Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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 001-38334
IMMERSION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
94-3180138
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
50 Rio Robles, San Jose, California 95134
(Address of principal executive offices) (Zip Code)
(408) 467-1900
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value
IMMR
NASDAQ Global Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý     No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨(Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
 
 
 
 
Emerging Growth Company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
Number of shares of common stock outstanding at November 1, 2019: 31,795,744.


Table of Contents

IMMERSION CORPORATION
INDEX
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
86,585

 
$
110,988

Short-term investments
 
9,026

 
13,930

Accounts and other receivables
 
1,865

 
1,051

Prepaid expenses and other current assets
 
11,988

 
9,856

Total current assets
 
109,464

 
135,825

Property and equipment, net
 
1,768

 
2,343

Other assets, net
 
16,510

 
7,827

Total assets
 
$
127,742

 
$
145,995

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
2,176

 
$
3,612

Accrued compensation
 
2,381

 
3,948

Other current liabilities
 
4,202

 
3,194

Deferred revenue
 
4,666

 
4,591

Total current liabilities
 
13,425

 
15,345

Long-term deferred revenue
 
26,816

 
30,203

Other long-term liabilities
 
3,072

 
787

Total liabilities
 
43,313

 
46,335

Contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock and additional paid-in capital — $0.001 par value; 100,000,000 shares authorized; 38,618,922 and 37,652,498 shares issued, respectively; 31,795,775 and 30,829,351 shares outstanding, respectively
 
252,191

 
246,415

Accumulated other comprehensive income
 
132

 
116

Accumulated deficit
 
(119,544
)
 
(98,521
)
Treasury stock at cost: 6,823,147 and 6,823,147 shares, respectively
 
(48,350
)
 
(48,350
)
Total stockholders’ equity
 
84,429

 
99,660

Total liabilities and stockholders’ equity
 
$
127,742

 
$
145,995

See accompanying Notes to Condensed Consolidated Financial Statements.


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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Royalty and license
$
10,549

 
$
8,462

 
$
24,264

 
$
99,789

Development, services, and other
75

 
90

 
225

 
323

Total revenues
10,624

 
8,552

 
24,489

 
100,112

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
62

 
61

 
117

 
190

Sales and marketing
1,688

 
1,664

 
4,876

 
4,454

Research and development
1,933

 
2,110

 
6,066

 
7,152

General and administrative
8,216

 
9,880

 
35,359

 
31,669

Total costs and expenses
11,899

 
13,715

 
46,418

 
43,465

Operating income (loss)
(1,275
)
 
(5,163
)
 
(21,929
)
 
56,647

Interest and other income (loss)
(24
)
 
545

 
1,106

 
1,151

Income (loss) before provision for income taxes
(1,299
)
 
(4,618
)
 
(20,823
)
 
57,798

Provision for income taxes
(88
)
 
(22
)
 
(200
)
 
(313
)
Net income (loss)
$
(1,387
)
 
$
(4,640
)
 
$
(21,023
)
 
$
57,485

Basic net income (loss) per share
$
(0.04
)
 
$
(0.15
)
 
$
(0.67
)
 
$
1.89

Shares used in calculating basic net income (loss) per share
31,711

 
30,780

 
31,461

 
30,340

Diluted net income (loss) per share
$
(0.04
)
 
$
(0.15
)
 
$
(0.67
)
 
$
1.83

Shares used in calculating diluted net income (loss) per share
31,711

 
30,780

 
31,461

 
31,334

Other comprehensive income
 
 
 
 
 
 
 
Change in unrealized gains (loss) on short-term investments
(6
)
 
(2
)
 
16

 
8

Total other comprehensive income
(6
)
 
(2
)
 
16

 
8

Total comprehensive income (loss)
$
(1,393
)
 
$
(4,642
)
 
$
(21,007
)
 
$
57,493

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except number of shares)
(Unaudited)

 
Three Months Ended September 30, 2019
 
Common Stock and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balances at June 30, 2019
38,488,327

 
$
250,079

 
$
138

 
$
(118,157
)
 
6,823,147

 
$
(48,350
)
 
$
83,710

Net loss
 
 
 
 
 
 
(1,387
)
 
 
 
 
 
(1,387
)
Unrealized loss on available-for-sale securities, net of taxes
 
 
 
 
(6
)
 
 
 
 
 
 
 
(6
)
Issuance of stock for ESPP purchase
8,262

 
56

 
 
 
 
 
 
 
 
 
56

Exercise of stock options, net of shares withheld for employee taxes
111,333

 
869

 
 
 
 
 
 
 
 
 
869

Release of restricted stock units and awards
11,000

 
 
 
 
 
 
 
 
 
 
 

Stock based compensation
 
 
1,187

 
 
 
 
 
 
 
 
 
1,187

Balances at September 30, 2019
38,618,922

 
$
252,191

 
$
132

 
$
(119,544
)
 
6,823,147

 
$
(48,350
)
 
$
84,429



 
Three Months Ended September 30, 2018
 
Common Stock and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balances at June 30, 2018
37,488,535

 
$
240,445

 
$
109

 
$
(91,156
)
 
6,726,385

 
$
(47,441
)
 
$
101,957

Net loss
 
 
 
 
 
 
(4,640
)
 
 
 
 
 
(4,640
)
Unrealized loss on available-for-sale securities, net of taxes
 
 
 
 
(2
)
 
 
 
 
 
 
 
(2
)
Issuance of common stock for employee stock purchase
12,855

 
120

 
 
 
 
 
 
 
 
 
120

Exercise of stock options, net of shares withheld for employee taxes
4,687

 
31

 
 
 
 
 

 

 
31

Release of restricted stock units and awards
20,833

 


 
 
 
 
 
 
 
 
 

Stock based compensation
 
 
2,514

 
 
 
 
 
 
 
 
 
2,514

Effect of change in accounting policy
 

 
 
 
 
417

 
 
 
 
 
417

Balances at September 30, 2018
37,526,910

 
$
243,110

 
$
107

 
$
(95,379
)
 
6,726,385

 
$
(47,441
)
 
$
100,397


In the three months ended September 30, 2018, the Company determined that a certain customer had underreported its 2017 unit sales and owed an additional $0.4 million in royalties to the Company.  This amount was adjusted through accumulated deficit as this would have been recorded as such on January 1, 2018 upon the adoption of ASC 606 had the Company known about this at the time.

See accompanying Notes to Condensed Consolidated Financial Statements.


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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except number of shares)
(Unaudited)

 
Nine Months Ended September 30, 2019
 
 
 
Common Stock and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balances at December 31, 2018
37,652,498

 
$
246,415

 
$
116

 
$
(98,521
)
 
6,823,147

 
$
(48,350
)
 
$
99,660

Net loss
 
 
 
 
 
 
(21,023
)
 
 
 
 
 
(21,023
)
Unrealized gain on available-for-sale securities, net of taxes
 
 
 
 
16

 
 
 
 
 
 
 
16

Issuance of stock for ESPP purchase
21,741

 
165

 
 
 
 
 
 
 
 
 
165

Exercise of stock options, net of shares withheld for employee taxes
173,131

 
1,240

 
 
 
 
 
 
 
 
 
1,240

Release of restricted stock units and awards
771,552

 
 
 
 
 
 
 
 
 
 
 

Stock based compensation
 
 
4,371

 
 
 
 
 
 
 
 
 
4,371

Balances at September 30, 2019
38,618,922

 
$
252,191

 
$
132

 
$
(119,544
)
 
6,823,147

 
$
(48,350
)
 
84,429




 
Nine Months Ended September 30, 2018
 
Common Stock and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balances at December 31, 2017
35,950,518

 
$
228,046

 
$
99

 
$
(171,616
)
 
6,686,690

 
$
(46,872
)
 
$
9,657

Net income
 
 
 
 
 
 
57,485

 
 
 
 
 
57,485

Unrealized gain on available-for-sale securities, net of taxes
 
 
 
 
8

 
 
 
 
 
 
 
8

Issuance of common stock for employee stock purchase
26,689

 
218

 
 
 
 
 
 
 
 
 
218

Exercise of stock options, net of shares withheld for employee taxes
1,326,718

 
8,580

 
 
 
 
 
39,695

 
(569
)
 
8,011

Release of restricted stock units and awards
222,985

 
 
 
 
 
 
 
 
 
 
 

Stock based compensation
 
 
6,266

 
 
 
 
 
 
 
 
 
6,266

Effect of change in accounting policy (1)
 
 
 
 
 
 
18,752

 
 
 
 
 
18,752

Balances at September 30, 2018
37,526,910

 
$
243,110

 
$
107

 
$
(95,379
)
 
6,726,385

 
$
(47,441
)
 
$
100,397


(1) Effect of adoption of ASC 606 effective January 1, 2018. See Note 2. Revenue Recognition for additional information.

