##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  
 IMMERSION CORPORATION
  Delaware
    
    94-3180138(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 801 Fox Lane, San Jose, California 95131
 (Address of principal executive offices)(Zip Code)
 (408) 467-1900
 (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller
 reporting company)
    
    Smaller Reporting Company o
  o þ




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##### 



IMMERSION CORPORATION
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and
December 31, 2009
    
    
        3Unaudited Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2010 and 2009
    
    
        4Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2010 and 2009
    
    
        5Unaudited Notes to Condensed Consolidated Financial Statements
    
    
        6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
        21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
        36Item 4. Controls and Procedures
    
    
        36PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
        38Item 1A. Risk Factors
    
    
        40Item 5. Other Information
    
    
        55Item 6. Exhibits
    
    
        56SIGNATURES
    
    
        56EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 June 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,987
    
    
    $
    19,828Short-term investments
    
    
    48,938
    
    
    
    43,900Accounts receivable (net of allowances for doubtful accounts as of: June 30, 2010  $125
and December 31, 2009  $207)
    
    
    1,968
    
    
    
    2,988Inventories
    
    
    524
    
    
    
    2,001Deferred income taxes
    
    
    250
    
    
    
    248Prepaid expenses and other current assets
    
    
    3,981
    
    
    
    4,474Total current assets
    
    
    70,648
    
    
    
    73,439Property and equipment, net
    
    
    2,375
    
    
    
    3,498Intangibles and other assets, net
    
    
    11,658
    
    
    
    10,897Total assets
    
    $
    84,681
    
    
    $
    87,834LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,978
    
    
    $
    1,382Accrued compensation
    
    
    1,686
    
    
    
    1,387Other current liabilities
    
    
    1,341
    
    
    
    3,087Deferred revenue and customer advances
    
    
    5,616
    
    
    
    6,578Total current liabilities
    
    
    10,621
    
    
    
    12,434Long-term deferred revenue
    
    
    18,310
    
    
    
    18,851Deferred income tax liabilities
    
    
    250
    
    
    
    248Other long-term liabilities
    
    
    578
    
    
    
    560Total liabilities
    
    
    29,759
    
    
    
    32,093Contingencies (Note 15)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued: June 30, 2010  30,913,219 and
December 31, 2009 
30,786,156; shares outstanding: June 30, 2010  28,125,010
and December 31, 2009  27,999,593
    
    
    174,281
    
    
    
    172,679Warrants
    
    
    
    
    
    
    11Accumulated other comprehensive income
    
    
    139
    
    
    
    66Accumulated deficit
    
    
    (101,100
    )
    
    
    (98,626
    )Treasury stock at cost: June 30, 2010  2,788,209 and December 31, 2009  2,786,563
    
    
    (18,398
    )
    
    
    (18,389
    )Total stockholders equity
    
    
    54,922
    
    
    
    55,741Total liabilities and stockholders equity
    
    $
    84,681
    
    
    $
    87,834
  3




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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Royalty and license
    
    $
    6,304
    
    
    $
    3,580
    
    
    $
    12,707
    
    
    $
    7,361Product sales
    
    
    1,850
    
    
    
    2,772
    
    
    
    4,818
    
    
    
    6,051Development contracts and other
    
    
    321
    
    
    
    330
    
    
    
    659
    
    
    
    776Total revenues
    
    
    8,475
    
    
    
    6,682
    
    
    
    18,184
    
    
    
    14,188Costs and expenses:Cost of product sales (exclusive of amortization and impairment
of intangibles shown separately below)
    
    
    761
    
    
    
    2,312
    
    
    
    2,130
    
    
    
    3,563Sales and marketing
    
    
    1,911
    
    
    
    4,016
    
    
    
    4,264
    
    
    
    8,300Research and development
    
    
    2,005
    
    
    
    3,412
    
    
    
    4,466
    
    
    
    7,341General and administrative
    
    
    3,084
    
    
    
    4,841
    
    
    
    8,800
    
    
    
    9,226Amortization and impairment of intangibles
    
    
    204
    
    
    
    224
    
    
    
    439
    
    
    
    439Restructuring costs
    
    
    
    
    
