SEC Filing - Immersion Corporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐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.)

330 Townsend Street, Suite 234, San Francisco, CA 94107

(Address of principal executive offices) (Zip Code)

(408) 467-1900

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report.)

Not Applicable

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 ☒ 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 ☒ 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):

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 ☒

Number of shares of common stock outstanding at July 31, 2020 26,894,116.

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IMMERSION CORPORATION

INDEX




		Page
PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019	4

	Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Three and Six Months Ended June 30, 2020 and 2019	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	7

	Unaudited Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	36

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	40

Item 6.	Exhibits	56

SIGNATURES		59

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IMMERSION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	54,101		$	86,478
Short-term investments	—			3,019
Accounts and other receivables	1,789			3,385
Prepaid expenses and other current assets	8,791			14,078
Total current assets	64,681			106,960
Property and equipment, net	252			1,226
Long-term deposits	11,700			7,062
Other assets	8,987			9,600
Total assets	$	85,620		$	124,848
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	474		$	809
Accrued compensation	1,803			2,844
Other current liabilities	2,446			3,478
Deferred revenue	4,617			4,692
Total current liabilities	9,340			11,823
Long-term deferred revenue	23,571			25,952
Other long-term liabilities	2,979			3,316
Total liabilities	35,890			41,091
Contingencies (Note 10)
Stockholders’ equity:
Common stock and additional paid-in capital — $0.001 par value; 100,000,000 shares authorized; 39,007,576 and 38,624,784 shares issued, respectively; 26,864,143 and 31,414,328 shares outstanding, respectively	255,446			253,289
Accumulated other comprehensive income	122			124
Accumulated deficit	(124,105		)	(118,565		)
Treasury stock at cost: 12,143,433 and 7,210,456 shares, respectively	(81,733		)	(51,091		)
Total stockholders’ equity	49,730			83,757
Total liabilities and stockholders’ equity	$	85,620		$	124,848

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues:
Royalty and license	$	5,593		$	8,668		$	11,775		$	13,715
Development, services, and other	75			75			150			150
Total revenues	5,668			8,743			11,925			13,865
Costs and expenses:
Cost of revenues	62			40			106			55
Sales and marketing	1,255			1,579			2,971			3,188
Research and development	1,323			1,831			3,012			4,133
General and administrative	4,087			14,448			11,443			27,143
Total costs and expenses	6,727			17,898			17,532			34,519
Operating loss	(1,059		)	(9,155		)	(5,607		)	(20,654		)
Interest and other income	388			532			160			1,130
Loss before benefit from (provision for) income taxes	(671		)	(8,623		)	(5,447		)	(19,524		)
Benefit from (provision for) income taxes	(41		)	3			(93		)	(112		)
Net loss	$	(712	)	$	(8,620	)	$	(5,540	)	$	(19,636	)
Basic net loss per share	$	(0.03	)	$	(0.27	)	$	(0.19	)	$	(0.63	)
Shares used in calculating basic net loss per share	27,634			31,578			29,320			31,335
Diluted net loss per share	$	(0.03	)	$	(0.27	)	$	(0.19	)	$	(0.63	)
Shares used in calculating diluted net loss per share	27,634			31,578			29,320			31,335

Other comprehensive income (loss)
Change in unrealized gains (loss) on short-term investments	—			16			(2		)	22
Total other comprehensive income (loss)	—			16			(2		)	22
Total comprehensive loss	$	(712	)	$	(8,604	)	$	(5,542	)	$	(19,614	)

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 June 30, 2020
	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Accumulated Other Comprehensive Income		Accumulated Deficit			Shares	Amount			Total Stockholders’ Equity
Balances at March 31, 2020	38,824,681	$	254,081	$	122	$	(123,393	)	9,223,222	$	(63,066	)	$	67,744
Net loss						(712		)					(712		)
Stock repurchases									2,920,211	(18,667		)	(18,667		)
Release of restricted stock units and awards	182,895												—
Stock-based compensation		1,365											1,365
Balances at June 30, 2020	39,007,576	$	255,446	$	122	$	(124,105	)	12,143,433	$	(81,733	)	$	49,730



