UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☑
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December��December 31, 20212022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☐
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 001-37824
IMPINJ, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 91-2041398 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
400 Fairview Avenue North, Suite 1200, Seattle, Washington | 98109 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (206) (206) 517-5300
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.001 par value per share (Title of each class) | PI (Trading Symbol) | The Nasdaq Global Select Market (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐No☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financing reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2021,2022, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant’s common stock held by non-affiliates based upon the closing price of such shares on The Nasdaq Global Market on such date was $968.0 million.approximately $1.3 billion.
As of February 4, 2022, 24,764,6783, 2023, 26,157,089 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated in this report by reference to the registrant’s definitive proxy statement relating to its 20222023 annual meeting of stockholders. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2021.2022.
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As used in this report, the terms “Impinj,” “the Company,” “we,” “us” and “our” refer to Impinj, Inc., unless the context indicates otherwise.
Risk Factors 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, but are not limited to, the following:
| • we operate in a very competitive market and if we fail to compete successfully, then our business and operating results will suffer; •RAIN adoption is concentrated in key industries and the extent and pace of RAIN market adoption beyond these industries is uncertain; •our ability to deliver platform solutions at scale are nascent; •poor product quality could result in significant costs to us and impair our ability to sell our products; •end users must design our products into their products and business processes; •an inability or limited ability of enterprise systems to exploit RAIN information may adversely affect the market for our products; •alternative technologies or standards, or changes in existing technologies or standards, may adversely affect RAIN market growth and our business; •we obtain the products we sell through a limited number of third parties with whom we do not have long-term supply contracts; •we are vulnerable to silicon wafer shortages, which have and may continue to adversely affect our ability to meet demand for our products; •we rely on a small number of customers for a large share of our revenue; •our ability to affect or determine end-user demand is limited in part because we sell and fulfill primarily through partners; •our growth strategy depends in part on the success of strategic relationships with third parties and their continued performance and alignment; •if we are unable to protect our intellectual property, then our business could be adversely affected; •we are and may become party to additional intellectual property disputes, which are time consuming; costly to prosecute, defend or settle; could result in the loss of significant rights; and could adversely affect RAIN adoption or adoption of our platform; •we have a history of losses and have only achieved profitability intermittently and we cannot be certain that we will attain or sustain profitability in the future; •we have a history of significant fluctuations in our quarterly and annual operating results; •our executive officers, directors and principal stockholders, together with their affiliates, beneficially owned approximately 22.0% of our outstanding common stock as of December 31, 2022, and as a result are able to exercise significant influence over matters subject to stockholder approval; and •we may not have sufficient cash flow or access to cash necessary to satisfy our obligations under the $287.5 million aggregate principal amount 1.125% convertible senior notes due 2027, or the 2021 Notes, and our current and future indebtedness may restrict our business. •
| if RAIN market adoption does not continue to develop, or develops slower than we expect, or if RAIN adoption by retailers does not continue at the rate we expect, our business will suffer;
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| our market is very competitive, and if we fail to compete successfully, our business and operating results will suffer;
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| an inability or limited ability of enterprise systems to exploit RAIN information may adversely affect the market for our products;
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| if end users or our direct customers fail to design our products into their products and systems, our operating results and prospects will be adversely affected;
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| alternative technologies or standards, or changes in existing technologies or standards, may adversely affect RAIN market growth and our business;
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| we obtain products we sell through third parties who operate outside of United States and with whom we do not have long-term supply contracts, and if we are unable to effectively manage our relationships with suppliers our operating results and financial condition would be adversely affected;
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| we are vulnerable to silicon wafer shortages, which may adversely affect our ability to meet demand for our products;
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| our products must meet demanding technical and quality specifications and failure of our products to operate as expected could have an adverse effect on our operating results;
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| Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our business are uncertain;
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| we rely on a small number of customers for a large share of our revenues;
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| because we sell and fulfill through channel partners, our ability to affect or determine end-user demand is limited;
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| our growth strategy depends in part on the success of strategic relationships with third parties and their continued performance and alignment;
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| if we are unable to protect our intellectual property, then our business could be adversely affected;
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| 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;
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| we have a history of losses and have only achieved profitability intermittently, and we cannot be certain that we will attain or sustain profitability in the future;
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| we have a history of significant fluctuations in our quarterly and annual operating results;
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| servicing $287.5 million aggregate principal amount 1.125% convertible senior notes due 2027, or the 2021 Notes, and $9.85 million aggregate principal amount 2.0% convertible senior notes due 2026, or the 2019 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 Notes, in which case our indebtedness may limit our operating flexibility or otherwise affect our business; and
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| our executive officers, directors, principal stockholders, together with their affiliates, beneficially owned approximately 25.0% of our outstanding common stock as of December 31, 2021, and as a result are able to exercise significant influence over matters subject to stockholder approval.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements 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
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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 market opportunity; the adoption of RAIN technology and solutions; our ability to compete effectively against competitors and competing technologies; our market share and product leadership; and our business model, strategic plans and product-development plans; •the impact of Covid-19, including on our business, operations and financial condition as well as on macroeconomic conditions; •our future financial performance, including our average selling prices, gross margins and the dependency of our future financial performance on macroeconomic conditions; •the performance of third parties on which we rely for product development, manufacturing, assembly and testing; and our relationship with other third parties on which we rely for product distribution, sales, integration and deployment; •our ability to adequately protect our intellectual property; •the regulatory environment for our products and services; and •our leadership in industry and standards-setting bodies. •
| our market opportunity; the adoption of RAIN RFID technology and solutions; our ability to compete effectively against competitors and competing technologies; and our market share and technology leadership; and the implementation of our business model, strategic plans and product development plans;
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| the impact of Covid-19, including on macroeconomic conditions and our business, results and operations and financial condition;
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| our future financial performance, including our average selling prices and gross margins; and the dependency of our future financial performance on future macroeconomic conditions;
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| the performance of third parties on which we rely for product development, manufacturing, assembly and testing; and our relationship with other third parties on which we rely for product distribution, sales integration and deployment;
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| our ability to adequately protect our intellectual property;
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| the regulatory regime for our products and services; and
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| our leadership of standards-setting processes.
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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 I, Item 1A (Risk Factors).
In light ofConsidering 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 theany 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.
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PART I
Item 1. Business
Overview
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-clouditem connectivity that our platform will deliver will enhancedelivers enhances businesses efficiencies and commerce and, ultimately, improve peoples’ lives.
Impinj Platform
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.applications. We link the products within our platform to deliver capabilities and performance that surpasses mix-and-match solutions built from competitor products.
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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 6075 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.GDP. We believe RAIN’s capabilities – in particular, endpoint ICs with serialized identifiers for individual items, battery-free operation, 30-foot range, readingnot line-of-sight readability, up to 1,000 itemsreads per second, without line-of-sight, radio-frequency energy harvesting for battery-free operation,low cost, essentially unlimited life and in the future,available cryptographic item authentication – position RAIN to be the leading item-to-cloud connectivity technology for the IoT.
RAIN market adoption has historically been slower than anticipated or forecasted by us and industry sources. For additional information related to RAIN market adoption, please see the section of this report captioned “Risk Factors.”
Endpoint ICs
Our endpoint integrated circuit, or ICs,IC, product family comprises miniature radios-on-a-chip that sell for pennies and can wirelessly connect almost any item yet sell for pennies.item. Each IC attaches to a host item and includes a number to identify the item. The IC may also include or enable features such as user data storage, security, authentication, loss prevention, privacy protection and value-added Impinj custom capabilities, all accessible by our platform.
Our original equipment manufacturing, or OEM, partners typically attach eachan endpoint IC to a thin printed or etched antenna on a paper or Mylar backing, then cover the composite inlay with a paper face to form a tag. End users attach the tags to items used in markets including retail, supply chain and logistics, healthcare, automotive, sports, industrial and manufacturing, consumer experience, food, datacenter, travel and banking. In some more-recent applications, rather than attaching a tag to an item, end users may instead embed the inlay directly into the item, for example by sewing an inlay into a garment’s care label. Regardless of the method by which our partners embed an endpoint IC into a host item, we refer to an IC and its host item as an endpoint.
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When a consumer purchases a retail item, a store or supplier will typically procure another inventory item to sell, including another endpoint IC. We believe endpoint ICs are the first market for consumable silicon and selling endpoint ICs representsis a recurring revenue source for us.
Systems
Our systems product family comprises reader ICs, readers and gateways that wirelessly provide power to, and communicate bidirectionally with, endpoint ICs on host items. They also read, write, authenticate and engage the endpoint ICs on those items. Our systems products include software and algorithms that enable our partners to deliver use cases such as retail self-checkout and loss prevention, and warehouse pallet and cartonpackage tracking, to end users worldwide.
Our reader IC product family comprises multiple products, tiered by performance and functionality, that our reader IC partners use in their readers. We offer easy-to-use application programming interfaces, or APIs, sample code, development environments, sample code, drivers and libraries to facilitate partner reader development. We also leverage developments in our reader and gateway software to enhance the firmware in our reader IC firmware.ICs. We sell our reader ICs to OEM and original design manufacturing, or ODM, partners that use them in mobile or handheld readers, fixed readers, gateways, RAIN-enabled appliances and other intelligent edge devices. We sell our reader ICs for tens of dollars.
Our reader product family comprises multiple finished products, tiered by performance and functionality. Our gateway product family integrates our readers with beamforming antennas to electrically steer a radio beam like a radar, locating and tracking items in one dimension or two.two dimensions. Our partners can use our readers and gateways to enable end-user solutions. Our readers and gateways are easy to deploy and use, can be powered via power-over-Ethernet, or PoE, and are certified for operation in more than 40 countries.
Our software and algorithms run either entirely on our readers and gateways or partly on them and partly on partner devices. We are currently focused on developing software and algorithms to enable retail use cases (such as self-checkout and loss prevention), and on supply chain and logistics use cases (such as pallet tracking in dock
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doors and package sortation on conveyors). Our easy-to-use APIs enable ourallow partners to transform item data into actionable information, enabling analytics and insights about the items that businesses manufacture, transport and sell. Our APIs also help our partners deliver enterprise-grade systems management and control. We sell our readers and gateways through distributors, system integrators, or SIs, value-added resellers, or VARs, and solution providers. We sell our readers for hundreds of dollars and our gateways for thousands of dollars.
Industry Use Cases
The following use cases are representative of actual RAIN deployments we serve today.
Retail
Retailers, both traditional “brick-and-mortar” and online, consume billions of RAIN tags each year to obtain real-time data about products they manufacture, transport and sell. Today, most retail products with RAIN tags are apparel and footwear, but retailers are extending RAIN usage to cosmetics,general merchandise including toys, home good,goods, electronics, auto parts, magazines, stationary, sporting items, cosmetics and even food. Retailers can obtain the following benefits by using our platform:
| • In-store Inventory Visibility. Our platform delivers accurate and timely data about a retailer’s product inventory. Accurate inventory data can reduce overstocks, understocks and searching, thereby allowing retailers to reduce inventory and increase same-store sales by ensuring each store is properly stocked and by enabling staff to focus on customers rather than on inventorying or searching for items. •Omnichannel Fulfillment. The cornerstone of a successful omnichannel operation is real-time inventory visibility in stores, warehouses and fulfillment centers. The visibility our platform delivers can help or enable retailers ship directly from those stores, warehouses and fulfillment centers as well as allow consumers to buy online and pickup in store. It can also help retailers sell to any customer from any retail location, confidently sell to the last item and facilitate seamless returns. •Self-checkout and Loss Prevention. Consumer self-checkout is a clear opportunity for retailers looking to modernize their in-store experience. However, self-checkout requires effective loss prevention. Our platform can enable both – self-checkout via sales terminals that read endpoint ICs on items and loss-prevention systems that scan RAIN tags for unsold items leaving the store. As our inlay partners focus on embedding RAIN tags directly into retail items, we focus on key innovations like our patented Protected Mode that allows a tag to require a PIN for post-point-of-sale readability, enabling loss-prevention systems to focus on unsold items while satisfying General Data Protection Regulation, or GDPR, and similar privacy requirements. •
| In-store Inventory Visibility. Our platform delivers accurate and timely data about a retailer’s inventory. Accurate inventory data can reduce overstocks, understocks and searching, thereby allowing retailers to both reduce costly inventory and increase same-store sales by ensuring each store is properly stocked and by enabling staff to focus on customers rather than on inventorying or searching for items.
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| Omnichannel Fulfillment. The cornerstone of a successful omnichannel operation is real-time inventory visibility in stores, warehouses and fulfillment centers. The visibility our platform delivers can help or enable retailers ship directly from those stores, warehouses and fulfillment centers as well as allow consumers to buy online and pickup in store. It can also help retailers sell to any customer from any retail location, confidently sell down to the last item and facilitate seamless returns.
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| Self-checkout and Loss Prevention. Consumer self-checkout is a clear opportunity for retailers looking to modernize their in-store experience. However, self-checkout requires effective loss prevention. Our platform can enable both – self-checkout via kiosks that read endpoint ICs on items and loss-prevention systems that scan RAIN tags for unsold items leaving the store. As our inlay partners focus on embedding RAIN tags directly into retail items, we focus on key innovations like our patented Protected Mode that allows a tag to require a PIN for post point-of-sale readability, enabling loss-prevention systems to focus on unsold items while satisfying General Data Protection Regulation, or GDPR, and similar privacy requirements.
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Supply Chain and Logistics
The supply chain and logistics, or SC&L, industry includes shipping companies, third-party logistics providers, postal organizations, captive distribution operations and other organizations transporting nationalproducts nationally and international trade.internationally. These organizations are increasingly demanding real-time shipment data to virtualize, analyze and optimize their operations. SC&L companies can obtain these benefits using our platform:
| • Shipment Verification. Our platform provides real-time data about items passing through dock doors to the systems that run shipping and receiving, enabling SC&L companies to reduce mistakes, automate processes and drive operational efficiencies. •Conveyor Sortation. Our platform enables high-speed, real-time, not line-of-sight reading of packages moving along conveyors, improving automatic sortation accuracy and reducing costly shipping errors. •Returnable Transit Item, or RTI, Tracking. By tagging RTI containers, our platform can reduce RTI loss and ensure SC&L companies have the RTI containers they need. •Asset Management. Our platform enables automated asset check-in/out procedures and location monitoring, reducing loss and improving efficiencies and maintenance-schedule compliance. •
| Shipment Verification. Our platform provides real-time data about items passing through dock doors to the systems that run shipping and receiving, enabling SC&L companies to reduce mistakes, automate processes and drive operational efficiencies.
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| Conveyor Sortation. Our platform enables high-speed, real-time, not line-of-sight reading of packages moving along conveyors, improving automatic sortation accuracy and reducing costly shipping errors.
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| Returnable Transit Item, or RTI, Tracking. By tagging RTI containers that travel in and out of warehouses, our platform can reduce RTI loss and ensure SC&L companies have the RTI containers they need.
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| Asset Management. Our platform enables automated asset check-in/out procedures and location monitoring, reducing loss and improving efficiencies and maintenance-schedule compliance.
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Other Industries
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These other industries can also obtain benefits using our platform:
| • Aviation. Luggage tags that incorporate our endpoint ICs allow airlines to give passengers real-time location information for their checked bags as well as reduce lost bags. •Automotive. Car manufacturers use our platform to track and verify automotive parts for vehicle assembly, reducing mistakes and labor costs and improving operations. •Healthcare. Hospitals use our platform to track assets and manage patient and clinician workflows. Partner products built on our platform include RAIN-enabled medical cabinets and refrigerators. •Industrial and Manufacturing. Industrial companies track components to increase manufacturing productivity and reduce shipping errors. Manufacturers use our platform to track assets and tools, reducing errors and increasing calibration compliance. •Sports. Marathons and other foot races track runners via our endpoint ICs in race bibs. Golf venues score participants’ shots via our endpoint ICs inside golf balls. •Food. Our reader ICs track syrup cartridges for replenishment in soda fountains. Our endpoint ICs track meat, fish and fresh produce for freshness. •Datacenters. Datacenters use our platform for asset tracking. Electronics manufacturers embed our endpoint ICs into electronic devices for processor-secured storage. •Travel. Driver licenses in some states in the United States include our endpoint ICs to speed border crossings. Fueling stations use vehicle windshield tags to enable automatic and cashless fueling. •Banking. Banks use our endpoint ICs for money bundles and to track information-technology assets. •Linen and Uniform Tracking. Laundry providers embed washable tags into their linens and uniforms for automated tracking. •
| Aviation. Luggage tags that incorporate our endpoint ICs allow airlines to give passengers real-time location information for their checked bags as well as reduce lost bags.
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| Automotive. Car manufacturers use our platform to track and verify automotive parts for vehicle assembly, reducing mistakes and labor costs and improving operations.
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| Healthcare. Hospitals use our platform to track assets and manage patient and clinician workflows. Partner products built on our platform include RAIN-enabled medical cabinets and refrigerators.
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| Industrial and Manufacturing. Industrial companies track components to increase manufacturing productivity and reduce shipping errors. Manufacturers use our platform to track assets and tools, reducing errors and increasing calibration compliance.
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| Sports. Marathons and other foot races track runners via our endpoint ICs in race bibs. Golf venues score participants’ shots via our endpoint ICs inside golf balls.
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| Food. Our reader ICs track syrup cartridges for replenishment in soda fountains. Our endpoint ICs track meat and fish for freshness.
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| Datacenters. Datacenters use our platform for asset tracking. Electronics manufacturers embed our endpoint ICs into electronic devices for processor-secured storage.
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| Travel. Driver licenses in some states in the United States include our endpoint ICs to speed border crossings. Fueling stations use vehicle windshield tags to enable automatic and cashless fueling.
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| Banking. Banks use our endpoint ICs for money bundles and to track information-technology assets.
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| Linen and Uniform Tracking. Laundry providers embed washable tags into their linens and uniforms for automated tracking.
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Competitive Advantages
We believe we can extend our leadership of the RAIN RFID market by leveraging our competitive strengths, including:
| • Platform. Our platform integrates our products and enables enhanced functionalities in ways we believe surpasses mix-and-match solutions built from competitor components, improving overall RAIN system performance, capabilities, reliability and ease-of-use. •Market Leadership. We believe we lead the RAIN market as the only company with an integrated platform spanning endpoint ICs, reader ICs, fixed readers and gateways. •Technology Leadership. Our RAIN focus has enabled us to regularly be first-to-market with innovative, high-performing and high-quality products. Our chief executive officer is a recognized industry thought leader, a director of the RAIN Alliance and previously was an editor for the RAIN radio standard. •Partner Ecosystem. Our worldwide partner ecosystem comprises hundreds of distributors, SIs, VARs, software solution partners and reader, inlay and tag ODMs and OEMs. That ecosystem gives us market reach, penetration and scale we believe few, if any, of our competitors enjoy. •Trusted Brand. We believe our industry leadership, name recognition and reputation for innovative, high-performing and high-quality products have significantly contributed to our leading market position. •Intellectual Property. We believe we have the leading RAIN patent portfolio. As of December 31, 2022, our portfolio included 296 issued and allowed U.S. patents, five issued and allowed international patents, 20 pending U.S. patent applications and 7 pending international patent applications. •
| Platform. Our platform integrates our products and enables enhanced functionalities in ways we believe surpasses mix-and-match solutions built from competitor components, improving overall RAIN system performance, capabilities, reliability and ease-of-use.
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| Market Leadership. We believe we lead the RAIN market as the only company with an integrated platform spanning endpoint ICs, reader ICs, fixed readers and gateways.
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| Technology Leadership. Our RAIN focus has enabled us to regularly be first-to-market with innovative, high-performing and high-quality products. Our chief executive officer is a recognized industry thought leader, a director of the RAIN Alliance and previously was an editor for the RAIN radio standard.
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| Partner Ecosystem. Our worldwide partner ecosystem comprises hundreds of distributors, SIs, VARs, software solution partners and reader, inlay and tag ODMs and OEMs. That ecosystem gives us market reach, penetration and scale we believe few, if any, of our competitors enjoy.
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| Trusted Brand. We believe our industry leadership, name recognition and reputation for innovative, high-performing and high-quality products have significantly contributed to our leading market position.
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| Intellectual Property. We believe we have the leading RAIN patent portfolio. As of December 31, 2021, our portfolio included 291 issued and allowed U.S. patents, five issued and allowed international patents, 24 pending U.S. patent applications and 2 pending international patent applications.
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Growth Strategies
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To further our mission of connecting every thing, we plan to focus on the following strategic areas:
| • Develop Enterprise Solutions: Focus on developing repeatable enterprise solutions with top-tier partners, enhancing and expanding our product offerings and deepening our platform integration with those partners. •Deliver Our Platform: Continue investing in our platform’s products, software and algorithms, use cases, differentiated capabilities and cost reductions. •Lead the RAIN silicon opportunity: Invest in endpoint IC performance, features, cost reduction and platform integration to win endpoint IC opportunities across all verticals and geographies. •Ubiquitous Reading: Advance our reader ICs to improve functionality, reduce costs and make Impinj-based partner readers ubiquitous. •Cloud Services: Invest in cloud services that leverage differentiated features in our endpoint ICs, such as cryptographic authentication, to enhance our platform’s reach and breadth and enable new use cases and recurring-revenue opportunities. •
| Drive RAIN Adoption: We will focus on repeatable whole products with top-tier partners, enhancing and expanding our product offerings and deepening our platform integration with those partners.
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| Invest in Our Platform: We will continue investing in our platform’s products, software and algorithms, use cases, differentiated capabilities and cost reductions.
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| Ubiquitous Reading: We will develop next-generation reader ICs to improve functionality, reduce costs and make Impinj-based partner readers ubiquitous.
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| Cloud Services: We will invest in cloud services that leverage differentiated features in our endpoint ICs to enhance our platform’s reach and breadth and enable new use cases and opportunities
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Sales and Marketing
We have a worldwide sales team with expertise in endpoint ICs, reader ICs, readers, gateways and solutions. We also have a global ecosystem of hundreds of partners. Our sales team enables end-user solutions through, with and alongside those partners, fulfilling through the partners primarily as follows:
| • Endpoint ICs: Directly to inlay and tag OEMs. We typically negotiate pricing with these OEMs annually, with new pricing effective during the first quarter of the calendar year. •Reader ICs: Through distribution to handheld and fixed reader OEMs and ODMs. •Readers and gateways: To solutions providers, VARs and SIs through distributors. •
| Endpoint ICs: Directly to inlay and tag OEMs. We typically negotiate pricing with these OEMs annually, with new pricing effective during the first quarter of the calendar year.
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| Reader ICs: Through distribution to handheld and fixed reader OEMs and ODMs.
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| •
| Readers and gateways: To VARs and SIs through distributors.
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We aim to engender preference for our platform in all our sales engagements, encouraging our partners and end users to use and gain the full benefit of our entire platform. Our business development, product marketing, technical and systems engineers actively engage those partners and end users. Our solutions-marketing and business-development teams also work with our ISVsindependent software vendor, or ISV, partners to enable end-user awareness, joint solutions, joint go-to-market selling and sales enablement.
