7. LONG-TERM DEFERRED REVENUE
On March 31, 2009, long-term deferred revenue was $17.7 million and included approximately $16.3 million of deferred revenue from Sony Computer Entertainment. On December 31, 2008, long-term deferred revenue was $16.9 million and included approximately $15.4 million from Sony Computer Entertainment.
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.
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.
We expect that the accretion of interest income from Sony Computer Inc. that was approximately $272,000 in the three months ended March 31, 2009 and will total approximately $1.3 million in 2009 will be completed at the end of 2009.
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 March 31, 2009, we had received nine of these installments.
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 Company’s 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 ended March 31, 2009, there were no stock repurchases under this program.
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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 ended March 31, 2009. Workforce reduction costs consisting of severance benefits of $166,000 are included in accrued compensation on the Company’s condensed consolidated balance sheet. In addition, the Company expects to record approximately $200,000 of workforce reduction costs relating to the remaining service period of these Medical division employees for the three months ended June 30, 2009, bringing the cumulative total to $366,000. All of the severance benefits are expected to be paid in the second or third quarter of 2009 with the exception of certain COBRA costs that will be paid by the end of 2009. The Company will also incur costs in the remainder of 2009 for temporary housing, the closing down of the Gaithersburg, Maryland facility, and the movement of operations to the San Jose facility.
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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 ended March 31, 2009. Workforce reduction costs consisting of severance benefits of $166,000 are included in accrued compensation on the Company’s condensed consolidated balance sheet. In addition, the Company expects to record approximately $200,000 of workforce reduction costs relating to the remaining service period of these Medical division employees for the three months ended June 30, 2009, bringing the cumulative total to $366,000. All of the severance benefits are expected to be paid in the second or third quarter of 2009 with the exception of certain COBRA costs that will be paid by the end of 2009. The Company will also incur costs in the remainder of 2009 for temporary housing, the closing down of the Gaithersburg, Maryland facility, and the movement of operations to the San Jose facility.
On November 17, 2008, the Company announced that it would divest its 3D product line which was part of its Touch segment. The Company’s 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 received for the sales was $900,000 in the form of cash and notes receivable and the proceeds are being recognized when they are received. The Company has abandoned all other 3D operations. 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. Revenues included in discontinued operations of the 3D product line were $531,000 and $1.2 million for the three months ended March 31, 2009 and March 31, 2008, respectively. The assets sold consisted primarily of intangibles that had no carrying value on the Company’s books at the time of sale.
In addition, for the first three months of 2009, there were reorganizations in the Company’s Touch segment due to business changes causing workforce reductions that have been recorded as accrued compensation in the company’s condensed consolidated balance sheet and restructuring charges in the statement of operations for the three months ended March 31, 2009.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Total Revenue — Our total revenue from continuing operations for the first three months of 2009 increased by $49,000 or 1% from the first three months 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 three months ended March 31, 2009 was $3.8 million, an increase of $320,000 or 9% from the three months ended March 31, 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. We expect royalty revenue to be a significant component of our revenue as our technology continues to be included in mobile phone handsets and other mobility devices.
We categorize our geographic information into four major regions: North America, Europe, Far East, and Rest of the World. In the first three months of 2009, revenue generated in North America, Europe, Far East, and Rest of the World represented 45%, 29%, 24%, and 2%, respectively, compared to 62%, 23%, 11%, and 4%, respectively, for the first three months of 2008. The shift in revenues among regions was mainly due to an increase in royalty revenue and medical product revenue from Europe and the Far East and a decrease in royalty and medical contract revenue in North America and Medical product revenue from the Rest of the World. We partially attribute increased European and Far East revenue to the addition of increased international sales and support personnel in 2008.
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 funds, travel, and an allocation of facilities costs. Sales and marketing expenses from continuing operations were $4.8 million, an increase of $1.6 million or 52% in the first three months of 2009 compared to the comparable period in 2008. The increase was primarily due to an increase in bad debt expense of $571,000 primarily from one customer that has not paid within terms, increased compensation, benefits, and overhead of $357,000, increased marketing, advertising, and public relations costs of $291,000, increased consulting costs of $220,000 to supplement our sales and marketing staff, and increased sales and marketing travel expense of $171,000. The increased sales and marketing expenses were primarily due to the expansion of our sales and marketing efforts internationally. We are taking steps to reduce our sales and marketing expenses, although we expect to continue to focus our sales and marketing efforts on medical, mobile device, and touchscreen market opportunities to build greater market acceptance for our touch technologies as well as continue to expand our sales and marketing presence internationally.
Restructuring — Restructuring costs consist primarily of severance benefits paid in connection with the reduction of workforce due to severance benefits to be paid as the result of a planned reduction of workforce due to the relocation of the Maryland medical business operations to San Jose of $166,000 and severance benefits to be paid as the result of the reduction of workforce due to business changes in our Touch segment of $480,000. There were no restructuring charges incurred in the three months ended March 31, 2008. We expect to record approximately $200,000 of workforce reduction costs relating to the remaining service period of the Maryland business operations employees plus additional costs relating to the move and close down of facilities in the second quarter of 2009.
