Impinj(PI) - 2021 Q2 - Quarterly Report

Risk Factor Summary Summary of Key Risks This section provides a high-level overview of the key risks and uncertainties facing Impinj, Inc., including market adoption challenges for RAIN technology, intense competition, supply chain vulnerabilities (silicon wafer shortages, third-party manufacturers), product quality issues, impact of COVID-19, customer concentration, intellectual property disputes, and historical financial losses - RAIN market adoption may develop slower than expected, adversely affecting business[9] - The market is highly competitive, and failure to compete successfully will harm business and operating results[9] - Vulnerability to silicon wafer shortages may adversely affect the ability to meet product demand[9] - COVID-19 has adversely affected the business, and the magnitude and duration of future effects are uncertain[9] - Reliance on a small number of customers for a large share of revenues poses a risk[9] - History of losses and intermittent profitability, with no certainty of future sustained profitability[9] - Servicing $86.3 million convertible senior notes due 2026 may require significant cash, potentially limiting operating flexibility[9] PART I. — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, cash flows, and changes in stockholders' equity, along with detailed notes explaining significant accounting policies, fair value measurements, inventory, stock-based awards, commitments, debt facilities, leases, net loss per share, segment information, deferred revenue, related-party transactions, and restructuring activities Condensed Consolidated Balance Sheets | (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $51,175 | $23,636 | | Short-term investments | $60,788 | $82,453 | | Inventory, net | $24,064 | $36,329 | | Total current assets | $165,673 | $171,364 | | Total assets | $211,422 | $207,616 | | Current portion of long-term debt | $84,045 | $— | | Total current liabilities | $107,706 | $27,593 | | Total liabilities | $122,651 | $98,497 | | Total stockholders' equity | $88,771 | $109,119 | - Cash and cash equivalents increased significantly from $23.6 million at December 31, 2020, to $51.2 million at June 30, 2021[11] - Current portion of long-term debt increased from $0 to $84.0 million, leading to a substantial increase in total current liabilities[11] - Total stockholders' equity decreased from $109.1 million to $88.8 million[11] Condensed Consolidated Statements of Operations | (in thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $47,268 | $26,457 | $92,516 | $74,279 | | Gross profit | $24,777 | $12,960 | $46,758 | $34,354 | | Loss from operations | $(8,317) | $(16,270) | $(17,189) | $(19,665) | | Net loss | $(8,906) | $(17,534) | $(18,322) | $(21,860) | | Net loss per share — basic and diluted | $(0.37) | $(0.77) | $(0.77) | $(0.97) | - Revenue increased by 78.6% for the three months ended June 30, 2021, and by 24.5% for the six months ended June 30, 2021, compared to the prior year periods[12] - Net loss decreased by 49.2% for the three months ended June 30, 2021, and by 16.2% for the six months ended June 30, 2021, compared to the prior year periods[12] Condensed Consolidated Statements of Comprehensive Loss | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(8,906) | $(17,534) | $(18,322) | $(21,860) | | Unrealized gain (loss) on investments | $1 | $(47) | $1 | $24 | | Comprehensive loss | $(8,905) | $(17,581) | $(18,321) | $(21,836) | - Total comprehensive loss significantly decreased from $(17,581) thousand in Q2 2020 to $(8,905) thousand in Q2 2021[14] Condensed Consolidated Statements of Cash Flows | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $4,981 | $2,809 | | Net cash provided by investing activities | $13,317 | $24,935 | | Net cash provided by financing activities | $9,241 | $2,846 | | Net increase in cash and cash equivalents | $27,539 | $30,590 | | Cash and cash equivalents, end of period | $51,175 | $97,488 | - Net cash provided by operating activities increased by 77.3% to $5.0 million for the six months ended June 30, 2021[16] - Net cash provided by investing activities decreased by 46.5% to $13.3 million for the six months ended June 30, 2021[16] - Net cash provided by financing activities increased by 224.7% to $9.2 million for the six months ended June 30, 2021[16] Condensed Consolidated Statements of Changes in Stockholders' Equity | (in thousands) | Balance at Dec 31, 2020 | Cumulative-effect adjustment from ASU 2020-06 | Issuance of common stock | Stock-based compensation | Net loss | Other comprehensive loss | Balance at June 30, 2021 | | :------------- | :---------------------- | :------------------------------------------ | :----------------------- | :----------------------- | :------- | :----------------------- | :----------------------- | | Common Stock | $23 | $— | $1 | $— | $— | $— | $24 | | Additional Paid-in Capital | $423,759 | $(32,743) | $9,242 | $18,031 | $— | $— | $418,289 | | Accumulated Deficit | $(314,666) | $3,442 | $— | $— | $(18,322) | $— | $(329,546) | | Total Stockholders' Equity | $109,119 | $(29,301) | $9,243 | $18,031 | $(18,322) | $1 | $88,771 | - Total stockholders' equity decreased by $20.3 million from $109.1 million at December 31, 2020, to $88.8 million at June 30, 2021[18] - The adoption of ASU 2020-06 resulted in a $29.3 million decrease in total stockholders' equity[18] - Stock-based compensation contributed $18.0 million to additional paid-in capital for the six months ended June 30, 2021[18] Notes to Condensed Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies - Impinj adopted ASU 2020-06 on January 1, 2021, using the modified retrospective transition method, accounting for convertible notes on a whole-instrument basis[24] - Upon adoption, long-term debt increased by $29.3 million, additional paid-in capital decreased by $32.7 million, and accumulated deficit decreased by $3.4 million[24] - Interest expense decreased for the three and six months ended June 30, 2021, as amortization of debt discount is no longer incurred[24] Note 2. Fair Value Measurements | (in thousands) | June 30, 2021 (Total) | December 31, 2020 (Total) | | :------------- | :-------------------- | :------------------------ | | Cash equivalents: Money market funds | $43,019 | $12,425 | | Short-term investments: U.S. government agency securities | $15,087 | $20,293 | | Short-term investments: Corporate notes and bonds | $19,235 | $13,185 | | Short-term investments: Commercial paper | $11,991 | $23,983 | | Short-term investments: Treasury bill | $9,999 | $24,992 | | Short-term investments: Asset-backed securities | $4,476 | $— | | Total | $103,807 | $94,878 | - Total assets measured at fair value increased from $94.9 million at December 31, 2020, to $103.8 million at June 30, 2021[29] Note 3. Inventory | (in thousands) | June 30, 2021 | December 31, 2020 | | :------------- | :------------ | :---------------- | | Raw materials | $4,639 | $5,275 | | Work-in-process | $7,648 | $9,815 | | Finished goods | $11,777 | $21,239 | | Total inventory | $24,064 | $36,329 | - Total inventory decreased by 33.7% from $36.3 million at December 31, 2020, to $24.1 million at June 30, 2021[30] - Sales of fully reserved inventory had a favorable net gross margin impact of 1.2% for the six months ended June 30, 2021, primarily from endpoint IC inventory[31] - In contrast, inventory excess and obsolescence charges had an unfavorable net gross margin impact of 2.2% and 4.4% for the three and six months ended June 30, 2020, respectively[32] Note 4. Stock-Based Awards | (in thousands) | Stock Options (Number of Underlying Shares) | | :------------- | :---------------------------------------- | | Outstanding at December 31, 2020 | 3,061 | | Granted | 10 | | Exercised | (384) | | Forfeited or expired | (42) | | Outstanding at June 30, 2021 | 2,645 | | (in thousands) | RSUs | MSUs | PSUs | | :------------- | :--- | :--- | :--- | | Outstanding at December 31, 2020 | 836 | — | 251 | | Granted | 621 | 84 | 265 | | Vested | (203) | — | (241) | | Forfeited | (21) | — | (10) | | Outstanding at June 30, 2021 | 1,233 | 84 | 265 | | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total stock-based compensation expense | $10,582 | $4,597 | $18,031 | $9,818 | - Total stock-based compensation expense increased by 130.2% to $10.6 million for the three months ended June 30, 2021, and by 83.7% to $18.0 million for the six months ended June 30, 2021[38] Note 5. Commitments and Contingencies - Impinj is committed to purchase $14.9 million of inventory as of June 30, 2021[40] - A New York State Securities Class Action was settled and dismissed in 2020, with the stipulation discontinuing the action with prejudice entered on April 28, 2021[43] - Shareholder derivative actions are awaiting final court approval for a settlement that includes corporate governance changes and payment of up to $900,000 in attorneys' fees by insurers[45] - Impinj is involved in multiple patent infringement lawsuits with NXP in California, Washington, and Texas, asserting infringement of its patents and defending against NXP's counterclaims[46][49][52] - NXP has also filed patent infringement lawsuits against Impinj Shanghai in China, with jurisdictional challenges rejected and invalidity requests upheld by CNIPA[54] Note 6. Debt Facilities - Impinj issued $86.3 million aggregate principal amount of 2.00% convertible senior notes due 2026 (2019 Notes) in December 2019[55] - The 2019 Notes were convertible at the option of the holders as of June 30, 2021, as the common stock price exceeded 130% of the conversion price[61] | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest expense | $525 | $1,349 | $1,050 | $2,661 | - Interest expense related to the 2019 Notes decreased due to the adoption of ASU 2020-06, eliminating amortization of debt discount[63] | (in thousands) | June 30, 