 2017, we had unrecognized tax benefits under ASC 740 "Income Taxes" of approximately $4.7 million, which includes the impact of the change in tax rates described above, and there was no applicable interest. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $97,000.

Discontinued Operations
Income from discontinued operations, net of taxes, was zero for the year ended December 31, 2017, compared to $649,000 in the year ended December 31, 2016 which is comprised of a final payment received from the sales of the 3D product line that occurred in the year ended December 31, 2009.

Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments consist primarily of money market funds and U.S. treasury bills. All of our short-term investments are classified as available-for-sale. The securities are stated at market value, with unrealized gains and losses reported as a component of accumulated other comprehensive income, within stockholders’ equity.
As of December 31, 2017, our cash, cash equivalents, and short-term investments totaled $46.5 million, a decrease of $43.3 million from $89.8 million on December 31, 2016.
Cash provided by (used in) operating activities - Net cash used in operating activities was $43.8 million for 2017 compared to $22.0 million provided by operating activities in 2016. The $65.8 million change was primarily driven by $28.0 million change in long-term deferred revenue and customer advances, $24.3 million change in deferred income taxes, $8.4 million decrease in working capital, and $5.9 million increase in net loss. The $28.0 million change in long-term deferred revenue and customer advance was mainly related to new billings for up-front licensee fees added in 2016 that we recognized ratably as revenue during 2017. The $24.3 million change in deferred income tax was primarily caused by a non-cash charge of $28.1 million recorded in the fourth quarter of 2016 to establish a full valuation allowance against our U.S. deferred tax assets, partially offset by additions to our deferred tax assets recorded in the period. Working capital is defined as current assets (excluding cash and cash equivalents) minus current liabilities. Working capital decreased $8.4 million in 2017 compared to 2016 due primarily to decreases in the year-over-year change in accounts payable and accrued compensation and other current liabilities of $4.6 million and $2.4 million, respectively, and an increase in the year-over-year change in prepaid income taxes of $2.0 million.

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Cash provided by (used in) investing activities — Net cash provided by investing activities during 2017 was $11.1 million, an increase of $3.3 million compared to $7.8 million cash provided by investing activities during 2016. Net cash provided by investing activities during 2017 consisted of maturities of short-term investments of $35.0 million. This was partially offset by purchases of short-term investments of $23.8 million and purchases of property, plant, and equipment of $125,000. Net cash provided by investing activities during 2016 was $7.8 million, compared to the $1.3 million cash used in investing activities during 2015. Net cash provided by investing activities during 2016 consisted of maturities of short-term investments of $40.0 million and proceeds from sales of discontinued operations of $1.0 million. This was partially offset by purchases of short-term investments of $32.8 million and purchases of property, plant, and equipment of $343,000.
Cash provided by financing activities — Net cash provided by financing activities during 2017 was $518,000, a decrease of $1.4 million compared to $2.0 million net cash provided by financing activities during 2016. Net cash provided by financing activities during 2017 consisted primarily of exercises of stock options of $518,000 and the issuance of common stock under the ESPP of $328,000, partially offset by repurchases of treasury stock of $328,000. Net cash provided by financing activities during 2016 was $2.0 million, an increase of $38,000 compared to $1.9 million net cash provided by financing activities during 2015. Net cash provided by financing activities during 2016 consisted primarily of exercises of stock options of $2.4 million and the issuance of common stock under the ESPP of $307,000, partially offset by repurchases of treasury stock of $729,000.
We believe that our cash, cash equivalents, and short-term investments will be sufficient to meet our working capital needs for at least the next twelve months. Of our total cash, cash equivalents, and short-term investments of $46.5 million as of December 31, 2017, 17% was held by our foreign subsidiaries and subject to repatriation tax effects. Our intent is to permanently reinvest all of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. We will continue to invest in, protect, and defend our extensive IP portfolio, which is expected to result in the continued use of cash. At December 31, 2017 there was $33.4 million under our previously-approved share repurchase program. We anticipate that capital expenditures for property and equipment for the year ended December 31, 2018 will be less than $1.0 million. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A, “Risk Factors.”