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash flows provided by (used in) operating activities:
 
 
 
 
Net income (loss)
 
$
(21,023
)
 
$
57,485

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
588

 
647

Stock-based compensation
 
4,371

 
6,266

Foreign currency translation loss
 
361

 

Deferred income taxes
 
105

 
67

Other
 
1

 
26

Changes in operating assets and liabilities:
 
 
 
 
Accounts and other receivables
 
(814
)
 
(454
)
Prepaid expenses and other current assets
 
(2,239
)
 
(1,870
)
Other assets
 
(9,849
)
 
(3,910
)
Accounts payable
 
(1,440
)
 
(5,889
)
Accrued compensation
 
(1,567
)
 
(1,560
)
Other current liabilities
 
(15
)
 
1,807

Deferred revenue
 
(3,312
)
 
22,713

Other long-term liabilities
 
3,967

 
211

Net cash provided by (used in) operating activities
 
(30,866
)
 
75,539

Cash flows provided by investing activities:
 
 
 
 
Purchases of short-term investments
 
(8,930
)
 
(17,693
)
Proceeds from maturities of short-term investments
 
14,000

 
22,000

Purchases of property and equipment
 
(12
)
 
(63
)
Net cash provided by investing activities
 
5,058

 
4,244

Cash flows provided by financing activities:
 
 
 
 
Proceeds from issuance of common stock under employee stock purchase plan
 
165

 
218

Proceeds from stock options exercises
 
1,240

 
8,010

Net cash provided by financing activities
 
1,405

 
8,228

Net increase (decrease) in cash and cash equivalents
 
(24,403
)
 
88,011

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
110,988

 
24,622

End of period
 
$
86,585

 
$
112,633

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for income taxes
 
$
104

 
$
139

Supplemental disclosure of non-cash operating, investing, and financing activities:
 
 
 
 
Release of restricted stock units and awards under company stock plan
 
$
7,148

 
$
2,806


See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
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 business model under which it provides advanced tactile software, related tools, technical assistance designed to help integrate its patented technology into its customers’ products or enhance the functionality of its patented technology to certain customers, and offers licenses to the Company's patented technology to other customers.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Immersion Corporation and its wholly owned subsidiaries: Immersion Canada Corporation; Immersion International, LLC; Immersion Medical, Inc.; Immersion Japan K.K.; Immersion Ltd.; Immersion Software Ireland Ltd.; Haptify, Inc.; Immersion (Shanghai) Science & Technology Company, Ltd.; and Immersion Technology International Ltd. All intercompany accounts, transactions, and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, and cash flows, in conformity with U.S. GAAP and should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, all adjustments consisting of only normal and recurring items necessary for the fair presentation of the financial position and results of operations for the interim periods presented have been included.

The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

Segment Information

The Company develops, licenses, and supports software and a wide-range of IP that more fully engage users’ sense of touch as they engage with products and experience the digital world around them. The Company currently focuses on the following target application areas: mobility, automotive, gaming, medical and wearables. The Company’s chief operating decision maker ("CODM") is the Chief Executive Officer. The CODM allocates resources to and assesses the performance of the Company using information about its financial results as one operating and reporting segment.

Revenue Recognition

The Company adopted the Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), effective January 1, 2018 using the modified retrospective transition method where the cumulative effect of the initial application is recognized as an adjustment to the opening balance of the accumulated deficit at January 1, 2018, the date of adoption. Refer to Note 2 Revenue Recognition of the Notes to Condensed Consolidated Financial Statements for the Company's revenue recognition accounting policy.

Leases

The Company leases all of its office space pursuant to lease arrangements, each of which have expiration dates on or before February 29, 2024. On January 1, 2019 (the "Adoption Date"), the Company adopted the Accounting Standards Codification Section ASC 842 Leases ("ASC 842"), using the alternative modified transition method to apply the standard and measure leases existed at, or entered into, after the Adoption Date. The Company's operating leases accounted for as right-of-use ("ROU") assets and lease liability obligations in the Company's Condensed Consolidated Balance Sheets under Other assets, Other current liabilities and Other long-term liabilities, respectively. ROU assets represent the Company's right to use an

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underlying asset for the lease term, and lease liability obligations represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The Company has lease agreements that combine lease and non-lease components, and the Company elects to account for such components as a single lease component. As the Company's leases typically do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease payments made and exclude lease incentives and direct costs. Lease expense is recognized on a straight-line basis over the lease term. The Company elects to not present leases with an initial term of 12 months or less on its Condensed Consolidated Balance Sheet. See Note 11 Leases of the Notes to Condensed Consolidated Financial Statements for further information on ASC 842 adoption.

Recently Adopted Accounting Pronouncements

In July 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-09 "Codification Improvement" ("ASU 2018-09"). This ASU amends a wide variety of Topics in the Codification issued by FASB with technical corrections, clarifications, and other minor improvements, and should eliminate the need for periodic agenda requests for narrow and incremental items. Many of the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018 for public entities. The Company adopted this ASU as of January 1, 2019. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting" ("ASU 2018-07"). This ASU expands the scope of Topic 718 to include share-based payment transaction for acquiring goods and services from nonemployees and supersedes subtopic 505-50. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted but no earlier than adoption of Topic 606. The Company adopted this ASU as of January 1, 2019. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02 "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company adopted this ASU as of January 1, 2019. The amount of stranded tax effects that was reclassified from accumulated other comprehensive loss was not material to the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 Leases: Topic 842 ("ASU 2016-02") in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior U.S. GAAP. Subsequently, the FASB issued numerous amendments to the initial guidance including ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, "ASC 842"). ASC 842 requires that a lessee should recognize a liability to make lease payments ("lease liabilities") and a right-to-use ("ROU") asset representing its right-to-use the underlying asset for the lease term on the balance sheet. ASC 842 also requires additional disclosures related to key information about leasing arrangements, including, but not limited to, amounts, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC 842 on January 1, 2019 (the "Adoption Date"), using the alternative modified transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of accumulated deficit to be recognized on the Adoption Date, with prior periods not restated. The Company elected certain practical expedients, including 1) not to reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases, 2) not to use hindsight to determine lease terms, 3) to not separate non-lease components within our lease portfolio, and 4) not to present leases with an initial term of 12 months or less on its Condensed Consolidated Balance Sheets. The adoption of ASC 842 resulted in the recognition of ROU assets of $4.0 million and lease liabilities for operating leases of $4.9 million. There was no cumulative effect adjustment recognized on the beginning accumulated deficits as a result of the adoption. The comparative period presented in this Form 10-Q reflects the former lease U.S. GAAP accounting guidance. See Note 11 Leases of Notes to Condensed Consolidated Financial Statements for further information.


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Recent Accounting Guidance Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). This guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected based on historical events, current conditions and forecast information. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-13 on its Condensed Consolidated Financial Statements.

2. REVENUE RECOGNITION

Revenue Recognition Accounting Policy

The Company's revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenue earned from development, services and other revenue.

Fixed fee license revenue

The Company is required to recognize revenue from a fixed fee license agreement when it has satisfied its performance obligations, which typically occurs upon the transfer of rights to the Company's technology upon the execution of the license agreement. However, in certain contracts, the Company grants a license to its existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolves throughout the contract term. For such arrangements, the Company has concluded that it has two separate performance obligations:

Performance Obligation A: to transfer rights to the Company's patent portfolio as it exists when the contract is executed;

Performance Obligation B: to transfer rights to the Company's patent portfolio as it evolves over the term of the contract, including access to new patent applications that the licensee can benefit from over the term of the contract.