2021 | December 31, 2020 | | :------------- | :------------ | :---------------- | | Outstanding principal amount | $86,250 | $86,250 | | Carrying value | $84,045 | $54,556 | - The estimated fair value of the 2019 Notes was $144.6 million at June 30, 2021, and $118.7 million at December 31, 2020[64] Note 7. Leases | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating lease costs | $1,073 | $998 | $2,093 | $1,979 | - Cash paid for amounts included in the measurement of lease liabilities was $2.4 million for the six months ended June 30, 2021[68] | (in thousands) | Operating Leases (Net) | | :------------- | :--------------------- | | 2021 | $1,736 | | 2022 | $3,561 | | 2023 | $3,450 | | 2024 | $3,289 | | 2025 | $3,315 | | Thereafter | $3,415 | | Total lease payments | $18,766 | Note 8. Net Loss Per Share | (in thousands, except per share amounts) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(8,906) | $(17,534) | $(18,322) | $(21,860) | | Weighted-average shares outstanding — basic and diluted | 24,120 | 22,716 | 23,895 | 22,564 | | Net loss per share — basic and diluted | $(0.37) | $(0.77) | $(0.77) | $(0.97) | - The 'if-converted' method is used for calculating the dilutive effect of convertible instruments on diluted EPS for periods after January 1, 2021, due to ASU 2020-06 adoption[70] Note 9. Segment Information - Impinj operates as a single reportable operating segment focused on the development and sale of RAIN RFID products and services[72] | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Endpoint ICs | $30,784 | $18,545 | $68,866 | $52,220 | | Systems | $16,484 | $7,912 | $23,650 | $22,059 | | Total revenue | $47,268 | $26,457 | $92,516 | $74,279 | Note 10. Deferred Revenue - Deferred revenue primarily comprises extended warranty, enhanced maintenance, and advance payments on non-recurring engineering services contracts[74] | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $7,088 | $764 | | Deferral of revenue | $319 | $658 | | Recognition of deferred revenue | $(6,872) | $(378) | | Balance at end of period | $535 | $1,044 | - Impinj recognized $6.6 million of revenue related to amounts included in deferred revenue as of December 31, 2020, for the six months ended June 30, 2021[75] Note 11. Related-Party Transactions - Impinj recognized $115,200 and $249,600 of consulting fee expense to Cathal Phelan, a board member, for the three and six months ended June 30, 2021, respectively[76] Note 12. Restructuring - On February 2, 2021, Impinj restructured its go-to-market organization, eliminating approximately seven full-time positions (2% of workforce)[77] - Restructuring charges of $1.2 million for employee termination benefits and $50,000 for legal expenses were incurred for the six months ended June 30, 2021[77] | (in thousands) | Employee Termination Benefits | Other Associated Costs | Total | | :------------- | :---------------------------- | :--------------------- | :---- | | Restructuring costs | $1,213 | $50 | $1,263 | | Cash payments | $(583) | $(50) | $(633) | | Accrued restructuring costs as of June 30, 2021 | $630 | $— | $630 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Impinj's financial condition and results of operations, discussing the company's business, factors affecting performance (including COVID-19, growth investments, market adoption, and supply chain), detailed analysis of revenue, gross profit, operating expenses, and non-GAAP measures, as well as liquidity and capital resources Our Business - Impinj's vision is a boundless Internet of Things (IoT), connecting everyday physical items to digital counterparts in the cloud[82] - The company's mission is to connect every thing, delivering a platform that powers item-to-cloud connectivity[83] - Impinj's platform uses RAIN, a type of radio-frequency identification (RFID) technology pioneered by the company, enabling connectivity to more than 50 billion items[86] - Impinj co-founded the RAIN Alliance, which now has over 160 member companies, and spearheaded the development of the RAIN radio standard[86] Factors Affecting Our Performance Covid-19 Impact - COVID-19 exacerbated forecasting difficulties for endpoint ICs due to limited end-user visibility and retail market uncertainties[88] - Increased demand for all endpoint ICs in Q1 2021 outstripped wafer supply and post-processing capacity, leading to inventory consumption[89] - Systems business experienced delayed pilots and deployments in 2020, and in 2021, increased demand is constrained by packaging delays and component shortfalls[90] - Resurgence of COVID-19 in manufacturing regions caused periodic impacts on endpoint IC and systems production[92] Investing in Growth - Impinj continues to invest in research and development to enhance and extend its RAIN platform, focusing on retail self-checkout, loss prevention, and supply chain & logistics opportunities[97][98] - Most investments precede sales benefits and carry inherent