    
    705
    
    
    
    
    
    
    
    1,351Total costs and expenses
    
    
    7,965
    
    
    
    15,510
    
    
    
    20,099
    
    
    
    30,220Operating income (loss)
    
    
    510
    
    
    
    (8,828
    )
    
    
    (1,915
    )
    
    
    (16,032
    )Change in fair value of warrant liability
    
    
    
    
    
    
    (136
    )
    
    
    
    
    
    
    344Interest and other income
    
    
    63
    
    
    
    207
    
    
    
    142
    
    
    
    510Income (loss) from continuing operations before provison for
income taxes
    
    
    573
    
    
    
    (8,757
    )
    
    
    (1,773
    )
    
    
    (15,178
    )Provision for income taxes
    
    
    (423
    )
    
    
    (300
    )
    
    
    (762
    )
    
    
    (391
    )Income (loss) from continuing operations
    
    
    150
    
    
    
    (9,057
    )
    
    
    (2,535
    )
    
    
    (15,569
    )Discontinued
operations (Note 9) :Gain on sales of discontinued operations net of provision for
income taxes of $0
    
    
    30
    
    
    
    20
    
    
    
    60
    
    
    
    187Gain from discontinued operations, net of provision (benefit) for
income taxes of $0, $(48), $1, and $102
    
    
    
    
    
    
    166
    
    
    
    1
    
    
    
    401Net income (loss)
    
    $
    180
    
    
    $
    (8,871
    )
    
    $
    (2,474
    )
    
    $
    (14,981
    )Basic net income (loss) per shareContinuing operations
    
    
    0.01
    
    
    
    (0.33
    )
    
    
    (0.09
    )
    
    
    (0.56
    )Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.02Total
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    (0.09
    )
    
    $
    (0.54
    )Shares used in calculating basic net income (loss) per share
    
    
    28,101
    
    
    
    27,968
    
    
    
    28,093
    
    
    
    27,946Diluted net income (loss) per shareContinuing operations
    
    
    0.01
    
    
    
    (0.33
    )
    
    
    (0.09
    )
    
    
    (0.56
    )Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.02Total
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    (0.09
    )
    
    $
    (0.54
    )Shares used in calculating diluted net income (loss) per share
    
    
    28,519
    
    
    
    27,968
    
    
    
    28,093
    
    
    
    27,946
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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (unaudited)
 Six Months EndedJune 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (2,474
    )
    
    $
    (14,981
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    583
    
    
    
    873Amortization and impairment of intangibles
    
    
    439
    
    
    
    439Stock-based compensation
    
    
    1,533
    
    
    
    2,651Change in fair market value of warrant liability
    
    
    
    
    
    
    (344
    )Allowance for doubtful accounts
    
    
    (82
    )
    
    
    (194
    )Loss on disposal of equipment
    
    
    79
    
    
    
    708Loss on divestiture
    
    
    42
    
    
    
    Gain on sales of discontinued operations
    
    
    (60
    )
    
    
    (187
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,101
    
    
    
    2,137Inventories
    
    
    595
    
    
    
    (172
    )Prepaid expenses and other assets
    
    
    347
    
    
    
    339Accounts payable
    
    
    532
    
    
    
    (1,789
    )Accrued compensation and other current liabilities
    
    
    (1,230
    )
    
    
    (779
    )Deferred revenue and customer advances
    
    
    (1,371
    )
    
    
    1,933Other long-term liabilities
    
    
    116
    
    
    
    5Net cash provided by (used in) operating activities
    
    
    150
    
    
    
    (9,361
    )Cash flows used in investing activities:Purchases of short-term investments
    
    
    (29,965
    )
    
    
    (48,988
    )Maturities of short-term investments
    
    
    25,000
    
    
    
    21,000Net proceeds from divestiture
    
    
    964
    
    
    
    Additions to intangibles
    
    
    (981
    )
    
    
    (1,543
    )Proceeds from sale of property and equipment
    
    
    160
    
    
    
    Purchases of property and equipment
    
    
    (289
    )
    
    
    (1,288
    )Proceeds from sales of discontinued operations
    
    
    60
    
    
    
    187Net cash used in investing activities
    
    
    (5,051
    )
    