If a fixed fee license agreement contains only Performance Obligation A, the Company will recognize most or all of the revenue from the agreement at the inception of the contract. For fixed fee license agreements that contain both Performance Obligation A and B, the Company will allocate the transaction price based on the standalone price for each of the two performance obligations. The Company uses a number of factors primarily related to the attributes of its patent portfolio to estimate standalone prices related to Performance Obligation A and B. Once the transaction price is allocated, the portion of the transaction price allocable to Performance Obligation A will be recognized in the quarter the license agreement is signed and the customer can benefit from rights provided in the contract, and the portion allocable to Performance Obligation B will be recognized on a straight-line basis over the contract term. For such contracts, a contract liability account will be established and included within deferred revenue on the Condensed Consolidated Balance Sheets. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract are presented on a net basis.

Some of the Company's license agreements contain fixed fees related to past infringements. Such fixed fees are recognized as revenue or recorded as a deduction to the Company's operating expense in the quarter the license agreement is signed.

Payments for fixed fee license contracts typically are due in full within 30 - 45 days from execution of the contract. From time to time, the Company enters into a fixed fee license contract with payments due in a number of installments payable throughout the contract term. In such cases, the Company will determine if a significant financing component exists and if it does, the Company will recognize more or less revenue and corresponding interest expense or income, as appropriate.

Per-unit Royalty revenue

ASC 606 requires an entity to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. As the Company generally does not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows the Company to adequately review the reports and include the actual amounts in its quarterly results for such quarter, the Company accrues the related revenue based on estimates of its licensees’ underlying sales, subject to certain constraints on its ability to estimate such amounts. The Company develops such estimates based on a combination of available data including, but not limited to, approved customer forecasts, a lookback at historical royalty reporting for each of its customers, and industry information available for the licensed products.

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As a result of accruing per-unit royalty revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true up revenue to the actual amounts reported by its licensees. The Company recorded adjustments to decrease royalty revenue by $143,000 during the three months ended September 30, 2019. This adjustment represents the difference between the actual per-unit royalty revenue for the three months ended June 30, 2019 as reported by the Company's licensees during the three months ended September 30, 2019 and the estimated per-unit royalty revenue for the three months ended June 30, 2019 that the Company reported during the three months ended June 30, 2019. During the three months ended June 30 and March 31, 2019, the Company recorded adjustments to increase royalty revenue by $234,000 and $149,000, respectively, based on actual sales that occurred in the previous quarters. During the three months ended September 30 and June 30, 2018, the Company recorded adjustments to decrease royalty revenue by $333,000 and $326,000, respectively, based on actual sales that occurred in the previous quarters. The Company had no true-ups for the three months ended March 31, 2018.

Certain of the Company's per-unit royalty agreements contains minimum royalty provision which sets forth minimum amounts to be received by the Company during the contract term. Under ASC 606, minimum royalties are considered a fixed transaction price to which the Company will have an unconditional right once all other performance obligations, if any, are satisfied. The Company recognizes all minimum royalties as revenue at the inception of the license agreement or in the period in which all remaining revenue recognition criteria have been met. The Company accounts for the unbilled minimum royalties as contract assets on a contract basis on its Condensed Consolidated Balance Sheets, and the balance of such contract assets will be reduced by the actual royalties to be reported by the licensee during the contract term until fully utilized, after which point any excess per-unit royalties reported will be recognized as revenue. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract are presented on a net basis.

Payments of per-unit royalties typically are due within 30 to 60 days from the end of the calendar quarter in which the underlying sales took place.

Development, services, and other revenue

As the performance obligation related to the Company's development, service and other revenue is satisfied over a period of time, the Company recognizes such revenue evenly over the period of performance obligation, which is generally consistent with the contractual term.

Disaggregated Revenue

The following table presents the disaggregation of the Company's revenue for the three and nine months ended September 30, 2019 and 2018 (in thousands).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Fixed fee license revenue
$
4,115

 
$
4,317

 
$
10,109

 
$
81,955

Per-Unit royalty revenue
6,434

 
4,145

 
14,155

 
17,834

Total royalty and license revenue
10,549

 
8,462

 
24,264

 
99,789

Development, services, and other revenue
75

 
90

 
225

 
323

Total revenues
$
10,624

 
$
8,552

 
$
24,489

 
$
100,112


The Company had contract assets of $11.2 million and $9.0 million included within prepaid expenses and other current assets as of September 30, 2019 and December 31, 2018, respectively. The Company had contract assets of $6.0 million and $7.2 million included within other non-current assets of the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. During the nine months ended September 30, 2019, contract assets decreased by $1.1 million primarily due to actual royalties billed during the nine months ended September 30, 2019, that reduced the minimum royalties recognized in contract assets. The contract assets as of September 30, 2019 also included the Company's estimate of per-unit royalty related to the underlying sales that occurred in the three months ended September 30, 2019.

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Contracted Revenue

Based on contracts signed and payments received as of September 30, 2019, the Company expects to recognize $31.1 million in revenue related to Performance Obligation B under the Company's fixed fee license agreements, which is satisfied over time, including $12.4 million over one to three years and $18.7 million over more than three years. Revenue related to Performance Obligation B was $34.5 million as of December 31, 2018. During the nine months ended September 30, 2019 and 2018, the Company recognized $3.4 million and $5.7 million in fixed fee license revenue related to Performance Obligation B under the Company's fixed fee license agreements.

3. FAIR VALUE MEASUREMENTS

Cash, Cash Equivalents and Short-term Investments

The Company's financial instruments 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.

Financial instruments are 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.

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.

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 September 30, 2019 and December 31, 2018, the Company did not hold any Level 3 instruments.

Financial instruments measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 are classified based on the valuation technique in the table below (in thousands):

 
 
September 30, 2019
 
 
 
 
Fair Value Measurements Using
 
 
 
 
Quoted Prices
 in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
63,226

 
$

 
$

 
$
63,226

U.S. Treasury securities
 

 
9,026

 

 
9,026

Total assets at fair value (1)
 
$
63,226

 
$
9,026

 
$

 
$
72,252

(1) The above table excludes $23.4 million of cash held in banks.

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December 31, 2018
 
 
 
 
Fair Value Measurements Using
 
 
 
 
Quoted Prices 
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
81,425

 
$

 
$

 
$
81,425

U.S. Treasury securities
 

 
13,930

 

 
13,930

Total assets at fair value (2)
 
$
81,425

 
$
13,930

 
$

 
$
95,355

(2) The above table excludes $29.6 million of cash held in banks.

The contractual maturities of the Company’s available-for-sale securities on September 30, 2019 and December 31, 2018 were all due within one year. There were no transfers of instruments between Level 1 and 2 during the three and nine months ended September 30, 2019 and the year ended December 31, 2018.

Money market accounts are classified as cash equivalents and U.S. Treasury securities (classified as available-for-sale securities), with maturity dates less than one year, are within short-term investments on the Company’s Condensed Consolidated Balance Sheets.

Short-term Investments 

Short-term investments as of September 30, 2019 and December 31, 2018 consisted of the following (in thousands):

 
 
September 30, 2019
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
U.S. Treasury securities
 
$
9,016

 
$
10

 
$

 
$
9,026

Total
 
$
9,016

 
$
10

 
$

 
$
9,026


 
 
December 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
U.S. Treasury securities
 
$
13,936

 
$

 
$
(6
)
 
$
13,930

Total
 
$
13,936

 
$

 
$
(6
)
 
$
13,930


4. ACCOUNTS AND OTHER RECEIVABLES
Accounts and other receivables consisted of the following (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Trade accounts receivable
 
$
1,485

 
$
645

Other receivables
 
380

 
406

Accounts and other receivables
 
$
1,865

 
$
1,051



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There was no estimated allowance for doubtful accounts as of September 30, 2019 and December 31, 2018.