uncertainties, including market receptiveness, product development success, and personnel retention[99] Market Adoption - Financial performance depends on the pace and scope of end-user adoption of products, especially in retail apparel, which has been materially impacted by COVID-19[101] - RAIN adoption pace remains uncertain, leading to large fluctuations in operating results and challenges in managing product inventory[102][103] - New products like the Impinj M700 endpoint IC and Impinj R700 reader, introduced in 2020, and E710, E510, E310 reader ICs in 2021, are expected to foster adoption, though M700 demand outstripped supply in H1 2021[104] Timing and Complexity of Customer Deployments - Endpoint IC sales volumes increased at a compounded annual growth rate of 25% from 2010 to 2020, but the pace has been uneven and unpredictable[106] - The systems business relies disproportionately on large-scale deployments, causing significant variability in systems revenue, such as 13% of Q2 2021 revenue from a project-based gateway deployment for a large European retailer[107] Average Selling Price (ASP) - Product ASPs generally decline over time due to competitive pressures and discounting[109] - In 2021, rising costs and delayed supply due to wafer and component shortages are anticipated, which may negatively affect operating margins if price increases are not feasible[109] Seasonality - Endpoint IC pricing renegotiations typically reduce revenue and gross margins in Q1, while system sales tend to be stronger in Q4[110][111] - COVID-19 impacts on demand and supply may disrupt these historical seasonal trends in 2021[110][111] Inventory Supply - Impinj is experiencing wafer shortages in 2021 due to significant worldwide demand and semiconductor foundries reallocating capacity[115] - Limited 200mm inventory, tight 200mm and 300mm foundry capacity, and insufficient 300mm post-processing capacity are constraining the ability to meet endpoint IC demand[115] - Foundry partners signal tight wafer availability well into 2022, potentially leading to an inability to meet 2022 endpoint IC demand[115] - The systems business faces lengthened packaging lead times for reader ICs and anticipated shortages and price increases for electronic components in readers and gateways[116] Results of Operations Overview | (in thousands, except percentages) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $47,268 | $26,457 | $92,516 | $74,279 | | Gross profit | $24,777 | $12,960 | $46,758 | $34,354 | | Gross margin | 52.4% | 49.0% | 50.5% | 46.2% | | Loss from operations | $(8,317) | $(16,270) | $(17,189) | $(19,665) | - Revenue increased significantly for both the three and six months ended June 30, 2021, driven by higher endpoint IC and systems revenue[118][119] - Gross margin improved due to prior-year excess and obsolescence charges and current-year leverage on overhead costs[118][119] - Loss from operations decreased, primarily due to increased gross profit, partially offset by higher operating expenses, including stock-based compensation and restructuring charges[118][119] Revenue | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Endpoint ICs | $30,784 | $18,545 | $68,866 | $52,220 | | Systems | $16,484 | $7,912 | $23,650 | $22,059 | | Total revenue | $47,268 | $26,457 | $92,516 | $74,279 | - Endpoint IC revenue increased by $12.2 million (Q2) and $16.6 million (H1), primarily due to higher shipment volumes, partially offset by lower ASPs[121][123] - Systems revenue increased by $8.6 million (Q2), driven by a $6.3 million project-based gateway deployment and higher reader shipment volumes[122] - For H1, systems revenue increased by $1.6 million, with growth in reader and gateway revenue offset by a $3.2 million decrease in reader IC revenue due to packaging delays[124] Gross Profit and Gross Margin | (in thousands, except percentages) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $22,491 | $13,497 | $45,758 | $39,925 | | Gross profit | $24,777 | $12,960 | $46,758 | $34,354 | | Gross margin | 52.4% | 49.0% | 50.5% | 46.2% | - Gross profit increased due to higher endpoint IC and systems revenue[126][127] - Gross margin increased due to prior-year excess and obsolescence charges, current-year sales of fully reserved inventory, and leverage on overhead costs from increased revenue[126][127] Operating Expenses Research and Development | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $15,900 | $10,661 | $29,691 | $21,718 | - R&D expense increased by $5.2 million (Q2) and $8.0 million (H1), primarily due to higher stock-based compensation, increased personnel expenses from higher headcount, and higher product development costs[129][130] Sales and Marketing | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales and marketing | $8,196 | $6,123 | $15,841 | $13,613 | - Sales and marketing expense increased by $2.0 million (Q2) and $2.2 million (H1), mainly due to increased stock-based