Summary Disclosures about Contractual Obligations and Commercial Commitments
The following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2017 (in thousands):
Contractual Obligations
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Operating Leases
$
5,242

 
$
1,306

 
$
1,811

 
$
1,815

 
$
310

At December 31, 2017, we had a liability for unrecognized tax benefits totaling $4.7 million including interest of $10,000, of which approximately $0 could be payable in cash. We did not have any other significant non-cancellable purchase commitments as of December 31, 2017.

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

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Changes in these factors may cause fluctuations in our earnings and cash flows. We evaluate and manage the exposure to these market risks as follows:
Cash Equivalents and Short-term Investments — We had cash equivalents and short-term investments of $23.0 million as of December 31, 2017, which are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of our cash equivalents and short-term investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximate $59,000 in the fair value of our cash equivalents and short-term investments as of December 31, 2017.

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We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our cash equivalents and short-term investment portfolios. The primary objective of our policies is to preserve principal while at the same time maximizing yields, without significantly increasing risk. Our policy’s guidelines also limit exposure to loss by limiting the sums we can invest in any individual security and restricting investments to securities that meet certain defined credit ratings. We do not use derivative financial instruments in our investment portfolio to manage interest rate risk.Foreign Currency Exchange Rates — A substantial majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we do incur certain operating costs for our foreign operations in other currencies but these operations are limited in scope and thus we are not materially exposed to foreign currency fluctuations. Additionally, we have some reliance on international revenues that are subject to the risks of fluctuations in currency exchange rates. Because a substantial majority of our international revenues, as well as expenses, are typically denominated in U.S. dollars, a strengthening of the U.S. dollar could cause our licenses to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. We have no foreign exchange contracts, option contracts, or other foreign currency hedging arrangements and we do not expect to have such arrangements in the foreseeable future.


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Item 8. Financial Statements and Supplementary Data
IMMERSION CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Immersion Corporation
San Jose, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Immersion Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 27, 2018
We have served as the Company's auditor since 1997.

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IMMERSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
December 31,
 
2017
 
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
24,622

 
$
56,865

Short-term investments
21,916

 
32,907

Accounts and other receivables, net
806

 
1,382

Prepaid expenses and other current assets
736

 
2,876

Total current assets
48,080

 
94,030

Property and equipment, net
3,150

 
4,016

Deferred income tax assets
401

 
359

Prepaid income taxes

 
4,997

Other assets, net
344

 
365

Total assets
$
51,975

 
$
103,767

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
6,647

 
$
5,951

Accrued compensation
4,133

 
4,753

Other current liabilities
3,896

 
4,409

Deferred revenue
4,424

 
5,909

Total current liabilities
19,100

 
21,022

Long-term deferred revenue
22,303

 
26,393

Other long-term liabilities
915

 
1,012

Total liabilities
42,318

 
48,427

Commitments and contingencies (Notes 13 and 14)

 

Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital – $0.001 par value; 100,000,000 shares authorized; 35,950,518 and 35,555,562 shares issued, respectively; 29,263,828 and 28,917,559 shares outstanding, respectively
228,046

 
221,098

Accumulated other comprehensive income
99

 
115

Accumulated deficit
(171,616
)
 
(119,329
)
Treasury stock at cost: 6,686,690 and 6,638,003 shares, respectively
(46,872
)
 
(46,544
)
Total stockholders’ equity
9,657

 
55,340

Total liabilities and stockholders’ equity
$
51,975

 
$
103,767

See notes to consolidated financial statements.