5. OTHER ASSETS, NET

Other assets consisted of the following (in thousands):

 
 
September 30,
2019
 
December 31,
2018
Contract assets - long-term
 
$
6,033

 
$
7,231

Lease assets
 
3,371

 

Deferred tax assets
 
295

 
295

Other assets
 
6,811

 
301

Total other assets, net
 
$
16,510

 
$
7,827


The Company adopted ASC 842 on January 1, 2019 and recognized $4.0 million ROU assets on its Condensed Consolidated Balance Sheets. See Note 1 Significant Accounting Policies and Note 11 Leases of the Notes to the Condensed Consolidated Financial Statements for more detail on ASC 842 adoption.

In March 2019, as part of a then-pending litigation matter with Samsung Electronics Co, the Company recorded a $6.9 million deposit included in Other assets, net along with related accounts payable which was paid in April 2019. See Note 12 Contingencies of Notes to Condensed Consolidated Financial Statements for further disclosure.


6. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following (in thousands):
 
September 30,
2019
 
December 31,
2018
Accrued legal
$
1,453

 
$
1,827

Lease liabilities - current
1,161

 

Income taxes payable
228

 
204

Other current liabilities
1,360

 
1,163

Total other current liabilities
$
4,202

 
$
3,194


7. STOCK-BASED COMPENSATION

Stock Options and Awards

The Company’s equity incentive program is a long-term retention program that is intended to attract, retain, and provide incentives for employees, consultants, officers, and directors and to align stockholder and employee interests. The Company may grant time-based options, market condition-based options, stock appreciation rights, restricted stock ("RSA"), restricted stock units (“RSUs”), performance shares, performance units, and other stock-based to employees, officers, directors, and consultants. Under this program, stock options may be granted at prices not less than the fair market value on the date of grant for stock options. These stock options generally vest over four years and expire from seven to ten years from the grant date. In addition to time-based vesting, market condition-based options are subject to a market condition whereby the closing price of the Company common stock must exceed a certain level for a number of trading days within a specified time frame or the options will be canceled before the expiration of the options. RSAs generally vest over one year. RSUs generally vest over three years. Awards granted other than a stock option or stock appreciation right shall reduce the common stock shares available for grant by 1.75 shares for every share issued. On June 14, 2019, the Company's stockholders approved an increase to the number of common stock shares reserved for issuance by 2,595,751 shares.

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A summary of the Company's equity incentive program is as follows (in thousands):

 
 
September 30,
2019
Common stock shares available for grant
 
3,172

Standard and market condition-based stock options outstanding
 
2,011

RSAs outstanding
 
91

RSUs outstanding
 
949


Time-Based Stock Options

The following summarizes activities for the time-based stock options for the nine months ended September 30, 2019 (in thousands except for weighted average exercise per share and weighted average remaining contractual life data):

 
 
Number of Shares
Underlying Stock Options
 
Weighted Average
Exercise Price
Per Share
 
Weighted Average
Remaining Contractual Life
(Years)
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2018
 
1,862

 
$
9.44

 
2.85
 
$
751

Granted
 
783

 
$
8.25

 
 
 
 
Exercised
 
(173
)
 
$
7.16

 
 
 
 
Canceled or expired
 
(733
)
 
$
9.78

 
 
 
 
Outstanding as of September 30, 2019
 
1,739

 
$
8.98

 
3.35
 
$
128

Vested and expected to vest at September, 2019
 
1,739

 
$
8.98

 
3.35
 
$
128

Exercisable at September 30, 2019
 
927

 
$
9.57

 
0.52
 
$
10


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

Market Condition-Based Stock Options

In 2014, the Company began to grant market condition-based stock options. These stock options will vest if the closing price of the Company stock exceeds a certain level for a number of trading days within a specified time frame or the stock options will be canceled before the expiration of the stock options. As of September 30, 2019 and December 31, 2018, the Company had 272,081 market condition-based stock options outstanding. There were no market condition-based stock options granted, exercised or canceled during the nine months ended September 30, 2019.


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Restricted Stock Units

The following summarizes RSU activities for the nine months ended September 30, 2019 (in thousands except for weighted average exercise per share and weighted average remaining contractual life data):

 
 
Number of Restricted Stock Units
 
Weighted Average Grant Date Fair Value
 
Weighted Average
Remaining Contractual Life
(Years)
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2018
 
1,091

 
$
10.97

 
0.67
 
$
9,773

Granted
 
864

 
$
8.57

 

 


Released
 
(709
)
 
$
11.32

 

 


Forfeited
 
(297
)
 
$
9.84

 

 


Outstanding at September 30, 2019
 
949

 
$
8.88

 
1.47
 
$
7,259


Restricted Stock Awards

The following summarizes RSA activities for the nine months ended September 30, 2019 (in thousands except for weighted average exercise per share and weighted average remaining contractual life data):

 
 
Number of Restricted Stock Awards
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Recognition Period
(Years)
Outstanding at December 31, 2018
 
55

 
$
13.02

 
0.46
Granted
 
114

 
$
7.06

 
 
Released
 
(62
)
 
$
12.63

 
 
Forfeited
 
(16
)
 
$
7.27

 
 
Outstanding at September 30, 2019
 
91

 
$
7.45

 
0.70

Employee Stock Purchase Plan

Under the Company's 1999 Employee Stock Purchase Plan ("ESPP"), eligible employees may purchase common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Company’s common stock at the beginning of the offering period or the purchase date. Participants may not purchase more than 2,000 shares in a six months offering period or purchase stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period. A total of 1.0 million shares of common stock has been reserved for issuance under the ESPP. During the nine months ended September 30, 2019, 21,741 shares were purchased under the ESPP. As of September 30, 2019, 253,437 shares were available for future purchase under the ESPP.


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Stock-based Compensation Expense

The following table summarizes stock-based compensation expenses recognized for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Stock options
 
$
200

 
$
286

 
$
516

 
$
960

RSUs and RSAs
 
971

 
2,206

 
3,798

 
5,234

Employee stock purchase plan
 
16

 
22

 
57

 
72

Total
 
$
1,187

 
$
2,514

 
$
4,371

 
$
6,266

 
 
 
 
 
 
 
 
 
Sales and marketing
 
$
207

 
$
377

 
$
700

 
$
675

Research and development
 
234

 
561

 
1,054

 
1,382

General and administrative
 
746

 
1,576

 
2,617

 
4,209

Total
 
$
1,187

 
$
2,514

 
$
4,371

 
$
6,266


As of September 30, 2019, there was $9.3 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options, RSAs and RSUs. This unrecognized compensation cost will be recognized over an estimated weighted-average period of approximately 2.78 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

8. STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income for the three and nine months ended September 30, 2019 are as follows (in thousands):

 
 
Unrealized Gains & Losses on Available for Sale Securities
 
Foreign Currency Items
 
Total
Balance as of June 30, 2019
 
$
16

 
$
122

 
$
138

Amounts reclassified from accumulated other comprehensive income
 
(6
)
 

 
(6
)
Net current period other comprehensive income
 
(6
)
 

 
(6
)
Balance as of September 30, 2019
 
$
10

 
$
122

 
$
132


 
 
Unrealized Gains & Losses on Available for Sale Securities
 
Foreign Currency Items
 
Total
Balance as of December 31, 2018
 
$
(6
)
 
$
122

 
$
116

Amounts reclassified from accumulated other comprehensive income
 
16

 

 
16

Net current period other comprehensive income
 
16

 

 
16

Balance as of September 30, 2019
 
$
10

 
$
122

 
$
132



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Stock Repurchase Program
On November 1, 2007, the Company announced its Board of Directors (the "Board") authorized the repurchase of up to $50.0 million of the Company’s common stock (the “Stock Repurchase Program”). In addition, on October 22, 2014, the Board authorized another $30.0 million under the Stock Repurchase Program. The Company may repurchase its common stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase authorization has no expiration date, does not require the Company to repurchase a specific number of shares, and may be modified, suspended, or discontinued at any time.
There were no stock repurchases during the three and nine months ended September 30, 2019 and 2018. As of September 30, 2019, the Stock Repurchase Program remains available with approximately $33.4 million of the Company's common stock that may yet be purchased under this program.

