IMMERSION CORP - Quarter Report: 2009 June (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended June 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-27969
IMMERSION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 94-3180138 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
801 Fox Lane, San Jose, California 95131
(Address of principal executive offices)(Zip Code)
(408) 467-1900
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Number of shares of common stock outstanding at January 25, 2010: 27,999,593
IMMERSION CORPORATION
INDEX
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PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 25,047 | $ | 64,769 | ||||
Short-term investments |
48,962 | 20,974 | ||||||
Accounts receivable (net of allowances for doubtful accounts of: June 30, 2009 $241
and December 31, 2008 $436) |
4,185 | 6,114 | ||||||
Inventories net |
3,672 | 3,757 | ||||||
Deferred income taxes |
311 | 311 | ||||||
Prepaid expenses and other current assets |
4,012 | 4,344 | ||||||
Total current assets |
86,189 | 100,269 | ||||||
Property and equipment, net |
3,868 | 3,827 | ||||||
Intangibles and other assets, net |
10,329 | 9,491 | ||||||
Total assets |
$ | 100,386 | $ | 113,587 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 903 | $ | 2,842 | ||||
Accrued compensation |
2,052 | 2,920 | ||||||
Other current liabilities |
3,731 | 3,493 | ||||||
Deferred revenue and customer advances |
7,833 | 8,042 | ||||||
Total current liabilities |
14,519 | 17,297 | ||||||
Long-term deferred revenue |
18,131 | 15,989 | ||||||
Deferred income tax liabilities |
311 | 311 | ||||||
Other long-term liabilities |
217 | 212 | ||||||
Total liabilities |
33,178 | 33,809 | ||||||
Contingencies (Note 16) |
||||||||
Stockholders equity: |
||||||||
Common stock and additional paid-in capital $0.001 par value; 100,000,000 shares
authorized; shares issued: June 30, 2009 30,779,628 and December 31, 2008
30,674,045; shares outstanding: June 30, 2009 27,991,759 and
December 31, 2008 27,887,482 |
170,808 | 167,870 | ||||||
Warrants |
11 | 1,731 | ||||||
Accumulated other comprehensive income |
114 | 109 | ||||||
Accumulated deficit |
(85,328 | ) | (71,543 | ) | ||||
Treasury stock at cost: June 30, 2009 2,787,869 shares and
December 31, 2008 2,786,563 shares |
(18,397 | ) | (18,389 | ) | ||||
Total stockholders equity |
67,208 | 79,778 | ||||||
Total liabilities and stockholders equity |
$ | 100,386 | $ | 113,587 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(As Restated)(1) | (As Restated)(1) | |||||||||||||||
Revenues: |
||||||||||||||||
Royalty and license |
$ | 3,580 | $ | 3,171 | $ | 7,361 | $ | 6,632 | ||||||||
Product sales |
2,772 | 3,744 | 6,051 | 6,324 | ||||||||||||
Development contracts and other |
330 | 704 | 776 | 1,503 | ||||||||||||
Total revenues |
6,682 | 7,619 | 14,188 | 14,459 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales (exclusive of amortization and impairment
of intangibles shown separately below) |
2,312 | 2,051 | 3,563 | 3,735 | ||||||||||||
Sales and marketing |
4,016 | 3,846 | 8,300 | 7,191 | ||||||||||||
Research and development |
3,412 | 2,940 | 7,341 | 6,430 | ||||||||||||
General and administrative |
4,841 | 5,111 | 9,226 | 9,525 | ||||||||||||
Amortization and impairment of intangibles |
224 | 202 | 439 | 472 | ||||||||||||
Restructuring costs |
705 | | 1,351 | | ||||||||||||
Total costs and expenses |
15,510 | 14,150 | 30,220 | 27,353 | ||||||||||||
Operating loss |
(8,828 | ) | (6,531 | ) | (16,032 | ) | (12,894 | ) | ||||||||
Change in fair value of warrant liability |
(136 | ) | | 344 | | |||||||||||
Interest and other income |
207 | 973 | 510 | 2,608 | ||||||||||||
Loss from continuing operations before provision for income taxes |
(8,757 | ) | (5,558 | ) | (15,178 | ) | (10,286 | ) | ||||||||
Benefit (provision) for income taxes |
(300 | ) | 1,903 | (391 | ) | 3,157 | ||||||||||
Loss from continuing operations |
(9,057 | ) | (3,655 | ) | (15,569 | ) | (7,129 | ) | ||||||||
Discontinued operations (Note 10) : |
||||||||||||||||
Gain on sales of discontinued operations net of provision for
income taxes of $0 |
20 | | 187 | | ||||||||||||
Gain from discontinued operations, net of provision (benefit) for
income taxes of $(48), $133, $102, and $324 |
166 | 210 | 401 | 536 | ||||||||||||
Net loss |
$ | (8,871 | ) | $ | (3,445 | ) | $ | (14,981 | ) | $ | (6,593 | ) | ||||
Basic and diluted net loss per share |
||||||||||||||||
Continuing operations |
(0.33 | ) | (0.12 | ) | (0.56 | ) | (0.23 | ) | ||||||||
Discontinued operations |
0.01 | 0.01 | 0.02 | 0.01 | ||||||||||||
Total |
$ | (0.32 | ) | $ | (0.11 | ) | $ | (0.54 | ) | $ | (0.22 | ) | ||||
Shares used in calculating basic and diluted net loss per share |
27,968 | 30,356 | 27,946 | 30,417 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
(1) See Note 2 Restatement of Condensed Consolidated Financial Statements of Notes to
Condensed Consolidated Financial Statements.
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Six Months Ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
As Restated (1) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (14,981 | ) | $ | (6,593 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
873 | 541 | ||||||
Amortization and impairment of intangibles |
439 | 472 | ||||||
Stock-based compensation |
2,651 | 2,759 | ||||||
Excess tax benefits from stock-based compensation |
| (176 | ) | |||||
Realized gain on short-term investments |
| (80 | ) | |||||
Change in fair value of warrant liability |
(344 | ) | | |||||
Write off of equipment |
708 | | ||||||
Gain on sales of discontinued operations |
(187 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
1,943 | 728 | ||||||
Inventories |
(172 | ) | (822 | ) | ||||
Deferred income taxes |
| (623 | ) | |||||
Prepaid expenses and other current assets |
332 | (1,333 | ) | |||||
Other assets |
7 | 19 | ||||||
Accounts payable |
(1,789 | ) | 290 | |||||
Accrued compensation and other current liabilities |
(783 | ) | 1,165 | |||||
Income taxes payable |
4 | (319 | ) | |||||
Deferred revenue and customer advances |
1,933 | 2,478 | ||||||
Other long-term liabilities |
5 | 30 | ||||||
Net cash used in operating activities |
(9,361 | ) | (1,464 | ) | ||||
Cash flows provided by (used in) investing activities: |
||||||||
Purchases of short-term investments |
(48,988 | ) | (32,144 | ) | ||||
Maturities of short-term investments |
21,000 | 51,979 | ||||||
Additions to intangibles |
(1,543 | ) | (1,560 | ) | ||||
Purchases of property and equipment |
(1,288 | ) | (1,065 | ) | ||||
Proceeds from sales of discontinued operations |
187 | | ||||||
Net cash provided by (used in) investing activities |
(30,632 | ) | 17,210 | |||||
Cash flows provided by (used in) financing activities: |
||||||||
Issuance of common stock under employee stock purchase plan |
134 | 168 | ||||||
Exercise of stock options and warrants |
144 | 1,121 | ||||||
Excess tax benefits from stock-based compensation |
| 176 | ||||||
Purchases of treasury stock |
| (6,155 | ) | |||||
Tax withholding payment related to vested and released restricted stock units |
(7 | ) | | |||||
Net cash provided by (used in) financing activities |
271 | (4,690 | ) | |||||
Effect (decrease) of exchange rates on cash and cash equivalents |
| (14 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(39,722 | ) | 11,042 | |||||
Cash and cash equivalents: |
||||||||
Beginning of the period |
64,769 | 86,493 | ||||||
End of the period |
$ | 25,047 | $ | 97,535 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid (received) for taxes |
$ | 7 | $ | (731 | ) | |||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Shares
issued upon vesting of restricted stock units |
$ | 22 | $ | | ||||
Amounts accrued for property and equipment, and intangibles |
$ | 434 | $ | 701 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
(1) See Note 2 Restatement of Condensed Consolidated Financial Statements of Notes to
Condensed Consolidated Financial Statements.
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IMMERSION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Immersion Corporation (the Company) was incorporated in 1993 in California and
reincorporated in Delaware in 1999 and develops, manufactures, licenses, and supports a wide range
of hardware and software technologies and products that enhance digital devices with touch
interaction.
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Immersion Corporation
and its majority-owned subsidiaries. All intercompany accounts, transactions, and balances have
been eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP) for interim
financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X and,
therefore, do not include all information and footnotes necessary for a complete presentation of
the financial position, results of operations, and cash flows, in conformity with accounting
principles generally accepted in the United States of America. These condensed consolidated
financial statements should be read in conjunction with the Companys audited consolidated
financial statements included in the Companys Amendment No. 1 to Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2008. 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 period have been included.
The results of operations for the interim periods ended June 30, 2009 are not necessarily
indicative of the results to be expected for the full year.
Revenue Recognition
The Company recognizes revenues in accordance with applicable accounting standards, including
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition (SAB No. 104); Emerging Issues Task Force (EITF) No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables (EITF No. 00-21); and American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue
Recognition (SOP No. 97-2), as amended. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and
determinable, and collectability is probable. The Company derives its revenues from three principal
sources: royalty and license fees, product sales, and development contracts.
Royalty
and license revenue The Company recognizes royalty and license revenue based on
royalty reports or related information received from the licensee as well as time-based licenses of
its intellectual property portfolio. Up-front payments under license agreements are deferred and
recognized as revenue either based on the royalty reports received or amortized over the license
period depending on the nature of the agreement. Advance payments under license agreements that
also require the Company to provide future services to the licensee are deferred and recognized
over the service period once services commence when vendor-specific objective evidence (VSOE)
related to the value of the services does not exist.
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The Company generally recognizes revenue from its licensees under one or a combination of the
following models:
License revenue model | Revenue recognition | |
Perpetual license of
intellectual property portfolio
based on per unit royalties, no
services contracted.
|
Based on royalty reports received from licensees. No further obligations to licensee exist. | |
Time-based license of
intellectual property portfolio
with up-front payments and/or
annual minimum royalty
requirements, no services
contracted. Licensees have
certain rights to updates to
the intellectual property
portfolio during the contract
period.
|
Based on straight-line amortization of annual minimum/up-front payment recognized over contract period or annual minimum period. | |
Perpetual license of
intellectual property portfolio
or technology license along
with contract for development
work.
|
Based on proportional performance method over the service period or completed performance method. | |
License of software or
technology, no modification
necessary, no services
contracted.
|
Up-front revenue recognition based on SOP No. 97-2 criteria or SAB No. 104, as applicable. |
Individual contracts may have characteristics that do not fall within a specific license model
or may have characteristics of a combination of license models. Under those circumstances, the
Company recognizes revenue in accordance with SAB No. 104, EITF No. 00-21, and SOP No.97-2, as
amended, to guide the accounting treatment for each individual contract. See also the discussion
regarding Multiple element arrangements below.
Product
sales The Company generally recognizes revenues from product sales when the product
is shipped, provided the other revenue recognition criteria are met, including that collection is
determined to be probable and no significant obligation remains. The Company sells the majority of
its products with warranties ranging from three to sixty months. The Company records the estimated
warranty costs during the quarter the revenue is recognized. Historically, warranty-related costs
and related accruals have not been significant. The Company offers a general right of return on the
MicroScribe® product line for 14 days after purchase. The Company recognizes revenue at
the time of shipment of a MicroScribe digitizer and provides an accrual for potential returns based
on historical experience. The Company offers no other general right of return on its products.
Development
contracts and other revenue Development contracts and other revenue is comprised
of professional services (consulting services and/or development contracts), customer support, and
extended warranty contracts. Development contract revenues are recognized under the proportional
performance accounting method based on physical completion of the work to be performed or completed
performance method. Losses on contracts are recognized when determined. Revisions in estimates are
reflected in the period in which the conditions become known. Customer support and extended
warranty contract revenue is recognized ratably over the contractual period.
Multiple
element arrangements The Company enters into revenue arrangements in which the
customer purchases a combination of patent, technology, and/or software licenses, products,
professional services, support, and extended warranties (multiple element arrangements). The
Company allocates revenue to each element based on the relative fair value of each of the elements.
If vendor specific objective evidence of fair value does not exist, the revenue is generally
recorded over the term of the contract or upon delivery of all elements for which vendor specific
evidence of fair value does not exist.
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Recent Accounting Pronouncements
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP No. FAS 142-3). FSP No. FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under Statement of SFAS No. 142, Goodwill and Other Intangible
Assets. FSP No. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The
adoption of this guidance did not have a material impact on the Companys condensed consolidated
results of operations, financial position or cash flows.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP No. FAS 115-2 and FAS No. 124-2). This FSP
amends the other-than temporary impairment guidance for debt securities to make the guidance more
operational and to improve the presentation and disclosure of other-than-temporary impairments in
the financial statements. The most significant change the FSP brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. FSP No. FAS 115-2 and FAS No.
124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The
adoption of this guidance did not have a material impact on the Companys condensed consolidated
results of operations, financial position or cash flows.
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP No. FAS 157-4). This FSP provides additional guidance for
estimating fair value in accordance with SFAS No. 157, Fair Value Measurements (SFAS No. 157),
when the volume and level of activity for the asset or liability have significantly decreased. This
FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.
This FSP emphasizes that even if there has been a significant decrease in the volume and level of
activity for the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the measurement date under
current market conditions. FSP No. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, and is applied prospectively. The adoption of this guidance did not
have a material impact on the Companys condensed consolidated results of operations, financial
position or cash flows.
In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board (APB) 28-1,
Interim Disclosures about Fair Value of Financial Instruments (FSP No. FAS 107-1 and APB No.
28-1). This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to
require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB No. 28-1 is effective for interim
and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have
a material impact on the Companys condensed consolidated results of operations, financial position
or cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). SFAS No. 165
provides guidance on managements assessment of subsequent events and incorporates this guidance
into accounting literature. It also requires entities to disclose the date through which they have
evaluated subsequent events and whether the date corresponds with the release of their financial
statements. This guidance is effective for all interim and annual periods ending after June 15,
2009. The adoption of this guidance did not have a material impact on the Companys consolidated
results of operations or financial position. The Company has evaluated subsequent events through
February 8, 2010, the date of issuance of the Companys condensed consolidated financial
statements.
In September 2009, the FASB ratified EITF Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables (EITF No. 08-1). EITF No. 08-1 superseded EITF No.00-21 and addresses criteria for
separating the consideration in multiple-element arrangements. EITF No. 08-1 will require companies
to allocate the overall consideration to each deliverable by using a best estimate of the selling
price of individual deliverables in the arrangement in the absence of vendor-specific objective
evidence or other third-party evidence of the selling price. EITF No. 08-1 will be effective
prospectively for revenue
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arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 and early adoption will be permitted. The Company is currently
evaluating
the potential impact, if any, of the adoption of EITF No. 08-1 on its consolidated results of
operations and financial condition.
In September 2009, the FASB also ratified EITF No. 09-3, Certain Revenue Arrangements That
Include Software Elements (EITF No. 09-3). EITF No. 09-3 modifies the scope of Statement of
Position No. 97-2, Software Revenue Recognition, to exclude (a) non-software components of
tangible products and (b) software components of tangible products that are sold, licensed, or
leased with tangible products when the software components and non-software components of the
tangible product function together to deliver the tangible products essential functionally. EITF
No. 09-3 has an effective date that is consistent with EITF No. 08-1. The Company is currently
evaluating the potential impact, if any, of the adoption of EITF No. 09-3 on its consolidated
results of operations and financial condition.
2. RESTATEMENT OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the issuance of the Companys unaudited condensed consolidated financial
statements for the quarter ended June 30, 2008, the Companys management determined that errors
existed in its previously issued financial statements. As a result, the accompanying condensed
consolidated financial statements for the quarter and six months ended June 30, 2008 have been
restated from amounts previously reported. The following summarizes the nature of the errors and
the effects on the condensed consolidated financial statements.
Revenue Transactions
Side Agreement
The Company determined that certain commitments may have been made to a customer of its
Medical line of business in the form of an undisclosed apparent side agreement dated in the fourth
quarter of fiscal 2008. The customer and the Company had previously executed a distribution
agreement in May 2008, and the customer entered into various sales transactions with the Company,
both before and after the date of the apparent side agreement. The Company concluded that revenue
should not have been recognized on certain transactions resulting in restatement adjustments to
revenue in various reporting periods for the following reasons: (i) in certain circumstances, the
product remained in a third-party warehouse and was not shipped to the customer until after the
quarter in which revenue was recognized; (ii) a previously undisclosed apparent side agreement
caused the terms of earlier transactions to be deemed not final until the distribution agreement
between the customer and the Company was terminated; (iii) in certain circumstances, the Company
had conflicting exclusivity arrangements in effect during the quarters when the Company was
recognizing revenue for transactions with such customer; and (iv) concessions related to extended
payment terms caused the amount to not be fixed and determinable. As a result, the
Company determined that a total of $511,000 of revenue recorded in the quarter and six months ended
June 30, 2008 had not been appropriately recognized and has been reversed and will be recorded in
subsequent periods.
Additional Transactions Analyzed
The Company also discovered additional transactions in its Medical line of business where
revenue was not properly recognized due to one or more of the following reasons:
| Premature recognition of revenue for products sold with FOB Destination or other similar shipping terms, or for incomplete shipment of products or storage of products following shipment; | ||
| Non-standard terms and conditions that prevented recognition of revenue upon shipment, including rights of return, extended payment terms, product replacement commitments, potential free upgrades and other non-standard commitments, that prevented recognition of revenue upon shipment; and | ||
| Lack of probable collectability at the time revenue was recognized. |
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As a result, for the three months ended June 30, 2008 a net decrease in revenue in the amount
of $114,000 was recorded. This included an increase of approximately $80,000 that was originally
recorded in the prior quarter which has now been recorded in the second quarter of 2008 and a
decrease of approximately $194,000 of revenue originally recorded in the second quarter of 2008
which has been reversed and recognized in subsequent periods. For the six months ended June 30,
2008, a decrease in revenues of $194,000 was recorded which will be recognized in subsequent
periods
Other Impact of Revenue Adjustments
As a result of the adjustments to revenues discussed above, cost of product sales decreased by
$231,000 and $252,000 for the quarter ended and six months ended June 30, 2008, respectively and
commission expense decreased by $21,000 for the quarter ended and six months ended June 30, 2008.
There was no other impact on these accounts for the quarter or six months ended June 30, 2008.
Other Errors in Condensed Consolidated Financial Statements
The Company also corrected the condensed consolidated financial statements for the following
items:
| Stock-Based Compensation Expense. The Company identified a software-based error in its calculated stock-based compensation expense. The previous version of software used to calculate stock-based compensation expense incorrectly continued to apply a weighted average forfeiture rate to the vested portion of stock option awards until the grants final vest date, rather than reflecting actual forfeitures as awards vested. This error resulted in an understatement of stock-based compensation expense in certain periods prior to the grants final vest date. The Company recorded additional stock-based compensation expense of $187,000 and $830,000 for the first quarter and six months ended June 30, 2008, respectively. | ||
| Interest Income. The Company identified an error in the accounting relating to the timing of the recognition of interest income with respect to its patent license with Sony Computer Entertainment. Accordingly, the Company recorded additional interest income of approximately $64,000 and $192,000 for the second quarter and six months ended June 30, 2008, respectively. This accounting error related to the timing of the recognition of interest income but does not change the overall interest income to be recognized. | ||
| Amortization and Impairment of Intangibles. The Company identified instances where it had not commenced amortization of patents in the periods the patents were granted. In addition, the Company identified certain patent applications that were abandoned but had not been previously identified as such and has corrected this error by increasing amortization and impairment of intangibles by $27,000 and $62,000 in the second quarter and six months ended June 30, 2008, respectively. |
Impact of Corrections on Previously Issued Condensed Consolidated Financial Statements
The Companys accompanying condensed consolidated financial statements have been restated
resulting from the restatement adjustments described above, as follows:
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Detailed Components of Revenue Transaction Adjustments | ||||||||||||||||
($ in thousands) | ||||||||||||||||
Total Impact of Revenue | ||||||||||||||||
Revenue | Cost of Product Sales | Commission Expense | Adjustments | |||||||||||||
Six
months ended June 30, 2008 |
||||||||||||||||
Increase (Decrease) |
$ | (691) | (1) | $ | 252 | $ | 21 | $ | (418 | ) | ||||||
Three months ended
June 30, 2008 |
||||||||||||||||
Increase (Decrease) |
$ | (602) | (2) | $ | 231 | $ | 21 | $ | (350 | ) |
(1) | For the six months ended June 30, 2008 reflects a decrease of $511,000 as discussed in Side Agreement and a decrease of $194,000 in revenue as discussed in Additional Transactions Analyzed and an increase of $14,000 in revenue due to warranty adjustments. | |
(2) | For the three months ended June 30, 2008 reflects a decrease of $511,000 as discussed in Side Agreement and a net decrease of $114,000 in revenue as discussed in Additional Transactions Analyzed and an increase of $23,000 in revenue due to warranty adjustments. |
Summary of Impact of Restatement Adjustments | ||||||||||||||||||||||||||||
Loss from | ||||||||||||||||||||||||||||
Loss from Continuing Operations Before | Continuing | |||||||||||||||||||||||||||
Provision for Income Taxes | Operations | |||||||||||||||||||||||||||
Revenue | Amortization | |||||||||||||||||||||||||||
Transactions | and | Total | ||||||||||||||||||||||||||
Adjustments | Impairment | Interest | Stock-based | Income Tax | Adjustments | |||||||||||||||||||||||
(1) | of Intangibles | Income | Compensation | Total | Effect | Net of Tax | ||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||
Six months ended June 30, 2008 |
||||||||||||||||||||||||||||
Increase
(Decrease) |
$ | (418 | ) | $ | (62 | ) | $ | 192 | $ | (830 | ) | $ | (1,118 | ) | $ | 199 | $ | (919 | ) | |||||||||
Three months ended June 30, 2008 |
||||||||||||||||||||||||||||
Increase (Decrease) |
$ | (350 | ) | $ | (27 | ) | $ | 64 | $ | (187 | ) | $ | (500 | ) | $ | 148 | $ | (352 | ) |
(1) See table above
The following tables present the impact of the restatement and reclassification on the
Companys previously issued condensed consolidated statements of operations for the quarter and six
months ended June 30, 2008 and cash flow for the six months ended June 30, 2008.