	Three Months Ended June 30, 2019
	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Accumulated Other Comprehensive Income		Accumulated Deficit			Shares	Amount			Total Stockholders’ Equity
Balances at March 31, 2019	38,375,744	$	248,698	$	122	$	(109,537	)	6,823,147	$	(48,350	)	$	90,933
Net loss						(8,620		)					(8,620		)
Unrealized gain on available-for-sale securities, net of taxes				16									16
Exercise of stock options, net of shares withheld for employee taxes	50,027	300											300
Release of restricted stock units and awards	62,556												—
Stock-based compensation		1,081											1,081
Balances at June 30, 2019	38,488,327	$	250,079	$	138	$	(118,157	)	6,823,147	$	(48,350	)	$	83,710

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)



	Six Months Ended June 30, 2020
	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Accumulated Other Comprehensive Income			Accumulated Deficit			Shares	Amount			Total Stockholders’ Equity
Balances at December 31, 2019	38,624,784	$	253,289	$	124		$	(118,565	)	7,210,456	$	(51,091	)	$	83,757
Net loss							(5,540		)					(5,540		)
Unrealized loss on available-for-sale securities, net of taxes				(2		)								(2		)
Stock repurchases										4,932,977	(30,642		)	(30,642		)
Issuance of stock for ESPP purchase	10,162	63												63
Release of restricted stock units and awards	372,630													—
Stock-based compensation		2,094												2,094
Balances at June 30, 2020	39,007,576	$	255,446	$	122		$	(124,105	)	12,143,433	$	(81,733	)	$	49,730



	Six Months Ended June 30, 2019
	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Accumulated Other Comprehensive Income		Accumulated Deficit			Shares	Amount			Total Stockholders’ Equity
Balances at December 31, 2018	37,652,498	$	246,415	$	116	$	(98,521	)	6,823,147	$	(48,350	)	$	99,660
Net loss						(19,636		)					(19,636		)
Unrealized gain on available-for-sale securities, net of taxes				22									22
Issuance of stock for ESPP purchase	13,479	109											109
Exercise of stock options, net of shares withheld for employee taxes	61,798	371								—			371
Release of restricted stock units and awards	760,552												—
Stock-based compensation		3,184											3,184
Balances at June 30, 2019	38,488,327	$	250,079	$	138	$	(118,157	)	6,823,147	$	(48,350	)	$	83,710

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IMMERSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2020			2019
Cash flows provided by (used in) operating activities:
Net loss	$	(5,540	)	$	(19,636	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,446			854
Stock-based compensation	2,094			3,184
Other	255			60
Changes in operating assets and liabilities:
Accounts and other receivables	1,596			(3,916		)
Prepaid expenses and other current assets	5,306			1,539
Long-term deposit	(4,889		)	(6,783		)
Other assets	748			(4,841		)
Accounts payable	(338		)	3,762
Accrued compensation	(1,041		)	(2,003		)
Other current liabilities	(1,288		)	1,742
Deferred revenue	(2,456		)	(2,108		)
Other long-term liabilities	(661		)	4,231
Net cash used in operating activities	(4,768		)	(23,915		)
Cash flows provided by (used in) investing activities:
Purchases of short-term investments	—			(8,930		)
Proceeds from maturities of short-term investments	3,000			14,000
Purchases of property and equipment	(30		)	(9		)
Net cash provided by investing activities	2,970			5,061
Cash flows provided by (used in) financing activities:
Cash paid for purchases of treasury shares	(30,642		)	—
Proceeds from issuance of common stock under employee stock purchase plan	63			109
Proceeds from stock options exercises	—			371
Net cash provided by (used in) financing activities	(30,579		)	480
Net decrease in cash and cash equivalents	(32,377		)	(18,374		)
Cash and cash equivalents:
Beginning of period	86,478			110,988
End of period	$	54,101		$	92,614
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	20		$	25
Supplemental disclosure of non-cash operating, investing, and financing activities:
Release of restricted stock units and awards under company stock plan	$	2,554		$	7,065
Leased assets obtained in exchange for new operating lease liabilities	$	577		$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Immersion Corporation (the "Company", "Immersion", "we" or "us") was incorporated in 1993 in California and reincorporated in Delaware in 1999. We focus 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 have adopted a business model under which it provides advanced tactile software, related tools, technical assistance designed to help integrate our patented technology into our customers’ products or enhance the functionality of our patented technology to certain customers, and offers licenses to our patented technology to other customers.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to combat the spread of the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The COVID-19 outbreak and related public health measures, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, consumers, economies, and financial markets globally, leading to an economic downturn and increased market volatility.