9. INCOME TAXES

Income tax provisions consisted of the following (in thousands, except for effective tax rate percentage):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Income (loss) before provision for income taxes
$
(1,299
)
 
$
(4,618
)
 
$
(20,823
)
 
$
57,798

Provision for income taxes
$
(88
)
 
$
(22
)
 
$
(200
)
 
$
(313
)
Effective tax rate
(6.8
)%
 
(0.5
)%
 
(1.0
)%
 
0.5
%

The provision for income tax for the three and nine months ended September 30, 2019 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. For the three and nine months ended September 30, 2019, the Company used a year-to-date approach to calculate the effective tax rate. The Company continues to carry a full valuation allowance on its federal and state deferred tax assets. As a result, no benefit for losses generated from the Company's U.S. territory was included in the calculation of the year-to-date effective tax rate, which was the main reason for the difference between the statutory tax rate and actual effective tax rate. The provision for income tax for the three and nine months ended September 30, 2018 resulted primarily from estimated foreign taxes included in the calculation of the annual effective tax rate.

On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing arrangement. On February 19, 2016, the IRS appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit (the "Ninth Circuit"). On July 24, 2018, the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court that had found certain Treasury regulations related to stock-based compensation to be invalid. On August 7, 2018, the Ninth Circuit withdrew its July 24, 2018 opinion to allow a reconstituted panel to confer on the decision. This reconstituted panel reconsidered the validity of the cost sharing regulations at issue. The regulations at issue require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as “qualified cost-sharing arrangements” and to avoid potential IRS adjustment. On June 7, 2019, the reconstituted panel of the Ninth Circuit upheld the 2018 decision of the Ninth Circuit, concluding stock-based compensation must be included in intercompany cost sharing agreements for the agreements to be classified as “qualified cost-sharing arrangements”. On July 22, 2019, Altera filed a petition for an en banc rehearing with the Ninth Circuit. In the case of a denial of a Ninth Circuit en banc rehearing or a decision against Altera following an en banc rehearing, Altera can appeal to the United States Supreme Court for review. Although the Company believes stock-based compensation is not required to be included in its pool of shared costs under its intercompany cost sharing arrangement, the Company has concluded that it is not more likely than not that Altera will prevail with their appeal of the Ninth Court’s ruling. As such, the Company has made corresponding provisions. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements.

The Company concluded that it is has not met the threshold requirements of the Base Erosion and Anti-Abuse Tax (the “BEAT”). Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of topics, is expected to be issued. In accordance with ASC 740, Income Taxes ("ASC 740"), the Company will recognize any effects of the guidance in the period that such guidance is issued.


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As of September 30, 2019, the Company had unrecognized tax benefits under ASC 740 Income Taxes of approximately $5.1 million and applicable interest of $23,000. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, is $97,000. The Company’s policy is to account for interest and penalties related to uncertain tax positions as a component of income tax provision. We do not expect to have any significant changes to unrecognized tax benefits during the next twelve months.

As of September 30, 2019, the Company had net deferred income tax assets of $295,000 consisting primarily of foreign net operating loss carryforwards, and deferred income tax liabilities of $30,000. Because the Company had net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state, and foreign taxing authorities may examine the Company’s tax returns for all years from 2000 through the current period.

The Company maintains a valuation allowance of $24.5 million against certain of its deferred tax assets, including all federal, state, and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset balance due to historical losses, the variability of operating results, and uncertainty regarding near term projected results. In the event that the Company determines the deferred tax assets are realizable based on its assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made. The valuation allowance does not impact the Company’s ability to utilize the underlying net operating loss carryforwards.

10. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes stock options, RSUs, RSAs and ESPP.

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share (in thousands, except per share amounts):

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(1,387
)
 
$
(4,640
)
 
$
(21,023
)
 
$
57,485

Denominator:
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding, basic
 
31,711

 
30,780

 
31,461

 
30,340

  Dilutive effect of potential common shares:
 
 
 
 
 
 
 
 
  Stock options, RSUs, RSA and ESPP
 

 

 

 
994

Total shares, diluted
 
31,711

 
30,780

 
31,461

 
31,334

Basic net income (loss) per share
 
$
(0.04
)
 
$
(0.15
)
 
$
(0.67
)
 
$
1.89

Diluted net income (loss) per share
 
$
(0.04
)
 
$
(0.15
)
 
$
(0.67
)
 
$
1.83


The Company includes the underlying market condition-based stock options in the calculation of diluted earnings per share if the performance condition has been satisfied as of the end of the reporting period and excludes such options if the performance condition has not been met.

For the nine months ended September 30, 2018, standard stock options to purchase approximately 262,000 shares of common stock, with exercise prices greater than the average fair market value of the Company’s stock of $12.04 per share, were not included in the calculation because the effect would have been anti-dilutive.


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As of September 30, 2019 and 2018, the Company had stock options, RSUs and RSAs outstanding that could potentially dilute basic earnings per share in the future, but these were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2019 and the three months ended September 30, 2018, since their effect would have been anti-dilutive. These outstanding securities consisted of the following (in thousands):

 
 
September 30
 
 
2019
 
2018
Standard and market condition-based stock options outstanding
 
2,011

 
2,323

RSUs outstanding
 
949

 
1,091

RSAs outstanding
 
91

 
63


11. LEASES

The Company leases all of its office space pursuant to lease arrangements, each of which have expiration dates on or before February 29, 2024. On January 1, 2019 (the "Adoption Date"), the Company adopted ASC 842 Leases, using the alternative modified transition method to apply the standard and measure leases existed at, or entered into after the Adoption Date. Upon adoption of ASC 842, the Company recognized operating lease liabilities of $4.9 million, which represents the present value of the remaining lease payments of existing leases as of the Adoption Date using an estimated incremental borrowing rate of 3.25%. The Company did not enter into any new leases in the nine months ended September 30, 2019. The Company also recognized ROU assets of $4.0 million which represent the Company's right-to-use an underlying asset for the lease term. In conjunction with the adoption of ASC 842, the Company elected the following practical expedients: (i) combining lease and non-lease components, (ii) leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets, and the associated lease payments are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) on a straight-line basis over the lease term, and (iii) applying discount rates to operating leases using a portfolio approach.

There was no cumulative-effect adjustment recognized on the beginning accumulated deficit as a result of the adoption. The comparative periods presented in this Form 10-Q reflect the former lease accounting guidance.

Below is a summary of our ROU assets and lease liabilities as of the Adoption Date and September 30, 2019, respectively (in thousands):

 
Balance Sheets Classification
 
September 30, 2019
 
January 1, 2019
Assets
 
 
 
 
 
Operating lease assets
Other assets
 
$
3,371

 
$
4,048

Liabilities
 
 
 
 
 
  Operating lease liabilities - current
Other current liabilities
 
1,161

 
1,157

  Operating lease liabilities - long-term
Other long-term liabilities
 
2,921

 
3,693

Total lease liabilities
 
 
$
4,082

 
$
4,850


The table below provides supplemental information related to operating leases during the nine months ended as of September 30, 2019 (in thousands except for lease term):

Cash paid within operating cash flow
 
$
878

Weighted average lease terms (in years)
 
3.60

 

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Operating lease ROU assets and liabilities commencing after the Adoption Date are recognized at commencement date based on the present value of lease payments over the lease term. Under ASC 842, all operating lease expenses are recognized on a straight-line basis over the lease term. During the three and nine months ended September 30, 2019, and 2018, the Company's operating lease expenses are as follows:

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Operating lease costs
 
$
301

 
$
285

 
$
855

 
$
891


As of December 31, 2018, the Company had $764,000 in deferred rent which represented unamortized lease incentives on its outstanding leases and was recorded as a reduction to the ROU assets recognized at the Adoption Date.

