Edgar Filing: IMMERSION CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨(Do not check if a smaller reporting company)

Smaller Reporting Company

Emerging Growth Company

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended September 30, 2018

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

For the transition period from to

Commission file number 001-38334

IMMERSION CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		94-3180138
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

50 Rio Robles, San Jose, California 95134

(Address of principal executive offices) (Zip Code)

(408) 467-1900

(Registrant’s 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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Number of shares of common stock outstanding at October 26, 2018: 37,529,629.

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IMMERSION CORPORATION

INDEX




		Page
PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5

	Unaudited Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	39

Item 6.	Exhibits	50

SIGNATURES		52

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IMMERSION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	September 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	112,633		$	24,622
Short-term investments	17,835			21,916
Accounts and other receivables	1,260			806
Prepaid expenses and other current assets	7,802			736
Total current assets	139,530			48,080
Property and equipment, net	2,540			3,150
Deferred income tax assets	371			401
Other assets	4,254			344
Total assets	$	146,695		$	51,975
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	758		$	6,647
Accrued compensation	2,573			4,133
Other current liabilities	5,703			3,896
Deferred revenue	4,694			4,424
Total current liabilities	13,728			19,100
Long-term deferred revenue	31,407			22,303
Other long-term liabilities	1,163			915
Total liabilities	46,298			42,318
Contingencies (Note 12)
Stockholders’ equity:
Common stock and additional paid-in capital — $0.001 par value; 100,000,000 shares authorized; 37,526,910 and 35,950,518 shares issued, respectively; 30,800,525 and 29,263,828 shares outstanding, respectively	243,110			228,046
Accumulated other comprehensive income	107			99
Accumulated deficit	(95,379		)	(171,616		)
Treasury stock at cost: 6,726,385 shares	(47,441		)	(46,872		)
Total stockholders’ equity	100,397			9,657
Total liabilities and stockholders’ equity	$	146,695		$	51,975

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues:
Royalty and license	$	8,462		$	11,636		$	99,789		$	27,427
Development, services, and other	90			227			323			690
Total revenues	8,552			11,863			100,112			28,117
Costs and expenses:
Cost of revenues	61			61			190			158
Sales and marketing	1,664			3,376			4,454			10,142
Research and development	2,110			3,116			7,152			9,138
General and administrative	9,880			10,753			31,669			41,885
Total costs and expenses	13,715			17,306			43,465			61,323
Operating income (loss)	(5,163		)	(5,443		)	56,647			(33,206		)
Interest and other income	545			200			1,151			504
Income (loss) before provision for income taxes	(4,618		)	(5,243		)	57,798			(32,702		)
Provision for income taxes	(22		)	(44		)	(313		)	(295		)
Net income (loss)	$	(4,640	)	$	(5,287	)	$	57,485		$	(32,997	)
Basic net income (loss) per share	$	(0.15	)	$	(0.18	)	$	1.89		$	(1.13	)
Shares used in calculating basic net income (loss) per share	30,780			29,245			30,340			29,155
Diluted net income (loss) per share	$	(0.15	)	$	(0.18	)	$	1.83		$	(1.13	)
Shares used in calculating diluted net income (loss) per share	30,780			29,245			31,334			29,155
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on short-term investments	(2		)	10			8			(14		)
Total other comprehensive income (loss)	(2		)	10			8			(14		)
Total comprehensive income (loss)	$	(4,642	)	$	(5,277	)	$	57,493		$	(33,011	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
Cash flows provided by (used in) operating activities:
Net income (loss)	$	57,485		$	(32,997	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	647			709
Stock-based compensation	6,266			4,073
Deferred income taxes	67			(75		)
Loss on disposal of equipment	26			1
Changes in operating assets and liabilities:
Accounts and other receivables	(454		)	(5,096		)
Prepaid expenses and other current assets	(1,870		)	(101		)
Other assets	(3,910		)	(146		)
Accounts payable	(5,889		)	(1,116		)
Accrued compensation and other current liabilities	466			(3,209		)
Income tax payable	(219		)	—
Deferred revenue	22,713			(4,082		)
Other long-term liabilities	211			(78		)
Net cash provided by (used in) operating activities	75,539			(42,117		)
Cash flows provided by investing activities:
Purchases of short-term investments	(17,693		)	(23,807		)
Proceeds from maturities of short-term investments	22,000			28,000
Purchases of property and equipment	(63		)	(121		)
Net cash provided by investing activities	4,244			4,072
Cash flows provided by financing activities:
Issuance of common stock under employee stock purchase plan	218			328
Exercise of stock options	8,010			443
Purchases of treasury stock	—			(328		)
Net cash provided by financing activities	8,228			443
Net increase (decrease) in cash and cash equivalents	88,011			(37,602		)
Cash and cash equivalents:
Beginning of period	24,622			56,865
End of period	$	112,633		$	19,263
Supplemental disclosure of cash flow information:
Cash paid for taxes	$	139		$	128
Supplemental disclosure of noncash operating, investing, and financing activities:
Amounts accrued for treasury stocks	$	569		$	—
Release of Restricted Stock Units and Awards under company stock plan	$	2,806		$	2,524

See accompanying Notes to Condensed Consolidated Financial Statements.

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IMMERSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Immersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware in 1999. The Company focuses on the creation, design, development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully as they engage with products and experience the digital world around them. The Company has adopted a “hybrid” business model, under which it provides advanced tactile software, related tools, and technical assistance to certain customers; and offers licenses to the Company's patented intellectual property (“IP”) to other customers.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Immersion Corporation and its wholly owned subsidiaries: Immersion Canada Corporation; Immersion International, LLC; Immersion Medical, Inc.; Immersion Japan K.K.; Immersion Ltd.; Immersion Software Ireland Ltd.; Haptify, Inc.; Immersion (Shanghai) Science & Technology Company, Ltd.; and Immersion Technology International Ltd. All intercompany accounts, transactions, and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2017. In the opinion of management, all adjustments consisting of only normal and recurring items necessary for the fair presentation of the financial position and results of operations for the interim periods presented have been included.

The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year.

Segment Information

The Company develops, licenses, and supports a wide range of software and IP that more fully engage users’ sense of touch as they engage with products and experience the digital world around them. The Company currently focuses on the following target application areas: mobility, automotive, gaming, medical and wearables. The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM allocates resources to and assesses the performance of the Company using information about its financial results as one operating and reporting segment.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers (Topic 606)" ("Accounting Standard Codification 606", "ASC 606"), which superseded most prior revenue recognition guidance under ASC Topic 605, "Revenue Recognition" ("ASC 605") including industry-specific guidance. The underlying principle of ASC 606 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled in exchange for those goods or services. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized, and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption if the modified retrospective transition method is elected. The new standard also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.

The Company adopted the new revenue standard effective January 1, 2018 using the modified retrospective transition method where the cumulative effect of the initial application is recognized as an adjustment to the opening balance of the accumulated deficit at January 1, 2018, the date of adoption. Therefore, comparative prior periods have not been adjusted and continue to be presented under ASC 605. Refer to Note 2 to the condensed consolidated financial statements for the Company's revised revenue recognition accounting policy and a summary of the impact of adoption of ASC 606.