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IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
Royalty and license
$
34,089

 
$
56,030

 
$
61,677

Development, services, and other
924

 
1,056

 
1,716

Total revenues
35,013

 
57,086

 
63,393

Costs and expenses:
 
 
 
 
 
Cost of revenues
197

 
197

 
460

Sales and marketing
13,516

 
14,613

 
14,674

Research and development
11,759

 
13,388

 
14,785

General and administrative
53,343

 
44,151

 
28,755

Restructuring costs
1,620

 

 

Total costs and expenses
80,435

 
72,349

 
58,674

Operating income (loss)
(45,422
)
 
(15,263
)
 
4,719

Interest and other income
337

 
817

 
177

Other expense
274

 
(63
)
 
(447
)
Income (loss) from continuing operations before provision for income taxes
(44,811
)
 
(14,509
)
 
4,449

Provision for income taxes from continuing operations
(480
)
 
(25,521
)
 
(1,591
)
Income (loss) from continuing operations
(45,291
)
 
(40,030
)
 
$
2,858

Income from discontinued operations, net of tax

 
649

 

Net income (loss)
$
(45,291
)
 
$
(39,381
)
 
$
2,858

Basic net income (loss) per share:
 
 
 
 
 
Continuing operations
$
(1.55
)
 
$
(1.39
)
 
$
0.10

Discontinued operations
0.00

 
0.02

 
0.00

Total
$
(1.55
)
 
$
(1.37
)
 
$
0.10

Shares used in calculating basic net income (loss) per share
29,179

 
28,759

 
28,097

Diluted net income (loss) per share:
 
 
 
 
 
Continuing operations
$
(1.55
)
 
$
(1.39
)
 
$
0.10

Discontinued operations
0.00

 
0.02

 
0.00

Total
$
(1.55
)
 
$
(1.37
)
 
$
0.10

Shares used in calculating diluted net income (loss) per share
29,179

 
28,759

 
29,015

Other comprehensive income (loss), net of tax
 
 
 
 
 
Change in unrealized gains (losses) on short-term investments
(16
)
 
8

 
(16
)
Foreign currency translation adjustments

 
21

 

Total other comprehensive income (loss)
(16
)
 
29

 
(16
)
Total comprehensive income (loss)
$
(45,307
)
 
$
(39,352
)
 
$
2,842

See notes to consolidated financial statements.

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IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except Shares information)
 
Common Stock and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at January 1, 2015
34,225,778

 
$
204,876

 
$
102

 
$
(82,806
)
 
6,510,391

 
$
(45,569
)
 
$
76,603

Net income
 
 
 
 
 
 
2,858

 
 
 
 
 
2,858

Unrealized gain (loss) on available-for-sale securities, net of taxes
 
 
 
 
(16
)
 
 
 
 
 
 
 
(16
)
Issuance of stock for ESPP purchase
45,820

 
367

 
 
 
 
 
 
 
 
 
367

Exercise of stock options, net of shares withheld for employee taxes
239,071

 
1,630

 
 
 
 
 
5,503

 
(69
)
 
1,561

Release of restricted stock units and awards, including related stock compensation
334,641

 
3,059

 
 
 
 
 
 
 
 
 
3,059

Tax benefit/(deficiency) from the stock incentive plans
 
 
(228
)
 
 
 
 
 
 
 
 
 
(228
)
Stock based compensation for stock options
 
 
2,411

 
 
 
 
 
 
 
 
 
2,411

Balances at December 31, 2015
34,845,310

 
$
212,115

 
$
86

 
$
(79,948
)
 
6,515,894

 
$
(45,638
)
 
$
86,615

Net loss
 
 
 
 
 
 
(39,381
)
 
 
 
 
 
(39,381
)
Unrealized gain (loss) on available-for-sale securities, net of taxes
 
 
 
 
8

 
 
 
 
 
 
 
8

Foreign currency translation adjustments
 
 
 
 
21

 
 
 
 
 
 
 
21

Repurchase of stock


 


 

 

 
105,750

 
(729
)
 
(729
)
Issuance of stock for ESPP purchase
45,825

 
307

 
 
 
 
 
 
 
 
 
307

Exercise of stock options, net of shares withheld for employee taxes
395,515

 
2,565

 
 
 
 
 
16,359

 
(177
)
 
2,388

Release of restricted stock units and awards, including related stock compensation
268,912

 
2,257

 
 
 
 
 
 
 
 
 
2,257

Stock based compensation for stock options
 
 
3,854

 
 
 
 
 
 
 
 