The following table presents total revenue concentration to Avery Dennison Corporation, or Avery Dennison, and Arizon RFID Technology (Yangzhou) Co., LTD, or Arizon, and a North American logistics provider for the periods presented;
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Revenue: | | | | | | | | | | | | |
Avery Dennison(1) | | | 32 | % | | | 32 | % | | | 31 | % |
North American logistics provider | | * | | | * | | | | 14 | |
Arizon | | | 11 | | | | 10 | | | * | |
| | | 43 | % | | | 42 | % | | | 45 | % |
* Less than 10% | | | | | | | | | | | | |
(1) Includes revenue concentration related to Smartrac NV, or Smartrac. Avery Dennison acquired Smartrac in March 2020. | |
Avery Dennison and Arizon, purchase our endpoint ICs for their inlay and tag products. In 2019, we generated 14% ofThe following table presents total revenue from a North American logistics provider in connection with a project-based gateway deployment.concentration to Avery Dennison and Arizon for the periods presented:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Revenue: | | | | | | | | | |
Avery Dennison(1) | | | 28 | % | | | 32 | % | | | 32 | % |
Arizon | | | 10 | | | | 11 | | | | 10 | |
| | | 38 | % | | | 43 | % | | | 42 | % |
(1) Includes revenue concentration related to Smartrac. Avery Dennison acquired Smartrac in March 2020. | |
Manufacturing
Manufacturing
We outsource all our product manufacturing to third-party manufacturers that build our products to our specifications. This capital-efficient operating model scales efficiently with volume, allowing us to focus our resources on accelerating development of new products and solutions.
Taiwan Semiconductor Manufacturing Company Limited, or TSMC, fabricates our endpoint IC wafers in Asia and the United States and has been our sole endpoint IC wafer supplier since 2003. We order endpoint IC wafers on a purchase-order basis and do not have a long-term agreement with TSMC. We test the wafers in Asia and at our U.S. headquarters and in Asia.headquarters. We use multiple subcontractors to post-process the wafers.wafers including Stars Microelectronics (Thailand) Public Company Limited, or Stars, Chipbond Technology Corporation, or Chipbond, and Unisem Group, or Unisem, are our primary subcontracts.Unisem. We generally engage all our endpoint IC subcontractors on a purchase-order basis.
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Tower Semiconductor, or Tower, and TSMC fabricate our reader IC wafers. Tower fabricates our reader IC wafers in the United States and has been our solesupplier since 2008. TSMC fabricates reader IC waferwafers in Asia and has been a reader IC supplier since 2008.2021. We order reader IC wafers on a purchase-order basis and do not have a long-term agreement with Tower.Tower or TSMC. We test and package the reader ICs in Asia. We generally engage all our reader IC subcontractors on a purchase-order basis.
Plexus Corp., or Plexus, manufactures our readers and gateways in Asia, since 2005. We order readers and gateways pursuant to non-exclusive purchase agreements that automatically renew each year, subject to each party’s right to terminate on 180 days’ notice. We use subcontractors on a purchase-order basis to assemble and test printed circuit boards, to build our reader and gateway enclosures and to test our readers and gateways.
Research and Development
We built our company around technology leadership, innovation and best-in-class products. Throughout our history we have committed, and we plan to continue committing, significant resources to technology, innovation and product development. We believe we have achieved our leading market position by continuously improving product performance, features, quality and reliability while reducing costs, and we plan to invest to continue doing so.
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In most situations, we strive to lead the market with new products and innovations, but we sometimes adopt a more deliberate approach depending on the market situation. As one example, our nearest endpoint IC competitor migrated from 200mm wafers to 300mm wafers before we did. That migration caused the inlay OEMs to gradually retrofit their inlay manufacturing machines to handle 300mm wafers. In the meantime, we focused on an endpoint IC process-node migration, which we completed in 2020. Our first productproducts in that process node, the Impinj M700, isM730 and M750, are not only on 300mm wafers, but today hashave roughly twice as many ICs per wafer as that competitor and entered the market with the inlay OEMs already able to process 300mm wafers.
We have a team of skilled engineers that today conduct all our research and most of our product development internally. As of December 31, 2021,2022, we had 194205 employees in research and development. We regularly review our technology, products and market development opportunities and reallocate our spending and resources accordingly.
Intellectual Property
We protect our technologies by filing patent applications, retaining trade secrets and defending and enforcing our intellectual property rights where appropriate. To date, our intellectual property portfolio includes 291296 issued and allowed U.S. patents, five issued and allowed international patents, 2420 pending U.S. patent applications and 27 pending international patent applications. The first of our 270281 utility patents expire in 20222023 and the first of our 2115 design patents expire in 2022.2023. To protect confidential information not otherwise subject to patent protection, we rely on trade secret law and enter into confidentiality agreements with our employees, customers, suppliers and partners.
Because most RAIN product SKUsproducts are used in the United States, and because most of our partners, end users and competitors have U.S. operations, we believe U.S. patents hold the most value for our business. Consequently, we have primarily filed U.S. patent applications. Because our portfolio currently comprises mostly U.S. patents, we have limited ability to assert our intellectual property rights outside the United States.
Although our patents and trade secrets constitute valuable assets, we do not view any one of them as material. Instead, we believe the totality of our patent and trade-secret portfolio creates an advantage for our business.
We have entered into licensing, broad-scope cross licensing and other agreements authorizing us to use or to operate within the scope of patents and intellectual property owned by third parties. For example, we have licenses to third-party intellectual property that we use in our products. As another example, by participating in developing GS1 EPCglobal protocols, such as the RAIN radio protocol, we agreed to license those of our patents necessarily infringed by thenecessary to practice of thesethose protocols on a royalty-free basis to other GS1 EPCglobal members, subject to reciprocal royalty-free rights from those members. By participating in developing International Organization for Standardization, or ISO, standards, we agreed to grant to all users worldwide a license to those of our patents necessarily infringed by the practice of several ISO standards, including RAIN and non-RAIN standards, on reasonable and nondiscriminatory terms, here again subject to reciprocity.
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We own a number of trademarks and develop names for our new products and secure trademark protection for them, including domain name registration, in relevant jurisdictions.
Alliances and Standardization
Our platform connects everyday items using the RAIN RFID technology we pioneered. We spearheaded development ofdeveloping the RAIN radio standard, lobbied governments to allocate frequency spectrum and, along with Google, Intel and Smartrac, N.V., cofounded the RAIN Alliance.Alliance. Our chief executive officer is presently an Alliance Director and was previously the Alliance Chairman.Chairman. The Alliance is a global organization promoting the universal adoption of RAIN technology and solutions, with more than 150 members as of December 31, 2021.2022. Today, the RAIN industry has access to radio spectrum freely available in 81 countries encompassing roughly 95% of the world’s GDP and has connected many tens of billions of items.GDP. We believe RAIN’s core capabilities – serialized identifiers for individual items, battery-free operation, 30-foot range, not line-of-sight readability, up to 1,000 reads per second, low cost, essentially unlimited life and available cryptographic authentication – position RAIN to be the leading item-to-cloud connectivity technology for the IoT.
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We, our end users, partners and competitors developed the RAIN radio protocol, whose technical name is EPC™ Radio-Frequency Identity Protocols Generation-2 UHF RFID (standardized as ISO/IEC 18000-63 and often known colloquially as Gen2) in 2004, with us as the editor. Our community delivered a backward-compatible update in 2013, again with us as theeditor. Our community is currently developing another update, again with us as an editor. Our industry uses the RAIN radio protocol nearly exclusively.
By participating in GS1 EPCglobal, which produced Gen2, and ISO, which ratified 18000-63, as well as in other standards bodies, we agreed to license certain necessary patents as described in the section captioned “Intellectual Property.”
Government Regulations
Government regulations require us to certify our readers and gateways in jurisdictions where they operate. For example, we certify our readers and gateways to Federal Communications Commission regulations to operate in the United States and its territories. Our readers and gateways are certified for operation in more than 40 countries worldwide including the United States, Canada, Mexico, China, Japan, South Korea and all of the European Union.
Competition
Each of our competitors competes with some, but not all, of our products. Our primary competition includes:
| • Endpoint ICs: NXP B.V., or NXP, EM Microelectronic, Kiloway, Fudan Microelectronics Group and Alien Technology Corporation, or Alien. •Reader ICs: STMicroelectronics N.V., or ST, Phychips Inc, Zhikun Semiconductor Co. Ltd, or Iotelligent, and MagicRF. •Readers and Gateways: Zebra Technologies Corporation, or Zebra. •
| Endpoint ICs: NXP B.V., or NXP, EM Microelectronic, Kiloway and Alien Technology Corporation, or Alien.
|
| •
| Reader ICs: STMicroelectronics N.V., or ST, Phychips Inc, Zhikun Semiconductor Co. Ltd, or Iotelligent, and MagicRF.
|
| •
| Readers and Gateways: Alien, which also purchases our reader ICs, and Zebra Technologies Corporation, or Zebra.
|
The market for RAIN, our platform and our products is highly competitive. New entrants can and do come into our market at any time, and we expect our competition to increase as the market and end-user adoption grow. The competitive factors that impact our platform and product sales include:
| • portfolio, performance, features, lead times, reliability and price; •support, ease of use and availability of reference designs; •development tools and APIs (except in the endpoint IC market); •integration and certification with end-user applications; and •
| portfolio, performance, features, lead times, reliability and price;
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| •
| support, ease of use and availability of reference designs;
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| •
| development tools and APIs (except in the endpoint IC market);
|
| •
| integration and certification with end-user applications; and
|
Although we believe we compete favorably on the above factors, our future competitiveness will depend on our ability to design, develop and deliver compelling products and enable compelling end-user solutions.
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Because our product pricing is denominated in U.S. dollars, we occasionally experience competitive pressures due to prevailing exchange rates as our product pricing is denominated in U.S. dollars.rates. In addition, our competitive position depends on our ability to continue to attractattracting and retainretaining talent while protecting our intellectual property. For additional information on the risks associated with our business, see “Risk Factors.”
Employees and Culture
As of December 31, 2021,2022, we had 332389 employees. Most of our employees are not represented by a labor union and we believe our employee relations are excellent.
Our corporate culture embodies a set of principles centered around respect, collaboration, accountability, empowerment and thinking big. We believe our principles and the culture that derives from them are essential to the health and success of our business. We focus on aligning our employees to those principles and promoting and fostering diversity, equity, inclusion, passion and commitment.
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Available Information
We were incorporated in Delaware in April 2000. Our principal executive office is located at 400 Fairview Avenue North, Suite 1200, Seattle, Washington 98109. Our telephone number is (206) 517-5300. Our website is www.impinj.com.www.impinj.com. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this report.
Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andas well as amendments to those reports are available on our website at www.investor.impinj.com, free of charge, as soon as reasonably practicable after the electronic filing of thesethose reports with the SEC. The information contained on our website is not a part of this report or any other document we file with the SEC.
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, then 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 ofdue to factors that are described below and elsewhere in this report.
Risks Relating to Our Platform, Products and Technologies
TheWe operate in a very competitive market.
Our principal current competitors are:
•In endpoint ICs, NXP, EM Microelectronic, Kiloway, Fudan Microelectronics Group and Alien;
•in reader ICs, ST, Phychips, Iotelligent and MagicRF; and
•in readers and gateways, Zebra.
These competitors include companies that have much greater financial, operating, research and development, marketing and other resources than us. To gain market share, they could discount their products and accept lower margins, or they could maintain margins by achieving cost savings through better, more efficient designs or production methods. They could devote more resources than we can to product development, promotion, sale and support. They could also bundle other technologies, including those we do not have in our product portfolio, with their RAIN products.
Our partners, including our OEMs, ODMs, distributors, SIs, VARs and solution partners, may choose to compete with us rather than purchase our products, which would not only reduce our customer base but also
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increase competition in the market. 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.
RAIN adoption is concentrated in key industries and the extent and pace of RAIN market adoption beyond those industries is uncertain. If
Our financial performance depends on the pace of end-user RAIN adoption in key industries such as retail apparel, our largest market, retail general merchandise and SC&L. Although RAIN has been adopted to some degree by end users in those industries, those end users as well as the industries themselves are subject to business cycles. Continued RAIN adoption does not continue to develop, or develops slower than we expect, our business will suffer.by those end users and in those industries may be at risk if and when downcycles occur.
TheOutside those key industries, the RAIN market is still developing. RAIN adoption, andas well as adoption of our platform and products, depend on many factors, including the extent to which end users understand and embrace the benefits that RAIN offers; whether the benefits of RAIN adoption outweigh the cost and time to replace or modify end users’ existing systems and processes; and whether RAIN products and platform, depend on numerous factors, including:applications meet end users’ current or anticipated needs.
| •
| the extent to which end users understand and embrace the benefits that RAIN offers;
|
| •
| whether the benefits of RAIN adoption outweigh the cost and time to replace or modify end users’ existing systems and processes; and
|
| •
| whether RAIN products and applications meet end users’ current or anticipated needs.
|
In the past, weWe 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. Ifretailer 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. Other industries that we currently regard as being key for RAIN adoption include supply chain and logistics, aviation and automotive, many of which face similar stressors as the retail market.
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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 and Kiloway; in reader ICs, ST, Phychips, Iotelligent and MagicRF; 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 affecting our operating results, business and prospects. Companies in adjacent markets or newly formed companies may decide to enter our market, particularly as RAIN adoptiongrows. 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 keep pace with technology advancements,advance our business, satisfy increasingly demanding end-user requirements and grow RAIN market acceptance.adoption. We commit significant resources to developing and introducing these new products and services whileservices. We also commit significant resources improving the performance and reliability of, and reducing costs. Becausethe costs of, our existing products are often used in, and incorporated into, complex business processes and use cases,services.
Whether our new products and services may take time to be successful or may notwill succeed at all.
In the future, ouris uncertain. Our success in developing the technologies, processes or processescapabilities necessary or desired for new or enhanced products and services, or in licensing or otherwise acquiring these technologiesthem from third parties, and our ability to introduce new products and services before our competition, will dependdepends on variousmany factors, including:
| •
| our timely and efficient completion of the design process;
|
•our ability to identify new product capabilities or services that will be widely adopted;
| •
| our timely and efficient implementation of manufacturing, assembly and testing procedures;
|
•our timely and efficient completion of the design process;
| •
| product or service performance;
|
•our timely and efficient implementation of manufacturing, assembly and testing procedures;
•our attainment of appropriate product or service performance levels and product certification;
| •
| our ability to attract, retain and manage technical personnel;
|
•partnering successfully with others to deliver complementary products or services;
| •
| the quality, reliability and selling price of the product or service; and
|
•the quality, reliability and selling price of our product or service; and
| •
| effective marketing, sales and service.
|
•the effectiveness of our marketing, sales and service.
13When we introduce new products, our success in ramping adoption depends, in part, on us making those products easy to deploy by our partners and their end users. For example, for our new M700-family 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.
Our abilities to deliver platform solutions at scale are nascent.
We believe we are still at a very early stage in our ability to deliver enterprise solutions. We are developing solutions for retail self-checkout and loss prevention and SC&L package routing that have been, or that we expect to be, deployed by the industry-leading enterprise end users for whom we are developing the solutions. However, to fully capitalize on our platform's potential, we must make our current offerings repeatable across multiple
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enterprises as well as deliver additional solutions to enterprise needs. If we do not succeed in identifying, developing and deploying enterprise solutions across a range of industries and customers, then our business prospects will suffer.
An inability or limited abilityDelivering solutions that address enterprise needs requires a network of partner products and services that complement our own product offerings and that together address complex enterprise systemsneeds. Convincing enterprises to exploitengage us to solve their business problems – including evaluation, design, deployment, operations and partner services, including leveraging RAIN information may adversely affectdata into the market for our products.
A successful end-user RAIN deployment requires not only tags and readers or gateways, but RAIN integration withenterprise's information systems, requires tight coordination among our and applications that derive business value fromour partners' sales, marketing, operations and engineering teams. Although we today have partners who successfully introduce our platform, or aspects of it, to their customers, their knowledge of our platform and RAIN data. Unless third parties continue developingin general is still nascent. If we do not build our network of solutions and advancing business analytics tools,partners to deliver those solutions and end users enhance their information systems to use these tools, RAIN deployments could stall. Ourbroaden our efforts to foster third-party development and deployment of these tools could fail. In addition,deliver solutions that leverage 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.
The selling prices of our products could fluctuate substantially, which could have a material adverse effect on our revenue and gross margins.
The average selling price, or ASP, of our products has historically decreased with time and with RAIN market growth. Although we expect further price decreasesplatform in the long term, we raised prices in 2021 to accommodate higher product costs and we cannot predict future pricing trends. Also, from time-to-time we reduce our product prices to meet end-user demands or to respond to market pressure from our competition. We also sometimes reduce prices to encourage adoption, address macroeconomic conditions or for other reasons. If, in the future, 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,large, complex enterprise opportunities, then our revenue and gross marginsbusiness prospects will suffer.
Rapid market innovation, which we continueWe rely on endpoint IC sales 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.revenue.
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 accommodateoffset 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, then we may not be successfulunsuccessful in countering competitive pressures to lower prices for our endpoint ICs and our business and operating results could be adversely affected.
The selling prices of our products could fluctuate substantially.
The average selling price, or ASP, of our products has historically decreased with time, to meet end-user demands, to encourage adoption, to address macroeconomic conditions or to respond to market pressure from our competition. However, that trend is not constant and we have also increased prices from time to time. Although we expect further price decreases in the long term, we raised prices in 2021 and 2022 to accommodate higher product costs. We may be required to raise prices again if macroeconomic conditions, including inflation, create 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.
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 product suppliers and manufacturers cannot create and implement processes or improve efficiencies sufficient to maintain our margins, then we may be unable to sell our products profitably.
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.
Changes in our product mix could adversely affect our overall gross margin.
We generate most of our revenue from endpoint IC sales withwhich have, for the most part, lower gross margins than our other products. In addition, endpoint ICsystems product sales. Our overall product gross margins are affected by product mix, which can fluctuate based on demand and supply, competitive pressures and end-user needs and demand. A further shift in sales mix away from our higher margin products to lower margin products, especiallyeither within our endpoint IC product portfolio or from our systems business to our endpoint ICs, willcould negatively affect our gross margins.
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Our products must meet demanding technical andPoor product 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.
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Our products must meet demanding customer specifications for quality, reliability and performance. TheyOur products are alsoboth highly technical and are deployed in large, complex systems. Our partners and end users may discoversystems in which errors, defects or incompatibilities in our products, including after deploying them. In addition,can be problematic for our partners orand 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.users.
If we are unable to fixcorrect errors, defects, incompatibilities or other problems in our products, we could experience:
| •
| loss of customers or customer orders;
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•loss of customer orders or customers;
| •
| lost or delayed market acceptance and sales of our products;
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•lost or delayed market acceptance or sales;
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| damage to our brand and reputation;
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•damage to our brand and reputation;
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| impaired ability to attract new customers or achieve market acceptance;
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•impaired ability to attract new customers;
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| diversion of development resources;
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•diversion of development resources;
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| increased service and warranty costs;
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•increased service and warranty costs;
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| • legal actions by our customers; and |
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| increased insurance costs.
|
Currently, our products are experiencing production issues, including but not limited to production delays, insufficient production capacity and component shortages. 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 or end users; and
•increased insurance costs.
Moreover, if we encounter product quality issues, then we may be required to incur significant time and their end customers. For example, forcosts to diagnose, test and fix the issues, and these efforts could further constrain our new M700 endpoint ICs and E710, E510 and E310 reader ICs, we continue supportingability to supply 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 ourwith new products and platform, our business results and prospects could suffer ifuntil we are unable to make our products and our platform easy to deploy. To demonstratehave resolved 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.issues.
End users or our direct customersand partners must design our products into their products and systems. If they fail to do so, our operating results and prospects will be adversely affected.business processes.
ConvincingPersuading end users or our direct customerspartners to design RAIN and our products into their business processes or products and systems requires educating them about RAIN’s value over other technologies.and our products’ value. They may currently use other technologies or products and may not feel the need to learn about how RAIN or our products can improve their systems.business processes or products. Even when convinced, they often undertake long pilotspilot programs or qualification processes prior to placing orders. We spend significantThese pilot programs or qualification processes can be time consuming and resources to have RAINexpensive, and there is no assurance they will result in an order for our products selected by a potential end user or customer. End users or our direct customers adopting RAIN often involves them weighing the benefits of RAIN against the costs of modifying or replacing their existing systems, and if they remain unconvinced, they may not
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deploy. products. If we fail to develop new products that adequately or competitively address the needs of end usersusers’ or our direct customers, theypartners’ needs, then we may not select our products to be designed into their systems,receive product orders, which could adversely affect our business, prospects and operating resultsresults..
Our visibility into the length of the sales and deployment cycles for our products is limited.
We have limited visibility into the length of productend user sales and deployment cycles, and these cycles are often longer than we anticipate. Many factors contribute to our uncertainty,limited visibility, including the time channelour partners and end users spend evaluating our products, the time educating them on RAIN’s benefits, and the time integrating our products with theirend users’ 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.
An inability or limited ability of end user systems to exploit RAIN information may adversely affect the market for our products.
A successful end-user deployment requires not only tags and readers or gateways, but RAIN integration with information systems and applications that create business value from the 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.
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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.
Alternative technologies or changes in RAIN standards, may enable competitive products and services and may adversely affect RAIN market growth and our business.that compete with ours.
Technology developments may affect our business negatively. Breakthroughs in legacy RFID technologies or markets, including those using low frequency or high frequency RFID technology, or in other radio technologies, could adversely affect RAIN market growth generally and demand for our products in particular.products. Likewise, new technologies may allowenable lower-cost ICs than our current silicon-based technology allows.products. 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.
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 or changes to existing standards, could render our products obsolete and cause us to incur substantial development costs to adapt tomeet the new or changed standards. If the 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 sale of 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 if those features do not meet the new or changed standards.products. The lost opportunities as well as time and expense for us to develop new products or change our existing products to comply with new or changed standards could be substantial, and we may not successfully developultimately 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 fewsome or noneall 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 in jurisdictions 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
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changes could cause us to incur significant costs, including costs associated with obsolete inventory. Regulatory changes may also cause usforego opportunities to improve our products, potentially delaying our time-to-market.
Sales of some of our products could cannibalize revenue from other products.
Our salesSome of our partners develop products using some of our products enable our channel partners to develop their own products that compete with other of our products. For example, salessome of our OEM partners use our reader ICs allow our OEM partners to build and sell readers and gateways that may compete with our readers and gateways. Similarly, salessome of our readers allowpartners use our channel partnersreaders to build and sell gateways that compete with our xArray and xSpan. In the future,gateways. If we may see one product line expand at the expense of another, or we may be asked by partnersfail to disadvantage or divest a product line. We cannot predict whether we can manage such conflicts in the future or retain channel partners despite conflicts.
Pricing commitmentssuccessfully, then our business and other restrictive provisions in our customer agreements could adversely affect our operating results.
In the ordinary course of 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.be negatively affected.
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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 suppliers, our operating results and financial condition would be adversely affected.
Our ability to secure cost-effective, quality products in a timely manner could be adversely affected by many factors, including:
| • Third-party manufacturing capacity may not be available when we need it, particularly from our foundry partners from whom we procure silicon wafers. •Efforts to diversify our supplier base may be unsuccessful or may not result in us obtaining the anticipated benefits of such diversification. •Some products have long lead times, and we place orders for them many months before our anticipated delivery dates to our customers. If we inaccurately forecast customer demand, then we may be unable to meet our customers’ delivery requirements or we may accumulate excess inventory, increasing our costs. •Supply disruptions may affect our ability to meet partner or end user demand, whether in a cost-effective manner or at all, potentially causing those partners or end users to cancel orders, qualify alternative suppliers or purchase from our competitors. Supply disruptions can also distort demand, making it even harder to meet true demand with finished products. •
| Third-party manufacturing capacity may not be available when we need it.