Recent Accounting Pronouncements

Adopted

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In March 2018, the FASB issued ASU2018-05 "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)", which updates Securities and Exchange Commission (“SEC”) guidance released in December 2017 when the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Additional information regarding the adoption of this ASU and its material impact on the Company's condensed consolidated financial statements is contained in Note 10 to the condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 “Stock Compensation: Scope of Modification Accounting”. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2017. The Company adopted the standard effective January 1, 2018. The adoption of this ASU did not have a material impact on its condensed consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19 “Technical Corrections and Improvements”. The amendments in this update affect a wide variety of topics in the Accounting Standards Codification. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods in the annual period beginning after December 15, 2018. The Company adopted the standard effective January 1, 2018. The adoption of this ASU did not have a material impact on its condensed consolidated financial statements.

Not yet adopted

In July 2018, the FASB issued ASU 2018-09 "Codification Improvement" ("ASU 2018-09"). This ASU amends a wide variety of Topics in the Codification issued by FASB with technical corrections, clarifications, and other minor improvements, and should eliminate the need for periodic agenda requests for narrow and incremental items. Many of the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018 for public entities. The Company is currently assessing when it will adopt this ASU, but does not expect material impact on its condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 "Compensation-- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). The amendments in this ASU expand the scope of Topic 718 to include share-based payment transaction for acquiring goods and services from nonemployees and supersede subtopic 505-50. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted but no earlier than adoption of Topic 606. The Company is currently in the process of evaluating the impact of this standard on its condensed consolidated financial statements, and expects to adopt this ASU as of January 1, 2019.

In February 2018, the FASB issued ASU 2018-02 "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing when it will adopt this ASU and its potential impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 “Leases: Topic 842” (“ASU 2016-02” "Topic 842"), which supersedes the existing guidance for lease accounting in Topic 840, Leases. The FASB issued the ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting remains largely unchanged. This ASU is effective for periods beginning after December 15, 2018 for public entities with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-10 "Codification Improvement to Topic 842, Leases" ("ASU 2018-10"). The FASB issued this separate ASU for the improvements related to ASC 2016-02 to increase stakeholders' awareness of the amendments and to expedite the improvements. In July 2018, the FASB issued ASU 2018-11 "Leases (Topic 842) Target Improvement" ("ASU 2018-11"). This ASU introduces a lessee model that will bring most leases of property, plant and equipment onto the balance sheet. It requires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right of use asset” for all leases, although certain short-term leases are exempted from the standard. The ASU introduces two models for the subsequent measurement of the lease asset and liability, depending on whether the lease qualifies as a “finance lease” or an “operating lease”. This distinction focuses on whether or not effective control of the asset is being transferred from the lessor to the lessee. Both effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. The Company plans to adopt the standard on January 1, 2019. The Company expects that its operating lease commitments will be subject to the new standard, and will record a lease liability and a right to use lease asset on its condensed consolidated balance sheet upon adoption.

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2. REVENUE RECOGNITION

Revised Revenue Recognition Accounting Policy

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method. The new revenue standard has been applied to all contracts that were not completed as of the date of adoption. To the extent that modifications occurred prior to the adoption of ASC 606, the Company has reflected the aggregate impact of any modification when evaluating the impact of the adoption.

The Company's revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenue earned from development, services and other revenue. The adoption of ASC 606 affected the Company's revenue recognition model for both fixed fee license revenue and per-unit royalty revenue presented as “royalty and license revenue” on the Company’s condensed consolidated statements of operations and comprehensive income (loss). All of the Company’s revenue in the periods presented have been derived from contracts with customers and consequently have been recognized under ASC 606.

Fixed fee license revenue

In applying ASC 606, the Company is required to recognize revenue from a fixed fee license agreement when it has satisfied its performance obligations, which typically occurs upon the transfer of rights to the Company's technology upon the execution of the license agreement. However, in certain contracts, the Company grants a license to its existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolves throughout the contract term. For such arrangements, the Company has concluded that it has two separate performance obligations:

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

•Performance Obligation B: to transfer rights to the Company's patent portfolio as it evolves over the term of the contract, including access to new patent applications that the licensee can benefit from over the term of the contract.

Under the Company's previous accounting practices under ASC 605, fixed license fees were generally recognized on a straight-line basis over the contract term. As a result of the adoption of ASC 606, if a fixed fee license agreement contains only Performance Obligation A, the Company will recognize most or all of the revenue from the agreement at the inception of the contract. For fixed fee license agreements that contain both Performance Obligation A and B, the Company will be required to allocate the transaction price based on the standalone price for each of the two performance obligations. The Company has developed a process, and established internal controls around such process, to estimate standalone prices related to Performance Obligation A and B using a number of factors primarily related to the attributes of its patent portfolio. Once the transaction price is allocated, the portion of the transaction price allocable to Performance Obligation A will be recognized in the quarter the license agreement is signed and the customer can benefit from rights provided in the contract, and the portion allocable to Performance Obligation B will be recognized on a straight-line basis over the contract term. For such contracts, a contract liability account will be established and included within "deferred revenue" on the condensed consolidated balance sheet. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis.

Historically, certain of the Company's license agreements contained fixed fees related to past infringements for which the fixed fees were recognized as revenue or recorded as a deduction to its operating expense in the quarter the license agreement was signed. After the adoption of ASC 606, the Company will recognize revenue from such fixed fees related to past infringements in the same manner in the quarter the license agreement is signed.

Payments for fixed fee license contracts typically are due in full within 30 - 45 days from execution of the contract. From time to time, the Company enters into a fixed fee license contract with payments due in a number of installments payable throughout the contract term. In such cases, the Company will determine if a significant financing component exists and if it does, the Company will recognize more or less revenue and corresponding interest expense or income, as appropriate.

Per-unit Royalty revenue

Under the Company's previous accounting practices under ASC 605, it recognized revenue from per-unit royalty agreements in the period in which the related royalty report was received from its licensees, generally one quarter in arrears from the period in which the underlying sales occurred (i.e. on a "quarter-lag"). ASC 606 requires an entity to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. As the Company generally does not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows the Company to adequately review the reports and include the actual amounts in its quarterly results for such quarter, the Company accrues the related revenue based on estimates of its licensees’ underlying sales, subject to certain constraints on its ability to estimate such amounts. The Company’s estimates are developed based on a combination of available data including, but not limited to,

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approved customer forecasts, a lookback at historical royalty reporting for each of its customers, and industry information available for the licensed products.

As a result of accruing per-unit royalty revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true up revenue to the actual amounts reported by its licensees. During the three months ended September 30, 2018, the Company trued up approximately $(333,000) per-unit royalty revenue, as compared to $(326,000) for the three months ended June 30, 2018. The true-up represents the difference between per-unit royalty based on its licensees' actual sales reported in a quarter-lag, and the estimate of per-unit royalty that was reported in the same quarter as the underlying sales occurred. The Company had no true-ups for the three months ended March 31, 2018.

Certain of the Company's per-unit royalty agreements contains a minimum royalty provision which sets forth minimum amounts to be received by the Company during the contract term. Per the Company's previous accounting policy under ASC 605, such minimum royalties were recognized as revenue at the end of each reporting period (usually a calendar year) if the actual royalties reported by the customer for that reporting period were below the minimum threshold set forth in the contract. Under ASC 606, minimum royalties are considered a fixed transaction price to which the Company will have an unconditional right once all other performance obligations, if any, are satisfied. Therefore, the Company recognizes all minimum royalties as revenue at the inception of the license agreement, or in the period in which all remaining revenue recognition criteria have been met. The Company will establish contract assets for the unbilled minimum royalties on a contract basis. Such contract asset balance will be reduced by the actual royalties reported by the licensee during the contract term until fully utilized, after which point any excess per-unit royalties reported will be recognized as revenue. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis.

Payments of per-unit royalties typically are due within 30 to 60 days from the end of the calendar quarter in which the underlying sales took place.