Minimum future lease payment obligations as of September 30, 2019 are as follows (in thousands):

For the Years Ending December 31,
 
 
2019 Remaining
 
$
304

2020
 
1,211

2021
 
1,195

2022
 
1,170

2023
 
454

Thereafter
 
24

Total
 
$
4,358


12. CONTINGENCIES

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

In the normal course of business, the Company provides indemnification of varying scope to customers, most commonly to licensees in connection with licensing arrangements that include our IP, although these provisions can cover additional matters. Historically, costs related to these guarantees have not been significant, and the Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

As discussed in Part II, Item 1 (Legal Proceedings), on April 28, 2017, the Company and Immersion Software Ireland Limited (collectively, “Immersion”) received a letter from Samsung Electronics Co. (“Samsung”) requesting that the Company 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, on behalf of Samsung, Immersion filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes and penalties. On October 18, 2018, the Korea Tax Tribunal held a hearing and on November 19, 2018, the Korea Tax Tribunal issued its ruling in which it decided not to accept the Company's arguments with respect to the Korean tax authorities’ assessment of withholding tax and penalties imposed on Samsung. On behalf of Samsung, we filed an appeal with the Korea Administrative Court on February 15, 2019. The first hearing occurred on June 27, 2019. A second hearing occurred on August 29, 2019. A third hearing occurred on October 31, 2019. A fourth hearing is scheduled for December 19, 2019.

On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against Immersion demanding that the Company reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. On March 27, 2019, the Company received the final award. The award ordered Immersion to pay Samsung KRW 7,841,324,165 which Immersion paid on April 22, 2019, denied Samsung’s claim for interest from and after May 2, 2017, and ordered Immersion to pay Samsung’s cost of the arbitration in the amount of approximately $871,454.


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The Company believes that there are valid defenses to all of the claims from the Korean tax authorities. The Company intends to vigorously defend against the claims from the Korean tax authorities. The Company expects to be reimbursed by Samsung to the extent the Company ultimately prevails in the appeal in the Korea courts. At March 31, 2019, $6.9 million was recorded as a deposit included in Other assets on the Company's Condensed Consolidated Balance Sheets. In the event that the Company does not ultimately prevail in its appeal in the Korean courts, the deposit included in Other assets would be recorded as additional income tax expense on the Company's Condensed Consolidated Statement of Operations and Comprehensive Income (Loss), in the period in which the Company does not ultimately prevail.

On October 16, 2017, the Company received a letter from LG Electronics Inc. (“LGE”) requesting that the Company 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, on behalf of LGE, the Company filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes. The Korea Tax Tribunal hearing took place on March 5, 2019. On March 19, 2019, the Korea Tax Tribunal issued its ruling in which it decided not to accept Immersion’s arguments with respect to the Korean tax authorities’ assessment of withholding tax and penalties imposed on LGE. On behalf of LGE, we filed an appeal with the Korea Administrative Court on June 10, 2019. The first hearing occurred on October 15, 2019.

The Company believes that there are valid defenses to the claims raised by the Korean tax authorities and that LGE’s claims are without merit.  The Company intends to vigorously defend itself against these claims. In the event that the Company does not ultimately prevail in its appeal in the Korean courts, any payments to LGE with respect to withholding tax imposed on LGE by the Korean tax authorities as described in the previous paragraph would be recorded as additional income tax expense on the Company's Condensed Consolidated Statement of Operations and Comprehensive Income (Loss), in the period in which the Company does not ultimately prevail.

On July 31, 2019, the Company entered into a settlement and license agreement with Motorola Mobility LLC and Motorola Mobility Holdings LLC (collectively, “Motorola”). Pursuant to that agreement, on August 12, 2019, the parties filed a joint motion to dismiss the case with prejudice. On August 13, 2019, the Court granted the motion and ordered that all claims and counterclaims in Civil Action No. 1:17-cv-01081-RGA be dismissed with prejudice, and that each party shall bear its own costs, expenses, and attorneys’ fees. The parties also terminated the related IPR proceedings. See Legal Proceedings in Part II, Item 1 of this Quarterly Report for more information related to this settlement and license agreement and the related IPR proceedings.



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13. SUBSEQUENT EVENTS

On October 23, 2019, the Board authorized the abandonment of the leased facility at 50 Rio Robles in San Jose California.  The Company has begun offering the facility along with all in place leasehold improvements and furniture and fixtures for sublease and intends to relocate as soon as is practicable.  At September 30, 2019, the Company has $2.4 million recorded as a right-of-use asset for this lease and net book values of the leasehold improvements and furniture and fixtures of $1.1 million and less than $0.1 million, respectively. The liability recorded associated with this lease is $3.0 million at September 30, 2019.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” “places,” and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements, which refer to expectations, projections, or other characterizations of future events, or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth below in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors, those described elsewhere in this report, and those described in our other reports filed with the SEC. The following Management's Discussion and Analysis of Financial Conditions and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

OVERVIEW

We believe we are 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 believe we are a leading expert in haptics and our focus on innovation allows us to deliver world-class intellectual property ("IP") and technology that enables the creation of products that delight end users. Our technologies are designed to facilitate the creation of high-quality haptic experiences, enable their widespread distribution, and ensure that their playback is optimized. 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, wearables, as well as residential, commercial, and industrial Internet of Things ("IoT"). In recent years, we have seen a trend towards broad market adoption of haptic technology, and we 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 IP and technologies will continue to expand.

We have adopted a business model under which we provide advanced tactile software, related tools and technical assistance designed to help 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. We and our wholly owned subsidiaries hold more than 3,400 issued or pending patents worldwide as of September 30, 2019. 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 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.

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CRITICAL ACCOUNTING POLICES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, stock-based compensation, leases, 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.

Our critical accounting policies and estimates are important to the portrayal of our financial condition and results of operations and require us to make judgments and estimates about matters that are inherently uncertain. With the exception of our adoption of ASC 842 Leases, there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019, that have had a material impact on our condensed consolidated financial statements and related notes. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, for a complete discussion of our other critical accounting policies and estimates.

RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

OVERVIEW

Total revenues for the three months ended September 30, 2019 was $10.6 million, an increase of $2.1 million, or 24%, compared to $8.6 million for the three months ended September 30, 2018 primarily driven by a $2.3 million, or 55%, increase in per-unit royalty revenue partially offset by a $0.2 million decrease in fixed fee license revenue. Total revenues for the nine months ended September 30, 2019 was $24.5 million, a decrease of $75.6 million, or 76%, compared to $100.1 million for the nine months ended September 30, 2018. The decrease was primarily driven by a $71.8 million decrease in fixed fee license revenue and $3.7 million decrease in per-unit royalty revenue.

Net loss for the three months ended September 30, 2019 was $1.4 million, a decrease of $3.3 million, or (70)%, as compared to a net loss of $4.6 million for the three months ended September 30, 2018. This lower net loss was mainly attributable to a $2.1 million increase in revenues and a $1.8 million decrease in operating expenses due to lower legal and settlement costs and decreased employee compensation from headcount reductions partially offset by increased consulting and public company expenses. Net loss for the nine months ended September 30, 2019 was $21.0 million as compared to a net income of $57.5 million for the nine months ended September 30, 2018. The net loss was mainly attributable to a $75.6 million decrease in total revenues and a $3.0 million increase in operating expenses attributable to an increase in legal, employee retention and consulting costs partially offset by lower stock-based compensation expense.

REVENUES

The following table sets forth a summary of our revenues for the three and nine months ended September 30, 2019 and 2018 (in thousands except for percentages):

 
Three Months Ended
September 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
Fixed fee license revenue
$
4,115

 
$
4,317

 
$
(202
)
 
(5
)%
Per-unit royalty revenue
6,434

 
4,145

 
2,289

 
55
 %
Total royalty and license revenue
10,549

 
8,462

 
2,087

 
25
 %
Development, services, and other revenue
75

 
90

 
(15
)
 
(17
)%
Total revenues
$
10,624

 
$
8,552

 
$
2,072

 
24
 %


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Nine Months Ended
September 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
Fixed fee license revenue
$
10,109

 
$
81,955

 
$
(71,846
)
 
(88
)%
Per-unit royalty revenue
14,155

 
17,834

 
(3,679
)
 
(21
)%
Total royalty and license revenue
$
24,264

 
99,789

 
(75,525
)
 
(76
)%
Development, services, and other revenue
225

 
323

 
(98
)
 
(30
)%
Total revenues
$
24,489

 
$
100,112

 
$
(75,623
)
 
(76
)%


Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Royalty and license revenue — Royalty and license revenue is comprised of per unit royalties earned based on usage or net sales by licensees and fixed payment license fees charged for our IP and software. Total royalty and license revenue for three months ended September 30, 2019 increased $2.1 million, or 25%, from $8.5 million for the three months ended September 30, 2018 to $10.5 million for the three months ended September 30, 2019.