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| Some products have long lead times and we place orders for them five or more months before our anticipated delivery dates to our customers. If we inaccurately forecast customer demand, we may be unable to meet our customers’ delivery requirements or we may accumulate excess inventory.
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| Supply disruptions may affect our ability to meet our customers’ demand, potentially causing customers to cancel orders, qualify alternative suppliers or purchase from our competitors. Supply disruptions can also distort demand, making it even harder to meet true demand with finished products.
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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, then we could have difficulty fulfilling orders, our revenue could decline and our growth prospects could be impaired. Transitioning our assembly services or IC foundriesproduct manufacturing to new providers would take many months and, in the case of ICs, could take several years. AndAny transition would require a requalification by our customers or end users, which could also adversely affect our ability to sell our products andas well as 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.
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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 revenuesrevenue and/or gross margins.
The semiconductor industry has experienced many periods of capacity shortfall. Many industries, ours included, are experiencing such a shortfall and just experienced another due to increased post-Covid demand. In particular, in both 2021 and 2022 due to significant worldwide semiconductor demandwe experienced tight wafer availability, and limited foundry supply. We exited fourth-quarter 2021 with limited semiconductor inventory and tight foundry supply for both our 200mm and 300mm products, andalthough our foundry partner has signaled tightimproving wafer availability at least in the older-generation semiconductor nodes that we use, well into 2022. They2023, they have also raised prices. AbsentThe semiconductor industry may continue to experience significant supply/demand imbalances, resulting in continued constraints on wafer availability. We procure wafers on a significantly higherpurchase-order basis from our foundry partners; consequently, wafer allocation in 2022 over 2021,supply is not contractually guaranteed and without the benefit of the wafer inventory buffer we had entering 2021,there can be no assurance that we will be unable to meet 2022 endpoint IC demand, potentially by a significant amount. capacity, and total unit volumes in light of anticipated strong endpoint IC demand against that constrained wafer supply. We havereceive adequate wafer supply commitments similar to fourth-quarter levels through at least mid-2022, butfrom our supplyfoundry partners in subsequent periods is less certain. 2023 or in the future.
Wafer shortfalls may decreaselimit sales and may cause market-share losses if we are unable to supply enough products and/or our customers purchase competing products or, alternatively, may artificially increase salesbookings as customers overbuyover-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.
We have also experienced, and expect to continue experiencing,As we recover from wafer shortages, and price increases for components we use in readers and gateways, potentially impacting future product availability and/or costs. If we are unable to increase our prices to cover our increased costs, our gross margins and other financial results could 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, aslike 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.
To convert the wafers we receive from our foundry partner into saleable products, we and several third parties perform additional procedures, such as testing, thinning, dicing and bumping 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, then we may be unable to keep up with demand for our products and our financial results will suffer.
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We have also experienced shortages and price increases for components we use in our readers and gateways, as well as in packaging and test capacity for our reader ICs, and we may continue to experience such shortages and price increases in the future. Any such shortages or 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, then our financial results will suffer.
We bear inventory risks due to our reliance on channel partners to sell and distribute our products.
We typically manufactureorder products from our productssuppliers based on channel-partnerpartner forecasts before we receive purchase orders. However, many of our channel partners have difficulty accurately forecasting end-usertheir 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 practicescompetition 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-19Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our business are uncertain.
Since 2020, Covid-19 has created significant worldwide economic volatility, uncertainty and disruption, and those effects are likely to persist for some time. Covid-19 has already, and will likely continue to, adversely affect our financial position, results of operations, cash flows and future business prospects.may persist. Our significant continuing Covid-19 risks include: include:
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| uncertain product demand given the decline and subsequent rebound, the latter at least partial, in many business activities globally, particularly in the retail industry, as well as overall delays in RAIN market adoption;
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•uncertain product demand globally;
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| decreased visibility into market demand and consequent challenges in effectively managing our inventory;
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•product availability delays and shortages;
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| partner-requested preordering or rescheduling as a result of supply concerns which can distort channel inventory, either positively or negatively;
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•challenges in effectively managing our inventory due to uncertain supply or demand;
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| increased operating costs such as those associated with work-from-home or restricted-movement edicts, increased legal and regulatory demands, and increase product costs due to component or production shortfalls;
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•partner-requested preordering or rescheduling as a result of supply concerns, possibly distorting channel inventory, either positively or negatively;
•increased operating and product costs;
•delays in research and development efforts, which, in turn, could delay new product introductions or product enhancements; and
•maintaining employee engagement and productivity in a remote or hybrid work environment.
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| product delays or shortages due to restrictions on our ability, or that of our suppliers, to operate at normal capacity due to personnel movement restrictions or other limitations;
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| delays in customer pilots which can delay project-based deployments;
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| delays in research and development efforts which can, in turn, delay new product introductions or product enhancements;
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| inability to engage in in-person sales and market activities, which can reduce our ability to effectively sell our products and drive future demand;
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| cost-reduction initiatives, such as lay-offs and furloughs; and
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| maintaining employee engagement and productivity in a prolonged work-from-home environment.
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With respectThe extent to which Covid-19 will continue impacting market demand inis unclear. In 2020 and 2021, Covid-19 caused widespread venue closures, materially affecting demand for our products. Covid-19 continued impacting venues in 2021, with an adverse impact inadversely affected retail, including retail apparel, where RAIN is widely adopted, and likely will continue to have impacts on venues and retailers in 2022. Covid-19 may accelerate a long-term shift in consumer behavior away from physical stores which may further reduce demand for our products over the longer term. The extent and duration to which Covid-19 impacts the retail industry and any retailer’s plans with respect to capital expenditures is unclear, as is the extent to which it will impact our product sales.
Covid-19 hasadopted. It also affected many other markets that use our products including aviation, sporting events such as footraces, and many others.Many of these markets continued
Our international supply chains remain vulnerable to feel Covid-19’s impacts in 2021 and may continue to feel these impacts in 2022. If we fail to makeCovid-19 related disruptions because most our products are manufactured and platform easy-to-deployprocessed in Asia, which until fairly recently imposed regional lockdowns and economical for these markets, or if participantswhich is still experiencing significant negative impacts of Covid-19. Accordingly, risks associated with Covid-19 on our future product supply remain.
Changes in these markets delay or forgo RAIN investments in response to Covid-19 or otherwise, our ability to penetrate them may suffer.
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.
In recent years, theThe U.S. government has imposed significant tariffs on a variety of items imported from other countries, particularly China. China has responded by imposing significant tariffs on a variety of items imported from the United States. SuchThese tariffs could materially and adversely affect our ability to compete internationally. 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 tariffs, as well as the possibility for new tariffs, remains uncertain. Changes in U.S. and Chinese industrial policy also contribute to uncertainty regarding the global trade environment.
Other causes of uncertainty include the Chinese government’s efforts to promote China’s domestic semiconductor industryeffects of sanctions and lingering uncertainties stemming fromother actions taken against Russia because Russia invaded Ukraine. While we do not today have business with Russian partners or end users, the United Kingdom’s separation fromeffect of
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these sanctions on global trade and macroeconomic conditions generally—such as increases in the EU.cost of energy and inflation—could nevertheless negatively affect our business.
We are subject to risks inherent in operating abroad and may not be able to successfully maintain or expand our international operations.
In 2021,2022, we derived 83% of our total revenue from sales outside the United States. We anticipate growing our business, in part, by continuing to expandgrowing our international operations, which haspresents a variety of significant risks, including:
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| changes, some unexpected or unanticipated, in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
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•changes, some unexpected or unanticipated, in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
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| lack of established, clear, or fairly implemented standards or regulations with which our products must comply;
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•lack of established, clear, or fairly implemented standards or regulations with which our products must comply;
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| greater difficulty in enforcing contracts, judgments and arbitration awards in international courts, and in collecting accounts receivable and longer payment and collection periods;
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•greater difficulty in enforcing contracts, judgments and arbitration awards in international courts, and in collecting accounts receivable as well as longer payment and collection periods;
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| limited or unfavorable intellectual property protection;
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•limited or unfavorable intellectual property protection;
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| • misappropriation of our intellectual property; |
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| inflation and fluctuations in foreign currency exchange rates and interest rates;
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our intellectual property; | •
| restrictions, or changes thereof, on foreign trade or investment, including currency-exchange controls;
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•inflation and fluctuations in foreign currency exchange rates and interest rates;
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| changes in a country’s or region’s political, regulatory, legal or economic conditions, including, for example, global and regional economic disruptions caused by Covid-19;
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•restrictions, or changes thereof, on foreign trade or investment, including currency-exchange controls, including as a result of sanctions against Russia as a result of Russia invading Ukraine;
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| political uncertainty, strife, unrest, or conflict, including, for example, the United Kingdom’s 2021 departure from the EU and China’s crackdown on Hong Kong;
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•changes in a country’s or region’s political, regulatory, legal or economic conditions, including, for example, global and regional economic disruptions caused by Covid-19;
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| differing regulations with regard to maintaining operations, products and public information;
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•political, social and economic instability abroad; wars and other armed conflicts; and terrorist attacks and security concerns in general, including Russia invading Ukraine and China threatening Taiwan;
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| inequities or difficulties obtaining or maintaining export and import licenses;
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•differing regulations with regard to maintaining operations, products and public information;
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| differing labor regulations, including where labor laws may be more advantageous to employees than in the United States;
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•inequities or difficulties obtaining or maintaining export and import licenses;
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| restrictions on earnings repatriation;
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•differing labor regulations, including where labor laws may be more advantageous to employees than in the United States;
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| • restrictions on earnings repatriation; •corrupt or unethical practices in foreign jurisdictions that may subject us to exposure under applicable anti-corruption and anti-bribery laws such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, and the United Kingdom Bribery Act of 2010, or U.K. Bribery Act; and |
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| regulations, and changes thereof, relating to data privacy, cybersecurity, and the unauthorized use of, or access to, commercial and personal information, particularly in Europe.
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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. 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
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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.
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 U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, and the U.K.United Kingdom Bribery Act. We intend to increase our international sales and business in China and, as such, our riskAct of violating laws such as the FCPA2010, or U.K. Bribery Act also increases.
We generally conduct our China operations through a wholly owned subsidiaryAct; and
•regulations, and our European operations through our U.K. subsidiary. For other worldwide jurisdictions, we generally report our taxable income based on our business operationschanges thereof, relating to data privacy, cybersecurity and the unauthorized use of, or access to, commercial and personal information, particularly 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.Europe.
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 and import 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.Controls, as well as similar controls established in the countries in which we do business. For example, the U.S. Commerce Department recently issued rules regarding semiconductor- and supercomputer-related products and restrictions against sending certain chips and chip-related technology and software to China without an export license. In addition, after Russia invaded Ukraine, the United States and other countries imposed economic sanctions and export control restrictions against Russia and Belarus, as well as against certain Russian nationals and entities. We must undertake additional diligence efforts to comply with these rules, which may be time-consuming and result in delayed or lost opportunities. We may not always be successful in obtaining necessary export or import licenses, and our failure to obtain required importexport or exportimport approval for our
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products or limitations on our ability to export or sell our products imposed by these laws may harm our internationaldomestic and domesticinternational sales and adverselynegatively 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
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or restrictions may be imposed by the U.S. government on items imported into the United States from China and any such measures could further adversely affect our ability to sell our products to existing or potential customers andas well as harm our ability to compete internationally. Any changechanges in our product or 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 resultdelay us introducing new products in decreasedinternational markets, decrease use of our products by, or indecrease 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.supply of products.
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.
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 our products. In response, weWe outsource our manufacturing and production to suppliers in a small number of Asian jurisdictions including Thailand, Malaysia, Taiwan and China. Some of these jurisdictions have experienced, and may continue experiencing, intermittent or sustained mandatory shutdowns or other restrictions to combat the spread of Covid-19. These jurisdictions have also experienced significant changes in political, social, business or economic conditions in the past and may experience them in the future.
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, weWe 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 ofNotably, China has refused to renounce the use of military force to gain control overagainst Taiwan, and there can be no assurancesassurance that relations between TaiwanChina and mainland ChinaTaiwan will not deteriorate further, particularly in light of ongoing tensions between China, the United States and Taiwan.China. 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-19Covid-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 coverscovering 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.revenue.
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 selland our readers and gateways to solution providers, VARs and SIs, all primarily through distribution. If we fail to retain our endpoint IC, reader IC, reader or gateway partners or distributors or fail to establish relationships with new partners, then our business, financial condition or operating results could be harmed.
In 2021,2022, sales to tag OEMs Avery Dennison and Arizon accounted for 32%28% and 11%10% of our total revenue, respectively. In March 2020, Avery Dennison acquired Smartrac’s RFID inlay segment. Sales concentration to a smallersmall number of OEMs decreases our bargaining power and increases the risk that our pricing or sales could decline based on sales measuresactions 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.
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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 revenuesrevenue 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, then our sales could decline from period to period and harm our stock price.
Because we sell and fulfill through channel partners, ourOur ability to affect or determine end-user demand is limited.limited in part because we sell and fulfill primarily through partners and rarely directly to end users.
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 and affect 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,then our sales to these channelthose 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 our future sales.sales to them. Distributors may, subject to time and quality limitations, return products in exchange for other products, subject to time and quantity limitations.products. Our reservereserves estimates for products stocked by our distributors are based principallyprimarily on reports provided to us by ourthose distributors, typically on a monthly basis.monthly. If the inventory and resale information our partners and distributors provide is inaccurate, or if we do not receive it in a timely manner, then we may not have a reliable view of products being sold to end users which could negatively 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 solution providers, SIs, VARs and software providers whose product and/or solution offerings complement ours and through which we often 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 our costs but do not increase revenue. Partner relationships may also involveinclude exclusivity provisions, multiple levels of distribution, discountdiscounted pricing or investments in other companies. The cost of developing and maintaining these partner relationships may go unrecovered and our efforts may not generate a corresponding increase in revenue.revenue increase.
Our business depends on our brand recognition and reputation, and ifIf we fail to maintain or enhance our brand recognition or reputation on which our business depends, 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:
| • continuing to deliver high-quality, innovative and defect-free products; •maintaining high partner and end user satisfaction; •successfully differentiating our products from those of our competitors; and •appropriately managing both positive and negative publicity. •
| continuing to deliver high-quality, innovative and defect-free products;
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| maintaining high customer satisfaction;
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| successfully differentiating our products from those of our competitors; and
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| appropriately managing both positive and negative publicity.
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Product supply shortages have challenged our ability to meet customermarket needs and we have recently increased prices in response to our suppliers increasing their prices to us. Our inability to supply customerspartners and end users with products they need, and/or our need to increase our prices could result in long-lasting, negative consequences to our relationships with customers,those partners and end users, to RAIN adoption and to our business overall.
23Increasing 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, partners and end users are increasingly focusing on environmental, social and governance, or ESG, practices. Our ESG practices may not meet their standards, and they as well as advocacy groups may campaign for us to change our business or practices to address their ESG-related concerns. A failure, or perceived failure, of us to respond to any such campaigns could harm our business and reputation and negatively impact the market price of our securities. Moreover, with the continued
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evolution of ESG practices and reporting and disclosure requirements, our costs related to those ESG practices and reporting and disclosure requirements could increase, which could negatively affect our operating results.
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 our 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 ofmany reasons, including the fact that manymost RAIN products are used in or imported into the United States. We have only a small number of foreign patent applications or foreign patents. We also only have registered trademarks and domain names in select countries where we believe filing for such protection is appropriate. By seeking patentfocusing our intellectual property protection primarily inon the United States ourand a small number of foreign countries, we have limited ability to assert ourthat 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:
| • any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned; •our intellectual property rights will provide competitive advantages to us; •our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; •any of our pending or future patent applications will be issued or have the coverage we originally sought; •our intellectual property rights can or will be enforced, particularly in jurisdictions where competition may be intense or where legal protections may be weak; •we will not lose the ability to assert our intellectual property rights against, or to license our technology to, others and collect royalties or other payments; or •we will retain the right to ask for a royalty-bearing license to an industry standard if we fail to file an intellectual property declaration pursuant to the standards process. •
| any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;
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| our intellectual property rights will provide competitive advantages to us;
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| our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
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| any of our pending or future patent applications will be issued or have the coverage we originally sought;
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| our intellectual property rights can or will be enforced, particularly in jurisdictions where competition may be intense or where legal protections may be weak;
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| we will not lose the ability to assert our intellectual property rights against, or to license our technology to, others and collect royalties or other payments; or
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| we will retain the right to ask for a royalty-bearing license to an industry standard if we fail to file an intellectual property declaration pursuant to the standards process.
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Monitoring and addressing unauthorized use of our intellectual property is difficult and costly. Unauthorized use ofcostly, and litigation to enforce our intellectual property has already occurredrights is time consuming, distracting, expensive and may occur again.uncertain. Our failure to identify unauthorized use of, or otherwise adequately protect our intellectual property could adversely affect our business.
LitigationWe may become party to enforce our intellectual property rights isdisputes which could be time consuming, distracting, expensive and couldcostly to prosecute, defend or settle, result in outcomesthe loss of significant rights, and adversely affect RAIN adoption or consequences that are harmful to us. We could incur significant costs and divert our attention and the attentionadoption of our employees by threateningproducts or initiating litigation, which could,platform.
We are engaged 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 aseveral patent infringement lawsuitlawsuits against NXP USA, Inc., a Delaware corporation, and subsidiarycertain of NXP Semiconductors N.V., or NXP, in the U.S. District Court for the Northern District of California, or the Court.its affiliates. For further information regarding this litigation, please refer to Note 11 of our condensed consolidated financial statements included elsewhere in this report.
Our litigation with NXP will increase our expenses, distract management and key employees and could negatively impact our relationships with partners or end users. 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, then we could see a material adverse effect on our business, results of operations or financial condition. Regardless of
We may or may not prevail in patent-related proceedings given the outcome, our lawsuit against NXP will increase our expensescomplexity and distract management and key employees, and could negatively impact our relationships with partnersinherent uncertainties in patent litigation. If any pending or end users andfuture proceedings result in retaliatory claims against us.an adverse outcome, then we could be required to:
•cease manufacturing, using or selling the infringing products, processes or technology;
•pay substantial damages for infringement;
•expend significant resources to develop noninfringing products, processes or technology;
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Some of•license technology from the party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
•cross-license our technology is not patentedto a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or patentable and constitutes trade secrets. To protect
•pay substantial damages to 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 andor end users and we implement security measuresfor them to protect our trade secrets and other confidential information. We cannot guarantee we have entered into appropriate agreementsdiscontinue using, or replace, infringing products with all parties that have access to our trade secrets or confidential information. Moreover, the agreements we have entered into may not provide sufficient protection for our trade secrets or other confidential information in the event of any unauthorized use or disclosure. 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.noninfringing products.
Our use of overseas manufacturers has extra risk. The intellectual property protection in countries where our third-party contractors operate is 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 we could suffer lost profits 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-practicingnonpracticing 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 offerinvitation to license or to refute aan asserted claim, then the offering or claiming party may pursue litigation against us.
Intellectual property disputes have adversely affected RAIN adoption.adoption in the past. As one example, in 2011 Round Rock Research filed lawsuits against 11 end users, including Walmart and Macy’s, for RAIN-related patent infringement. WeDespite the subsequent availability of an industry-wide license, 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.2019. The licensed Round Rock patents all expired by the end ofin 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 channelthose 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:
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| cease the manufacture, use or sale of the infringing products, processes or technology;
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| pay substantial damages for infringement;
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| expend significant resources to develop non-infringing products, processes or technology;
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| license technology from the party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
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| cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or
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| pay substantial damages to our channel partners or end users to cause them to discontinue their use of, or replace, infringing products with non-infringing products.
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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 subjectpolicies of industry standards organizations in whose working groups we participate could require 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 propertyprovide royalty-free licenses of others, for example to necessary intellectual property in GS1 EPCglobal protocols and ISO standards. We have similarly licensed some of our patentsintellectual property.
When participating in GS1, ISO, RAIN and other industry-standards organizations, it is a general policy that those who participate in developing a protocol or standard must license, either royalty-free or under reasonable and nondiscriminatory, or RAND, terms, intellectual property that is necessary to others, for example pursuantimplement all or part of the protocol or standard. The standards body may require that the license be granted to agreements in connection with us participating in developing GS1 EPCglobal protocols and ISO standards.
For the former,members, as in the coursecase of us participatingGS1, or to all parties, as in the case of ISO, that implement the protocol or standard.
As a participant in developing GS1 EPCglobal UHF Gen2, UHF Gen2 V2, tag data standards, low-level reader protocol and other GS1 EPCglobal protocols, we agreed to license to other GS1 EPCglobal members, on a royalty-free basis, those of our patents that are necessarily infringed by thenecessary to practice of thesethose protocols, to other GS1 EPCglobal members, subject to us receiving reciprocal royalty-free rights from thosethe other members. ForGS1 EPCglobal member practicing the latter, in the course of us participatingprotocol. As a participant in developing ISO standards, we agreed to license on a RAND basis those of our patents that are necessarily infringed by thenecessary to practice of those ISO standards, again subject to us receiving a reciprocal royalty-free rightsRAND license from the other ISO members.entity practicing the standard.
BecauseAlthough the policies themselves seek to advance protocol or standards development, disputes can arise because it may not be clear whether a member’scertain intellectual property is necessary to the practice of currenta protocol or future protocols or standards, disputesstandard. Such uncertainty could arise among members, resulting in our inability to receive a license on royalty-free or RAND terms or to assertcomplicate us asserting our not-necessary patents against others.others, or to use those patents in our own defense, thereby devaluing our intellectual property. Further, some GS1 EPCglobal members declined to license their intellectual property on royalty-free terms, instead demanding reasonable and nondiscriminatory, orretaining the right to license their technology on RAND terms. Disputes or confusionThese members 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 litigationin which case we will need to defend ourselves within the confines of the GS1 and harming our business, financial condition and operating results.
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.policies.
We rely on third-party license agreements; impairment of those agreements maywhich, if impaired or terminated, could 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.
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ICs. Third-party licenses for patents, software and other technology important to our business may not continue to be available on commercially reasonable terms ifor may not be available 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 harmweaken our intellectual property.property rights.
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
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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 codesoftware 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 relative to such open-source software, 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 personally identifiablepersonal information or personal data, tracking consumers, stealing identities or causing other issues relating to privacy or data protection. IfAny such concerns increase,incident could cause our or if actual maliciousour partners’ or inadvertent breaches of privacyend users’ operations to be disrupted and subject us or theft occurthem to regulatory investigations or are perceived to have occurred, then our reputation could be damaged, our businessproceedings and prospects may suffer, andclaims, demands or litigation; consequently, we could incurface potential liability and 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.expenses to remediate or otherwise respond to the incident. Any failure or perceived failure to comply with any privacy- or security-related 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,or litigation; legal and other costs,costs; substantial time and resourcesresources; and fines, penalties or other liabilities. Any such actions or concerns about security and privacy may be expensive to defend, may entailcause us to expend 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, personally identifiable 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 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 delaynegatively impact 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 ordevelopment, even if unfounded.incidents.