Our compliance with these containment measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our customers and suppliers for an extended period of time. To support the health and well-being of our employees, customers and communities, we implemented work-from-home and restricted travel policies in the first quarter of 2020, which are expected to remain in place until the end of September 2020. In addition, many of our customers are working remotely, which may delay the timing of some orders due to their and our compliance with frequently changing government-mandated or recommended shelter-in-place orders in jurisdictions in which we, our customers and our suppliers operate.

We reported lower estimated royalties revenue in the second quarter of 2020 following the anticipated volume reductions due to delay in shipments as well as decline in general business environment due to the impact of COVID-19.

In response to certain anticipated impacts from the COVID-19 pandemic, we have also implemented a series of cost reduction initiatives to further preserve financial flexibility. These actions include: reductions of the base salaries and cash compensation of company executives and board members; cancellation and reduction in current year's executive and employee bonus plans; renegotiated professional services fees from third-party services providers; relocation of certain positions to lower-cost regions; temporarily suspended company matching of our employee retirement savings plan and taking advantage of the broad-based employer relief provided by the governments.

In April 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (“CEWS”) for Canadian employers whose businesses were affected by the COVID-19 pandemic. The CEWS provides a subsidy of up to 75% of eligible employees’ employment insurable remuneration, subject to certain criteria. We applied for the CEWS to the extent we met the requirements to receive the subsidy. During the three months ended June 30, 2020, we recorded $0.2 million in government subsidies as a reduction to operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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

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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 our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of condensed consolidated financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of income taxes including uncertain tax provisions, and revenue recognition. Actual results may differ materially from those estimates which were made based on the best information known to management at that time. The business and economic uncertainty resulting from the COVID-19 pandemic has made such estimates and assumptions more difficult to calculate. Accordingly, actual results and outcomes may differ from those estimates.

Segment Information

We develop, license, and support a wide range of software and IP that more fully engage users’ senses of touch when operating digital devices. We focus on the following target application areas: mobile devices, wearables, consumer, mobile entertainment and other content; console gaming; automotive; medical; and commercial. We manage these application areas in one operating and reporting segment with only one set of management, development, and administrative personnel.

Our chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM approves budgets and allocates resources to and assesses the performance of our business using information about our revenue and operating loss. There is only one segment that is reported to management.

Recently Adopted Accounting Pronouncements

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. We adopted ASU 2016-13 as of January 1, 2020. The adoption of this new accounting standard did not have a material impact on our condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment is effective for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. We are evaluating the impact of this amendment on our condensed consolidated financial statements.

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2. REVENUE RECOGNITION

Revenue Recognition Accounting Policy

Our 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

We recognize revenue from a fixed fee license agreement when we have satisfied our performance obligations, which typically occurs upon the transfer of rights to our technology upon the execution of the license agreement. However, in certain contracts, we grant a license to our existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolves throughout the contract term. For such arrangements, we have concluded that there are two separate performance obligations:

•Performance Obligation A: to transfer rights to our patent portfolio as it exists when the contract is executed;

•Performance Obligation B: to transfer rights to our patent portfolio as it evolves over the term of the contract, including access to new 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, we 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, we allocate the transaction price based on the standalone price for each of the two performance obligations. We use a number of factors primarily related to the attributes of our 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 is recognized in the period the license agreement is signed and the customer can benefit from rights provided in the contract. The portion allocable to Performance Obligation B is recognized on a straight-line basis over the contract term. For such contracts, a contract liability account is 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 our license agreements contain fixed fees related to past infringements. Such fixed fees are recognized as revenue or recorded as a deduction to our operating expense in the period 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, we enter into a fixed fee license contract with payments due in a number of installments payable throughout the contract term. In such cases, we will determine if a significant financing component exists and if it does, we will recognize revenue and corresponding interest expense or income, as appropriate.