Per-unit royalty revenue increased by $2.3 million, or 55%, from $4.1 million for the three months ended September 30, 2018 to $6.4 million for the three months ended September 30, 2019, primarily caused by a $3.0 million increase in royalties obtained from our mobility licenses ("mobility royalties") partially offset by a $0.7 million decrease in royalties obtained from our gaming licenses ("gaming royalties"). The $3.0 million increase in mobility royalties was due mainly to per-unit royalty agreements entered into during the three months ended September 30, 2019 and partially offset by the impact of lower shipments estimated for other mobility licensees. The $0.7 million decrease in gaming royalties was caused by lower shipment volumes estimated for our gaming licensees.

Fixed fee license revenue decreased $0.2 million, or 5%, from $4.3 million for the three months ended September 30, 2018 to $4.1 million for the three months ended September 30, 2019. This decrease was due to a $0.2 million decrease in mobility license revenue.

We expect royalty and license revenue to continue to be the major components of our future revenue. Under revenue standard ASC 606, our fixed fee license revenue could fluctuate depending upon the timing of execution of new fixed license fee arrangements. We also anticipate that our per-unit royalty revenue will fluctuate relative to our customer's unit shipments. We have historically experienced seasonally higher mobility royalties and gaming royalties, due to the reporting of holiday sales, in the first calendar quarter compared to other calendar quarters. We anticipate a continued reduction in per-unit royalty and license revenue in the future from our medical customers as a percentage of our consolidated per-unit royalty and license revenue, as this line of business is a less significant portion of our market focus

Development, services and other revenue — Development, services, and other revenue for the three months ended September 30, 2019 decreased by $15,000, or 17%, from $90,000 for the three months ended September 30, 2018 to $75,000 for the three months ended September 30, 2019.

Geographically, revenues generated in Asia, North America, and Europe for the three months ended September 30, 2019 represented 56%, 35%, and 9%, respectively, of our total revenue as compared to 35%, 57%, and 8%, respectively, for the three months ended September 30, 2018. The increase in revenue attributable to Asia as a percentage of total revenue was primarily driven by increased revenues from mobility and gaming customers, partially offset by decreased revenues from automotive customers in Asia. The decrease in revenue attributable to North America as a percentage of total revenue was primarily driven by lower revenues from gaming and mobility customers in the region. The increase in revenue attributable to Europe as a percentage of total revenue was primarily caused by higher revenues from automotive customers in the region.


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Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Royalty and license revenue — Total royalty and license revenue for the nine months ended September 30, 2019 decreased by $75.6 million, or 76%, from $99.8 million for the nine months ended September 30, 2018 to $24.3 million for the nine months ended September 30, 2019.

Per-unit royalty revenue decreased by $3.7 million, or 21%, to $14.2 million for the nine months ended September 30, 2019 from $17.8 million for the nine months ended September 30, 2018 . This decrease in per-unit royalty revenue was primarily caused by a $5.1 million decrease in automotive royalties and a $1.9 million decrease in gaming royalties and was partially offset by a $3.4 million increase in mobility royalties. The decrease in automotive royalties was mainly due to the impact of certain per-unit royalty agreements entered into during the first quarter of 2018 that contained a minimum royalty provision for which we recognized the whole set of minimum royalties as revenue at the inception of such agreements. The decrease in gaming royalties was due to lower shipments experienced by our licensees. The increase in mobility royalties was primarily due to revenue from per-unit royalty agreements entered into during the nine months ended September 30, 2019 partially offset by the impact of lower shipment volumes reported by other mobility licensees.

Fixed fee license revenue decreased $71.8 million, or 88%, to $10.1 million for nine months ended September 30, 2019 from $81.9 million nine months ended September 30, 2018. The decrease was primarily related to a material fixed fee license agreement entered into with a mobility customer during the first quarter of 2018.

Development, services and other revenue — Development, services, and other revenue for nine months ended September 30, 2019 decreased by $98,000, or 30%, from $323,000 for the nine months ended September 30, 2018 to $225,000 for the nine months ended September 30, 2019.

Geographically, revenues generated in Asia, North America, and Europe for the nine months ended September 30, 2019 represented 55%, 36%, and 9%, respectively, of our total revenue as compared to 9%, 82%, and 9%, respectively, for the nine months ended September 30, 2018. The increase in revenue from Asia as a percentage of total revenue was primarily driven by increased revenues from mobility customers and partially offset by a decrease in revenues from automotive customers in the region. The decrease in revenue attributable to North America as a percentage of total revenue was primarily caused by lower revenues from mobility customers and partially offset by increased revenue from gaming and automotive customers in the region.


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OPERATING EXPENSES

The following tables set forth a summary of our operating expenses for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 
Three Months Ended
September 30,
 
 
 
 
 
2019
 
2018
 
Change
 
% Change
Sales and marketing
$
1,688

 
$
1,664

 
$
24

 
1
 %
% of total revenue
16
%
 
19
%
 
 
 
 
Research and development
$
1,933

 
$
2,110

 
$
(177
)
 
(8
)%
% of total revenue
18
%
 
25
%
 
 
 
 
General and administrative
$
8,216

 
$
9,880

 
$
(1,664
)
 
(17
)%
% of total revenue
77
%
 
116
%
 
 
 
 

 
Nine Months Ended
September 30,
 
 
 
 
 
2019
 
2018
 
Change
 
% Change
Sales and marketing
$
4,876

 
$
4,454

 
$
422

 
9
 %
% of total revenue
20
%
 
4
%
 
 
 
 
Research and development
$
6,066

 
$
7,152

 
$
(1,086
)
 
(15
)%
% of total revenue
25
%
 
7
%
 
 
 
 
General and administrative
$
35,359

 
$
31,669

 
$
3,690

 
12
 %
% of total revenue
144
%
 
32
%
 
 
 
 

Sales and Marketing — Our sales and marketing expenses are primarily comprised of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and allocation of facilities costs. Sales and marketing expenses were flat for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. Sales and marketing expenses increased $0.4 million, or 9%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily attributable to a $0.5 million increase in compensation, benefits, and other personnel-related costs as a result of higher headcount and a $0.2 million increase in advertising and marketing expenses in the nine months ended September 30, 2019 as compared to the same period in 2018. These expense increases were partially offset by a $0.3 million decrease in outside services costs.

Research and Development — Our research and development expenses are comprised of employee compensation and benefits, consulting fees, tooling and supplies, and an allocation of facilities costs. Research and development expenses decreased $0.2 million, or 8%, for the three months ended September 30, 2019 compared to three months ended September 30, 2018. This decrease was primarily due to a $0.2 million decrease in compensation, benefits and other personnel related costs due to reduced headcount and a decrease in stock-based compensation expense in the three months ended September 30, 2019 as compared to the same period in 2018. Research and development expenses decreased $1.1 million, or 15%, for the nine months ended September 30, 2019 compared to nine months ended September 30, 2018, primarily due to a $1.0 million decrease in compensation, benefits and other personnel-related costs attributable to lower salaries and benefits as a result of reduced headcount, a decrease in stock-based compensation and the impact of a decrease in 2019 employee retention expenses and a $0.2 million decrease in facilities costs in the nine months ended September 30, 2019 compared to the same period in 2018. These expense decreases were partially offset by a $0.1 million increase in outside services costs.

We believe that continued investment in research and development is critical to our future success, and we expect to continue making targeted investments in areas of research and technology development to support future growth in key markets.

General and Administrative — Our general and administrative expenses consist of employee compensation and benefits; legal and professional fees; external legal costs for patents; office supplies; travel; and allocation of facilities costs. General and administrative expenses decreased $1.7 million, or 17%, for three months ended September 30, 2019 compared to the three

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months ended September 30, 2018 due to a $2.0 million decrease in legal expenses, primarily attributable to reduced activities following litigation settlements, and a $0.4 million decrease in employee compensation, benefits, and other personnel-related costs. These decreases were partially offset by a $0.7 million increase in professional expense, outside services costs, public company fees and insurance.