We cannot ensurebe sure 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 privacy- or security-related matter.
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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.features, and actual or alleged violations of laws relating to privacy or information security may result in claims, proceedings and liability.
Our customerspartners and end users are subject to laws and regulations related to collecting, storing, transmitting and using personal information and personal data, as well as to 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. WhileWhereas compliance with the guidelines is voluntary, our customerspartners and end users 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 or enable compliance with the guidelines, then our business may suffer.
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More generally, the data security and privacy legislative and regulatory landscape in the United States, EU and other foreign jurisdictions continues evolving. Aspects of key privacy laws and regulations—including the California Consumer Privacy Act of 2018, the California Privacy Rights Act and the General Data Protection Regulation—remain unclear as of the date of this report and continue evolving, potentially with far-reaching implications. Laws and regulations relating to evolve,privacy, data protection and new or changedsecurity; related industry standards and guidelines; and continued evolution of these laws, regulations, standards, guidelines and standardsother actual and asserted obligations, as well as their interpretation and enforcement, may require us to modify our products, practices and policies, which we may not be able to do on commercially reasonable terms or at all, and otherwise could cause us to incur substantial costs and expenses. Any failure or perceived failure by us or any third parties with which we do business to comply with these laws and regulations or other actual or asserted obligations may result in claims or litigation; actions against us by governmental entities; 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 impactaffect our business, including our ability to develop future products. Iffinancial condition and results of operations.
Additionally, 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 incidentsincident 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, andsupply-chain attacks as well as social engineering andor other forms of employee or contractor negligence, malfeasance or unintentional acts, or malfeasance.acts. Accidental or willful security breaches or incidents, or other unauthorized access to our facilities or information systems, or to others used in our business, could compromise access tothe security of those facilities or information systems and the confidentiality, integrity and availability of thisconfidential, personal or proprietary information.
The consequences of loss, and possible misuse, corruption or other unauthorized processing of ourconfidential, personal or proprietary and confidential information including information relating to individuals, could include, among other things, unfavorable publicity, reputational 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 investigations and other proceedings and possible fines, penalties and other damages and liabilities, anyliabilities. Any of whichthese consequences could have a material adverse effect on our business, financial condition, reputation and relationships with customers and partners.business relationships.
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We rely on third-party providersservices to store and process data on our behalf, and on third-party security systems in a variety of corporate infrastructure services such as for human resources, electronic communications and financial functions. Additionally, ourapplications. Our platform operates in conjunction with, and we are dependent upon, third-party products, services, and components. Consequently, we dependdepends 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 for security. The cybersecurity threat environment continues to evolve considering the increase in remote work and if there isheightened activity by state-sponsored actors. If we, our platform, or any of the third parties on which we rely suffers a security exploit targeting them,breach or incident, vulnerability, error, ransomware or malicious event, then 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. We use SolarWinds products, including those compromised by the security breach SolarWinds announced on December 14, 2020. We applied the recommended security patches provided by SolarWinds and we do not believe our system was compromised. Using third-party providers introduces risk of a cybersecurity incident.reputation.
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 requiredmay need 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. ClaimsOur insurance may not adequately cover claims relating to an actual or perceived security breach or incident and any breach or incident may not be adequately covered byincrease our insurance costs as well as reduce or eliminate the future availability of such insurance, harming our business and may result in increased insurance costs or insurance not being available to us at all.reputation.
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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$24.3 million for the year ended December 31, 2022, and an accumulated deficit of $362.5$386.8 million as of December 31, 2021. 2022. Our ability to attain or sustain profitability depends on numerous factors, many of which are out of our control, including continued RAIN industry adoption and us maintaining or growing our market share. We expect significant expensesOur costs to support operations, product development and business and headcountpersonnel expansion in sales, engineering and marketing are significant and may, for periods of time, chooseare likely to increase as we invest to grow the market and our share of it, reduce our costs and improve our efficiencies or shorten our supply chain.operations. 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,of it fail, then we may not attain or sustain profitability in the future.profitability.
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-
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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.
Our history shows significant sales volatility and highlights oura 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 we saw strong demand in excess of our available product supply, and we expect that these conditions will continue into 2022. We currently have endpoint IC supply commitments that will allow us to equal or exceed fourth-quarter 2021 shipment levels through mid-2022, but the adequacy of our supply beyond mid-2022 remains uncertain.
We expectanticipate that, for the foreseeable future, our visibility to future sales, including volumes and prices, willcontinue to be limited. Our poorThat limited visibility may cause fluctuations particularly on a quarterly basis, in our actual operating results and in differences between ouractual and expected and actualquarterly or annual operating results.
Many factors, most of which aresome 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, theseThese fluctuations may also 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 include:
•macroeconomic conditions, including inflation and
revenue include: | •
| the impact of Covid-19 on macroeconomic conditions, our business and our customers, end-users, suppliers and other business partners;
|
recession, and their impact on our business and that of our suppliers, partners and end users; | •
| variations in RAIN adoption and deployment delays by end users;
|
•fluctuations or delays in RAIN adoption and deployment by end users;
| •
| fluctuations in demand for our products or platform, including by tag manufacturers and other significant customers on which we rely for a substantial portion of our revenue;
|
•fluctuations in demand for our products or platform, including by tag OEMs and other significant partners and end users on whom we rely for a substantial portion of our revenue;
| •
| fluctuations in the availability or supply of our products;
|
•fluctuations in the pricing and availability or supply of our products or key elements or components of those products, especially semiconductor wafers;
| •
| variations in the quality of our products and return rates;
|
•degradations in product quality, whether due to us or our suppliers, including quality claims or product returns;
| •
| delays in new-product introductions and in the maturity of our new-product technologies;
|
•delays in new-product introductions and in the maturity of our new-product technologies;
| •
| decreases in selling prices for our products;
|
•decreases in selling prices for our products;
| •
| delays in our product-shipment timing, customer or end-user sales or deployment cycles, or work performed under development contracts;
|
•delays in our product-shipment timing, customer or end-user sales or deployment cycles, or work performed under development contracts;
| •
| intellectual property disputes involving us, our customers, end users or other participants in our industry;
|
•intellectual property disputes involving us, our partners, end users or other participants in our industry;
| •
| adverse outcomes of litigation or governmental proceedings;
|
•adverse outcomes of litigation or governmental proceedings;
| •
| timing variability in product introductions, enhancements, services, and technologies by us and our competitors and market acceptance of these new or enhanced products, services and technologies;
|
•timing variability in product introductions, enhancements, services and technologies by us and our competitors as well as market acceptance of new or enhanced products, services and technologies;
| •
| unanticipated excess or obsolete inventory as a result of supply-chain mismanagement, new-product introduction, quality issues or otherwise;
|
•unanticipated excess or obsolete inventory as a result of supply-chain mismanagement, new-product introduction, quality issues or otherwise;
| •
| changes in the amount and timing of our operating costs, including those related to the expansion of our business, operations and infrastructure;
|
•changes in the amount and timing of our operating costs, including those related to expanding our business, operations and infrastructure;
| •
| changes in business cycles or seasonal fluctuations that may affect the markets in which we sell;
|
•changes in business cycles or seasonal fluctuations that affect the markets in which we sell;
•changes in industry standards or specifications, or changes in government regulations, relating to our products or our platform;
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| • late, delayed or cancelled payments from our partners or end users; and •unanticipated impairment of long-lived assets and goodwill. •
| changes in industry standards or specifications, or changes in government regulations, relating to RAIN, or to our products or our platform;
|
| •
| late, delayed or cancelled payments from our customers; and
|
| •
| unanticipated impairment of long-lived assets and goodwill.
|
A substantial portion of our operating expenses are fixed forin 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 or at all.
In the future we may raise capital, including pursuant to a shelf registration statement filed with the SEC, potentially diluting our stockholders, restricting our operations or otherwise adversely affecting our business.
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 may impose financial covenants that limit our ability to achieve our business objectives.
Our management has broad discretion in how to invest and spend our cash and cash equivalents and the proceeds from financings, including on capital expenditures, product development, working capital and other general corporate purposes. We may spend our cash and cash equivalents in ways that our stockholders may not agree with or that do not yield favorable returns.
If we need additional capital but cannot raise it on acceptable terms, if at all, then we may not be able to meet our business objectives, financial obligations or both. If we raise additional capital but do not deploy it effectively then our business, financial condition, results of operations and prospects could be harmed and the market price of our common stock could suffer.
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, 2021,2022, we had federal net operating loss carryforwards, or NOLs, of $274.7$249.3 million and federal research and development credit carryforwards of $18.3$22.3 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 lossNOL and federal 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 by one or more stockholders or groups of stockholders who own at least 5% of a company's stock 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; ifIf 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 impairedlimited 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.carryforwards to offset future taxable income or income taxes.
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 any 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.
Changes in tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
We are subject to tax laws, regulations and policies of several taxing jurisdictions. Changes in tax laws, as well as other factors, could cause us to experience fluctuations in our tax obligations and effective tax rates and otherwise adversely affect our tax positions and/or our tax liabilities. For example, in August 2022 the United States enacted a 1% excise tax on stock buybacks and a 15% alternative minimum tax on adjusted financial statement income as part of the Inflation Reduction Act of 2022.
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The U.S. CHIPS and Science Act, enacted August 9, 2022, provides tax credits for semiconductor manufacturing activities within the United States, but because we outsource our semiconductor manufacturing we do not expect to be entitled to these tax credits.
Many countries, as well as organizations such as the Organization for Economic Cooperation and Development, have proposed changes to existing tax laws, including a proposed 15% global minimum tax. Any of these developments or changes in federal, state or international tax laws or tax rulings could adversely affect our effective tax rate and our operating results. There can be no assurance that our effective tax rates, tax payments or tax credits and incentives will not be adversely affected by these or other developments or changes in law.
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.taxes.
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.
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Risks Relating to Our Financial Reporting and Disclosure
If we failAny failure to maintain an effective system of disclosure controls and internal controls over financial reporting, or 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.us.
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 wemust 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 may no longer avail ourselves of this exemption since 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 2404 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 likelycould adversely affect the market price of our common stock. In addition, weWe could also 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 ofassociated with being a public company.
We have incurred significant legal, accounting and other costs associated with public companypublic-company reporting requirements. We ceased to be an “emerging growth company” on December 31, 2021, and are no longer eligible for the reduced disclosure requirements and exemptions applicable to “emerging growth companies.” As such, we will be required to hold a say-on-pay vote and a say-on-frequency vote at our 2022 annual meeting of stockholders. We expect that ourOur loss of “emerging growth company”this status will requirehas required additional management attention from management and will result in increased our costs, to us, which could include higherincluding 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.investor-relations-related costs. We cannot predict or accurately estimate the amount of additional costs we mayare likely to incur as a result offrom being a public company.company or the timing of these costs.
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We have and will continue to incur costs associated with recently adoptedaccepted 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. WeThey may 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 and retain them.insurance. Although we monitor developments with respect to those requirements, we cannot predict or accurately estimate the additional costs we mayare likely to incur or the timing of suchthese 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 sharesThe trading price of our common stock in our initial public offering through December 31, 2021, our stock price has ranged from $9.95fluctuated and is likely to $94.39.continue to fluctuate substantially. 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:
| 27• | price and volume fluctuations in the overall stock market;
|
| •
| changes in operating performance, stock market valuations, and volatility in the market prices of other technology companies generally, or those in our industry in particular;
|
| •
| actual or anticipated quarterly variations in our results of operations or those of our competitors;
|
| •
| actual or anticipated changes in our growth rate relative to our competitors;
|
| •
| delays in end-user deployments of RAIN systems;
|
| •
| announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
|
| •
| supply interruptions, including semiconductor wafer or other product shortfalls;
|
| •
| developments relating to intellectual property rights or in disputes relating to those rights;
|
| •
| our ability to develop and market new and enhanced products on a timely basis;
|
| •
| commencement of, or our involvement in, litigation;
|
| •
| changes in our board of directors or management;
|
| •
| changes in governmental regulations or in the status of our regulatory approvals;
|
| •
| unstable regional political and economic conditions;
|
| •
| the trading volume of our stock;
|
| •
| actual or perceived security breaches;
|
| •
| any future sales of our common stock or other securities;
|
| •
| financial analysts dropping or reducing their coverage of us; changes in financial estimates by analysts who do cover us; or our failure to meet analyst estimates or investor expectations;
|
| •
| fluctuations in the values of companies investors perceive to be comparable to us; and
|
| •
| the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections.
|
| •
| general economic conditions and slow or negative growth of markets in which we operate.
|
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•price and volume fluctuations in the overall stock market;
•changes in operating performance, stock market valuations and volatility in the market prices of other technology companies generally, and of those in our industry in particular;
•actual or anticipated quarterly variations in our results of operations or those of our competitors;
•actual or anticipated changes in our growth rate relative to our competitors;
•delays in end-user deployments of RAIN solutions;
•announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
•supply interruptions, including semiconductor wafer or other product or component shortfalls;
•developments relating to intellectual property rights or in disputes relating to those rights;
•our ability to develop and market new and enhanced products on a timely basis;
•commencement of, or our involvement in, litigation;
•changes in our board of directors or management;
•changes in governmental regulations or in the status of our regulatory approvals;
•unstable political and economic conditions, including instability resulting from wars and other armed conflicts, such as Russia invading Ukraine;
•the trading volume of our stock;
•actual or perceived security breaches;
•any future sales of our common stock or other securities;
•financial analysts dropping or reducing their coverage of us; changes in financial estimates by analysts who do cover us; or our failure to meet analyst estimates or investor expectations;
•fluctuations in the values of companies that investors perceive to be comparable to us;
•the financial projections we may provide to the public, as well as any changes in those projections or our failure to meet those projections; and
•general economic conditions and slow or negative growth in the markets in which we operate.
Technology companyTechnology stocks like ours have experienced extreme price and volume fluctuations, often unrelated or disproportionate to the company’s underlying operating performance of those companies. Securitiesperformance. Stock price volatility can cause stockholders to institute securities class-action litigation is frequently instituted against companies whose stock prices decline significantly,or stockholder derivative litigation, as it was against us. Such litigation causes substantial costsoccurred to us between 2018 and a diversion of management’s attention and resources. For further information regarding this litigation risk, please refer to Note 112020. If any of our condensed consolidated financial statements included elsewhere in this report.
We may needstockholders were 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.
Inbring a lawsuit against us, the course of running our business we may need to raise capital, potentially diluting our stockholders. In December 2019, we issueddefense and sold $86.3 million aggregate principal amount of 2.00% convertible senior notes due 2026, or the 2019 Notes. In November 2021, we issued and sold $287.5 million aggregate principal amount of 1.125% convertible senior notes due 2027, or the 2021 Notes and we may in the future engage in additional equity, equity-linked or debt financings to secure additional funds. We used approximately $183.6 milliondisposition of the net proceeds, excluding accrued interest, to repurchase approximately $76.4 million aggregate principallawsuit could be costly and divert the time and attention of the 2019 Notes through individual privately negotiated transactions concurrent with such offering. If unforeseen circumstances drive our financing needs, such as unforeseen expenditures or ifmanagement, harm 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 restrictingand negatively impact the trading price of our ability to take specific actions such as incurring additional debt, expending capital or declaring dividends, or which impose financial covenants that limitcommon stock.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 yourinvestment.
Transactions relating to the 2019 Notes or the 2021 Notes may affect our stock’s value.
If the 2019 Notes or the 2021 Notes are converted by holders, then we have the ability under the indenture for the 2019 Notesare entitled 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 thestockholders will be diluted, and public market sales of the stock issuableissued upon a conversion could decrease our stock price. Anticipated future conversions of the 2019 Notes or the 2021 Notes into shares of our stock could also decrease our stock price. Certainprice, as could short selling by holders of the 2019 Notes or the 2021 Notes may also engage in short selling to hedge their position inpositions.
In December 2019, we issued convertible senior notes due December 15, 2026, or the 2019 Notes or the 2021 Notes, which could also decrease our stock price.
In connection with us issuing the 2019 Notes,Notes. When we did so we entered into privately negotiated capped-call transactions with financial counterparties. Thecounterparties to mitigate the dilutive impact on the Company above a given stock price. We left those capped-call transactions are generally designed to reduce potential dilution to our stock upon any conversion or settlementintact after we acquired the remainder of the outstanding 2019 Notes or offset any cash payments we are 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.June 2022. From time to time, the financial counterparties
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to the capped calls may modify their hedge positions by entering into or unwinding various derivative transactions with respect toinvolving our stock or by 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 76 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 December 31, 2021,2022, our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially owned approximately 25.0%22.0% 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 ownership 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 mayprice. This ownership concentration could also prevent attempts by our stockholders to replace or remove our board of directors or management.
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Servicing the 2019 Notes and the 2021 Notes may require a significant amount of cash, and weWe may not have sufficient cash flow or the abilityaccess to raise the fundscash necessary to satisfy our obligations under the 2021 Notes, and our current and future indebtedness may limit our operating flexibility or otherwise affectrestrict 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 2019 Notes and 2021 Notes, or to make cash payments in connection with any conversion of the 2019 Notes or 2021 Notes or upon any fundamental change if holders require us to repurchase their 2019 Notes or 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, then we may be required to adopt one or morepursue other 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 2019 Notes and the 2021 Notes, will depend on the capital markets and our financial condition at suchthat time. We may not be able to engage in any ofpursue these activitiesalternatives on favorable terms or engage in these activities on desirable terms,at all, which could result in us defaulting on our debt obligations. In addition, our
Our existing and future indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
| • make it more difficult for us to satisfy our debt obligations, including the 2021 Notes; •increase our vulnerability to general adverse economic and industry conditions; •require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the cash available to run our business; •limit our flexibility in planning for, or reacting to, changes in our business or in our industry; •restrict us from exploiting business opportunities; •place us at a competitive disadvantage compared to our competitors that have less indebtedness; and •limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, executing our business strategy or for other purposes. •
| make it more difficult for us to satisfy our debt obligations, including the 2019 Notes and 2021 Notes;
|
| •
| increase our vulnerability to general adverse economic and industry conditions;
|
| •
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the cash available to run our business;
|
| •
| limit our flexibility in planning for, or reacting to, changes in our business or in the RAIN industry;
|
| •
| restrict us from exploiting business opportunities;
|
| •
| place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
|
| •
| limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or for other purposes.
|
Anti-takeover provisions in our charter documents and under Delaware or Washington law could makeprevent, delay or impede an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and limitconstrain 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, theseThese provisions could therefore adversely affect our stock price. Among other things, our certificate of incorporation and bylaws:
| 29• | permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
|
| •
| provide that the authorized number of directors may be changed only by resolution of the board of directors;
|
| •
| provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
|
| •
| divide our board of directors into three classes, each of which stands for election once every three years (subject to gradual declassification beginning at the 2021 annual meeting of stockholders, such that our board of directors will be fully declassified beginning at the 2023 annual meeting of stockholders);
|
| •
| restrict the forum for certain litigation against us to Delaware;
|
| •
| require that any action taken by our stockholders be effected at a duly called annual or special meeting of stockholders and not by written consent;
|
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•permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
| • provide that the authorized number of directors may be changed only by resolution of the board of directors; •provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; •divide our board of directors into three classes, each of which stands for election once every three years (subject to gradual declassification beginning at the 2021 annual meeting of stockholders, such that our board of directors will be fully declassified beginning at the 2023 annual meeting of stockholders); •restrict the forum for certain litigation against us to Delaware; •require that any action taken by our stockholders be effected at a duly called annual or special meeting of stockholders and not by written consent; •provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice; •do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any uncontested election of directors to elect all of the directors standing for election, if they should so choose); and •provide that special meetings of our stockholders may be called only by the chair of the board, our chief executive officer or the board of directors. •
| provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice;
|
| •
| do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any uncontested election of directors to elect all of the directors standing for election, if they should so choose);
|
| •
| provide that special meetings of our stockholders may be called only by the chair of the board, our chief executive officer or by the board of directors; and
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| •
| provide that stockholders will be permitted to amend our bylaws only upon receiving at least two-thirds of the total votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.
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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 provideinclude provisions 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,behalf; any action asserting a breach of fiduciary duty,duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylawsbylaws; 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.
Not applicable.
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Item 2. Properties
We have several operating leases for office space, which are summarized as of December 31, 20212022 in the table below. We believe that our facilities are adequate for our current needs.
| Location | | Purpose | | Approximate Square Feet | | | Principal Lease Expiration Dates | | Purpose | | Approximate Square Feet | | Principal Lease Expiration Dates |
Seattle, Washington | | Corporate headquarters | | | 109,000 | | | 2026 | | Corporate headquarters | | | 109,000 | | | 2026 |
Seattle, Washington | | Design laboratory | | | 11,000 | | | 2024 | | Design laboratory | | | 11,000 | | | 2024 |
Seattle, Washington | | | Design laboratory | | | 29,000 | | | 2029 |
Shanghai, China | | General office space | | | 4,000 | | | 2023 | | General office space | | | 4,000 | | | 2023 |
WeIn addition, we hold a lease for approximately 39,000 square feet of commercial office space in Seattle, Washington that expires in 2023. We have sublet the entirety of this office space through the expiration date. We also lease offices in Thailand and Malaysia. For more information about our lease commitments, please refer to Note 10 to our consolidated financial statements included elsewhere in this report.report.
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Item 3. 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, cash flows, market position or stock price.
Stockholder Litigation
Between July 2018 and December 2020, four class-action complaints for violation of federal securities laws (one of which was subsequently voluntarily dismissed by the plaintiffs) and three shareholder derivative actions were filed against us and certain of our officers and, in the derivative actions, against certain of our directors. The Court issued an opinion and final order approving a settlement resolving the consolidated derivative actions in November 2021. For further information on these complaints, please refer to Note 11 of our consolidated financial statements included elsewhere in this report.
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 11 of our consolidated financial statements included elsewhere in this report.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has traded on The Nasdaq Global Select Market under the symbol “PI” since July 21, 2016.
Holders of Record
As of February 4, 2022,3, 2023, there were 4933 holders of record of our common stock. The actual number of stockholdersholders is greater than the number of holders of record and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. The number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid a cash dividend on our common stock and westock. We currently intend to retain allapply our available funds and any future earnings to fund the developmentdeveloping and growth ofgrowing our business. We therefore do not anticipate paying any cash dividends on our common stock for the foreseeable future. In addition, future debt instruments, if any, may materially restrict our ability to pay dividends on our common stock. Any future determination to pay dividends on our common stock will depend at least on our results of operations, our financial condition and liquidity requirements, restrictions that may be imposed by applicable law or by contracts, and any other factors that our board of directors may consider relevant.
38Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Impinj, Inc. under
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Performance Graphthe Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph compares our cumulative total stockholder return on Impinj’sour common stock with the NASDAQ Composite Index and the Philadelphia Semiconductor Index:
Index.
This graph covers the period from July 21, 2016, using the closing price for the first day of trading immediately following the effectiveness of our initial public offering per SEC regulations, through December 31, 2021. This graph assumes that the investment in Impinj’sour common stock and in each index (including dividend reinvestment) was $100 on July 21, 2016.December 31, 2017, and assumes dividend reinvestment, if any. The stock price performance shown on the graph below is not indicative of future stock price performance.