Additionally, as disclosed in footnote 10, the previously reported results of operations of
the 3D product line for the quarter and six months ended June 30, 2008 have been reclassified and
reported separately in the condensed consolidated statement of operations as discontinued
operations.
11
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(In thousands, except per share amounts)
Three Months Ended June 30, 2008 | ||||||||||||||||||
As Previously | Discontinued | Restatement | As | |||||||||||||||
Reported | Operations | Adjustments | Restated and | |||||||||||||||
Reclassification | Reclassified | |||||||||||||||||
Revenues: |
||||||||||||||||||
Royalty and license |
$ | 3,171 | $ | - | $ | - | $ | 3,171 | ||||||||||
Product
sales |
5,386 | (1,040 | ) | (602 | ) | 3,744 | ||||||||||||
Development contracts and other |
756 | (52 | ) | - | 704 | |||||||||||||
Total revenues |
9,313 | (1,092 | ) | (602 | ) | 7,619 | ||||||||||||
Costs and expenses: |
||||||||||||||||||
Cost of product sales (exclusive of amortization and impairment of intangibles
shown separately below) |
2,570 | (301 | ) | (218 | ) | 2,051 | ||||||||||||
Sales and marketing |
4,258 | (448 | ) | 36 | 3,846 | |||||||||||||
Research and development |
2,855 | - | 85 | 2,940 | ||||||||||||||
General and administrative |
5,084 | - | 27 | 5,111 | ||||||||||||||
Amortization and impairment of intangibles |
170 | - | 32 | 202 | ||||||||||||||
Total costs and expenses |
14,937 | (749 | ) | (38 | ) | 14,150 | ||||||||||||
Operating
loss |
(5,624 | ) | (343 | ) | (564 | ) | (6,531 | ) | ||||||||||
Interest and other income |
909 | - | 64 | 973 | ||||||||||||||
Loss from continuing operations before provision for income taxes |
(4,715 | ) | (343 | ) | (500 | ) | (5,558 | ) | ||||||||||
Benefit for income taxes |
1,624 | 131 | 148 | 1,903 | ||||||||||||||
Loss from continuing operations |
(3,091 | ) | (212 | ) | (352 | ) | (3,655 | ) | ||||||||||
Discontinued operations: |
||||||||||||||||||
Gain from discontinued operations, net of provision for |
||||||||||||||||||
income taxes of $133 |
- | 212 | (2 | ) | 210 | |||||||||||||
Net loss |
$ | (3,091 | ) | $ | - | $ | (354 | ) | $ | (3,445 | ) | |||||||
Basic and diluted net loss per share |
||||||||||||||||||
Continuing operations |
$ | (0.10 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.12 | ) | ||||||
Discontinued operations |
- | 0.01 | (0.00 | ) | 0.01 | |||||||||||||
Total
|
$ | (0.10 | ) | $ | 0.00 | $ | (0.01 | ) | $ | (0.11 | ) | |||||||
Shares used in calculating basic and diluted net loss per share |
30,356 | - | - | 30,356 | ||||||||||||||
12
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(In thousands, except per share amounts)
Six Months Ended June 30, 2008 | ||||||||||||||||
As Previously | Discontinued | Restatement | As | |||||||||||||
Reported | Operations | Adjustments | Restated and | |||||||||||||
Reclassification | Reclassified | |||||||||||||||
Revenues: |
||||||||||||||||
Royalty and license |
$ | 6,632 | $ | - | $ | - | $ | 6,632 | ||||||||
Product
sales |
9,237 | (2,222 | ) | (691 | ) | 6,324 | ||||||||||
Development contracts and other |
1,599 | (96 | ) | - | 1,503 | |||||||||||
Total revenues |
17,468 | (2,318 | ) | (691 | ) | 14,459 | ||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales (exclusive of amortization and impairment of intangibles
shown separately below) |
4,656 | (704 | ) | (217 | ) | 3,735 | ||||||||||
Sales and marketing |
7,700 | (754 | ) | 245 | 7,191 | |||||||||||
Research and development |
6,084 | - | 346 | 6,430 | ||||||||||||
General and administrative |
9,347 | - | 178 | 9,525 | ||||||||||||
Amortization and impairment of intangibles |
405 | - | 67 | 472 | ||||||||||||
Total costs and expenses |
28,192 | (1,458 | ) | 619 | 27,353 | |||||||||||
Operating
loss |
(10,724 | ) | (860 | ) | (1,310 | ) | (12,894 | ) | ||||||||
Interest and other income |
2,416 | - | 192 | 2,608 | ||||||||||||
Loss from continuing operations before provision for income taxes |
(8,308 | ) | (860 | ) | (1,118 | ) | (10,286 | ) | ||||||||
Benefit for income taxes |
2,632 | 326 | 199 | 3,157 | ||||||||||||
Loss from continuing operations |
(5,676 | ) | (534 | ) | (919 | ) | (7,129 | ) | ||||||||
Discontinued operations: |
||||||||||||||||
Gain from discontinued operations, net of provision for |
||||||||||||||||
income taxes of $324 |
- | 534 | 2 | 536 | ||||||||||||
Net loss |
$ | (5,676 | ) | $ | - | $ | (917 | ) | $ | (6,593 | ) | |||||
Basic and diluted net loss per share |
||||||||||||||||
Continuing operations |
$ | (0.19 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.23 | ) | ||||
Discontinued operations |
- | 0.01 | 0.00 | 0.01 | ||||||||||||
Total
|
$ | (0.19 | ) | $ | 0.00 | $ | (0.03 | ) | $ | (0.22 | ) | |||||
Shares used in calculating basic and diluted net loss per share |
30,417 | - | - | 30,417 | ||||||||||||
13
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(In thousands)
Six Months Ended June 30, 2008 | ||||||||||||
As | ||||||||||||
Previously | Restatement | As | ||||||||||
Reported | Adjustments | Restated | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net
loss |
$ | (5,676 | ) | $ | (917 | ) | $ | (6,593 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||||||
Depreciation and amortization |
541 | - | 541 | |||||||||
Amortization and impairment of intangibles |
405 | 67 | 472 | |||||||||
Stock-based compensation |
1,929 | 830 | 2,759 | |||||||||
Excess tax benefits from stock-based compensation |
(176 | ) | - | (176 | ) | |||||||
Realized gain on short-term investments |
(80 | ) | - | (80 | ) | |||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
175 | 553 | 728 | |||||||||
Inventories
|
(590 | ) | (232 | ) | (822 | ) | ||||||
Deferred income taxes |
(475 | ) | (148 | ) | (623 | ) | ||||||
Prepaid expenses and other current assets |
(1,164 | ) | (169 | ) | (1,333 | ) | ||||||
Other
assets |
19 | - | 19 | |||||||||
Accounts payable |
290 | - | 290 | |||||||||
Accrued compensation and other current liabilities |
1,186 | (21 | ) | 1,165 | ||||||||
Income taxes payable |
(319 | ) | - | (319 | ) | |||||||
Deferred revenue and customer advances |
2,436 | 42 | 2,478 | |||||||||
Other long-term liabilities |
30 | - | 30 | |||||||||
Net cash used in operating activities |
(1,469 | ) | 5 | (1,464 | ) | |||||||
Cash flows provided by (used in) investing activities: |
||||||||||||
Purchases of short-term investments |
(32,144 | ) | - | (32,144 | ) | |||||||
Maturities of short-term investments |
51,979 | - | 51,979 | |||||||||
Additions to intangibles |
(1,555 | ) | (5 | ) | (1,560 | ) | ||||||
Purchases of property and equipment |
(1,065 | ) | - | (1,065 | ) | |||||||
Net cash provided by investing activities |
17,215 | (5 | ) | 17,210 | ||||||||
Cash flows provided by (used in) financing activities: |
||||||||||||
Issuance of common stock under employee stock purchase plan |
168 | - | 168 | |||||||||
Exercise of stock options and warrants |
1,121 | - | 1,121 | |||||||||
Excess tax benefits from stock-based compensation |
176 | - | 176 | |||||||||
Purchases of treasury stock |
(6,155 | ) | - | (6,155 | ) | |||||||
Net cash used in financing activities |
(4,690 | ) | - | (4,690 | ) | |||||||
Effect (decrease) of exchange rates on cash and cash equivalents |
(14 | ) | - | (14 | ) | |||||||
Net increase in cash and cash equivalents |
11,042 | - | 11,042 | |||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of the period |
86,493 | - | 86,493 | |||||||||
End of the period |
$ | 97,535 | $ | - | $ | 97,535 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash received for taxes |
$ | (731 | ) | $ | - | $ | (731 | ) | ||||
Non-cash investing and financing activities: |
||||||||||||
Amounts accrued for property and equipment, and intangibles |
$ | 701 | $ | - | $ | 701 | ||||||
14
Table of Contents
3. FAIR VALUE MEASUREMENTS
Cash Equivalents, Short-term Investments, and Warrant Derivative Liabilities
The financial instruments of the Company measured at fair value on a recurring basis are cash
equivalents, short-term investments, and warrant derivative liabilities. The Companys cash
equivalents and short-term investments are generally classified within Level 1 or Level 2 of the
fair value hierarchy because they are valued using quoted market prices, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price transparency. The
Companys warrant derivative liabilities are generally classified within Level 3 of the fair value
hierarchy because they are valued using unobservable inputs which reflect the reporting entitys
own assumptions that market participants would use in pricing the liability. Unobservable inputs
are developed based on the best information available in the circumstances and also include the
Companys own data.
The types of instruments valued based on quoted market prices in active markets include most
U.S. government agency securities and most money market securities. Such instruments are generally
classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on quoted prices in markets that are less active, broker
or dealer quotations, or alternative pricing sources with reasonable levels of price transparency
and include most investment-grade corporate commercial papers. Such instruments are generally
classified within Level 2 of the fair value hierarchy.
The types of instruments valued based on unobservable inputs which reflect the reporting
entitys own assumptions that market participants would use in pricing the liability include the
warrant derivative liability. Such instruments are generally classified within Level 3 of the fair
value hierarchy.
Financial instruments measured at fair value on a recurring basis as of June 30, 2009 and
December 31, 2008 are classified based on the valuation technique in the table below:
June 30, 2009 | ||||||||||||||||
Fair value measurements using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Corporate commercial paper |
$ | | $ | 9,993 | $ | | $ | 9,993 | ||||||||
U.S. government agency securities |
39,066 | | | 39,066 | ||||||||||||
Money market accounts |
22,245 | | | 22,245 | ||||||||||||
Total assets at fair value |
$ | 61,311 | $ | 9,993 | $ | | $ | 71,304 | ||||||||
Liabilities: |
||||||||||||||||
Warrant derivative liabilities |
$ | | $ | | $ | 173 | $ | 173 | ||||||||
Total liabilities at fair value |
$ | | $ | | $ | 173 | $ | 173 | ||||||||
The above table excludes $2.7 million of cash held in banks.
December 31, 2008 | ||||||||||||||||
Fair value measurement using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Corporate commercial paper |
$ | | $ | 24,971 | $ | | $ | 24,971 | ||||||||
U.S. government agency securities |
23,978 | | | 23,978 | ||||||||||||
Money market accounts |
34,429 | | | 34,429 | ||||||||||||
Total |
$ | 58,407 | $ | 24,971 | $ | | $ | 83,378 | ||||||||
The above table excludes $2.4 million of cash held in banks.
15
Table of Contents
The following table provides a summary of changes in fair value in the Level 3 financial
instrument for the three months and six months ending June 30,
2009:
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||
Fair Value Measurement Using | Fair Value Measurement Using | |||||||
Significant Unobservable Inputs | Significant Unobservable Inputs | |||||||
Warrant Derivative Liability | (Level 3) | (Level 3) | ||||||
(In thousands) | (In thousands) | |||||||
Balances, beginning of the period |
$ | 37 | $ | 517 | ||||
Change in fair value |
||||||||
Included in net loss |
136 | (344 | ) | |||||
Balances, end of period |
$ | 173 | $ | 173 | ||||
Short term investments measured at fair value on a recurring basis as of June 30, 2009 and
December 31, 2008 are as below:
June 30, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Corporate commercial paper |
$ | 9,991 | $ | 2 | $ | | $ | 9,993 | ||||||||
U.S. government agency securities |
38,951 | 18 | | 38,969 | ||||||||||||
Total |
$ | 48,942 | $ | 20 | $ | | $ | 48,962 | ||||||||
December 31, 2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Corporate commercial paper |
$ | 9,980 | $ | 1 | $ | | $ | 9,981 | ||||||||
U.S. government agency securities |
10,975 | 18 | | 10,993 | ||||||||||||
Total |
$ | 20,955 | $ | 19 | $ | | $ | 20,974 | ||||||||
16
Table of Contents
The contractual maturities of the Companys available-for-sale securities on June 30,
2009 and December 31, 2008 were all due in one year or less.
4. INVENTORIES
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Raw materials and subassemblies |
$ | 2,680 | $ | 3,119 | ||||
Work in process |
284 | 209 | ||||||
Finished goods |
708 | 429 | ||||||
Inventories net |
$ | 3,672 | $ | 3,757 | ||||
Included in the cost of product sales for the three and six months ended June 30, 2009 is
a write off of $554,000 resulting from a book to physical adjustment of inventory in the Medical
line of business.
5. PROPERTY AND EQUIPMENT
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Computer equipment and purchased software |
$ | 4,474 | $ | 4,735 | ||||
Machinery and equipment |
1,710 | 3,269 | ||||||
Furniture and fixtures |
1,405 | 1,336 | ||||||
Leasehold improvements |
1,457 | 1,261 | ||||||
Total |
9,046 | 10,601 | ||||||
Less accumulated depreciation |
(5,178 | ) | (6,774 | ) | ||||
Property and equipment, net |
$ | 3,868 | $ | 3,827 | ||||
The sales and marketing expense for the three and six months ended June 30, 2009 included
a charge of $666,000 resulting from a book to physical adjustment of demo equipment in the Medical
line of business.
17
Table of Contents
6.
INTANGIBLES AND OTHER ASSETS
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Patents and technology |
$ | 18,056 | $ | 17,008 | ||||
Other assets |
148 | 156 | ||||||
Gross intangibles and other assets |
18,204 | 17,164 | ||||||
Accumulated amortization of patents and technology |
(7,875 | ) | (7,673 | ) | ||||
Intangibles and other assets, net |
$ | 10,329 | $ | 9,491 | ||||
The Company amortizes its intangible assets related to patents and trademarks, over their
estimated useful lives, generally 10 years. The estimated annual amortization expense for
intangible assets as of June 30, 2009 is $797,000 in 2009, $1.2 million in 2010, $1.2 million in
2011, $1.2 million in 2012, $1.1 million in 2013, and $5.1 million in total for all years
thereafter.
7. COMPONENTS OF OTHER CURRENT LIABILITIES AND DEFERRED REVENUE AND CUSTOMER ADVANCES
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Accrued legal |
$ | 392 | $ | 491 | ||||
Income taxes payable |
40 | 36 | ||||||
Other current liabilities |
3,299 | 2,966 | ||||||
Total other current liabilities |
$ | 3,731 | $ | 3,493 | ||||
Deferred revenue, current |
$ | 7,765 | $ | 7,954 | ||||
Customer advances |
68 | 88 | ||||||
Total deferred revenue, current and customer advances |
$ | 7,833 | $ | 8,042 | ||||
8. LONG-TERM DEFERRED REVENUE
On June 30, 2009, long-term deferred revenue was $18.1 million and included approximately
$16.5 million of deferred revenue from Sony Computer Entertainment. On December 31, 2008, long-term
deferred revenue was $16.0 million and included approximately $14.5 million from Sony Computer
Entertainment.
18
Table of Contents
9. STOCK-BASED COMPENSATION
Stock Options and Awards
The Companys equity incentive program is a long-term retention program that is intended to
attract, retain, and provide incentives for talented employees, consultants, officers, and
directors and to align stockholder and employee interests. The Company may grant options, stock
appreciation rights, restricted stock, restricted stock units (RSUs), performance shares,
performance units, and other stock-based or cash-based awards to employees, directors, and
consultants. Under these programs, stock options may be granted at prices not less than the fair
market value on the date of grant for stock options. These options generally vest over 4 years and expire 10 years from the date of grant.
RSUs generally vest over 3 years. Restricted stock
generally vests over one year. On June 30, 2009, 3,466,081 shares of common stock were available
for grant, and there were 6,548,887 options to purchase shares of common stock outstanding, as well
as 311,917 RSUs and shares of restricted stock outstanding.
General Stock Option Information
The following table sets forth the summary of option activity under the Companys stock option
plans:
Number | ||||
of Shares | ||||
Outstanding at December 31, 2008 (4,055,180 exercisable at a
weighted average price of $9.35 per share) |
7,009,667 | |||
Granted (weighted average fair value of $2.10 per share) |
1,330,183 | |||
Exercised |
(71,207 | ) | ||
Forfeited and cancelled |
(1,719,756 | ) | ||
Outstanding at June 30, 2009 |
6,548,887 | |||
Exercisable at June 30, 2009 |
3,744,748 | |||
Restricted Stock Units
Restricted stock unit activity for the six months ended June 30, 2009 is as follows:
Number | ||||
of Shares | ||||
Beginning balance at December 31, 2008 |
34,500 | |||
Awarded |
292,287 | |||
Released |
(4,000 | ) | ||
Forfeited |
(37,870 | ) | ||
Ending Balance at June 30, 2009 |
284,917 | |||
Expected to Vest (1) |
194,713 | |||
(1) | RSUs expected to vest reflect estimated forfeiture rates. |
19
Table of Contents
Restricted Stock
Restricted stock activity for the six months ended June 30, 2009 is as follows:
Number | ||||
of Shares | ||||
Beginning balance at December 31, 2008 |
| |||
Awarded |
27,000 | |||
Released |
| |||
Forfeited |
| |||
Ending balance at June 30, 2009 |
27,000 | |||
The assumptions used to value option grants and shares under the Companys Employee Stock
Purchase Plan are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Options | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Expected term (in years) |
5.5 | 5.5 | 5.5 | 5.5 | ||||||||||||
Volatility |
69 | % | 63 | % | 69 | % | 62 | % | ||||||||
Interest rate |
2.3 | % | 3.4 | % | 1.8 | % | 2.9 | % | ||||||||
Dividend yield |
| | | |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Employee Stock Purchase Plan | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Expected term (in years) |
0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||
Volatility |
109 | % | 73 | % | 109 | % | 73 | % | ||||||||
Interest rate |
0.4 | % | 2.2 | % | 0.4 | % | 2.2 | % | ||||||||
Dividend yield |
| | | |
20
Table of Contents
Total stock-based compensation recognized in the condensed consolidated statements of
operations is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Income Statement Classifications | (In thousands) | (In thousands) | ||||||||||||||
Cost of product sales |
$ | 33 | $ | 65 | $ | 102 | $ | 108 | ||||||||
Sales and marketing |
213 | 354 | 443 | 777 | ||||||||||||
Research and development |
240 | 268 | 713 | 814 | ||||||||||||
General and administrative |
761 | 437 | 1,393 | 993 | ||||||||||||
Total continuing operations |
1,247 | 1,124 | 2,651 | 2,692 | ||||||||||||
Discontinued operations |
| 28 | | 67 | ||||||||||||
Total |
$ | 1,247 | $ | 1,152 | $ | 2,651 | $ | 2,759 | ||||||||
As of June 30, 2009, there was $9.8 million of unrecognized compensation cost, adjusted for
estimated forfeitures, related to non-vested stock options, restricted stock and RSUs granted to
the Companys employees and directors. This cost will be recognized over an estimated
weighted-average period of approximately 3.16 years for options, 0.68 years for restricted stock
and 2.68 years for RSUs. Total unrecognized compensation cost will be adjusted for future changes
in estimated forfeitures.