General and administrative expenses increased $3.7 million, or 12%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily caused by a $2.8 million increase in legal expenses and a $1.8 million increase in consulting, recruiting and professional services fees, a $0.3 million increase in public company fees, travel expense, and office expense and a $0.2 million increase in foreign currency transaction loss in the nine months ended September 30, 2019 as compared to the same period in 2018. These increases were partially offset by a $1.5 million decrease in employee compensation, benefits, and other personnel-related costs largely attributable to a decrease in stock-based compensation expense.

We expect our general and administrative expenses to decrease in the future as we complete certain outstanding litigation matters and achieve targeted reductions in consulting and professional services.

INTEREST AND OTHER INCOME (LOSS)

Interest and Other Income (Loss) — Interest and other income (loss) consists of interest income from cash equivalents and short-term investments, interest on notes receivable, translation exchange rate gains and other income. Interest and other income (loss) decreased $0.6 million during the three months ended September 30, 2019 compared to the same period in 2018 primarily driven by a $0.4 million increase in foreign currency translation loss and a $0.2 million decrease in investment earnings on cash equivalents and short-term investments.

Interest and other income (loss) decreased less than $0.1 million during the nine months ended September 30, 2019 compared to the same period in 2018 due to a $0.2 million increase foreign currency translation loss partially offset set by a $0.2 million increase in investment income earned.

PROVISION FOR INCOME TAXES

The following table sets forth a summary of our benefit (provision) for income taxes for the three and nine months ended September 30, 2019 and 2018 (in thousands except for percentages):

 
 
Three Months Ended
September 30,
 
 
 
 
2019
 
2018
 
Change
 
% Change
Loss before provision for income taxes
 
$
(1,299
)
 
$
(4,618
)
 
 
 
 
Provision for income taxes
 
(88
)
 
(22
)
 
$
(66
)
 
300
%
Effective tax rate
 
(6.8
)%
 
(0.5
)%
 
 
 
 

 
 
Nine Months Ended
September 30,
 
 
 
 
2019
 
2018
 
Change
 
% Change
Income (loss) before provision for income taxes
 
$
(20,823
)
 
$
57,798

 
 
 
 
Provision for income taxes
 
(200
)
 
(313
)
 
$
113

 
(36
)%
Effective tax rate
 
(1.0
)%
 
0.5
%
 
 
 
 

The provision for income tax for the three and nine months ended September 30, 2019 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. For the three and nine months ended September 30, 2019, we used a year-to-date approach to calculate the effective tax rate. We continue to carry a full valuation allowance on our federal deferred tax assets. As a result, no benefit for losses generated from our U.S. territory was included in the calculation of the year-to-date effective tax rate, which was the main reason for the difference between the statutory tax rate and actual effective tax rate. The provision for income tax for the three and nine months ended September 30, 2018 resulted primarily from estimated foreign taxes included in the calculation of the annual effective tax rate.


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The year-over-year change in provision for income taxes resulted primarily from the change in mix of income (loss) from continuing operations across various tax jurisdictions.

On December 22, 2017, the Tax Act was passed into law. Among other changes, the Tax Act introduced the Base Erosion and Anti-Abuse Tax (“BEAT”), which creates a new tax on certain related-party payments. We concluded that we have not met the threshold requirements of the BEAT. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of topics, is expected to be issued. In accordance with ASC 740, we will recognize any effects of the guidance in the period that such guidance is issued.

We continue to maintain a valuation allowance of $24.5 million against certain of our deferred tax assets, including all federal, state, and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset balance due to historical losses, the variability of operating results, and uncertainty regarding near term projected results. In the event that we determine the deferred tax assets are realizable based on an assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made. The valuation allowance does not impact our ability to utilize the underlying net operating loss carryforwards.

We also maintain liabilities for uncertain tax positions. As of September 30, 2019, we had unrecognized tax benefits under ASC 740 of approximately $5.1 million and applicable interest of $23,000. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $97,000.

LIQUIDITY AND CAPITAL RESOURCES

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

On September 30, 2019, our cash, cash equivalents, and short-term investments totaled $95.6 million, a decrease of $29.3 million from $124.9 million on December 31, 2018.

 
 
Nine Months Ended
September 30,
 
 
2019
 
2018
Net cash (used in) provided by operating activities
 
$
(30,866
)
 
$
75,539

Net cash provided by investing activities
 
$
5,058

 
$
4,244

Net cash provided by financing activities
 
$
1,405

 
$
8,228



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Cash (used in) provided by operating activities

Net cash used in operating activities was $30.9 million during the nine months ended September 30, 2019 compared to $75.5 million cash provided by operating activities during the nine months ended September 30, 2018, primarily due to $78.5 million decrease from $57.5 million net income for the nine months ended September 30, 2018 to $21.0 million net loss, for the nine months ended September 30, 2019, a $26.0 million decrease in deferred revenue, a $5.9 million increase in other assets, a $1.9 million decrease in stock-based compensation expense, a $1.8 million increase in other current liabilities, a $0.4 million decrease in prepaid expenses and other current assets and a $0.4 million increase in accounts and other receivables, each when comparing the nine months ended September 30, 2018 compared to the nine months ended September 30, 2019. These cash flow decreases were partially offset by a $4.4 million increase in accounts payable due mainly to the timing of payments and a $3.8 million increase in other long-term liabilities. The decrease in deferred revenue primarily reflected the effect of the adoption of ASC 606 on January 1, 2018.

Cash provided by investing activities

Net cash provided by investing activities during the nine months ended September 30, 2019 was $5.1 million compared to $4.2 million cash provided by investing activities during the nine months ended September 30, 2018. Net cash provided by investing activities during the current period consisted of maturities of short-term investments of $14.0 million partially offset by purchases of short-term investments of $8.9 million.

Cash provided by financing activities

Net cash provided by financing activities during the nine months ended September 30, 2019 was $1.4 million, a decrease of $6.8 million compared to $8.2 million cash provided by financing activities during the nine months ended September 30, 2018. Net cash provided by financing activities during the nine months ended September 30, 2019 consisted of $1.4 million in proceeds from stock option exercises and stock purchases under our employee stock purchase plan.

Our total cash, cash equivalents, and short-term investments were $95.6 million as of September 30, 2019, of which approximately 10% ($9.5 million) 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 may continue to invest in, protect, and defend our extensive IP portfolio, which can result in the use of cash in the event of litigation.

At September 30, 2019, there was $33.4 million remaining under our previously-approved share repurchase program.

We anticipate that capital expenditures for property and equipment for the year ending December 31, 2019 will be less than $1 million.

We believe that our cash, cash equivalents, and short-term investments will be sufficient to meet our working capital needs for at least the next twelve months.

Cash from operations could also be affected by various risks and uncertainties, including but not limited to the risks detailed in Part II, Item 1A Risk Factors.

SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

We presented our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2018. Our principal commitments as of September 30, 2019 consisted of $4.4 million obligations under operating leases. There have been no material changes in those obligations during the three and nine months ended September 30, 2019.

As of September 30, 2019, we had unrecognized tax benefits under ASC 740 Income Taxes of approximately $5.1 million and applicable interest of less than $0.1 million. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $0.1 million.


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RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 Significant Accounting Policies and Note 11 Leases of the Notes to Condensed Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements, in particular the impact of the adoption of ASC 842 Leases.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Cash Equivalents and Short-term Investments — We had cash equivalents and short-term investments of $72.3 million as of September 30, 2019, 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 less than $0.1 million in the fair value of our cash equivalents and short-term investments as of September 30, 2019.

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 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on their evaluation as of September 30, 2019, our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes to internal controls over financial reporting that occurred during the quarter ended September 30, 2019  that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Our management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any within Immersion, have been detected.


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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Immersion Corporation vs. Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (C.A. No. 17-cv-572, 18-cv-55)

On August 3, 2017, we filed a complaint against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (collectively, “Samsung”) in the U.S. 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 sought to stop Samsung from further infringement as well as the recovery of damages. The complaints asserted
infringement by the Accused Phones of the following patents:

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

U.S. Patent No 7,969,288 (the ’288 patent): “Force Feedback System Including Multi-Tasking Graphical Host Environment and Interface Device”

U.S. Patent No 9,323,332 (the ’332 patent): “Force Feedback System Including Multi-Tasking Graphical Host Environment”