 
3,854

Balances at December 31, 2016
35,555,562

 
$
221,098

 
$
115

 
$
(119,329
)
 
6,638,003

 
$
(46,544
)
 
$
55,340

Net loss
 
 
 
 
 
 
(45,291
)
 
 
 
 
 
(45,291
)
Unrealized gain (loss) on available-for-sale securities, net of taxes
 
 
 
 
(16
)
 
 
 
 
 
 
 
(16
)
Repurchase of stock
 
 
 
 
 
 
 
 
48,687

 
(328
)
 
(328
)
Issuance of stock for ESPP purchase
48,750

 
328

 
 
 
 
 
 
 
 
 
328

Exercise of stock options, net of shares withheld for employee taxes
70,608

 
518

 
 
 
 
 

 

 
518

Release of restricted stock units and awards, including related stock compensation
275,598

 
2,661

 
 
 
 
 
 
 
 
 
2,661

Stock based compensation for stock options
 
 
3,441

 
 
 
 
 
 
 
 
 
3,441

Effect of change in accounting policy (1)
 
 
 
 
 
 
$
(6,996
)
 
 
 
 
 
(6,996
)
Balances at December 31, 2017
35,950,518

 
$
228,046

 
$
99

 
$
(171,616
)
 
6,686,690

 
$
(46,872
)
 
$
9,657

(1): Effect of early adoption of ASU2016-16 "Income Taxes: Topic 740, Intra-Entity Transfers of Assets Other Than Inventory" at the beginning of the first quarter of 2017. See Note 10 for detail disclosures.
See notes to consolidated financial statements.


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IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
  
Years Ended December 31,
 
2017
 
2016
 
2015
Cash flows provided by (used in) operating activities:
 
 
 
 
 
Net income (loss)
$
(45,291
)
 
$
(39,381
)
 
$
2,858

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization of property and equipment
968

 
910

 
1,016

Stock-based compensation
6,102

 
6,111

 
5,470

Deferred income taxes
(32
)
 
24,274

 
9,935

Loss on disposal of equipment
1

 
19

 
4

Income from discontinued operations

 
(649
)
 

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts and other receivables
576

 
(171
)
 
1,814

Prepaid income taxes

 
1,998

 
(6,995
)
Prepaid expenses and other current assets
141

 
(86
)
 
(1,945
)
Intangibles and other assets
(197
)
 
(275
)
 
(36
)
Accounts payable
696

 
5,322

 
(19
)
Accrued compensation and other current liabilities
(1,111
)
 
967

 
3,750

Deferred revenue
(5,575
)
 
23,090

 
(6,394
)
Other long-term liabilities
(107
)
 
(87
)
 
587

Net cash provided by (used in) operating activities
(43,829
)
 
22,042

 
10,045

Cash flows provided by (used in) investing activities:
 
 
 
 
 
Purchases of short-term investments
(23,807
)
 
(32,813
)
 
(44,910
)
Proceeds from maturities of short-term investments
35,000

 
40,000

 
48,000

Purchases of property and equipment
(125
)
 
(343
)
 
(4,430
)
Proceeds from discontinued operations

 
1,000

 

Net cash provided by (used in) investing activities
11,068

 
7,844

 
(1,340
)
Cash flows provided by financing activities:
 
 
 
 
 
Issuance of common stock under employee stock purchase plan
328

 
307

 
367

Exercise of stock options, net of shares withheld for employee taxes
518

 
2,388

 
1,561

Purchases of treasury stock
(328
)
 
(729
)
 

Net cash provided by financing activities
518

 
1,966

 
1,928

Net increase (decrease) in cash and cash equivalents
(32,243
)
 
31,852

 
10,633

Cash and cash equivalents:
 
 
 
 
 
Beginning of year
56,865

 
25,013

 
14,380

End of year
$
24,622

 
$
56,865

 
$
25,013

Supplemental disclosure of cash flow information:
 
 
 
 
 
Cash paid for taxes
$
191

 
$
(419
)
 