Per-unit Royalty revenue

We record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. As we generally do not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows us to adequately review the reports and include the actual amounts in our quarterly results for such quarter, we accrue the related revenue based on estimates of our licensees’ underlying sales, subject to certain constraints on our ability to estimate such amounts. We develop 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 our customers, and industry information available for the licensed products.

As a result of accruing per-unit royalty revenue for the quarter based on such estimates, we make adjustments in the following quarter to true-up revenue to the actual amounts reported by our licensees. During the three months ended June 30, 2020, we recorded a $20,000 adjustment to decrease per-unit royalty revenue. This adjustment represents the difference between the actual per-unit royalty revenue for the three months ended March 31, 2020 as reported by our licensees during the three months ended June 30, 2020 and the estimated per-unit royalty revenue for the three months ended March 31, 2020 that we reported during the quarter.

Certain of our per-unit royalty agreements contains a minimum royalty provision which sets forth minimum amounts to be received by us during the contract term. Under Accounting Standard Codification 606, Revenue from Contracts with Customers, (“ASC 606”), minimum royalties are considered a fixed transaction price to which we have an unconditional right

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once all other performance obligations, if any, are satisfied. We recognize 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. We account for the unbilled minimum royalties as contract assets on our 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 are 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 quarter in which the underlying sales took place.

Development, services, and other revenue

As the performance obligation related to our development, service and other revenue is satisfied over a period of time, we recognize 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 our revenue for the three and six months ended June 30, 2020 and 2019 (in thousands).



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Fixed fee license revenue	$	1,292	$	4,254	$	2,578	$	5,994
Per-Unit royalty revenue	4,301		4,414		9,197		7,721
Total royalty and license revenue	5,593		8,668		11,775		13,715
Development, services, and other revenue	75		75		150		150
Total revenue	$	5,668	$	8,743	$	11,925	$	13,865

As of June 30, 2020, we had contract assets of $7.8 million included within Prepaid expenses and other current assets, and $6.0 million included within Other assets on the Condensed Consolidated Balance Sheets. As of December 31, 2019, we had contract assets of $13.1 million included within Prepaid expenses and other current assets, and $6.9 million included within Other assets, on the Condensed Consolidated Balance Sheets.

Contract assets decreased by $6.2 million from December 31, 2019 to June 30, 2020, primarily due to actual royalties billed during the six months ended June 30, 2020 that reduced the minimum royalties recorded in contract assets.

Contract Revenue

Based on contracts signed and payments received as of June 30, 2020, we expect to recognize $28.1 million in revenue related to Performance Obligation B under our fixed fee license agreements, which is satisfied over time, including $13.8 million over one to three years and $14.3 million over more than three years. Revenue related to Performance Obligation B was $30.6 million as of December 31, 2019.

3. FAIR VALUE MEASUREMENTS

Cash, Cash Equivalents and Short-term Investments

Our financial instruments measured at fair value on a recurring basis are cash equivalents and short-term investments.

Our fixed income available-for-sale securities consist of high quality, investment grade securities. We value 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.

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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 June 30, 2020 and December 31, 2019, we did not hold any Level 3 instruments.

Financial instruments measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 are classified based on the valuation technique in the table below (in thousands):



	June 30, 2020
	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	$	45,605	$	—	$	—	$	45,605
Total assets at fair value (1)	$	45,605	$	—	$	—	$	45,605

(1) The above table excludes $8.5 million of cash held in banks.



	December 31, 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	$	63,351	$	—	$	—	$	63,351
U.S. Treasury securities	—		3,019		—		3,019
Total assets at fair value (2)	$	63,351	$	3,019	$	—	$	66,370

(2) The above table excludes $23.1 million of cash held in banks.

The contractual maturities of our available-for-sale securities on June 30, 2020 and December 31, 2019 were all due within one year. There were no transfers of instruments between Level 1 and 2 during the three and six months ended June 30, 2020 and the year ended December 31, 2019.

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 our Condensed Consolidated Balance Sheets.

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Short-term Investments

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



	December 31, 2019
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
U.S. Treasury securities	$	3,018	$	1	$	—	$	3,019
Total	$	3,018	$	1	$	—	$	3,019

We had no short-term investments as of June 30, 2020.