Stock Repurchase Program
On November 1, 2007, the Company announced that its board of directors authorized the
repurchase of up to $50 million of the Companys common stock. The Company may repurchase its stock
for cash in the open market in accordance with applicable securities laws. The timing of and amount
of any stock repurchase will depend on share price, corporate and regulatory requirements, economic
and market conditions, and other factors. The stock repurchase authorization has no expiration
date, does not require the Company to repurchase a specific number of shares, and may be modified,
suspended, or discontinued at any time. During the three months and six months ended June 30, 2009,
there were no stock repurchases under this program.
During the three months and six months ended June 30, 2008 there were 718,683 shares of stock
repurchased under this program.
Warrants
The Company adopted EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entitys Own Stock (EITF 07-5), Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock effective January 1, 2009. EITF 07-5
provides that an entity should use a two step approach to evaluate whether an equity-linked
financial instrument is indexed to its own stock, including evaluating the instruments contingent
exercise and settlement provisions. Therefore, warrants to purchase 426,951 shares of the
Companys common stock issued in 2004 that were previously classified as Warrants have been
retroactively restated upon adoption of EITF 07-5 and classified to Other Current Liabilities and Retained
Earnings effective January 1, 2009 due to the presence of a warrant adjustment feature that allows
for a change in the number of shares subject to issuance and a change in the exercise price of the
warrant under certain circumstances, including the issuance of stock for cash in a secondary
offering. The warrants expire on December 23, 2009 and the fair value balance of the remaining
liability is now marked to market and recognized quarterly in non-operating income. The Company
calculated the fair value of warrants using the Black-Scholes option pricing model, assuming a
risk-free rate of 1.6%, a volatility factor of 66.9% as of January 1, 2009 and a contractual life
of one year, and a derivative liability was established in the amount of $517,000 with an offset
to warrants of $1.7 million and the cumulative effect of the change in accounting principle in the
amount of $1.2 million recognized as an adjustment to the opening balance of retained earnings. At
June 30, 2009, the Company recalculated the fair value of the warrants using the Black-Scholes
option pricing model assuming a risk-free rate of 2.3%, a volatility factor of 69% and a
contractual life of six months. This resulted in a credit (charge) to non-operating income of
$(136,000) and $344,000 for the quarter and six months ended June 30, 2009. The fair value of the
warrants derivative liability will be recalculated at each balance sheet date until they expire in
December 2009.
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10. RESTRUCTURING COSTS AND DISCONTINUED OPERATIONS
The Company accounts for restructuring costs and discontinued operations in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and SFAS No. 146,
Accounting for Costs Associated with Exit of Disposal Activities, respectively. The following
table sets forth the charges and expenses that are included in the restructuring line on the
Companys condensed consolidated Statement of Operations for the six months ended June 30, 2009:
December 31, | June 30, | |||||||||||||||||||
2008 | Six Months Ended June 30, 2009 | 2009 | ||||||||||||||||||
Restructuring | Add | Deduct Cash | Non-Cash | Restructuring | ||||||||||||||||
Reserve | Charges | Payments | Expenses | Reserve | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||
Medical workforce reductions |
$ | | $ | 464 | $ | (310 | ) | $ | (14 | ) | $ | 140 | ||||||||
Touch workforce reductions |
142 | 542 | (632 | ) | (2 | ) | 50 | |||||||||||||
Medical division location transition |
| 361 | (285 | ) | | 76 | ||||||||||||||
Total |
$ | 142 | $ | 1,367 | $ | (1,227 | ) | $ | (16 | ) | $ | 266 | ||||||||
Restructuring Costs
On March 2, 2009, the Company announced that it was relocating its Medical business operations
from Gaithersburg, Maryland to San Jose, California. The Company had workforce reductions that were
recorded as Medical segment restructuring charges for the three months and six months ended June
30, 2009. Workforce reduction costs consisting of severance benefits of $133,000 are included in
accrued compensation on the Companys condensed consolidated balance sheet. Other restructuring
items are included in other current liabilities on the Companys condensed consolidated balance
sheet. All of the remaining severance benefits have been paid in the third quarter of 2009 with the
exception of certain COBRA costs that will be paid by the end of 2010.
In addition, for the first three months and six months of 2009, there were reorganizations in
the Companys Touch segment due to business changes causing workforce reductions that have been
recorded as accrued compensation in the Companys condensed consolidated balance sheet and
restructuring charges in the statement of operations for the three months and six months ended June
30, 2009.
Results of Discontinued Operations
On November 17, 2008, the Company announced that it would divest its 3D product line which was
part of its Touch segment. The Companys 3D product line consisted of a variety of products in the
area of 3D digitizing, 3D measurement and inspection, and 3D interaction and included products such
as MicroScribe digitizers, the CyberGlove family of products, and a SoftMouse 3D positioning
device. In the three months ended March 31, 2009, the Company sold its CyberGlove and SoftMouse 3D
positioning device product families including inventory, fixed assets, and intangibles and has
recorded a gain on sale of discontinued operations of $167,000. Negotiated consideration for the
sales was $900,000 in the form of cash and notes receivable and the proceeds will be recognized
when they are received. In the three months ended June 30, 2009, the Company sold its MicroScribe
device product family including inventory, fixed assets and intangibles and has recorded a gain on
sale of discontinued operations of $20,000. Negotiated consideration for the sale was $1.8 million
in the form of cash and notes receivable and the proceeds will be recognized when they are
received. Accordingly, the operations of the 3D product line have been classified as discontinued
operations, net of income tax, in the condensed consolidated statement of operations.
Included in restructuring costs within discontinued operations for
the year ended December 31, 2008 were
asset impairment charges which
included reserves taken against capitalized patent costs of $255,000 and fixed asset
write offs of $20,000 due to the divesting
of the product line. The Company had also accrued $105,000 of severance charges at December 31, 2008
which had been paid in cash as of September 30, 2009.
Revenues
included in discontinued operations of the 3D product line were $118,000 and $649,000 for the three
months and six months ended June 30, 2009, respectively. Revenues included in
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discontinued
operations of the 3D product line were $1.1 million and $2.3 million for the three months and six
months ended June 30, 2008, respectively. The assets sold consisted primarily of intangibles that
had no carrying value on the Companys books at the time of sale.
11. INTEREST AND OTHER INCOME
The Company has accounted for payments from Sony Computer Inc. due under a license entered in
with them in 2007 in accordance with Accounting Principles Board (APB) Opinion No. 21. Under APB
No. 21, the Company determined the present value of $22.5 million of payments from them due over
the three years ended December 31, 2009 to equal $20.2 million. The Company is accounting for the
difference of $2.3 million as interest income which is being recognized in the income statement as
each quarterly payment installment becomes due.
12. INCOME TAXES
For the three months and six months ended June 30, 2009, the Company recorded income tax
provisions of $300,000 and $391,000 on pre-tax losses from continuing operations of $8.8 million
and $15.2 million, yielding effective tax rates of 3.4% and 2.6% respectively. For the three months
and six months ended June 30, 2008, the Company recorded income tax benefits of $1.9 million and
$3.2 million on pre-tax losses from continuing operations of $5.6 million and $10.3 million,
yielding effective tax rates of (34.2)% and (30.7)%, respectively. The effective tax rate differs
from the statutory rate primarily due to
the valuation allowance, foreign withholding taxes and interest on unrecognized tax benefits. The income tax provision or benefit
for the six months ended June 30, 2009 and 2008, are as a result of applying the estimated annual effective tax rate to cumulative income (loss) before taxes, adjusted for certain discrete items which are fully recognized in the period they occur.
The tax effect of the discontinued operations is removed to arrive at the income tax provision or benefit from continuing operations.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109, (FIN 48), regarding accounting for uncertain tax
benefits, on January 1, 2007. As of June 30, 2009, the Company has unrecognized tax benefits of
approximately $647,000, including interest of $20,000. The total amount of unrecognized tax
benefits that would affect the Companys effective tax rate, if recognized, is $219,000. There were
no material changes in the amount of unrecognized tax benefits during the quarter ended June 30,
2009. The Company does not expect any material changes to its liability for unrecognized tax
benefits during the next twelve months. The Companys policy is to account for interest and
penalties related to uncertain tax positions as a component of income tax provision.
Because the Company has net operating loss and credit carryforwards, there are open statutes
of limitations in which federal, state, and foreign taxing authorities may examine the Companys
tax returns for all years from 1993 through the current period.
During 2008, the Company recorded a valuation allowance for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset balance due to losses in fiscal
2008, the variability of operating results, and near term projected results. In the event that the
Company determines the deferred tax assets are realizable, an adjustment to the valuation allowance
may increase income in the period such determination is made. The valuation allowance does not
impact the Companys ability to utilize the underlying net operating loss carryforwards.
The net tax benefits from employee stock option transactions were approximately $0 and $0
during the three months and six months ended June 30, 2009, respectively. The net tax benefits from
employee stock option transactions were approximately $75,000 and $182,000 during the three months
and six months ended June 30, 2008, respectively. The Company includes only the direct tax effects
of employee stock incentive plans in calculating this increase to additional paid-in capital.
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13. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in computing basic
and diluted net loss per share (in thousands, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Loss from continuing operations |
$ | (9,057 | ) | $ | (3,655 | ) | $ | (15,569 | ) | $ | (7,129 | ) | ||||
Gain from discontinued operations |
186 | 210 | 588 | 536 | ||||||||||||
Net loss |
$ | (8,871 | ) | $ | (3,445 | ) | $ | (14,981 | ) | $ | (6,593 | ) | ||||
Denominator: |
||||||||||||||||
Shares used in computation, basic and diluted
(weighted average common shares outstanding) |
27,968 | 30,356 | 27,946 | 30,417 | ||||||||||||
Basic and diluted net loss per share: |
||||||||||||||||
Continuing operations |
$ | (0.33 | ) | $ | (0.12 | ) | $ | (0.56 | ) | $ | (0.23 | ) | ||||
Discontinued operations |
0.01 | 0.01 | 0.02 | 0.01 | ||||||||||||
Total |
$ | (0.32 | ) | $ | (0.11 | ) | $ | (0.54 | ) | $ | (0.22 | ) | ||||
As of June 30, 2009 and 2008, the Company had securities 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 in the periods presented since their effect would have been
anti-dilutive. These outstanding securities consisted of the following:
June 30, | June 30, | |||||||
2009 | 2008 | |||||||
Outstanding stock options |
6,548,887 | 7,505,995 | ||||||
Restricted stock and RSUs |
311,917 | | ||||||
Warrants
|
428,567 | 436,772 |
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14. COMPREHENSIVE LOSS
The following table sets forth the components of comprehensive income (loss):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net loss |
$ | (8,871 | ) | $ | (3,445 | ) | $ | (14,981 | ) | $ | (6,593 | ) | ||||
Change in unrealized losses on short-term investments |
2 | (22 | ) | | (29 | ) | ||||||||||
Foreign currency translation adjustment |
72 | (8 | ) | 5 | (20 | ) | ||||||||||
Total comprehensive loss |
$ | (8,797 | ) | $ | (3,475 | ) | $ | (14,976 | ) | $ | (6,642 | ) | ||||
15. SEGMENT REPORTING
The Company develops, manufactures, licenses, and supports a wide range of hardware and software
technologies that more fully engage users sense of touch when operating digital devices. The
Company focuses on the following target application areas: automotive, consumer electronics,
entertainment, gaming, and commercial and industrial controls; medical simulation; mobile
communications; and three-dimensional design and interaction. The Company manages these application
areas under two operating and reportable segments: 1) Touch (previously called Immersion Computing,
Entertainment, and Industrial), and 2) Medical. The Company determines its reportable segments in
accordance with criteria outlined in SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
The Companys chief operating decision maker (CODM) is the Chief Executive Officer. The CODM
allocates resources to and assesses the performance of each operating segment using information
about its revenue and operating income (loss). A description of the types of products and services
provided by each operating segment is as follows:
Touch develops and markets touch feedback technologies that enable software and hardware developers
to enhance realism and usability in their mobility, computing, entertainment, and industrial
applications. Medical develops, manufactures, and markets medical training simulators that recreate
realistic healthcare environments.
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The following tables display information about the Companys reportable segments:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Revenues: |
||||||||||||||||
Touch |
$ | 4,187 | $ | 3,920 | $ | 8,661 | $ | 7,882 | ||||||||
Medical |
2,495 | 3,699 | 5,561 | 6,618 | ||||||||||||
Intersegment eliminations |
| | (34 | ) | (41 | ) | ||||||||||
Total |
$ | 6,682 | $ | 7,619 | $ | 14,188 | $ | 14,459 | ||||||||
Operating loss: |
||||||||||||||||
Touch |
$ | (3,875 | ) | $ | (5,688 | ) | $ | (8,891 | ) | $ | (10,577 | ) | ||||
Medical |
(4,953 | ) | (855 | ) | (7,140 | ) | (2,312 | ) | ||||||||
Intersegment eliminations |
| 12 | (1 | ) | (5 | ) | ||||||||||
Total |
$ | (8,828 | ) | $ | (6,531 | ) | $ | (16,032 | ) | $ | (12,894 | ) | ||||
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Total Assets: |
||||||||
Touch |
$ | 126,275 | $ | 129,305 | ||||
Medical |
9,835 | 11,471 | ||||||
Intersegment eliminations |
(35,724 | ) | (27,189 | ) | ||||
Total |
$ | 100,386 | $ | 113,587 | ||||
16. CONTINGENCIES
In re Immersion Corporation Initial Public Offering Securities Litigation
The Company is involved in legal proceedings relating to a class action lawsuit filed on
November 9, 2001 in the U. S. District Court for the Southern District of New York, In re Immersion
Corporation Initial Public Offering Securities Litigation, No. Civ. 01-9975 (S.D.N.Y.), related to
In re Initial Public Offering Securities Litigation, No. 21 MC 92 (S.D.N.Y.). The named defendants
are the Company and three of its current or former officers or directors (the Immersion
Defendants), and certain underwriters of its November 12, 1999 initial public offering (IPO).
Subsequently, two of the individual defendants stipulated to a dismissal without prejudice.
The operative amended complaint is brought on purported behalf of all persons who purchased
the Companys common stock from the date of the Companys IPO through December 6, 2000. It alleges
liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, on the grounds that the registration statement for the IPO did
not disclose that: (1) the underwriters agreed to allow certain customers to purchase shares in the
IPO in exchange for excess commissions to be paid to the underwriters; and (2) the underwriters
arranged for certain customers to purchase additional shares in the aftermarket at predetermined
prices. The complaint also appears to allege that false or misleading analyst reports were issued.
The complaint does not claim any specific amount of damages.
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Similar allegations were made in other lawsuits challenging over 300 other initial public
offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the District Court ruled on all defendants motions to
dismiss. The motion was denied as to claims under the Securities Act of 1933 in the case involving
Immersion as well as in all other cases (except for 10 cases). The motion was denied as to the
claim under Section 10(b) as to the Company, on the basis that the complaint alleged that the
Company had made acquisition(s) following the IPO. The motion was granted as to the claim under
Section 10(b), but denied as to the claim under Section 20(a), as to the remaining individual
defendant.
In September 2008, all of the parties to the lawsuits reached a settlement, subject to
documentation and approval of the District Court. The Immersion Defendants would not be required
to contribute to the settlement. Subsequently, an underwriter defendant filed for bankruptcy and
other underwriter defendants were acquired. On April 2, 2009, final documentation evidencing the
settlement was presented to the District Court for approval. If the settlement is not approved by
the District Court, the Company intends to defend the lawsuit vigorously.
Other Contingencies
From time to time, the Company receives claims from third parties asserting that the Companys
technologies, or those of its licensees, infringe on the other parties intellectual property
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 managements opinion, the resolution of such matters will not have a material
adverse effect on the Companys consolidated financial condition, results of operations, or
liquidity.
In the normal course of business, the Company provides indemnifications of varying scope to
customers against claims of intellectual property infringement made by third parties arising from
the use of the Companys intellectual property, technology, or products. Historically, costs
related to these guarantees have not been significant, and the Company is unable to estimate the
maximum potential impact of these guarantees on its future results of operations.
As permitted under Delaware law, the Company has agreements whereby it indemnifies its
officers and directors for certain events or occurrences while the officer or director is, or was,
serving at its request in such capacity. The term of the indemnification period is for the
officers or directors lifetime. The maximum potential amount of future payments the Company could
be required to make under these indemnification agreements is unlimited; however, the Company
currently has director and officer insurance coverage that limits its exposure and enables it to
recover a portion of any future amounts paid. Management believes the estimated fair value of these
indemnification agreements in excess of applicable insurance coverage is indeterminable.
17. SUBSEQUENT EVENTS
In re Immersion Corporation Securities Litigation
In September and October 2009, various putative shareholder class action and derivative
complaints were filed in federal and state court against the Company and certain current and former
Immersion directors and officers.
On September 2, 2009, a securities class action complaint was filed in the United States
District Court for the Northern District of California against the Company and certain of its
current and former directors and officers. Over the following five weeks, four additional class
action complaints were filed. (One of these four actions was later voluntarily dismissed.) The
securities class action complaints name the Company and certain
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current and former Immersion
directors and officers as defendants and allege violations of federal securities laws based on the
Companys issuance of allegedly misleading financial statements. The various complaints assert
claims covering the period from May 2007 through July 2009 and seek compensatory damages allegedly
sustained by the purported class members.
On December 21, 2009, these class actions were consolidated by the court as In Re Immersion
Corporation Securities Litigation. On the same day, the court appointed a lead plaintiff and lead
plaintiffs counsel.
The lead plaintiff will file a consolidated complaint following the Companys
restatement of financial statements which defendants will then have the opportunity to file responsive pleadings.
In re Immersion Corporation Derivative Litigation
On September 15, 2009, a putative shareholder derivative complaint was filed in the United
States District Court for the Northern District of California, purportedly on behalf of the Company
and naming certain of its current and former directors and officers as individual defendants.
Thereafter, two additional putative derivative complaints were filed in the same court.
The derivative complaints arise from the same or similar alleged facts as the federal
securities actions and seek to bring state law causes of action on behalf of the Company against
the individual defendants for breaches of fiduciary duty, gross negligence, abuse of control, gross
mismanagement, breach of contract, waste of corporate assets, unjust enrichment, as well as for
violations of federal securities laws. The federal derivative complaints seek compensatory
damages, corporate governance changes, unspecified equitable and injunctive
relief, the imposition of a constructive trust, and restitution. On November 17, 2009, the
court consolidated these actions as In re Immersion Corporation
Derivative Shaw V. Richardson et. al. Litigation and appointed
lead counsel.
Plaintiffs will file a consolidated derivative complaint following the Companys restatement of financial statements to which defendants will then have the
opportunity to file responsive pleadings.
On October 7, 2009, a putative shareholder derivative complaint was filed in the Superior
Court of the State of California for the County of Santa Clara, purportedly on behalf of the
Company, seeking compensatory damages, equitable and injunctive relief, and restitution. The
complaint names certain current and former directors and officers of the Company as individual
defendants. This complaint arises from the same or similar alleged facts as the federal securities
actions and seeks to bring causes of action on behalf of the Company against the individual
defendants for breaches of fiduciary duty, waste of corporate assets and unjust enrichment.
Plaintiff will file on amended complaint in this action following the Companys
restatement of financial statements to which defendants will then have the opportunity to file responsive pleadings.
The Company cannot predict the ultimate outcome of the above-mentioned federal and state
actions, and it is unable to estimate any potential liability it may incur.
ITEM 2. MANAGEMENTS 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, and Section 21E of the Securities Exchange
Act of 1934, as amended. The forward-looking statements involve risks and uncertainties.
Forward-looking statements are identified by words such as anticipates, believes, expects,
intends, may, will, and other similar expressions. However, these words are not the only
way we identify forward-looking statements. In addition, any statements, which refer to
expectations, projections, or other characterizations of future events, or circumstances, are
forward-looking statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those set forth below in
Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk
Factors, those described elsewhere in this report, and those described in our other reports filed
with the SEC. We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report, and we undertake no obligation to update these
forward-looking statements after the filing of this report. You are urged to review carefully and
consider our various disclosures in this report and in our other reports publicly disclosed or
filed with the SEC that attempt to advise you of the risks and factors that may affect our
business.
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OVERVIEW
We are a leading provider of haptic technologies that allow people to use their sense of touch
more fully when operating a wide variety of digital devices. To achieve this heightened
interactivity, we develop and manufacture or license a wide range of hardware and software
technologies and products. While we believe that our technologies are broadly applicable, we are
currently focusing our marketing and business development activities on the following target
application areas: automotive, consumer electronics, entertainment, gaming, and commercial and
industrial controls; medical simulation; and mobile communications. We manage these application
areas under two operating and reportable segments: 1) Touch and 2) Medical.
In some markets, such as video console gaming, mobile phones, and automotive controls, we
license our technologies to manufacturers who use them in products sold under their own brand
names. In other markets, such as medical simulation we sell products manufactured under our own
brand name through direct sales to end users, distributors, OEMs, or value-added resellers. From
time to time, we also engage in development projects for third parties. In the three months ended
March 31, 2009, we divested our 3D product line which was part of our Touch segment. We ceased
operations of the 3D product line and sold its MicroScribe, CyberGlove, and SoftMouse 3D
positioning device product families. We have abandoned all other 3D operations.
Our objective is to drive adoption of our touch technologies across markets and applications
to improve the user experience with digital devices and systems. We and our wholly owned
subsidiaries hold over 700 issued or pending patents in the U.S. and other countries, covering
various aspects of hardware
and software technologies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in accordance with
GAAP. The preparation of these condensed consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates and assumptions, including those related to revenue recognition, stock-based
compensation, bad debts, inventory reserves, short-term investments, warranty obligations, patents
and intangible assets, contingencies, and litigation. We base our estimates and assumptions on
historical experience and on various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates and assumptions.
