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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For the quarterly period ended
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
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.
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).
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of October 14, 2022,
IMPINJ, INC.
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
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Page |
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3 |
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Item 1. |
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4 |
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4 |
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5 |
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6 |
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7 |
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Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) |
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8 |
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9 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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33 |
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Item 4. |
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34 |
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Item 1. |
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35 |
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Item 1A. |
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35 |
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Item 2. |
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56 |
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Item 3. |
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57 |
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Item 4. |
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57 |
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Item 5. |
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57 |
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Item 6. |
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58 |
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59 |
2
Risk Factor Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report captioned “Risk
Factors.” These risks include the following:
3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
IMPINJ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value, unaudited)
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September 30, 2022 |
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December 31, 2021 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Short-term investments |
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Accounts receivable, net |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Long-term investments |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Other non-current assets |
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Goodwill |
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Total assets |
$ |
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$ |
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Liabilities and stockholders' equity (deficit): |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued compensation and employee related benefits |
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Accrued and other current liabilities |
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Current portion of operating lease liabilities |
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Restructuring liabilities |
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Current portion of long-term debt |
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— |
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Current portion of deferred revenue |
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Total current liabilities |
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Long-term debt, net of current portion |
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Operating lease liabilities, net of current portion |
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Other long-term liabilities |
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Deferred revenue, net of current portion |
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Total liabilities |
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(Note 5) |
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Stockholders' equity (deficit): |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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( |
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( |
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Total stockholders' equity (deficit) |
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( |
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Total liabilities and stockholders' equity (deficit) |
$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
4
IMPINJ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Research and development |
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Sales and marketing |
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General and administrative |
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Restructuring costs |
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— |
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— |
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— |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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Other income, net |
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Induced conversion expense |
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— |
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— |
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( |
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— |
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Interest expense |
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( |
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( |
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( |
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( |
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Loss before income taxes |
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( |
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( |
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( |
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Income tax expense |
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( |
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( |
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( |
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( |
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Net loss |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per share — basic and diluted |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Weighted-average shares outstanding — basic and diluted |
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See accompanying notes to condensed consolidated financial statements.
5
IMPINJ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net loss |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive loss, net of tax: |
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Unrealized loss on investments |
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( |
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( |
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( |
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Total other comprehensive loss |
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( |
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( |
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( |
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Comprehensive loss |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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See accompanying notes to condensed consolidated financial statements.
6
IMPINJ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
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Nine Months Ended September 30, |
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2022 |
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2021 |
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Operating activities: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation |
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Stock-based compensation |
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Accretion of discount or amortization of premium on investments |
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Amortization of debt issuance costs |
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Induced conversion expense related to convertible notes |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Inventory |
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( |
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Prepaid expenses and other assets |
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( |
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Accounts payable |
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Accrued compensation and employee related benefits |
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Accrued and other liabilities |
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Operating lease right-of-use assets |
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Operating lease liabilities |
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( |
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( |
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Restructuring liabilities |
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( |
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Deferred revenue |
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( |
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Net cash provided by operating activities |
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Investing activities: |
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Purchases of investments |
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( |
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Proceeds from maturities of investments |
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Purchases of property and equipment |
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( |
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Net cash provided by (used in) investing activities |
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( |
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Financing activities: |
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Principal payments on finance lease obligations |
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— |
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( |
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Proceeds from exercise of stock options and employee stock purchase plan |
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Payment of 2019 Notes |
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( |
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— |
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Net cash provided by (used in) financing activities |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents |
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Beginning of period |
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End of period |
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$ |
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$ |
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Supplemental disclosure of cashflow information: |
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Cash paid for interest |
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$ |
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$ |
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Purchases of property and equipment not yet paid |
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See accompanying notes to condensed consolidated financial statements.
7
IMPINJ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, unaudited)
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Equity (Deficit) |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Issuance of common stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Issuance of common stock |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Induced conversion on 2019 Notes |
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— |
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— |
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( |
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— |
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— |
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( |
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Balance at June 30, 2022 |
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( |
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( |
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( |
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Issuance of common stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance at September 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Equity (Deficit) |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Cumulative-effect adjustment from adoption of ASU 2020-06 |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of common stock |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at March 31, 2021 |
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|
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
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Issuance of common stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Other comprehensive income |
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— |
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— |
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— |
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— |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Issuance of common stock |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
See accompanying notes to condensed consolidated financial statements.
8
IMPINJ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include Impinj, Inc. and its wholly owned subsidiaries. We have eliminated intercompany balances and transactions in consolidation. We have prepared these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021 included in Impinj, Inc.’s Annual Report on Form 10-K, which was filed with the SEC on February 14, 2022. The condensed consolidated balance sheet as of December 31, 2021, included herein, was derived from the audited consolidated financial statements of Impinj, Inc.
The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary to state fairly our financial position, results of operations, and our cash flows for the periods presented. Interim results are not necessarily indicative of the results for a full year or for any other future period.
Use of Estimates
Preparing financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, sales incentives, estimates to complete development contracts, deferred revenue, inventory excess and obsolescence, income taxes, determination of the fair value of stock awards and compensation and employee-related benefits. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.
Recently Adopted Accounting Standards
In August 2020, the FASB issued guidance on debt with conversion and other options, or ASU 2020-06. This guidance eliminates the beneficial- and cash-conversion accounting models for convertible instruments and amends the derivative scope exception for contracts in an entity’s own equity. Additionally, this guidance requires the application of the “if-converted” method to calculate the impact of convertible instruments on diluted earnings per share. We
The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022, and 2021, are presented under ASU 2020-06.
Recently Issued Accounting Standards Not Yet Adopted
Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not have, or are not expected to have, a material impact on our present or future consolidated financial statements.
9
Note 2. Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
We applied the following methods and assumptions in estimating our fair value measurements:
Cash Equivalents — Cash equivalents consist of highly liquid investments, including money market funds with original maturities of less than three months at the acquisition date. We record the fair value measurement of these assets based on quoted market prices in active markets.
Investments — Our investments comprise fixed income securities, which include U.S. government agency securities, corporate notes and bonds, commercial paper, treasury bills and asset-backed securities. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Long-term Debt — See Note 6 for the carrying amount and estimated fair value of the Notes.
The following table presents the balances of assets measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
||||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Money market funds |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||
Total cash equivalents |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agency securities |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Corporate notes and bonds |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Commercial paper |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Treasury bill |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Yankee bonds |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||
Asset-backed securities |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Total short-term investments |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agency securities |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Total long-term investments |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
We did
10
The following tables present the cost or amortized cost, gross unrealized gains, gross unrealized losses and total estimated fair value of our financial assets as of the dates presented (in thousands):
|
September 30, 2022 |
|
|||||||||||||
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
Total Estimated |
|
||||
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
Description: |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
U.S. government agency securities |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate notes and bonds |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Yankee bonds |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
||||
Treasury bill |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
December 31, 2021 |
|
|||||||||||||
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
Total Estimated |
|
||||
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
Description: |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
U.S. government agency securities |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate notes and bonds |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
||||
Treasury bill |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Marketable securities in a continuous loss position for less than 12 months had an estimated fair value of $
In making the determination as to whether the unrealized loss is other-than-temporary, for the periods presented, we have concluded that there is no plan to sell the securities nor is it more likely than not that we would be required to sell the securities before their anticipated recovery.
11
Note 3. Inventory
The following table presents the detail of inventories as of the dates presented (in thousands):
|
|
|
|
|
|
|
||
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total inventory |
|
$ |
|
|
$ |
|
||
For the three and nine months ended September 30, 2022, sales of fully reserved inventory had an immaterial impact on net gross margin. For the three and nine months ended September 30, 2021, sales of fully reserved inventory had a favorable net gross margin impact of
Note 4. Stock-Based Awards
Stock Options
The following table summarizes stock option activity for the nine months ended September 30, 2022 (in thousands):
|
|
Number of |
|
|
Outstanding at December 31, 2021 |
|
|
|
|
Granted |
|
|
— |
|
Exercised |
|
|
( |
) |
Forfeited or expired |
|
|
( |
) |
Outstanding at September 30, 2022 |
|
|
|
|
Vested and exercisable at September 30, 2022 |
|
|
|
|
Restricted Stock Units
We grant (i) RSUs with a service condition, (ii) RSUs with performance and service conditions (“PSUs”), and (iii) RSUs with market and service conditions (“MSUs”) as further explained below.
We historically paid annual bonuses to our senior executives and other bonus-eligible employees with PSUs. In fiscal year 2022, we will pay employees’ bonus half with cash and half with PSUs. The number of annual PSUs that will ultimately vest depends on us attaining financial metrics for the year as well as on an employee’s continued employment through the vesting date. The compensation committee and board of directors typically certify PSU attainment in the first quarter of each year.
On April 12, 2021 and May 20, 2021, we granted a total of
On March 23, 2022 we granted a total of
12
The following table summarizes activity for RSUs, PSUs and MSUs for the nine months ended September 30, 2022 (in thousands):
|
|
|
Number of Underlying Shares |
|
|||||||||
|
|
|
RSUs |
|
|
MSUs |
|
|
PSUs |
|
|||
Outstanding at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|
|||
Vested |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Forfeited |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Outstanding at September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|||
We recorded $
Stock-Based Compensation Expense
The following table presents stock-based compensation expense included in our condensed consolidated statements of operations for the periods presented (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cost of revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Research and development expense |
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing expense |
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
|
||||
Total stock-based compensation expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
13
Note 5. Commitments and Contingencies
For information on our commitments and contingencies, see Part II, Item 8 (Financial Statements and Supplementary Data, Note 11. Commitments and Contingencies) of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our commitments and contingencies, outside of the ordinary course of our business, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, except for “Obligations with Third-Parties” and “Litigation” as discussed below.
Obligations with Third Parties
We have certain non-cancelable obligations, which include obligations with third-party manufacturers who manufacture our products. We are committed to purchase $
Litigation
From time to time, we are subject to various legal proceedings or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of September 30, 2022 and December 31, 2021, we did
Patent Infringement Claims and Counterclaims
Impinj Patent Infringement Claims Against NXP in California
On June 6, 2019, we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP Semiconductors N.V., in the U.S. District Court for the Northern District of California, or the Court. The original complaint alleged that certain NXP integrated circuit products infringe
In February 2020, NXP filed inter partes review, or IPR, petitions with the Patent Trial and Appeal Board for the U.S. Patent and Trademark Office, or PTAB, against
On September 24, 2020, the Court lifted the stay on
On September 3, 2021, the Court lifted the stay on the other
The Court has issued a schedule that provides for, among other things, a trial for all four patents in suit beginning on June 5, 2023. The Court has also scheduled a summary judgment hearing on January 31, 2023, for any summary judgment motions filed by the parties.
NXP Patent Infringement Claims Against Impinj in Washington
On October 4, 2019, NXP USA, Inc. and NXP B.V., filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges that certain of our products infringe
14
On December 11, 2020, we also moved to stay the case with respect to
On March 9, 2021, we moved for summary judgment of noninfringement on the
Impinj Patent Infringement Claims Against NXP in Texas
On May 25, 2021, we filed a new patent infringement lawsuit against NXP USA, Inc. in the United States District Court for the Western District of Texas (Waco), asserting that NXP has infringed
On July 26, 2021, NXP USA filed an answer to our complaint and counterclaimed that we infringe
The Court issued a claim construction order on February 10, 2022. The Court has also ordered that that the initial trial will involve
In addition, we filed petitions for reexamination on
NXP Patent Infringement Claims Against Impinj in China
On December 7, 2020, Impinj Radio Frequency Technology (Shanghai) Co., Ltd., or Impinj Shanghai, was served with patent infringement lawsuits filed in the Intellectual Property Court in Shanghai, China, or Shanghai Intellectual Property Court, in which NXP asserts that certain of our products infringe
15
Note 6. Long-term debt
Convertible Senior Notes
In December 2019, we issued $
The following table presents the outstanding principal amount and carrying value of the Notes as of the dates indicated (in thousands):
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
|
Principal Amount |
|
|
Unamortized debt issuance costs |
|
|
Net Carrying Amount |
|
|
Principal Amount |
|
|
Unamortized debt issuance costs |
|
|
Net Carrying Amount |
|
||||||
2019 Notes (1) (2) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
2021 Notes |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Total Debt |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Short-term Debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
||
Long-term Debt |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
(1) In November 2021, we completed a privately negotiated repurchase of $ |
|
|||||||||||||||||||||||
Further details of the Notes are as follows:
Issuance |
|
Maturity Date |
|
Interest Rate |
|
First Interest Payment Date |
|
Effective Interest Rate |
|
Semi-Annual Interest Payment Dates |
|
Initial Conversion Rate per $1,000 Principal |
|
Initial Conversion Price |
|
|
Number of Shares (in millions) (1) |
|
2019 Notes |
|
|
|
|
|
|
|
$ |
|
|
N/A |
|||||||
2021 Notes |
|
|
|
|
|
|
|
$ |
|
|
||||||||
(1) The 2019 Notes were repurchased in November 2021 ($ |
||||||||||||||||||
The Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures for both (the Indentures). The total net proceeds from the Notes, after deducting initial debt issuance costs, fees and expenses, were $
Terms of the Notes
The Notes holders may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding the respective conversion dates under the following circumstances:
16
We may redeem all, or a portion of the Notes for cash, at our option, on or after November 20, 2024 (2021 Notes), if the last reported sale price of our common stock has been at least
Notes holders who convert their Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally in the event of a corporate event constituting a fundamental change (as defined in the Indenture), Notes holders may require us to repurchase all or a portion of their Notes at a repurchase price equal to
Accounting for the Notes
Prior to January 1, 2021, we separated the 2019 Notes into liability and equity components.