    
    (30,632
    )Cash flows provided by financing activities:Issuance of common stock under employee stock purchase plan
    
    
    
    
    
    
    127Exercise of stock options and warrants
    
    
    60
    
    
    
    144Net cash provided by financing activities
    
    
    60
    
    
    
    271Net decrease in cash and cash equivalents
    
    
    (4,841
    )
    
    
    (39,722
    )Cash and cash equivalents:Beginning of the period
    
    
    19,828
    
    
    
    64,769End of the period
    
    $
    14,987
    
    
    $
    25,047Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    6
    
    
    $
    7Supplemental disclosure of non-cash investing and financing activities:Amounts accrued for property and equipment, and intangibles
    
    $
    279
    
    
    $
    434Shares issued under company stock plan
    
    $
    428
    
    
    $
    22
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IMMERSION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
  Description of Busines
  Principles of Consolidation and Basis of Presentation
    Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists: For a license arrangement, the
Company requires a written contract, signed by both the customer and the Company.
For a stand-alone product sale, the Company requires a purchase order or other form
of written agreement with the customer.
    
    Delivery has occurred. The Company delivers software and product to customers
physically and also delivers software electronically. For physical deliveries not
related to software, the transfer terms typically include transfer of title and risk
of loss at the Companys shipping location. For electronic deliveries, delivery
occurs when the Company
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provides the customer access codes or keys that allow the
customer to take immediate possession of the software.
    
    The fee is fixed or determinable. The Companys arrangement fee is based on the
use of standard payment terms which are those that are generally extended to the
majority of customers. For transactions involving extended payment terms, the Company
deems these fees not to be fixed or determinable for revenue recognition purposes and
revenue is deferred until the fees become due and payable.
    
    Collectibility is probable.To recognize revenue, the Company must judge
collectibility of the arrangement fees, which is done on a customer-by-customer basis
pursuant to the credit review policy. The Company typically sells to customers with
whom there is a history of successful collection. For new customers, the Company
evaluates the customers financial condition and ability to pay. If it is determined
that collectibility is not probable based upon the credit review process or the
customers payment history, revenue is recognized when payment is received.
 Royalty and license revenue
 Product sales
 Development contracts and other revenue
 Multiple element arrangements 
  Recent Accounting Pronouncements
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Cash Equivalents and Short-term Investments
     8




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June 30, 2010Fair value measurements usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Assets:U.S. government agency securities
    
    $
    48,938
    
    
    $
    
    
    
    $
    
    
    
    $
    48,938Money market accounts
    
    
    9,330
    
    
    
    
    
    
    
    
    
    
    
    9,330Total assets at fair value
    
    $
    58,268
    
    
    $
    
    
    
    $
    
    
    
    $
    58,268
  December 31, 2009Fair value measurements usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Assets:U.S. government agency securities
    
    $
    49,071
    
    
    $
    
    
    
    $
    
    
    
    $
    49,071Money market accounts
    
    
    11,546
    
    
    
    
    
    
    
    
    
    
    
    11,546Total assets at fair value
    
    $
    60,617
    
    
    $
    
    
    
    $
    
    
    
    $
    60,617
  Short-term Investments
 June 30, 2010Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    HoldingCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)U.S. government agency securities
    
    $
    48,900
    
    
    $
    38
    
    
    $
    
    
    
    $
    48,938Total
    
    $
    48,900
    
    
    $
    38
    
    
    $
    
    
    
    $
    48,938
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December 31, 2009Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    HoldingCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)U.S. government agency securities
    
    $
    43,935
    
    
    $
    2
    
    
    $
    (37
    )
    
    $
    43,900Total
    
    $
    43,935
    
    
    $
    2
    
    
    $
    (37
    )
    
    $
    43,900
   June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Raw materials and subassemblies
    
    $
    311
    
    
    $
    1,653Work in process
    
    
    2
    
    
    
    45Finished goods
    
    
    211
    
    
    
    303Inventories
    
    $
    524
    
    
    $
    2,001
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Computer equipment and purchased software
    
    $
    3,813
    
    
    $
    4,458Machinery and equipment
    
    
    875
    
    
    