We believe the following are our most critical accounting policies as they require our
significant judgments and estimates in the preparation of our condensed consolidated financial
statements:
Revenue Recognition
We recognize revenues in accordance with applicable accounting standards, including SAB
No. 104, EITF No. 00-21, and SOP No. 97-2. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and
determinable, and collectability is probable. We derive our revenues from three principal sources:
royalty and license fees, product sales, and development contracts.
Royalty
and license revenue We recognize royalty and license revenue based on royalty
reports or related information received from the licensee as well as time-based licenses of our
intellectual property portfolio. Up-front payments under license agreements are deferred and
recognized as revenue either based on the royalty reports received or amortized over the license
period depending on the nature of the agreement. Advance payments under license agreements that
also require us to provide future services to the licensee are generally deferred and recognized
over the service period once services commence when VSOE related to the value of the services does
not exist.
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We generally recognize revenue from our licensees under one or a combination of the following
license models:
License revenue model | Revenue recognition | |
Perpetual license of
intellectual property portfolio
based on per unit royalties, no
services contracted.
|
Based on royalty reports received from licensees. No further obligations to licensee exist. | |
Time-based license of
intellectual property portfolio
with up-front payments and/or
annual minimum royalty
requirements, no services
contracted. Licensees have
certain rights to updates to
the intellectual property
portfolio during the contract
period.
|
Based on straight-line amortization of annual minimum/up-front payment recognized over contract period or annual minimum period. | |
Perpetual license of
intellectual property portfolio
or technology license along
with contract for development
work.
|
Based on proportional performance method over the service period or completed performance method. | |
License of software or
technology, no modification
necessary, no services
contracted.
|
Up-front revenue recognition based on SOP No. 97-2 criteria or SAB No. 104, as applicable. |
Individual contracts may have characteristics that do not fall within a specific license model
or may have characteristics of a combination of license models. Under those circumstances, we
recognize revenue in accordance with SAB No. 104, EITF No. 00-21 and SOP No. 97-2, as amended, to
guide the accounting treatment for each individual contract. See also the discussions regarding
Multiple element arrangements below. If the information received from our licensees regarding
royalties is incorrect or inaccurate, our revenues in future periods may be adversely affected. To
date, none of the information we have received from our licensees has caused any material reduction
in future period revenues.
Product sales We generally recognize revenues from product sales when the product is shipped
provided the other revenue recognition criteria are met, including that collection is determined to
be probable and no significant obligation remains. We sell the majority of our products with
warranties ranging from three to sixty months. We record the estimated warranty costs during the
quarter the revenue is recognized. Historically, warranty-related costs and related accruals have
not been significant. We offer a general right of return on the MicroScribe product line for
14 days after purchase. We recognize revenue at the time of shipment of a MicroScribe digitizer and
provide an accrual for potential returns based on historical experience. We offer no other general
right of return on our products.
Development contracts and other revenue Development contracts and other revenue is comprised
of professional services (consulting services and/or development contracts), customer support, and
extended warranty contracts. Development contract revenues are recognized under the proportional
performance accounting method based on physical completion of the work to be performed or completed
performance method. Losses on contracts are recognized when determined. Revisions in estimates are
reflected in the period in which the conditions become known. Customer support and extended
warranty contract revenue is recognized ratably over the contractual period.
Multiple element arrangements We enter into revenue arrangements in which the customer
purchases a combination of patent, technology, and/or software licenses, products, professional
services, support, and extended warranties (multiple element arrangements). We allocate revenue to
each element based on the relative fair value of each of the elements. If vendor specific
objective evidence of fair value does not exist, the revenue is generally recorded over the term of
the contract or upon delivery of all elements for which vendor specific evidence of fair value does
not exist.
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Our revenue recognition policies are significant because our revenues are a key component of
our results of operations. In addition, our revenue recognition determines the timing of certain
expenses, such as commissions and royalties. Revenue results are difficult to predict, and any
shortfall in revenue or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in greater or future operating losses.
Stock-based Compensation
We account for stock-based compensation in accordance with SFAS No. 123R. We accounted for
stock-based compensation using the modified-prospective method, under which prior periods are not
revised for comparative purposes. Under the fair value recognition provisions of this statement,
stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as expense on a straight-line basis over the requisite service period, which is
the vesting period.
Valuation and amortization method We use the Black-Scholes model, single-option approach to
determine the fair value of stock options, and ESPP shares. All share-based payment awards are
amortized on a straight-line basis over the requisite service periods of the awards, which are
generally the vesting periods. The determination of the fair value of stock-based payment awards on
the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include actual
and projected employee stock option exercise behaviors that impact the expected term and forfeiture
rates, our expected stock price volatility over the term of the awards, risk-free interest rate,
and expected dividends.
Expected term We estimate the expected term of options granted by calculating the average
term from our historical stock option exercise experience. We used the simplified method as
prescribed by SAB No. 110 for options granted prior to January 1, 2008.
Expected volatility We estimate the volatility of our common stock taking into consideration
our historical stock price movement and our expected future stock price trends based on known or
anticipated events.
Risk-free interest rate We base the risk-free interest rate that we use in the option
pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term
on the options.
Expected dividend We do not anticipate paying any cash dividends in the foreseeable future
and therefore use an expected dividend yield of zero in the option pricing model.
Forfeitures We are required to estimate future forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. We record
stock-based compensation expense only for those awards that are expected to vest. We estimate our
forfeiture rate based on anticipated future trends in pre-vesting options and awards forfeitures
and recent historical data.
If factors change and we employ different assumptions for estimating stock-based compensation
expense in future periods, or if we decide to use a different valuation model, the future periods
may differ significantly from what we have recorded in the current period and could materially
affect our operating results.
The Black-Scholes model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable, characteristics not present in our
option grants and ESPP shares. Existing valuation models, including the Black-Scholes and lattice
binomial models, may not provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates of the fair values of our
stock-based compensation awards on the grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration, early termination, or forfeiture of those stock-based
payments in the future. Certain stock-based payments, such as employee stock options, may expire
and be worthless or otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements. Alternatively,
value may be realized from these instruments that are significantly higher than the fair values
originally estimated on the grant date and reported in our financial statements. There currently is
no market-based mechanism or other practical application to verify the reliability and accuracy of
the estimates stemming from these valuation models, nor is there a means to compare and adjust the
estimates to actual values.
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See Note 9 to the condensed consolidated financial statements for further information
regarding the SFAS No. 123R disclosures.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method,
income tax expense is recognized for the amount of taxes payable or refundable for the current
year. In addition, deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected to be realized and
are reversed at such time that realization is believed to be more likely than not. Management must
make assumptions, judgments, and estimates to determine our current provision for income taxes and
also our deferred tax assets and liabilities and any valuation allowance to be recorded against a
deferred tax asset.
Our judgments, assumptions, and estimates relative to the current provision for income tax
take into account current tax laws, our interpretation of current tax laws, and possible outcomes
of current and future audits conducted by foreign and domestic tax authorities. We have established
reserves for income taxes to address potential exposures involving tax positions that could be
challenged by tax authorities. Although we believe our judgments, assumptions, and estimates are
reasonable, changes in tax laws or our interpretation of tax laws and any future tax audits could
significantly impact the amounts provided for income taxes in our condensed consolidated financial
statements.
Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take
into account predictions of the amount and category of future taxable income, such as income from
operations or capital gains income. Actual operating results and the underlying amount and category
of income in future years could render inaccurate our current assumptions, judgments, and estimates
of recoverable net deferred taxes. Any of the assumptions, judgments, and estimates mentioned above
could cause our actual income tax obligations to differ from our estimates, thus materially
impacting our financial position and results of operations.
Short-term Investments
Our short-term investments consist primarily of highly liquid commercial paper and government
agency securities purchased with an original or remaining maturity of greater than 90 days on the
date of purchase. We classify all debt securities with readily determinable market values as
available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Even though the stated maturity dates of these debt securities may be one
year or more beyond the balance sheet date, we have classified all debt securities as short-term
investments in accordance with Accounting Research Bulletin No. 43, Chapter 3A, Working
CapitalCurrent Assets and Current Liabilities, as they are reasonably expected to be realized in
cash or sold within one year. These investments are carried at fair market value with unrealized
gains and losses considered to be temporary in nature reported as a separate component of other
comprehensive income (loss) within stockholders equity.
We follow the guidance provided by FSP No. 115-1/124-1 and EITF No. 03-01 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments to assess whether our
investments with unrealized loss positions are other than temporarily impaired. Realized gains and
losses and declines in value judged to be other than temporary are determined based on the specific
identification method and are reported in the condensed consolidated statement of operations.
Factors considered in determining whether a loss is temporary include the length of time and extent
to which fair value has been less than the cost basis, the financial condition and near-term
prospects of the investee, and our intent and ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery in market value.
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements required under other accounting pronouncements. SFAS No. 157 clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly
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transaction between market participants. SFAS No. 157 also requires that a fair value
measurement reflect the assumptions market participants would use in pricing an asset or liability
based on the best information available. Assumptions include the risks inherent in a particular
valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the
lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy under SFAS No. 157 are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are less active or financial instruments for which all
significant inputs are observable, either directly or indirectly;
Level 3: Prices or valuations that require inputs that are both significant to the fair value
measurement and unobservable.
A financial instruments level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement.
In February 2008, the FASB issued FSP No. 157-2 that delays the effective date of SFAS No. 157
for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually) until
fiscal years beginning after November 15, 2008. The delay is intended to allow the FASB and
constituents additional time to consider the effect of various implementation issues that have
arisen, or that may arise, from the application of SFAS No. 157. We continue to assess the impact
that FSP No. 157-2 may have on our consolidated financial position and results of operations. The
adoption of this guidance did not have a material impact on the Companys consolidated results of
operations, financial position or cash flows.
Further information about the application of SFAS No. 157 may be found in Note 3 to the
condensed consolidated financial statements.
Recovery of Accounts Receivable
We maintain allowances for doubtful accounts for estimated losses resulting from our review
and assessment of our customers ability to make required payments. If the financial condition of
one or more of our customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances might be required.
Inventory Reserves
We reduce our inventory value for estimated obsolete and slow moving inventory in an amount
equal to the difference between the cost of inventory and the net realizable value based upon
assumptions about future demand and market conditions. If actual future demand and market
conditions are less favorable than those projected by management, additional inventory write-downs
may be required.
Product Return and Warranty Reserves
We provide for estimated costs of future anticipated product returns and warranty obligations
based on historical experience when related revenues are recognized, and we defer warranty-related
revenue over the related warranty term.
Intangible Assets
We have acquired patents and other intangible assets. In addition, we capitalize the external
legal and filing fees associated with patents and trademarks. We assess the recoverability of our
intangible assets, and we must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets that affect our consolidated financial
statements. If these estimates or related assumptions change in the future, we may be required to
record impairment charges for these assets. We amortize our intangible assets related to patents
and trademarks, once they issue, over their estimated
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useful lives, generally 10 years. Future changes in the estimated useful life could affect
the amount of future period amortization expense that we will incur. During the six months ended
June 30, 2009, we capitalized costs associated with patents and trademarks $1.3 million. Our total
amortization expense for the three and six months ended June 30, 2009 for all intangible assets was
$224,000 and $438,000, respectively.
Restructuring Costs
We calculate our Restructuring costs based upon our estimate of workforce reduction costs,
asset impairment charges, and other appropriate charges resulting from a restructuring. The Company
accounts for restructuring costs in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and SFAS No. 146, Accounting for Costs Associated with Exit of
Disposal Activities based on our assumptions, judgments, and estimates, we determine whether we
need to record an impairment charge to reduce the value of the asset carried on our balance sheet
to its estimated fair value. Assumptions, judgments and estimates about future values are complex
and often subjective. They can be affected by a variety of factors, including external factors such
as industry and economic trends, and internal factors such as changes in our business strategy.
The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP, with no need for managements judgment in their application. There are also areas
in which managements judgment in selecting any available alternative would not produce a
materially different result.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
The following discussion and analysis includes our results of operations from continuing
operations for the three months and six months ended June 2009 and 2008. A separate discussion of
the 3D product line under discontinued operations has been presented following our analysis of
continuing operations. Accordingly, the sales, gross profit, sales and marketing expense, and
income tax provision from our discontinued operations have been aggregated and reported as loss
from discontinued operations and are not a component of the aforementioned continuing operations
discussion.
Overview
We had a 12% decrease in revenues from continuing operations during the second quarter of 2009
as compared to the second quarter of 2008. The second quarter revenue decline was primarily due to
a 26% decrease in product sales, mainly medical product sales, and a 53% decrease in development
contract revenues. We believe that the current economic downturn has had a negative effect on
capital purchases of our products. The revenue decrease was partially offset by a 13% increase in
royalty and license revenues from increased Touch royalty and license fees mainly from customers
that sell mobile devices. We had a 2% decrease in revenues from continuing operations during the
six months ended June 30, 2009 as compared to the six months ended June 30, 2008. The first six
months revenue decline was primarily due to a 48% decrease in development contract revenues and a
4% decrease in product sales, mainly medical product sales. The revenue decrease was partially
offset by an 11% increase in royalty and license revenues from increased Touch royalty and license
fees mainly from customers that sell mobile devices. In conjunction with moving our medical
operating segment to San Jose and other workforce reductions in our Touch segment, we had
restructuring costs of $705,000 and $1.4 million for the three and six months ended June 30, 2009,
respectively. We had physical inventory write offs of $543,000 and $554,000 for the three and six
months ended June 30, 2009 primarily consisting of physical count to book adjustments of medical
demo equipment. We also recognized write offs of demo equipment of $668,000 and $666,000 for the
three and six months ended June 30, 2009, respectively, resulting from a reconciliation of the
fixed asset records to the physical inventory at the time of the move. We divested our 3D product
line and recorded gains of $166,000 and $401,000 from discontinued operations for the three and six
months ended June 30, 2009, respectively. This was compared to gains of $210,000 and $536,000 for
the three and six months ended June 30, 2008, respectively. We also had gains on sales of
discontinued operations of $20,000 and $187,000 for the three and six months ended June 30, 2009,
respectively. Our net loss was $8.9 million for the second quarter of 2009 compared to a net loss
of $3.4 million for the second quarter of 2008. Our net
loss was $15.0 million for the six months ended June 30, 2009 compared to a net loss of $6.6
million for the six months ended June 30, 2008.
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With our divestiture of the 3D product line, our move of the medical operating segment to San
Jose, and other restructuring efforts, we hope to achieve certain cost reductions in 2009. In 2009,
we expect to continue to focus on the execution of plans in our established businesses to seek to
increase revenue and make selected investments for longer-term growth
areas. Our success could be limited by several factors, including the current macro-economic
climate, the timely release of our new products and our licensees products, continued market
acceptance of our products and technology, the introduction of new products by existing or new
competitors, and the cost of ongoing litigation. For a further discussion of these and other risk
factors, see Part II Item 1A Risk Factors.
June 30, | ||||||||||||
REVENUES | 2009 | 2008 | Change | |||||||||
(In thousands) | ||||||||||||
Three months ended: |
||||||||||||
Royalty and license |
$ | 3,580 | $ | 3,171 | 13 | % | ||||||
Product sales |
2,772 | 3,744 | (26 | )% | ||||||||
Development contracts and other |
330 | 704 | (53 | )% | ||||||||
Total Revenue |
$ | 6,682 | $ | 7,619 | (12 | )% | ||||||
Six months ended: |
||||||||||||
Royalty and license |
$ | 7,361 | $ | 6,632 | 11 | % | ||||||
Product sales |
6,051 | 6,324 | (4 | )% | ||||||||
Development contracts and other |
776 | 1,503 | (48 | )% | ||||||||
Total Revenue |
$ | 14,188 | $ | 14,459 | (2 | )% | ||||||
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Total Revenue Our total revenue from continuing operations for the second quarter of 2009
decreased by $937,000 or 12% from the second quarter of 2008.
Royalty and license revenue Royalty and license revenue is comprised of royalties earned on
sales by our TouchSense licensees and license fees charged for our intellectual property portfolio.
Royalty and license revenue for the second quarter of 2009 was $3.6 million, an increase of
$409,000 or 13% from the second quarter of 2008. The increase in royalty and license revenue was
primarily due to an increase in royalty and license revenue from our Touch segment from increased
shipments by licensees of mobile devices partially offset by decreased revenue from gaming and
automotive licensees. We expect royalty revenue to be a significant component of our revenue as our
technology continues to be included in mobile phone handsets.
Based on our litigation conclusion and new business agreement entered into with Sony Computer
Entertainment in March 2007, we are recognizing a minimum of $30.0 million as royalty and license
revenue from March 2007 through March 2017, approximately $750,000 per quarter. The revenue from
our third-party peripheral licensees included in royalty and license revenue has also generally
continued to decline primarily due to i) the reduced sales of past generation video console
systems due to the launches of the next-generation console models from Microsoft Xbox 360, Sony
PlayStation 3 (PS3), and Nintendo Wii, and ii) the decline in third-party market share of
aftermarket game console controllers due to the launch of next-generation peripherals by
manufacturers of console systems.
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Sony has, to date, not yet broadly licensed third parties to produce peripherals of the PS3
system. To the extent Sony discourages or impedes third-party controller makers from making more
PS3 controllers with vibration feedback, our licensing revenue from third-party PS3 peripherals
will continue to be severely limited.
For the Microsoft Xbox 360 video console system launched in November 2005, Microsoft has, to
date, not broadly licensed third parties to produce game controllers. Because our gaming royalties
come mainly from third-party manufacturers, unless Microsoft broadens its licenses to third-party
controller makers, particularly with respect to wireless controllers for Xbox 360, our gaming
royalty revenue may decline. Additionally, Microsoft is now making touch-enabled wheels covered by
its royalty-free, perpetual, irrevocable license to our worldwide portfolio of patents that could
compete with our licensees current or future products for which we earn per unit royalties. For
the Nintendo Wii video console system launched in December 2006, Nintendo has, to date, not yet
broadly licensed third parties to produce game controllers for its Wii game console. Because our
gaming royalties come mainly from third-party manufacturers, unless Nintendo broadens its licenses
to third-party controller makers, our gaming royalty revenue may decline.
In addition, BMW has removed our technology from certain controller systems, which also caused
automotive royalties to decline. We expect that this removal of our technology from certain
controller systems will cause our automotive royalty revenue to decline in the future, which may be
partially offset by new vehicles from other manufacturers brought to market.
Product sales Product sales for the second quarter of 2009 were $2.8 million, a decrease of
$972,000 or 26% as compared to the second quarter of 2008. The decrease in product sales was
primarily due to a decrease in medical product sales. Reduced medical product sales were mainly due
to decreased sales of our endoscopy, endovascular, Virtual IV, and laparoscopy simulators partially
offset by an increase in sales of our arthroscopy simulators. We believe that the current economic
downturn has had and may continue to have a negative effect on capital purchases of our products in
the near term.
Development contract and other revenue Development contract and other revenue is comprised
of revenue on commercial contracts and extended support contracts. Development contract and other
revenue was $330,000 during the second quarter of 2009, a decrease of $374,000 or 53% as compared
to the second quarter of 2008. The decrease was mainly attributable to a decrease in medical
contract revenue due to the completion of work performed under medical contracts that occurred
through the first six months of 2008. We do not currently have any government projects in
development. We continue to transition our engineering resources from certain commercial
development contract efforts to product development efforts that focus on leveraging our existing
sales and channel distribution capabilities.
We categorize our geographic information into four major regions: North America, Europe, Far
East, and Rest of the World. In the second quarter of 2009, revenue generated in North America,
Europe, Far East, and Rest of the World represented 54%, 14%, 32%, and 0%, respectively, compared
to 66%, 16%, 13%, and 5%, respectively, for the second quarter of 2008. The shift in revenues among
regions was mainly due to an increase in touch royalty revenue in the Far East, a decrease in
medical product and contract revenue in North America, a decrease in touch royalty revenue from
Europe, and a decrease in medical product revenue from the Rest of the World. We mainly attribute
the increase in touch royalty revenue in the Far East to increased
revenue from licensees of mobile
devices, partially due to the addition of increased international sales and support personnel in
2008. The decrease in medical product revenue in North America and Rest of the World is partially
attributable to the current economic downturn has had a negative effect on capital purchases of our
products.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Total Revenue Our total revenue from continuing operations for the six months ended June 30,
2009 decreased by $271,000 or 2% from the first six months ended June 30, 2008.
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Royalty and license revenue Royalty and license revenue is comprised of royalties earned on
sales by our TouchSense licensees and license fees charged for our intellectual property portfolio.
Royalty and license revenue for the six months ended June 30, 2009 was $7.4 million, an increase
of $729,000 or 11% from the six months ended June 30, 2008. The increase in royalty and license
revenue was primarily due to an increase in royalty and license revenue from our Touch segment from
increased shipments by licensees of mobile devices partially offset by decreased shipments by
gaming and automotive licensees.
Product sales Product sales for the six months ended June 30, 2009 were $6.1 million, a
decrease of $273,000 or 4% as compared to the six months ended June 30, 2008. The decrease in
product sales was primarily due to a decrease in medical product sales. Reduced medical product
sales were mainly due to decreased sales of our Virtual IV, endovascular, and endoscopy simulators
partially offset by an increase in sales of our laparoscopy and arthroscopy simulators.