We determined the fair value of the liability component to be $
We allocated the 2019 Notes total issuance costs of $
Effective January 1, 2021, we early adopted ASU 2020-06 using the modified retrospective approach. As a result, we accounted for the 2019 Notes as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives. Upon adoption, we recorded a $
We accounted for the 2021 Notes issuance as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives. We presented the 2021 Notes total issuance costs of $
Interest expense related to the Notes was as follows (in thousands):
|
|
Three Months Ended September 30, 2022 |
|
|
Three Months Ended September 30, 2021 |
|
||||||||||||||
|
|
2019 Notes |
|
|
2021 Notes |
|
|
Total |
|
|
2019 Notes |
|
|
Total |
|
|||||
Amortization of debt issuance costs |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash interest expense |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest expense |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
17
|
|
Nine Months Ended September 30, 2022 |
|
|
Nine Months Ended September 30, 2021 |
|
||||||||||||||
|
|
2019 Notes |
|
|
2021 Notes |
|
|
Total |
|
|
2019 Notes |
|
|
Total |
|
|||||
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Accrued interest related to the 2021 Notes as of September 30, 2022 was $
Our estimated fair value of the 2021 Notes was $
Capped Calls
In connection with issuing the 2019 Notes, we entered into privately negotiated capped-call transactions with certain financial counterparties. The capped-call transactions remain outstanding as of September 30, 2022, even though the 2019 Notes were repurchased in November 2021 and June 2022 as detailed below. The capped-call transactions are generally designed to reduce the potential dilution to our common stock upon any conversion or settlement of convertible debt, or to offset any cash payments we are required to make in excess of the principal amount upon conversion of convertible debt, as the case may be, with such reduction or offset subject to a cap based on the cap price. If, however, the market price per share of our common stock exceeds the cap price of the capped-call transactions, then our stock would experience some dilution and/or the capped call would not fully offset the potential cash payments, in each case, to the extent the then-market price per share of our common stock exceeds the cap price. The initial cap price of the capped-call transactions is $
The capped-call transactions meet the criteria for classification in equity, are not accounted for as derivatives, and are not remeasured each reporting period. We paid $
Repurchase of the Convertible Senior Notes – 2019
In November 2021 and June 2022, we completed a privately negotiated induced conversion of $
18
Note 7. Leases
The following table presents the components of lease expense in our condensed consolidated statements of operations for the periods presented (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Operating lease costs(a) |
|
|
|
|
|
|
|
|
|
|
|
||||
Single lease costs |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
|
||||
Sublease income(b) |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total operating lease costs |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(a) Includes short-term lease costs, which are immaterial. |
|
||||||||||||||
(b) Sublease income is related to unused office space that we sublet as part of the restructuring in fiscal 2018 where we continue to have the primary obligations. |
|
||||||||||||||
The following table presents supplemental cash-flow information related to operating leases for the periods presented (in thousands):
|
Nine Months Ended September 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
||
Operating cash flows used |
$ |
|
|
$ |
|
||
Lease liabilities arising from remeasurement of right-of-use assets |
|
|
|
|
|
||
Operating leases |
$ |
— |
|
|
$ |
|
|
Lease liabilities arising from obtaining ROU assets |
|
|
|
|
|
||
Operating leases |
$ |
|
|
$ |
— |
|
|
The following table presents weighted-average remaining lease term and weighted-average discount rate related to operating leases as of the dates presented:
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Weighted-average remaining lease term (years) |
|
|
|
|
|
||
Weighted-average discount rate |
|
% |
|
|
% |
||
The following table presents future lease payments under operating leases as of September 30, 2022 (in thousands):
|
|
Operating Leases |
|
|||||||||
|
|
Lease Payments |
|
|
Sublease Income |
|
|
Net |
|
|||
2022 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
2023 |
|
|
|
|
|
( |
) |
|
|
|
||
2024 |
|
|
|
|
|
— |
|
|
|
|
||
2025 |
|
|
|
|
|
— |
|
|
|
|
||
2026 |
|
|
|
|
|
— |
|
|
|
|
||
Thereafter |
|
|
|
|
|
— |
|
|
|
|
||
Total lease payments |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Less: Imputed interest |
|
|
( |
) |
|
|
|
|
|
|
||
Present value of lease liabilities |
|
|
|
|
|
|
|
|
|
|||
Less: Current portion of lease liabilities |
|
|
|
|
|
|
|
|
|
|||
Lease liabilities, net of current portion |
|
$ |
|
|
|
|
|
|
|
|||
19
Note 8. Net Loss Per Share
Upon us adopting ASU 2020-06 using the modified retrospective transition method on January 1, 2021, we applied the “if-converted” method for calculating any potential dilutive effect of the conversion of the 2019 Notes or the 2021 Notes on diluted net loss per share for the three and nine months ended September 30, 2022 and September 30, 2021.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share for the periods presented (in thousands, except per share amounts):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average shares outstanding — basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share — basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The following table presents the outstanding shares of our common stock equivalents excluded from the computation of diluted net loss per share as of the dates presented because their effect would have been antidilutive (in thousands):
|
Three and Nine Months Ended September 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Stock options |
|
|
|
|
|
||
RSUs, MSUs, and PSUs |
|
|
|
|
|
||
Employee stock purchase plan shares |
|
|
|
|
|
||
2019 Notes |
|
— |
|
|
|
|
|
2021 Notes |
|
|
|
|
— |
|
|
Note 9. Segment Information
We have
The chief executive officer reviews information about our revenue categories, which are endpoint ICs and systems. We define systems as reader ICs, readers, gateways and software.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Endpoint ICs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Systems |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
20
Note 10. Deferred Revenue
Deferred revenue, comprising individually immaterial amounts for extended warranty, enhanced maintenance and advance payments on non-recurring engineering services contracts, represents contracted revenue that has not yet been recognized. Deferred revenue as of December 31, 2020, included a $
The following table presents the changes in deferred revenue for the periods presented (in thousands):
|
Nine Months Ended September 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Balance at beginning of period |
$ |
|
|
$ |
|
||
Deferral of revenue |
|
|
|
|
|
||
Recognition of deferred revenue |
|
( |
) |
|
|
( |
) |
Balance at end of period |
$ |
|
|
$ |
|
||
Note 11. Related-Party Transactions
We have a consulting agreement with a limited liability company owned by Cathal Phelan, a member of our board of directors, pursuant to which Mr. Phelan provides advisory and consulting services. The term of the consulting agreement began in May 2020 through December 2020, which was extended by an additional
Note 12. Restructuring
A summary of accrued restructuring costs as of September 30, 2022, is shown in the table below (in thousands):
|
|
Employee Termination Benefits |
|
|
Other Associated Costs |
|
|
Total |
|
|||
Restructuring costs incurred in 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Cash payments in 2021 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Cash payments in 2022 |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Accrued restructuring costs as of September 30, 2022 |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains certain forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about:
Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A (Risk Factors).
In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Our Business
Our vision is a boundless Internet of Things, or IoT. We are driving a future in which everyday physical items are wirelessly connected to digital counterparts, or digital twins, in the cloud, and in which businesses and people access information about an item from its digital twin. Our mission is to connect every thing. We deliver a platform that powers item-to-cloud connectivity, and on which enterprise solution providers innovate IoT whole products.
Today, we deliver the identity, location and authenticity of billions of physical items. We believe our future is extending that delivery to trillions of physical items and enabling ubiquitous access to cloud-based digital twins of those items, each storing an item’s ownership, history and links. We believe the item-to-cloud connectivity that our platform will deliver will enhance businesses efficiencies and commerce and, ultimately, improve peoples’ lives.
Our platform, which comprises multiple product families, wirelessly connects individual items and delivers data about the connected items to business and consumer applications enabled by our partner network. We link the products within our platform to deliver capabilities and performance that surpasses mix-and-match solutions built from competitor products.
We and our partners connect the items via a miniature radio chip embedded in the item or in its packaging, reading and delivering each item’s identity, location and authenticity. To date, we have enabled connectivity to more than 60 billion items, enabling businesses and consumers to derive timely information from those connected items.
Our platform uses RAIN, a type of radio-frequency identification, or RFID, technology we pioneered. We spearheaded development of the RAIN radio standard, lobbied governments to allocate frequency spectrum and cofounded the RAIN Alliance that today has more than 150 member companies. Our industry uses free spectrum in 81 countries encompassing roughly 95% of the world’s GDP and has connected many tens of billions of items to date. We believe RAIN’s capabilities – in particular, endpoint ICs with serialized identifiers, 30-foot range reading up to 1,000 items per second without line-of-sight, radio-frequency energy harvesting for battery-free operation, essentially unlimited life and, in the future, cryptographic item authentication – position RAIN to be the leading item-to-cloud connectivity technology for the IoT.
22
Factors Affecting Our Performance
Inventory Supply
From time to time, we experience inventory overages or shortages, either due to us misestimating customer or end-user demand; insufficient manufacturing capacity or product availability; market fluctuations; competitive product availability; macroeconomic fluctuations; changes in regulations or tariffs; or for a host of other reasons. These inventory dynamics can impact some or all of our products. High inventory levels can increase expenses, cause product obsolescence and/or increase reserves, negatively affecting our business. Low inventory levels can cause lengthened lead times, missed opportunities, market-share loss and/or damaged customer relationships, also negatively affecting our business. For example, in 2010 we experienced IC wafer shortages relative to our needs because of high worldwide demand for foundry capacity. These shortages prevented us from fully meeting customer demand and, in some cases, caused customers to cancel orders, qualify alternative suppliers or purchase from our competitors.
In 2020, during the Covid-19 economic downturn, we built endpoint IC inventory. Beginning in fourth-quarter 2020, demand for all our endpoint ICs increased dramatically. Worldwide wafer demand also increased dramatically, leading to wafer shortfalls in many industries, including ours. In first-quarter 2021, we consumed the inventory we built in 2020 at a pace that exceeded our first-quarter 2021 supply and post-processing capacity. In the second and third quarters, we moderated our sales and inventory burndown, stretching our IC supply but constraining our ability to fully capitalize on the increasing endpoint IC demand, while we also expanded and matured our post-processing capacity. Despite that moderation, by end of third-quarter 2021 we had mostly consumed our prebuilt inventory. Demand for our endpoint ICs continued to exceed our ability to supply in fourth-quarter 2021 and the first three quarters of 2022, and we expect it to continue in fourth-quarter 2022 and at least into first-half 2023.
Our foundry partner has signaled improving 200mm wafer availability, heading into 2023, which will allow us to modestly increase endpoint IC shipments in fourth-quarter 2022 and again in first-quarter 2023. However, because our primary market demand and more than two thirds of our post-processing capacity is focused on 300mm wafers, we need 300mm wafer upside, and our foundry partner has signaled continued tight 300mm availability in our process node into 2023, preventing us from fully capitalizing on our demand. Although we believe they continue to prioritize us for upside 300mm wafers, absent a significantly higher 2023 300mm wafer allocation over 2022, we will be unable to meet our 2023 endpoint IC demand, potentially by a significant amount. The consequent mix shift back to older generation 200mm products, combined with the ongoing 300mm wafer shortfall, may cause us to lose market share if our competitors are able to deliver more endpoint ICs and/or at lower pricing than we can. Our insufficient wafer supply, the 200mm vs 300mm supply imbalance, and the lower performance and lesser features in the 200mm products combined with higher costs may negatively impact our operating results and prospects.
In fourth-quarter 2021 and in the first three quarters of 2022 we have also been unable to obtain enough reader components to meet reader market demand. We expect that shortfall to persist into 2023. For reader ICs, we previously experienced long packaging lead times for our Indy reader ICs and testing delays for our new E-family. The Indy lead times stabilized by the end of first-half 2022. We expect the E-family product availability to stabilize by the end of fourth-quarter 2022; however, strong E-family demand may still outpace supply. We also saw cost increases for all systems products, which caused us to raise prices and potentially negatively impact market competitiveness. Overall, the supply, packaging and test shortfalls, as well as cost increases, may decrease sales and cause market-share losses if our customers buy competing products over ours, or choose to not deploy at all, negatively impacting our operating results and prospects.
Covid-19
We are actively monitoring and mitigating the impacts of Covid-19 in all aspects of our business, including for our employees, suppliers, partners and end users.
In 2021, as the worldwide economy began to recover from the downturn caused by Covid-19, demand for all our products increased. Unfortunately, at the same time, we experienced supply constraints and higher costs that limited our ability to capitalize on the increased demand, as discussed above.
Given the ongoing uncertainty over Covid-19’s epidemiological, economic and operational impacts we cannot reasonably estimate the extent or duration of Covid-19’s continuing impact on our business. The extent to which Covid-19 impacts our future results will depend on developments that are inherently unpredictable, including the emergence of new Covid-19 variants and actions we and others take in response to Covid-19.
For more information on Covid-19’s impact on our business, please refer to Part I, Item 1A (Risk Factors) of this report.
23
Investing for Growth
We have invested in, and plan to continue investing in, research and development to enhance and extend our platform, including enhancing existing products, introducing new products and tightening the platform linkages between our products. Although we sell our products into many end markets, relying significantly on our partner channel, we are today focusing particular attention on retail self-checkout and loss prevention and supply chain and logistics, or SC&L, portal and conveyor opportunities.
Most of our investments precede any sales benefits from the investments and, in some instances, we may never see any benefits if the market is not receptive to our product or sales approach, product development is late or fails, or for other causes. We sometimes enter into arrangements with end users, suppliers or channel partners for them to fund a portion of our investment, but even in those instances the results of our investments remain uncertain, and in some instances, we may be required to refund the investment if the development is unsuccessful or the market opportunity fails to materialize. In some instances, we delay or cancel investments without or until we obtain such funding. The outcome of an investment is almost always uncertain, and if our results do not meet expectations then our operating results, profitability and stock price may be adversely affected.
While our long-term plan to invest for growth remains unchanged, Covid-19 has introduced new uncertainty to our business. We will continue to monitor the impacts of Covid-19 on our supply chain, market and opportunities and adjust our investment strategy as appropriate.
Market Adoption
Our financial performance depends on the pace and scope of end-user adoption of our products in multiple industries, but especially in retail apparel, which is our largest market. Covid-19 had a materially adverse impact on the retail industry. Covid-19 may also accelerate an ongoing shift in consumer shopping away from physical stores, which could adversely affect demand for endpoint ICs by retailers. The extent to which Covid-19 materially impacts the retail industry is unclear, as is the extent to which it will impact our product sales. Other industries that are potential future drivers of RAIN adoption have also been impacted by Covid-19, although the long-term impact on our business is unclear. For example, the aviation industry, which had proposed widespread luggage tagging, has been negatively impacted by Covid-19. By contrast, SC&L has experienced increased demand which could positively impact our financial performance if SC&L further adopts RAIN.
The pace and scope of end-user adoption, slowed in 2020 by Covid-19, remains uncertain today, potentially causing large fluctuations in our operating results. For a first historical example of the potential impact of those fluctuations, in 2015 and 2016 several major retailers commenced deployments that significantly increased our endpoint IC sales, lengthening our product lead times. In 2017 we invested in endpoint IC inventory to reduce those lead times, but in second-half 2017 the endpoint IC growth rate slowed, we believe due primarily to delays in new deployments at several large retailers. That decelerating growth rate engendered an endpoint IC channel inventory correction that negatively impacted our operating results for several subsequent quarters. For a second historical example, in late 2018 and in 2019 a large North American logistics provider purchased and deployed significant quantities of our gateways, positively impacting our operating results for several quarters, then transitioned to an operational phase in first-half 2020, reducing our gateway sales. For a third historical example, in first-quarter 2020 we saw high endpoint IC demand as our inlay partners built inventory ahead of Covid-19, followed by several quarters of depressed demand as those same inlay partners consumed that inventory, followed by high demand in 2021 as those same inlay partners deliver into recovering end-user opportunities.
Given the uncertainties in our market, we cannot be certain that RAIN adoption will continue; that we will have appropriate product inventory; that we will not experience future product inventory shortfalls or overages; or that Covid-19 will not materially impact our business going forward. We also cannot be certain that we will be able to maintain or grow our market share for any of our products, whether because of insufficient inventory, Covid-19, competitors copying our products, insufficient wafer or other product supply, competition generally or for a host of other reasons, many of which are outside our control.
Regardless of the uneven pace of retail, SC&L and other industry adoption, we believe the underlying, long-term trend is continued RAIN adoption and as a result we have continued investing in new products. In our endpoint IC business, in 2020 we introduced our new Impinj M700, which offers significant performance advantages over other endpoint ICs on the market and which we believe will foster adoption. In our systems business, in 2020 we introduced our new Impinj R700 reader and in 2021 our new Impinj E-family reader ICs, which likewise offer significant performance advantages over other readers and reader ICs on the market and which we believe will also foster adoption. Market adoption could be impacted by product availability. See further discussion of product availability under “Inventory Supply”.
24
We sell our products through partners and distributors and have limited ability to determine end-user demand. Consequently, we may incorrectly forecast that demand or not identify market shifts in a timely fashion, potentially affecting our business adversely. If RAIN market adoption, and adoption of our products specifically, does not meet our expectations or if we are unable to meet partner or end-user volume or performance expectations, because of the impact of Covid-19, recovering demand, or otherwise, then our operating results and growth prospects will be adversely affected. If we reduce prices to win opportunities, then our gross margins may be negatively affected. In contrast, if our endpoint IC, reader IC, reader or gateway sales exceed expectations, then our revenue and profitability may be positively affected.