    1,909Furniture and fixtures
    
    
    665
    
    
    
    1,407Leasehold improvements
    
    
    882
    
    
    
    1,458Total
    
    
    6,235
    
    
    
    9,232Less accumulated depreciation
    
    
    (3,860
    )
    
    
    (5,734
    )Property and equipment, net
    
    $
    2,375
    
    
    $
    3,498
  10




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June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Patents, technology, and trademarks
    
    $
    20,047
    
    
    $
    19,018Other assets
    
    
    290
    
    
    
    145Gross intangibles and other assets
    
    
    20,337
    
    
    
    19,163Accumulated
amortization of patents, technology, and trademarks
    
    
    (8,679
    )
    
    
    (8,266
    )Intangibles and other assets, net
    
    $
    11,658
    
    
    $
    10,897
   June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Accrued legal
    
    $
    285
    
    
    $
    509Income taxes payable
    
    
    40
    
    
    
    40Other current liabilities
    
    
    1,016
    
    
    
    2,538Total other current liabilities
    
    $
    1,341
    
    
    $
    3,087Deferred revenue
    
    $
    5,411
    
    
    $
    6,336Customer advances
    
    
    205
    
    
    
    242Total deferred revenue and customer advances
    
    $
    5,616
    
    
    $
    6,578
    Stock Options and Awards
  11




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General Stock Option Information
  Numberof SharesOutstanding at December 31, 2009 (3,247,607 exercisable at a
weighted average price of $9.25 per share)
    
    
    5,041,235Granted (weighted average fair value of $3.11 per share)
    
    
    488,085Exercised
    
    
    (33,375
    )Forfeited and cancelled
    
    
    (1,253,110
    )Outstanding at June 30, 2010
    
    
    4,242,835Exercisable at June 30, 2010
    
    
    2,559,921
 Restricted Stock Units
  Numberof SharesBeginning balance at December 31, 2009
    
    
    198,055Awarded
    
    
    363,928Released
    
    
    (62,188
    )Forfeited
    
    
    (39,958
    )Outstanding balance at June 30, 2010
    
    
    459,837Expected to vest (1)
    
    
    346,378
 
 (1)
    
    RSUs expected to vest reflect estimated forfeiture rates. Restricted Stock
  12




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Numberof SharesBeginning balance at December 31, 2009
    
    
    27,000Awarded
    
    
    22,500Released
    
    
    (31,500
    )Forfeited
    
    
    Ending balance at June 30, 2010
    
    
    18,000
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Options
    
    2010
    
    2009
    
    2010
    
    2009Expected term (in years)
    
    
    5.2
    
    
    
    5.5
    
    
    
    5.2
    
    
    
    5.5Volatility
    
    
    67
    %
    
    
    69
    %
    
    
    67
    %
    
    
    69
    %Interest rate
    
    
    2.1
    %
    
    
    2.3
    %
    
    
    2.1
    %
    
    
    1.8
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Employee Stock Purchase Plan
    
    2010
    
    2009
    
    2010
    
    2009Expected term (in years)
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Volatility
    
    
    
    
    
    
    109
    %
    
    
    
    
    
    
    109
    %Interest rate
    
    
    
    
    
    
    0.4
    %
    
    
    
    
    
    
    0.4
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  13




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Income Statement Classifications
    
    (In thousands)
    
    
    (In thousands)Cost of product sales
    
    
    
    
    
    $
    33
    
    
    $
    10
    
    
    $
    102Sales and marketing
    
    
    226
    
    
    
    213
    
    
    
    392
    
    
    
    443Research and development
    
    
    202
    
    
    
    240
    
    
    
    397
    
    
    
    713General and administrative
    
    
    510
    
    
    
    761
    
    
    
    734
    
    
    
    1,393Total
    
    $
    938
    
    
    $
    1,247
    
    
    $
    1,533
    
    
    $
    2,651
  Stock Repurchase Program
   Divestiture
  14




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Restructuring Costs
   Results of Discontinued Operations
     15




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16




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Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Income (loss) from continuing operations
    
    $
    150
    
    
    $
    (9,057
    )
    
    $
    (2,535
    )
    