compensation and personnel expenses (commission, headcount)[132][133] - H1 increase was partially offset by a $340,000 decrease in marketing and advertising expense due to reduced spend on tradeshows impacted by COVID-19[133] General and Administrative | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | General and administrative | $8,998 | $12,446 | $17,152 | $18,688 | - G&A expense decreased by $3.5 million (Q2) and $1.5 million (H1), primarily due to a $5.4 million decrease in settlement and related costs from prior-year lawsuits[135][136] - Decreases were partially offset by increased stock-based compensation and professional services fees (H1)[135][136] Restructuring Costs | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Restructuring costs | $— | $— | $1,263 | $— | - Impinj incurred $1.2 million in restructuring charges for the six months ended June 30, 2021, related to realigning its go-to-market organization and eliminating approximately 2% of its workforce[137] Other Income (Expense), net | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Other income (expense), net | $(4) | $126 | $19 | $535 | - Other income (expense), net, decreased for both periods due to a decrease in interest rates[139] Interest Expense | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense | $525 | $1,349 | $1,050 | $2,661 | - Interest expense decreased due to the adoption of ASU 2020-06 on January 1, 2021, which eliminated the amortization of debt discount[141] Income Tax Expense | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $60 | $41 | $102 | $69 | - Income tax expense remained comparable for the periods presented[142] Non-GAAP Financial Measures Adjusted EBITDA | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Adjusted EBITDA | $3,301 | $(5,188) | $4,181 | $(2,194) | - Adjusted EBITDA significantly improved, turning positive for both the three and six months ended June 30, 2021, compared to losses in the prior year periods[144] Non-GAAP Net Income (Loss) | (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Non-GAAP net income (loss) | $2,712 | $(5,566) | $3,048 | $(2,649) | - Non-GAAP net income (loss) also showed significant improvement, turning positive for both periods, driven by the exclusion of various non-cash and non-recurring items[146] Liquidity and Capital Resources Overview - As of June 30, 2021, Impinj had $112.0 million in cash, cash equivalents, and short-term investments, with working capital of $58.0 million[147] - The company believes existing cash and investments will be sufficient for at least the next 12 months but may require additional funding for future acquisitions or growth[148] Sources of Funds - Historically, operations have been funded through cash from operations, equity issuances, convertible-debt offerings, and prior senior credit facilities[149] - Impinj may explore additional financing sources, including equity, equity-linked, and debt financing, to lower its cost of capital[149] 2019 Notes - In December 2019, Impinj issued $86.3 million aggregate principal amount of 2.00% convertible senior notes due 2026[150] - Net proceeds of approximately $83.5 million were used to pay for capped-call transactions, repay a prior senior credit facility, and for general corporate purposes[151] Cash Flows Operating Cash Flows | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $4,981 | $2,809 | - Net cash provided by operating activities increased to $5.0 million in H1 2021, driven by a working-capital contribution and adjusted net loss[153] Investing Cash Flows | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :----------------------------- | :----------------------------- | | Net cash provided by investing activities | $13,317 | $24,935 | - Net cash provided by investing activities was $13.3 million in H1 2021, primarily from investment maturities ($41.0 million) offset by purchases of investments ($19.8 million) and property and equipment ($7.9 million)[155] Financing Cash Flows | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :----------------------------- | :----------------------------- | | Net cash provided by financing activities | $9,241 | $2,846 | - Net cash provided by financing activities was $9.2 million in H1 2021, primarily from stock-option exercises and the employee stock purchase plan[157] Cash Requirements and Contractual Obligations - Primary cash requirements are for operating expenses and capital expenditures[158] | (in thousands) | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :------------- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Convertible senior notes (1) | $95,738 | $1,725 | $3,450 | $3,450 | $87,113 | | Net operating lease commitments | $18,767 | $3,527 | $6,902 | $6,631 | $1,707 | | Purchase commitments (2) | $18,003 | $17,138 | $865 | $— | $— | | Total | $132,508 | $22,390 | $11,217 | $10,081 | $88,820 | - Purchase commitments include $14.9 million of non-cancelable inventory as of June 30, 