Immersion Corp. has a market cap of $131.4 million; its shares were traded at around $4.7 with and P/S ratio of 3.6.
Highlight of Business Operations:In October 2009, we reviewed the accounting of the interest income recognition for a license agreement entered into in March 2007 between us and Sony Computer Entertainment as part of the conclusion of the patent infringement action that we had asserted against Sony. Under the license agreement, we granted Sony Computer Entertainment and certain of its affiliates a worldwide, non-transferable, non-exclusive license under our patents that have issued, may issue, or claim a priority date before March 2017 for the going forward use, development, manufacture, sale, lease, importation, and distribution of Sonys current and past PlayStation and related products in exchange for certain covenants not to sue and the payment of 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 well as certain other fees and royalty amounts. We accounted for future payments in accordance with Accounting Principles Board Opinion No. 21 Interest on Receivables and Payables (APB No. 21). Under APB No. 21, we determined the present value of the $22.5 million future payments was $20.2 million. We accounted for the difference of $2.3 million as interest income as each $1.875 million quarterly payment installment became due. Following the review, we identified an error in the way interest income was being recognized as future installments were being recorded. This accounting error relates to the timing of the recognition of interest income but does not change the overall interest income to be recognized for the Sony license.
In the third quarter of fiscal 2008, we entered into two separate transactions with the same customer and recognized revenue of $42,000 and $481,000 for such transactions. We determined that the $42,000 in revenue should not have been recognized during this quarter for the reasons described in the preceding paragraph. The revenue for this transaction has now been deferred until the third quarter of fiscal 2009 at which time we received the cash payment for the transaction and we terminated the distribution agreement with the customer.
The revenue for the second of these transactions of $481,000 also should not have been recognized in the third quarter of fiscal 2008 because (i) the product remained in a third-party warehouse and was not shipped to the customer until the fourth quarter of fiscal 2008; (ii) the commitments made in the side agreement caused the terms of earlier transactions to be deemed not final until the distribution agreement between the parties was terminated in the third quarter of fiscal 2009; and (iii) concessions related to payment terms caused the amount to not be fixed and determinable. We have received payment in the amount of $438,000 for this transaction, which we have deferred until the third quarter of fiscal 2009 when the distribution agreement with the customer was terminated. We have not received payment of the remaining $43,000 which has been reversed and will be recognized when and if payment is received.
We determined that a total of $1.6 million of revenue recorded from the customer in fiscal 2008 had not been appropriately recognized, $995,000 of which has been deferred and $623,000 of which has been reversed and not recognized.
In the fourth quarter of fiscal 2008, we recorded revenue for five transactions where the product sold lacked sufficient functionality to permit recognition of revenue. In three of these transactions totaling $468,000 in revenue, we delivered a fully functional upgrade to the product in the first quarter of fiscal 2009. In the fourth transaction for which we had recorded $130,000 in revenue, sales personnel also promised a deliverable that was not available in the fourth quarter of fiscal 2008. We have deferred this revenue until such time as the deliverable is provided, or the issue is otherwise resolved. In the fifth transaction, for which we had recorded $129,000 in revenue, the purchase order provided for certain acceptance criteria that were not met in the fourth quarter of fiscal 2008. Thus, the revenue associated with this transaction has been deferred until such time, if at all, as the acceptance criteria is met. In sum, for fiscal 2008, a total of $727,000 in revenue was deferred as a result of this issue.
As a result of the adjustments to revenue discussed above, cost of product sales decreased by $1.4 million for the year ended December 31, 2008, increased by $23,000 for the year ended December 31, 2007, decreased by $21,000 for the year ended December 31, 2006 and commission expense decreased by $114,000 for the year ended December 31, 2008. Also, as a result of the adjustment in costs of product sales, we recorded deferred cost of goods sold in the amount of $1.1 million at December 31, 2008 which is reported as prepaid expenses and other current assets on the balance sheet.
Read the The complete Report