Securities Authorized for Issuance Under Equity Compensation Plans
For more information on securities authorized for issuance under our equity compensation plans, see Note 8 and Note 9 of our consolidated financial statements included elsewhere in this report.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with our consolidated financial statements and the related notes to those statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
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-clouditem connectivity that our platform will deliver will enhanceenhances 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.applications. 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 6075 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 160150 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.GDP. We believe RAIN’s capabilities – in particular, endpoint ICs with serialized identifiers for individual items, battery-free operation, 30-foot range, readingnot line-of-sight readability, up to 1,000 itemsreads per second, without line-of-sight, radio-frequency energy harvesting for battery-free operation,low cost, essentially unlimited life and in the future,available cryptographic item authentication – position RAIN to be the leading item-to-cloud connectivity technology for the IoT.
Factors Affecting Our Performance
Covid-19Inventory Supply
We are actively monitoring and mitigating the impactsFrom 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 Covid-19 inother reasons. These inventory dynamics can impact some or all aspects of our business, includingproducts. 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 2021 and 2022 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 employees, suppliers, partners and end users.
For our endpoint IC business, forecasting was already difficult without Covid-19, because we sell our ICs to inlay partners and therefore have limited visibility to end-user demand. The myriad uncertainties that Covid-19 introduced, and continues introducing, especially at retail end users, has exacerbated that forecasting difficulty. Covid-19’s impact has been further complicated by countries vaccinating and reopening at different rates and with varying levels of effectiveness, as well as the impacts of various Covid-19 variants. Covid-19 also caused long-term shifts, many negative, in other industries important to us, such as aviation and sports. Even in supply chain and logistics, or SC&L, which saw shipment volumes surge in the depths of Covid-19, end users had been reticent to deploy new technologies.
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WeIn 2020, during the Covid-19 economic downturn, we built endpoint IC inventory through much of 2020, anticipating tight 200mm wafer foundry capacity ahead of our transition to our 300mm M700 product family. We introduced our new Impinj M700 in 2020 and, although it was in production by the end of 2020, we initially saw a slower demand ramp than we expected.inventory. Beginning in fourth-quarter 2020, demand for all our endpoint ICs including our M700, increased dramatically. Worldwide IC 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 wafer supply and post-processing capacity. In the second and third quarters, we moderated thatour sales and inventory burndown, stretching our IC supply to our partners and market but constraining our ability to fully capitalize on the increasedincreasing endpoint IC demand, while we also expandingexpanded and maturing additional
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matured our post-processing capacity. Despite that moderation, by end of third-quarter 2021 we had mostly consumed thatour prebuilt inventory. This trend continued in fourth-quarter 2021 withinventory and demand for our endpoint IC inventory exceedingICs continued to exceed our ability to meet that demand.supply.
ForIn 2022, wafer shortfalls in our systems business, Covid-19 delayed pilots and deployments throughout 2021. These delays were dueprocess nodes continued, preventing us from fully capitalizing on our demand in some cases to businesses being closed by local regulations and in others by businesses reducing or deferring capital expenditures. Some end users accelerated their investments in business-process modernization technologies like RAIN during the pandemic, but even in those cases, Covid-19 delayed deployments for reasonsevery quarter of health and safety, product and labor availability, and store closures. We also saw our distributors normalize their inventory to match Covid-19 demand levels.2022. Although we built additional systems inventory during 2021, like withdid receive wafer upsides from our foundry partner that supported sequential increases in endpoint ICs,IC revenue each quarter, demand exceeded supply constraints limitedthroughout the year. And because many of those upside wafers were 200mm rather than 300mm, we transitioned some customers back from our ability300mm M700 family to accumulate inventory sufficientour prior-generation 200mm Monza R6 product family, despite M700 being our primary market demand. In fourth-quarter 2022, our foundry partner signaled improving wafer supply. Regardless, we anticipate taking until at least second-half 2023 to begin building a sustainable level of endpoint IC finished goods inventory.
Throughout 2022 we were also unable to obtain enough reader components to meet reader market demand. We saw increased systems demand but packaging delaysAlthough component availability is starting to improve, some components remain stubbornly tight, and packaging price increases causing short supply of ourwe expect that tightness to persist at least into first-half 2023. For reader ICs, low inventory levels atwe previously experienced long packaging lead times for our distributors,Indy reader ICs and pricetesting delays for our new E-family reader ICs. The Indy lead times and E-family testing stabilized in second-half 2022.
In 2022 we saw cost increases and component shortfalls for analog, specialized logic, and memory chips constraining reader and gateway supply. Consequently, like for our endpoint ICs, our ability to capitalize on the increasedIC wafers and for all systems demand is constrained.
Our business operations have also been affected by Covid-19. Government restrictions in the early days of the pandemicproducts, which caused us to mostly closeraise prices and potentially negatively impact our offices in early 2020. Today, except for a small number of employees who needmarket competitiveness. Overall, the supply, packaging and test shortfalls, as well as cost increases, may decrease sales and cause market-share losses if our partners and end users buy competing products over ours, or choose to be in our offices to fulfill their roles, almostnot deploy at all, our employees continue to work from home. As we evaluate how to safely reopen our offices, our first priority is protecting our employees’ health and safety, and we will prioritize health and safety over a rapid office return.
Recently, a resurgence of Covid-19 in geographies where our manufacturing subcontractors are located has caused governments to reinstitute mandatory factory staff reductions, facility closures or both, periodicallynegatively impacting our endpoint ICoperating results and systems production and our ability to ship products.
Covid-19 travel restrictions adversely affected our business by slowing new-product launches and typical sales activities, and those activities remain restricted. We previously anticipated that second half 2021 would bring a return to some semblance of travel and sales normalcy, but for the most part our anticipations were not met. Moreover, there can be no assurance that Covid-19’s impact on our employees or business activities will return to normal in the first-half of 2022. Our compliance with legal and regulatory requirements related to Covid-19 may subject us to future challenges, particularly as requirements evolve.
Despite ongoing uncertainties related to Covid-19, we continue investing in research and development and long-term RAIN opportunities. Although we plan to continue making these investments into 2022, we may, depending on the business environment,prospects. choose to slow or suspend our investments, potentially impairing our ability to meet our long-term strategic objectives.
Covid-19 negatively impacted our results of operations, cash flows and financial position in 2020. It caused supply and travel disruptions in 2021. We expect it to continue disrupting our business in 2022, in ways that are difficult for us to fully predict. 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.
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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 tighteningadvancing the unique capabilities and features our platform linkages between our products.enables. 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 SC&L portal and conveyor opportunities.package tracking.
Most of our investments precede any sales benefits from the investments and, in some instances, we may never see any benefitsbenefit if the market is not receptive to our product or sales approach, our product development is late or fails, or for other causes.reasons. We sometimes enter into arrangements with end users, suppliers or channel partners for them to fund a portionpart of our investment, but even in those instances the investment results of our investments remain uncertain, and in some instances,cases 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 and a weaker global economy has introduced new uncertainty to our business. We will continue to monitor the impacts of Covid-19both 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 has had and we expect it to continue to have, a materially adverse impact on the retail industry. Covid-19 may also accelerate an ongoing shift inindustry, initially by shifting consumer shopping away from physical stores, which could adversely affectthen causing post-Covid supply shortfalls and retailer over-ordering and, in early 2023, inventory corrections at many retailers. Despite these retail macro trends, for the most part retail demand for endpoint ICs by retailers. The extent to whichour products exceeded our supply throughout 2022. Covid-19 materially impacts the retail industry is unclear, as is the extent to which it will impact our product sales. Other industriesalso impacted other markets 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.use RAIN. For example, the aviation, industry, which had proposed widespread luggage tagging, has been negatively impacted by Covid-19.saw delayed adoption. By contrast, SC&L has experienced markedly increased demandshipment volumes which could positively impact our financial performance if SC&L further adopts RAIN. Seeimpacted adoption. Regardless, for the section captioned “Covid-19”most part across all these industries, and for additional information.
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 quantitiesmost 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 ICproducts, 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.exceeded supply throughout 2022.
Given the uncertainties in our market and product supply, the negative impacts of our insufficient 2022 supply and end user perceptions of the risks associated with insufficient supply, 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 and a weaker global economy will not materially impact our
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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 continuedcontinue investing in new products. In our endpoint IC business, in 2020 we introduced our newthe Impinj M700 which offersfamily, with significant performance
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advantages over other endpoint ICs on the marketmarket. We continue expanding the M700 family, for example with our introduction of the M780 and which we believe will foster adoption.M781 in November 2022. In our systems business, in 2020 we introduced our newthe Impinj R700 reader and in 2021 our new Impinj E710, E510 and E310E-family reader ICs, both of which likewise offer significant performance advantages over other readers and reader ICs on the market and for which we believe will also foster adoption. Marketcontinue expanding the product families. Regardless, market adoption could be impacted by product availability. See furtheravailability—see the discussion of product availability under “Inventory Supply”.
We sell our products primarily through partners and distributors and therefore have limited abilityvisibility to determine end-user demand. Consequently, we may incorrectly forecast that demand or not identify market shifts in a timely fashion,manner, potentially adversely affecting our business adversely.business. 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,supply-chain disruption, macroeconomic conditions 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 User Deployments
From 2010 to 2021,2022, our endpoint IC sales volumes increased at a compounded annual growth rate of 27%26%. 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 2021.2022. 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 onis impacted by 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-preventionself-checkout and loss prevention at a large European retailerEuropean-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.results.
Average Selling Price
Our product 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 the second half ofsecond-half 2021, due to wafer and component supply shortfalls at many of our suppliers, we began to experienceexperiencing increasing rather than decreasing costs for both endpoint ICs and systems. In October 2021,2022, we began raisingraised 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. 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 product margins to be volatile based on product mix and the timing of our price changes.
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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 customerspartners and end users 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 maydid not see these historical trends hold in 2022 due to the price increases noted above, and ongoing demand and supply impacts from Covid-19.
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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’end users’ fiscal years. Like for our endpoint ICs, we maydid not see these historical trends hold in 2022 due to the price increases noted above and ongoing demand and supply impacts from Covid-19.may not see them in 2023.
While, over the longerlong term, we expect these seasonal trends to continue, quarter-to-quarter revenue variability in our revenue can be caused by a number offrom factors including supply uncertainty, in demanddeployment timing, competitor products and supply as a result of Covid-19, the timing of large deployments, competitor product availability as well as supply constraints, any orsupply-chain disruptions can all of which can mask seasonality in any given period. These risks and uncertainties,variabilities, 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).
Inventory Supply
From time to time, we experience inventory overages or shortages, either due to us mis-estimating customer or end-user demand; constrained supplier manufacturing capacity or product availability; fluctuationsCovid-19
We are actively monitoring and mitigating the impacts of Covid-19 in our market, including competitor product availability or in the global economy; changes in regulations or tariffs; or for a host of other reasons. These inventory dynamics can impact some or all aspects of our products. High inventory levels can result in product obsolescence, increases in reserves or unexpected expenses that adversely affectbusiness, including for our business. Low inventory levels can affect our ability to meet customer demand, lengthen lead timesemployees, suppliers, partners and potentially causing us to miss opportunities, lose market share and/or damage customer relationships, also adversely affecting our business. end users.
For example, in 2010 we experienced wafer shortages relative to our submitted endpoint IC wafer purchase orders because of highIn 2021 and 2022, as the worldwide economy began recovering from the downturn caused by Covid-19, demand for semiconductor foundry capacity. These shortages adversely affectedall our ability to meet our customers’ demand and, in some cases, caused customers to cancel orders, qualify alternative suppliers or purchase from our competitors.
In 2021, we again experienced wafer shortages due to both significant worldwide demand from multiple industries and semiconductor foundries wafer shortfalls. In 2020, we anticipated a 2021 200mm shortfall and, in the depths of the pandemic, both built 200mm wafer inventory and accelerated our investment in 300mm M700 post-processing capacity. Regardless, the worldwide semiconductor wafer supply imbalance exceeded our prior expectations. We focused our 2021 efforts on moderating our 200mm wafer supply, accelerating and maturing our 300mm post-processing capacity, and maximizing our total unit volumes to best support our inlay partners and capture the market opportunity. Looking forward, our foundry partner has signaled tight wafer availability,products increased. Unfortunately, at least in the older-generation semiconductor nodes we use, well into 2022. We therefore continue our focus in 2022 on wafer availability, expanding and maturing our 300mm post-processing capacity, and total unit volumes in light of anticipated strong endpoint IC demand against that constrained wafer supply. We have wafer supply commitments similar to fourth-quarter levels through at least mid-2022, but our supply in subsequent periods is less certain. Any inability to obtain sufficient wafer supply at reasonable prices or at all would negatively impact our operating results and prospects.
In our systems business, we experienced lengthened packaging lead times for our reader ICs, which negatively impacted our ability to meet reader IC demand for 2021. We expect those lengthened lead times, and our ability to meet demand, to stabilize in first-half 2022. At the same time, we anticipate reader IC cost increases, at least for several quarters. We have also experienced supply constraints and expecthigher costs that limited our ability to continue experiencing shortagesfully capitalize on the increased demand, as discussed above.
Given the ongoing uncertainty over Covid-19’s epidemiological, economic and price increases foroperational impacts we cannot reasonably estimate the electronicextent 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 other componentsactions we and others take in response to Covid-19.
For more information on Covid-19’s impact on our subcontractors usebusiness, please refer to build our readers and gateways, impacting current and future reader and gateway availability and costs.Part I, Item 1A (Risk Factors) of this report.
Results of Operations
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | |
(in thousands, except percentages) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Revenue | | $ | 190,283 | | | $ | 138,923 | | | $ | 152,836 | | | $ | 51,360 | | | $ | (13,913 | ) | | | $ | 257,800 | | | $ | 190,283 | | | $ | 138,923 | | | $ | 67,517 | | | $ | 51,360 | | |
Gross profit | | $ | 98,954 | | | $ | 65,140 | | | $ | 74,002 | | | $ | 33,814 | | | $ | (8,862 | ) | | | $ | 137,884 | | | $ | 98,954 | | | $ | 65,140 | | | $ | 38,930 | | | $ | 33,814 | | |
Gross margin | | | 52.0 | % | | | 46.9 | % | | | 48.4 | % | | | 5.1 | % | | | (1.5 | )% | | | | 53.5 | % | | | 52.0 | % | | | 46.9 | % | | | 1.5 | % | | | 5.1 | % | |
Loss from operations | | $ | (37,249 | ) | | $ | (47,071 | ) | | $ | (21,661 | ) | | $ | 9,822 | | | $ | (25,410 | ) | | | $ | (19,479 | ) | | $ | (37,249 | ) | | $ | (47,071 | ) | | $ | 17,770 | | | $ | 9,822 | | |
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Year ended December 31, 20212022 compared with year ended December 31, 20202021
Revenue and gross profit increased, due primarily to higher endpoint IC and systems revenue. The endpoint IC revenue increase was driven primarily by higher ASP and shipment volumes when compared to the prior year period. Gross margin increased, due primarily to increased product margins. The increased product margins were driven primarily by an increase in endpoint IC margins due to product mix. Loss from operations decreased, due primarily to increased gross profit 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; higher stock-based compensation expense; higher infrastructure costs; and higher marketing and advertising costs; offset by lower restructuring expenses.prior-year
Year ended December 31, 2021 compared with year ended December 31, 2020
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Revenue and gross profit increased, due primarily to higher endpoint IC and systems revenue. Gross margin increased, due primarily to 2020 excess and obsolescence charges as well as current-year2021 sales of fully reserved inventory and increased product margins. The increased product margins were driven primarily driven by thean increase in endpoint IC marginmargins due to product mix. Loss from operations decreased, due primarily to increased gross profit offset by increased operating expenses. The increase in operating expenses was due primarily due to increased stock-based compensation expense,expense; increased research and development and sales and marketing personnel expensesexpenses; and increased non-settlement relatednon-settlement-related legal fees.
Year ended December 31, 2020 compared with year ended December 31, 2019Revenue
Revenue and gross profit decreased due primarily to lower systems revenue, partially offset by higher endpoint IC revenue. Gross margin decreased due primarily to revenue mix with systems revenue comprising a smaller portion of our total revenue. Loss from operations increased due primarily to increased operating expenses and decreased gross profit. The increase in operating expenses was primarily due to increased stock-based compensation expense, litigation-settlement and related costs incurred in second-quarter 2020, and increased research and development personnel expenses, partially offset by decreased sales and marketing personnel expenses.
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Endpoint ICs | | $ | 191,532 | | | $ | 139,250 | | | $ | 102,326 | | | $ | 52,282 | | | $ | 36,924 | | |
Systems | | | 66,268 | | | | 51,033 | | | | 36,597 | | | | 15,235 | | | | 14,436 | | |
Total revenue | | $ | 257,800 | | | $ | 190,283 | | | $ | 138,923 | | | $ | 67,517 | | | $ | 51,360 | | |
Revenue
| | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | |
Endpoint ICs | | $ | 139,250 | | | $ | 102,326 | | | $ | 97,657 | | | $ | 36,924 | | | $ | 4,669 | | |
Systems | | | 51,033 | | | | 36,597 | | | | 55,179 | | | | 14,436 | | | | (18,582 | ) | |
Total revenue | | $ | 190,283 | | | $ | 138,923 | | | $ | 152,836 | | | $ | 51,360 | | | $ | (13,913 | ) | |
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, orsolutions providers, VARs and system integrators, or SIs, also primarily through distributors. We expect endpoint IC sales to represent the majority of our revenue for the foreseeable future.
Year ended December 31, 2022 compared with year ended December 31, 2021
Endpoint IC revenue increased $52.3 million, due primarily to a $35.5 million increase from higher ASPs and a $16.8 million increase from higher shipment volumes. The ASP increase was due primarily to price increases we implemented to offset higher product costs as discussed above under "—Factors Affecting Our Performance—Average Selling Price" and product mix, the latter from a higher contribution from industrial and specialty ICs.
Systems revenue increased $15.2 million, due primarily to increases of $7.6 million in reader IC revenue, $4.9 million in gateway revenue and $3.3 million in reader revenue offset by a decrease of $913,000 in nonrecurring engineering, or NRE, revenue. The reader IC and gateway revenue increases were due primarily to higher shipment volumes; the reader revenue increase was due primarily to higher ASPs.
For more information, see the sections captioned “—Factors Affecting Our Performance—Inventory Supply” and “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 revenue and/or gross margins”.
Year ended December 31, 2021 compared with year ended December 31, 2020
Endpoint IC revenue increased $36.9 million, due primarily to a $44.5 million increase in shipment volumes, offset by a $7.6 million decrease due to lower ASPs. The increase in shipment volumes was due, in part, to prior year2020 volumes being low, a result of Covid-19 which negatively impacted several markets we sell to, including retail, our largest endpoint IC market, as well as growth in our customers’ underlying business. The ASP decrease was due to our annual price negotiations as discussed above under “—“—Factors Affecting Our Performance—Seasonality” and product mix with a higher contribution from our M700 product line which has a lower ASP, both of which were slightly offset by higher contribution from industrial and specialized products.
Systems revenue increased $14.4 million, due primarily to increases of $12.2 million in reader revenue, $1.4 million in gateway revenue and $629,000 in NRE revenue. Reader revenue increased primarily due to higher shipment volumes and ASPs, gateway revenue increased primarily due to higher ASPs; and NRE revenue increased due to timing of revenue recognition.
For more information, see the sections captioned “—Factors Affecting Our Performance—Covid-19”Gross Profit and “Risk Factors—Risks Relating to Our Platform, Products and Technologies—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 Margin
Year ended December 31, 2020 compared with year ended December 31, 2019
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands, except percentages) | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Cost of revenue | | $ | 119,916 | | | $ | 91,329 | | | $ | 73,783 | | | $ | 28,587 | | | $ | 17,546 | | |
Gross profit | | | 137,884 | | | | 98,954 | | | | 65,140 | | | | 38,930 | | | | 33,814 | | |
Gross margin | | | 53.5 | % | | | 52.0 | % | | | 46.9 | % | | | 1.5 | % | | | 5.1 | % | |
Endpoint IC revenue increased $4.7 million, due primarily to a $7.0 million increase in shipment volumes, partially offset by a $2.3 million decrease due to lower ASPs. The ASP decrease was due primarily to our annual price negotiations as discussed above under “—Factors Affecting Our Performance—Seasonality”, partially offset by favorable product mix. The increase in shipment volumes was due primarily to growth in our customers’
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underlying business before Covid-19 negatively impacted global retail apparel sales starting second-quarter 2020 and subsequent demand recovery in fourth-quarter 2020.
Systems revenue decreased $18.6 million, due primarily to decreases of $14.8 million in gateway revenue and $5.2 million in reader revenue, partially offset by a $1.3 million increase in reader IC revenue. Gateway revenue decreased due primarily to the North American logistics provider in connection with a project-based gateway deployment described above; reader revenue decreased due primarily to lower shipment volumes, in part caused by Covid-19 related delays in systems deployments; reader IC revenue increased primarily due to higher shipment volumes.
Gross Profit and Gross Margin
| | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | |
(in thousands, except percentages) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | |
Cost of revenue | | $ | 91,329 | | | $ | 73,783 | | | $ | 78,834 | | | $ | 17,546 | | | $ | (5,051 | ) | |
Gross profit | | $ | 98,954 | | | $ | 65,140 | | | $ | 74,002 | | | $ | 33,814 | | | $ | (8,862 | ) | |
Gross margin | | | 52.0 | % | | | 46.9 | % | | | 48.4 | % | | | 5.1 | % | | | (1.5 | )% | |
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.
Year ended December 31, 2022 compared with year ended December 31, 2021
Cost of revenue increased $28.6 million, due primarily to increased endpoint IC and systems revenue. Gross margin increased, due primarily to increased product margins, with fluctuations that offset one another related to reduced sales of fully reserved inventory and higher indirect costs. The product-margin increase was due primarily to higher endpoint IC margins from a higher revenue contribution from industrial and specialty ICs. Sales of fully reserved inventory had an immaterial gross margin impact for the year ended December 31, 2022, compared to a favorable gross margin impact of 1.5% for the year ended December 31, 2021.
Year ended December 31, 2021 compared with year ended December 31, 2020
Cost of revenue increased $17.5 million, due primarily to increased endpoint IC and systems revenue. Gross margin increased 5.1%, due to inventory excess and obsolescence charges that had an unfavorable net gross margin impact of 2.2% in 2020, sales of fully reserved inventory that had a positive 1.5% impact in 2021, and increased underlying product margins primarily related to favorable endpoint IC product mix with an increasing mix of M700 and higher contribution from industrial and specialized products.specialty ICs.
Year ended December 31, 2020 compared with year ended December 31, 2019Operating Expenses
Cost of revenue decreased $5.1 million, due primarily to decreased systems revenue partially offset by increased endpoint IC revenue. Gross margin decreased 1.5%, due primarily to revenue mix with systems revenue comprising a smaller portion of our total revenue. Inventory excess and obsolescence charges had an unfavorable net gross-margin impact of 2.2% in 2020.