Development contract and other revenue Development contract and other revenue is comprised
of revenue on commercial contracts and extended support contracts. Development contract and other
revenue was $776,000 during the six months ended June 30, 2009, a decrease of $727,000 or 48% as
compared to the six months ended June 30, 2008. The decrease was mainly attributable to a decrease
in medical contract revenue due to the completion of work performed under medical contracts that
occurred through the first six months of 2008. Partially offsetting that decrease was increased
revenue recognized on Touch development contracts and support.
In the first six months of 2009, revenue generated in North America, Europe, Far East,
and Rest of the World represented 51%, 19%, 29%, and 1%, respectively, compared to 64%, 19%, 12%,
and 5%, respectively, for the first six months of 2008. The shift in revenues among regions was
mainly due to an increase in Touch royalty revenue from Europe and the Far East and a decrease in
touch royalty and medical product and contract revenue in North America and Medical product revenue
from the Rest of the World.
June 30, | Change | |||||||||||
COST OF PRODUCT SALES | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Three months ended: |
||||||||||||
Cost of product sales |
$ | 2,312 | $ | 2,051 | 13 | % | ||||||
% of total product revenue |
83 | % | 55 | % | ||||||||
Six months ended: |
||||||||||||
Cost of product sales |
$ | 3,563 | $ | 3,735 | (5 | )% | ||||||
% of total product revenue |
59 | % | 59 | % |
Cost of Product Sales Our cost of product sales (exclusive of amortization of intangibles)
consists primarily of materials, labor, and overhead. There is no cost of product sales associated
with royalty and license revenue or development contract revenue. Cost of product sales from
continuing operations was $2.3 million, an increase of $261,000 or 13% for the second quarter of
2009 as compared to the second quarter of 2008. The increase in cost of product sales was primarily
due to increased physical inventory write off costs of $535,000 and increased obsolescence expense
of $306,000 partially offset by reduced overhead costs of $490,000 and reduced direct material
costs of $107,000. The physical inventory write off costs consisted primarily of physical count to
book adjustments of medical demo equipment inventory in the second quarter of 2009. The increase in
obsolescence expense was mainly due to additional excess and obsolescence write-off from medical
product parts. Overhead costs decreased mainly as a result of reduced salary expense from decreased
headcount. The decrease in direct material costs was mainly the result of reduced product sales.
The cost of product sales increased as a percentage of product revenue in the second quarter of
2009 from the second quarter of 2008 and increased in the second quarter of 2009 from the first
quarter of 2009. These increases are mainly due to the increased physical inventory costs and
obsolescence expense in the second quarter of 2009 mentioned above partially offset by reduced
overhead costs including reduced headcount.
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Cost of product sales from continuing operations was $3.6 million, a decrease of $172,000 or
5% for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008. The
decrease in cost of product sales was primarily due to reduced overhead costs of $579,000 and
reduced material and production costs of $300,000 partially offset by increased physical inventory
write off costs of $564,000, increased obsolescence expense of $97,000 and increased freight costs
of $29,000. Overhead costs decreased mainly as a result of reduced salary expense from decreased
headcount. The decrease in material and production costs was mainly the result of reduced product
sales and the result of a product mix change. The physical inventory write off costs were primarily
consisting of physical count to book adjustments of medical equipment parts in the second quarter
of 2009. The increase in obsolescence expense was mainly due to additional excess and obsolescence
write-off from medical product parts.
June 30, | Change | |||||||||||
OPERATING EXPENSES AND OTHER | 2009 | 2008 | ||||||||||
($ In thousands) | ||||||||||||
Three months ended: |
||||||||||||
Sales and marketing |
$ | 4,016 | $ | 3,846 | 4 | % | ||||||
% of total revenue |
60 | % | 50 | % | ||||||||
Research and development |
$ | 3,412 | $ | 2,940 | 16 | % | ||||||
% of total revenue |
51 | % | 39 | % | ||||||||
General and administrative |
$ | 4,841 | $ | 5,111 | (5 | )% | ||||||
% of total revenue |
72 | % | 67 | % | ||||||||
Amortization and impairment of intangibles |
$ | 224 | $ | 202 | 11 | % | ||||||
% of total revenue |
3 | % | 3 | % | ||||||||
Restructuring Costs |
$ | 705 | $ | | * | % | ||||||
% of total revenue |
11 | % | * | % | ||||||||
Six months ended: |
||||||||||||
Sales and marketing |
$ | 8,300 | $ | 7,191 | 15 | % | ||||||
% of total revenue |
59 | % | 50 | % | ||||||||
Research and development |
$ | 7,341 | $ | 6,430 | 14 | % | ||||||
% of total revenue |
52 | % | 44 | % | ||||||||
General and administrative |
$ | 9,226 | $ | 9,525 | (3 | )% | ||||||
% of total revenue |
65 | % | 66 | % | ||||||||
Amortization and impairment of intangibles |
$ | 439 | $ | 472 | (7 | )% | ||||||
% of total revenue |
3 | % | 3 | % | ||||||||
Restructuring Costs |
$ | 1,351 | $ | | * | % | ||||||
% of total revenue |
10 | % | * | % |
* | Not meaningful |
Sales and Marketing Our sales and marketing expenses are comprised primarily of employee
compensation and benefits costs, advertising, public relations, trade shows, brochures, market
development
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funds, travel, and an allocation of facilities costs. Sales and marketing expenses from continuing
operations were $4.0 million, an increase of $170,000 or 4% in the second quarter of 2009 compared
to the comparable period in 2008. The increase was primarily due to a write off of demo equipment
of $668,000, primarily resulting from a reconciliation of the fixed asset records to the physical
inventory at the time of the move and increased consulting costs of $34,000 partially offset by
reduced compensation, benefits, and overhead of $334,000 primarily due to decreased sales and
marketing headcount, decreased employee recruitment expense of $82,000, decreased marketing,
advertising, and public relations costs of $58,000, and decreased bad debt expense of $56,000. We
are taking steps to reduce our sales and marketing expenses, although we expect to continue to
focus our sales and marketing efforts on mobile device, touchscreen, and medical market
opportunities to build greater market acceptance for our touch technologies.
Sales and marketing expenses from continuing operations were $8.3 million, an increase of
$1.1 million or 15% in the first six months of 2009 compared to the comparable period in 2008. The
increase was primarily due to a write off of demo equipment of $666,000, primarily resulting from
a reconciliation of the fixed asset records to the physical inventory at the time of the move,
increased consulting costs of $254,000 to supplement our sales and marketing staff, increased
marketing, advertising, and public relations costs of $232,000, increased sales and marketing
travel expense of $194,000, partially offset by reduced sales and marketing employee recruitment
charges of $182,000 and a reduction in bad debt expense of $161,000. The increased sales and
marketing expenses were primarily due to the expansion of our sales and marketing efforts
internationally.
Research and Development Our research and development expenses are comprised primarily of
employee compensation and benefits costs, consulting fees, tooling and supplies, and an allocation
of facilities costs. Research and development expenses from continuing operations were $3.4
million, an increase of $472,000 or 16% in the second quarter of 2009 compared to the same period
in 2008. The increase was primarily due to increased compensation, benefits, and overhead of
$231,000, increased consulting costs of $164,000 to supplement our engineering staff, and
engineering travel costs of $64,000. The increased compensation, benefits, and overhead expense was
primarily due to increased research and development headcount. We believe that continued
significant investment in research and development is critical to our future success, and we expect
to make significant investments in areas of research and technology development to support future
growth.
Research and development expenses from continuing operations were $7.3 million, an increase of
$911,000 or 14% in the first six months of 2009 compared to the same period in 2008. The increase
was primarily due to increased compensation, benefits, and overhead of $622,000 and increased
consulting costs of $267,000 to supplement our engineering staff. The increased compensation,
benefits, and overhead expense was primarily due to increased research and development headcount.
General and Administrative Our general and administrative expenses are comprised primarily
of employee compensation and benefits, legal and professional fees, office supplies, travel, and an
allocation of facilities costs. General and administrative expenses from continuing operations were
$4.8 million, a decrease of $270,000 or 5% in the second quarter of 2009 compared to the same
period in 2008. The decrease was primarily due to reduced legal, professional, and license fee
expenses of $649,000, partially offset by increased compensation, benefits, and overhead of
$241,000, and increased supplies and office expenses of $60,000. The decreased legal, professional,
and license fee expenses were primarily due to decreased litigation costs of $1.1 million, mainly
Microsoft litigation which was settled in 2008; partially offset by increased costs resulting from
our internal investigation. Increased compensation, benefits, and overhead are primarily increased
stock compensation costs. We expect that the dollar amount of general and administrative expenses
to continue to be a significant component of our operating expenses, but we are currently taking
steps to reduce our general and administrative expenses. We will continue to incur costs related to
litigation as we continue to assert our intellectual property and contractual rights and defend
lawsuits brought against us.
General and administrative expenses from continuing operations were $9.2 million, a decrease
of $299,000 or 3% in the first six months of 2009 compared to the same period in 2008. The decrease
was primarily due to reduced legal, professional, and license fee expenses of $1.2 million,
partially offset by increased compensation, benefits, and overhead of $574,000, increased travel of
$134,000, and increased
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supplies and office expenses of $91,000, and increased public company expense of $65,000. The
decreased legal, professional, and license fee expenses were primarily due to decreased litigation
costs of $2.0 million, mainly Microsoft litigation which was settled in 2008; partially offset by
costs resulting from our current internal investigation. The increased compensation, benefits, and
overhead expense was primarily due to increased general and administrative headcount and increased
non-cash stock-based compensation charges.
Amortization and impairment of Intangibles Our amortization and impairment of intangibles is
comprised primarily of patent amortization and other intangible amortization along with impairment
s or write off of intangibles. Amortization and impairment of intangibles increased by $22,000 or
11% in the second quarter of 2009 compared to the same period in 2008. Amortization and impairment
of intangibles decreased by $33,000 or 7% in the first six months of 2009 compared to the same
period in 2008. The decrease was primarily attributable to some intangible assets reaching full
amortization.
Restructuring Restructuring costs in the second quarter of 2009 consist primarily of
severance benefits and move and close down of facility costs paid in connection with the reduction
of workforce and relocation of the Maryland medical business operations to San Jose of $646,000.
Restructuring costs also include severance benefits paid as the result of the reduction of
workforce due to business changes in our Touch segment of $59,000. There were no restructuring
charges incurred in the second quarter of 2008. We do not expect to record significant additional
costs relating to the reduction of workforce and relocation of the Maryland medical business
operations to San Jose except for some employee move and temporary housing costs.
Restructuring costs in the first six months of 2009 consist primarily of severance benefits
and move and close down of facility costs paid in connection with the reduction of workforce and
relocation of the Maryland medical business operations to San Jose of $811,000. Restructuring costs
also include severance benefits paid as the result of the reduction of workforce due to business
changes in our Touch segment of $540,000. There were no restructuring charges incurred in the six
months ended June 30, 2008.
Change in fair value of warrant liability In January 2009, we adopted EITF Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock.
Quarterly we recalculate the fair value of our warrants using the Black-Scholes option pricing
model. For the three months and six months ended June 30, 2009, the gain or loss from the change
in fair value of the warrant liability was ($136,000) and $344,000, respectively.
Interest and Other Income Interest and other income consist primarily of interest income and
dividend income from cash and cash equivalents and short-term investments and gain on sale of
short-term investments. Interest and other income decreased by $766,000 in the second quarter of
2009 compared to the same period in 2008. This was primarily the result of decreased interest
income due to a reduction in cash equivalents and short-term investments and reduced interest rates
on cash, cash equivalents, and short-term investments. We expect that the accretion of interest
income from Sony Computer Entertainment that was approximately $112,000 in the second quarter of 2009 and
will total approximately $377,000 in 2009 will be completed at the end of 2009.
Interest and other income decreased by $2.1 million in the first six months of 2009 compared
to the same period in 2008. This was primarily the result of decreased interest income due to a
reduction in cash equivalents and short-term investments and reduced interest rates on cash, cash
equivalents, and short-term investments.
Provision for Income Taxes We recorded a provision for income taxes for second quarter of
2009 of $300,000 on pre-tax loss from continuing operations of $8.8 million, yielding an effective
tax rate 3.4%. For the second quarter of 2008, we recorded a benefit for income taxes of $1.9
million on pre-tax loss from continuing operations of $5.6 million, yielding an effective tax rate
of (34.2)%. The income tax provision or benefit for the second quarter of 2009 and 2008 are arrived
at as a result of applying the estimated annual effective tax rate to
cumulative income (loss) before taxes, adjusted for certain discrete
items which are fully recognized in the period they occur. The tax
effect of the discontinued operations is removed to arrive at the
income tax provision or benefit from continuing operations.
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We recorded a provision for income taxes for the six months ended June 30, 2009 of $391,000 on
pre-tax loss from continuing operations of $15.2 million, yielding an effective tax rate of 2.6%
which reflects the continuing impact of the valuation allowance on the deferred tax asset taken in
Q3 2008. During 2008, we recorded a valuation allowance due to uncertainty in realization of asset
balances due to losses. For the six months ended June 30, 2008, we recorded a benefit for income
taxes of $3.2 million on pre-tax loss from continuing operations of $10.3 million, yielding an
effective tax rate of (30.7)%. The income tax provision or benefit for the six months ended June
30, 2009 and June 30, 2008 are arrived at as a result of applying the estimated annual effective
tax rate to cumulative loss before taxes, plus foreign withholding tax expense, adjusted for
certain discrete items which are fully recognized in the period they occur.
Discontinued Operations In the three months ended June 30, 2009, we sold our MicroScribe
family of products and have recorded a gain on sale of discontinued operations of $20,000. The
remaining operations of the 3D product line have been classified as discontinued operations in the
condensed consolidated statement of operations. Gain from discontinued operations, net of tax,
decreased by $44,000 in the second quarter of 2009 compared to the same period in 2008, primarily
due to the decrease in activity due to the ceasing of 3D operations in the quarter ended March 31,
2009 resulting in reduced sales volumes and costs and expenses associated with 3D operations during
subsequent periods.
In the six months ended June 30, 2009, we ceased operations of the 3D product line and sold
our CyberGlove family of products, SoftMouse 3D positioning device family of products, and our
Microscribe family of products, and recorded a gain on sale of discontinued operations of $187,000.
Accordingly, the operations of the 3D product line have been classified as discontinued operations
in the condensed consolidated statement of operations. Gain from discontinued operations, net of
tax, decreased by $135,000 in the six months ended June 30, 2009 compared to the same period in
2008, primarily due to the decrease in activity due to the ceasing of 3D operations in the quarter
ended March 31, 2009 resulting in reduced sales volumes and costs and expenses associated with 3D
operations during that period.
SEGMENT RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
We have two operating and reportable segments. One segment, Touch, develops and markets touch
feedback technologies that enable software and hardware developers to enhance realism and usability
in their computing, entertainment, and industrial applications. The second segment, Medical,
develops, manufactures, and markets medical training simulators that recreate realistic healthcare
environments.
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Revenues: |
||||||||||||||||
Touch |
$ | 4,187 | $ | 3,920 | $ | 8,661 | $ | 7,882 | ||||||||
Medical |
2,495 | 3,699 | 5,561 | 6,618 | ||||||||||||
Intersegment eliminations |
| | (34 | ) | (41 | ) | ||||||||||
Total |
$ | 6,682 | $ | 7,619 | $ | 14,188 | $ | 14,459 | ||||||||
Operating loss: |
||||||||||||||||
Touch |
$ | (3,875 | ) | $ | (5,688 | ) | $ | (8,891 | ) | $ | (10,577 | ) | ||||
Medical |
(4,953 | ) | (855 | ) | (7,140 | ) | (2,312 | ) | ||||||||
Intersegment eliminations |
| 12 | (1 | ) | (5 | ) | ||||||||||
Total |
$ | (8,828 | ) | $ | (6,531 | ) | $ | (16,032 | ) | $ | (12,894 | ) | ||||
* | Note: Segment information may not be indicative of the financial position or results of operations that would have been achieved had these segments operated as unaffiliated entities. |
Touch segment Revenues from the Touch segment were $4.2 million, an increase of $267,000 or
7% in the second quarter of 2009 compared to the same period in 2008. Royalty and license revenues
increased by $400,000 mainly due to increased revenue from licensees of mobile devices partially
offset by decreased revenue from gaming and automotive licensees. Development contract revenue
decreased by $117,000 primarily due to decreased development contracts and support. Operating loss
for the second quarter of 2009 was $3.9 million, a decrease of $1.8 million compared to the same
period in 2008. The decrease was primarily due to a decrease in general and administrative expenses
of $990,000 mainly due to decreased litigation costs, increased gross margin of $768,000 mainly due
to increased royalty and license revenue, and a decrease in sales and marketing expenses of
$548,000. The decreases to the operating loss were partially offset by an increase in research and
development costs of $371,000 and an increase in restructuring costs of $101,000.
Revenues from the Touch segment were $8.7 million, an increase of $779,000 or 10% in the first
six months of 2009 compared to the same period in 2008. Royalty and license revenues increased by
$721,000 mainly due to increased revenue from licensees of mobile devices partially offset by
decreased revenue from gaming and automotive licensees. Development contract revenue increased by
$65,000 primarily due to increased development contracts and support. Operating loss for the six
months ended June 30, 2009 was $8.9 million, a decrease of $1.7 million compared to the same period
in 2008. The decrease was primarily due to increased gross margin of $1.6 million mainly due to
increased royalty and license revenue, a decrease in general and administrative expenses of $1.3
million mainly due to decreased litigation costs, and decreased sales and marketing expenses of
$178,000. The decreases to operating loss were partially offset by an increase of research and
development expenses of $838,000, and an increase in restructuring costs of $581,000.
Medical segment Revenues from the Medical segment were $2.5 million, a decrease of $1.2
million or 33%, for the second quarter of 2009 compared to the same period in 2008. The decrease
was primarily due to a reduction of product sales mainly due to decreased sales of our endoscopy,
endovascular, Virtual IV, and laparoscopy simulators partially offset by an increase in sales of
our arthroscopy simulators and a reduction of medical development contract revenue due to the
completion of work performed under medical contracts that occurred through the first six months of
2008. Operating loss for the second quarter of 2009 was $5.0 million, an increase of $4.1
million compared to the same period in 2008. The increase was mainly due to a decrease in gross
margin of $2.0 million primarily due to reduced revenue and physical
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inventory write offs primarily consisting of physical count to book adjustments of medical
equipment parts, increased general and administrative expenses of $719,000 primarily due to
increased legal costs, increased sales and marketing expenses of $719,000 including fixed asset
write offs resulting from a reconciliation of the fixed asset records to the physical inventory, an
increase in restructuring costs of $604,000 mainly due to the facility move to San Jose, and
increased research and development expenses of $101,000.
Revenues from the Medical segment were $5.6 million, a decrease of $1.1 million or 16%, for
the first six months of 2009 compared to the same period in 2008. The decrease was primarily due to
a reduction of product sales mainly due to decreased sales of our Virtual IV, endovascular, and
endoscopy simulators partially offset by an increase in sales of our laparoscopy and arthroscopy
simulators. and a reduction of medical development contract revenue due to the completion of work
performed under medical contracts that occurred through the first six months of 2008. Operating
loss for the six months ended June 30, 2009 was $7.1 million, an increase of $4.8 million compared
to the same period in 2008. The increase was mainly due to a decrease in gross margin of $1.7
million primarily due to reduced revenue and physical inventory write offs primarily consisting of
physical count to book adjustments of medical equipment parts, increased sales and marketing
expenses of $1.3 million primarily due to an expansion of international sales and marketing efforts
and fixed asset write offs resulting from a reconciliation of the fixed asset records to the
physical inventory, increased general and administrative expenses of $969,000 mainly due to
increased legal costs, and an increase in restructuring costs of $770,000 mainly due to the
facility move to San Jose.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents, and short-term investments consist primarily of money market funds
and highly liquid commercial paper and government agency securities. All of our short-term
investments are classified as available-for-sale under the provisions of SFAS No. 115. 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 June 30, 2009, our cash, cash equivalents, and short-term investments totaled $74.0
million, a decrease of $11.7 million from $85.7 million on December 31, 2008.
In March 2007, we concluded our patent infringement litigation against Sony Computer
Entertainment and we received $97.3 million. Furthermore, we entered into a new business agreement
under which, we are to receive twelve quarterly installments of $1.875 million for a total of $22.5
million beginning on March 31, 2007 and ending on December 31, 2009. As of June 30, 2009, we had
received ten of these installments.
Net cash used in operating activities during the six months ended June 30, 2009 was $9.4
million, a change of $7.9 million from the $1.5 million used during the six months ended June 30,
2008. Cash used in operations during the six months ended June 30, 2009 was primarily the result of
a net loss of $15.0 million, a decrease of $1.8 million due to a change in accounts payable, a
decrease of $783,000 due to a change in accrued compensation and other current liabilities, and a
decrease of $172,000 due to a change in inventories. These decreases were offset by a $1.9 million
increase due to a change in accounts receivable, a $1.9 million increase due to a change in
deferred revenue and customer advances, and an increase of $332,000 due to a change in prepaid
expenses and other current assets. Cash used in operations during the six months ended June 30,
2009 was also impacted by noncash charges and credits of $4.1 million, including $2.7 million of
noncash stock-based compensation, $873,000 in depreciation and amortization, $439,000 in
amortization and impairment of intangibles, $708,000 of write off of equipment, partially offset
by a decrease in the fair market value of warrant liability of $344,000 and gain on sales of
discontinued operations of $187,000.