Development, services, and other revenue

With little change from its previous accounting practices related to development, service and other revenue, the Company will continue to recognize revenue from this stream when it has satisfied service obligations. Consistent with the Company’s previous accounting practices under ASC 605, the performance obligation related to its development, service and other revenue is satisfied over a period of time, and such revenue is recognized evenly over the period of performance obligation, which is generally consistent with the contractual term.

Adjustments upon Adoption of ASC 606

The following table summarizes adjustments related to the Company's adoption of ASC 606.



(in thousands)	Balance at December 31, 2017 as Reported under ASC 605			Adjustment for Fixed Fee License Revenue *		Elimination of Quarter-Lag Per-Unit Royalties			Total Adjustments upon Adoption of ASC 606			Balance at January 1, 2018 (ASC 606)
Prepaid expenses and other current assets	$	736				$	4,996		$	4,996		$	5,732
Deferred revenue - current	(4,424		)	1,766					1,766			(2,658		)
Long-term deferred revenue	(22,303		)	11,573					11,573			(10,730		)
Accumulated deficit	171,616			(13,339	)	(4,996		)	(18,335		)	153,281

* Adjustment for fixed fee license revenue includes both the recognition of Performance Obligation A upon the adoption of ASC 606, which had previously been deferred under ASC 605, and the change in the transaction price allocated to Performance Obligation B and consequently the revenue recognized as of January 1, 2018.

Disaggregated Revenue

The following table presents the disaggregation of the Company's revenue for the three and nine months ended September 30, 2018 under ASC 606. Revenues for the three and nine months ended September 30, 2017 are presented in accordance with ASC 605.

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(in thousands)	Three Months Ended September 30,
	2018		2017		Increase (Decrease)
Fixed fee license revenue	$	4,317	$	6,881	$	(2,564	)	(37	)%
Per-Unit royalty revenue	4,145		4,755		(610		)	(13	)%
Total royalty and license revenue	8,462		11,636		(3,174		)	(27	)%
Development, services, and other revenue	90		227		(137		)	(60	)%
Total revenues	$	8,552	$	11,863	$	(3,311	)	(28	)%

	Nine Months Ended September 30,
	2018		2017		Increase (Decrease)
Fixed fee license revenue	$	81,955	$	11,156	$	70,799		635	%
Per-Unit royalty revenue	17,834		16,271		1,563			10	%
Total royalty and license revenue	99,789		27,427		72,362			264	%
Development, services, and other revenue	323		690		(367		)	(53	)%
Total revenues	$	100,112	$	28,117	$	71,995		256	%

For the three and nine months ended September 30, 2018, the Company recognized $1.2 million and $2.3 million, respectively, as revenue that had been included in deferred revenue as of the beginning of the period. As of September 30, 2018, the Company had contract assets of $7.1 million and $4.0 million included within prepaid expenses and other current assets and other assets on the condensed consolidated balance sheet, respectively. During the three and nine months ended September 30, 2018, the balance of contract assets increased by $1.8 million and $6.0 million, respectively, primarily related to certain contracts entered into during the periods which included a minimum royalty arrangement. During the three months ended September 30, 2018, there was no evidence that would have indicated impairment of the contract assets.

Impact of Adoption of ASC 606

Presented in the tables below is disclosure of the impact of adoption on the Company's condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2018, as well as balance sheet as of September 30, 2018, in accordance with the requirements of ASC 606. The Company believes that this additional information is vital during the transition year to allow readers of its financial statements to compare financial results from the preceding financial year given the use of the modified retrospective method of adoption. The adoption of ASC 606 did not affect the Company's reported total amounts of cash flows from operating, investing and financing activities. Therefore, tables for this separate financial statement have not been provided.

Amounts contained in the tables below are in thousands, except per share data.

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(in thousands, except per share amounts)	Three Months Ended September 30,
	2018									2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Revenues:
Fixed fee license revenue	$	4,317		$	(499	)	$	3,818		$	6,881
Per-unit royalty revenue	4,145			(21		)	4,124			4,755
Total royalty and license revenue	8,462			(520		)	7,942			11,636
Development, services, and other revenue	90			—			90			227
Total revenues	$	8,552		$	(520	)	$	8,032		$	11,863
Operating expenses	13,715						13,715			17,306
Operating loss	(5,163		)	(520		)	(5,683		)	(5,443		)
Interest and other income	545			—			545			200
Loss before provision for income taxes	(4,618		)	(520		)	(5,138		)	(5,243		)
Income tax provision	(22		)	—			(22		)	(44		)
Net loss	$	(4,640	)	$	(520	)	$	(5,160	)	$	(5,287	)
Basic net loss per share	$	(0.15	)	$	(0.02	)	$	(0.17	)	$	(0.18	)
Diluted net loss per share	$	(0.15	)	$	(0.02	)	$	(0.17	)	$	(0.18	)


	Nine Months Ended September 30,
	2018									2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Revenues:
Fixed fee license revenue	$	81,955		$	(70,409	)	$	11,546		$	11,156
Per-unit royalty revenue	17,834			(4,274		)	13,560			16,271
Total royalty and license revenue	99,789			(74,683		)	25,106			27,427
Development, services, and other revenue	323			—			323			690
Total revenues	$	100,112		$	(74,683	)	$	25,429		$	28,117
Operating expenses	43,465						43,465			61,323
Operating income (loss)	56,647			(74,683		)	(18,036		)	(33,206		)
Interest and other income	1,151			—			1,151			504
Income (loss) before provision for income taxes	57,798			(74,683		)	(16,885		)	(32,702		)
Income tax provision	(313		)	—			(313		)	(295		)
Net income (loss)	$	57,485		$	(74,683	)	$	(17,198	)	$	(32,997	)
Basic net income (loss) per share	$	1.89		$	(2.46	)	$	(0.57	)	$	(1.13	)
Diluted net income (loss) per share	$	1.83		$	(2.46	)	$	(0.57	)	$	(1.13	)

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	September 30, 2018									December 31, 2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Prepaid expenses and other current assets	$	7,802		$	(7,079	)	$	723		$	736
Other non-current assets	4,254			(3,963		)	291			344
Other current liabilities	(5,703		)	180			(5,523		)	(3,896		)
Deferred revenue - current	(4,694		)	(10,715		)	(15,409		)	(4,424		)
Long-term deferred revenue	(31,407		)	(72,161		)	(103,568		)	(22,303		)
Accumulated deficit	$	95,379		$	93,435		$	188,814		$	171,616

Contracted Revenue

Based on contracts signed and payments received as of September 30, 2018, the Company expects to recognize $36.1 million revenue related to Performance Obligation B under its fixed fee license agreements, which is satisfied over time, including $14.0 million over one to three years and $22.1 million over more than three years.

3. FAIR VALUE MEASUREMENTS

Cash Equivalents and Short-term Investments

The financial instruments of the Company measured at fair value on a recurring basis are cash equivalents and short-term investments.

The Company’s fixed income available-for-sale securities consist of high quality, investment grade securities. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1) or inputs other than quoted prices that are observable either directly or indirectly (Level 2) in determining fair value.

The types of instruments valued based on quoted market prices in active markets include money market accounts. 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 are generally classified within Level 2 of the fair value hierarchy and include U.S. treasury securities.

The types of instruments valued based on unobservable inputs which reflect the reporting entity’s own assumptions or data that market participants would use in valuing an instrument are generally classified within Level 3 of the fair value hierarchy. The Company had no Level 3 instruments as of September 30, 2018 and December 31, 2017.