Timing and Complexity of End Customer Deployments
From 2010 to 2021, our endpoint IC sales volumes increased at a compounded annual growth rate of 27%. However, the pace has been uneven and unpredictable. For example, our endpoint IC unit sales volumes increased significantly in 2016, declined in second-half 2017 and in first-half 2018, returned to growth in second-half 2018 and in 2019 (the latter albeit not at the same pace as in 2016), declined again in second- and third-quarter 2020 due to Covid-19, and recovered in fourth-quarter 2020, in 2021 and in the first three quarters of 2022. We expect short-term demand to remain unpredictable in scope and timing. Longer term, we believe our endpoint IC opportunity will continue to grow, but we cannot predict whether historical annual growth rates are indicative of the pace of future growth.
Our systems business, at least for our readers and gateways, relies disproportionally on large-scale deployments at discrete end users. The timing of those large deployments causes large variability in our systems revenue. For example, we generated 14% of total 2019 revenue from a large North American SC&L provider in connection with a project-based gateway deployment. We did not have comparable new project-based revenue in 2020. As another example, in second-quarter 2021, we generated 13% of our quarterly revenue from a project-based gateway deployment for RAIN-based loss-prevention at a large Europe-based global retailer.
Finally, although we promote our platform as an integrated offering, we sell our products individually, and end users often use only certain of our products. For any given end-user solution, whether an end user chooses to deploy our entire platform or only a portion will also affect our operating results.
Average Selling Price
Our product average selling prices, or ASPs, fluctuate based on competitive pressures and the discounting we offer to win opportunities, but generally decline over time. Historically, we have been able to compensate these ASP declines by reducing the per-unit cost of most of our products, by reducing supplier costs and implementing manufacturing and quality improvements, as well as by introducing newer and lower-cost products, but the timing of these cost reductions and new-product introductions fluctuates and may not materialize in any given quarter or year. In second-half 2021, due to wafer and component supply shortfalls at many of our suppliers, we began experiencing increasing rather than decreasing costs for both endpoint ICs and systems. In fourth-quarter 2021, our foundry partner increased our wafer pricing and we began raising prices to offset the impact of those increased costs. Many of our vendors and subcontractors have signaled future price increases, including our wafer foundry partner who has signaled another round of price increases in first-quarter 2023, although the magnitude of these increases is currently uncertain. Such increases, if or when they occur, could cause us to pass the higher costs to our customers. If we are unable to successfully increase our prices or if our customers choose competitors’ products due to our higher prices, then our product margins, operating results or both may suffer. In the near term, we expect margins to be volatile based on product mix and the timing of our price changes.
Seasonality
We typically renegotiate pricing with most of our endpoint IC OEMs with an effective date of the first quarter of the calendar year, reducing both revenue and gross margins in the first quarter compared to prior periods. Historically, the impact tends to decline in subsequent quarters as we reduce costs and, to the extent we can migrate our customers to newer, lower-cost products, adjust product mix. Endpoint IC volumes also tend to be historically lower in the fourth quarter than in the third quarter. We will not see these historical trends hold in 2022 and may not see them in 2023 due to the price increases, ongoing demand and supply constraints noted above.
System sales tend to be stronger in the fourth quarter of the calendar year, and less strong in the first quarter. We believe this seasonality is due to the availability of residual funding for capital expenditures prior to the end of many customers’ fiscal years. Like for our endpoint ICs, we may not see these historical trends hold in 2022 due to the price increases, ongoing demand and supply constraints noted above.
25
While, over the longer term, we expect these seasonal trends to continue, quarter-to-quarter variability in our revenue can be caused by a number of factors including uncertainty in demand and supply, the timing of large deployments, competitor product availability as well as supply constraints, any or all of which can mask seasonality in any given period. These risks and uncertainties, as well as other risks and uncertainties, including but not limited to the impacts of Covid-19, can cause our actual results to differ significantly from our expectations, as described in greater detail in the sections of this report captioned “—Covid-19” and in Part I, Item 1A (Risk Factors).
Results of Operations
The following table presents our results of operations for the periods indicated:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Revenue |
|
$ |
68,270 |
|
|
$ |
45,193 |
|
|
$ |
23,077 |
|
|
$ |
181,210 |
|
|
$ |
137,709 |
|
|
$ |
43,501 |
|
Gross profit |
|
$ |
37,435 |
|
|
$ |
23,013 |
|
|
$ |
14,422 |
|
|
$ |
97,716 |
|
|
$ |
69,771 |
|
|
$ |
27,945 |
|
Gross margin |
|
|
54.8 |
% |
|
|
50.9 |
% |
|
|
3.9 |
% |
|
|
53.9 |
% |
|
|
50.7 |
% |
|
|
3.2 |
% |
Loss from operations |
|
$ |
(1,744 |
) |
|
$ |
(12,372 |
) |
|
$ |
10,628 |
|
|
$ |
(19,535 |
) |
|
$ |
(29,561 |
) |
|
$ |
10,026 |
|
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Revenue and gross profit increased, due primarily to higher endpoint IC and systems revenue compared to the prior year. The endpoint IC increase was driven by higher ASP and shipment volumes. The systems increase was driven by volume increases in gateways and reader ICs. Gross margin increased, due primarily to higher product margin, offset by reduced sales of fully reserved inventory. Loss from operations decreased from the prior period, with increased gross profit partially offset by increased operating expenses. The operating-expense increase was due primarily to higher research and development, sales and marketing and general and administrative personnel costs; infrastructure costs; and non-settlement-related legal fees slightly offset by a decrease in stock-based compensation.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Revenue and gross profit increased, due primarily to higher endpoint IC and systems revenue compared to the prior year. The endpoint IC increase was primarily driven by higher ASP. Overall, shipment volumes were comparable to those of the prior year period; however, the prior year's shipment volumes included substantially more sales of fully reserved inventory. The systems increase was driven by volume and ASP increases in reader and reader ICs. Gross margin increased, due primarily to increased product margins, offset by reduced sales of fully reserved inventory and higher indirect costs. Loss from operations decreased from the prior period, with increased gross profit partially offset by increased operating expenses. The operating-expense increase was due primarily to higher research and development, sales and marketing and general and administrative personnel costs; non-settlement-related legal fees, stock-based compensation expense; infrastructure costs; product-development costs; and marketing and advertising costs.
Revenue
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Endpoint ICs |
|
$ |
51,155 |
|
|
$ |
31,960 |
|
|
$ |
19,195 |
|
|
$ |
132,804 |
|
|
$ |
100,826 |
|
|
$ |
31,978 |
|
Systems |
|
|
17,115 |
|
|
|
13,233 |
|
|
|
3,882 |
|
|
|
48,406 |
|
|
|
36,883 |
|
|
|
11,523 |
|
Total revenue |
|
$ |
68,270 |
|
|
$ |
45,193 |
|
|
$ |
23,077 |
|
|
$ |
181,210 |
|
|
$ |
137,709 |
|
|
$ |
43,501 |
|
We currently derive substantially all our revenue from sales of endpoint ICs, reader ICs, readers and gateways. We sell our endpoint ICs primarily to inlay manufacturers; our reader ICs primarily to OEMs and ODMs through distributors; and our readers and gateways to value-added resellers, or VARs, and system integrators, or SIs, primarily through distributors. We expect endpoint IC sales to represent the majority of our revenue for the foreseeable future.
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Endpoint IC revenue increased $19.2 million, due primarily to a $14.7 million increase due to higher ASPs and a $4.5 million increase due to higher shipment volumes. The ASP increase was due primarily to product mix, with a higher contribution from industrial and specialty ICs, as well as to price increases that we implemented in fourth-quarter 2021.
Systems revenue increased $3.9 million, due primarily to increases of $2.9 million in gateway revenue and $2.1 million in reader IC revenue, offset by a $1.1 million decrease in reader revenue. The increased gateway and reader IC revenue was due to increased shipment volumes. The decreased reader revenue was due to decreased shipment volumes offset by higher ASPs.
26
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Endpoint IC revenue increased $32.0 million, due primarily to a $31.8 million increase due to higher ASPs. The ASP increase was due primarily to product mix, with a higher contribution from industrial and specialty ICs, as well as to price increases that we implemented in fourth-quarter 2021.
Systems revenue increased $11.5 million, due primarily to increases of $6.3 million in reader IC revenue and $4.9 million in reader revenue. The increase in reader and reader IC revenue was due to increased shipment volumes as well as higher ASPs.
For more information, see the sections captioned “—Factors Affecting Our Performance—Covid-19” and “Risk Factors—Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our financial position, results of operations, cash flows and business prospects are uncertain.”
Gross Profit and Gross Margin
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Cost of revenue |
|
$ |
30,835 |
|
|
$ |
22,180 |
|
|
$ |
8,655 |
|
|
$ |
83,494 |
|
|
$ |
67,938 |
|
|
$ |
15,556 |
|
Gross profit |
|
$ |
37,435 |
|
|
$ |
23,013 |
|
|
$ |
14,422 |
|
|
$ |
97,716 |
|
|
$ |
69,771 |
|
|
$ |
27,945 |
|
Gross margin |
|
|
54.8 |
% |
|
|
50.9 |
% |
|
|
3.9 |
% |
|
|
53.9 |
% |
|
|
50.7 |
% |
|
|
3.2 |
% |
Cost of revenue includes costs associated with manufacturing our endpoint ICs, reader ICs, readers and gateways, including direct materials and outsourced manufacturing costs as well as associated overhead costs such as logistics, quality control, planning and procurement. Cost of revenue also includes charges for excess and obsolescence and warranty costs. Our gross margin varies from period to period based on mix of endpoint IC and systems, underlying product margins driven by changes in ASPs or costs, as well as from inventory excess and obsolescence charges.
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Gross profit increased, due primarily to higher endpoint IC and systems revenue and higher gross margins. The higher gross margins were due primarily to higher product margin offset by reduced sales of fully reserved inventory. Product margin increased primarily due to endpoint IC margins, the result of higher contribution from industrial and specialty ICs as well as a larger mix of M700 ICs. Sales of fully reserved inventory had an immaterial gross margin impact for the three months ended September 30, 2022 compared to a favorable gross margin impact of 2.0% for the three months ended September 30, 2021.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Gross profit increased, due primarily to higher endpoint IC and systems revenue and higher gross margins. The gross margin increase was due primarily to higher product margin offset by reduced sales of fully reserved inventory and higher indirect costs. Product margin increased primarily due to endpoint IC margins, the result of higher contribution from industrial and specialty ICs and a larger mix of M700 ICs, offset by a decrease in systems margins due to less high-margin project revenue. Sales of fully reserved inventory had an immaterial gross margin impact for the nine months ended September 30, 2022 compared to a favorable gross margin impact of 1.4% for the nine months ended September 30, 2021.
Operating Expenses
Research and Development
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Research and development |
|
$ |
18,766 |
|
|
$ |
16,789 |
|
|
$ |
1,977 |
|
|
$ |
55,124 |
|
|
$ |
46,480 |
|
|
$ |
8,644 |
|
Research and development expense comprises primarily personnel expenses (salaries, benefits and other employee related costs) and stock-based compensation expense for our product-development personnel; product development costs which include external consulting and service costs, prototype materials and other new-product development costs; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs. We expect research and development expense to increase in absolute dollars in future periods as we focus on new product development and introductions.
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Research and development expense increased $2.0 million, due primarily to increases of $1.7 million in personnel expenses due to higher headcount and a change in our bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, and $349,000 in infrastructure costs from increased software costs.
27
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Research and development expense increased $8.6 million, due primarily to increases of $4.9 million in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, $1.5 million in infrastructure costs from increased software costs, $1.2 million in stock-based compensation expense primarily related to increased outstanding equity grants and $694,000 in product development costs.
Sales and Marketing
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Sales and marketing |
|
$ |
9,326 |
|
|
$ |
8,736 |
|
|
$ |
590 |
|
|
$ |
28,239 |
|
|
$ |
24,577 |
|
|
$ |
3,662 |
|
Sales and marketing expense comprises primarily personnel expenses (salaries, incentive sales compensation, or commission, benefits and other employee related costs) and stock-based compensation expense for our sales and marketing personnel; travel, advertising and promotional expenses; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs. We expect sales and marketing expense to modestly increase on an absolute dollar basis, except for incentive sales compensation which fluctuates as a function of revenue. Expenses associated with our sales and marketing activities related to marketing events requiring travel will continue to fluctuate depending on current and future Covid-19 travel restrictions.
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Sales and marketing expense increased $590,000, due primarily to increases of $1.3 million in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs offset by a decline of $764,000 in stock-based compensation expense primarily due to forfeitures.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Sales and marketing expense increased $3.7 million, due primarily to increases of $2.6 million in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, $508,000 in stock-based compensation expense primarily related to increased outstanding equity grants offset by forfeitures and $418,000 in marketing and advertising expenses.
General and Administrative
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
General and administrative |
|
$ |
11,087 |
|
|
$ |
9,860 |
|
|
$ |
1,227 |
|
|
$ |
33,888 |
|
|
$ |
27,012 |
|
|
$ |
6,876 |
|
General and administrative expense comprises primarily personnel expenses (salaries, benefits, and other employee related costs) and stock-based compensation expense for our executive, finance, human resources and information technology personnel; legal, accounting and other professional service fees; travel and insurance expense; and an allocated portion of infrastructure costs which include, occupancy, depreciation and software costs. We expect general and administrative expense to remain approximately constant on an absolute dollar basis, except for non-settlement-related legal fees which fluctuate.
Three months ended September 30, 2022 compared with three months ended September 30, 2021
General and administrative expense increased $1.2 million, due primarily to increases of $751,000 in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, and $298,000 in professional services due primarily to non-settlement-related legal fees.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
General and administrative expense increased $6.9 million, due primarily to a $3.2 million increase in non-settlement-related legal fees, $1.6 million in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, and $1.4 million in stock-based compensation expense primarily related to increased outstanding equity grants.
28
Induced Conversion Expense
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Induced conversion expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,232 |
|
|
$ |
— |
|
|
$ |
2,232 |
|
In June 2022, we repurchased the remaining $9.85 million principal amount of the 2019 Convertible Notes (“2019 Note Repurchase”). We accounted for the 2019 Notes Repurchase transaction as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20). As a result of the induced conversion, we recorded $2.2 million in induced conversion expense which is included in the Consolidated Statements of Operations for the nine months ended September 30, 2022. The induced conversion expense represents the fair value of the consideration issued upon conversion in excess of the fair value of the securities issuable under the original terms of the 2019 Convertible Notes. For further information on the 2019 Notes, please refer to Note 6 to our consolidated financial statements included elsewhere in this report.
Restructuring Costs
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Restructuring costs |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,263 |
|
|
$ |
(1,263 |
) |
On February 2, 2021, we restructured our go-to-market organization to strategically align our global sales, product, partner development and marketing teams. As part of the restructuring, we eliminated approximately seven full-time positions in our go-to-market organization, representing about 2% of our workforce. We incurred restructuring charges of $1.7 million for employee termination benefits as well as $50,000 in other associated legal costs for the year ended December 31, 2021. We substantially completed our restructuring by June 30, 2021. For further information on this restructuring, please refer to Note 12 to our condensed consolidated financial statements included elsewhere in this report.
Other Income, net
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Other income, net |
|
$ |
774 |
|
|
$ |
2 |
|
|
$ |
772 |
|
|
$ |
1,367 |
|
|
$ |
21 |
|
|
$ |
1,346 |
|
Other income, net comprises primarily interest income on our short-term investments.
Other income, net increased from the prior periods due to an increase in interest rates.
Interest Expense
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Interest expense |
|
$ |
1,205 |
|
|
$ |
526 |
|
|
$ |
679 |
|
|
$ |
3,716 |
|
|
$ |
1,576 |
|
|
$ |
2,140 |
|
Interest expense comprises primarily cash interest, amortization of debt issuance costs and debt discount on our debt.