2021[159] Off-Balance Sheet Arrangements - Impinj has not had any relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements since inception[160] Critical Accounting Policies and Significant Estimates - The preparation of financial statements requires significant estimates and assumptions, which are evaluated on an ongoing basis[161] - For detailed information on critical accounting policies and estimates, refer to the Annual Report on Form 10-K for the year ended December 31, 2020[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Impinj's exposure to market risks, specifically interest rate risk, inflation risk, and foreign currency exchange risk, and assesses their potential impact on the company's financial condition and results of operations Interest Rate Risk - Impinj invests excess cash in money market funds, U.S. government agency securities, corporate bonds and notes, and commercial paper, prioritizing principal preservation and liquidity[163] - As of June 30, 2021, cash, cash equivalents, and short-term investments totaled $112.0 million[164] - A hypothetical 100 basis point increase in interest rates is not expected to materially affect interest income, results of operations, or cash flows due to the short-term nature of investments and fixed rate of 2019 Notes[164][165] Inflation Risk - Impinj does not believe inflation has had a material effect on its business, financial condition, or results of operations[166] - Significant inflationary pressures on costs, if not offset by price increases, could adversely affect the business[166] Foreign Currency Exchange Risk - The functional currency of Impinj's foreign subsidiaries is the U.S. dollar, and foreign currency fluctuations have not had a material impact[167] - As international operations grow, exposure to foreign currency risk is expected to become more significant[167] Item 4. Controls and Procedures This section details the evaluation of Impinj's disclosure controls and procedures and internal control over financial reporting, confirming their effectiveness and reporting no material changes during the quarter, while also acknowledging the inherent limitations of any control system Evaluation of Disclosure Controls and Procedures - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021[168] Changes in Internal Control over Financial Reporting - There were no changes that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the three months ended June 30, 2021[169] Limitations on Controls - Disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance, not absolute, and are subject to inherent limitations[170] PART II. — OTHER INFORMATION Item 1. Legal Proceedings This section provides an overview of Impinj's legal proceedings, including ongoing shareholder derivative actions and multiple patent infringement lawsuits with NXP in various jurisdictions, noting the uncertain outcome of these litigations - Three shareholder derivative actions filed in October and November 2018 against Impinj and certain officers/directors are ongoing[173] - Impinj filed a patent infringement lawsuit against NXP USA, Inc. on June 6, 2019, and NXP subsequently filed counter-lawsuits[174] - Impinj filed an additional patent infringement suit against NXP on May 25, 2021[174] - The outcome of the patent litigation with NXP remains uncertain, with potential for additional lawsuits[174] Item 1A. Risk Factors This comprehensive section details various risks that could materially impact Impinj's business, operating results, and financial condition, categorized into risks related to its platform, products, and technologies; personnel and business operations; relationships with customers, channel partners, and end users; intellectual property; privacy and cybersecurity; financial position and capital needs; financial reporting and disclosure; and owning or trading of its securities Risks Relating to Our Platform, Products and Technologies RAIN Market Adoption Uncertainty - The RAIN market is still developing, and its adoption pace and scope are uncertain, depending on end-user understanding of benefits, cost-benefit analysis, and product suitability[176] - Historical overestimation of adoption rates and project-based deployments contribute to difficulties in forecasting future operating results[176] Competitive Market - Impinj faces significant competition from established and emerging competitors in endpoint ICs (NXP, Alien, Kiloway), reader ICs (ST, Phychips, Iotelligent, MagicRF), and readers/gateways (Alien, Zebra)[178] - Competitors may have greater resources, offer discounts, bundle technologies, or channel partners may choose to compete, adversely affecting Impinj's operating results[178][180] New Product Introduction and Development - Impinj must regularly introduce new products and enhancements, committing significant resources to development, performance, reliability, and cost reduction[181] - Success depends on timely