Operating Expenses
Research and Development
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Research and development | | $ | 64,058 | | | $ | 48,590 | | | $ | 38,880 | | | $ | 15,468 | | | $ | 9,710 | | | | $ | 74,106 | | | $ | 64,058 | | | $ | 48,590 | | | $ | 10,048 | | | $ | 15,468 | | |
ResearchResearch 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.
Year ended December 31, 2022 compared with year ended December 31, 2021
Research and development expense increased $10.0 million, due primarily to increases of $6.6 million in personnel expenses from higher headcount and a change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, $1.9 million in infrastructure costs primarily from increased software costs, and $793,000 in stock-based compensation expense related primarily to increased outstanding equity grants.
Year ended December 31, 2021 compared with year ended December 31, 2020
Research and development expense increased $15.5 million, due primarily to increases of $6.9 million in stock-based compensation expense primarily related to PSU grant timing, and to a lesser extent, an increased number of equity grants outstanding. Other major factors driving the increase included $4.6 million in personnel
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expenses from higher headcount; $2.9 million in product-development costs; and $1.1 million in infrastructure costs from increased software costs.
Year ended December 31, 2020 compared with year ended December 31, 2019
Research and development expense increased $9.7 million, due primarily to increases of $4.2 million in personnel expenses from higher headcount, $3.9 million in stock-based compensation expense from PSUs and an increased number of equity grants outstanding and $1.2 million in product development costs as a result of fluctuations in the timing of development activities and $589,000 in infrastructure costs from increased software costs.
Sales and Marketing
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Sales and marketing | | $ | 34,287 | | | $ | 28,663 | | | $ | 32,642 | | | $ | 5,624 | | | $ | (3,979 | ) | | | $ | 37,894 | | | $ | 34,287 | | | $ | 28,663 | | | $ | 3,607 | | | $ | 5,624 | | |
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Sales and marketing expense comprises primarily personnel expenses (salaries, incentive sales compensation, or commission, benefits and other employee relatedemployee-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
Year ended December 31, 2022 compared with year ended December 31, 2021
Sales and marketing expense increased $3.6 million, due primarily to remain approximately constant on an absolute dollar basis, except for incentive sales compensation which fluctuates as a functionincreases of revenue. Expenses associated with our sales$2.9 million in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, and $554,000 in marketing activities related to marketing events requiring travel will continue to fluctuate depending on current and future Covid-19 travel restrictions.advertising expenses.
Year ended December 31, 2021 compared with year ended December 31, 2020
Sales and marketing expense increased $5.6 million, due primarily to increases of $3.5 million in stock-based compensation expense primarily related to PSU grant timing, and an increased number of equity grants outstanding. Other major factors driving the increase included $2.2 million in personnel expenses from higher salaries and benefits, and commissions as a result of our increased revenue.
Year ended December 31, 2020 compared with year ended December 31, 2019
Sales and marketing expense decreased $4.0 million, due primarily to decreases of $3.3 million in personnel expenses from lower commission expense and, to a lesser extent, lower headcount, and $1.3 million from travel related expense due to Covid-19. These decreases were partially offset by a $516,000 increase in infrastructure costs from increased software costs.
General and Administrative
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
General and administrative | | $ | 36,137 | | | $ | 34,958 | | | $ | 24,141 | | | $ | 1,179 | | | $ | 10,817 | | | | $ | 45,465 | | | $ | 36,137 | | | $ | 34,958 | | | $ | 9,328 | | | $ | 1,179 | | |
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.
Year ended December 31, 2022 compared with year ended December 31, 2021
General and administrative expense increased $9.3 million, due primarily to a $4.4 million increase in non-settlement-related legal fees, $2.3 million in personnel expenses from higher headcount and the change in bonus payment structure from 100% PSUs to 50% cash and 50% PSUs, and $1.6 million in stock-based compensation expense related primarily to increased outstanding equity grants.
Year ended December 31, 2021 compared with year ended December 31, 2020
General and administrative expense increased $1.2 million due primarily to increases of $3.6 million in stock-based compensation expense primarily related to PSU grant timing, and an increased number of equity grants outstanding. Other major factors comprising the increase included $3.1 million in professional services primarily
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related to non-settlement related legal fees offset by decreases of $5.8 million in settlement and related costs incurred in 2020.
Restructuring costs
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Restructuring costs | | $ | (102 | ) | | $ | 1,721 | | | $ | — | | | $ | (1,823 | ) | | $ | 1,721 | | |
On February 2, 2021, we restructured our go-to-market organization to strategically align our global sales, product, partner development and marketing teams. We eliminated approximately seven full-time positions in our go-to-market organization, representing roughly 2% of our workforce. Restructuring charges were immaterial for the year ended December 31, 2022. 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 17 to our consolidated financial statements included elsewhere in this report.
Other Income, Net
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Other income, net | | $ | 2,517 | | | $ | 25 | | | $ | 650 | | | $ | 2,492 | | | $ | (625 | ) | |
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Other income, net comprises primarily interest income on our short-term investments.
Year ended December 31, 20202022 compared with year ended December 31, 20192021
General and administrative expenseOther income, net increased $10.8$2.5 million, due primarily to increases of $5.4 million in the litigation settlementhigher interest rates on our short and related costs, $3.1 million in stock-based compensation expense from PSUslong-term investments.
Year ended December 31, 2021 compared with year ended December 31, 2020
Other income, net decreased $625,000, due primarily to lower interest rates on our short and an increased number of equity grants outstanding, $1.3 million in non-settlement related legal fees and $723,000 in personnel expenses from higher headcount.long-term investments.
Induced Conversion Expense
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | |
Induced conversion expense | | $ | 11,333 | | | $ | — | | | $ | — | | | $ | 11,333 | | | $ | — | | | $ | 2,232 | | | $ | 11,333 | | | $ | — | | | $ | (9,101 | ) | | $ | 11,333 | |
In November 2021 and June 2022, we completed a privately negotiated repurchase of $76.4 million and $9.85 million principal amountamounts, respectively, of the 2019 Convertible Notes (“2019 Note Repurchase”). TheWe accounted for the 2019 Notes Repurchase transaction was accounted fortransactions 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, weWe recorded $11.3 million and $2.2 million in induced conversion expense which is included in theour Consolidated Statements of Operations for the yearyears ended December 31, 2021.2021 and December 31, 2022, respectively. 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 7 to our consolidated financial statements included elsewhere in this report.
Restructuring costs
| | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | |
Restructuring costs | | $ | 1,721 | | | $ | — | | | $ | — | | | $ | 1,721 | | | $ | — | | |
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 17 to our condensed consolidated financial statements included elsewhere in this report.
Other Income, Net
| | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | |
Other income, net | | $ | 25 | | | $ | 650 | | | $ | 1,242 | | | $ | (625 | ) | | $ | (592 | ) | |
Other income, net comprises primarily interest income on our short-term investments.
Year ended December 31, 2021 compared with year ended December 31, 2020
Other income, net decreased $625,000, due primarily to a lower interest rate on our short-term and long-term investments.
Year ended December 31, 2020 compared with year ended December 31, 2019
Other income, net decreased $592,000, due primarily to a lower interest rate on our short-term investments.
Interest Expense
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Interest expense | | $ | 2,550 | | | $ | 5,413 | | | $ | 1,794 | | | $ | (2,863 | ) | | $ | 3,619 | | | | $ | 4,923 | | | $ | 2,550 | | | $ | 5,413 | | | $ | 2,373 | | | $ | (2,863 | ) | |
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Interest expense comprises primarily cash interest, amortization of debt issuance costs and debt discount on our debt.discount.
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 yearyears ended December 31, 2021 and December 21, 2022 use the new standard and we no longer record amortization of debt discount. We have not adjusted the comparative prior reporting period.
Year ended December 31, 2022 compared with year ended December 31, 2021
Interest expense increased $2.4 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 7 to our consolidated financial statements included elsewhere in this report.
Year ended December 31, 2021 compared with year ended December 31, 2020
Interest expense decreased $2.9 million, due primarily to the fact we no longer record amortization of debt discount as noted above, and to a lesser extent, the impact of the partial our repurchase of $76.4 million principal amount of the 2019 convertible senior notes in November 2021. For further information on the 2019 Notes, please refer to Note 7 to our consolidated financial statements included elsewhere in this report.
Year ended December 31, 2020 compared with year ended December 31, 2019
Interest expense increased $3.6 million, due primarily to an increase in amortization of debt discount related to our subordinated convertible notes, or the 2019 Notes. For further information on the 2019 Notes, please refer to Note 7 to our consolidated financial statements included elsewhere in this report.
Loss on Debt Extinguishment
| | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | |
Loss on debt extinguishment | | $ | — | | | $ | — | | | $ | (576 | ) | | $ | — | | | $ | 576 | | |
In December 2019, we used $24.0 million of the net proceeds from the 2019 Notes to repay our senior credit facility in full, which was terminated pursuant to its terms. In connection with this repayment, we recorded a $576,000 loss on debt extinguishment, comprising a $470,000 prepayment penalty fees and a $106,000 write-off of unamortized debt issuance costs.
Income Tax Benefit (Expense)Expense
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Income tax expense | | $ | (153 | ) | | $ | (89 | ) | | $ | (198 | ) | | $ | (64 | ) | | $ | 109 | | | | $ | 184 | | | $ | 153 | | | $ | 89 | | | $ | 31 | | | $ | 64 | | |
We are subject to federal and state income taxes in the United States and foreign jurisdictions.
Year ended December 31, 2022 compared with year ended December 31, 2021
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Income tax expense remained comparable to the prior period.
Year ended December 31, 2021 compared with year ended December 31, 2020
Income tax expense remained comparable to the prior period.
Year ended December 31, 2020 compared with year ended December 31, 2019
Income tax expense remained comparable to the prior period.
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 companiescompanies..
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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 2019, we revised our definition of adjusted EBITDA to exclude loss on debt extinguishment incurred in connection with the December 2019 repayment of our senior credit facility. In second-quarter 2020, we revised our definition of adjusted EBITDA to exclude litigation settlement costs for the class-action and derivative lawsuits, including related costs. In fourth-quarter 2021, we revised our definition of adjusted EBITDA to exclude the expense incurred in connection with the November 2021 induced conversion 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. Neither revision to the definition of adjusted EBITDA impacted adjusted EBITDA previously reported for prior periods preceding the revisions. The following table presents a reconciliation of net loss to adjusted EBITDA:EBITDA:
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Net loss | | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | (22,987 | ) | | $ | 663 | | | $ | (28,936 | ) | | | $ | (24,301 | ) | | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | 26,959 | | | $ | 663 | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income, net | | | (25 | ) | | | (650 | ) | | | (1,242 | ) | | | 625 | | | | 592 | | | | | (2,517 | ) | | | (25 | ) | | | (650 | ) | | | (2,492 | ) | | | 625 | | |
Interest expense | | | 2,550 | | | | 5,413 | | | | 1,794 | | | | (2,863 | ) | | | 3,619 | | | | | 4,923 | | | | 2,550 | | | | 5,413 | | | | 2,373 | | | | (2,863 | ) | |
Loss on debt extinguishment | | | — | | | | — | | | | 576 | | | | — | | | | (576 | ) | | |
Income tax expense | | | 153 | | | | 89 | | | | 198 | | | | 64 | | | | (109 | ) | | | | 184 | | | | 153 | | | | 89 | | | | 31 | | | | 64 | | |
Depreciation | | | 4,602 | | | | 4,504 | | | | 4,809 | | | | 98 | | | | (305 | ) | | | | 6,044 | | | | 4,602 | | | | 4,504 | | | | 1,442 | | | | 98 | | |
Stock-based compensation | | | 40,498 | | | | 25,675 | | | | 18,486 | | | | 14,823 | | | | 7,189 | | | | | 42,443 | | | | 40,498 | | | | 25,675 | | | | 1,945 | | | | 14,823 | | |
Restructuring costs | | | 1,721 | | | | — | | | | — | | | | 1,721 | | | | — | | | | | (102 | ) | | | 1,721 | | | | — | | | | (1,823 | ) | | | 1,721 | | |
Settlement and related costs | | | (460 | ) | | | 5,359 | | | | — | | | | (5,819 | ) | | | 5,359 | | | | | — | | | | (460 | ) | | | 5,359 | | | | 460 | | | | (5,819 | ) | |
Induced conversion expense | | | 11,333 | | | | — | | | | — | | | | 11,333 | | | | — | | | | | 2,232 | | | | 11,333 | | | | — | | | | (9,101 | ) | | | 11,333 | | |
Adjusted EBITDA | | $ | 9,112 | | | $ | (11,533 | ) | | $ | 1,634 | | | $ | 20,645 | | | $ | (13,167 | ) | | | $ | 28,906 | | | $ | 9,112 | | | $ | (11,533 | ) | | $ | 19,794 | | | $ | 20,645 | | |
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 our convertible notes; and prepayment penalty on debt extinguishment. In fourth-quarter 2019, we revised our definition of non-GAAP net income (loss) to exclude the prepayment penalty on debt extinguishment incurred in connection with the December 2019 repayment of our senior credit facility and amortization of debt discount related to the equity component of the 2019 Notes. We have revised the prior period non-GAAP net income (loss) to conform to our current period presentation. In second-quarter 2020, we revised our definition of non-GAAP net income (loss) to exclude litigation settlement costs for the class-action and derivative lawsuits, including related costs. Excluding settlement and related costs did not impact non-GAAP net income (loss) previously reported for prior periods preceding the revision. In fourth-quarter 2021, we revised our definition of non-GAAP net income (loss) to exclude the expense incurred in connection with the November 2021 induced conversion of our 2019 Notes.
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GAAP requires that certain convertible debt instruments that may be settled in cash on conversion be accounted for as separate liability and equity components in a manner that reflects our non-convertible debt borrowing rate. This accounting results in the debt component being treated as though it was issued at a discount, with the debt discount being amortized as additional non-cash interest expense over the debt instrument term using the effective interest method. As a result, we believe that excluding this non-cash interest expense attributable to the debt discount in calculating our non-GAAP net income (loss) is useful because this interest expense is not indicative of our ongoing operational performance. performance. 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 year ended December 31, 2021 use the new standard and we no longer record amortization of debt discount.
The following table presents a reconciliation of net loss to non-GAAP net income (loss):
| | | Year Ended December 31, | | | 2021 vs 2020 | | | 2020 vs 2019 | | | | Year Ended December 31, | | | 2022 vs 2021 | | | 2021 vs 2020 | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | Change | | | Change | | | | 2022 | | | 2021 | | | 2020 | | | Change | | | Change | | |
Net loss | | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | (22,987 | ) | | $ | 663 | | | $ | (28,936 | ) | | | $ | (24,301 | ) | | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | 26,959 | | | $ | 663 | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 4,602 | | | | 4,504 | | | | 4,809 | | | | 98 | | | | (305 | ) | | | | 6,044 | | | | 4,602 | | | | 4,504 | | | | 1,442 | | | | 98 | | |
Stock-based compensation | | | 40,498 | | | | 25,675 | | | | 18,486 | | | | 14,823 | | | | 7,189 | | | | | 42,443 | | | | 40,498 | | | | 25,675 | | | | 1,945 | | | | 14,823 | | |
Restructuring costs | | | 1,721 | | | | — | | | | — | | | | 1,721 | | | | — | | | | | (102 | ) | | | 1,721 | | | | — | | | | (1,823 | ) | | | 1,721 | | |
Amortization of debt discount | | | — | | | | 3,566 | | | | 140 | | | | (3,566 | ) | | | 3,426 | | | | | — | | | | — | | | | 3,566 | | | | — | | | | (3,566 | ) | |
Prepayment penalty on debt extinguishment | | | — | | | | — | | | | 470 | | | | — | | | | (470 | ) | | |
Settlement and related costs | | | | — | | | | (460 | ) | | | 5,359 | | | | 460 | | | | (5,819 | ) | |
Induced conversion expense | | | 11,333 | | | | — | | | | — | | | | 11,333 | | | | — | | | | | 2,232 | | | | 11,333 | | | | — | | | | (9,101 | ) | | | 11,333 | | |
Settlement and related costs | | | (460 | ) | | | 5,359 | | | | — | | | | (5,819 | ) | | | 5,359 | | | |
Non-GAAP net income (loss) | | $ | 6,434 | | | $ | (12,819 | ) | | $ | 918 | | | $ | 19,253 | | | $ | (13,737 | ) | | |
Non-GAAP net income | | | $ | 26,316 | | | $ | 6,434 | | | $ | (12,819 | ) | | $ | 19,882 | | | $ | 19,253 | | |
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Quarterly Results of Operations
The following tables set forth our unaudited quarterly statements of operations data for the last eight quarters. In the opinion of management, these data have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this report and reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the data. The results of historical periods are not indicative of expectations for any future period. You should read these data together with our audited consolidated financial statements and the related notes included elsewhere in this report.
| | Three Months Ended | |
| | Dec. 31, | | | Sep. 30, | | | Jun. 30, | | | Mar. 31, | | | Dec. 31, | | | Sep. 30, | | | Jun. 30, | | | Mar. 31, | |
| | 2021 | | | 2021 | | | 2021 | | | 2021 | | | 2020 | | | 2020 | | | 2020 | | | 2020 | |
| | (in thousands, except percentages) | |
Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 52,574 | | | $ | 45,193 | | | $ | 47,268 | | | $ | 45,248 | | | $ | 36,448 | | | $ | 28,196 | | | $ | 26,457 | | | $ | 47,822 | |
Cost of revenue | | | 23,391 | | | | 22,180 | | | | 22,491 | | | | 23,267 | | | | 19,034 | | | | 14,824 | | | | 13,497 | | | | 26,428 | |
Gross profit | | | 29,183 | | | | 23,013 | | | | 24,777 | | | | 21,981 | | | | 17,414 | | | | 13,372 | | | | 12,960 | | | | 21,394 | |
Gross margin | | | 55.5 | % | | | 50.9 | % | | | 52.4 | % | | | 48.6 | % | | | 47.8 | % | | | 47.4 | % | | | 49.0 | % | | | 44.7 | % |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development expense | | | 17,578 | | | | 16,789 | | | | 15,900 | | | | 13,791 | | | | 14,971 | | | | 11,901 | | | | 10,661 | | | | 11,057 | |
Sales and marketing expense | | | 9,710 | | | | 8,736 | | | | 8,196 | | | | 7,645 | | | | 8,086 | | | | 6,964 | | | | 6,123 | | | | 7,490 | |
General and administrative expense | | | 9,125 | | | | 9,860 | | | | 8,998 | | | | 8,154 | | | | 8,743 | | | | 7,527 | | | | 12,446 | | | | 6,242 | |
Restructuring costs | | | 458 | | | | — | | | | — | | | | 1,263 | | | | — | | | | — | | | | — | | | | — | |
Total operating expenses | | | 36,871 | | | | 35,385 | | | | 33,094 | | | | 30,853 | | | | 31,800 | | | | 26,392 | | | | 29,230 | | | | 24,789 | |
Loss from operations | | | (7,688 | ) | | | (12,372 | ) | | | (8,317 | ) | | | (8,872 | ) | | | (14,386 | ) | | | (13,020 | ) | | | (16,270 | ) | | | (3,395 | ) |
Other income (expense), net | | | 4 | | | | 2 | | | | (4 | ) | | | 23 | | | | 66 | | | | 49 | | | | 126 | | | | 409 | |
Induced conversion expense | | | (11,333 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Interest expense | | | (974 | ) | | | (526 | ) | | | (525 | ) | | | (525 | ) | | | (1,392 | ) | | | (1,360 | ) | | | (1,349 | ) | | | (1,312 | ) |
Loss on debt extinguishment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Loss before income taxes | | | (19,991 | ) | | | (12,896 | ) | | | (8,846 | ) | | | (9,374 | ) | | | (15,712 | ) | | | (14,331 | ) | | | (17,493 | ) | | | (4,298 | ) |
Income tax expense | | | (23 | ) | | | (28 | ) | | | (60 | ) | | | (42 | ) | | | (5 | ) | | | (15 | ) | | | (41 | ) | | | (28 | ) |
Net loss | | | (20,014 | ) | | $ | (12,924 | ) | | $ | (8,906 | ) | | $ | (9,416 | ) | | $ | (15,717 | ) | | $ | (14,346 | ) | | $ | (17,534 | ) | | $ | (4,326 | ) |
Net loss per share — basic and diluted | | $ | (0.81 | ) | | $ | (0.53 | ) | | $ | (0.37 | ) | | $ | (0.40 | ) | | $ | (0.68 | ) | | $ | (0.63 | ) | | $ | (0.77 | ) | | $ | (0.19 | ) |
Weighted-average shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 24,581 | | | | 24,330 | | | | 24,120 | | | | 23,671 | | | | 23,218 | | | | 22,931 | | | | 22,716 | | | | 22,412 | |
Diluted | | | 24,581 | | | | 24,330 | | | | 24,120 | | | | 23,671 | | | | 23,218 | | | | 22,931 | | | | 22,716 | | | | 22,412 | |
Liquidity and Capital Resources
As of December 31, 2021,2022, we had cash, cash equivalents and short-term investments of $193.3$173.7 million, comprising cash deposits held at major financial institutions and short-term investments in a variety of securities, including U.S. government agencies,securities, treasury bills, corporate notes and bonds, commercial paper, asset-backed securities and money market funds. As of December 31, 2021,2022, we had working capital of $220.3$232.8 million.
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 2021,2022, our principal useuses of cash iswere funding operations to capture our market opportunity and capital expenditures.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, then we may raise additional capital through equity, equity-linked andor debt financing, to the extent such funding sources are available. Alternatively, we may be requiredneed to reduce expenses to manage liquidity; however, any such reductions could adversely impact our business and competitive position.
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Sources of Funds
From time to time, we may explore additional financing sources and meansways to lowerreduce our cost of capital, which could includeincluding equity, equity-linked and debt financing. In addition, in connection with any future acquisitions, we may pursue additional fundingfinancing 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 ourwere a senior unsecured obligations. The 2019 Notes bearobligation, bearing 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 bewere convertible into cash, shares of our common stock or a combination thereof, at our election. The 2019 Notes will matureelection, and matured on December 15, 2026, unless earlier repurchased, redeemed or converted in accordance with the terms of the indenture for the 2019 Notes.terms.
The net proceeds from issuing the 2019 Notes were approximately $83.5 million after deducting fees and expenses. We used some of the net proceeds from issuing the 2019 Notes to pay the cost of the capped callcapped-call transactions and repay our senior credit facility. We intend to usefacility, and the remainder of the net proceedsrest for general corporate purposes.
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In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Convertible Notes, (“2019 Note Repurchase”). The 2019 Notes Repurchaseaccounting for the transaction was accounted for 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, weWe paid approximately $183.6 million in cash and paid accrued and unpaid interest thereon.thereon in connection with the induced conversion.
In June 2022, we repurchased the remaining $9.85 million principal amount of the 2019 Notes accounting for the transaction as an induced conversion in accordance with ASC 470-20. We paid approximately $17.6 million in cash and accrued and unpaid interest thereon in connection with the induced conversion.
For further information on the terms of this debt, please refer to Note 7 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 bearobligation, bearing 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 beare convertible into cash, shares of our common stock or a combination thereof, at our election. The 2021 Noteselection, and will mature on May 15, 2027 unless earlier repurchased, redeemed or converted in accordance with the terms of the indenture for the 2021 Notes.terms.