4. BALANCE SHEETS DETAILS

Cash and Cash Equivalents

Our cash and cash equivalent balances were as follows (in thousands):



	June 30, 2020		December 31, 2019
Cash	$	8,496	$	23,127
Money market funds	45,605		63,351
Cash and cash equivalents	$	54,101	$	86,478

Accounts and Other Receivable

Accounts and other receivables consisted of the following (in thousands):



	June 30, 2020		December 31, 2019
Trade accounts receivable	$	1,237	$	2,972
Other receivables	552		413
Accounts and other receivables	$	1,789	$	3,385

Allowance for credit losses as of June 30, 2020 and December 31, 2019 were not material.

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Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):




	June 30, 2020	December 31, 2019
Prepaid expenses	811	933
Contract assets - current	7,787	13,128
Other current assets	193	17
Prepaid expenses and other current assets	8,791	14,078

Other Assets

Other assets consisted of the following (in thousands):



	June 30, 2020		December 31, 2019
Contract assets - long-term	$	5,991	$	6,928
Right-of-use ("ROU") assets	2,337		2,202
Deferred tax assets	470		470
Other assets	189		—
Total other assets	$	8,987	$	9,600

Other Current Liabilities

Other current liabilities are as follows (in thousands):



	June 30, 2020		December 31, 2019
Accrued legal	$	206	$	1,077
Lease liabilities - current	1,406		1,150
Other current liabilities	834		1,251
Total other current liabilities	$	2,446	$	3,478

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5. STOCK-BASED COMPENSATION

Stock Options and Awards

Our 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. We may grant time-based options, market condition-based options, stock appreciation rights, restricted stock ("RSAs"), restricted stock units (“RSUs”), performance shares, performance units, and other stock-based equity awards to employees, officers, directors, and consultants. Under this program, stock options may be granted at prices not less than the fair market value on the date of grant for stock options. Stock options generally vest over four years and expire seven years from the grant date. Market condition-based options are subject to a market condition whereby the closing price of our 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.

A summary of our equity incentive program is as follows (in thousands):



	June 30, 2020
Common stock shares available for grant	2,776
Stock options outstanding	1,370
RSAs outstanding	130
RSUs outstanding	1,124

Time-Based Stock Options

The following summarizes activities for the time-based stock options for the six months ended June 30, 2020 (in thousands except for weighted average exercise price 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, 2019	967		$	8.55	5.63	$	16
Granted	456		$	7.58
Canceled or expired	(53	)	$	9.73
Outstanding as of June 30, 2020	1,370		$	8.18	5.84	$	—
Vested and expected to vest at June 30, 2020	1,178		$	8.23	5.78	$	—
Exercisable at June 30, 2020	344		$	8.89	4.76	$	—

Aggregate intrinsic value is the difference between the closing price on the last trading day in June 30, 2020 and the exercise price, multiplied by the number of in-the-money stock options.

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Restricted Stock Units

The following summarizes RSU activities for the six months ended June 30, 2020 (in thousands except for weighted average grant date fair value 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, 2019	945		$	8.81	1.25	$	7,020
Granted	507		$	5.93
Released	(301	)	$	9.00
Forfeited	(27	)	$	8.18
Outstanding at June 30, 2020	1,124		$	7.47	1.40	$	7,004

Restricted Stock Awards

The following summarizes RSA activities for the six months ended June 30, 2020 (in thousands except for weighted average grant date fair value and weighted average remaining recognition period):



	Number of Restricted Stock Awards		Weighted Average Grant Date Fair Value		Weighted Average Remaining Recognition Period (Years)
Outstanding at December 31, 2019	91		$	7.45	0.45
Granted	142		$	6.43
Released	(71	)	$	7.18
Forfeited	(32	)	$	7.27
Outstanding at June 30, 2020	130		$	6.53	0.95

Employee Stock Purchase Plan

Under our 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 our 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 six months ended June 30, 2020, 10,162 shares were purchased under the ESPP. As of June 30, 2020, 243,275 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 six months ended June 30, 2020 and 2019 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Stock options	$	298	$	122	$	553	$	316
RSUs and RSAs	1,056		938		1,518		2,826
Employee stock purchase plan	11		21		23		42
Total	$	1,365	$	1,081	$	2,094	$	3,184