Financial instruments measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are classified based on the valuation technique in the table below:



	September 30, 2018
	Fair value measurements using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
U.S. Treasury securities	$	—	$	17,835	$	—	$	17,835
Money market accounts	86,983		—		—		86,983
Total assets at fair value	$	86,983	$	17,835	$	—	$	104,818

The above table excludes $25.7 million of cash held in banks.

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	December 31, 2017
	Fair value measurements using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
U.S. Treasury securities	$	—	$	21,916	$	—	$	21,916
Money market accounts	1,117		—		—		1,117
Total assets at fair value	$	1,117	$	21,916	$	—	$	23,033

The above table excludes $23.5 million of cash held in banks.

U.S. Treasury securities are classified as short-term investments and money market accounts are classified as cash equivalents on the Company’s condensed consolidated balance sheets.

Short-term Investments



	September 30, 2018
(in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
U.S. Treasury securities	$	17,850	$	—	$	(15	)	$	17,835
Total	$	17,850	$	—	$	(15	)	$	17,835



	December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
U.S. Treasury securities	$	21,939	$	—	$	(23	)	$	21,916
Total	$	21,939	$	—	$	(23	)	$	21,916

The contractual maturities of the short-term investments (classified as available-for-sale securities) on September 30, 2018 and December 31, 2017 were all due within one year. There were no transfers of instruments between Level 1 and 2 during the nine months ended September 30, 2018 and the year ended December 31, 2017.

4. ACCOUNTS AND OTHER RECEIVABLES



(in thousands)	September 30, 2018		December 31, 2017
Trade accounts receivable	$	937	$	458
Other receivables	323		348
Accounts and other receivables	$	1,260	$	806

There was no estimated allowance for doubtful accounts as of September 30, 2018 and December 31, 2017.

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5. PROPERTY AND EQUIPMENT



(in thousands)	September 30, 2018			December 31, 2017
Computer equipment and purchased software	$	3,151		$	3,206
Machinery and equipment	843			834
Furniture and fixtures	1,146			1,274
Leasehold improvements	3,920			3,920
Total	9,060			9,234
Less accumulated depreciation	(6,520		)	(6,084		)
Property and equipment, net	$	2,540		$	3,150

6. OTHER CURRENT LIABILITIES



(in thousands)	September 30, 2018		December 31, 2017
Accrued legal	$	4,477	$	2,202
Income taxes payable	—		219
Other current liabilities	1,226		1,475
Total other current liabilities	$	5,703	$	3,896

7. RESTRUCTURING COSTS

In the fourth quarter of 2017, the Company executed a series of restructuring actions designed to sharpen the Company’s strategic focus and establish a more cost-efficient operating structure. The restructuring activities primarily focused on a reduction of the Company’s global workforce in conjunction with steps taken to:

•Significantly reduce the Company’s presence in China and focus its efforts on Mobile OEM licensing in that region;

•Cease its Mobile Advertising activities; and

•Narrow its focus in the Gaming and VR/AR markets on development efforts to bolster its IP licensing model in these markets

The restructuring plan is expected to increase internal efficiencies through the consolidation of certain sites of operation and has resulted in the elimination of approximately 56 positions, or 41%, of the worldwide employee base.

For the year ended December 31, 2017, the Company recorded restructuring expenses of $1.6 million. There were no additional restructuring activities during the three and nine months ended September 30, 2018. There were $44,000 adjustments to the 2017 restructuring costs that were reflected in the condensed consolidated statements of operations for the three months ended March 31, 2018. There were no restructuring costs for the three and nine months ended September 30, 2017.

Employee separation costs are associated with worldwide headcount reductions. Asset-related charges consist primarily of accelerated depreciation costs related to the closure of one of the Company’s offices in China. Accelerated depreciation costs represent the difference between the depreciation expense as determined using the useful life of the assets prior to the restructuring activities and the revised useful life resulting from the restructuring activities. Other expenses consist primarily of lease termination expenses related to the closure of one of the Company’s offices in China.

Substantially all accrued amounts related to the 2017 restructuring activities were paid during the first quarter of 2018. The following table presents a reconciliation of the restructuring reserve recorded within other current liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2018:

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(in thousands)	Employee Separation Costs			Asset-Related Charges		Other			Total
Balance as of December 31, 2017	$	1,522		$	—	$	57		$	1,579
Charges	—			—		—			—
Adjustments	(44		)	—		—			(44		)
Non-cash activity	(10		)	—		(29		)	(39		)
Cash payments	(1,468		)	—					(1,468		)
Balance as of September 30, 2018	—			—		28			28

8. STOCK-BASED COMPENSATION

Stock Options and Awards

The Company’s 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 time based options, market condition based options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock-based or cash-based awards to employees, officers, directors, and consultants. Under this program, stock options may be granted at prices not less than the fair market value on the date of grant for stock options. These options generally vest over four years and expire from seven to ten years from the date of grant. In addition to time based vesting, market condition based options are subject to a market condition: the closing price of the Company stock must exceed a certain level for a number of trading days within a specified timeframe or the options will be cancelled before the expiration of the options. On June 2, 2017, the Company's stockholders approved an increase to the number of shares reserved for issuance by 3,476,850 shares. Restricted stock generally vests over one year. RSUs generally vest over three years. Awards granted other than an option or stock appreciation right reduce the common stock shares available for grant under the program by 1.75 shares for each share issued.



	September 30, 2018
Common stock shares available for grant	1,714,531
Standard and market condition stock options outstanding	2,322,517
Restricted stock awards outstanding	62,556
RSUs outstanding	1,090,938

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may purchase common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Company’s common stock at the beginning of the offering period or the purchase date. Participants may not purchase more than 2,000 shares in a six-month offering period or purchase stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period. A total of 1,000,000 shares of common stock has been reserved for issuance under the ESPP. As of September 30, 2018, 724,822 shares had been purchased since the inception of the ESPP in 1999. Under ASC 718-10, the ESPP is considered a compensatory plan and the Company is required to recognize compensation cost related to the fair value of the award purchased under the ESPP. Shares purchased under the ESPP for the nine months ended September 30, 2018 are listed below. Shares purchased under the ESPP for the nine months ended September 30, 2017 are 48,750.

The intrinsic value listed below is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.



	Nine Months Ended September 30, 2018
Shares purchased under ESPP	26,689
Average price of shares purchased under ESPP	$	8.17
Intrinsic value of shares purchased under ESPP	$	106,000

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Summary of Standard Stock Options

The following table sets forth the summary of activity with respect to standard stock options granted under the Company’s stock option plans for the nine months ended September 30, 2018:



	Nine Months Ended September 30, 2018
Beginning outstanding balance	3,277,991
Granted	207,500
Exercised	(1,326,718		)
Forfeited	(50,140		)
Expired	(58,197		)
Ending outstanding balance	2,050,436
Aggregate intrinsic value of options exercised	$	7,905,000
Weighted average fair value of options granted	$	5.82

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the exercise price of the Company’s common stock for the options that were in-the-money.

Information regarding these standard stock options outstanding at September 30, 2018 is summarized below:



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in millions)
September 30, 2018
Options outstanding	2,050,436	$	9.31	2.97	$	3.3
Options vested and expected to vest using estimated forfeiture rates	1,956,894	9.27		2.82	3.1
Options exercisable	1,511,605	$	9.11	2.00	$	2.5

Summary of Market Condition Based Stock Options

The Company continued to have an outstanding balance of 272,081 market condition based stock options as of both December 31, 2017 and September 30, 2018. No activity noted in the period presented.