In August 2020, the FASB issued guidance on debt with conversion and other options, or ASU 2020-06. On January 1, 2021, we adopted ASU 2020-06 using the modified retrospective transition method, accounting for the 2019 Notes on a whole-instrument basis. Our condensed consolidated financial statements for the three and nine months ended September 30, 2022 and September 30, 2021, are presented under the new standard and we no longer record amortization of debt discount.no longer record amortization of debt dis.
Three months ended September 30, 2022 compared with three months ended September 30, 2021
Interest expense increased $679,000, due primarily to us issuing the $287.5 million aggregate principal amount of the 2021 Notes in November 2021, due May 15, 2027. For further information on the 2021 Notes, please refer to Note 6 to our consolidated financial statements included elsewhere in this report.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Interest expense increased $2.1 million, due primarily to us issuing the $287.5 million aggregate principal amount of the 2021 Notes in November 2021, due May 15, 2027. For further information on the 2021 Notes, please refer to Note 6 to our consolidated financial statements included elsewhere in this report.
29
Income Tax Expense
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Income tax expense |
|
$ |
24 |
|
|
$ |
28 |
|
|
$ |
(4 |
) |
|
$ |
67 |
|
|
$ |
130 |
|
|
$ |
(63 |
) |
We are subject to federal and state income taxes in the United States and foreign jurisdictions. Income tax expense remained comparable for the periods stated above.
Non-GAAP Financial Measures
Our key non-GAAP performance measures include adjusted EBITDA and non-GAAP net income (loss), as defined below. We use adjusted EBITDA and non-GAAP net income (loss) as key measures to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operating plans. We believe these measures provide useful information for period-to-period comparisons of our business to allow investors and others to understand and evaluate our operating results in the same manner as our management and board of directors. Our presentation of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP, and our non-GAAP measures may be different from similarly termed non-GAAP measures used by other companies.
Adjusted EBITDA
We define adjusted EBITDA as net income (loss) determined in accordance with GAAP, excluding, if applicable for the periods presented, the effects of stock-based compensation; depreciation; investigation costs; restructuring costs; settlement and related costs; induced conversion expense; other income, net; interest expense; loss on debt extinguishment; and income tax benefit (expense). In fourth-quarter 2021, we revised our definition of adjusted EBITDA to exclude the expense incurred in connection with the induced conversion expense associated with repurchases of our 2019 Notes. We have excluded these costs and expenses because we do not believe they reflect our core operations and us excluding them enables more consistent evaluation of our operating performance. The following table presents a reconciliation of net loss to adjusted EBITDA:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Net loss |
|
$ |
(2,199 |
) |
|
$ |
(12,924 |
) |
|
$ |
10,725 |
|
|
$ |
(24,183 |
) |
|
$ |
(31,246 |
) |
|
$ |
7,063 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other income, net |
|
|
(774 |
) |
|
|
(2 |
) |
|
|
(772 |
) |
|
|
(1,367 |
) |
|
|
(21 |
) |
|
|
(1,346 |
) |
Interest expense |
|
|
1,205 |
|
|
|
526 |
|
|
|
679 |
|
|
|
3,716 |
|
|
|
1,576 |
|
|
|
2,140 |
|
Income tax expense |
|
|
24 |
|
|
|
28 |
|
|
|
(4 |
) |
|
|
67 |
|
|
|
130 |
|
|
|
(63 |
) |
Depreciation |
|
|
1,483 |
|
|
|
1,095 |
|
|
|
388 |
|
|
|
4,456 |
|
|
|
3,171 |
|
|
|
1,285 |
|
Stock-based compensation |
|
|
10,057 |
|
|
|
10,920 |
|
|
|
(863 |
) |
|
|
32,230 |
|
|
|
28,951 |
|
|
|
3,279 |
|
Restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,263 |
|
|
|
(1,263 |
) |
Induced conversion expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,232 |
|
|
|
— |
|
|
|
2,232 |
|
Adjusted EBITDA |
|
$ |
9,796 |
|
|
$ |
(357 |
) |
|
$ |
10,153 |
|
|
$ |
17,151 |
|
|
$ |
3,824 |
|
|
$ |
13,327 |
|
Non-GAAP Net Income (Loss)
We define non-GAAP net income (loss) as net income (loss), excluding, if applicable for the periods presented, the effects of stock-based compensation; depreciation; restructuring costs; settlement and related costs; induced conversion expense; amortization of debt discount related to the equity component of the Notes; and prepayment penalty on debt extinguishment. On January 1, 2021, we adopted ASU 2020-06 using the modified retrospective transition method, accounting for the 2019 Notes on a whole-instrument basis. In fourth-quarter 2021, we revised our definition of non-GAAP net income (loss) to exclude the expense incurred in connection with the induced conversion expense associated with repurchases of our 2019 Notes.
The following table presents a reconciliation of net loss to non-GAAP net income (loss):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Change |
|
||||||
Net loss |
|
$ |
(2,199 |
) |
|
$ |
(12,924 |
) |
|
$ |
10,725 |
|
|
$ |
(24,183 |
) |
|
$ |
(31,246 |
) |
|
$ |
7,063 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Depreciation |
|
|
1,483 |
|
|
|
1,095 |
|
|
|
388 |
|
|
|
4,456 |
|
|
|
3,171 |
|
|
|
1,285 |
|
Stock-based compensation |
|
|
10,057 |
|
|
|
10,920 |
|
|
|
(863 |
) |
|
|
32,230 |
|
|
|
28,951 |
|
|
|
3,279 |
|
Restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,263 |
|
|
|
(1,263 |
) |
Induced conversion expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,232 |
|
|
|
— |
|
|
|
2,232 |
|
Non-GAAP net income |
|
$ |
9,341 |
|
|
$ |
(909 |
) |
|
$ |
10,250 |
|
|
$ |
14,735 |
|
|
$ |
2,139 |
|
|
$ |
12,596 |
|
30
Liquidity and Capital Resources
As of September 30, 2022, we had cash, cash equivalents and short-term investments of $181.9 million, comprising cash deposits held at major financial institutions and short-term investments in a variety of securities, including U.S. government agencies, treasury bills, corporate notes and bonds, commercial paper, asset-backed securities and money market funds. We had working capital of $226.3 million as of September 30, 2022.
Historically, we have funded our operations primarily through cash generated from operations and by issuing equity securities, convertible-debt offerings and/or borrowing under our prior senior credit facility. In 2022, our principal uses of cash are funding our operations to capture our market opportunity and capital expenditures.
We believe, based on our current operating plan, that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. Over the longer term, we plan to continue investing to enhance and extend our platform. If our available funds are insufficient to fund our future activities or execute on our strategy, we may raise additional capital through equity, equity-linked or debt financing, to the extent such funding sources are available. Alternatively, we may be required to reduce expenses to manage liquidity; however, any such reductions could adversely impact our business and competitive position.
Sources of Funds
From time to time, we may explore additional financing sources and means to lower our cost of capital, which could include equity, equity-linked or debt financing. In addition, in connection with any future acquisitions, we may pursue additional funding which may be in the form of additional debt, equity or equity-linked financing or a combination thereof. We can provide no assurance that any additional financing will be available to us on acceptable terms.
2019 Notes
In December 2019, we issued the 2019 Notes in an aggregate principal amount of $86.3 million. The 2019 Notes are our senior unsecured obligations. The 2019 Notes bear interest at a fixed rate of 2.00% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2020. The 2019 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election. The 2019 Notes will mature on December 15, 2026, unless earlier repurchased, redeemed or converted in accordance with the terms of the indenture for the 2019 Notes.
The net proceeds from issuing the 2019 Notes were approximately $83.5 million after deducting fees and expenses. We used the net proceeds from issuing the 2019 Notes to pay the cost of the capped call transactions and repay our senior credit facility. We intend to use the remainder of the net proceeds for general corporate purposes.
In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Convertible Notes. We accounted for the 2019 Notes Repurchase transaction as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20). In connection with the induced conversion, we paid approximately $183.6 million in cash and accrued and unpaid interest thereon.
In June 2022, we repurchased the remaining $9.85 million principal amount of the 2019 Notes. We accounted for the 2019 Notes Repurchase as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20). In connection with the induced conversion, we paid approximately $17.6 million in cash and accrued and unpaid interest thereon.
For further information on the terms of this debt, please refer to Note 6 to our consolidated financial statements included elsewhere in this report.
2021 Notes
In November 2021, we issued the 2021 Notes in an aggregate principal amount of $287.5 million. The 2021 Notes are our senior unsecured obligations. The 2021 Notes bear interest at a fixed rate of 1.125% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2022. The 2021 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election. The 2021 Notes will mature on May 15, 2027, unless earlier repurchased, redeemed or converted in accordance with the terms of the indenture for the 2021 Notes.
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The net proceeds from issuing the 2021 Notes were approximately $278.4 million after deducting initial debt issuance costs, fees and expenses. We used approximately $183.6 million of the net proceeds for the cash repurchase of approximately $76.4 million aggregate principal amount of the 2019 Notes through individual privately negotiated transactions concurrent with the offering of the 2021 Notes in November 2021. We used an additional $17.6 million of cash to repurchase the remaining $9.85 million aggregate principal of the 2019 Notes through individual privately negotiated transactions in June 2022. Please refer to the section “Repurchase of the Convertible Senior Notes – 2019” as described in Note 6 to our consolidated financial statements included elsewhere in this report. We will use the remainder of the net proceeds from the offering for general corporate purposes.
For further information on the terms of this debt, please refer to Note 6 to our consolidated financial statements included elsewhere in this report.
Cash Flows
The following table presents selected cash flow information for the periods presented:
|
Nine Months Ended September 30, |
|
|||||
(in thousands) |
2022 |
|
|
2021 |
|
||
Net cash provided by operating activities |
$ |
6,813 |
|
|
$ |
10,407 |
|
Net cash provided by (used in) investing activities |
|
(86,304 |
) |
|
|
19,388 |
|
Net cash provided by (used in) financing activities |
|
(5,102 |
) |
|
|
11,759 |
|
Operating Cash Flows
For the nine months ended September 30, 2022, we generated $6.8 million of net cash from operating activities. These net cash proceeds were driven primarily by $16.2 million of net loss adjusted for non-cash items, and $9.4 million in working-capital, primarily from increased cash usage for inventory purchases and accounts receivable.
For the nine months ended September 30, 2021, we generated $10.4 million of net cash from operating activities. These net cash proceeds were driven primarily by a $8.5 million working-capital contribution, primarily from lower cash usage for inventory purchases, and $1.9 million of net loss adjusted for non-cash items.
Investing Cash Flows
For the nine months ended September 30, 2022, we used $86.3 million of net cash from investing activities. This net cash usage was driven primarily by investment and property and equipment purchases of $159.8 million and $6.0 million, respectively, partially offset by investment maturities of $79.5 million.
For the nine months ended September 30, 2021, we generated $19.4 million of net cash from investing activities. The net cash proceeds were driven primarily by investment maturities of $70.0 million, partially offset by investment and property and equipment purchases of $36.4 million and $14.2 million, respectively.
Financing Cash Flows
For the nine months ended September 30, 2022, we used $5.1 million of net cash from financing activities. This net cash usage was driven primarily by $12.5 million from stock-option exercises and our employee stock purchase plan. This amount was offset by $17.6 million for the cash repurchase of the remaining $9.85 million principal amount of the 2019 Notes described in the section “Repurchase of the Convertible Senior Notes – 2019” as described in Note 6 to our consolidated financial statements included elsewhere in this report
For the nine months ended September 30, 2021, we generated $11.8 million of net cash from financing activities. These net cash proceeds were driven primarily by $11.8 million from stock-option exercises and our employee stock purchase plan.
Cash Requirements and Contractual Obligations
Our primary cash requirements are for operating expenses and capital expenditures. Our operating expenses have generally increased as we invest in sales and marketing and in developing products and technologies that we believe have the potential to drive long-term business growth.
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The following table reflects a summary of our contractual obligations as of September 30, 2022:
|
|
Payments Due By Period |
|
|||||||||||||||||
|
|
Total |
|
|
Less |
|
|
1-3 |
|
|
3-5 |
|
|
More |
|
|||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Convertible senior notes (1) |
|
$ |
303,672 |
|
|
$ |
3,234 |
|
|
$ |
6,469 |
|
|
$ |
293,969 |
|
|
$ |
— |
|
Operating lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating lease obligations |
|
|
18,972 |
|
|
|
4,406 |
|
|
|
7,755 |
|
|
|
5,462 |
|
|
|
1,349 |
|
Sublease income |
|
|
(493 |
) |
|
|
(493 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net operating lease commitments |
|
|
18,479 |
|
|
|
3,913 |
|
|
|
7,755 |
|
|
|
5,462 |
|
|
|
1,349 |
|
Purchase commitments (2) |
|
|
56,401 |
|
|
|
56,401 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
378,552 |
|
|
$ |
63,548 |
|
|
$ |
14,224 |
|
|
$ |
299,431 |
|
|
$ |
1,349 |
|
Off-Balance Sheet Arrangements
Since inception, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.
Critical Accounting Policies and Significant Estimates
We have prepared our condensed consolidated financial statements in accordance with GAAP. Our preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates and assumptions. For information on our critical accounting policies and estimates, see Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. Some of these risks are related to fluctuations in interest rates.
Interest Rate Risk
Under our current investment policy, we invest our excess cash in money market funds, U.S. government agency securities, corporate bonds and notes and commercial paper. Our current investment policy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting our principal at risk. We do not enter into investments for trading or speculative purposes.
As of September 30, 2022, we had cash, cash equivalents and short-term investments of $181.9 million. Our investments are exposed to market risk due to fluctuations in prevailing interest rates, which may reduce the yield on our investments or their fair value. Because the majority of our investment portfolio is short-term in nature, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our results of operations or cash flows to be materially affected by a sudden change in market interest rates.
Our convertible notes have fixed interest rates, thus a hypothetical 100 basis point increase in interest rates would not impact interest expense.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations to date. If our costs were to become subject to significant inflationary pressure, we may not be able to fully offset these higher costs with price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
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Foreign Currency Exchange Risk
We view our foreign subsidiaries as extensions of our U.S. company. The functional currency of our foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are included in other income, net on the consolidated statements of operations. For any of the periods presented, we did not have material impact from exposure to foreign currency fluctuation. As we grow operations, our exposure to foreign currency risk will likely become more significant.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2022.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, we may be named as a party to various legal claims, actions and complaints. We cannot predict whether any resulting liability will have a material adverse effect on our financial position, results of operations or cash flows.
Patent Litigation
On June 6, 2019, we filed a patent infringement lawsuit against a competitor, NXP, USA Inc., and on October 4, 2019, NXP USA, Inc. and its parent NXP Semiconductors N.V., filed a patent infringement lawsuit against us. Both we and NXP subsequently filed additional lawsuits against each other. On May 25, 2021, we filed an additional patent infringement suit against NXP. The outcome of this patent litigation remains uncertain, and we may file additional lawsuits against NXP USA, Inc. and/or its parent or they may file additional lawsuits against us. For further information on these lawsuits, please refer to Note 5 of our consolidated financial statements included elsewhere in this report.
Item 1A. Risk Factors.
You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occur, our business, operating results and financial condition could be materially impacted. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
Risks Relating to Our Platform, Products and Technologies
The extent and pace of RAIN market adoption is uncertain. If RAIN market adoption does not continue to develop, or develops slower than we expect, our business will suffer.
The RAIN market is still developing. RAIN adoption, and adoption of our products and platform, depend on numerous factors, including:
In the past, we have, at times, anticipated and forecasted a pace of end-user adoption that exceeded the actual pace. Additionally, adoption has not progressed evenly for many reasons, such as the project-based nature of many end-user deployments. We expect continued difficulty forecasting the pace of adoption. As a result, we may be unable to accurately forecast our future operating results, including revenue, gross margins, cash flows and profitability, any or all of which could negatively impact our financial performance.