$
156

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

 
$
22

 
$
18

Cashless option exercise under company stock plan
$

 
$
177

 
$
69

Release of Restricted Stock Units and Awards under company stock plan
$
2,661

 
$
2,257

 
$
3,059

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.   Significant Accounting Policies
Description of Business
Immersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware in 1999. The company focuses on the creation, design, development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully as they engage with products and experience the digital world around them. The Company has adopted a “hybrid” business model, under which it provides advanced tactile software, related tools, and technical assistance to certain customers; and offers licenses to the Company's patented intellectual property (“IP”) to other customers.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Immersion Corporation and its wholly-owned subsidiaries, Immersion Canada Corporation; Immersion International, LLC; Immersion Medical, Inc.; Immersion Japan K.K.; Immersion Ltd.; Immersion Software Ireland Ltd.; Haptify, Inc.; Immersion (Shanghai) Science & Technology Company, Ltd.; and Immersion Technology International Ltd. All intercompany accounts, transactions, and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents.
Short-term Investments
The Company’s short-term investments consist primarily of U.S treasury bills with an original or remaining maturity of greater than 90 days on the date of purchase. The Company classifies debt securities with readily determinable market values as “available-for-sale.” Even though the stated maturity dates of these debt securities may be one year or more beyond the balance sheet date, the Company has classified all debt securities as short-term investments as they are reasonably expected to be realized in cash or sold within one year. These investments are carried at fair market value with unrealized gains and losses considered to be temporary in nature reported as a separate component of other comprehensive income (loss) within stockholders’ equity.
The Company recognizes an impairment charge in the consolidated statement of operations and comprehensive loss when a decline in value is judged to be other than temporary based on the specific identification method. Other-than-temporary impairment charges may exist when the Company has the intent to sell the security, will more likely than not be required to sell the security, or does not expect to recover the principal.
Property and Equipment
Property is stated at cost and is depreciated using the straight-line method over the estimated useful life of the related asset. The estimated useful lives are typically as follows:
Computer equipment and purchased software
3 years
Machinery and equipment
3-5 years
Furniture and fixtures
5 years
Leasehold improvements are amortized over the shorter of the lease term or their estimated useful life.
Long-lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of that asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset.
Revenue Recognition
The Company recognizes revenues in accordance with applicable accounting standards, including ASC 605-10-S99, “Revenue Recognition” (“ASC 605-10-S99”); ASC 605-25, “Multiple Element Arrangements” (“ASC 605-25”), and ASC 985-605,

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“Software-Revenue Recognition” (“ASC 985-605”). The Company derives its revenues from two principal sources: royalty and license fees, and development contract and service fees. As described below, management judgments, assumptions, and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue for any period based on the judgments and estimates made by management. Specifically, in connection with each transaction, the Company must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is probable. The Company applies these criteria as discussed below.
Persuasive evidence of an arrangement exists. For a license arrangement, the Company requires a written contract, signed by both the customer and the Company.
Delivery has occurred. The Company delivers software electronically. Delivery occurs when the Company provides the customer access codes or “keys” that allow the customer to take immediate possession of the software.
The fee is fixed or determinable. The Company’s arrangement fee is based on the use of standard payment terms, which are those that are generally offered to the majority of customers. For transactions involving extended payment terms, the Company deems these fees not to be fixed or determinable for revenue recognition purposes and revenue is deferred until the fees become due and payable.
Collectability is probable. To recognize revenue, the Company must judge collectability of fees, which is done on a customer-by-customer basis pursuant to the Company’s credit review policy. The Company typically sells to customers with whom there is a history of successful collection. For new customers, the Company evaluates the customer’s financial condition and ability to pay. If it is determined that collectability is not probable based upon the credit review process or the customer’s payment history, revenue is recognized when payment is received.
Royalty and license revenue — The Company licenses its patents and software to customers in a variety of industries such as mobility, gaming, automotive, and medical devices. Revenues that are derived from the sale of a licensee's products that incorporate the Company’s IP are classified as royalty revenues. 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 could be subject to change and may result in out of period adjustments depending on the specific terms of the arrangement. The Company also enters into fixed license fee arrangements. The Company recognizes fixed license fee revenue when earned under the terms of the agreements, which generally results in recognition on a straight-line basis over the expected term of the license.
Development, services, and other revenue — Development, services, and other revenue are composed of engineering services (engineering services and/or development contracts), and in limited cases, post contract customer support (“PCS”). Engineering services revenues are recognized under the proportional performance accounting method based on the completion of the work to be performed or completed performance method. A provision for losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Revisions in estimates are reflected in the period in which the conditions 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 with an engineering services component, the services are generally not essential to the functionality of the software, and customers may purchase engineering services from the Company to facilitate the adoption of the Company’s technology, but they may choose to use their own resources or appoint other engineering service organizations to perform these services. For arrangements that are in substance subscription arrangements, the entire arrangement fee is recognized ratably over the contract term, subject to any limitations related to extended payment terms. For arrangements involving upfront fees for services and royalties earned by the Company based on units sold or sales volumes of the respective licensed products, and the services are performed ratably over the arrangement or are front-end loaded, the upfront fees are recognized ratably over the contract term, and royalties based on units sold or sales volume are recognized when they become fixed and determinable. As the Company is unable to reliably estimate the licensees’ sales in any given quarter to determine the royalties due to it, the Company recognizes per unit or sales volume driven royalty revenues based on royalties reported by licensees and when all revenue recognition criteria are met.
Deferred Revenue
Deferred revenue consists of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue. The amounts are primarily related to our fixed fee contracts which are recognized ratably over