Summary of Restricted Stock Units

RSU activity for the nine months ended September 30, 2018 was as follows:



	Nine Months Ended September 30, 2018
Beginning outstanding balance	508,880
Awarded	922,443
Released	(178,447		)
Forfeited	(161,938		)
Ending outstanding balance	1,090,938
Weighted average fair value on grant date of RSUs	$	11.83
Total fair value of RSUs released	$	2,133,000

Information regarding RSUs outstanding at September 30, 2018 is summarized below:

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	Number of Shares	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in millions)
September 30, 2018
RSUs outstanding	1,090,938	0.90	$	11.5
RSUs vested and expected to vest using estimated forfeiture rates	915,934	0.80	$	9.7

Summary of Restricted Stock Awards

Restricted stock award activity for the nine months ended September 30, 2018 was as follows:



	Nine Months Ended September 30, 2018
Beginning outstanding balance	44,538
Awarded	62,556
Released	(44,538		)
Forfeited	—
Ending outstanding balance	62,556
Weighted average grant date fair value of restricted stock awarded	$	13.32
Total fair value of restricted stock awards released	$	673,000

Stock Plan Assumptions

The assumptions used to value option grants under the Company’s stock plans were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Standard Stock Options
Expected life (in years)	4.5		4.6		4.4		4.5
Volatility	55	%	53	%	55	%	53	%
Interest rate	2.7	%	1.7	%	2.5	%	1.7	%
Dividend yield	N/A		N/A		N/A		N/A



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018		2017
Market Condition Based Stock Options
Expected life (in years)	N/A	N/A	7.0		7.0
Volatility	N/A	N/A	55	%	55	%
Interest rate	N/A	N/A	2.0	%	2.0	%
Dividend yield	N/A	N/A	N/A		N/A

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Employee Stock Purchase Plan
Expected life (in years)	0.5		0.5		0.5		0.5
Volatility	39	%	46	%	58	%	48	%
Interest rate	2.2	%	1.1	%	1.9	%	0.9	%
Dividend yield	N/A		N/A		N/A		N/A

Compensation Costs

Total stock-based compensation recognized in the condensed consolidated statements of operations and comprehensive income (loss) is as follows:



(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Statement of Operations Classifications
Sales and marketing	$	377	$	317	$	675	$	808
Research and development	561		231		1,382		780
General and administrative	1,576		790		4,209		2,485
Total	$	2,514	$	1,338	$	6,266	$	4,073

As of September 30, 2018, there was $8.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options, restricted stock awards and RSUs granted to the Company’s employees and directors. This cost will be recognized over an estimated weighted-average period of approximately 2.64 years for standard options, 1.36 years for RSUs, and 0.72 years for restricted stock awards. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

9. STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income are included in the table below.



	Nine Months Ended September 30, 2018
(in thousands)	Unrealized Gains and Losses on Short-term Investments			Foreign Currency Items		Total
Beginning balance	$	(23	)	$	122	$	99
Other comprehensive income before reclassifications	8			—		8
Amounts reclassified from accumulated other comprehensive income	—			—		—
Net current period other comprehensive income	8			—		8
Ending Balance	$	(15	)	$	122	$	107

Stock Repurchase Program

On November 1, 2007, the Company announced its Board of Directors (the "Board")’ authorized the repurchase of up to $50.0 million of the Company’s common stock (“Stock Repurchase Program”). In addition, on October 22, 2014, the Board authorized another $30.0 million under the share repurchase program. The Company may repurchase its common stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase

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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.

There were no stock repurchases during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2017, the Company repurchased 48,687 shares for $328,000 at an average cost of $6.73 per share, net of transaction costs through open market repurchases. As of September 30, 2018, the Stock Repurchase Program remains available with approximately $33.4 million that may yet be purchased under the program.

Stockholders Rights Plan

On December 26, 2017, the Board declared a dividend of one right (a “Right”) for each of the Company's issued and outstanding shares of common stock, par value $0.001 per share. The dividend was paid to the stockholders of record at the close of business on January 8, 2018 (the “Record Date”). Each Right entitles the holder to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $30.00 (the “Exercise Price”), subject to certain adjustments and contingently issuable. The Rights expire December 26, 2018 if not earlier redeemed, exchanged or terminated.

There were no rights exercised during the three and nine months ended September 30, 2018 and the nine months ended September 30, 2017.

10. INCOME TAXES

Income tax provisions consisted of the following:



(in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Income (loss) before provision for income taxes	$	(4,618	)	$	(5,243	)	$	57,798		$	(32,702	)
Provision for income taxes	$	(22	)	$	(44	)	$	(313	)	$	(295	)
Effective tax rate	(0.5		)%	(0.8		)%	0.5		%	(0.9		)%

The provision for income tax for the three and nine months ended September 30, 2018 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. The Company continues to carry a full valuation allowance on its federal deferred tax assets. As a result, no provision for U.S. sourced income was included in the calculation, the primary reason for the difference between the statutory tax rate and effective tax rate. The provision for income tax for the three and nine months ended September 30, 2017 resulted primarily from estimated foreign taxes and foreign withholding tax expense.

On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing arrangement. On February 19, 2016, the IRS appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit. On July 24^,2018, the U.S. Court of Appeals for the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court that had found certain Treasury regulations related to stock-based compensation to be invalid. On August 7, 2018, the U.S. Court of Appeals for the Ninth Circuit withdrew its July 24, 2018 opinion to allow a reconstituted panel to confer on the decision. This reconstituted panel will reconsider the validity of the cost sharing regulations at issue. The regulations at issue require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as “qualified cost-sharing arrangements” and to avoid potential IRS adjustment. The Company will evaluate the implications of the final decision, when rendered.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. The Act reduces the US federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In addition, the Act introduced the Base Erosion and Anti-Abuse Tax (“BEAT”), which creates a new tax on certain related party payments.

During December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the federal tax rate change and other tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects

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of the Tax Act is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provision estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with the Company's adoption of the Tax Act and consideration of SAB 118, the following updates have been made to the Company's income tax provision. In the fourth quarter of 2017, due to the federal tax rate change, the Company recorded a $12.9 million reduction to deferred tax assets and related valuation allowance in connection with the re-measurement of certain deferred tax assets and liabilities, resulting in no impact to its results of operations. The Company estimated that no current tax expense should be recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, a provisional estimate at December 31, 2017. There have been no changes as of September 30, 2018. Additional work is necessary to complete a more detailed analysis of the Company’s deferred tax assets and liabilities and historical foreign earnings as well as potential correlative adjustments.

For the Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act, the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred. At September 30, 2018, because the Company is still evaluating the GILTI provisions and the analysis of future taxable income that is subject to GILTI, the Company has included GILTI related to current-year operations only in its annual effective tax rate calculation and has not provided additional GILTI on deferred items. Additionally, the Company has determined that it is has not met the threshold requirements of the BEAT.

The Company has made a reasonable estimate of the effects of the Act as of September 30, 2018 in accordance with guidance in SAB 118. The Company will continue to monitor the estimated impacts as additional guidance is released. Any adjustments recorded to the provisional amounts through fourth quarter 2018 may be included in net income as an adjustment to tax expense.

As of September 30, 2018, the Company had unrecognized tax benefits under ASC 740 “Income Taxes” of approximately $4.8 million and applicable interest of $16,000. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, is $405,000. The Company’s policy is to account for interest and penalties related to uncertain tax positions as a component of income tax provision. We do not expect to have any significant changes to unrecognized tax benefits during the next twelve months.