RAIN adoption is concentrated in key industries, particularly retail. If retailer adoption does not continue at the rate we expect, our business will be adversely affected.
Our financial performance depends on the pace of end-user RAIN adoption in key industries such as retail, our largest market. Retailers with primarily a physical marketplace presence have experienced financial stress in recent periods. Many of these same retailers have deployed RAIN to improve their competitiveness. If they fail to compete effectively then the number of stores they maintain, and the scope of their RAIN deployments, may decrease. The other industry we currently regard as being key for RAIN adoption is supply chain and logistics ("SC&L"), which faces different but similarly significant stressors as the retail market.
Our market is very competitive. If we fail to compete successfully then our business and operating results will suffer.
We face significant competition from both established and emerging competitors. We believe our principal current competitors are: In endpoint ICs, NXP, Alien, EM Microelectronic, Kiloway and Fudan Microelectronics Group; in reader ICs ST, Phychips, Iotelligent, MagicRF and Fudan Microelectronics Group; and in readers and gateways, Alien and Zebra. Our channel partners, including our OEMs, ODMs, distributors, SIs, VARs and software solution partners may choose to compete with us rather than purchase our products, which would not only reduce our customer base but also increase competition in the market, adversely
35
affecting our operating results, business and prospects. Companies in adjacent markets or newly formed companies may decide to enter our market, particularly as RAIN adoption grows. Further, the Chinese government has made development of the Chinese semiconductor industry a priority, potentially increasing competition for us globally while possibly restricting our ability to participate in the Chinese market.
Competition for customers is intense. Because the RAIN market is evolving rapidly, winning customer and end-user accounts at an early stage in the development of the market is critical to growing our business. End users that instead use competing products and technologies may face high switching costs, which may affect our and our channel partners’ ability to successfully convert them to our products. Failure to obtain orders from customers and end users, for competitive reasons or otherwise, will materially adversely affect our operating results, business and prospects.
Some of our competitors may devote more resources than we can to the development, promotion, sale and support of their products. Our competitors include companies that have much greater financial, operating, research and development, marketing and other resources than us. These competitors may discount their products to gain market share. In doing so, they could simply accept lower margins, or they could maintain margins by achieving cost savings through better, more efficient designs or production methods. They may also bundle other technologies, including those we do not have in our product portfolio, with their RAIN products.
We are expected to introduce new products and product enhancements on a regular basis.
We introduce new products and services to advance our business, satisfy increasingly demanding end-user requirements and grow RAIN market acceptance. We commit significant resources to develop and introduce these new products and services while improving performance, reliability and reducing costs.
New products and services may take time to be successful or may not succeed at all. They are often used in, and incorporated into, complex business processes and use cases. In some circumstances, our products and services may offer capabilities that are so novel that the extent and pace of market adoption is uncertain, which may put our investment into developing those capabilities at risk and negatively affect our competitive position.
In the future, our success in developing the technologies, processes or capabilities necessary or desired for new or enhanced products and services, or in licensing or otherwise acquiring them from third parties, and our ability to introduce new products and services before our competition, will depend on various factors, including:
An inability or limited ability of enterprise systems to exploit RAIN information may adversely affect the market for our products.
A successful end-user RAIN deployment requires not only tags and readers or gateways, but RAIN integration with information systems and applications that derive business value from RAIN data. Unless third parties continue developing and advancing business analytics tools, and end users enhance their information systems to use these tools, RAIN deployments could stall. Our efforts to foster third-party development and deployment of these tools could fail. In addition, our guidance to business-analytics providers for integrating our products with their tools could prove ineffective.
Solution providers and SIs are essential to the RAIN market. They provide deployment know-how to enable end users to successfully deploy RAIN solutions. Integrating our products with end-user information systems could prove more difficult or time consuming than we or they anticipate, which could delay deployments.
36
The selling prices of our products could fluctuate substantially, which could have a material adverse effect on our revenue and gross margins.
Our product ASPs have historically decreased with time and with RAIN market growth, although some periods, like 2021, have seen ASP increases. Historically, we have reduced our product prices to meet end-user demands or to respond to market pressure from our competition. We have also sometimes reduced prices to encourage adoption, address macroeconomic conditions or for other reasons. Although we expect further price decreases in the long term, we raised prices in 2021 and 2022 to accommodate higher product costs and we may be required to do so again in the future. Further, we anticipate that recent macroeconomic conditions, including inflation, may also contribute to upward pressure on our product costs. If, we are unable to offset ASP reductions with increased sales volumes or reduced product costs, or if we are unable to successfully increase ASPs to offset cost increases, then our revenue and gross margins will suffer.
Rapid market innovation, which we continue to experience, can drive intense pricing pressure, particularly for older products or products using older technology. New requirements can render older products uncompetitive for new opportunities. In addition, costs for producing older products may stay the same or even increase due to reduced volumes or limited capacity for producing these products. When demand for older products declines, or during times of increased market inventory, ASPs may decline quickly. To sell our products profitably we must continually improve our technology and processes and reduce costs in line with the lower selling prices. If we and our third-party suppliers and manufacturers cannot develop and implement processes or improve efficiencies sufficient to maintain required margins, we may be unable to sell our products profitably.
We generate most of our revenue from our endpoint ICs, and a decline in sales of these products or increased price competition in the market for endpoint ICs could adversely affect our operating results and financial condition.
We derive, and expect to continue to derive, most of our product revenue from our endpoint ICs. Accordingly, we are vulnerable to fluctuations in endpoint IC demand, wafer supply and wafer prices. If demand declines, or if we are unable to procure enough wafers to meet the demand we do have, or if we are unable to raise prices to accommodate cost increases, then our business and operating results will suffer. In addition, the continued adoption of, and demand for, our existing endpoint ICs, as well as for our new endpoint ICs, derives in part from our ability to continually innovate and to demonstrate the benefits of using our endpoint ICs with our reader ICs, readers and gateways. If we fail to establish the benefits of using our endpoint ICs with our platform, we may not be successful in countering competitive pressures to lower prices for our endpoint ICs and our business and operating results could be adversely affected.
Changes in our product mix could adversely affect our overall gross margin.
We generate most of our revenue from endpoint IC sales, with lower gross margins than our other products. Endpoint IC gross margins are affected by product mix, which can fluctuate based on supply, competitive pressures and end-user demand. A shift in sales mix away from our higher margin products to lower margin products, either within our endpoint IC product portfolio or from our systems business to our endpoint ICs, could negatively affect our gross margins.
Our products must meet demanding technical and quality specifications. Defects, errors or interoperability issues with our products, the failure of our products to operate as expected, or undue difficulty in deploying our products in actual operations could affect our reputation, result in significant costs to us and impair our ability to sell our products.
Our products must meet demanding customer specifications for quality, reliability and performance. They are also highly technical and are deployed in large, complex systems. Our partners and end users may discover errors, defects or incompatibilities in our products, including after deploying them. In addition, our partners or end users may find compatibility or interoperability issues between our products and their enterprise software systems, or between our products and other RAIN products. They may also experience problems when our products are combined with or incorporated into products from other vendors, such as our tag OEMs using our endpoint ICs with their antennas, or our reader partners using our reader ICs in their readers. We may have difficulty identifying and correcting the problems when third parties are combining, incorporating or assembling our products.
If we are unable to fix errors or other problems, we could experience:
37
We have experienced, and may in the future experience, production issues, including but not limited to production delays, insufficient production capacity and component shortages. For example, we are currently subject to ongoing shortages for silicon wafers and components used in our readers and gateways; for more information, see “—Shortages of silicon wafers and components used in our readers and gateways may adversely affect our ability to meet demand for our products and adversely affect our revenues and/or gross margins.” If we are unable to resolve these issues in a timely manner, or at all, then our operating results will be adversely affected.
When we introduce new products, our success in ramping adoption depends, in part, on us making these products easy to deploy by our partners and their end customers. For example, for our new M700 endpoint ICs and E-family reader ICs, we continue supporting our partners to produce high-performing, high-quality products. Until our partners are able to deploy our products widely, adoption and our operating results could suffer.
Given the technical and business requirements against which end users evaluate RAIN and our products and platform, our business results and prospects could suffer if we are unable to make our products and our platform easy to deploy. To demonstrate the benefits of our platform in meeting business needs, and to develop deployment methods to meet those needs, we frequently enter into proof-of-concept deployments, or POCs, with prospective end users. These POCs can extend for relatively long periods of time, and they may not be successful for a variety of reasons, including changes in end-user requirements, changes in end-user commitment or deployment challenges.
End users or our direct customers must design our products into their products and systems. If they fail to do so, our operating results and prospects will be adversely affected.
Convincing end users or our direct customers to design our products into their products and systems requires educating them about RAIN’s value over other technologies. They may currently use other technologies or products and may not feel the need to learn about how RAIN and our products could improve the efficiency or effectiveness of their systems. Even when convinced, they often undertake long pilot programs or qualification processes prior to placing orders. These pilot programs or qualification processes can be time consuming and expensive, and there can be no assurance that these will result in an end user deploying RAIN technologies or placing orders for our products. If we fail to develop new products that adequately or competitively address end users’ or our direct customers’ needs, they may not design our products into their systems, which could adversely affect our business, prospects and operating results.
Our visibility into the length of the sales and deployment cycles for our products is limited.
We have limited visibility into the length of product sales and deployment cycles, and these cycles are often longer than we anticipate. Many factors contribute to this limited visibility, including the time channel partners and end users spend evaluating our products, the time educating them on RAIN’s benefits, and the time integrating our products with their systems. The length and uncertain timing of the sales and deployment cycles can lead to delayed product orders. In anticipation of those orders, we may incur substantial costs before the sales cycle is complete and before we receive any customer orders or payments, if we receive them at all.
Alternative technologies, or changes in RAIN standards, may enable competitive products and services and may adversely affect RAIN market growth and our business.
Technology developments may affect our business negatively. Breakthroughs in legacy RFID technologies or markets, including those using low frequency or high frequency RFID technology, could adversely affect RAIN market growth and demand for our products. Likewise, new technologies may allow lower-cost ICs than our current silicon-based technology. If we are unable to innovate using new or enhanced technologies or processes or are slow to react to changes in existing technologies or in the market, or if we have difficulty competing with advances in new or legacy technologies, then our development of new or enhanced products could be impacted and result in product obsolescence, decreased revenue and reduced market share.
38
Significant changes in RAIN standards bodies, standards or qualification processes could impede our ability to sell our products and services.
We participate in developing RAIN industry standards, including with GS1 and ISO, and have designed our products to comply with those standards. We have historically taken a leadership position in standards development. In the future, we could lose that leadership position or our influence in standards development, or we could choose not to participate in certain standards activities.
New or changed industry standards could render our products obsolete and cause us to incur substantial development costs to meet the new or changed standards. If industry standards diverge from our or the RAIN market’s needs, then our products may fail to keep pace with the market or cause end users to delay their deployments. Moreover, the adoption or expected adoption of new or changed standards could slow sales of our existing products before we can introduce new products that meet the new or changed standards. New standards or changes to existing standards could also limit our ability to implement new features in our products. The lost opportunities as well as time and expense to develop new products or change our existing products to comply with new or changed standards could be substantial, and we may not ultimately succeed in developing products that comply with new or changed standards.
Certain organizations develop requirements for RAIN tags and test tags against those requirements. As one example, the ARC Program at Auburn University, or ARC, develops tag performance and quality requirements for end users that engage them. Some participants in the RAIN market are ARC sponsors, but we are not among them. Some other organizations perform this function as well. ARC or a similar organization could develop specifications that some or all of our endpoint ICs fail to meet.
Changes in government spectrum regulations or in their enforcement could adversely affect our ability to sell our products.
Government radio regulations require that our readers and gateways be certified for spectral compliance where they are sold or operated. Our readers and gateways are collectively certified for use in more than 40 countries worldwide, including the United States, Canada, Mexico, China, Japan, South Korea and every country in the EU. If one of our reader or gateway products is found to be noncompliant despite being certified, we could be required to modify field-deployed readers or gateways and could spend significant resources and miss sales opportunities in the process.
Government regulations may change, possibly without notice, requiring us to redesign our products to conform with the new regulations or constraining our ability to incorporate new features into our products. Such changes could cause us to incur significant costs, including costs associated with obsolete inventory. Regulatory changes may also cause us forego opportunities to improve our products, potentially delaying our time-to-market.
Sales of some of our products could cannibalize revenue from other products.
Some of our channel partners develop products using some our products that compete with other of our products. For example, some of our OEM partners use our reader ICs to build and sell readers and gateways that compete with our readers and gateways. Similarly, some of our channel partners use our readers to build and sell gateways that compete with our gateways. If we fail to manage such conflicts successfully, our business and operating results could be negatively affected.
Pricing commitments and other restrictive provisions in our customer agreements could adversely affect our operating results.
In the ordinary course of our business, we enter into agreements containing pricing terms that could, in some instances, adversely affect our operating results and gross margins. For example, some contracts specify future IC, reader or gateway pricing or contain most-favored customer pricing for certain products. Other agreements contain exclusivity terms that prevent us from pursuing certain business with other customers during the exclusivity period. Reducing prices or offering favorable terms to one customer could adversely affect our ability to negotiate favorable terms with other customers.
Risks Relating to Our Personnel and Business Operations
We obtain the products we sell through a limited number of third parties with whom we do not have long-term supply contracts. If we are unable to effectively manage our relationships with key suppliers, our operating results and financial condition will be adversely affected.
Our ability to secure cost-effective, quality products in a timely manner could be adversely affected by many factors, including:
39
If our suppliers fail to manufacture our products at reasonable prices or with satisfactory quality levels, then our ability to bring those products to market and our reputation could both suffer. If supplier capacity diminishes, whether from equipment failures, closures, bankruptcy, capacity allocation, in response to Covid-19, catastrophic loss of facilities or otherwise, we could have difficulty fulfilling orders, our revenue could decline and our growth prospects could be impaired. Transitioning our assembly services or IC foundries to new providers would take many months and, in the case of ICs, could take several years. And transition would require a requalification by our customers or end users, which could also adversely affect our ability to sell our products and our operating results. Moreover, in the event of a quality issue, the process of testing failed products and diagnosing and fixing defects is time consuming and costly and could constrain our ability to supply customers with new products.
Shortages of silicon wafers and components used in our readers and gateways may adversely affect our ability to meet demand for our products and adversely affect our revenues and/or gross margins.
The semiconductor industry has experienced many times of capacity shortfall and is experiencing such a shortfall again now, due to increased worldwide demand. We have experienced tight supply for our 200mm and 300mm wafers throughout 2022, and although our foundry partner has signaled improving 200mm wafer availability heading into 2023, our primary market demand and post-processing capacity is focused on 300mm wafers. Our foundry partner has also raised prices and has signaled they will do so again in 2023. Although we believe our foundry partner has, and continues to, prioritize us for upside wafers, absent a significantly higher 2023 300mm wafer allocation over 2022, we will be unable to meet our 2023 endpoint IC demand, potentially by a significant amount. Wafer shortfalls limit sales and may cause market-share losses if we are unable to supply enough products or our customers purchase competing products or, alternatively, may artificially increase bookings as customers over-order our products, followed by sales declines in future periods as they consume their accumulated inventory. Additionally, if we are unable to raise our prices to cover our higher costs, our gross margins and other financial results could suffer.
To convert the wafers that we receive from our foundry partner into saleable products, we and several third parties perform additional procedures such as testing, dicing, bumping and packaging the ICs. If we or our partners are unable to efficiently perform these post-processing procedures, or if we experience any capacity constraints with respect to these post-processing procedures, we may be unable to keep up with demand for our products and our financial results will suffer.