    $
    (15,569
    )Gain from discontinued operations, net of tax
    
    
    30
    
    
    
    186
    
    
    
    61
    
    
    
    588Net income (loss) used in computing basic and diluted net income (loss)
per share
    
    $
    180
    
    
    $
    (8,871
    )
    
    $
    (2,474
    )
    
    $
    (14,981
    )Denominator:Shares used in computation of basic net income (loss) per share
(weighted
average common shares outstanding)
    
    
    28,101
    
    
    
    27,968
    
    
    
    28,093
    
    
    
    27,946Dilutive potential common shares:Restricted Stock and RSUs
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    Stock options
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    Shares used in computation of diluted net income (loss) per share
    
    
    28,519
    
    
    
    27,968
    
    
    
    28,093
    
    
    
    27,946Basic net income (loss) per share from:Continuing operations
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.09
    )
    
    $
    (0.56
    )Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.02Net Income (loss)
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    (0.09
    )
    
    $
    (0.54
    )Diluted net income (loss) per share:Continuing operations
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.09
    )
    
    $
    (0.56
    )Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.02Net Income (loss)
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    (0.09
    )
    
    $
    (0.54
    )
   June 30,
    
    June 30,2010
    
    2009Outstanding stock options
    
    
    4,242,835
    
    
    
    6,548,887Restricted stock and RSUs
    
    
    477,837
    
    
    
    311,917Warrants
    
    
    
    
    
    
    428,567
  17




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Net Income (loss)
    
    $
    180
    
    
    $
    (8,871
    )
    
    $
    (2,474
    )
    
    $
    (14,981
    )Change in unrealized losses on short-term
investments
    
    
    26
    
    
    
    2
    
    
    
    73
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    5Total comprehensive Income (loss)
    
    $
    206
    
    
    $
    (8,797
    )
    
    $
    (2,401
    )
    
    $
    (14,976
    )
      In re Immersion Corporation Initial Public Offering Securities Litigation
  18




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##### Table of Contents



Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  In re Immersion Corporation Securities Litigation
   19




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##### Table of Contents



In re Immersion Corporation Derivative Litigation
   Shaw v. Richardson et al.
  Kasmer v. Immersion Corporation
   Other Contingencies
 20




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     21




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##### Table of Contents



Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists: For a license arrangement, we
require a written contract, signed by both the customer and us. For a stand-alone
product sale, we require a purchase order or other form of written agreement with the
customer.
    
    Delivery has occurred. We deliver software and product to our customers
physically and also deliver software electronically. For physical deliveries not
related to software, our transfer terms typically include transfer of title and risk
of loss at our shipping location. For
 22




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##### Table of Contents



electronic deliveries, delivery occurs when we
provide the customer access codes or keys that allow the customer to take immediate
possession of the software.
    
    The fee is fixed or determinable. Our arrangement fee is based on the use of
standard payment terms which are those that are generally extended to the majority of
customers. For transactions involving extended payment terms, we deem these fees not
to be fixed or determinable for revenue recognition purposes and revenue is deferred
until the fees become due and payable.
    
    Collectibility is probable. To recognize revenue, we must judge collectibility of
the arrangement fees, which we do on a customer-by-customer basis pursuant to our
credit review policy. We typically sell to customers with whom we have a history of
successful collection. For new customers, we evaluate the customers financial
condition and ability to pay. If we determined that collectibility is not probable
based upon our credit review process or the customers payment history, we recognize
revenue when payment is received.
 Royalty and license revenue
 Product sales
 Development contracts and other revenue
 Multiple element arrangements 
  Stock-based Compensation 
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Valuation and amortization method
    Accounting for Income Taxes
    Short-term Investments
 24




---



##### Table of Contents



Recovery of Accounts Receivable
  Inventory Valuation
  Intangible Assets
 25




---



##### Table of Contents



Restructuring Costs
     Overview
  26




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Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
 27




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June 30,
    
    
    ChangeREVENUES
    
    2010
    
    
    2009(In thousands)Three months ended:Royalty and license
    
    $
    6,304
    
    
    $
    3,580
    
    
    
    76
    %Product sales
    
    
    1,850
    
    
    
    2,772
    
    
    