The net proceeds from issuing the 2021 Notes were approximately $278.4 million after deducting initial debt issuance costs, and fees and expenses. We used approximately $183.6 million of the net proceeds for the cashto repurchase of approximately $76.4 million aggregate principal amount of the 2019 Notes through individual privately negotiated transactions concurrent with the offering2021 Notes offering. We used $17.6 million to repurchase the remaining $9.85 million aggregate principal of the 20212019 Notes describedthrough individual privately negotiated transactions in June 2022. Please refer to the section “Partial Repurchase of the Convertible Senior Notes – 2019” as described in Note 7 to our consolidated financial statements included elsewhere in this report. We will use the remainderrest of the net proceeds from the offering for general corporate purposes.
For further information on the terms of this debt, please refer to Note 7 to our consolidated financial statements included elsewhere in this report.
Historical Cash Flow Trends
The following table shows a summary of our cash flows for the periods indicated:
| | | Year Ended December 31, | | | Year Ended December 31, | | |
(in thousands) | | 2021 | | | 2020 | | | 2019 | | | 2022 | | | 2021 | | | 2020 | | |
Net cash provided by (used in) operating activities | | $ | 6,465 | | | $ | (16,877 | ) | | $ | 4,708 | | | $ | 641 | | | $ | 6,465 | | | $ | (16,877 | ) | |
Net cash used in investing activities | | | (18,642 | ) | | | (36,287 | ) | | | (13,099 | ) | | | (102,799 | ) | | | (18,642 | ) | | | (36,287 | ) | |
Net cash provided by financing activities | | | 112,444 | | | | 9,902 | | | | 57,759 | | |
Net cash provided by (used in) financing activities | | | | (2,148 | ) | | | 112,444 | | | | 9,902 | | |
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Operating Cash Flows
For the year ended December 31, 2022, we generated $641,000 of net cash from operating activities. These net cash proceeds were due primarily to $27.8 million of net loss adjusted for non-cash items, partially offset by $27.2 million of working capital usage due primarily to higher inventory and accounts receivable offset by higher accounts payable.
For the year ended December 31, 2021, we generated $6.5 million of net cash from operating activities. The net cash proceeds were driven primarily by $51.3$6.2 million of net loss adjusted for non-cash items partially offset byand $288,000 of working capital contribution.
For the year ended December 31, 2020, we used $16.9 million of net cash from operating activities. The net cash usage was driven primarily by $17.8 million of net loss adjusted for non-cash items, partially offset by $963,000 of working capital contribution.
Investing Cash Flows
For the year ended December 31, 2019,2022, we generated $4.7used $102.8 million of net cash from operatinginvesting activities. TheThis net cash proceeds were drivenusage was due primarily by $4.1to investments and equipment purchases of $205.8 million of working capital contribution and $584,000 of a net loss adjusted for non-cash items. The working capital contribution was primarily due to lower cash usage in inventory purchases,$12.1 million, respectively, partially offset by lower cash collections in accounts receivable due to timinginvestment maturities of when amounts became due.$114.8 million.
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For the year ended December 31, 2021, we used $18.6 million of net cash from investing activities. The net cash usage was driven primarily by investments and equipment purchases of $84.4 million and $16.2 million, respectively, partially offset by investment maturities of $82 million.
For the year ended December 31, 2020, we used $36.3 million of net cash from investing activities. The net cash usage was driven primarily by investments and equipment purchases of $82.7 million and $3.1 million, respectively, partially offset by investment maturities of $49.5 million.
Financing Cash Flows
For the year ended December 31, 2019,2022, we used $13.1$2.2 million of net cash from investingfinancing activities. TheThis net cash usage was drivendue primarily by investmentsto $17.6 million to repurchase the remaining $9.85 million aggregate principal amount of the 2019 Notes described in the section “Repurchase of the Convertible Senior Notes – 2019” as described in Note 7 to our consolidated financial statements included elsewhere in this report. Other major factors included $15.4 million from stock options exercises and equipment purchases of $72.4 million and $2.4 million, respectively, partially offset by investment maturities of $61.7 million.our employee stock-purchase plan, or ESPP.
Financing Cash Flows
For the year ended December 31, 2021, we generated $112.4 million of net cash from financing activities. The net cash proceeds were driven primarily by $278.4 million net proceeds from issuing the 2021 Notes. This amount was offset by $183.6 million 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 described in the section “Partial Repurchase of the Convertible Senior Notes – 2019” as described in Note 7 to our consolidated financial statements included elsewhere in this report. Other major factors included $17.6 million from exercised stock options and our employee stock purchase plan.
For the year ended December 31, 2020, we generated $9.9 million of net cash from financing activities. The net cash proceeds were driven primarily by $10.2 million from exercised stock options and our employee stock purchase plan.
For the year ended December 31, 2019, we generated $57.8 million of net cash from financing activities. The net cash proceeds were driven primarily by $83.5 million from issuance of the 2019 Notes, $9.1 million from exercised stock options and our employee stock purchase plan and $4.0 million in term loan borrowings, net of debt issuance costs. These proceeds were partially offset by repayments of indebtedness of $28.2 million of principal under our senior credit facility and $10.1 million of premium we paid for the capped call transactions.Contractual Obligations
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Contractual Obligations
The following table reflects a summary of our contractual obligations as of December 31, 2021:2022:
| | | Payments Due By Period | | | Payments Due By Period | |
| | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than 5 Years | | | Total | | | Less
Than
1 Year | | | 1-3
Years | | | 3-5
Years | | | More
Than
5 Years | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Convertible senior notes (1) | | $ | 316,215 | | | $ | 3,521 | | | $ | 6,863 | | | $ | 16,714 | | | $ | 289,117 | | | $ | 302,055 | | | $ | 3,234 | | | $ | 6,469 | | | $ | 292,352 | | | $ | — | |
Operating lease obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating lease obligations | | | 18,490 | | | $ | 5,014 | | | $ | 6,747 | | | $ | 6,729 | | | $ | — | | | | 17,664 | | | | 4,059 | | | | 7,772 | | | | 4,642 | | | | 1,191 | |
Sublease income | | | (1,580 | ) | | $ | (1,457 | ) | | $ | (123 | ) | | $ | — | | | $ | — | | | | (123 | ) | | | (123 | ) | | | — | | | | — | | | | — | |
Net operating lease commitments | | | 16,910 | | | | 3,557 | | | | 6,624 | | | | 6,729 | | | | — | | | | 17,541 | | | | 3,936 | | | | 7,772 | | | | 4,642 | | | | 1,191 | |
Purchase commitments (2) | | | 60,734 | | | | 60,301 | | | | 433 | | | | — | | | | — | | | | 98,182 | | | | 98,182 | | | | — | | | | — | | | | — | |
Total | | $ | 393,859 | | | $ | 67,379 | | | $ | 13,920 | | | $ | 23,443 | | | $ | 289,117 | | | $ | 417,778 | | | $ | 105,352 | | | $ | 14,241 | | | $ | 296,994 | | | $ | 1,191 | |
(1) 2019 Notes include $986,000 of interest payments. The 2021 Notes include $17.9$14.6 million ofin interest payments.
(2) Purchase commitments comprise primarily non-cancelablenoncancelable commitments to purchase $54.4$87.9 million of inventory as of December 31, 2021, non-cancelable2022 and noncancelable software license agreements with vendors and equipment purchases.
Off-Balance SheetOff-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 purposespecial-purpose entities, whichor financial partnerships that would have been established for the purpose of facilitating off-balance sheetoff-balance-sheet arrangements or for another contractually narrow or limited purpose.
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Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which we have prepared in accordance with GAAP. TheOur preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the consolidated financial statements. Generally, we base our estimates on historical experience and on various other assumptions, in accordance with GAAP, that we believe to be reasonable under the circumstances. ActualOur actual results may differ from these estimates under other assumptions or conditions.
Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:
| • revenue recognition; •stock-based compensation. •
| revenue recognition;
|
| •
| stock-based compensation.
|
Revenue Recognition
We generate revenue primarily from sales of hardware products. We also generate revenue from software, extended warranties, enhanced maintenance, support services and nonrecurring engineeringNRE development services, allnone of which are not material.
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We recognize revenue when we transfer control of the promised goods or services is transferred to our customers, which for hardware sales is generally at the time of product shipment as determined by the agreed-upon shipping terms. We measure revenue based on the amount of consideration we expect to be entitled-to in exchange for those goods or services. TheWe expect the period between when we transfer control of promised goods or services and when we receive payment is expected to be one year or less, and that expectation is consistent with our historical experience. As such, we do not adjust our revenuesrevenue for the effects of a significant financing component. We recognize any variable consideration, which comprises primarily comprises sales incentives, as arevenue reduction of revenue at the time of revenue recognition. We estimate sales incentives based on our historical experience and current expectations at the time of revenue recognition and update them at the end of each reporting period as additional information becomes available.available.
Our reader and gateway products are highly dependent on embedded software and cannot function without this embedded software. In these cases, weWe account for the hardware and embedded software license as a single performance obligation and recognize revenue at the point in time when control is transferred.
Our customer contracts with customers with multiple performance obligations generally include a combination of hardware products, standalone software, extended warranty, and enhanced maintenance and support services. For these contracts, we account for individual performance obligations separately if they are distinct. TheWe allocate the transaction price is allocated to the separate performance obligations on a relative standalone selling-price basis. In instances where the standalone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the standalone selling price using one, or a combination of, the adjusted market assessment or expected cost-plus margin. AmountsWe defer amounts allocated to extended warranty and enhanced maintenance sold with our reader and gateway products are deferred and recognizedrecognize them on a straight-line basis over the term of the arrangement, which is typically from one to three years. AmountsWe defer amounts allocated to support services sold with our reader and gateway products are deferred and recognizedrecognize them when we transfer control of the promised services is transferred to our customers.
For nonrecurring engineeringNRE development agreements that involve significant production, modification or customization of our products, we generally recognize revenue over the performance period using the cost-input method because it best depicts the transfer of services to the customer. We receive payments under these agreements based on a billing schedule. Contract assets relate to our conditional right to consideration for our completed performance under these agreements. AccountsWe record accounts receivable are recorded when the right to consideration becomes unconditional. For the periods presented in this report, our contract assets, deferred revenue and the value of unsatisfied performance obligations for nonrecurring engineeringNRE development agreements are not material.
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If oura customer pays consideration before we transfer a good or service to the customer under the contract, then we classify those amounts are classified as contract liabilities, or deferred revenue. ContractWe recognize contract liabilities are recognized as revenue aswhen we transfer control of the promised goods or services to our customers.
Payment terms typically range from 30 to 120 days. We present revenue net of sales tax in our consolidated statements of operations. ShippingWe include shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.
Practical Expedients and Exemptions: We expense sales commissions when incurred because we expect the amortization period would have beento be one year or less. We record these costs within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less and (2) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Inventory
Inventories are statedWe state inventories at the lower of cost or estimated net realizable value using the average costing method, which approximates thea first-in, first-out method. Inventories comprise raw materials, work-in-process and finished goods. We continuously assess the value of our inventory and write down its value for estimated excess and obsolete inventory. This evaluation includes an analysis of inventory on hand, current and forecasted demand, product development plans, and market conditions. If future demand or market conditions are less favorable than our projections, or our product development plans change from current expectations, then a write-down of excess or obsolete inventory may be required and would be reflected in cost of goods sold in the period the updated information is known.
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We had sales of fully reserved inventory, which had a favorable net impact of 1.5% on our gross margin for 2021 and recorded inventory excess and obsolescence charges which had an unfavorable net impact of 2.2% and 1.7% on our gross margin for 2020 and 2019, respectively.Income Taxes
Income Taxes
We use the asset and liability approach for accounting, which requires recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to be in effect when suchthe assets and liabilities are recovered or settled. The effectWe recognize the effects of a change in tax rates on deferred tax assets and liabilities of a change in tax rates is recognized in the year that includesof the enactment date. We determine deferred tax assets, including historical net operating losses and deferred tax liabilities, based on temporary differences between the book and tax bases of the assets and liabilities. We believe that it is currently more likely than not that our deferred tax assets will not be realized and, as such, we have recorded a full valuation allowance for these assets. We evaluate the likelihood of our ability to realize deferred tax assets in future periods on a quarterly basis, and when appropriateif evidence indicates we wouldwill be able to realize some or all of our deferred tax assets then we will revise our valuation allowance accordingly.
We utilizeuse a two-step approach for evaluating uncertain tax positions. First, we evaluate recognition, which requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes. If we consider a tax position is not considered more likely than not to be sustained,unsustained, then no benefits of the position are recognized. Second, we measure the uncertain tax position based on the largest amount of benefit which is more likely than not to be realized on effective settlement. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. If actual results differ from our estimates, then our net operating loss and credit carryforwards could be materially impacted.
Our realization ofUs realizing the benefits of the NOLs and credit carryforwards depends on sufficient taxable income in future years. We have established a valuation allowance against the carrying value of our deferred tax assets, as it is currently more likely than not that we will not be ableunable to realize these deferred tax assets. In addition, using NOLs and credits to offset future income subject to taxes may be subject to substantial annual limitations due to the “change in ownership” provisions of the Code and similar state provisions. Events that cause limitations in the amount of NOLs that we may use in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined by Code Sections 382 and 383, over a three-year period. UtilizingUsing our NOLs and tax credit carryforwards could be significantly reduced if a cumulative ownership change of more than 50% has occurred in our past or occurs in our future.
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We do not anticipate that the amount of our existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Due to the presence of NOLs in most jurisdictions, our tax years remain open for examination by taxing authorities back to 2000.
Stock-Based Compensation
We have various equity award plans (“Plans”) for granting share-based awards to employees, consultants and non-employee directors of the Company. The Plans provide for granting several available forms of stock compensation such as stock option awards, restricted stock units, or RSUs, RSUs with performance conditions, or PSUs, and RSUs with market and service conditions, or MSUs.
We measure stock-based compensation costs for all share-based awards at fair value on the measurement date, which is typically the grant date and recognize compensation expense on a straight-line basis over the requisite service period, which typically vest over four years. We account for forfeitures as they occur.date. We determine the fair value of stock options using the Black-Scholes option-pricing model, which considers, among other things, estimates and assumptions on the expected life of the options, stock price volatility and market value of the Company’s common stock. We determine the fair value of RSUs and PSUs based on the closing price of our common stock at the date of grant. We determine the fair value of MSUs by usinggrant date. Additionally, for awards with a Monte Carlo simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period. We determine the fair value of stock options at the date of grant by using the Black-Scholes option-pricing model. We also use the Black-Scholes option-pricing model to determine the fair value of each common share issued under the ESPP. We determine the fair value of the ESPP grants on the first day of each offering period.
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In 2019,market condition, we began granting RSUs with performance conditions, or PSUs, replacing what has historically been our annual cash-bonus program for our senior executives and other bonus-eligible employees. The number of PSUs that ultimately vest will depend on the extent to which we achieve specified fiscal year financial performance metrics. We record compensation expense each period on a straight-line basis based on our estimate of the most probable number of PSUs that will vest and recognize that expense over the requisite service period.
In 2021, we began granting RSUs with market and service conditions, or MSUs to certain executives. The MSUs are eligible to vest based on our total stockholder return (“TSR”) relative to the TSR of the constituents comprising the S&P Semiconductor Select Industry Index over two measurement periods. Half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2022, and half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2023. We use a Monte Carlo simulation in estimating themodel to estimate grant date fair value, at grant date and recognize compensation cost overwhich takes into consideration the implied service period. The aggregate grant-date fair valuerange of these shares was estimated to be $6.4 million using the Monte Carlo simulation valuation method.possible stock price of total stockholder return outcomes.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, please refer to Note 2 in our consolidated financial statements included elsewhere in this report.
Item 7A. 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.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.
We had cash, cash equivalents and short-term investments of $193.3$173.7 million and $106.1$193.3 million as of December 31, 2022 and 2021, and 2020, respectively. 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 majoritymost 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, we have been able to substantially offset higher product costs by increasing our product selling prices. If our product costs were to becomebecame subject to significant future inflationary pressures, then we may not be able to fully offset suchthese higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Foreign Currency Exchange Risk
Our foreign subsidiaries are considered to be extensions of the 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.
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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.
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Item 8. Financial Statements and Supplementary Data
The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations.”
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Impinj, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Impinj, Inc. and subsidiaries (the Company) as of December 31, 20212022 and 2020,2021, the related consolidated statements of operations,, comprehensive loss, changes in stockholders'stockholders’ equity and cash flows for each of the twothree years in the period ended December 31, 2021,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2021,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021,2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 14, 202213, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
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| | |
Inventory valuation |
|
|
Description of the Matter |
| The Company's inventoriesinventory totaled $22.0$46.4 million as of December 31, 2021.2022. As explained in Note 2 to the financial statements, the Company determines the appropriate value of all inventories, including raw materials, work-in-process, and finished goodsinventory in each reporting period. Obsolete inventory or inventory in excess of management's estimated usage requirement is written down to its estimated net realizable value if those amounts are determined to be less than cost.
Auditing management's estimates for excess and obsolete inventory involved subjective auditor judgment because the estimates rely on a number of factors that are affected by market and economic conditions outside the Company's control, including management's assumptions about the product supply, demand, and life cycle.
|
|
|
|
How We Addressed the Matter in Our Audit |
| We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's excess and obsolete inventory reserve process. This included management's determination of the assumptions and data underlying the excess and obsolete inventory valuation.
To test the Company's estimates for excess and obsolete inventory, we performed audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the estimation calculations and evaluating significant assumptions (e.g., forecasted customer demand, technological and/or market obsolescence, and possible alternative uses). We compared the significant assumptions used by management to current industry and economic trends. We assessed whether there were any potential sources of contrary information, including historical forecast accuracy or history of significant revisions to previously recorded inventory valuation adjustments. We also performed sensitivity analyses over the significant assumptions to evaluate the changes in the excess and obsolete inventory estimates that would result from changes in the underlying assumptions.
|
| |
/s/ Ernst & Young LLP We have served as the Company’s auditor since 2020. Seattle, Washington February 14, 202213, 2023 |
|
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Impinj, Inc.
Opinion on the Financial Statements
We have audited the consolidated statement of operations, comprehensive loss, changes in stockholders’ equity and cash flows of Impinj, Inc. and its subsidiaries (the “Company”) for the year ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
March 2, 2020
We served as the Company's auditor from 2002 to 2020.
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Impinj, Inc.
Consolidated Balance Sheets
(in thousands, except par value)
| | December 31, 2021 | | | December 31, 2020 | | December 31, 2022 | | | December 31, 2021 | |
Assets: | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 123,903 | | | $ | 23,636 | | $ | 19,597 | | | $ | 123,903 | |
Short-term investments | | 69,443 | | | | 82,453 | | | 154,148 | | | | 69,443 | |
Accounts receivable, net of allowances of $1,132 and $533 at December 31, 2021 and 2020, respectively | | 35,449 | | | | 25,003 | | |
Accounts receivable, net of allowances of $755 and $1,132 at December 31, 2022 and 2021, respectively | | | 49,996 | | | | 35,449 | |
Inventory | | 21,958 | | | | 36,329 | | | 46,397 | | | | 21,958 | |
Prepaid expenses and other current assets | | 5,049 | | | | 3,943 | | | 5,032 | | | | 5,049 | |
Total current assets | | 255,802 | | | | 171,364 | | | 275,170 | | | | 255,802 | |
Long-term investments | | 14,225 | | | | - | | | 19,200 | | | | 14,225 | |
Property and equipment, net | | 27,500 | | | | 16,531 | | | 39,027 | | | | 27,500 | |
Operating lease right-of-use assets | | 11,667 | | | | 13,761 | | | 10,490 | | | | 11,667 | |
Other non-current assets | | 2,462 | | | | 2,079 | | | 1,969 | | | | 2,462 | |
Goodwill | | 3,881 | | | | 3,881 | | | 3,881 | | | | 3,881 | |
Total assets | $ | 315,537 | | | $ | 207,616 | | $ | 349,737 | | | $ | 315,537 | |
Liabilities and stockholders' equity: | | | | | | | | |
Liabilities and stockholders' equity (deficit): | | | | | | |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | $ | 11,732 | | | $ | 10,144 | | $ | 25,024 | | | $ | 11,732 | |
Accrued compensation and employee related benefits | | 6,365 | | | | 5,529 | | | 9,048 | | | | 6,365 | |
Accrued and other current liabilities | | 2,481 | | | | 1,468 | | | 2,925 | | | | 3,072 | |
Current portion of operating lease liabilities | | 4,143 | | | | 3,641 | | | 3,122 | | | | 4,143 | |
Restructuring liabilities | | 591 | | | | — | | |
Current portion of long-term debt | | 9,633 | | | | — | | | — | | | | 9,633 | |
Current portion of deferred revenue | | 558 | | | | 6,811 | | | 2,250 | | | | 558 | |
Total current liabilities | | 35,503 | | | | 27,593 | | | 42,369 | | | | 35,503 | |
Long-term debt, net of current portion | | 278,661 | | | | 54,556 | | | 280,244 | | | | 278,661 | |
Operating lease liabilities, net of current portion | | 11,934 | | | | 15,266 | | | 11,066 | | | | 11,934 | |
Other long-term liabilities | | 279 | | | | 805 | | | 118 | | | | 279 | |
Deferred revenue, net of current portion | | 236 | | | | 277 | | | 349 | | | | 236 | |
Total liabilities | | 326,613 | | | | 98,497 | | | 334,146 | | | | 326,613 | |
Commitments and contingencies (Note 11) | | | | | | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.001 par value — 5,000 shares authorized, 0 shares issued and outstanding at December 31, 2021 and 2020 | | — | | | | — | | |
Common stock, $0.001 par value — 495,000 shares authorized, 24,737 and 23,350 shares issued and outstanding at December 31, 2021 and 2020, respectively | | 25 | | | | 23 | | |
Stockholders' equity (deficit): | | | | | | |
Preferred stock, $0.001 par value — 5,000 shares authorized, no shares issued and outstanding at December 31, 2022 and 2021 | | | — | | | | — | |
Common stock, $0.001 par value — 495,000 shares authorized, 26,098 and 24,737 shares issued and outstanding at December 31, 2022 and 2021, respectively | | | 26 | | | | 25 | |
Additional paid-in capital | | 351,422 | | | | 423,759 | | | 403,599 | | | | 351,422 | |
Accumulated other comprehensive (loss) income | | (39 | ) | | | 3 | | |
Accumulated other comprehensive loss | | | (1,249 | ) | | | (39 | ) |
Accumulated deficit | | (362,484 | ) | | | (314,666 | ) | | (386,785 | ) | | | (362,484 | ) |
Total stockholders' equity | | (11,076 | ) | | | 109,119 | | |
Total liabilities and stockholders' equity | $ | 315,537 | | | $ | 207,616 | | |
Total stockholders' equity (deficit) | | | 15,591 | | | | (11,076 | ) |
Total liabilities and stockholders' equity (deficit) | | $ | 349,737 | | | $ | 315,537 | |
The accompanying notes are an integral part of these consolidated financial statements.