We have also experienced shortages and price increases for components we use in our readers and gateways, and packaging and test capacity for our reader ICs, and we may continue to experience such shortages and price increases in the future, particularly for reader and gateway components. Any such shortages and price increases will negatively impact our product availability and costs. If we are unable to procure sufficient components and to increase our prices to cover our increased costs, our financial results will suffer.
At times, our suppliers ask us to purchase excess products to ensure we do not face a subsequent shortage. For example, in certain quarters of 2014, 2015 and 2016, we purchased more endpoint IC wafers than we needed, which reduced our available cash. In addition, we may invest in inventory to support anticipated business growth, like we did with endpoint IC inventory in 2017 and 2020. If we are unable to sell the inventory we purchased, or if we must sell it at lower prices due to excess inventory or obsolescence, then our business will be negatively impacted.
We bear inventory risks due to our reliance on channel partners to sell and distribute our products.
We typically manufacture our products based on channel-partner forecasts before we receive purchase orders. However, many of our channel partners have difficulty accurately forecasting end-user demand and the timing of that demand. They also sometimes cancel purchase orders or reschedule product shipments, in some cases with little or no advance notice to us. We also sometimes receive soft commitments for large orders which do not materialize. In addition, when we introduce new products, we may initially carry higher inventory or have slower inventory turns depending on market acceptance. We have additional uncertainty arising from our competition’s business practices and from unanticipated external events, such as changes in regulatory standards, all of which can adversely affect demand and consequently our inventory levels, sales and operating results.
Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our business are uncertain.
Covid-19 has created significant worldwide economic volatility, uncertainty and disruption, and those effects are likely to persist for some time. Our significant Covid-19 risks include:
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The extent to which Covid-19 will continue to impact market demand is unclear. In 2020 and 2021, Covid-19 adversely affected retail, including retail apparel where RAIN is widely adopted. It also affected many other markets that use our products, including aviation, sporting events such as footraces, and others. These markets continued to feel Covid-19’s impacts in 2021, and the impacts will likely persist into the future.
Also, Covid-19 has, and continues to, create uncertainties with respect to supply. Because most our products are manufactured and processed in Asia, particularly in China where authorities continue to impose strict quarantine restrictions in response to Covid-19 outbreaks, our international supply chains are vulnerable to Covid-19 related disruptions. The impacts of Covid-19 on our future product supply remains uncertain.
Uncertainties surrounding global trade policies could have a material adverse effect on us.
Changes in U.S. and foreign laws and policies governing foreign trade, manufacturing, development and investment in the jurisdictions where we currently develop and sell products, and any negative consequences resulting from such changes, could materially affect our business.
The U.S. government has imposed significant tariffs on a variety of items imported other countries, particularly China. China responded by imposing significant tariffs on a variety of items imported from the United States. Although the United States and China signed a preliminary trade agreement in early 2020, the tariffs remain in place as negotiations between the countries continue. The future of these existing tariffs, as well as the possibility for new tariffs, remains uncertain.
Other causes of uncertainty include the Chinese government’s efforts to promote China’s domestic semiconductor industry, and the collateral effects of sanctions and other actions taken against Russia as a result of Russia’s invasion of Ukraine. While our direct business with customers in Russia is not material, the macroeconomic effects of sanctions or other actions against Russia now or in the future could negatively affect our business. These effects include increases in the cost of energy and in inflation generally.
We are subject to risks inherent in operating abroad and may not be able to successfully maintain or expand our international operations.
In 2021, we derived 83% of our total revenue from sales outside the United States. We anticipate growing our business, in part, by continuing to expand our international operations, which has a variety of significant risks, including:
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Various foreign regulatory or governmental bodies may issue rulings that invalidate prior laws, regulations, or legal frameworks in ways that may adversely impact our business. For example, the European Union Court of Justice in October 2015 invalidated the EU-U.S. Safe Harbor Framework, which facilitated personal data transfers to the United States in compliance with applicable EU data-protection laws. The EU-U.S. Privacy Shield, subsequently adopted in 2016 to provide a mechanism for companies to transfer EU personal data to the United States, was also invalidated by the European Union Court of Justice in July 2020. As another example, the European Commission adopted the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR imposes more stringent data-protection requirements than the former regulatory regime in the EU and provides for greater penalties for noncompliance of up to the greater of 4% of worldwide annual revenue or €20 million. Significant regulatory uncertainty remains surrounding data transfers from the European Economic Area to the United States. In China, we are monitoring legal and government advisory developments regarding cybersecurity-focused legislation for impacts to our business related to cross-border transfer limitations and evolving privacy, security, or data protection requirements. We may be required to change our policies and practices with respect to data transfer and other aspects of our data processing and security, which may be burdensome or involve substantial cost and expense, in an effort to address new and evolving limitations and requirements relating to privacy, security, data storage and data protection.
The United Kingdom, or UK, has enacted legislation that substantially implements the GDPR and which provides for penalties of up to the greater of 4% of worldwide annual revenue and £17.5 million. Following the UK’s exit from the EU, however, which became effective January 31, 2020, with a transition period ending December 31, 2020, significant uncertainty remains regarding matters such as data transfers between the UK, the EU and other jurisdictions. This uncertainty and other developments could require us to further change the way we conduct our business and transmit data between the U.S., the UK, the EU, and the rest of the world. Likewise, the California Consumer Privacy Act of 2018, or the CCPA, became effective on January 1, 2020. The CCPA imposes stringent data privacy and data protection requirements for certain data of California residents and provides for noncompliance penalties of up to $7,500 per violation. In addition, the California Privacy Rights Act, or CPRA, was passed by voters in California’s November 2020 election. The CPRA significantly modifies the CCPA, creating additional obligations with respect to consumer data commencing on January 1, 2022, and going into effect generally on January 1, 2023. Other states, including Virginia, Colorado, Utah, and Connecticut, have enacted similar legislation. Aspects of the CCPA, the CPRA, the GDPR and other laws and regulations relating to privacy, data protection, and security remain unclear as of the date of this report, but these laws and regulations potentially are far reaching. Laws and regulations relating to privacy, data protection and security, and continued evolution of such laws and regulations and their interpretation and enforcement, may require us to modify our practices and policies, which we may not be able to do on commercially reasonable terms or at all, and otherwise cause us to incur substantial costs and expenses in an effort to comply. Any failure or perceived failure by us or any third parties with which we do business to comply with these laws and regulations may result in actions against us by governmental entities, private claims and litigation, legal and other costs, substantial time and resources and fines, penalties or other liabilities. Any such actions may be expensive to defend, may incur substantial legal and other costs and substantial time and resources and likely would damage our reputation and adversely affect our business, financial condition and results of operations.
We opened an office in Shanghai, China in 2011. In addition to the risks listed above, our China operations expose us to risks associated with Chinese laws and policies governing Chinese operations and also to U.S. laws and regulations relating to foreign trade and investment. To date, legal, policy or regulatory changes have not had a material adverse effect on our business or financial condition, but they may in the future. We may experience increased costs for, or significant impact to, our Chinese operations in the event of changes in Chinese government policies or political unrest or unstable economic conditions in China. The nationalization or other expropriation of private enterprises by the Chinese government could result in total loss of our China investment. Any of these matters could materially and adversely affect our business and results of operations.
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Our failure to comply with anti-corruption and anti-bribery laws related to our foreign activities could subject us to penalties and other adverse consequences. Anti-corruption and anti-bribery laws generally prohibit companies and their employees and intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage or directing business to another person, and require companies to maintain accurate books and records and a system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. If we, our intermediaries or our solution providers, SIs, OEMs, ODMs, VARs, distributors, tag manufacturers or other partners fail to comply with FCPA or similar legislation, government authorities in the United States and elsewhere could seek to impose civil or criminal fines and penalties which could have a material adverse effect on our business, operating results and financial conditions. Moreover, China is an area of heightened exposure regarding compliance with anticorruption laws such as the FCPA and the U.K. Bribery Act. We intend to increase our international sales and business in China and, as such, our risk of violating laws such as the FCPA or U.K. Bribery Act also increases.
We generally conduct our China operations through a wholly owned subsidiary and our European operations through our U.K. subsidiary. For other worldwide jurisdictions, we generally report our taxable income based on our business operations in those jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to the jurisdiction or subsidiary. In the event of a disagreement, if our position is not sustained, we could be required to pay additional taxes, interest and penalties, which could result in tax charges, higher effective tax rates, reduced cash flows and lower overall profitability.
We have added engineering personnel in South America and are expanding our operations team in Southeast Asia, each through subsidiaries in these jurisdictions. Expanding our presence in this way increases our exposure to risks inherent in operating globally.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain products, technologies and software. We must export our products in compliance with U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions established by the Treasury Department’s Office of Foreign Assets Controls. Such controls are increasingly used to further significant foreign policy goals, and cover both an increasing scope of products, technologies, and software and an increasing range of end uses of such products, technologies, and software. For example, the U.S. government recently announced new controls regarding semiconductor- and supercomputer-related products and new restrictions affecting U.S. persons’ ability to send certain chips and chip-related technology and software to China without an export license. Because most our products are manufactured and processed in Asia, particularly in China, new controls may impact ability to manufacture and deliver our products. Additionally, to the extent our products may be used for these semiconductor- and supercomputer-related end-uses or provided to certain specified end-users or facilitates, we must undertake additional diligence efforts to maintain compliance with these laws. We may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for our products or limitations on our ability to export or sell our products imposed by these laws may harm our international and domestic sales and adversely affect our revenue. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.
Changes in our products or changes in export, import and economic sanctions laws and regulations may delay us introducing new products in international markets, prevent our customers from using our products internationally or, in some cases, prevent the export or import of our products to or from certain countries altogether. The U.S. government has imposed significant tariffs on a variety of items imported from China. China has responded by imposing significant tariffs on a variety of items imported from the United States. Such tariffs could have a material impact on our product costs and decrease our ability to sell our products to existing or potential customers and harm our ability to compete internationally. Further, it is possible that additional sanctions or restrictions that have been or may be imposed by the U.S. government on items imported into the United States from China or items exported from the United States to China could further adversely affect our ability to produce our products or sell our products to existing or potential customers and harm our ability to compete internationally. Any change in export or import regulations or legislation; shift or change in enforcement; or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations, adversely affecting our business and results of operations.
Instability or deterioration in the political, social, business or economic conditions in key production jurisdictions could harm our business, financial condition and operating results.
We outsource our manufacturing and production to suppliers in a small number of jurisdictions including Thailand, Malaysia, Taiwan and China. These jurisdictions have experienced significant changes in political, social, business or economic conditions in the past and may experience them in the future. Some of these jurisdictions have also experienced, and may continue to experience, intermittent or sustained mandatory shutdowns or other restrictions to combat the spread of Covid-19.
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Deterioration in the political, social, business or economic conditions in any jurisdictions in which we have significant suppliers could slow or halt product shipments or disrupt our ability to manufacture, test or post-process products. In response, we could be forced to transfer our manufacturing, testing and post-processing activities to more stable, and potentially more costly, regions or find alternative suppliers.
In particular, we source a significant portion of our wafers from suppliers in Taiwan, and our supply of wafers and other critical components may be materially and adversely affected by diplomatic, geopolitical and other developments affecting the relationship between China and Taiwan. Since 1949, Taiwan and the Chinese mainland have been separately governed. The government of the People’s Republic of China claims that it is the only legitimate government in China, including Taiwan and mainland China, and that Taiwan is part of China. Although significant economic and cultural relations have been established between Taiwan and mainland China in the past few years, the People’s Republic of China has refused to renounce the use of military force to gain control over Taiwan, there can be no assurances that relations between Taiwan and mainland China will not deteriorate, particularly in light of ongoing tensions between China, the United States and Taiwan. Any such developments could materially and adversely affect our business, financial condition and results of operations.
Our business operations could be disrupted by natural disasters.
In addition to the pandemic risk discussed earlier under “—Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our business are uncertain,” other disasters, whether natural or manmade, could decrease demand for our products, disable our facilities, disrupt operations or cause catastrophic losses. We have facilities in areas with known seismic activity, such as our headquarters in Seattle, Washington. We have facilities in areas with known flooding, such as our office in Shanghai, China. We have a wafer testing and dicing subcontractor in Thailand, a region with a known, and recent, history of flooding. A loss at any of these or other of our or our suppliers’ facilities could disrupt operations, delay production and shipments, reduce revenue and engender potentially large expenses to repair or replace the facility. We do not carry insurance that covers potential losses caused by pandemics, earthquakes, floods or other disasters.
Risks Relating to Our Relationships with Customers, Channel Partners and End Users
We rely on a small number of customers for a large share of our revenues.
We sell our endpoint ICs directly to inlay and tag OEMs and ODMs. We sell our reader ICs to OEMs and ODMs, primarily through distribution. We sell our readers and gateways to VARs and SIs, primarily through distribution. In 2021, sales to tag OEMs Avery Dennison and Arizon accounted for 32% and 11% of our total revenue, respectively. In March 2020, Avery Dennison acquired Smartrac’s RFID inlay segment. Sales concentration to a smaller number of OEMs decreases our bargaining power and increases the risk that our pricing or sales could decline based on sales measures taken by our competitors or our own failure to compete effectively.
If we fail to retain our endpoint IC, reader IC, reader or gateway partners or distributors or fail to establish new relationships, our business, financial condition or operating results could be harmed. Our competitors’ relationships with, or acquisitions of, these partners or distributors could interfere with our relationships with them. Any such interference could impair or delay our product sales or increase our cost of sales.
We engage directly with end users to adopt our products in large projects. These projects, often involving large purchases of our readers and gateways, are often discrete deployments that can result in significant sales for periods of time. They also increase the volatility of our revenues and operating results. If we are unable to replace project-based revenue with new revenue streams, or if end users with large projects change or delay them without giving us with adequate notice, our sales could decline from period to period and harm our stock price.
Because we sell and fulfill through channel partners, our ability to affect or determine end-user demand is limited.
End users drive demand for our products but, because we sell our products primarily through channel partners, we are one step removed from those end users and often unable to directly assess their demand. Our channel partners may choose to prioritize selling our competitors’ products over ours, or they may offer products that compete with our products or limit sales of our products. If our channel partners do not sell enough of our products or if they choose to decrease their inventories of our products for any reason, our sales to these channel partners and our revenue will decline.
Our channel partners may not properly forecast end users’ demand for our products.
Our channel partners may purchase more of our products than they need to satisfy end-user demand, increasing their inventory and reducing future sales. Distributors may return products in exchange for other products, subject to time and quantity limitations. Our reserve estimates for products stocked by our distributors are based principally on reports provided to us by our distributors, typically on a monthly basis. If the inventory and resale information our partners and distributors provide is inaccurate, or if we do not
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receive it in a timely manner, then we may not have a reliable view of products being sold to end users which could impact our operating results.
Our growth strategy depends in part on the success of strategic relationships with third parties and their continued performance and alignment.
We invest in relationships with SIs, VARs and software providers whose product offerings complement ours and through which we fulfill our product sales. Our business will be harmed if we fail to develop and grow these partner relationships. For example, our operating results may suffer if our efforts developing partner relationships increase costs but do not increase revenue. Partner relationships may also involve exclusivity provisions, multiple levels of distribution, discount pricing or investments in other companies. The cost of developing and maintaining partner relationships may go unrecovered and our efforts may not generate a corresponding increase in revenue.
Our business depends on our brand recognition and reputation, and if we fail to maintain or enhance our brand recognition or reputation then our business could be harmed.
We believe that building our brand and reputation is key to our relationships with partners and end users and to our ability to attract new partners and end users. We also believe that our brand and reputation will be increasingly important as market competition increases. Our success depends on a range of factors, including:
Product supply shortages have challenged our ability to meet customer needs and we have recently increased prices in response to our suppliers increasing their prices to us. Our inability to supply customers with products they need, and/or our need to increase our prices could result in long-lasting, negative consequences to our relationships with customers, to RAIN adoption and to our business overall.