Sales and marketing	$	343	$	173	$	388	$	493
Research and development	251		190		420		820
General and administrative	771		718		1,286		1,871
Total	$	1,365	$	1,081	$	2,094	$	3,184

We use the Black-Scholes-Merton option pricing model for our time-based options, single-option approach to determine the fair value of standard stock options. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

The determination of the fair value of share-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include actual and projected employee stock option exercise behaviors that impact the expected term, our expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividend.

The assumptions used to value options granted under our equity incentive program are as follows:



	Three Months Ended June 30,			Six Months Ended June 30,
	2020⁽¹⁾	2019		2020		2019
Expected life (in years)	N/A	4.4		4.2		4.5
Volatility	N/A	53	%	52	%	53	%
Interest rate	N/A	1.8	%	1.0	%	2.3	%
Dividend yield	N/A	—	%	—	%	—	%

(1) There were no stock option grants in the three month ended June 30, 2020.

As of June 30, 2020, there were $9.0 million of unrecognized compensation costs, 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 2.31 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

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6. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On November 1, 2007, our Board of Directors (the "Board") authorized the repurchase of up to $50.0 million of our common stock (the “Stock Repurchase Program”). In addition, on October 22, 2014, the Board authorized another $30.0 million under the Stock Repurchase Program. We may repurchase our 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 us to repurchase a specific number of shares, and may be modified, suspended, or discontinued at any time.

During the three months ended June 30, 2020, we repurchased 2.9 million shares for $18.7 million at an average cost of $6.39 per share. During the six months ended June 30, 2020. we repurchased approximately 4.9 million for $30.6 million at an average cost of $6.21 per share. As of June 30, 2020, we have no amount available for repurchase under the Stock Repurchase Program. There were no stock repurchases during the three and six months ended June 30, 2019.

7. INCOME TAXES

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Loss before benefit from (provision for) income taxes	$	(671	)	$	(8,623	)	$	(5,447	)	$	(19,524	)
Benefit from (provision for) income taxes	$	(41	)	$	3		$	(93	)	$	(112	)
Effective tax rate	6.1		%	—		%	1.7		%	0.6		%

The provision for income tax for the three and six months ended June 30, 2020 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. The benefit from income taxes for the three months ended June 30, 2019 and provision for income taxes for the six months ended June 30, 2019 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. For the three and six months ended June 30, 2019, we used a year-to-date approach to calculate the effective tax rate. We continue to carry a full valuation allowance on its 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.

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 which was denied. On June 22, 2020, the Supreme Court refused to hear the Altera case, leaving intact the Ninth Circuit ruling. We had concluded that it was not more-likely-than-not that Altera would prevail with an appeal to the Supreme Court and had made corresponding provisions in previous periods. Accordingly, there was no impact to our condensed consolidated financial statements for the three months ended June 30, 2020 arising from the Supreme Court’s refusal to hear the Altera case.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was passed into law. Among other changes, the Tax Act reduced the US federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced

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earnings. In addition, the Act introduced the Base Erosion and Anti-Abuse Tax (the “BEAT”), which creates a new tax on certain related-party payments. We concluded that it has not met the threshold requirements of the BEAT. On July 9, 2020, the Internal Revenue Service issued final regulations regarding deductions for global intangible low-taxed income (“GILTI”) and foreign-derived intangible income (“FDII”). On July 9, 2020, the Treasury Department released final regulations (TD 9901) under IRC Section 250, which allows an annual deduction to a domestic corporation for its foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) inclusion. The final guidance is not expected to have a material impact on our consolidated financial statements. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of other 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed into law. The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions. We analyzed the provisions of the CARES Act and determined there was no effect on our provision for the current period.

As of June 30, 2020, we had unrecognized tax benefits under ASC 740 Income Taxes of approximately $4.8 million and applicable interest of $29,000. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $97,000. Our 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 June 30, 2020, we had net deferred income tax assets of $0.5 million and deferred income tax liabilities of $0.5 million. Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state, and foreign taxing authorities may examine our tax returns for all years from 2000 through the current period.