Net cash used in investing activities during the six months ended June 30, 2009 was $30.6
million, compared to the $17.2 million provided by investing activities during the six months ended
June 30, 2008, an increase of $47.8 million. Net cash used in investing activities during the
period consisted of purchases of short-term investments of $49.0 million; a $1.5 million increase
in intangibles and other assets, primarily due to capitalization of external patent filing and
application costs; and $1.3 million used to purchase property and equipment; partially offset by
maturities or sales of short-term investments of $21.0 million and proceeds from sales of
discontinued operations of $187,000.
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Net cash provided by financing activities during the six months ended June 30, 2009 was
$271,000 compared to $4.7 million used during the six months ended June 30, 2008, or a $5.0 million
increase from the prior year. Net cash provided by financing activities for the period consisted
primarily of issuances of common stock and exercises of stock options and warrants in the amount of
$278,000.
We believe that our cash and cash equivalents will be sufficient to meet our working capital
needs for at least the next twelve months. We will continue to protect and defend our extensive
intellectual property portfolio across all business segments. We anticipate that capital
expenditures for the year ended December 31, 2009 will total approximately $3.0 million in
connection with anticipated maintenance and upgrades to operations and infrastructure. Cash flows
from our discontinued operations have been included in our consolidated statement of cash flows
with continuing operations within each cash flow category. The absence of cash flows from
discontinued operations is not expected to affect our future liquidity or capital resources.
Additionally, if we acquire one or more businesses, patents, or products, our cash or capital
requirements could increase substantially. In the event of such an acquisition, or should any
unanticipated circumstances arise that significantly increase our capital requirements, we may
elect to raise additional capital through debt or equity financing. Any of these events could
result in substantial dilution to our stockholders. There is no assurance that such additional
capital will be available on terms acceptable to us, if at all.
SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual cash obligations and other
commercial commitments as of December 31, 2008:
2010 and | 2012 and | |||||||||||||||||||
Contractual Obligations | Total | 2009 | 2011 | 2013 | 2014 | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating leases |
$ | 3,555 | $ | 928 | $ | 1,250 | $ | 1,094 | $ | 283 | ||||||||||
As discussed in Note 12 to the condensed consolidated financial statements, effective
January 1, 2007, we adopted the provisions of FIN 48. On June 30, 2009, we had a liability for
unrecognized tax benefits totaling approximately $647,000, including interest of $20,000. Due to
the uncertainties related to these tax matters, we are unable to make a reasonably reliable
estimate when cash settlement with a taxing authority will occur. Settlement of such amounts could
require the utilization of working capital.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the condensed consolidated financial statements for information regarding the
effect of new accounting pronouncements on our financial statements.
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 have cash equivalents and short-term
investments of $71.3 million as of June 30, 2009. These securities 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 an approximate $180,000 decrease in the fair value of our cash equivalents and
short-term investments as of June 30, 2009.
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 investment policy limits the maximum weighted average
duration of all invested funds to 12 months. Our policys guidelines also limit exposure to loss by
limiting the sums we can invest in any individual security and restricting investment to securities
that meet certain defined credit ratings. We do not use derivative financial instruments in our
investment portfolio to manage interest rate risk.
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Foreign Currency Exchange Rates A substantial majority of our revenue, expense, and capital
purchasing activities are transacted in U.S. dollars. However, we do incur certain operating costs
for our foreign operations in other currencies but these operations are limited in scope and thus
we are not materially exposed to foreign currency fluctuations. Additionally we have some reliance
on international and export sales that are subject to the risks of fluctuations in currency
exchange rates. Because a substantial majority of our international and export revenues, as well as
expenses, are typically denominated in U.S. dollars, a strengthening of the U.S. dollar could cause
our products to become relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. We have no foreign exchange contracts, option
contracts, or other foreign currency hedging arrangements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Interim Chief Executive Officer and Interim
Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of June 30, 2009. The purpose of
these controls and procedures is to ensure that information required to be disclosed in the reports
we file or submit under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SECs rules, and that such information is accumulated and
communicated to our management, including our Interim Chief Executive Officer and our Interim Chief
Financial Officer, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Interim Chief Executive Officer and Interim Chief
Financial Officer evaluated our disclosure controls and procedures and determined that there were
material weaknesses in our internal control over financial reporting as of June 30, 2009, as more
fully described in Managements Report on Internal Control over Financial Reporting (As Revised),
in Amendment No. 1 to our Annual Report on 10-K on Form 10-K/A filed on February 8, 2010 and in
Evaluation of Disclosure Controls and Procedures (As Revised) in Amendment No. 1 to our Quarterly
Report on 10-Q for the period ended March 31, 2009 on Form 10-Q/A filed on February 8, 2010.
Additionally, as of June 30, 2009, we did not maintain effective control over inventory and fixed
assets. Specifically, we determined that inventory, including capitalized demonstration and
customer loaner equipment was not appropriately tracked. As a result, we have concluded that there
is a material weakness in inventory control and fixed asset management. A material weakness is a
deficiency, or combination of deficiencies, such that there is a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be prevented or
detected on a timely basis. Based on this evaluation and because of the material weaknesses
described in our Form 10-K/A and Form 10-Q/A which have not been remediated as of June 30, 2009, our
Interim Chief Executive Officer and Interim Chief Financial Officer have concluded that certain
disclosure controls and procedures were not effective as of June 30, 2009.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than the remedial efforts to address our material weaknesses as described further below,
that took place or that were ongoing during the three months ended June 30, 2009, there were no
changes in our internal control over financial reporting during the three months ended June 30,
2009 that have materially affected or are reasonably likely to materially affect, our internal
control over financial reporting.
Plans for Remediation
We will not be able to assess whether the steps we are taking will fully remedy the material
weaknesses in our internal control over financial reporting until we have fully implemented them
and a sufficient time passes in order to evaluate their effectiveness.
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Subsequent to December 31, 2007 through the filing date of this Amendment, we have undertaken
the following remedial efforts to address the material weakness in our internal control over
financial reporting with respect to income taxes as initially reported in our Annual Report on Form
10-K for the year ended December 31, 2007:
| During the first quarter of fiscal 2008, we engaged outside consultants to advise us in areas of complex tax accounting and to design and implement controls to ensure proper communication with our personnel to obtain the needed advice and review of tax related accounting and reporting documentation. |
| In November 2008, we hired a senior tax manager who had responsibility to consider and apply proper accounting for income taxes, design and implement controls to ensure that the rationale for positions taken on certain tax matters would be adequately documented and appropriately communicated to all internal and external members of our tax team, and design and implement controls over the adjustment of the income tax accounts based on the preparation and filing of income tax returns. In June 2009, the senior tax manager departed the Company and we outsourced the preparation of the Companys quarterly and annual tax calculations and the related financial disclosures including the rationale for recognizing the benefits of certain tax positions in the financial statements to an external provider with oversight responsibility remaining with the corporate controller. We continue to evaluate additional steps to remediate this material weakness. |
Subsequent to June 30, 2009 through the filing date of this 10-Q, we have undertaken the
following remedial efforts to address the material weaknesses in our internal control over
financial reporting with respect to revenue recognition described in Amendment No. 1 to our Annual
Report on 10-K/A filed on February 8, 2010 :
| We are in the process of improving our documentation of our existing revenue recognition policies, including policies involving non-standard terms and conditions, multiple element arrangements, modifications to shipping terms and requests for pre-release products; |
| We have restructured our finance department such that the individuals responsible for the recognition of revenue are all located at our headquarters and report directly to the Interim CFO with clearly delineated responsibilities; |
| We have held training sessions on revenue recognition policies with the sales personnel and will continue to implement training and oversight of executive, finance, sales and operational personnel and new hires to ensure compliance with revenue recognition policies; |
| We have redesigned the quarterly sub-certification process to cover a wider variety of topics that could affect the financial statements and added more employees to this certification process; |
| We have implemented a process of obtaining quarterly certifications from all sales personnel certifying that they are not aware of any side agreements modifying our standard terms of contracts; |
| We have implemented a process of obtaining, on an annual basis, signed acknowledgments from each employee that he or she has read and is in compliance with our code of ethics and employee handbook; |
| We have improved our legal and financial review process of all sales order packages for all terms and conditions prior to shipment; and |
| We are in the process of automating the approval process for the release of all products in development to production, which approval process requires the approval of finance personnel. |
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In addition, we continue to take the steps set forth in the remedial plan approved by the
Audit Committee as further discussed in the Explanatory Note and Item 9 in the Form 10-K/A for the
year ended December 31, 2008.
Subsequent to June 30, 2009 through the filing date of this Amendment, we have undertaken the
following remedial efforts to address the material weaknesses in our internal control over
financial reporting with respect to the calculation of stock-based compensation, warrants and
inventory control and fixed assets management as discussed above or
in the amendments to our Annual Report on Form 10-K and Quarterly
Report on Form 10-Q describes above:
| We are in the process of adding a control procedure to test the calculation of the third-party stock-based compensation reports on a quarterly basis, including upon upgrades to new versions of the software, and to ensure timely review of the technical updates to the software. | ||
| We are in the process of adding a control procedure to test the review and implementation of all applicable new accounting pronouncements with the appropriate review by finance personnel to ensure compliance. | ||
| We are in the process of implementing control procedures to ensure capitalization and tracking of all demonstration and customer loaner equipment. | ||
| We are in the process of reviewing our physical inventory management procedures including cycle counts to ensure proper control of inventory with appropriate review by operations and finance personnel. |
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In
re Immersion Corporation Initial Public Offering Securities Litigation
We are involved in legal proceedings relating to a class action lawsuit filed on November 9,
2001 in the U. S. District Court for the Southern District of New York, In re Immersion Corporation
Initial Public Offering Securities Litigation, No. Civ. 01-9975 (S.D.N.Y.), related to In re
Initial Public Offering Securities Litigation, No. 21 MC 92 (S.D.N.Y.). The named defendants are
Immersion and three of our current or former officers or directors (the Immersion Defendants),
and certain underwriters of our November 12, 1999 initial public offering (IPO). Subsequently,
two of the individual defendants stipulated to a dismissal without prejudice.
The operative amended complaint is brought on purported behalf of all persons who purchased
our common stock from the date of our IPO through December 6, 2000. It alleges liability under
Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, on the grounds that the registration statement for the IPO did not disclose
that: (1) the underwriters agreed to allow certain customers to purchase shares in the IPO in
exchange for excess commissions to be paid to the underwriters; and (2) the underwriters arranged
for certain customers to purchase additional shares in the aftermarket at predetermined prices. The
complaint also appears to allege that false or misleading analyst reports were issued. The
complaint does not claim any specific amount of damages.
Similar allegations were made in other lawsuits challenging over 300 other initial public
offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the District Court ruled on all defendants motions to
dismiss. The motion was denied as to claims under the Securities Act of 1933 in the case involving
us as well as in all other cases (except for 10 cases). The motion was denied as to the claim under
Section 10(b) as to us, on the basis that the
complaint alleged that we had made acquisition(s) following the IPO. The motion was granted as
to the claim under Section 10(b), but denied as to the claim under Section 20(a), as to the
remaining individual defendant.
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In September 2008, all of the parties to the lawsuits reached a settlement, subject to
documentation and approval of the District Court. The Immersion Defendants would not be required
to contribute to the settlement. Subsequently, an underwriter defendant filed for bankruptcy and
other underwriter defendants were acquired. On April 2, 2009, final documentation evidencing the
settlement was presented to the District Court for approval. If the settlement is not approved by
the District Court, we intend to defend the lawsuit vigorously.
Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
On April 16, 2008, we announced that our wholly owned subsidiary, Immersion Medical, Inc.,
filed lawsuits for patent infringement in the United States District Court for the Eastern District
of Texas against Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd (collectively the
Defendants), seeking damages and injunctive relief. On July 11, 2008, Mentice AB and Mentice SA
(collectively, Mentice) answered the complaint by denying the material allegations and alleging
counterclaims seeking a judicial declaration that the asserted patents were invalid, unenforceable,
or not infringed. On July 11, 2008, Simbionix USA Corp. and Simbionix Ltd, (collectively,
Simbionix) filed a motion to stay or dismiss the lawsuit, and a motion to transfer venue for
convenience to Ohio. On August 7, 2008, we filed our opposition to both motions filed by
Simbionix. The court has not ruled on the pending motions. On December 2, 2008, the court held a
status conference in which it set a trial date for December 5, 2011 and a claim construction
hearing for June 1, 2011. We intend to vigorously prosecute this lawsuit.
Also see Note 17 to the Consolidated Financial Statements in Part I.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks and uncertainties, as well as other
information in this report and our other SEC filings, in considering our business and prospects. If
any of the following risks or uncertainties actually occur, our business, financial condition, or
results of operations could be materially adversely affected. The following risks and uncertainties
are not the only ones facing us. Additional risks and uncertainties of which we are unaware or that
we currently believe are immaterial could also materially adversely affect our business, financial
condition, or results of operations. In any case, the trading price of our common stock could
decline, and you could lose all or part of your investment. See also the Forward-looking Statements
discussion in Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Company
Risks
IF WE FAIL TO ESTABLISH AND MAINTAIN PROPER AND EFFECTIVE INTERNAL CONTROLS, OUR ABILITY TO PRODUCE
ACCURATE FINANCIAL STATEMENTS ON A TIMELY BASIS COULD BE IMPAIRED, WHICH WOULD ADVERSELY AFFECT OUR
CONSOLIDATED OPERATING RESULTS, OUR ABILITY TO OPERATE OUR BUSINESS AND OUR STOCK PRICE.
In connection with the internal investigation conducted by the audit committee into revenue
recognition of certain transactions in our Medical line of business, we determined that we did not
have adequate internal financial and accounting controls to produce accurate and timely financial
statements. Among weaknesses and deficiencies identified in our review, we determined that we had a
material weakness with respect to revenue recognition. In addition, as set forth in 2007, we
determined that we had a material weakness in controls over accounting for income taxes. In
reviewing our financial statements in preparation for the restatement we determined that we also
had material weaknesses in our controls over accounting for stock-based compensation, the adoption
of new accounting standards, inventory control management and accounting for fixed assets. Although
we have begun implementing new processes and procedures to improve
our internal controls, our interim chief
executive officer and interim chief financial officer determined that as of June 30, 2009, our internal
controls over financial reporting were not effective to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial statements for external
reporting in accordance with generally accepted accounting principles in the United States.
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Ensuring that we have adequate internal financial and accounting controls and procedures in
place to produce accurate financial statements on a timely basis is a costly and time-consuming
effort that needs to be re-evaluated frequently. Any failure on our part to remedy identified
material weaknesses or control deficiencies, or any additional delays or errors in our financial
reporting, whether or not resulting from the identified material weakness relating to revenue
recognition or any other material weakness or significant deficiencies, could cause our financial
reporting to be unreliable and could have a material adverse effect on our business, results of
operations, or financial condition and could have a substantial adverse impact on the trading price
of our common stock.
We do not expect that our internal control over financial reporting will prevent or detect all
errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems objectives will be met. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all control issues and
instances of fraud, if any, within our company will have been detected. As discussed in this Form
10-Q, our audit committee and management have identified material weaknesses and control
deficiencies in the past and may identify additional material weaknesses or control deficiencies in
the future.
We are required to comply with Section 404 of the Sarbanes Oxley Act of 2002. We have expended
significant resources in developing the necessary documentation and testing procedures required by
Section 404 of the Sarbanes Oxley Act. Our management has concluded that we did not maintain
effective control over financial reporting as of June 30, 2009 based on the criteria in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. We cannot be certain that the actions we have taken and are taking to improve our
internal controls over financial reporting will be sufficient or that we will be able to implement
our planned processes and procedures in a timely manner. In addition, we may be unable to produce
accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose
confidence in the reliability of our consolidated financial statements, which could cause the
market price of our common stock to decline and make it more difficult for us to finance our
operations and growth.
OUR CURRENT LITIGATION IS EXPENSIVE, DISRUPTIVE, AND TIME CONSUMING, AND WILL CONTINUE TO BE, UNTIL
RESOLVED, AND REGARDLESS OF WHETHER WE ARE ULTIMATELY SUCCESSFUL, COULD ADVERSELY AFFECT OUR
BUSINESS.
We are currently a party to various legal proceedings. Due to the inherent uncertainties
of litigation, we cannot accurately predict how these cases will ultimately be resolved. In
addition, it is possible that as a result of our internal investigation described elsewhere in this
report, we may be subject to additional litigation and investigations by government authorities
such as the SEC. We anticipate that currently pending litigation will continue to be costly and
that future litigation or investigations will result in additional legal expenses, and there can be
no assurance that we will be successful or able to recover the costs we incur in connection with
litigation or investigations. We expense litigation and investigatory costs as incurred, and only
accrue for costs that have been incurred but not paid to the vendor as of the financial statement
date. Litigation and investigations have diverted, and are likely to continue to divert, the
efforts and attention of some of our key management and personnel. As a result, until such time as
it is resolved or concluded, litigation and investigations could adversely affect our business.
Further, any unfavorable outcome could adversely affect our business. For additional background on
this and our other litigation, please see Note 17 to the consolidated financial statements in Part
I and Item 1. Legal Proceedings of this Part II.
THE UNCERTAIN GLOBAL ECONOMIC ENVIRONMENT COULD REDUCE OUR REVENUES AND COULD HAVE AN ADVERSE
EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The current global economic recession could materially hurt our business in a number of
ways including, longer sales and renewal cycles, delays in adoption of our products or
technologies, increased risk of competition, increased risk of inventory obsolescence, higher
overhead costs as a percentage of revenue, delays in signing or failing to sign customer
agreements, or signing customer agreements at reduced purchase levels. In addition, our suppliers,
customers, potential customers, and business partners are facing similar challenges, which could
materially and adversely affect the level of business they conduct with us or in the level of sales
of products that include our technology. The current economic
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downturn may lead to a reduction in corporate, university, or government budgets for research
and development in sectors including the automotive, aerospace, mobility, and medical sectors,
which use our products. Sales of our products or technology may be adversely affected by cuts in
these research and development budgets. Furthermore, a prolonged tightening of the credit markets
could significantly impact our ability to liquidate investments or reduce the rate of return on
investments.
WE HAD AN ACCUMULATED DEFICIT OF $85 MILLION AS OF JUNE 30, 2009, HAVE A HISTORY OF LOSSES,
EXPECT TO EXPERIENCE LOSSES IN THE FUTURE, AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE
FUTURE.
Since 1997, we have incurred losses in all but four recent quarters. We need to generate
significant ongoing revenue to return to profitability. We anticipate that we will continue to
incur expenses as we:
| continue to develop our technologies; | ||
| increase our sales and marketing efforts; | ||
| attempt to expand the market for touch-enabled technologies and products and change our business; | ||
| protect and enforce our intellectual property; | ||
| pursue strategic relationships; | ||
| incur costs related to pending litigation; | ||
| acquire intellectual property or other assets from third-parties; and | ||
| invest in systems and processes to manage our business. |
If our revenues grow more slowly than we anticipate or if our operating expenses exceed
our expectations, we may not achieve or maintain profitability.
WE HAVE LITTLE OR NO CONTROL OR INFLUENCE ON OUR LICENSEES DESIGN, MANUFACTURING, PROMOTION,
DISTRIBUTION, OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES, UPON
WHICH WE GENERATE ROYALTY REVENUE.
A key part of our business strategy is to license our intellectual property to companies
that manufacture and sell products incorporating our touch-enabling technologies. Sales of those
products generate royalty and license revenue for us. For the second quarter of 2009 and 2008, 54%
and 42%, respectively, of our total revenues were royalty and license revenues. For the six months
ended June 30, 2009 and 2008, 52% and 46%, respectively, of our total revenues were royalty and
license. We do not control or influence the design, manufacture, quality control, promotion,
distribution, or pricing of products that are manufactured and sold by our licensees, nor can we
control consolidation within an industry which could either reduce the number of licensing products
available or reduce royalty rates for the combined licensees. In addition, we generally do not have
commitments from our licensees that they will continue to use our technologies in current or future
products. As a result, products incorporating our technologies may not be brought to market,
achieve commercial acceptance, or otherwise generate meaningful royalty revenue for us. For us to
generate royalty revenue, licensees that pay us per-unit royalties must manufacture and distribute
products incorporating our touch-enabling technologies in a timely fashion and generate consumer
demand through marketing and other promotional activities. If our licensees products fail to
achieve commercial success or if products are recalled because of quality control problems, our
revenues will not grow and could decline.
Peak demand for products that incorporate our technologies, especially in the video
console gaming and computer gaming peripherals market, typically occurs in the fourth calendar
quarter as a result of increased demand during the year-end holiday season. If our licensees do not
ship products incorporating
our touch-enabling technologies in a timely fashion or fail to achieve strong sales in the
fourth quarter of the calendar year, we may not receive related royalty and license revenue.
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DUE TO RECENT TURNOVER, OUR EXECUTIVE MANAGEMENT TEAM HAS LIMITED EXPERIENCE WORKING TOGETHER
AND IF THERE ARE DIFFICULTIES WITHIN THIS TEAM, IT COULD IMPEDE THE EXECUTION OF OUR BUSINESS
STRATEGY.