As of September 30, 2018, the Company had net deferred income tax assets of $371,000 consisting primarily of foreign net operating loss carryforwards, and deferred income tax liabilities of $80,000. Because the Company had net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state, and foreign taxing authorities may examine the Company’s tax returns for all years from 1998 through the current period.

The Company maintains a valuation allowance of $37.6 million against certain of its deferred tax assets, including all federal, state, and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset balance due to historical losses, the variability of operating results, and uncertainty regarding near term projected results. In the event that the Company determines the deferred tax assets are realizable based on its assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made. The valuation allowance does not impact the Company’s ability to utilize the underlying net operating loss carryforwards.

11. NET INCOME (LOSS) PER SHARE

Basic and diluted net income (loss) per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock and RSUs. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share.

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(in thousands, except per share amounts)	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018		2017
Numerator:
Net income (loss)	$	(4,640	)	$	(5,287	)	$	57,485	$	(32,997	)
Denominator:
Shares used in computation of basic net income (loss) per share (weighted average common shares outstanding)	30,780			29,245			30,340		29,155
Dilutive potential common shares:
Stock options, ESPP, restricted stock awards and RSUs	—			—			994		—
Shares used in computation of diluted net income (loss) per share	30,780			29,245			31,334		29,155
Basic net income (loss) per share	$	(0.15	)	$	(0.18	)	$	1.89	$	(1.13	)
Diluted net income (loss) per share	$	(0.15	)	$	(0.18	)	$	1.83	$	(1.13	)

The Company includes the underlying market condition stock options in the calculation of diluted earnings per share if the performance condition has been satisfied as of the end of the reporting period and excludes such options if the performance condition has not been met.

For the nine months ended September 30, 2018, standard stock options to purchase approximately 261,667 shares of common stock, with exercise prices greater than the average fair market value of the Company’s stock of $12.04 per share, were not included in the calculation because the effect would have been anti-dilutive.

As of September 30, 2018 and 2017, 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 for the three months ended September 30, 2018 and 2017, and nine months ended September 30, 2017, since their effect would have been anti-dilutive. These outstanding securities consisted of the following:



	September 30,
	2018	2017
Standard and market condition based stock options outstanding	2,322,517	3,815,784
Restricted stock awards outstanding	62,556	44,538
RSUs outstanding	1,090,938	627,454
ESPP	7,529	10,152

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12. CONTINGENCIES

From time to time, the Company receives claims from third parties asserting that the Company’s technologies, or those of its licensees, infringe on the other parties’ IP 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 management’s opinion, the resolution of such matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations, or liquidity.

In the normal course of business, the Company provides indemnification of varying scope to customers, most commonly to licensees in connection with licensing arrangements that include our IP, although these provisions can cover additional matters. 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 discussed in Part II, Item 1 (Legal Proceedings), on April 28, 2017, the Company and Immersion Software Ireland Limited (collectively, “Immersion”) received a letter from Samsung Electronics Co. (“Samsung”) requesting that Immersion reimburse Samsung with respect to withholding tax and penalties imposed on Samsung by the Korean tax authorities following an investigation where the tax authority determined that Samsung failed to withhold taxes on Samsung’s royalty payments to Immersion Software Ireland from 2012 to 2016. On July 12, 2017, Immersion filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes and penalties.

On September 29, 2017, Samsung filed an arbitration demand with the International Chamber of Commerce against Immersion demanding that Immersion reimburse Samsung for the imposed tax and penalties that Samsung paid to the Korean tax authorities. We deny liability, and, as discussed in Part II, Item 1 (Legal Proceedings), the arbitration matter is ongoing. Immersion believes that there are valid defenses to all of the claims from the Korean tax authorities and that Samsung’s claims are without merit. Immersion intends to vigorously defend against these claims and as a result, Immersion has concluded that the likelihood of a material charge resulting from this claim is remote. In the event Samsung were to prevail in the arbitration in advance of the conclusion of the appeal with the Korea Tax Tribunal, Immersion could be required to make a payment to Samsung even though it would later be reimbursed should Immersion prevail in the appeal.

On October 16, 2017, the Company received a letter from LG Electronics Inc. (“LGE”) requesting that the Company reimburse LGE with respect to withholding tax imposed on LGE by the Korean tax authorities following an investigation where the tax authority determined that LGE failed to withhold on LGE’s royalty payments to Immersion Software Ireland from 2012 to 2014. On November 3, 2017, the Company filed an appeal with the Korea Tax Tribunal regarding their findings with respect to the withholding taxes. The Company believes that there are valid defenses to the claims raised by the Korean tax authorities and that LGE’s claims are without merit. The Company intends to vigorously defend itself against these claims and as a result, has concluded that the likelihood of a material charge resulting from the claim from LGE to be remote.

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ITEM 2. MANAGEMENT’S 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “will,” "places," 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 “Management’s 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.

OVERVIEW

We are a premier licensing company focused on the creation, design, development, and licensing of innovative haptic technologies that allow people to use their sense of touch more fully as they engage with products and experience the digital world around them. Our mission is to innovate touch technology that informs, humanizes, and excites while working with customers and partners to bring these tactile experiences to consumers. Our technologies are designed to facilitate the creation of high-quality haptic experiences, enable their widespread distribution, and ensure that their playback is optimized for end users. Our primary business is currently in the mobility, gaming, automotive and medical markets, but we believe our technology is broadly applicable and see opportunities in evolving new markets, including wearables and virtual and augmented reality.

We have adopted a hybrid business model, under which we provide advanced tactile software, related tools, and technical assistance designed to help integrate our patented technology into our customers’ products or enhance the functionality of our patented technology, and offer licenses of our patented technology to our customers. Our licenses allow our customers to deploy haptically-enabled devices, content and other offerings, which they typically sell under their own brand names. We and our wholly owned subsidiaries hold more than 3,210 issued or pending patents worldwide, covering a wide range of digital technologies and including many of the ways in which touch-related technology can be incorporated into and between hardware products and components, systems software, application software, and digital content.

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, income taxes, contingencies, and litigation. We base our estimates and assumptions on historical experience and 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.

Our critical accounting policies and estimates are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain. With the exception of our adoption of ASC 606, there have been no material changes during the nine months ended September 30, 2018 to the items we disclosed in the section "Critical Accounting Policies and Estimates" included in Item 7 and the section "Significant Accounting Policies" (Note 1) included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Refer to Note 1 and Note 2 to the condensed consolidated financial statements for our revised policies related to revenue recognition and related estimates after our adoption of ASC 606.

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RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Overview

For the three months ended September 30, 2018, total revenues decreased $3.3 million, or 28%, compared to the three months ended September 30, 2017.

Net loss was $4.6 million for the three months ended September 30, 2018 compared to a net loss of $5.3 million for the three months ended September 30, 2017. The decrease was primarily attributable to lower operating expenses and higher interest and other income, partially offset by the decreased total revenue during the third quarter in 2018 compared to the same period in 2017.

For the nine months ended September 30, 2018, total revenue increased $72.0 million, or 256%, compared to the nine months ended September 30, 2017. The increase was mainly driven by the $70.8 million increase in fixed fee license revenue and the $1.6 million increase in per-unit royalty revenue.

Net income was $57.5 million for the nine months ended September 30, 2018 as compared to a net loss of $33.0 million for the nine months ended September 30, 2017. The $90.5 million change was primarily related to the increase in total revenue and the decrease in operating expenses for the first nine months in 2018 compared to the same period in 2017.