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 $1.1 million in the first three 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. We expect that the accretion of interest income from Sony Computer Inc. that was approximately $272,000 in the three months ended March 31, 2009 and will total approximately $1.3 million in 2009 will be completed at the end of 2009.
Touch segment — Revenues from the Touch segment were $4.5 million, an increase of $513,000 or 13% in the first three months of 2009 compared to the same period in 2008. Royalty and license revenues increased by $320,000 mainly due to increased shipments by licensees of mobile devices partially offset by decreased shipments by gaming and automotive licensees. Development contract revenue increased by $182,000 primarily due to increased development contracts and support. Net loss for the three months ended March 31, 2009 was $4.3 million, an increase of $2.9 million compared to the same period in 2008. The increase was primarily due to an increase in provision for income taxes of $1.3 million, a decrease in interest and other income of $996,000 mainly due to reduced interest rates and a reduction in cash equivalents and short-term investments, an increase of research and development expenses of $603,000, an increase in restructuring costs of $480,000, an increase in sales and marketing expenses of $417,000 and an increase in amortization expense of $140,000. The increases to the net loss were partially offset by increased gross margin of $850,000 due to increased royalty and license revenue and a decrease in general and administrative expenses of $189,000.
We categorize our geographic information into four major regions: North America, Europe, Far East, and Rest of the World. In the first three months of 2009, revenue generated in North America, Europe, Far East, and Rest of the World represented 45%, 29%, 24%, and 2%, respectively, compared to 62%, 23%, 11%, and 4%, respectively, for the first three months of 2008. The shift in revenues among regions was mainly due to an increase in royalty revenue and medical product revenue from Europe and the Far East and a decrease in royalty and medical contract revenue in North America and Medical product revenue from the Rest of the World. We partially attribute increased European and Far East revenue to the addition of increased international sales and support personnel in 2008.
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 funds, travel, and an allocation of facilities costs. Sales and marketing expenses from continuing operations were $4.8 million, an increase of $1.6 million or 52% in the first three months of 2009 compared to the comparable period in 2008. The increase was primarily due to an increase in bad debt expense of $571,000 primarily from one customer that has not paid within terms, increased compensation, benefits, and overhead of $357,000, increased marketing, advertising, and public relations costs of $291,000, increased consulting costs of $220,000 to supplement our sales and marketing staff, and increased sales and marketing travel expense of $171,000. The increased sales and marketing expenses were primarily due to the expansion of our sales and marketing efforts internationally. We are taking steps to reduce our sales and marketing expenses, although we expect to continue to focus our sales and marketing efforts on medical, mobile device, and touchscreen market opportunities to build greater market acceptance for our touch technologies as well as continue to expand our sales and marketing presence internationally.
Restructuring — Restructuring costs consist primarily of severance benefits paid in connection with the reduction of workforce due to severance benefits to be paid as the result of a planned reduction of workforce due to the relocation of the Maryland medical business operations to San Jose of $166,000 and severance benefits to be paid as the result of the reduction of workforce due to business changes in our Touch segment of $480,000. There were no restructuring charges incurred in the three months ended March 31, 2008. We expect to record approximately $200,000 of workforce reduction costs relating to the remaining service period of the Maryland business operations employees plus additional costs relating to the move and close down of facilities in the second quarter of 2009.
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 $1.1 million in the first three 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. We expect that the accretion of interest income from Sony Computer Inc. that was approximately $272,000 in the three months ended March 31, 2009 and will total approximately $1.3 million in 2009 will be completed at the end of 2009.
Touch segment — Revenues from the Touch segment were $4.5 million, an increase of $513,000 or 13% in the first three months of 2009 compared to the same period in 2008. Royalty and license revenues increased by $320,000 mainly due to increased shipments by licensees of mobile devices partially offset by decreased shipments by gaming and automotive licensees. Development contract revenue increased by $182,000 primarily due to increased development contracts and support. Net loss for the three months ended March 31, 2009 was $4.3 million, an increase of $2.9 million compared to the same period in 2008. The increase was primarily due to an increase in provision for income taxes of $1.3 million, a decrease in interest and other income of $996,000 mainly due to reduced interest rates and a reduction in cash equivalents and short-term investments, an increase of research and development expenses of $603,000, an increase in restructuring costs of $480,000, an increase in sales and marketing expenses of $417,000 and an increase in amortization expense of $140,000. The increases to the net loss were partially offset by increased gross margin of $850,000 due to increased royalty and license revenue and a decrease in general and administrative expenses of $189,000.
Medical segment — Revenues from the Medical segment were $2.5 million, a decrease of $470,000 or 16%, for the first three months of 2009 compared to the same period in 2008. The decrease was primarily due to 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 partially offset by an increase in product sales mainly due to increased sales of our endovascular and laparoscopy simulators. Net loss for the three months ended March 31, 2009 was $3.2 million, an increase of $2.0 million compared to the same period in 2008. The increase was mainly due to increased sales and marketing expenses of $1.2 million as the segment expands international sales and marketing efforts, increased general and administrative expenses of $292,000, a decrease in gross margin of $261,000 primarily due to reduced development contract revenue, and an increase in restructuring costs of $166,000.
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.
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