    (33
    )%Development contracts and other
    
    
    321
    
    
    
    330
    
    
    
    (3
    )%Total Revenues
    
    $
    8,475
    
    
    $
    6,682
    
    
    
    27
    %Six months ended:Royalty and license
    
    $
    12,707
    
    
    $
    7,361
    
    
    
    73
    %Product sales
    
    
    4,818
    
    
    
    6,051
    
    
    
    (20
    )%Development contracts and other
    
    
    659
    
    
    
    776
    
    
    
    (15
    )%Total Revenues
    
    $
    18,184
    
    
    $
    14,188
    
    
    
    28
    %
 Total Revenue
 Royalty and license revenue
  Product sales
 Development contracts and other revenue
 28




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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
 Total Revenue
 Royalty and license revenue
 Product sales
 Development contracts and other revenue
  29




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June 30,
    
    ChangeCOST OF PRODUCT SALES
    
    2010
    
    2009(In thousands)Three months ended:Cost of product sales
    
    $
    761
    
    
    $
    2,312
    
    
    
    (67
    )%% of total product revenue
    
    
    41
    %
    
    
    83
    %Six months ended:Cost of product sales
    
    $
    2,130
    
    
    $
    3,563
    
    
    
    (40
    )%% of total product revenue
    
    
    44
    %
    
    
    59
    %
 Cost of Product Sales
  30




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June 30,
    
    ChangeOPERATING EXPENSES AND OTHER
    
    2010
    
    2009($ In thousands)Three months ended:Sales and marketing
    
    $
    1,911
    
    
    $
    4,016
    
    
    
    (52
    )%% of total revenue
    
    
    23
    %
    
    
    60
    %Research and development
    
    $
    2,005
    
    
    $
    3,412
    
    
    
    (41
    )%% of total revenue
    
    
    24
    %
    
    
    51
    %General and administrative
    
    $
    3,084
    
    
    $
    4,841
    
    
    
    (36
    )%% of total revenue
    
    
    36
    %
    
    
    72
    %Amortization and impairment of intangibles
    
    $
    204
    
    
    $
    224
    
    
    
    (9
    )%% of total revenue
    
    
    2
    %
    
    
    3
    %Restructuring Costs
    
    $
    
    
    
    $
    705
    
    
    
    *
    %% of total revenue
    
    
    *
    %
    
    
    11
    %Six months ended:Sales and marketing
    
    $
    4,264
    
    
    $
    8,300
    
    
    
    (49
    )%% of total revenue
    
    
    23
    %
    
    
    59
    %Research and development
    
    $
    4,466
    
    
    $
    7,341
    
    
    
    (39
    )%% of total revenue
    
    
    25
    %
    
    
    52
    %General and administrative
    
    $
    8,800
    
    
    $
    9,226
    
    
    
    (5
    )%% of total revenue
    
    
    48
    %
    
    
    65
    %Amortization and impairment of intangibles
    
    $
    439
    
    
    $
    439
    
    
    
    0
    %% of total revenue
    
    
    2
    %
    
    
    3
    %Restructuring Costs
    
    $
    
    
    
    $
    1,351
    
    
    
    *
    %% of total revenue
    
    
    *
    %
    
    
    10
    %
 
 *
    
    Not meaningful Sales and Marketing
 31




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Research and Development
  General and Administrative
 32




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Amortization and impairment of Intangibles
 Restructuring
  Change in fair value of warrant liability 
 Interest and Other Income
 Provision for Income Taxes
  33




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Discontinued Operations
          34




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Less Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating Leases
    
    $
    3,266
    
    
    $
    737
    
    
    $
    2,036
    
    
    $
    493
    
    
    $
    
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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash Equivalents and Short-term Investments
  Foreign Currency Exchange Rates
 
 ITEM 4. CONTROLS AND PROCEDURES
    36




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Plans for Remediation
   
    
    We have hired consultants to assist with the preparation of our 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 with
oversight responsibility remaining with the Corporate Controller.
During the three months ended June 30, 2010, the Chief Financial
Officer was also assigned oversight responsibility in addition to the
Corporate Controller.
  