As discussed above, we adopted the new revenue standard, ASC 606, effective January 1, 2018. Consistent with the modified retrospective transaction method, our results of operations for periods prior to our adoption of ASC 606 remain unchanged. As a result, the changes in total revenues for the three and nine months ended September 30, 2018 compared to the same periods a year ago reflected the component of accounting policy changes arising from the adoption of ASC 606. For the three-month period, the impact of the adoption included revenue of $0.5 million primarily related to fixed fee license agreements which would not have been reported as revenue under the previous standard. Such impact for the nine-month period included $70.4 million related to fixed fee license agreements and $4.3 million related to per-unit royalty agreements.

REVENUES



	September 30,									Components of Changes
(in thousands)	2018		2017		Change			% Change		Due to ASC 606 Adoption		Net of ASC 606 Adoption Effect			Total Change

Three months ended
Fixed fee license revenue	$	4,317	$	6,881	$	(2,564	)	(37	)%	$	499	$	(3,063	)	$	(2,564	)
Per-unit royalty revenue	4,145		4,755		$	(610	)	(13	)%	21		(631		)	(610		)
Total royalty and license revenue	8,462		11,636		$	(3,174	)	(27	)%	520		(3,694		)	(3,174		)
Development, services, and other	90		227		$	(137	)	(60	)%	—		(137		)	(137		)
Total revenues	$	8,552	$	11,863	$	(3,311	)	(28	)%	$	520	$	(3,831	)	$	(3,311	)

Nine months ended
Fixed fee license revenue	$	81,955	$	11,156	$	70,799		635	%	$	70,409	$	390		$	70,799
Per-unit royalty revenue	17,834		16,271		1,563			10	%	4,274		(2,711		)	1,563
Total royalty and license revenue	99,789		27,427		72,362			264	%	74,683		(2,321		)	72,362
Development, services, and other	323		690		(367		)	(53	)%	—		(367		)	(367		)
Total revenues	$	100,112	$	28,117	$	71,995		256	%	$	74,683	$	(2,688	)	$	71,995

Total Revenues - Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Royalty and license revenue — Royalty and license revenue is composed of per unit royalties earned based on usage or net sales by licensees and fixed payment license fees charged for our IP and software. Royalty and license revenue for the three months ended September 30, 2018 decreased by $3.2 million, or 27%, compared to $11.6 million for the three months ended September 30, 2017. Royalty and license revenue for the three months ended September 30, 2018 would be $(3.7) million

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lower, if reported under ASC 605, than the reported royalty and license revenue for the three months ended September 30, 2017, reflecting operational changes during the three months ended September 30, 2018 compared to the same period a year ago.

Per-unit royalty revenue decreased by $0.6 million, or 13%, from $4.8 million for the three months ended September 30, 2017 to $4.1 million for the three months ended September 30, 2018. Per-unit royalty revenue for the three months ended September 30, 2018 would be $(0.6) million lower, if reported under ASC 605, than per-unit royalty revenue for the three months ended September 30, 2017.

Fixed fee license revenue decreased $2.6 million, or 37%, from $6.9 million for the three months ended September 30, 2017 to $4.3 million for the three months ended September 30, 2018. Fixed fee license revenue for the three months ended September 30, 2018 would be $(3.1) million lower, if reported under ASC 605, than fixed fee license revenue for the three months ended September 30, 2017. The decrease was primarily due to a non-recurring fixed license fee from a mobility licensee recognized during the three months ended September 30, 2017, partially offset by fixed license fees from new customers, including Fitbit, recognized in the three months ended September 30, 2018.

We expect royalty and license revenue to continue to be a major component of our future revenue as our technology is included in products and we succeed in our efforts to monetize our IP. Our fixed fee license revenue could fluctuate depending upon the timing of execution of new fixed license fee arrangements under ASC 606. We also anticipate that our royalty revenue will fluctuate relative to our customers unit shipments. We historically experienced seasonally higher royalty revenue from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter compared to other calendar quarters. Due to the elimination of the one-quarter lag in reporting royalty income, we now expect to experience this seasonal impact in the fourth calendar quarter. We anticipate a continuous reduction in royalty and license revenue in the future from our medical customers as a percentage of our consolidated royalty and license revenue, as this line of business is a less significant portion of our market focus. Refer to Note 1 and Note 2 to the condensed consolidated financial statements for our revised revenue recognition policies and the impact of the adoption of ASC 606.

Geographically, revenues generated in North America, Asia, and Europe for the three months ended September 30, 2018 represented 57%, 35%, and 8%, respectively, of our total revenue as compared to 9%, 79%, and 12%, respectively, for the three months ended September 30, 2017. The increase in revenue attributable to North America as a percentage of total revenue was due primarily to increased revenues from commercial & industrial, mobility and gaming customers. The decrease in revenue attributable to Asia as a percentage of total revenue was primarily caused by declining revenues from mobility, gaming and commercial & industrial customers, partially offset by increased revenue from automotive customers in the region. The decrease in revenue attributable to Europe as a percentage of total revenue was mainly caused by decreased revenues from gaming and medical customers, partially offset by increased revenue from automotive customers in the region.

Total Revenues - Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Royalty and license revenue — Royalty and license revenue is composed of per unit royalties earned based on usage or net sales by licensees and fixed payment license fees charged for our IP and software. Royalty and license revenue for the nine months ended September 30, 2018 increased by $72.4 million, or 264%, compared to $27.4 million for the nine months ended September 30, 2017. Royalty and license revenue for the nine months ended September 30, 2018 would be $(2.3) million lower, if reported under ASC 605, than the reported royalty and license revenue for the nine months ended September 30, 2017.

Per-unit royalty revenue increased by $1.6 million, or 10%, from $16.3 million for the nine months ended September 30, 2017 to $17.8 million for the nine months ended September 30, 2018. Per-unit royalty revenue for the nine months ended September 30, 2018 would be $(2.7) million lower, if reported under ASC 605, than per-unit royalty revenue for the nine months ended September 30, 2017. The decrease was primarily caused by lower volume of shipments experienced by our mobility, medical and gaming customers during the nine months ended September 30, 2018 as compared to the same period a year ago.

Fixed fee license revenue increased by $70.8 million, or 635%, from $11.2 million for the nine months ended September 30, 2017 to $82.0 million for the nine months ended September 30, 2018. The increase primarily stemmed from new customer agreements executed during the first nine months in 2018 for which we recorded revenue in accordance with ASC 606.

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medical customers as a percentage of our consolidated royalty and license revenue, as this line of business is a less significant portion of our market focus. Refer to Note 1 and Note 2 to the condensed consolidated financial statements for our revised revenue recognition policies and the impact of the adoption of ASC 606.

Geographically, revenues generated in North America, Europe, and Asia for the nine months ended September 30, 2018 represented 82%, 9%, and 9%, respectively, of our total revenue as compared to 23%, 13%, and 64%, respectively, for the nine months ended September 30, 2017. The increase in revenue attributable to North America as a percentage of total revenue was due mainly to increased revenue from mobility customers, partially offset by decreased revenues from gaming and medical customers in the region. The decrease in revenue attributable to Europe as a percentage of total revenue was caused primarily by lower revenues from gaming and medical customers, partially offset by increased revenue from automotive customers in the region. The decrease in revenue attributable to Asia as a percentage of total revenue was related to declining revenues from mobility, gaming and automotive customers in the region.