design, manufacturing, product performance, certification, and effective marketing, with new products potentially taking time to succeed or failing entirely[182] Enterprise System Integration Challenges - The market for Impinj's products is adversely affected if enterprise systems cannot effectively exploit RAIN information, requiring integration with information systems and applications[182] - Difficulties in integrating Impinj's products with end-user information systems or a lack of third-party tool development could delay or stall RAIN deployments[182][183] Declining Average Selling Prices (ASPs) - Product ASPs have historically decreased and are expected to continue to do so due to competitive pressures and market innovation[184][185] - Failure to offset ASP reductions with increased sales volumes or reduced product costs will negatively impact revenue and gross margins, especially with anticipated rising costs in 2021[184][185] Dependence on Endpoint ICs - Impinj derives a majority of its product revenue from endpoint ICs, making it vulnerable to demand fluctuations and wafer supply issues[186] - A decline in sales or increased price competition for endpoint ICs, or failure to demonstrate their benefits with the Impinj platform, could adversely affect operating results and financial condition[186] Product Mix Impact on Gross Margin - Changes in product mix, particularly a shift towards lower-margin endpoint ICs, can negatively affect overall gross margins[187] Product Defects and Interoperability Issues - Defects, errors, or interoperability issues with Impinj's highly technical products, or difficulties in their deployment, can damage reputation, incur significant costs, and impair sales[188][189] - Current production issues, including delays, insufficient capacity, and component shortages, are adversely affecting operating results[190] - Success in ramping adoption of new products like M700 endpoint ICs or E710/510/310 reader ICs depends on ease of deployment by partners and end customers[191] Customer Design-in Dependency - Impinj's success depends on end users or direct customers designing RAIN and Impinj products into their systems, which requires extensive education and long pilot/qualification processes[193] - Failure to develop new products that adequately address customer needs or to convince customers to adopt could adversely affect business, prospects, and operating results[193] Limited Visibility into Sales and Deployment Cycles - Impinj has limited visibility into the length and timing of product sales and deployment cycles, which are often longer than anticipated due to customer evaluation, education, and integration processes[194] - This uncertainty can lead to delayed product orders and substantial upfront costs before sales materialize[194] Alternative Technologies and Standards Changes - Breakthroughs in legacy RFID technologies or new, lower-cost technologies, or significant changes in RAIN standards (GS1, ISO) or government regulations, could render products obsolete or impede sales[195][197][199] - Such changes could cause Impinj to incur substantial development costs, delay time-to-market, or limit the ability to implement new product features[197][200] Product Cannibalization - Sales of some Impinj products, such as reader ICs, can enable channel partners to develop their own products that compete with other Impinj products, potentially leading to revenue cannibalization[201] Restrictive Customer Agreement Provisions - Customer agreements containing pricing terms, most-favored customer clauses, or exclusivity terms can adversely affect operating results and gross margins by limiting pricing flexibility and business opportunities[202] Risks Relating to Our Personnel and Business Operations Third-Party Supplier Dependence - Impinj relies on third-party manufacturers without long-term supply contracts, exposing it to risks like manufacturing capacity shortages, long lead times, and supply disruptions[203] - Supplier failures in manufacturing at reasonable prices or quality levels, or diminished capacity, could lead to difficulty fulfilling orders, revenue decline, and impaired growth prospects[204] - Transitioning assembly services or IC foundries to new providers would be costly and time-consuming, requiring customer requalification[204] Silicon Wafer Shortages - Impinj is vulnerable to silicon wafer shortages, currently experiencing significant worldwide demand and foundry reallocation, leading to limited 200mm inventory and tight 200mm/300mm foundry capacity[205] - Foundry partners signal tight wafer availability into 2022, potentially leading to an inability to meet 2022 endpoint IC demand[205] - Anticipated future shortages and price increases for components in readers and gateways could impact product availability and costs[205] Inventory Risks from Channel Partners - Impinj bears inventory risks due to manufacturing based on channel-partner forecasts, which