Recently, we have experienced a number of changes in our executive team. Our success
will depend to a significant extent on the management teams ability to implement a successful
strategy, to successfully lead and motivate our employees, and to work effectively together and
with the board of directors. If this leadership team is not successful, our ability to execute our
business strategy would be impeded.
WE HAVE EXPERIENCED SIGNIFICANT CHANGE IN OUR BUSINESS, AND WE CANNOT ASSURE YOU THAT THESE CHANGES
WILL RESULT IN INCREASED REVENUE OR PROFITABILITY.
Our business has undergone significant changes in recent periods, including the
divestiture of our 3D business, new management, consolidation of our touch, gaming, and mobility
businesses, consolidation of our medical business and personnel changes and focus on additional
target markets. These changes have required significant investments of cash and other resources,
as well as managements time and attention and have placed significant strains on our managerial,
financial, engineering, or other resources. We cannot assure you that these efforts will result in
growing our business successfully or in increased operating performance.
WE MAY NOT BE ABLE TO CONTINUE TO DERIVE SIGNIFICANT REVENUES FROM MAKERS OF PERIPHERALS FOR
POPULAR VIDEO GAMING PLATFORMS.
A significant portion of our gaming royalty revenues come from third-party peripheral
makers who make licensed gaming products designed for use with popular video game console systems
from Microsoft, Sony, and Nintendo. Video game console systems are closed, proprietary systems, and
video game console system makers typically impose certain requirements or restrictions on
third-party peripheral makers who wish to make peripherals that will be compatible with a
particular video game console system. If third-party peripheral makers cannot or are not allowed to
obtain or satisfy these requirements or restrictions, our gaming royalty revenues could be
significantly reduced. Furthermore, should a significant video game console maker choose to omit
touch-enabling capabilities from its console system or somehow restrict or impede the ability of
third parties to make touch-enabling peripherals, it may very well lead our gaming licensees to
stop making products with touch-enabling capabilities, thereby significantly reducing our gaming
royalty revenues.
Under the terms of our agreement with Sony, Sony receives a royalty-free license to our
worldwide portfolio of patents. This license permits Sony to make, use, and sell hardware,
software, and services covered by our patents in its PS1, PS2, and PS3 systems for a fixed license
payment. The PS3 console system was launched in late 2006 in the United States and Japan without
force feedback capability. Sony has since released new PS3 controllers with vibration feedback. We
do not know to what extent Sony will allow third-party peripheral makers to make licensed PS3
gaming products with vibration feedback to interface with the PS3 console. To the extent Sony
selectively limits their licensing to leading third-party controller makers to make PS3 controllers
with vibration feedback, our licensing revenue from third-party PS3 peripherals will continue to be
severely limited. Sony continues to sell the PS2, and our third party licensees continue to sell
licensed PS2 peripherals. However, U.S. sales of PS2 peripherals continue to decline as more
consumers switch to the PS3 console system and other next-generation console systems like the
Nintendo Wii and Microsoft Xbox 360.
Both the Microsoft Xbox 360 and Nintendo Wii include touch-enabling capabilities. For the
Microsoft Xbox 360 video console system launched in November 2005, Microsoft has, to date, not yet
broadly licensed third parties to produce peripherals for its Xbox 360 game console. To the extent
Microsoft does not fully license third parties, Microsofts share of all aftermarket Xbox 360 game
controller sales will likely remain high or increase, which we expect will limit our gaming royalty
revenue. Additionally, Microsoft is now making touch-enabled steering wheel products covered by
their royalty-free, perpetual, irrevocable license to our worldwide portfolio of patents that could
compete with our licensees current products for which we earn per unit royalties.
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BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE FROM LICENSING IN
THE GAMING MARKET AND OTHER CONSUMER MARKETS HAS DECLINED AND MAY FURTHER DO SO IF MICROSOFT
INCREASES ITS VOLUME OF SALES OF TOUCH-ENABLED GAMING PRODUCTS AND CONSUMER PRODUCTS AT THE EXPENSE
OF OUR OTHER LICENSEES.
Under the terms of our present agreement with Microsoft, Microsoft receives a
royalty-free, perpetual, irrevocable license to our worldwide portfolio of patents. This license
permits Microsoft to make, use, and sell hardware, software, and services, excluding specified
products, covered by our patents. We will not receive any further revenues or royalties from
Microsoft under our current agreement with Microsoft. Microsoft has a significant share of the
market for touch-enabled console gaming computer peripherals and is pursuing other consumer markets
such as mobile phones, PDAs, and portable music players. Microsoft has significantly greater
financial, sales, and marketing resources, as well as greater name recognition and a larger
customer base than some of our other licensees. In the event that Microsoft increases its share of
these markets, our royalty revenue from other licensees in these market segments might decline.
WE GENERATE REVENUES FROM TOUCH-ENABLING COMPONENTS THAT ARE SOLD AND INCORPORATED INTO
THIRD-PARTY PRODUCTS. WE HAVE LITTLE OR NO CONTROL OR INFLUENCE OVER THE DESIGN, MANUFACTURE,
PROMOTION, DISTRIBUTION, OR PRICING OF THOSE THIRD-PARTY PRODUCTS.
Part of our business strategy is to sell components that provide touch feedback
capability in products that other companies design, manufacture, and sell. Sales of these
components generate product revenue. However, we do not control or influence the design,
manufacture, quality control, promotion, distribution, or pricing of products that are manufactured
and sold by those customers that buy these components. In addition, we generally do not have
commitments from customers that they will continue to use our components in current or future
products. As a result, products incorporating our components may not be brought to market, meet
quality control standards, or achieve commercial acceptance. If the customers fail to stimulate and
capitalize upon market demand for their products that include our components, or if products are
recalled because of quality control problems, our revenues will not grow and could decline.
THE TERMS IN OUR AGREEMENTS MAY BE CONSTRUED BY OUR LICENSEES IN A MANNER THAT IS INCONSISTENT
WITH THE RIGHTS THAT WE HAVE GRANTED TO OTHER LICENSEES, OR IN A MANNER THAT MAY REQUIRE US TO
INCUR SUBSTANTIAL COSTS TO RESOLVE CONFLICTS OVER LICENSE TERMS.
We have entered into, and we expect to continue to enter into, agreements pursuant to
which our licensees are granted rights under our technology and intellectual property. These rights
may be granted in certain fields of use, or with respect to certain market sectors or product
categories, and may include exclusive rights or sublicensing rights. We refer to the license terms
and restrictions in our agreements, including, but not limited to, field of use definitions, market
sector, and product category definitions, collectively as License Provisions.
Due to the continuing evolution of market sectors, product categories, and licensee business
models, and to the compromises inherent in the drafting and negotiation of License Provisions, our
licensees may, at some time during the term of their agreements with us, interpret License
Provisions in their agreements in a way that is different from our interpretation of such License
Provisions, or in a way that is in conflict with the rights that we have granted to other
licensees. Such interpretations by our licensees may lead to claims that we have granted rights to
one licensee which are inconsistent with the rights that we have granted to another licensee.
In addition, after we enter into an agreement, it is possible that markets and/or
products, or legal and/or regulatory environments, will evolve in a manner that we did not foresee
or was not foreseeable at the time we entered into the agreement. As a result, in any agreement, we
may have granted rights that will preclude or restrict our exploitation of new opportunities that
arise after the execution of the agreement.
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IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING LICENSEES AND WITH
ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR TOUCH-ENABLING TECHNOLOGIES, OUR ROYALTY REVENUE MAY
NOT GROW.
Our revenue growth is significantly dependent on our ability to enter into new licensing
arrangements. Our failure to enter into new or renewal of licensing arrangements will cause our
operating results to suffer. We face numerous risks in obtaining new licenses on terms consistent
with our business objectives and in maintaining, expanding, and supporting our relationships with
our current licensees. These risks include:
| the lengthy and expensive process of building a relationship with potential licensees; | ||
| the competition we may face with the internal design teams of existing and potential licensees; | ||
| difficulties in persuading product manufacturers to work with us, to rely on us for critical technology, and to disclose to us proprietary product development and other strategies; | ||
| difficulties with persuading potential licensees who may have developed their own intellectual property or licensed intellectual property from other parties in areas related to ours to license our technology versus continuing to develop their own or license from other parties; | ||
| challenges in demonstrating the compelling value of our technologies in new applications like mobile phones, portable devices, and touchscreens; | ||
| difficulties in persuading existing and potential licensees to bear the development costs and risks necessary to incorporate our technologies into their products; | ||
| difficulties in obtaining new licensees for yet-to-be commercialized technology because their suppliers may not be ready to meet stringent quality and parts availability requirements; | ||
| inability to sign new gaming licenses if the video console makers choose not to license third parties to make peripherals for their new consoles; and | ||
| reluctance of content developers, mobile phone manufacturers, and service providers to sign license agreements without a critical mass of other such inter-dependent supporters of the mobile phone industry also having a license, or without enough phones in the market that incorporate our technologies. |
OUR CONSOLIDATION OF OUR MEDICAL OPERATIONS MAY NOT BE SUCCESSFUL, AND MAY NEGATIVELY IMPACT
OUR BUSINESS
In May 2009, we moved the operations of our Medical line of business from Maryland to our
headquarters in San Jose, California. Consolidations and business restructurings involve numerous
risks and uncertainties, including, but not limited to: the potential loss of key employees,
customers and business partners; market uncertainty related to our future business plans; the
incurrence of unexpected expenses or charges; diversion of management attention from other key
areas of our business; negative impacts on employee morale; and other potential dislocations and
disruptions to the business. For second quarter of 2009 and 2008 our Medical line of business
represented 37% and 49%, respectively of our total revenues. For the six months ended June 30,
2009 and 2008 our Medical line of business represented 39% and 46%, respectively, of our total
revenues. Accordingly, if we are unable to manage this consolidation effectively, our overall
business and operating results could be materially and adversely affected.
LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE, DISRUPTIVE, AND TIME
CONSUMING; COULD RESULT IN THE IMPAIRMENT OR LOSS OF PORTIONS OF OUR INTELLECTUAL PROPERTY; AND
COULD ADVERSELY AFFECT OUR BUSINESS.
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Intellectual property litigation, whether brought by us or by others against us, has
caused us to expend, and may cause us to expend in future periods, significant financial resources
as well as divert managements time and efforts. From time to time, we initiate claims against
third parties that we believe infringe our intellectual property rights. We intend to enforce our
intellectual property rights vigorously and may initiate litigation against parties that we believe
are infringing our intellectual property rights if we are unable to resolve matters satisfactorily
through negotiation. Litigation brought to protect and enforce our intellectual property rights
could be costly, time-consuming, and difficult to pursue in certain venues, and distracting to
management and potential customers and could result in the impairment or loss of portions of our
intellectual property. In addition, any litigation in which we are accused of infringement may
cause product shipment delays, require us to develop non-infringing technologies, or require us to
enter into royalty or license agreements even before the issue of infringement has been decided on
the merits. If any litigation were not resolved in our favor, we could become subject to
substantial damage claims from third parties and indemnification claims from our licensees. We
could be enjoined from the continued use of the technologies at issue without a royalty or license
agreement. Royalty or license agreements, if required, might not be available on acceptable terms,
or at all. If a third party claiming infringement against us prevailed, and we may not be able to
develop non-infringing technologies or license the infringed or similar technologies on a timely
and cost-effective basis, our expenses could increase and our revenues could decrease.
While we attempt to avoid infringing known proprietary rights of third parties, third
parties may hold, or may in the future be issued, patents that could be infringed by our products
or technologies. Any of these third parties might make a claim of infringement against us with
respect to the products that we manufacture and the technologies that we license. From time to
time, we have received letters from companies, several of which have significantly greater
financial resources than we do, asserting that some of our technologies, or those of our licensees,
infringe their intellectual property rights. Certain of our licensees may receive similar letters
from these or other companies from time to time. Such letters or subsequent litigation may
influence our licensees decisions whether to ship products incorporating our technologies. In
addition, such letters may cause a dispute between our licensees and us over indemnification for
the infringement claim. Any of these notices, or additional notices that we or our licensees could
receive in the future from these or other companies, could lead to litigation against us, either
regarding the infringement claim or the indemnification claim.
We have acquired patents from third parties and also license some technologies from third
parties. We must rely upon the owners of the patents or the technologies for information on the
origin and ownership of the acquired or licensed technologies. As a result, our exposure to
infringement claims may increase. We generally obtain representations as to the origin and
ownership of acquired or licensed technologies and indemnification to cover any breach of these
representations. However, representations may not be accurate and indemnification may not provide
adequate compensation for breach of the representations. Intellectual property claims against our
licensees, or us, whether or not they have merit, could be time-consuming to defend, cause product
shipment delays, require us to pay damages, harm existing license arrangements, or require us or
our licensees to cease utilizing the technologies unless we can enter into licensing agreements.
Licensing agreements might not be available on terms acceptable to us or at all. Furthermore,
claims by third parties against our licensees could also result in claims by our licensees against
us for indemnification.
The legal principles applicable to patents and patent licenses continue to change and
evolve. Legislation and judicial decisions that make it easier for patent licensees to challenge
the validity, enforceability, or infringement of patents, or make it more difficult for patent
licensors to obtain a permanent injunction, obtain enhanced damages for willful infringement, or to
obtain or enforce patents, may adversely affect our business and the value of our patent portfolio.
Furthermore, our prospects for future revenue growth through our royalty and licensing based
businesses could be diminished.
PRODUCT LIABILITY CLAIMS COULD BE TIME-CONSUMING AND COSTLY TO DEFEND AND COULD EXPOSE US TO
LOSS.
Our products or our licensees products may have flaws or other defects that may lead to
personal or other injury claims. If products that we or our licensees sell cause personal injury,
property injury, financial loss, or other injury to our or our licensees customers, the customers
or our licensees may seek damages or
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other recovery from us. Defending any claims against us, regardless of merit, would be
time-consuming, expensive to defend, and distracting to management, and could result in damages and
injure our reputation, the reputation of our technology and services, and/or the reputation of our
products, or the reputation of our licensees or their products. This damage could limit the market
for our and our licensees products and harm our results of operations. In addition, if our
business liability insurance coverage proves inadequate or future coverage is unavailable on
acceptable terms or at all, our business, operating results and financial condition could be
adversely affected.
In the past, manufacturers of peripheral products including certain gaming products such
as joysticks, wheels, or gamepads, have been subject to claims alleging that use of their products
has caused or contributed to various types of repetitive stress injuries, including carpal tunnel
syndrome. While we have not experienced any product liability claims to date, we could face such
claims in the future, which could harm our business and reputation. Although our license agreements
typically contain provisions designed to limit our exposure to product liability claims, existing
or future laws or unfavorable judicial decisions could limit or invalidate the provisions.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED ERRORS, WHICH COULD HARM OUR REPUTATION
AND FUTURE PRODUCT SALES.
Any failure to provide high quality and reliable products, whether caused by our own
failure or failures of our suppliers or OEM customers, could damage our reputation and reduce
demand for our products. Our products have in the past contained, and may in the future contain,
undetected errors or defects. Some errors in our products may only be discovered after a product
has been shipped to customers. Any errors or defects discovered in our products after commercial
release could result in loss of revenue, loss of customers, and increased service and warranty
costs, any of which could adversely affect our business.
THE NATURE OF SOME OF OUR PRODUCTS MAY ALSO SUBJECT US TO EXPORT CONTROL REGULATION BY THE
U.S. DEPARTMENT OF STATE AND THE DEPARTMENT OF COMMERCE. VIOLATIONS OF THESE REGULATIONS CAN RESULT
IN MONETARY PENALTIES AND DENIAL OF EXPORT PRIVILEGES.
Our sales to customers in some areas outside the United States could be subject to
government export regulations or restrictions that prohibit us from selling to customers in some
countries or that require us to obtain licenses or approvals to export such products
internationally. Delays or denial of the grant of any required license or approval, or changes to
the regulations, could make it difficult or impossible to make sales to foreign customers in some
countries and could adversely affect our revenue. In addition, we could be subject to fines and
penalties for violation of these export regulations if we were found in violation. Such violation
could result in penalties, including prohibiting us from exporting our products to one or more
countries, and could materially and adversely affect our business.
COMPLIANCE WITH DIRECTIVES THAT RESTRICT THE USE OF CERTAIN MATERIALS MAY INCREASE OUR COSTS AND
LIMIT OUR REVENUE OPPORTUNITIES.
Our products and packaging must meet all safety, electrical, labeling, marking, or other
requirements of the countries into which we ship products or our resellers sell our products. We
have to assess each product and determine whether it complies with the requirements of local
regulations or whether they are exempt from meeting the requirements of the regulations. If we
determine that a product is not exempt and does not comply with adopted regulations, we will have
to make changes to the product or its documentation if we want to sell that product into the region
once the regulations become effective. Making such changes may be costly to perform and may have a
negative impact on our results of operations. In addition, there can be no assurance that the
national enforcement bodies of the regions adopting such regulations will agree with our assessment
that certain of our products and documentation comply with or are exempt from the regulations. If
products are determined not to be compliant or exempt, we will not be able to ship them in the
region that adopts such regulations until such time that they are compliant, and this may have a
negative impact on our revenue and results of operations.
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BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES
CURRENTLY WORK WITH MICROSOFTS OPERATING SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR
REVENUES COULD DECLINE IF MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.
Our hardware and software technologies for personal computer peripheral products that
incorporate our touch-enabling technologies are currently compatible with Microsofts Windows 2000,
Windows Me, Windows XP, and Windows Vista operating systems, including DirectX, Microsofts
entertainment API. Modifications and new versions of Microsofts operating system and APIs
(including DirectX and Windows 7) may require that we and/or our licensees modify the
touch-enabling technologies to be compatible with Microsofts modifications or new versions, and
this could cause delays in the release of products by our licensees. If Microsoft modifies its
software products in ways that limit the use of our other licensees products, our costs could
increase and our revenues could decline.
In addition, Microsoft announced that its new product, Windows 7, will feature a new
multi-touch input function, allowing users to use multiple fingers simultaneously to interact with
touch surfaces. Enabling multi-location touch-feedback will require us to innovate hardware and
software, enable Windows 7 APIs with multi-touch output support, and work with our licensees and
third parties to integrate such features. There are feasibility risks with both hardware and
software, and there may be potential delays in the revenue growth of haptically-enabled multi touch
surfaces.
IF WE ARE UNABLE TO DEVELOP OPEN SOURCE COMPLIANT PRODUCTS, OUR ABILITY TO LICENSE OUR
TECHNOLOGIES AND GENERATE REVENUES WOULD BE IMPAIRED.
We have seen, and believe that we will continue to see, an increase in customers
requesting that we develop products that will operate in an open source environment. Developing
open source compliant products, without imperiling the intellectual property rights upon which our
licensing business depends, may prove difficult under certain circumstances, thereby placing us at
a competitive disadvantage for new product designs. As a result, our revenues may not grow and
could decline.
THE MARKET FOR CERTAIN TOUCH-ENABLING TECHNOLOGIES AND TOUCH-ENABLED PRODUCTS IS AT AN EARLY
STAGE AND IF MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH.
The market for certain of our touch-enabling technologies and certain of our licensees
touch-enabled products is at an early stage. If we and our licensees are unable to develop demand
for touch-enabling technologies and touch-enabled products, we may not achieve or sustain revenue
growth. We cannot accurately predict the growth of the markets for these technologies and products,
the timing of product introductions, or the timing of commercial acceptance of these products.
Even if our touch-enabling technologies and our licensees touch-enabled products are
ultimately widely adopted, widespread adoption may take a long time to occur. The timing and amount
of royalties and product sales that we receive will depend on whether the products marketed achieve
widespread adoption and, if so, how rapidly that adoption occurs.
We expect that we will need to pursue extensive and expensive marketing and sales efforts
to educate prospective licensees, component customers, and end users about the uses and benefits of
our technologies and to persuade software developers to create software that utilizes our
technologies. Negative product reviews or publicity about our company, our products, our licensees
products, haptic features, or haptic technology in general could have a negative impact on market
adoption, our revenue, and/or our ability to license our technologies in the future.
IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY TO LICENSE OUR
TECHNOLOGIES AND GENERATE REVENUES WOULD BE IMPAIRED.
Our business depends on generating revenues by licensing our intellectual property rights
and by selling products that incorporate our technologies. We rely on our significant patent
portfolio to protect our proprietary rights. If we are not able to protect and enforce those
rights, our ability to obtain future licenses or maintain current licenses and royalty revenue
could be impaired. In addition, if a court or the patent office were to limit the scope, declare
unenforceable, or invalidate any of our patents, current licensees may
refuse to make royalty payments, or they may choose to challenge one or more of our patents.
It is also possible that:
| our pending patent applications may not result in the issuance of patents; |
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| our patents may not be broad enough to protect our proprietary rights; and | |
| effective patent protection may not be available in every country in which we or our licensees do business. |
We also rely on licenses, confidentiality agreements, other contractual agreements, and copyright,
trademark, and trade secret laws to establish and protect our proprietary rights. It is possible
that:
| laws and contractual restrictions may not be sufficient to prevent misappropriation of our technologies or deter others from developing similar technologies; and | |
| policing unauthorized use of our patented technologies, trademarks, and other proprietary rights would be difficult, expensive, and time-consuming, within and particularly outside of the United States of America. |
CERTAIN TERMS OR RIGHTS GRANTED IN OUR LICENSE AGREEMENTS OR OUR DEVELOPMENT CONTRACTS MAY
LIMIT OUR FUTURE REVENUE OPPORTUNITIES.