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the license term (up to 10 years). Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
Advertising
Advertising costs (including obligations under cooperative marketing programs) are expensed as incurred and included in sales and marketing expense. Advertising expense was as follows:
 
Year ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Advertising expense
$
221

 
$
102

 
$
265

Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization is believed to be more likely than not.
Software Development Costs
Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. The Company considers technological feasibility to be established upon completion of a working model of the software. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. See Note 6 for further information regarding the Company’s stock-based compensation assumptions and expenses.
Comprehensive Income
Comprehensive income includes net income as well as other items of comprehensive income or loss. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains and losses on short term investments, net of tax.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in accordance with U.S. GAAP and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of income taxes including uncertain tax provisions, revenue recognition, stock-based compensation, and accruals for other liabilities. Actual results may differ materially from those estimates which were made based on the best information known to management at that time.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents, short term investments, and accounts receivable. The Company is also subjected to a concentration of revenues given certain key licensees that contributed a significant portion of the Company's total revenue. See Note 15 for customer revenue concentration. The Company invests primarily in money market accounts and highly liquid debt instruments purchased with an original or remaining maturity of greater than 90 days on the date of purchase. Deposits held with banks may exceed the amount

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of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand. The Company licenses technology primarily to companies in North America, Europe, and Asia. To reduce credit risk, management performs periodic credit evaluations of its customers’ financial condition. The Company periodically evaluates potential credit losses to ensure adequate reserves are maintained, but historically the Company has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. As such, the Company had zero reserves for the year ended December 31, 2017 and December 31, 2016 due to its low credit risk.
Certain Significant Risks and Uncertainties
The Company operates in multiple industries and its operations can be affected by a variety of factors. For example, management believes that changes in any of the following areas could have a negative effect on the Company's future financial position and results of operations: the mix of revenues; the loss of significant customers; fundamental changes in the technologies underlying the Company’s and its licensees’ products; market acceptance of the Company’s and its licensees’ products under development; development of sales channels; litigation or other claims in which the Company is involved; the ability to successfully assert its patent rights against others; the impact of changing economic conditions; the hiring, training, and retention of key employees; successful and timely completion of product and technology development efforts; and new product or technology introductions by competitors.
Fair Value of Financial Instruments
Financial instruments consist primarily of cash equivalents, short-term investments, accounts receivable and accounts payable. Cash equivalents and short term investments are stated at fair value based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The recorded cost of accounts receivable and accounts payable approximate the fair value of the respective assets and liabilities.
Foreign Currency Translation
The functional currency of the Company’s foreign subsidiaries is U. S. dollars. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries and foreign currency transaction gains and losses are included in earnings.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09 “Stock Compensation: Scope of Modification Accounting” ("ASU 2017-09"). The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2017. The Company will adopt the standard in the first quarter of fiscal 2018, but does not expect the adoption of ASU 2016-19 will have a material impact on its condensed consolidated financial statements.
In December 2016, the FASB issued ASU 2016-19 “Technical Corrections and Improvements”. The amendments in this update affect a wide variety of topics in the Accounting Standards Codification. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods in the annual period beginning after December 15, 2018. The Company will adopt the standard in the first quarter of fiscal 2018, but does not expect the adoption of ASU 2016-19 will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases: Topic 842” (“ASU 2016-02”), which supersedes the existing guidance for lease accounting in Topic 840, Leases. The FASB issued the ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting remains largely unchanged. In September 2017, the FASB issued ASU 2017-13 "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)" ("ASU 2017-13)", which adds SEC paragraphs to the new revenue and leases sections of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the July 20, 2017 EITF meeting, and supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842. ASU2016-02 is effective for periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently in the process of evaluating the impact of this standard on its consolidated financial statements but has not elected to early adopt the standard and would plan to implement the standard on January 1, 2019.
In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers: Topic 606” (“ASU 2014-09”) which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific

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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 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date”, which deferred the effective date of ASU 2014-09 for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. In March 2016, the FASB issued ASU 2016-08 "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" ("ASU 2016-08") which provides updates to revenue recognition guidance relating to considerations for reporting revenue gross versus net. In April 2016, the FASB issued ASU 2016-10 "Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing" ("ASU 2016-10"), which provides updates to revenue recognition guidance relating to performance obligations and accounting for licensing revenue. In May 2016, the FASB issued ASU 2016-12 "Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12") which provides updates to revenue recognition guidance relating to scope and practical expedients for revenue recognition. In December 2016, the FASB issued ASU 2016-20 "Technical Corrections and Improvements to Topic 606" ("ASU 2016-20") which further provides updates to certain aspects of the revenue recognition guidance. In September 2017, the FASB issued ASU 2017-13 "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)" ("ASU 2017-13)", which adds SEC paragraphs to the new revenue and leases sections of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the July 20, 2017 EITF meeting, and supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842. In November 2017, the FASB issued ASU2017-14 "Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)" ("ASU 2017-14"). ASU 2017-14 amends SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403, which bring existing guidance into conformity with Topic 606, Revenue from Contracts with Customers. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company will adopt the new standard as of January 1, 2018 using the modified retrospective method rather than full retrospective method.
The Company's revenue is primarily comprised of per-unit royalty revenue and fixed fee license revenue, along with less significant revenue earned from development, services, and other revenue. The expected impacts upon adoption and post-adoption for each revenue stream are as follows:
Per-unit Royalty revenue
Under current GAAP, the Company recognizes per-unit royalty revenue when royalty reports are received from its customers (typically one quarter in arrears). The Company expects a shift in the method and timing by which it recognizes per-unit royalty revenue under the new standard, as the Company will be required to estimate the amount of this revenue in the quarter when the customer sales transaction occurs. As a result, there will be variances between the estimated per-unit royalty revenue and that based on the actual sales reported by its customers. The Company will be required to adjust the estimate to reflect the actual sales upon receipt of royalty reports submitted by the licensees in the following quarter.
Upon adoption of ASU 2014-09 on January 1, 2018, the Company will recognize the per-unit royalty revenue for customer transactions that occur in the fourth quarter of 2017 as an adjustment to accumulated deficit. Based on royalty reports received for the period and the estimates for those not yet received, the Company has estimated the impact on accumulated deficit will be $5.2 million.
The Company also expects a shift in the method and timing of revenue recognition for contracts with minimum royalty arrangements. Under current GAAP, minimum royalties are recognized as revenue at the end of each reporting period (usually a calendar year) if the actual royalties reported by the customer for that reporting period are below the minimum royalty amount set forth in the contract. Under the new standard, minimum royalties are considered a fixed transaction price to which the Company will have an unconditional right once all performance obligations are satisfied. At the inception of a contract, the Company will be required to recognize all minimum royalties, since only the passage of time is required before payment of the minimum royalty is due.
The Company determined that the contract asset to be established for the unbilled minimum royalties that exist as of January 1, 2018 will be immaterial. After adoption, the Company will record its unconditional right to minimum royalties as contract asset at the inception of the contract where the license is granted to the licensee, and present any associated contract assets and contract liabilities under one contract on a net basis in the statement of financial position.
Fixed fee license revenue