are often inaccurate, leading to potential excess inventory or reduced future sales[207] - Channel partners may cancel purchase orders or reschedule shipments, and inaccurate inventory/resale information can impact operating results[207][234] Ongoing COVID-19 Impacts - COVID-19 continues to create significant economic volatility and disruption, adversely affecting Impinj's financial position, operations, and future business prospects[208] - Risks include uncertain product demand (especially in retail), decreased visibility, supply chain disruptions, increased operating costs, and delays in R&D and sales activities[208][209] - COVID-19 may accelerate a long-term shift in consumer behavior away from physical stores, potentially reducing demand for Impinj's products[211] Global Trade Policy Uncertainties - Changes in U.S. and foreign laws and policies governing foreign trade, including tariffs (especially with China), could materially affect Impinj's business by impacting competition, product costs, and market access[213][214] - Other uncertainties include the Chinese government's efforts to promote its domestic semiconductor industry and lingering issues from Brexit[215] International Operations Risks - Impinj derived 80% of its total revenue from sales outside the United States in 2020, exposing it to risks like regulatory changes, trade restrictions, limited IP protection, and currency fluctuations[216][217] - Complex and evolving data privacy laws (GDPR, CCPA, CPRA) require policy changes, incur costs, and pose non-compliance risks, with potential for significant fines[219][220] - Failure to comply with anti-corruption laws like FCPA and the U.K. Bribery Act, especially with increased business in China, could subject Impinj to civil or criminal fines and penalties[223] Export and Import Controls - Impinj is subject to U.S. and foreign export/import controls, which can lead to liability, impair international competitiveness, and delay new product introductions[225][226] - Noncompliance with these laws or changes in regulations, tariffs, or targeted countries/technologies could adversely affect sales and operations[225][226] Political, Social, Economic Instability in Production Jurisdictions - Impinj's reliance on outsourced manufacturing in a few jurisdictions (Thailand, Malaysia, Taiwan, China) makes it vulnerable to political, social, business, or economic instability, including COVID-19 related shutdowns[227] - Such instability could disrupt production, delay shipments, and force costly transfers to alternative suppliers or regions[228] Natural Disasters - Impinj's business operations are vulnerable to natural disasters (e.g., seismic activity in Seattle, flooding in Shanghai/Thailand), which could decrease demand, disable facilities, disrupt operations, and cause catastrophic losses[229] - The company does not carry insurance that covers potential losses caused by pandemics, earthquakes, floods, or other disasters[229] Risks Relating to Our Relationships with Customers, Channel Partners and End Users Customer Concentration - Impinj relies on a small number of customers for a large share of its revenue; in 2020, Avery Dennison and Arizon accounted for 32% and 10% of total revenue, respectively[230] - This concentration reduces bargaining power, increases risk from competitor actions, and makes revenue volatile due to large project-based deployments (e.g., 14% of 2019 revenue from one SC&L provider)[230][232] Limited Influence on End-User Demand - As Impinj sells primarily through channel partners, its ability to directly assess and influence end-user demand is limited[233] - Channel partners may prioritize competitors' products, offer competing products, or reduce inventory, leading to decreased sales to these partners and overall revenue[233] Inaccurate Channel Partner Forecasting - Channel partners often inaccurately forecast end-user demand, leading to Impinj manufacturing products based on unreliable projections[234] - This can result in excess inventory, order cancellations, or rescheduled shipments, negatively impacting sales and operating results[234] Dependence on Strategic Relationships - Impinj's growth strategy relies on successful strategic relationships with SIs, VARs, and software providers whose product offerings complement its own[235] - Failure to develop and grow these partnerships, or if they increase costs without corresponding revenue, could harm the business[235] Brand Recognition and Reputation - Impinj's business depends on maintaining and enhancing its brand recognition and reputation, which is crucial for relationships with partners and end users, and for attracting new ones[236] - Success depends on delivering high-quality products, maintaining customer satisfaction, differentiating products, and managing publicity[236] Risks Relating to Our Intellectual Property Inability to Protect Intellectual Property - Impinj's success depends on **obtai