OPERATING EXPENSES



	September 30,						Change			% Change
(in thousands)	2018			2017

Three months ended
Sales and marketing	$	1,664		$	3,376		$	(1,712	)	(51	)%
% of total revenue	19		%	28		%	(9		)%
Research and development	$	2,110		$	3,116		$	(1,006	)	(32	)%
% of total revenue	25		%	26		%	(1		)%
General and administrative	$	9,880		$	10,753		$	(873	)	(8	)%
% of total revenue	116		%	91		%	25		%

Nine months ended
Sales and marketing	$	4,454		10,142			$	(5,688	)	(56	)%
% of total revenue	4		%	36		%	(32		)%
Research and development	$	7,152		9,138			$	(1,986	)	(22	)%
% of total revenue	7		%	32		%	(25		)%
General and administrative	$	31,669		41,885			$	(10,216	)	(24	)%
% of total revenue	32		%	149		%	(117		)%

Sales and Marketing — Our sales and marketing expenses are composed primarily of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and an allocation of facilities costs. Sales and marketing expenses decreased $1.7 million, or 51%, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, including $1.2 million decrease in compensation, benefits, and other related costs due to reduced headcount following our restructuring actions in December 2017, $211,000 decrease in travel costs, and $161,000 decrease in marketing and advertising costs. Sales and marketing expenses decreased $5.7 million, or 56%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, including $3.9 million decrease in compensation, benefits, and other related costs due to reduced headcount following our restructuring actions in December 2017, $777,000 decrease in marketing and advertising costs, and $704,000 decrease in travel costs. We believe that continued investment in sales and marketing is critical to our future success, and we expect to continue making targeted investments to expand market acceptance for our touch technologies across the markets we serve.

Research and Development — Our research and development expenses are composed primarily of employee compensation and benefits, consulting fees, tooling and supplies, and an allocation of facilities costs. Research and development expenses decreased $1.0 million, or 32%, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease was primarily related to $382,000 decrease in compensation, benefits, and other related costs due to reduced headcount, $363,000 decrease in outside services reflecting redirected development efforts, and $118,000 decrease in facilities costs. Research and development expenses decreased $2.0 million, or 22%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was primarily related to $824,000 decrease in compensation, benefits, and other related costs due to reduced headcount, $617,000 decrease in outside services

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reflecting redirected development efforts, $278,000 decrease in facilities costs, and $214,000 decrease in travel costs. We believe that continued investment in research and development is critical to our future success, and we expect to continue making targeted investments in areas of research and technology development to support future growth in key markets.

General and Administrative — Our general and administrative expenses are composed primarily of employee compensation and benefits; legal and professional fees; external legal costs for patents; office supplies; travel; and an allocation of facilities costs. General and administrative expenses decreased $873,000, or 8%, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease was primarily related to $1.4 million decrease in legal expenses, partially offset by $555,000 increase in compensation, benefits, and other related costs mainly due to higher stock compensation expense. The decrease in legal expenses was primarily due to $2.4 million decrease in litigation expense relating to ongoing proceedings including our recently settled and concluded litigation against Apple and AT&T Mobility and Fitbit, partially offset by increases of $567,000 in general legal services, $322,000 in patent related legal, filing, and maintenance costs, and $140,000 in licensing fee expenses. General and administrative expenses decreased $10.2 million, or 24%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was mainly related to $11.5 million decrease in legal expenses and $256,000 decrease in outside service costs, partially offset by $1.5 million increase in compensation, benefits, and other related costs mainly due to higher stock compensation expense. The decreased in legal expenses was primarily due to $13.8 million decrease in litigation expense relating to ongoing proceedings including our recently settled and concluded litigation against Apple and AT&T Mobility and Fitbit, and $1.1 million decrease in licensing fee expenses, partially offset by increases of $1.8 million in patent related legal, filing, and maintenance costs, and $1.7 million in general legal services. Our general and administrative expenses will continue to be significant in 2018 as we manage our business and strategic opportunities and continue to file, maintain, license, and enforce our IP and contractual rights, and defend any lawsuits brought against us or that we initiate against others to enforce our IP or contractual rights.

PROVISION FOR TAXES



	September 30,						Change			% Change
(in thousands)	2018			2017

Three months ended:
Provision for income taxes	$	(22	)	$	(44	)	$	22		(50	)%
Loss from continuing operations before provision for income taxes	(4,618		)	(5,243		)
Effective tax rate	(0.5		)%	(0.8		)%

Nine months ended
Provision for income taxes	(313		)	(295		)	$	(18	)	6	%
Income (loss) from continuing operations before provision for income taxes	57,798			(32,702		)
Effective tax rate	0.5		%	(0.9		)%

The provision for income tax for the three and nine months ended September 30, 2018 resulted primarily from estimated foreign taxes included in the calculation of the effective tax rate. We continue to carry a full valuation allowance on our federal deferred tax assets. As a result, no provision for U.S. sourced income was included in the calculation, the primary reason for the difference between the statutory tax rate and effective tax rate. The provision for income tax for the three and nine months ended September 30, 2017 resulted primarily from estimated foreign taxes and foreign withholding tax expense.

The year-over-year change in provision for income taxes resulted primarily from the change in mix of income (loss) from continuing operations across various tax jurisdictions, including the United States.

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reconsider the validity of the cost sharing regulations at issue. The regulations at issue require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as “qualified cost-sharing arrangements” and to avoid potential IRS adjustment. The Company will evaluate the implications of the final decision, when rendered.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. The Act includes many provisions; including reducing the US federal corporate income tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. We have made a reasonable estimate of the effects of the Act as of September 30, 2018, in accordance with guidance in SAB 118. We will continue to monitor the estimated impacts as additional guidance is released. Any adjustments recorded to the provisional amounts through fourth quarter 2018 will be included in net income as an adjustment to tax expense.

We continue to maintain a valuation allowance of $37.6 million against certain of our deferred tax assets, including all federal, state, and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset balance due to historical losses, the variability of operating results, and uncertainty regarding near term projected results. In the event that we determine the deferred tax assets are realizable based on an assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made. The valuation allowance does not impact our ability to utilize the underlying net operating loss carryforwards.

We also maintain liabilities for uncertain tax positions. As of September 30, 2018, we had unrecognized tax benefits under ASC 740 “Income Taxes” of approximately $4.8 million and applicable interest of $16,000. The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $405,000.

LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents, and short-term investments consist primarily of money market funds and treasury bills and government agency securities. All of our short-term investments are classified as available-for-sale. 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 September 30, 2018, our cash, cash equivalents, and short-term investments totaled $130.5 million, an increase of $84.0 million from $46.5 million on December 31, 2017.

Cash provided by (used in) operating activities

Net cash provided by operating activities was $75.5 million during the nine months ended September 30, 2018 compared to $42.1 million cash used in operating activities during the nine months ended September 30, 2017. The $117.6 million change was primarily related to $90.5 million increase from $33.0 million net loss for the nine months ended September 30, 2017 to $57.5 million net income for the nine months ended September 30, 2018 and $26.8 million increase in the year-over-year change in deferred revenue, partially offset by $3.8 million increase in the year-over-year change in other non-current assets. The increases in the year-over-year changes in deferred revenue and other non-current assets primarily reflected the effect of the adoption of ASC 606 on January 1, 2018. Cash provided by operating activities was also affected by an increase in non-cash charges of $2.2 million primarily related to higher stock-based compensation expense incurred for the nine months ended September 30, 2018 compared to the same period last year.

Cash provided by investing activities

Net cash provided by investing activities during the nine months ended September 30, 2018 was $4.3 million, an increase of $172,000 compared to $4.1 million cash provided by investing activities during the nine months ended September 30, 2017. Net cash provided by investing activities during the current period consisted of maturities of short-term investments of $22.0 million, partially offset by purchases of short-term investments of $17.7 million and purchases of property, plant, and equipme