We maintain a valuation allowance of $28.0 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 our assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made.

8. 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.

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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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Numerator:
Net loss	$	(712	)	$	(8,620	)	$	(5,540	)	$	(19,636	)
Denominator:
Weighted-average common stock outstanding, basic	27,634			31,578			29,320			31,335
Dilutive effect of potential common shares:
Stock options, RSUs, RSA and ESPP	—			—			—			—
Total shares, diluted	27,634			31,578			29,320			31,335
Basic net loss per share	$	(0.03	)	$	(0.27	)	$	(0.19	)	$	(0.63	)
Diluted net loss per share	$	(0.03	)	$	(0.27	)	$	(0.19	)	$	(0.63	)

As of June 30, 2020, approximately 1.4 million stock options and 1.3 million RSUs and RSAs were excluded from computation of diluted net loss per share because their effect would have been anti-dilutive.

As of June 30, 2019, approximately 2.0 million stock options and 0.8 million RSUs and RSAs were excluded from computation of diluted net loss per share because their effect would have been anti-dilutive.

9. LEASES

We lease all of our office space pursuant to operating lease and sublease arrangements, which expire at various dates through February 29, 2024. We recognize lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets. We combine lease and non-lease components for new and reassessed leases. We apply discount rates to operating leases using a portfolio approach.

On January 31, 2020, we entered into an agreement to lease approximately 5,000 square feet of office space in San Francisco, California. This facility is used for administrative and headquarter functions. The lease commenced in the first quarter of 2020 and expires in 2022. During the three months ended March 31, 2020, we recorded a lease liability of $0.6 million, which represents the present value of the lease payments using an estimated incremental borrowing rate of 3.50%. We also recognized lease right-of-use assets ("ROU") of $0.6 million which represents our right to use an underlying asset for the lease term. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Below is a summary of our ROU assets and lease liabilities as of June 30, 2020 and December 31, 2019, respectively (in thousands):



	Balance Sheets Classification	June 30, 2020		December 31, 2019
Assets
Right-of-use assets	Other assets	$	2,337	$	2,202
Liabilities
Operating lease liabilities - current	Other current liabilities	1,406		1,150
Operating lease liabilities - long-term	Other long-term liabilities	2,324		2,664
Total lease liabilities		$	3,730	$	3,814

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During 2019, we began to shift general and administrative, research and development and executive functions and employees from our San Jose, California facility (“SJ Facility”) to our San Francisco, California and Montreal, Canada offices. In the fourth quarter of 2019, we announced our decision to exit the SJ Facility by March 31, 2020. We accelerated the amortization of our SJ Facility leasehold improvements over their remaining estimated life. As of March 31, 2020, the SJ Facility leasehold improvements were fully amortized.

On March 12, 2020, we entered into a sublease agreement with Neato Robotics, Inc. ("Neato") for the San Jose California Facility ("SJ Facility"). This sublease commenced in June 2020 and ends on April 30, 2023 which is the lease termination date of the original SJ Facility lease.

In accordance with provisions of ASC 842 Leases ("ASC 842"), we treated the sublease as a separate lease as we were not relieved of the primary obligation under the original lease. We continue to account for the original SJ Facility, as a lessee, in the same manner as prior to the commencement date of the sublease. We accounted for the sublease as a lessor of the lease. We classified the sublease as an operating lease as it did not meet the criteria of a Sale-Type or Direct Financing lease.

At the commencement date of the sublease, we recognized initial direct costs of $0.3 million. These deferred costs will be amortized over the terms of the sublease payments. As of June 30, 2020, $0.1 million was reported in Prepaid expenses and other current assets and $0.2 million was reported in Other assets on our Condensed Consolidated Balance Sheets.

We recognize operating lease expense and lease payments from the sublease, on a straight-line basis, in our Condensed Consolidated Statements of Operations and Comprehensive Loss over the lease terms. During the three and six months ended June 30, 2020, and 2019, our net operating lease expenses are as follows (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020				2019
Operating lease cost	$	301		$	265	$	573			$	555
Sublease income	(70		)	—		(70		)	<