While it is not our general practice to sign license agreements that provide exclusive
rights for a period of time with respect to a technology, field of use, and/or geography, or to
accept similar limitations in product development contracts, we have entered into such agreements
and may in the future. Although additional compensation or other benefits may be part of the
agreement, the compensation or benefits may not adequately compensate us for the limitations or
restrictions we have agreed to as that particular market develops. Over the life of the exclusivity
period, especially in markets that grow larger or faster than anticipated, our revenue may be
limited and less than what we could have achieved in the market with several licensees or
additional products available to sell to a specific set of customers.
IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW APPLICATIONS AND PLATFORMS, WE MAY
NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES OR OUR TECHNOLOGIES MAY BECOME OBSOLETE, AND
OUR ABILITY TO GROW AND OUR RESULTS OF OPERATIONS MIGHT BE HARMED.
Our initiatives to develop new and enhanced technologies and to commercialize these
technologies for new applications and new platforms may not be successful or timely. Any new or
enhanced technologies may not be favorably received by consumers and could damage our reputation or
our brand. Expanding our technologies could also require significant additional expenses and strain
our management, financial, and operational resources.
Moreover, technology products generally have relatively short product life cycles and our
current products may become obsolete in the future. Our ability to generate revenues will be harmed
if:
| we fail to develop new technologies or products; | |
| the technologies we develop infringe on third-party patents or other third-party rights; | |
| our new technologies fail to gain market acceptance; or | |
| our current products become obsolete or no longer meet new regulatory requirements. |
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Our ability to achieve revenue growth also depends on our continuing ability to improve
and reduce the cost of our technologies and to introduce these technologies to the marketplace in a
timely manner. If our development efforts are not successful or are significantly delayed,
companies may not incorporate our technologies into their products and our revenue growth may be
impaired.
WE HAVE LIMITED ENGINEERING, CUSTOMER SERVICE, TECHNICAL SUPPORT, QUALITY ASSURANCE AND
MANUFACTURING RESOURCES TO DESIGN AND FULFILL FAVORABLE PRODUCT DELIVERY SCHEDULES AND SUFFICIENT
LEVELS OF QUALITY IN SUPPORT OF OUR DIFFERENT PRODUCT AREAS. PRODUCTS AND SERVICES MAY NOT BE
DELIVERED IN A TIMELY WAY, WITH SUFFICIENT LEVELS OF QUALITY, OR AT ALL, WHICH MAY REDUCE OUR
REVENUE.
Engineering, customer service, technical support, quality assurance, and manufacturing
resources are deployed against a variety of different projects and programs to provide sufficient
levels of quality necessary for channels and customers. Success in various markets may depend on
timely deliveries and overall levels of sustained quality and customer service. Failure to provide
favorable product and program deliverables and quality and customer service levels, or provide them
at all, may disrupt channels and customers, harm our brand, and reduce our revenues.
THE HIGHER COST OF PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES MAY INHIBIT OR PREVENT
THEIR WIDESPREAD ADOPTION.
Personal computer and console gaming peripherals, mobile devices, touchscreens, and
automotive and industrial controls incorporating our touch-enabling technologies can be more
expensive than similar competitive products that are not touch-enabled. Although major
manufacturers, such as ALPS Electric Co., BMW, LG Electronics, Logitech, Microsoft, Nokia, Samsung,
and Sony have licensed our technologies, the greater expense of development and production of
products containing our touch-enabling technologies, together with the higher price to the end
customer, may be a significant barrier to their widespread adoption and sale.
THIRD-PARTY VALIDATION STUDIES MAY NOT DEMONSTRATE ALL THE BENEFITS OF OUR MEDICAL TRAINING
SIMULATORS, WHICH COULD AFFECT CUSTOMER MOTIVATION TO BUY.
In medical training, validation studies are generally used to confirm the usefulness of
new techniques, devices, and training methods. For medical training simulators, several levels of
validation are generally tested: content, concurrent, construct, and predictive. A validation study
performed by a third party, such as a hospital, a teaching institution, or even an individual
healthcare professional, could result in showing little or no benefit for one or more types of
validation for our medical training simulators. Such validation study results published in medical
journals could impact the willingness of customers to buy our training simulators, especially new
simulators that have not previously been validated. In addition, customers may be reluctant to
purchase these products if no studies have been published or until a favorable study has been
published, which would negatively impact our revenues from sales of these products.
MEDICAL LICENSING AND CERTIFICATION AUTHORITIES MAY NOT RECOMMEND OR REQUIRE USE OF OUR
TECHNOLOGIES FOR TRAINING AND/OR TESTING PURPOSES AND CERTAIN LEGISLATION THAT MAY ENCOURAGE THE
USE OF SIMULATORS MAY NOT BECOME LAW, SIGNIFICANTLY SLOWING OR INHIBITING THE MARKET PENETRATION OF
OUR MEDICAL SIMULATION TECHNOLOGIES.
Several key medical certification bodies, including the American Board of Internal
Medicine (ABIM), the American Board of Surgery (ABS), and the American College of Cardiology
(ACC), have great influence in recommending particular medical methodologies, including medical
training and testing methodologies, for use by medical professionals. In the event that the ABIM
and the ACC, as well as other, similar bodies, do not endorse medical simulation products in
general, or our products in particular, as a training and/or testing tool, and in addition in the
event that the Enhancing Simulation Act of 2009 does not pass into law, market penetration for our
products in the medical market could be significantly and adversely affected.
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WE HAVE LIMITED DISTRIBUTION CHANNELS AND RESOURCES TO MARKET AND SELL OUR PRODUCTS, AND IF WE
ARE UNSUCCESSFUL IN MARKETING AND SELLING THESE PRODUCTS, WE MAY NOT ACHIEVE OR SUSTAIN PRODUCT
REVENUE GROWTH.
We have limited resources for marketing and selling our products, either directly or
through distributors. To achieve our business objectives, we must build a balanced mixture of sales
through a direct sales channel and through qualified distribution channels. The success of our
efforts to sell products will depend upon our ability to retain and develop a qualified sales force
and effective distribution channels. We may not be successful in attracting and retaining the
personnel necessary to sell and market our products. A number of our distributors are small,
specialized companies and may not have sufficient capital or human resources to support the
complexities of selling and supporting our products. In addition, many of our distributors do not
have exclusive relationships with us and may not devote sufficient time and attention to selling
our products. There can be no assurance that our direct selling efforts will be effective,
distributors or OEMs will market our products successfully or, if our relationships with
distributors or OEMs terminate, that we will be able to establish relationships with other
distributors or OEMs on satisfactory terms, if at all. Any disruption in the distribution, sales,
or marketing network for our products could have a material adverse effect on our product revenues.
IT IS DIFFICULT FOR US TO PREDICT THE SALES VOLUME OF OUR DISTRIBUTION CHANNELS, WHICH MAKES
IT DIFFICULT FOR US TO FORECAST OUR BUSINESS.
The sales volumes for our limited distribution channels are volatile and hard to predict. We
consider forecasts in determining our component needs and our inventory requirements. If the
business in these limited distribution channels fails to meet expectations, or if we fail to
accurately forecast our customers product demands, we may have inadequate or excess inventory of
our products or components or assets that are not realizable, which could adversely affect our
operating results.
THE MARKETS IN WHICH WE PARTICIPATE OR MAY TARGET IN THE FUTURE ARE INTENSELY COMPETITIVE, AND
IF WE DO NOT COMPETE EFFECTIVELY, OUR OPERATING RESULTS COULD BE HARMED.
Our target markets are rapidly evolving and highly competitive. Many of our competitors
and potential competitors are larger and have greater name recognition, much longer operating
histories, larger marketing budgets, and significantly greater resources than we do, and with the
introduction of new technologies and market entrants, we expect competition to intensify in the
future. We believe that competition in these markets will continue to be intense and that
competitive pressures will drive the price of our products and our licensees products downward.
These price reductions, if not offset by increases in unit sales or productivity, will cause our
revenues to decline. If we fail to compete effectively, our business will be harmed. Some of our
principal competitors offer their products or services at a lower price, which has resulted in
pricing pressures. If we are unable to achieve our target pricing levels, our operating results
would be negatively impacted. In addition, pricing pressures and increased competition generally
could result in reduced sales, reduced margins, losses, or the failure of our application suite to
achieve or maintain more widespread market acceptance, any of which could harm our business.
In the medical simulation market, we face competition from Simbionix USA Corporation,
Mentice Corporation, Medical Education Technologies, Inc., and Medical Simulation Corporation. In
the mobility and touchscreen markets, we face competition from internal design teams of existing
and potential OEM customers. As a result of their licenses to our patent portfolios, we could face
competition from Microsoft and Sony.
Our licensees or other third parties may also seek to develop products using our
intellectual property or develop alternative designs that attempt to circumvent our intellectual
property or that they believe do not require a license under our intellectual property. These
potential competitors may have significantly greater financial, technical, and marketing resources
than we do, and the costs associated with asserting our intellectual property rights against such
products and such potential competitors could be significant. Moreover, if such alternative designs
were determined by a court not to require a license under our intellectual property rights,
competition from such unlicensed products could limit or reduce our revenues.
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Additionally, if haptic technology gains market acceptance, more research by universities
and/or corporations or other parties may be performed potentially leading to strong intellectual
property positions by third parties in certain areas of haptics or the launch of haptics products
before we commercialize our own technology.
Many of our current and potential competitors, including Microsoft, are able to devote
greater resources to the development, promotion, and sale of their products and services. In
addition, many of our competitors have established marketing relationships or access to larger
customer bases, distributors, and other business partners. As a result, our competitors might be
able to respond more quickly and effectively than we can to new or changing opportunities,
technologies, standards or customer requirements. Further, some potential customers, particularly
large enterprises, may elect to develop their own internal solutions. For all of these reasons, we
may not be able to compete successfully against our current and future competitors.
WINNING BUSINESS IS SUBJECT TO A COMPETITIVE SELECTION PROCESS THAT CAN BE LENGTHY AND
REQUIRES US TO INCUR SIGNIFICANT EXPENSE, AND WE MAY NOT BE SELECTED.
Our primary focus is on winning competitive bid selection processes, known as design
wins, so that haptics will be included in our customers equipment. These selection processes can
be lengthy and can require us to incur significant design and development expenditures. We may not
win the competitive selection process and may never generate any revenue despite incurring
significant design and development expenditures. Because we typically focus on only a few customers
in a product area, the loss of a design win can sometimes result in our failure to get haptics
added to new generation products. This can result in lost sales and could hurt our position in
future competitive selection processes because we may not be perceived as being a technology
leader.
After winning a product design for one of our customers, we may still experience delays
in generating revenue from our products as a result of the lengthy development and design cycle. In
addition, a delay or cancellation of a customers plans could significantly adversely affect our
financial results, as we may have incurred significant expense and generated no revenue. Finally,
if our customers fail to successfully market and sell their equipment it could materially adversely
affect our business, financial condition, and results of operations as the demand for our products
falls.
AUTOMOBILES INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES ARE SUBJECT TO LENGTHY PRODUCT
DEVELOPMENT PERIODS, MAKING IT DIFFICULT TO PREDICT WHEN AND WHETHER WE WILL RECEIVE AUTOMOTIVE
ROYALTIES.
The product development process for automobiles is very lengthy, sometimes longer than
four years. We may not earn royalty revenue on our automotive technologies unless and until
automobiles featuring our technologies are shipped to customers, which may not occur until several
years after we enter into an agreement with an automobile manufacturer or a supplier to an
automobile manufacturer. Throughout the product development process, we face the risk that an
automobile manufacturer or supplier may delay the incorporation of, or choose not to incorporate,
our technologies into its automobiles, making it difficult for us to predict the automotive
royalties we may receive, if any. After the product launches, our royalties still depend on market
acceptance of the vehicle or the option packages if our technology is an option (for example, a
navigation unit), which is likely to be determined by many factors beyond our control.
OUR INTERNATIONAL EXPANSION EFFORTS SUBJECT US TO ADDITIONAL RISKS AND COSTS.
We intend to expand international activities. International operations are subject to a
number of difficulties and special costs, including:
| compliance with multiple, conflicting and changing governmental laws and regulations; | ||
| laws and business practices favoring local competitors; |
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| foreign exchange and currency risks; | ||
| difficulty in collecting accounts receivable or longer payment cycles; | ||
| import and export restrictions and tariffs; | ||
| difficulties staffing and managing foreign operations; | ||
| difficulties and expense in enforcing intellectual property rights; | ||
| business risks, including fluctuations in demand for our products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions; | ||
| multiple conflicting tax laws and regulations; and | ||
| political and economic instability. |
Our international operations could also increase our exposure to international laws and
regulations. If we cannot comply with foreign laws and regulations, which are often complex and
subject to variation and unexpected changes, we could incur unexpected costs and potential
litigation. For example, the governments of foreign countries might attempt to regulate our
products and services or levy sales or other taxes relating to our activities. In addition, foreign
countries may impose tariffs, duties, price controls, or other restrictions on foreign currencies
or trade barriers, any of which could make it more difficult for us to conduct our business.
WE MIGHT BE UNABLE TO RETAIN OR RECRUIT NECESSARY PERSONNEL, WHICH COULD SLOW THE DEVELOPMENT
AND DEPLOYMENT OF OUR TECHNOLOGIES.
Our ability to develop and deploy our technologies and to sustain our revenue growth
depends upon the continued service of our management and other key personnel, many of whom would be
difficult to replace. Management and other key employees may voluntarily terminate their employment
with us at any time upon short notice. The loss of management or key personnel could delay product
development cycles or otherwise harm our business.
We believe that our future success will also depend largely on our ability to attract,
integrate, and retain sales, support, marketing, and research and development personnel.
Competition for such personnel is intense, and we may not be successful in attracting, integrating,
and retaining such personnel. Given the protracted nature of if, how, and when we collect royalties
on new design contracts, it may be difficult to craft compensation plans that will attract and
retain the level of salesmanship needed to secure these contracts. Our stock option and award
program is a long-term retention program that is intended to attract, retain, and provide
incentives for talented employees, officers and directors, and to align stockholder and employee
interests. Additionally some of our executive officers and key employees hold stock options with
exercise prices above the current market price of our common stock. Each of these factors may
impair our ability to retain the services of our executive officers and key employees. Our
technologies are complex and we rely upon the continued service of our existing personnel to
support licensees, enhance existing technologies, and develop new technologies.
IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS WOULD BE SERIOUSLY
HARMED.
Our facilities could be subject to a catastrophic loss such as fire, flood, earthquake,
power outage, or terrorist activity. A substantial portion of our research and development
activities, manufacturing, our corporate headquarters, and other critical business operations are
located near major earthquake faults in San Jose, California, an area with a history of seismic
events. An earthquake at or near our facilities could disrupt our operations, delay production and
shipments of our products or technologies, and result in large expenses to repair and replace the
facility. While we believe that we maintain insurance sufficient to cover most long-term potential
losses at our facilities, our existing insurance may not be adequate for all possible
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losses. In addition, California has experienced problems with its power supply in recent
years. As a result, we have experienced utility cost increases and may experience unexpected
interruptions in our power supply that could have a material adverse effect on our sales, results
of operations, and financial condition.
Investment Risks
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE RESULTS ARE BELOW
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE PRICE OF OUR COMMON STOCK IS LIKELY TO
DECLINE.
Our revenues and operating results are likely to vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and any of which could
cause the price of our common stock to decline.
These factors include:
| the establishment or loss of licensing relationships; | ||
| the timing and recognition of payments under fixed and/or up-front license agreements; | ||
| the timing of work performed under development agreements; | ||
| the timing of our expenses, including costs related to litigation, stock-based awards, acquisitions of technologies, or businesses; | ||
| the timing of introductions and market acceptance of new products and product enhancements by us, our licensees, our competitors, or their competitors; | ||
| our ability to develop and improve our technologies; | ||
| our ability to attract, integrate, and retain qualified personnel; | ||
| seasonality in the demand for our products or our licensees products; and | ||
| our ability to build or ship products on a timely basis. |
OUR STOCK PRICE MAY FLUCTUATE REGARDLESS OF OUR PERFORMANCE.
The stock market has experienced extreme volatility that often has been unrelated or
disproportionate to the performance of particular companies. These market fluctuations may cause
our stock price to decline regardless of our performance. The market price of our common stock has
been, and in the future could be, significantly affected by factors such as: actual or anticipated
fluctuations in operating results; announcements of technical innovations; announcements regarding
litigation in which we are involved; changes by game console manufacturers to not include
touch-enabling capabilities in their products; new products or new contracts; sales or the
perception in the market of possible sales of large number of shares of our common stock by
insiders or others; stock repurchase activity; changes in securities analysts recommendations;
changing circumstances regarding competitors or their customers; governmental regulatory action;
developments with respect to patents or proprietary rights; inclusion in or exclusion from various
stock indices; and general market conditions. In the past, following periods of volatility in the
market price of a companys securities, securities class action litigation has been initiated
against that company.
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PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN
CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying
or preventing a change of control or changes in our board of directors or management, including the
following:
| our board of directors is classified into three classes of directors with staggered three-year terms; | ||
| only our chairperson of the board of directors, a majority of our board of directors or 10% or greater stockholders are authorized to call a special meeting of stockholders; | ||
| our stockholders can only take action at a meeting of stockholders and not by written consent; | ||
| vacancies on our board of directors can be filled only by our board of directors and not by our stockholders; | ||
| our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and | ||
| advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. |
In addition, certain provisions of Delaware law may discourage, delay, or prevent someone
from acquiring or merging with us. These provisions could limit the price that investors might be
willing to pay in the future for shares.
WE MAY ENGAGE IN ACQUISITIONS THAT COULD DILUTE STOCKHOLDERS INTERESTS, DIVERT MANAGEMENT
ATTENTION, OR CAUSE INTEGRATION PROBLEMS.
As part of our business strategy, we have in the past and may in the future, acquire
businesses or intellectual property that we feel could complement our business, enhance our
technical capabilities, or increase our intellectual property portfolio. The pursuit of potential
acquisitions may divert the attention of management and cause us to incur various expenses in
identifying, investigating, and pursuing suitable acquisitions, whether or not they are
consummated.
If we consummate acquisitions through the issuance of our securities, our stockholders
could suffer significant dilution. Acquisitions could also create risks for us, including:
| unanticipated costs associated with the acquisitions; | ||
| use of substantial portions of our available cash to consummate the acquisitions; | ||
| diversion of managements attention from other business concerns; | ||
| difficulties in assimilation of acquired personnel or operations; | ||
| failure to realize the anticipated benefits of acquired intellectual property or other assets; | ||
| charges associated with amortization of acquired assets or potential charges for write-down of assets associated with unsuccessful acquisitions; | ||
| potential intellectual property infringement claims related to newly acquired product lines; and | ||
| potential costs associated with failed acquisition efforts. |
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Any acquisitions, even if successfully completed, might not generate significant
additional revenue or provide any benefit to our business.
AS OUR BUSINESS GROWS, SUCH GROWTH MAY PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT AND
OPERATIONS AND, AS A RESULT, OUR BUSINESS MAY SUFFER.
We plan to continue expanding our business, and any significant growth could place a
significant strain on our management systems, infrastructure and other resources. We recently
transitioned the preparation of all of our internal reporting to upgraded management information
systems and are in the process of implementing this system for all of our subsidiaries. If we
encounter problems with the implementation of these systems, we may have difficulties preparing or
tracking internal information, which could adversely affect our financial results. We will need to
continue to invest the necessary capital to upgrade and improve our operational, financial and
management reporting systems. If our management fails to manage our growth effectively, we could
experience increased costs, declines in product quality, or customer satisfaction, which could harm
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders (the Annual Meeting) on June 9, 2009,
to consider and vote on the following proposals to: (i) elect three members of the Board of
Directors to serve for a three-year term as Class I Directors (Proposal 1); and (ii) ratify the
appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the
fiscal year ending December 31, 2009 (Proposal 2).
Proposal 1: The stockholders elected the three nominees for Class I directors to our Board of
Directors. The votes were as follows:
Number of | Number of | Number of | ||||||||||
Nominees | Votes For | Votes Against | Votes Abstained | |||||||||
Anne DeGheest |
19,466,094 | 838,348 | 1,684,020 | |||||||||
Jack Saltich |
15,506,895 | 4,792,773 | 1,688,793 | |||||||||
Victor Viegas |
19,516,222 | 986,416 | 1,485,824 |
Ms. DeGheests, Mr. Saltichs and Mr. Viegass terms will expire at the 2012 annual meeting.
Other directors terms of office continue as follows: Robert Van Naarden and Clent Richardson
(Class II term expires at the 2010 annual meeting) and John Hodgman and Emily Liggett (Class III
term expires at the 2011 annual meeting).
Proposal 2: The ratification of Deloitte & Touche LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2009:
Number of | Number of | Number of | ||
Votes For | Votes Against | Votes Abstained | ||
20,073,125
|
455,075 | 1,460,261 |
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit | ||
Number | Description | |
31.1
|
Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 8, 2010
IMMERSION CORPORATION |
||||
By | /s/ Henry Hirvela | |||
Henry Hirvela | ||||
Interim Chief Financial Officer |
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EXHIBIT INDEX
Exhibit | |||
Number | Description | . | |
31.1
|
Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2
|
Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1
|
Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2
|
Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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