Increasing attention to environmental, social and governance matters may cause us to incur additional costs or expose us to additional risks.
Investors, governmental and nongovernmental organizations and customers are increasing their focus and scrutiny on corporate environmental, social and governance, or ESG, practices. Our ESG practices may not meet the standards of our investors, customers or other stakeholders, and they as well as advocacy groups may campaign for us change our business, operations or practices to better address ESG-related concerns. A failure, or perceived failure, of us to respond to any such campaigns could harm our business and reputation and have a negative impact on the market price of our securities. Moreover, as ESG best practices, reporting standards and disclosure requirements continue to develop, we may incur increasing costs related to ESG monitoring and reporting.
Risks Relating to Our Intellectual Property
If we are unable to protect our intellectual property, then our business could be adversely affected.
Our success depends in part upon our ability to obtain, maintain and enforce patents, copyrights, trade secrets, trademarks and other intellectual property rights and to prevent third parties from infringing, misappropriating or circumventing those rights. We rely on a variety of intellectual property rights, including patents in the United States and copyrights, trademarks and trade secrets in the United States and foreign countries. We have historically focused on filing U.S. patent applications for a number of reasons including the fact that many RAIN products are used in or imported into the United States. By seeking patent protection primarily in the United States, our ability to assert our intellectual property rights outside the United States is limited, including in some significant foreign markets such as China. We have registered trademarks and domain names in selected foreign countries where we believe filing for such protection is appropriate and we have a small number of foreign patent applications and issued and allowed foreign patents. Regardless, some of our products and technologies may not be adequately protected by any patent, patent application, trademark, copyright, trade secret or domain name. Also, effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United States.
We cannot guarantee that:
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Monitoring and addressing unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property has already occurred and may occur again. Our failure to identify unauthorized use or otherwise adequately protect our intellectual property could adversely affect our business.
Litigation to enforce our intellectual property rights is time consuming, distracting, expensive and could result in outcomes or consequences that are harmful to us. We could incur significant costs and divert our attention and the attention of our employees by threatening or initiating litigation, which could, in turn, decrease revenue and increase expenses. Because litigation outcomes are uncertain, we could lose an enforcement action or weaken our intellectual property rights in litigation. An adverse decision could impair our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and operating results. At the same time, a decision not to enforce our intellectual property rights could embolden others to violate or potentially violate our intellectual property rights and thus weaken those rights over time.
On June 6, 2019, we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP Semiconductors N.V., or NXP, in the U.S. District Court for the Northern District of California, or the Court. For further information regarding this litigation, please refer to Note 11 of our condensed consolidated financial statements included elsewhere in this report.
If we are unsuccessful in prosecuting our patent-infringement claims against NXP or in defending ourselves against NXP’s counterclaims, or to the extent we cannot maintain the validity and enforceability of our patents, we could see a material adverse effect on our business, results of operations or financial condition. Regardless of the outcome, our lawsuit against NXP will increase our expenses and distract management and key employees, and could negatively impact our relationships with partners or end users and result in retaliatory claims against us.
Some of our technology contains trade secrets that are not patented or patentable. To protect our trade secrets, we require our employees, consultants, advisors and other collaborators to enter into confidentiality agreements. We also rely on contractual protections with our channel partners, suppliers and end users, as well as other security measures, to protect our trade secrets and other confidential information. We cannot guarantee that we have entered into confidentiality agreements with all parties with access to our trade secrets or confidential information, or that the agreements we have in force will adequately protect our trade secrets or other confidential information. Our trade secrets and other confidential information could also be obtained by third parties by breaches of our security systems. Our suppliers, employees or consultants could also assert rights to our trade secrets or other confidential information.
Our use of overseas manufacturers introduces extra risk. Intellectual property protections in countries where our third-party contractors operate are weaker than in the United States. If the steps we have taken, and the protection provided by law, do not adequately safeguard our intellectual property rights, then our business could suffer due to sales of competing products that exploit our intellectual property rights.
We may become party to intellectual property disputes which could be time consuming, costly to prosecute, defend or settle, result in the loss of significant rights, and adversely affect RAIN adoption generally.
Many companies in our industry, as well as non-practicing entities, hold patents and other intellectual property rights and may pursue, protect and enforce those intellectual property rights. We have received, and may receive in the future, invitations to license patent and other intellectual property rights to technologies that could be important to our business. We also receive assertions against us, our channel partners and or end users claiming that we or they infringe patent or other intellectual property rights. Offers to purchase patents or other intellectual property rights, or claims that we infringe patents or other intellectual property rights, regardless of their merit or resolution, are costly to resolve and divert the efforts and attention of our management and technical personnel. If we decline to accept an offer or refute a claim, then the offering or claiming party may pursue litigation against us.
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Intellectual property disputes have adversely affected RAIN adoption. As one example, in 2011 Round Rock Research filed lawsuits against 11 end users, including Walmart and Macy’s, for RAIN-related patent infringement. We believe those lawsuits adversely affected demand for our products from 2011 to 2014. In 2013, Round Rock Research entered into licensing agreements with many RAIN suppliers, including us; in early 2015 they reached a settlement agreement with the last of the end-user defendants. The licensed Round Rock patents all expired by the end of 2019. However, we, our channel partners, suppliers or end users could be involved in similar disputes in the future which could adversely affect our operating results and growth prospects.
We may be forced, or choose, to take action to protect our own intellectual property against infringement by others. Our actions could adversely affect RAIN adoption as well as our own operating and growth prospects. For example, in June 2019 we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP, in the U.S. District Court for the Northern District of California and in October 2019, NXP USA, Inc. and NXP filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. For more information, see “-If we are unable to protect our intellectual property, our business could be adversely affected.”
Many of our agreements require us to indemnify and defend our channel partners and end users from third-party infringement claims and pay damages in the case of adverse rulings. These damages could be sizable and disproportionate to the business we derive from the accused channel partners or end users. Moreover, we may not know whether we are infringing a third party’s rights due to the large number of RAIN-related patents or to other systemic factors. For example, patent applications in the United States are maintained in confidence for up to 18 months after filing or, in some instances, for the entire time prior to patent issuance. Consequently, we may not be able to account for such rights until after a patent issues.
Competitors may file patent applications or receive patents that block or compete with our patents. Claims of this sort can harm our relationships with our channel partners or end users and may deter these partners or end users from doing business with us. Further, we may or may not prevail in patent-related proceedings given the complexity and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, then we could be required to:
Any of the foregoing could have an adverse effect on our business, financial condition and operating results.
Intellectual property licensing from or to others, including competitors, may subject us to requirements or limitations that could adversely affect our business and prospects.
Various intellectual-property license agreements give us access to the patents and intellectual property of others, for example to necessary intellectual property in GS1 EPCglobal protocols and ISO standards. We have similarly licensed some of our patents and intellectual property to others, for example pursuant to agreements in connection with us participating in developing GS1 EPCglobal protocols and ISO standards.
For the former, in the course of us participating in developing GS1 EPCglobal UHF Gen2, UHF Gen2 V2, tag data standards, low-level reader protocol and other protocols, we agreed to license on a royalty-free basis those of our patents that are necessarily infringed by the practice of these protocols to other GS1 EPCglobal members, subject to reciprocal royalty-free rights from those other members. For the latter, in the course of us participating in developing ISO standards, we agreed to license on a RAND basis those of our patents that are necessarily infringed by the practice of those ISO standards, again subject to reciprocal royalty-free rights from the other ISO members.
Because it may not be clear whether a member’s intellectual property is necessary to the practice of current or future protocols or standards, disputes could arise among members, resulting in our inability to receive a license on royalty-free or RAND terms or to assert our not-necessary patents against others. Further, some GS1 EPCglobal members declined to license their intellectual property on royalty-free terms, instead demanding reasonable and nondiscriminatory, or RAND, terms. Disputes or confusion may arise about whether we may invoke our necessary intellectual property if those members choose to assert their RAND intellectual property, potentially causing or at least complicating any ensuing litigation and harming our business, financial condition and operating results.
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In the course of us participating in ISO, we may be required to grant to all users worldwide a license to those of our patents that are necessarily infringed by the practice of other standards, including at frequencies other than UHF, on RAND terms, again subject to reciprocity. As a result, we are not always able to limit to whom and, to a certain extent, on what terms we license our technologies, and our control over and our ability to generate licensing revenue from some of our patents may be limited. We may also choose to license our patents or intellectual property to others in the future. We cannot guarantee that any patents and technology that we provide in any will not be used against us.
We rely on third-party license agreements; impairment of those agreements may cause production or shipment delays that could harm our business.
We have license agreements with third parties for patents, software and technology we use in our operations and in our products. For example, we license tools from design-automation software vendors to design our silicon products. Third-party licenses for patents, software and other technology important to our business may not continue to be available on commercially reasonable terms, if at all. Loss of any such licenses could cause manufacturing interruptions or delays or reductions in product shipments until we can develop, license, integrate, and deploy alternative technologies, if even possible, which could harm our business and operating results.
Our use of open-source software may expose us to additional risks and harm our intellectual property.
Our products, processes and technology sometimes use or incorporate software that is subject to an open-source license. Open-source software is typically freely accessible, usable and modifiable, and is made available to the general public on an “as-is” basis under the terms of a nonnegotiable license. Use and distribution of open-source software may entail greater risks than use of third-party commercial software. Certain open-source software licenses require a user who intends to distribute the open-source software as a component of the user’s software to disclose publicly part or all of the user’s source code. In addition, certain open-source software licenses require the user of such software to make derivative works of the open-source code available to others at low or no cost. Consequently, open-source licensing can subject our previously proprietary software to open-source licensing terms, which could enable our competitors to create similar offerings with lower development effort and time and ultimately could result in a loss of sales. In addition, open-source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of their code, opening us to business risks that could materially harm our operating results.
We may face claims alleging noncompliance with open-source license terms or infringement or misappropriation of proprietary software. These claims could result in litigation, require us to purchase a costly license, or require us to devote research and development resources to change our software, any of which would have a negative effect on our business and operating results. Few courts have interpreted open-source licenses, and these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our offerings. In addition, if there are changes in the licensing terms for the open-source software we use, we may be forced to re-engineer our solutions, incur additional costs or discontinue the sale of our products. We cannot guarantee that we have incorporated all open-source software in a manner that is consistent with our current policies and procedures, or in a manner that will not subject us to liability.
Risks Relating to Privacy and Cybersecurity
Privacy and security concerns relating to RAIN could damage our reputation and deter current or potential customers from using our products.
Privacy advocates and others have raised and may continue raising concerns about RAIN compromising consumer privacy or facilitating theft. These concerns include unauthorized parties potentially collecting personal information or personal data, tracking consumers, stealing identities or causing other issues relating to privacy or data protection. If such concerns increase, or if actual malicious or inadvertent breaches of privacy or theft occur or are perceived to have occurred, then our reputation could be damaged, our business and prospects may suffer, and we could incur significant liability. We may be or be alleged to be subject to contractual or self-regulatory obligations, in addition to legal and regulatory obligations, relating to privacy, data protection and security with respect to RAIN. These actual or asserted obligations may require us to modify our practices and policies, which we may not be able to do on commercially reasonable terms or at all, and otherwise cause us to incur substantial costs and expenses. Any failure or perceived failure to comply with any laws, regulations, or contractual or other obligations to which we are or may be asserted to be subject may result in regulatory actions, private claims and litigation, legal and other costs, substantial time and resources and fines, penalties or other liabilities. Any such actions may be expensive to defend, may entail substantial legal and other costs as well as time and resources and likely would damage our reputation and adversely affect our business, financial condition and results of operations.
In addition to concerns over privacy or theft, it is possible for those with malicious intent to misuse RAIN to facilitate theft or damage the public trust. If a theft or other damaging incident occurs or is perceived to occur and customer or end-user data, personal information or other confidential information is accessed or used without authorization, then our and our customers’ operations could be disrupted and our customers or we could be the target of regulatory investigations or proceedings and private claims, demands or
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litigation, and we could face potential liability and significant costs and expenses to remediate and otherwise respond to the incident. Concerns about security and privacy, even if unfounded, could also damage our reputation and operating results or could delay overall RAIN industry development. In such an event, our business and prospects may suffer, and we could incur claims, proceedings and significant liability. We also could be required to expend significant capital and resources to address any security incident or breach and to implement measures to prevent further breaches or incidents.
We cannot ensure that any limitation-of-liability provisions in our customer and user agreements, contracts with third-party vendors and service providers or other contracts are enforceable or adequate or would protect us from any liabilities or damages against claims relating to a security breach or other security-related matter.
Government regulations and guidelines and other standards relating to consumer privacy may adversely impact adoption of our products, require us to make design changes or constrain our ability to implement new and desired product features.
Our customers are subject to laws and regulations related to collecting, storing, transmitting and using personal information and personal data, as well as additional laws and regulations that address privacy and security related to RFID in general. Because RAIN is a type of RFID, we believe these laws and regulations apply to RAIN.
The European Commission, or the EC, has issued guidance to address privacy concerns about RFID. In May 2009, the EC issued a recommendation that retailers in the EU inform their customers when RFID tags are either on or embedded within products. In April 2011, the EC signed a voluntary agreement with private and public entities to develop privacy guidelines for companies using RFID in the EU. While compliance with the guidelines is voluntary, our customers that do business in the EU prefer products that comply with the guidelines. If our RAIN products do not provide the necessary functionality to allow customers to comply with the guidelines then our business may suffer.
The data-security and privacy legislative and regulatory landscape in the United States, EU and other foreign jurisdictions continues to evolve, and new or changed laws, regulations, guidelines and standards may adversely impact our business, including our ability to develop future products. If we fail to develop products that meet end-user privacy requirements, then end users may choose not to use our products.
Although the Gen2 V2 protocol includes features for addressing consumer privacy and authenticating a tag, and although we have incorporated custom features in our products to further protect consumer privacy, a third party may still breach these features, including as implemented in our products, in which case our reputation could be damaged and our business and prospects could suffer.
A breach of security or other security incidents impacting our systems or others used in our business could have an adverse effect on our business.
We use security systems to maintain our facility’s physical and information-technology security and to protect our proprietary and confidential information, including that of our customers, suppliers and employees. We face risks of security breaches and incidents from a variety of sources, including viruses, ransomware, hacking, malicious code, and social engineering and other forms of employee or contractor negligence, unintentional acts, or malfeasance. Accidental or willful security breaches or incidents or other unauthorized access to our facilities or information systems could compromise access to and the integrity of this information. The consequences of loss and possible misuse of our proprietary and confidential information, including information relating to individuals, could include, among other things, unfavorable publicity, damage to our reputation, difficulty marketing or selling our products, customer allegations of breach of contract, loss or theft of intellectual property, claims and litigation, governmental and regulatory proceedings, and possible fines, penalties and other damages and liabilities, any of which could have a material adverse effect on our business, financial condition, reputation and relationships with customers and partners.