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In accordance with current GAAP, fixed fee license revenue historically has been recognized ratably over the term of the license agreement. Under the new standard, the Company will be required to recognize fixed fee license revenue when it satisfies its performance obligations, which typically occurs upon the transfer of rights to the Company's technology at the point in time a contract is executed, and/or the transfer of rights to technology updates and/or new technologies developed over the contract term. In certain contracts, the Company provides to its customers access to both the patent portfolio that exists as of the contract signing as well as future patents that are to be issued throughout the contract term. In consideration of ASU 2014-09, the Company has concluded that, for such arrangements, it has two separate performance obligations being (a) patents in existence when the contract is signed for which revenue will be recognized up front and (b) patents to be issued, finalized, or approved over the contract term that will be made available to customers for which revenue will be recognized over the course of the contract term.
In connection with the allocation of the transfer price between these two aforementioned performance obligations, the Company has developed a process to estimate the standalone price for each of the two performance obligations in these arrangements, considering a number of factors primarily based on the volume of the Company's patents outstanding as of the contract date as well as those which are expected to be filed and enforceable during the contract term. As of the date of this filing, the Company is in the process of finalizing this estimate and evaluating the performance of certain controls over the information used therein, and expects to complete the determination of its estimate in the first quarter of 2018.
Upon review of the potential impact of this change in accounting, the Company has determined that the majority of its deferred revenue balance as of December 31, 2017 relates to fixed fee license revenue, and expects that a substantial portion of this balance will be recorded as an adjustment to accumulated deficit on January 1, 2018 upon adoption of ASU 2014-09.
After adoption, the Company will account for and present any associated contract assets and contract liabilities under one contract on a net basis in the statement of financial position.
Development, services, and other revenue
The Company expects minimum changes on this revenue stream under the new standard. It will continue to recognize development, services, and other revenue when such service obligation is satisfied.
The Company acknowledges that the conclusions are drawn from the specific facts and circumstances pertaining to its existing contracts. With the Company’s continuous evolution of technologies and its increasing ability to demonstrate the value of its innovations to licensees, the Company will need to assess the application of ASU 2014-09 for each new contract entered after the adoption date, and determine the appropriate revenue recognition on a case-by-case, industry-by-industry basis.

2.   Fair Value Disclosures
Cash Equivalents and Short-term Investments
The financial instruments of the Company measured at fair value on a recurring basis are cash equivalents and short-term investments.
The Company’s fixed income available-for-sale securities consist of high quality, investment grade securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1) or inputs other than quoted prices that are observable either directly or indirectly (Level 2) in determining fair value.
The types of instruments valued based on quoted market prices in active markets include mostly money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy and include U.S. treasury securities.
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. As of December 31, 2017 and 2016, the Company did not hold any Level 3 instruments.
The Company recorded no other than temporary impairment charges in the years ended December 31, 2017, 2016, and 2015.

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Financial instruments measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 are listed in the table below:
 
December 31, 2017
 
Total
 
Fair value measurements using
 
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
 
(Level 3)
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$
21,916

 
$

 
$
21,916

Money market funds
1,117

 

 

 
1,117

Total assets at fair value
$
1,117

 
$
21,916

 
$

 
$
23,033

The above table excludes $23.5 million of cash held in banks.
 
December 31, 2016
 
Total
 
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)
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$
32,907

 
$

 
$
32,907

Money market funds
32,031

 

 

 
32,031

Total assets at fair value
$
32,031

 
$
32,907