    
    We improved our documentation of 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 up to
the Chief Financial Officer with clearly delineated responsibilities;
    
    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; and
    
    We have improved our legal and financial review process of all sales order packages
for all terms and conditions prior to shipment.
  37




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
    
    We have added a control procedure to test the calculation of the
third-party stock-based compensation reports on a quarterly basis, and upon upgrading
to new versions of the software, and to ensure timely review of the technical updates
to the software;
    
    We have added 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 reviewing our physical inventory management procedures
including cycle counts to ensure proper control of inventory with appropriate review
by operations and finance personnel and during the three months ended June 30, 2010, we have added certain control procedures to
ensure that inventory balances now held at third party locations are correct; and
    
    During the three months ended June 30, 2010, we have added control procedures to perform annual physical counts of inventory and
fixed assets.
 
 PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Immersion Corporation Initial Public Offering Securities Litigation
 In re Immersion Corporation
Initial Public Offering Securities Litigation
   38




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Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  In re Immersion Corporation Securities Litigation
   In Re Immersion
Corporation Securities Litigation.
 In re Immersion Corporation Derivative Litigation
   39




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In re Immersion Corporation Derivative Litigation
 Shaw v. Richardson et al.
  Kasmer v. Immersion Corporation
   
 ITEM
1A. RISK FACTORS
 Company Risks
    40




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41




---



##### Table of Contents




    
    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.
     
    
    continue to develop our technologies;
 42




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##### Table of Contents




    
    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.
        43
    Table of Contents          44




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
    
    our pending patent applications may not result in the issuance of patents;
    
    our patents may not be broad enough to protect our proprietary rights; and
    
    effective patent protection may not be available in every country, particularly in Asia, in
which we or our licensees do business.
  
    
    laws and contractual restrictions may not be sufficient to prevent misappropriation of our
technologies or deter others from developing similar technologies; and
 45




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##### Table of Contents




    
    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.
      46




---



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47




---



##### Table of Contents




    
    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.
        48




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49




---



##### Table of Contents



50




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##### Table of Contents



51




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##### Table of Contents




    
    compliance with multiple, conflicting and changing governmental laws and regulations;
    
    laws and business practices favoring local competitors;
    
    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.
     52




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##### Table of Contents



Investment
Risks
    
    
    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.
   53




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##### Table of Contents




    
    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.
    54




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
    
    unanticipated costs associated with the acquisitions;
    
    use of substantial portions of our available cash to consummate the acquisitions;
    
    diversion of managements attention from other business concerns;
    
    difficulties in assimilation of acquired personnel or operations
    
    failure to realize the anticipated benefits of acquired 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.
    
 ITEM 5. OTHER INFORMATION
   55




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ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description10.1*
    
    Offer Letter dated April 14, 2010 by and between Immersion Corporation and Shum
Mukherjee (incorporated by reference to Exhibit 99.01 of the Form 8-K filed by
Immersion Corporation with the Securities and Exchange Commission on May 6, 2010).10.2*
    
    Retention and Ownership Change Event Agreement dated April 14, 2010 by and
between Immersion Corporation and Shum Mukherjee (incorporated by reference to
Exhibit 99.02 of the Form 8-K filed by Immersion Corporation with the Securities
and Exchange Commission on May 6, 2010).31.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Shum Mukherjee, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Shum Mukherjee, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement. 
 SIGNATURES
   IMMERSION CORPORATIONBy
    /s/ Shum MukherjeeShum MukherjeeChief Financial Officer and Principal Accounting Officer 56




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EXHIBIT
INDEX
 ExhibitNumber
    

Description10.1*
    
    Offer Letter dated April 14, 2010 by and between Immersion Corporation and Shum
Mukherjee (incorporated by reference to Exhibit 99.01 of the Form 8-K filed by
Immersion Corporation with the Securities and Exchange Commission on May 6, 2010).10.2*
    
    Retention and Ownership Change Event Agreement dated April 14, 2010 by and
between Immersion Corporation and Shum Mukherjee (incorporated by reference to
Exhibit 99.02 of the Form 8-K filed by Immersion Corporation with the Securities
and Exchange Commission on May 6, 2010).31.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Shum Mukherjee, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Shum Mukherjee, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement. 57