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We rely on third-party providers of corporate infrastructure services such as for human resources, electronic communications and financial functions. Additionally, our platform operates in conjunction with, and we are dependent upon, third-party products, services, and components. Consequently, we depend on the security systems of these third-party providers. There have been and may continue to be significant attacks on certain third-party providers, and we cannot guarantee that our or our third-party providers’ systems and networks have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our platform. These third-party providers also face risks of security breaches or incidents, and our ability to monitor their security is limited. Any security breaches, incidents or other unauthorized access to our service-providers’ systems or viruses, loggers, ransomware or other errors, vulnerabilities, or malfeasant code in their data or software could expose us to loss, unavailability, or misappropriation of, or unauthorized use or disclosure of, confidential and proprietary information. If there is a security vulnerability, error, ransomware or other bug or malfeasant code in one of these third-party products, services and components and if there is a security exploit targeting them, we could face increased costs, claims, liability, reduced revenue and harm to our reputation or competitive position. Because the techniques used to obtain unauthorized access to or sabotage security systems change frequently and are often not recognized until after an attack, we may be unable to anticipate the techniques or implement adequate preventative measures, thereby exposing us to material adverse effect on our business, operations and financial condition. Using third-party providers also introduces risk of a cybersecurity incident. We use Okta products, including those that Okta reported on January 20, 2022 as breached. We conducted an internal investigation and found no indication of a breach of our systems. Okta confirmed on March 24, 2022 that Impinj was not impacted by their incident.
We may incur significant costs in an effort to detect and prevent security breaches and other security-related incidents. In the event of an actual or perceived security breach or incident, we could be required to expend significant capital and other resources to mitigate, notify third parties of, and otherwise address, the breach or incident and its root cause and to take steps to prevent further breaches or incidents. Claims relating to an actual or perceived security breach or incident may not be adequately covered by our insurance and may result in increased insurance costs or insurance not being available to us at all.
Risks Relating to Our Financial Position and Capital Needs
We have a history of losses and have only achieved profitability intermittently. We cannot be certain that we will attain or sustain profitability in the future.
We have incurred losses since our inception in 2000. Whereas we were profitable between 2013 and 2015, we had a net loss of $51.3 million for the year ended, and an accumulated deficit of $362.5 million as of, December 31, 2021. Our ability to attain or sustain profitability depends on numerous factors, many of which are out of our control, including continued RAIN adoption and us maintaining or growing our market share. We expect significant expenses to support operations, product development and business and headcount expansion in sales, engineering, and marketing and may, for periods of time, choose to invest to grow the market and our share, reduce costs, improve our efficiencies or shorten our supply chain. If we fail to increase our revenue or manage our expenses, or if our investments in growing the market or our market share do not succeed, then we may not attain or sustain profitability in the future.
We have a history of significant fluctuations in our quarterly and annual operating results.
You should consider our business and its prospects in light of the risks and difficulties we encounter in the uncertain and rapidly evolving RAIN market. Because this market is new, large and evolving, predicting its growth rate and ultimate size is difficult. The rapidly evolving nature of the markets in which we sell our products, as well as other factors that are beyond our control, reduce our ability to accurately gauge our future prospects and forecast our quarterly or annual performance. If sales exceed expectations or if we reduce prices to win a large opportunity or in response to competition, then our revenue and profitability may be positively affected, but gross margins may be negatively affected. If we are unable to obtain semiconductor wafers or electronic components, then our sales will decline and our revenue and profitability may be negatively affected. If research analysts or investors view our decisions negatively, the trading price of our common stock could decline.
Historically, our success predicting future sales of our products and platform has been limited. End users drive demand for our products, but we sell nearly all our products through channel partners so our ability to forecast end-user demand is limited. We rely on those same channel partners to integrate our products with end-user information systems and this integration has been uneven and unpredictable in scope, timing and implementation. Also, RAIN-based systems often require time-consuming proofs-of-concepts and other steps such as designing and implementing new business processes, which make sales of our products difficult to forecast. Partly as a consequence, in the past, both we and other industry participants have at times overestimated the RAIN market size and growth rates, then failed to meet expectations.
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Our history shows sales volatility and highlights our limited ability to forecast sales. For example, in 2016 our endpoint IC sales exceeded both our expectations and those of our industry’s analysts due in large part to several coincident large end-user deployments. Then, in the latter part of 2017 and in early 2018, the pace of endpoint IC unit-volume growth slowed relative to 2016, we believe due to multiple factors including, but not limited to, delays in new deployments and in planned expansions at several large retailers as well as a correction in our endpoint IC channel inventory. Then, in the latter part of 2018 and in 2019, due to shorter lead times for our endpoint ICs, we were increasingly receiving orders and shipping the ordered products within the same quarter. Those shortened lead times decreased our ability to predict both optimal inventory and order volume for a quarter. Then, in early 2020, Covid-19 introduced even greater uncertainty in our business, with us choosing to build product inventory during the pandemic-induced downturn. In 2021 demand exceeded our product supply, and that imbalance has continued throughout 2022. Our foundry partner has signaled continued tight endpoint IC wafer availability in our process nodes into 2023, preventing us from fully capitalizing on our demand. Although we believe they are prioritizing us for upside wafers and have provided enough fourth-quarter 2022 wafers for us to increase our shipment volumes relative to third quarter, much of the upside is 200mm rather than 300mm wafers, causing us to transition some customers back from M700 to our older product families.
We expect that for the foreseeable future our visibility to future sales, including volumes and prices, will continue to be limited. Our poor visibility may cause fluctuations, particularly on a quarterly basis, in our actual operating results and in differences between our expected and actual operating results.
Many factors, most of which are outside our control, may cause or contribute to fluctuations in our quarterly and annual operating results. These fluctuations make financial planning and forecasting difficult. In addition, these fluctuations may cause unanticipated decreases in our available cash, which could negatively affect our business and prospects. Material factors that contribute to fluctuations in our operating results and revenue include:
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A substantial portion of our operating expenses are fixed for the short term, and as a result, fluctuations in revenue or unanticipated expenses can have a material and immediate impact on our profitability and negatively affect our operating results, which could cause the price of our common stock to decline.
We may need to raise additional capital which may not be available on favorable terms, if at all, causing dilution to stockholders, restricting our operations or adversely affecting our ability to operate our business.
In the course of running our business we may need to raise capital, potentially diluting our stockholders, including pursuant to a shelf registration statement filed with the SEC. In December 2019, we issued and sold $86.3 million aggregate principal amount of the 2019 Notes. In November 2021, we issued and sold $287.5 million aggregate principal amount of the 2021 Notes. We may in the future engage in additional equity, equity-linked or debt financings to secure additional funds for our business, including for investments in manufacturing capacity and other capital expenditures. We used approximately $183.6 million of the net proceeds, excluding accrued interest, to repurchase approximately $76.4 million aggregate principal of the 2019 Notes through individual privately negotiated transactions concurrent with such offering. We used an additional $17.6 million of cash to repurchase the remaining $9.85 million aggregate principal of the 2019 Notes through individual privately negotiated transactions in June 2022.
If unforeseen circumstances drive our financing needs, such as unforeseen expenditures or if our operating results are worse than we expect, then we may not be able to raise capital on favorable terms, if at all. Debt financing, if available, may include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, expending capital or declaring dividends, or which impose financial covenants that limit our ability to achieve our business objectives. If we need but cannot raise additional capital on acceptable terms then we may not be able to meet our business objectives, our stock price may fall, and you may lose some or all of your investment.
Our management will have broad discretion as to how to spend and invest our cash and cash equivalents and the proceeds from financings, including on capital expenditures, product development, working capital and other general corporate purposes. We could spend such resources in ways that our stockholders may not agree with or that do not yield a favorable return. If we do not use such resources effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.
Risks Relating to U.S. Federal Income Tax
Our ability to use net operating losses to offset future taxable income may be limited.
As of December 31, 2021, we had federal net operating loss carryforwards, or NOLs, of $274.7 million and federal research and development credit carryforwards of $18.3 million which we may use to reduce future taxable income or offset income taxes due. We have established a valuation allowance against the carrying value of these deferred tax assets. The tax loss and research and development credit carryforwards began expiring in 2020. Insufficient future taxable income will adversely affect our ability to utilize these NOLs and credit carryforwards. Reductions in corporate tax rates may also reduce our ability to utilize the NOLs.
Under Sections 382 and 383 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more-than 50% ownership change over a three-year testing period is limited in its ability to use its pre-change NOLs and other tax assets to offset future taxable income or income taxes. Our existing NOLs and credit carryforwards may be subject to limitations arising from previous ownership changes; if we undergo a future ownership change then our ability to use our NOLs and credit carryforwards could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, the causes of which may be outside our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs may also be impaired under state law. As a result of these limitations, we may not be able to utilize a material portion of, or possibly any of, the NOLs and credit carryforwards.
We could be subject to additional income tax liabilities.
We are subject to income taxes in the United States and certain foreign jurisdictions. During the ordinary course of business, we use significant judgment in evaluating our worldwide income-tax obligations and we conduct many transactions for which the ultimate tax determination is uncertain. Additionally, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions and these jurisdictions may assess additional income tax against us. Although we believe our tax determinations are proper, the final determination of any tax audits and possible litigation could be materially different from our historical income-tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.
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Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or similar taxes, and we could be subject to liability with respect to past or future sales, any of which could negatively affect our operating results.
We do not collect sales and use, value-added or similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are either not applicable or an exemption from such taxes applies. Sales and use, value-added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future, including as a result of a change in law. Such tax assessments, penalties and interest or future requirements may negatively affect our operating results.
Risks Relating to Our Financial Reporting and Disclosure
If we fail to maintain an effective system of disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired, which may adversely affect investor confidence in us and, in turn, lead to a decline in the market price of our common stock.
As a public company, we are required to comply with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The Nasdaq Stock Market. The Sarbanes-Oxley Act, among other things, requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud.
For example, under Section 404 of the Sarbanes-Oxley Act, or Section 404, we are required to make a formal assessment of the effectiveness of our internal control over financial reporting. As an “emerging growth company”, we availed ourselves of an exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting. However, we ceased to be an “emerging growth company” on December 31, 2021. As a result, our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting and the cost of our compliance with Section 404 will correspondingly increase. Compliance with the applicable provisions of Section 404 will continue to divert resources and take significant time and effort. Moreover, we may be unable to successfully complete all the procedures, certifications and attestation requirements of Section 404 in a timely manner.
Additionally, we have previously identified and reported material weaknesses in our internal controls over financial reporting in prior years, and while these identified material weaknesses have been remediated, there can be no assurance that our remediation will be effective in future periods or prevent other material weaknesses or significant deficiencies in our internal control over financial reporting from arising in the future. We may identify additional material weaknesses in our internal controls over financial reporting in future periods. A material weakness, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. Any inability to provide reliable financial reports or prevent fraud could harm our business.
Any failure to implement and maintain effective disclosure controls and procedures and internal control over financial reporting, including identifying material weaknesses, could cause investors to lose confidence in the accuracy and completeness of our financial statements and reports, which would likely adversely affect the market price of our common stock. In addition, we could be subject to sanctions or investigations by The Nasdaq Stock Market, the SEC and other regulatory authorities.
We have incurred and, in the future, will incur high costs of being a public company.
We have incurred significant legal, accounting and other costs associated with public company reporting requirements. We ceased to be an “emerging growth company” on December 31, 2021 and are no longer eligible for reduced disclosure requirements and exemptions applicable to “emerging growth companies.” As such, we were required to hold a say-on-pay vote and a say-on-frequency vote at our 2022 annual meeting of stockholders. We expect that our loss of “emerging growth company” status will require additional attention from management and will result in increased costs to us, which could include higher legal fees, accounting fees and fees associated with investor relations activities, among others. We have hired and may need to continue to hire additional accounting and information technology staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a result of being a public company.
We have and will continue to incur costs associated with recently adopted corporate governance requirements, including those of the SEC and The Nasdaq Global Select Market. We expect those governance requirements to lead to ongoing legal and financial costs and make some activities more time consuming and costly. We also expect those requirements to increase the difficulty and expense for us to obtain director and officer liability insurance, and we may need to accept reduced policy limits and coverage or pay substantially higher costs to obtain similar or higher coverage to what we have today. As a result, we may find it difficult to attract and retain qualified persons to serve on our board of directors or as executive officers or may need to pay higher compensation to attract
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and retain them. Although we monitor developments with respect to those requirements, we cannot predict or estimate the additional costs we may incur or the timing of such costs.
Risks Relating to Owning or Trading of Our Securities
The market price of our common stock has been and will likely continue to be volatile, and the value of your investment could decline significantly.
Since July 2016, when we sold shares of our common stock in our initial public offering through September 30, 2022, our stock price has ranged from $9.95 to $99.00. The following factors, in addition to general risks and other risks described in this report, may have a material effect on the trading price of our common stock:
Technology company stocks like ours have experienced extreme price and volume fluctuations often unrelated or disproportionate to the operating performance of those companies. Securities class-action litigation is frequently instituted against companies whose stock prices decline significantly, as it was against us. Such litigation causes substantial costs and a diversion of management’s attention and resources. For further information regarding this litigation risk, please refer to Note 11 of our condensed consolidated financial statements included elsewhere in this report.
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Transactions relating to the 2019 Notes or the 2021 Notes may affect our stock’s value.
If the 2021 Notes are converted by holders, then we have the ability under the indenture for the 2021 Notes to deliver cash, stock or any combination of cash or stock, at our election. If we elect to deliver stock, then doing so will dilute the ownership interests of our existing stockholders. Any sales in the public market of the stock issuable upon a conversion could decrease our stock price. Anticipated future conversions of the 2021 Notes into shares of our stock could also decrease our stock price. The holders of the 2021 Notes may also engage in short selling to hedge their positions in the 2021 Notes, which could also decrease our stock price.
In connection with us issuing the 2019 Notes, we entered into privately negotiated capped-call transactions with financial counterparties and these capped-call transactions were left intact even after we acquired the outstanding 2019 Notes in June 2022. The capped-call transactions were generally designed to reduce potential dilution to our stock upon any conversion or settlement of the 2019 Notes or offset any cash payments we were required to make in excess of the principal amount of converted 2019 Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. From time to time, the financial counterparties to the capped calls may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our stock or purchasing or selling our stock or other securities of ours in secondary market transactions prior to the maturity of the capped calls. This activity could cause a decrease in our stock price.
For more information on the 2019 Notes, the 2021 Notes and the capped-call transactions, see Note 6 of our consolidated financial statements included elsewhere in this report.
Our principal stockholders and management own a significant percentage of our stock and are able to exercise significant influence over matters subject to stockholder approval.
As of September 30, 2022, our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially owned approximately 24.8% of our stock. As a result, our executive officers, directors and principal stockholders may be able to significantly influence, in their capacity as stockholders, matters requiring approval by our stockholders, including electing directors and approving mergers, acquisitions or other transactions. They may have interests that differ from yours and may vote in a way with which you disagree, and which may be adverse to your interests. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove our board of directors or management.
Servicing the 2021 Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 2021 Notes, and our current and future indebtedness may limit our operating flexibility or otherwise affect our business.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance any current or future indebtedness, including the 2021 Notes, or to make cash payments in connection with any conversion of the 2021 Notes or upon any fundamental change if holders require us to repurchase their 2021 Notes for cash, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate sufficient future cash from operations to service our indebtedness and make necessary capital expenditures. If we are unable to generate sufficient cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any of our indebtedness, including the 2021 Notes, will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in us defaulting on our debt obligations. In addition, our existing and future indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
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Anti-takeover provisions in our charter documents and under Delaware or Washington law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and limit our stock price.
Provisions of our certificate of incorporation and our bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect our stock price. Among other things, our certificate of incorporation and bylaws:
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”
Our bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our bylaws provide that, unless we otherwise consent in writing, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit stockholders’ ability to bring a claim in a judicial forum favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
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Incorporation by Reference |
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3.2 |
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Amended and Restated Bylaws of Impinj, Inc. adopted as of August 10, 2022 |
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8/10/2022 |
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3.2 |
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31.1 |
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32.2* |
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Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. |
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Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. |
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* The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Impinj, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Impinj, Inc. |
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Date: October 26, 2022 |
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By: |
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/s/ Cary Baker |
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Cary Baker Chief Financial Officer (principal financial officer and duly authorized signatory) |
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