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Impinj, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
| | Year Ended December 31, | | | Year Ended December 31, | | |
| 2021 | | | 2020 | | | 2019 | | | 2022 | | | 2021 | | | 2020 | | |
Revenue | $ | 190,283 | | | $ | 138,923 | | | $ | 152,836 | | | $ | 257,800 | | | $ | 190,283 | | | $ | 138,923 | | |
Cost of revenue | | 91,329 | | | | 73,783 | | | | 78,834 | | | | 119,916 | | | | 91,329 | | | | 73,783 | | |
Gross profit | | 98,954 | | | | 65,140 | | | | 74,002 | | | | 137,884 | | | | 98,954 | | | | 65,140 | | |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Research and development | | 64,058 | | | | 48,590 | | | | 38,880 | | | | 74,106 | | | | 64,058 | | | | 48,590 | | |
Sales and marketing | | 34,287 | | | | 28,663 | | | | 32,642 | | | | 37,894 | | | | 34,287 | | | | 28,663 | | |
General and administrative | | 36,137 | | | | 34,958 | | | | 24,141 | | | | 45,465 | | | | 36,137 | | | | 34,958 | | |
Restructuring costs | | 1,721 | | | | — | | | | — | | | | (102 | ) | | | 1,721 | | | | — | | |
Total operating expenses | | 136,203 | | | | 112,211 | | | | 95,663 | | | | 157,363 | | | | 136,203 | | | | 112,211 | | |
Loss from operations | | (37,249 | ) | | | (47,071 | ) | | | (21,661 | ) | | | (19,479 | ) | | | (37,249 | ) | | | (47,071 | ) | |
Other income, net | | 25 | | | | 650 | | | | 1,242 | | | | 2,517 | | | | 25 | | | | 650 | | |
Induced conversion expense | | (11,333 | ) | | | — | | | | — | | | | (2,232 | ) | | | (11,333 | ) | | | — | | |
Interest expense | | (2,550 | ) | | | (5,413 | ) | | | (1,794 | ) | | | (4,923 | ) | | | (2,550 | ) | | | (5,413 | ) | |
Loss on debt extinguishment | | — | | | | — | | | | (576 | ) | | |
Loss before income taxes | | (51,107 | ) | | | (51,834 | ) | | | (22,789 | ) | | | (24,117 | ) | | | (51,107 | ) | | | (51,834 | ) | |
Income tax expense | | (153 | ) | | | (89 | ) | | | (198 | ) | | | (184 | ) | | | (153 | ) | | | (89 | ) | |
Net loss | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | (22,987 | ) | | $ | (24,301 | ) | | $ | (51,260 | ) | | $ | (51,923 | ) | |
| | | | | | | | | | | | | | | | | | |
Net loss per share — basic and diluted | $ | (2.12 | ) | | $ | (2.28 | ) | | $ | (1.05 | ) | | $ | (0.95 | ) | | $ | (2.12 | ) | | $ | (2.28 | ) | |
Weighted-average shares outstanding — basic and diluted | | 24,176 | | | | 22,819 | | | | 21,847 | | | | 25,539 | | | | 24,176 | | | | 22,819 | | |
The accompanying notes are an integral part of these consolidated financial statements.
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Impinj, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
| | Year Ended December 31, | | Year Ended December 31, | | |
| 2021 | | | | 2020 | | | 2019 | | 2022 | | | 2021 | | | 2020 | | |
Net loss | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | (22,987 | ) | $ | (24,301 | ) | | $ | (51,260 | ) | | $ | (51,923 | ) | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | |
Unrealized loss on investments | | (42 | ) | | | | | (31 | ) | | | 43 | | | (1,210 | ) | | | (42 | ) | | | (31 | ) | |
Total other comprehensive loss | | (42 | ) | | | | | (31 | ) | | | 43 | | | (1,210 | ) | | | (42 | ) | | | (31 | ) | |
Comprehensive loss | $ | (51,302 | ) | | $ | (51,954 | ) | | $ | (22,944 | ) | $ | (25,511 | ) | | $ | (51,302 | ) | | $ | (51,954 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
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Impinj, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands)
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Additional | | | | | | | Other | | | Total | | | | | | | | | | | | Accumulated | | Total | |
| | Common Stock | | | Paid-in | | | Accumulated | | | Comprehensive | | | Stockholders' | | | | | | | Additional | | | | Other | | Stockholders' | |
| | Shares | | | Amount | | | Capital | | | Deficit | | | Income (loss) | | | Equity | | | Common Stock | | | Paid-in | | Accumulated | | Comprehensive | | Equity | |
Balance at December 31, 2018 | | | 21,492 | | | | 21 | | | | 337,627 | | | | (239,756 | ) | | | (9 | ) | | | 97,883 | | |
Issuance of common stock | | | 725 | | | | 1 | | | | 9,196 | | | | — | | | | — | | | | 9,197 | | |
Stock-based compensation | | | — | | | | — | | | | 18,486 | | | | — | | | | — | | | | 18,486 | | |
Net loss | | | — | | | | — | | | | — | | | | (22,987 | ) | | | — | | | | (22,987 | ) | |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 43 | | | | 43 | | |
Equity component of issuance of 2019 Notes, net of issuance costs of $1,089 (Note 7) | | | — | | | | — | | | | 32,743 | | | | | | | | — | | | | 32,743 | | |
Premiums paid for Capped Call Transactions (Note 7) | | | — | | | | — | | | | (10,126 | ) | | | — | | | | — | | | | (10,126 | ) | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Income (loss) | | | (Deficit) | |
Balance at December 31, 2019 | | | 22,217 | | | | 22 | | | | 387,926 | | | | (262,743 | ) | | | 34 | | | | 125,239 | | | | 22,217 | | | $ | 22 | | | $ | 387,926 | | | $ | (262,743 | ) | | $ | 34 | | | $ | 125,239 | |
Issuance of common stock | | | 1,133 | | | | 1 | | | | 10,158 | | | | — | | | | — | | | | 10,159 | | | | 1,133 | | | | 1 | | | | 10,158 | | | | — | | | | — | | | | 10,159 | |
Stock-based compensation | | | — | | | | — | | | | 25,675 | | | | — | | | | — | | | | 25,675 | | | | — | | | | — | | | | 25,675 | | | | — | | | | — | | | | 25,675 | |
Net loss | | | — | | | | — | | | | — | | | | (51,923 | ) | | | — | | | | (51,923 | ) | | | — | | | | — | | | | — | | | | (51,923 | ) | | | — | | | | (51,923 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (31 | ) | | | (31 | ) | | | — | | | | — | | | | — | | | | — | | | | (31 | ) | | | (31 | ) |
Balance at December 31, 2020 | | | 23,350 | | | $ | 23 | | | $ | 423,759 | | | $ | (314,666 | ) | | $ | 3 | | | $ | 109,119 | | | | 23,350 | | | $ | 23 | | | $ | 423,759 | | | $ | (314,666 | ) | | $ | 3 | | | $ | 109,119 | |
Cumulative-effect adjustment from adoption of ASU 2020-06 | | | — | | | | — | | | | (32,743 | ) | | | 3,442 | | | | — | | | | (29,301 | ) | | | — | | | | — | | | | (32,743 | ) | | | 3,442 | | | | — | | | | (29,301 | ) |
Issuance of common stock | | | 1,387 | | | | 2 | | | | 17,646 | | | | — | | | | — | | | | 17,648 | | | | 1,387 | | | | 2 | | | | 17,646 | | | | — | | | | — | | | | 17,648 | |
Stock-based compensation | | | — | | | | — | | | | 40,498 | | | | — | | | | — | | | | 40,498 | | | | — | | | | — | | | | 40,498 | | | | — | | | | — | | | | 40,498 | |
Induced conversion on 2019 Notes (Note 7) | | | — | | | | — | | | | (97,738 | ) | | | — | | | | — | | | | (97,738 | ) | | | — | | | | — | | | | (97,738 | ) | | | — | | | | — | | | | (97,738 | ) |
Net loss | | | — | | | | — | | | | — | | | | (51,260 | ) | | | — | | | | (51,260 | ) | | | — | | | | — | | | | — | | | | (51,260 | ) | | | — | | | | (51,260 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (42 | ) | | | (42 | ) | | | — | | | | — | | | | — | | | | — | | | | (42 | ) | | | (42 | ) |
Balance at December 31, 2021 | | | 24,737 | | | $ | 25 | | | $ | 351,422 | | | $ | (362,484 | ) | | $ | (39 | ) | | $ | (11,076 | ) | | | 24,737 | | | $ | 25 | | | $ | 351,422 | | | $ | (362,484 | ) | | $ | (39 | ) | | $ | (11,076 | ) |
Issuance of common stock | | | | 1,361 | | | | 1 | | | | 15,415 | | | | — | | | | — | | | | 15,416 | |
Stock-based compensation | | | | — | | | | — | | | | 42,443 | | | | — | | | | — | | | | 42,443 | |
Induced conversion on 2019 Notes (Note 7) | | | | — | | | | — | | | | (5,681 | ) | | | — | | | | — | | | | (5,681 | ) |
Net loss | | | | — | | | | — | | | | — | | | | (24,301 | ) | | | — | | | | (24,301 | ) |
Other comprehensive loss | | | | — | | | | — | | | | — | | | | — | | | | (1,210 | ) | | | (1,210 | ) |
Balance at December 31, 2022 | | | | 26,098 | | | $ | 26 | | | $ | 403,599 | | | $ | (386,785 | ) | | $ | (1,249 | ) | | $ | 15,591 | |
The accompanying notes are an integral part of these consolidated financial statements.
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Impinj, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 31, | |
| 2021 | | | 2020 | | | 2019 | |
Operating activities: | | | | | | | | | | | |
Net loss | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | (22,987 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | |
Depreciation | | 4,602 | | | | 4,504 | | | | 4,809 | |
Stock-based compensation | | 40,498 | | | | 25,675 | | | | 18,486 | |
Accretion of discount or amortization of premium on investments | | 896 | | | | 224 | | | | (506 | ) |
Amortization of debt issuance costs and debt discount | | 568 | | | | 3,680 | | | | 206 | |
Loss on debt extinguishment | | — | | | | — | | | | 576 | |
Induced conversion expense related to convertible notes | | 11,333 | | | | — | | | | — | |
Settlement and related costs | | (460 | ) | | | — | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | |
Accounts receivable | | (10,446 | ) | | | (1,268 | ) | | | (5,273 | ) |
Inventory | | 14,371 | | | | (2,176 | ) | | | 10,572 | |
Prepaid expenses and other assets | | (770 | ) | | | (3,081 | ) | | | (524 | ) |
Deferred revenue | | (6,294 | ) | | | 6,324 | | | | (70 | ) |
Accounts payable | | 2,340 | | | | 3,491 | | | | 1,046 | |
Accrued compensation and employee related benefits | | 836 | | | | (330 | ) | | | (1,486 | ) |
Operating lease right-of-use assets | | 2,792 | | | | 2,740 | | | | 2,153 | |
Operating lease liabilities | | (3,528 | ) | | | (3,380 | ) | | | (3,038 | ) |
Accrued and other liabilities | | 987 | | | | (1,357 | ) | | | 744 | |
Net cash provided by (used in) operating activities | | 6,465 | | | | (16,877 | ) | | | 4,708 | |
Investing activities: | | | | | | | | | | | |
Purchases of investments | | (84,412 | ) | | | (82,735 | ) | | | (72,413 | ) |
Proceeds from maturities of investments | | 82,000 | | | | 49,522 | | | | 61,743 | |
Purchases of property and equipment | | (16,230 | ) | | | (3,074 | ) | | | (2,429 | ) |
Net cash used in investing activities | | (18,642 | ) | | | (36,287 | ) | | | (13,099 | ) |
Financing activities: | | | | | | | | | | | |
Proceeds from issuance of 2019 Notes, net of issuance costs | | — | | | | — | | | | 83,475 | |
Premiums paid for capped call transactions | | — | | | | — | | | | (10,126 | ) |
Principal payments on finance lease obligations | | (2 | ) | | | (257 | ) | | | (522 | ) |
Payments on term and equipment loans | | — | | | | — | | | | (28,192 | ) |
Proceeds from term loans, net of debt issuance costs | | — | | | | — | | | | 3,991 | |
Proceeds from exercise of stock options and employee stock purchase plan | | 17,648 | | | | 10,159 | | | | 9,133 | |
Proceeds from issuance of 2021 Notes, net of issuance costs | | 278,422 | | | | — | | | | — | |
Payment of 2019 Notes | | (183,624 | ) | | | — | | | | — | |
Net cash provided by financing activities | | 112,444 | | | | 9,902 | | | | 57,759 | |
Net increase (decrease) in cash and cash equivalents | | 100,267 | | | | (43,262 | ) | | | 49,368 | |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | | 23,636 | | | | 66,898 | | | | 17,530 | |
End of period | $ | 123,903 | | | $ | 23,636 | | | $ | 66,898 | |
| | | | | | | | | | | |
Supplemental disclosure of cashflow information: | | | | | | | | | | | |
Cash paid for interest | | 1,559 | | | | 1,720 | | | | 1,612 | |
Purchases of property and equipment not yet paid | | 417 | | | | 1,076 | | | | 557 | |
Disposal of fully depreciated property and equipment | | 4,467 | | | | 308 | | | | 1,432 | |
| | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | | 2021 | | | 2020 | | |
Operating activities: | | | | | | | | | |
Net loss | $ | (24,301 | ) | | $ | (51,260 | ) | | $ | (51,923 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | |
Depreciation | | 6,044 | | | | 4,602 | | | | 4,504 | | |
Stock-based compensation | | 42,443 | | | | 40,498 | | | | 25,675 | | |
Accretion of discount or amortization of premium on investments | | (233 | ) | | | 896 | | | | 224 | | |
Amortization of debt issuance costs | | 1,601 | | | | 568 | | | | 3,680 | | |
Loss on fixed asset disposal | | 57 | | | | — | | | | — | | |
Induced conversion expense related to convertible notes | | 2,232 | | | | 11,333 | | | | — | | |
Settlement and related costs | | — | | | | (460 | ) | | | — | | |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | (14,547 | ) | | | (10,446 | ) | | | (1,268 | ) | |
Inventory | | (24,439 | ) | | | 14,371 | | | | (2,176 | ) | |
Prepaid expenses and other assets | | 852 | | | | (770 | ) | | | (3,081 | ) | |
Accounts payable | | 7,371 | | | | 2,340 | | | | 3,491 | | |
Accrued compensation and employee related benefits | | 2,683 | | | | 836 | | | | (330 | ) | |
Accrued and other liabilities | | (215 | ) | | | 987 | | | | (1,357 | ) | |
Operating lease right-of-use assets | | 3,414 | | | | 2,792 | | | | 2,740 | | |
Operating lease liabilities | | (4,126 | ) | | | (3,528 | ) | | | (3,380 | ) | |
Deferred revenue | | 1,805 | | | | (6,294 | ) | | | 6,324 | | |
Net cash provided by (used in) operating activities | | 641 | | | | 6,465 | | | | (16,877 | ) | |
Investing activities: | | | | | | | | | |
Purchases of investments | | (205,749 | ) | | | (84,412 | ) | | | (82,735 | ) | |
Proceeds from maturities of investments | | 114,750 | | | | 82,000 | | | | 49,522 | | |
Proceeds from sale of property and equipment | | 279 | | | | — | | | | — | | |
Purchases of property and equipment | | (12,079 | ) | | | (16,230 | ) | | | (3,074 | ) | |
Net cash used in investing activities | | (102,799 | ) | | | (18,642 | ) | | | (36,287 | ) | |
Financing activities: | | | | | | | | | |
Principal payments on finance lease obligations | | — | | | | (2 | ) | | | (257 | ) | |
Proceeds from exercise of stock options and employee stock purchase plan | | 15,416 | | | | 17,648 | | | | 10,159 | | |
Proceeds from issuance of 2021 Notes, net of issuance costs | | — | | | | 278,422 | | | | — | | |
Payment of 2019 Notes | | (17,564 | ) | | | (183,624 | ) | | | — | | |
Net cash provided by (used in) financing activities | | (2,148 | ) | | | 112,444 | | | | 9,902 | | |
Net increase (decrease) in cash and cash equivalents | | (104,306 | ) | | | 100,267 | | | | (43,262 | ) | |
Cash and cash equivalents | | | | | | | | | |
Beginning of period | | 123,903 | | | | 23,636 | | | | 66,898 | | |
End of period | $ | 19,597 | | | $ | 123,903 | | | $ | 23,636 | | |
| | | | | | | | | |
Supplemental disclosure of cashflow information: | | | | | | | | | |
Cash paid for interest | | 3,420 | | | | 1,559 | | | | 1,720 | | |
Purchases of property and equipment not yet paid | | 6,245 | | | | 417 | | | | 1,076 | | |
Disposal of fully depreciated property and equipment | | 199 | | | | 4,467 | | | | 308 | | |
The accompanying notes are an integral part of these consolidated financial statements.
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IMPINJ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Impinj, Inc., a Delaware corporation, is headquartered in Seattle, Washington. The Impinj platform comprising multiple product families, wirelessly connects individual items and delivers data about the connected items to business and consumer applications enabled by our partner network. Impinj Impinj's revenue derives revenue from selling our platform's constituent elements — endpoint ICs, reader ICs, readers, gateways and software — as well as from development, service and license agreements.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include Impinj, Inc. and its wholly owned subsidiaries. We have eliminated intercompany balances and transactions in consolidation. CertainWe have reclassified certain amounts on our consolidated balance sheets in prior period have been reclassified to conform to current period presentation.We have prepared these consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP.
Use of Estimates
The preparation ofPreparing financial statements in conformity with GAAP requires management 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, estimate to completepercentage completion of development contracts, deferred revenue, inventory excess and obsolescence, income taxes determination of theand fair value of stock awards and compensation and employee-related benefits.awards. To the extent there are material differences between theseour estimates, judgments, or assumptions and actual results, our financial statements will be affected. Covid-19 has introduced significant additional uncertainty with respect to estimates, judgments and assumptions about current and forecasted demand, which may materially impact the estimates previously listed, among others.
Concentrations of Credit Risk
Financial instruments,, which potentially subject us to concentrations of credit risk, consistcredit-risk concentration, comprise primarily of cash equivalents, investments and accounts receivable. We place our cash and cash equivalents and investments with major financial institutions, which management assesses to be of high credit quality, to limit our investmentsinvestment exposure. We extend credit to customers based uponon our evaluation of the customer’s financial condition and
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generally collateral isdo not required. require collateral. The following table presentstables present total revenue and accounts receivable concentration for the indicated periods as of the dates presented:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Revenue: | | | | | | | | | |
Avery Dennison(1) | | | 28 | % | | | 32 | % | | | 32 | % |
Arizon | | | 10 | | | | 11 | | | | 10 | |
| | | 38 | % | | | 43 | % | | | 42 | % |
(1) Includes revenue concentration related to Smartrac. Avery Dennison acquired Smartrac in March 2020. | |
| | | | | | | | |
| | As of December 31, | |
| | 2022 | | | 2021 | |
Accounts Receivable: | | | | | | |
Avery Dennison(1) | | | 24 | % | | | 21 | % |
Arizon | | | 13 | | | | 13 | |
Intel | | * | | | | 13 | |
Blue Star | | * | | | | 13 | |
| | | 37 | % | | | 60 | % |
* Less than 10% | | | | | | |
(1) Includes accounts receivable concentration related to Smartrac. | |
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Revenue: | | | | | | | | | | | | |
Avery Dennison(1) | | | 32 | % | | | 32 | % | | | 31 | % |
North American logistics provider | | * | | | * | | | | 14 | |
Arizon | | | 11 | | | | 10 | | | * | |
| | | 43 | % | | | 42 | % | | | 45 | % |
* Less than 10% | | | | | | | | | | | | |
(1) Includes revenue concentration related to Smartrac NV, or Smartrac. Avery Dennison acquired Smartrac in March 2020. | |
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| | As of December 31, | |
| | 2021 | | | 2020 | |
Accounts Receivable: | | | | | | | | |
Avery Dennison(1) | | | 21 | % | | | 21 | % |
Arizon | | | 13 | | | | 17 | |
Xindeco | | * | | | | 12 | |
Intel | | | 13 | | | * | |
Blue Star | | | 13 | | | * | |
| | | 60 | % | | | 50 | % |
* Less than 10% | | | | | | | | |
(1) Includes concentration of accounts receivable related to Smartrac. | |
Concentration of Supplier Risk
We outsource the manufacturing and production of our hardware products to a small number of suppliers. Although there are a limited number of manufacturers for hardware products, weWe believe that other suppliers could provide similar products on comparable terms. Aterms if needed. However, a supplier change in suppliers, however,would delay manufacturing and could cause a delay in manufacturing and a possiblesales loss, of sales, which would adversely affect our operating results.
Cash and Cash Equivalents
Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. Our cash equivalents include onlyare solely investments with an original or remaining maturity of three months or less at the date of purchase. We regularly maintain cash in excess ofamounts exceeding federally insured limits at financial institutions.
Investments
Investments
Our investments consist ofcomprise fixed income securities, which includeincluding U.S. government agency securities, corporate notes and bonds, commercial paper and asset-backed securities. The contractual maturities of a portionsome of our available-for-sale, or AFS, debt securities are overexceed a year and are classified as long-term investments on theour balance sheet. We carry AFS debt securities are carried at fair value with unrealized gains and losses reported as a component of other comprehensive income (loss). For AFS debt securities whereOur investments are subject to a periodic impairment review. We recognize an impairment charge when a decline in fair value of its investments below the cost basis is lessdetermined to be other-than-temporary. Factors we consider in determining whether a loss is temporary include the extent and length of time the investment's fair value has been lower than its cost basis, the financial condition and near-term prospects of the investee, our intent to sell the security and whether or not we intend to hold or more-likely-than-not will not be required to sell the security prior to the expected recovery of the investment's amortized cost basis. Nosuch securities; if any, we record credit-related impairment inchanges were recorded during the consolidated statements of operations through an allowanceyears ended December 31, 2022, 2021 and 2020. See Note 3 tables for credit losses and adjust each period for changes in credit risk. Thethe cost or amortized cost, gross unrealized gains, orgross unrealized losses on short-term and long-term investmentstotal estimated fair value of our financial assets as of December 31, 20212022 and 2020 were not material.2021.
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Fair Value Measurement
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:
| • Level 1 — Quoted prices in active markets for identical assets or liabilities. •Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities. •Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued on the best available data, some of which are internally developed; and considered risk premiums that a market participant would require. •
| Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
| •
| Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.
|
| •
| Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.
|
We applied the following methods and assumptions in estimating our fair value measurements:
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Cash Equivalents — Cash equivalents consist ofcomprise highly liquid investments, including money market funds with original or remaining 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. Thesecurities. We base 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.
Debt —See Note 7 for the carrying amount and estimated fair value of our convertible senior notes due 2026 and 2027.2027.
Accounts Receivable and Allowances
Accounts receivable comprises amounts billed and currently due from customers, net of an allowanceallowances for doubtful accounts, an allowance for sales returns and price exceptions.
The allowance for doubtful accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. We record changes in our estimate toof the allowance for doubtful accounts through bad debt expense and write off the receivable and corresponding allowance when accounts are ultimately determined to be uncollectible. BadWe include bad debt expense is included in general and administrative expenses. For the periods presented in this report, bad debt expense and the allowance for doubtful account were not material.
We derive a majoritymost of our accounts receivable from sales to original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, as well as tosolution providers, and distributors who are large, well-established companies. We do not have customers that represent a significant credit risk based on current economic conditions and past collection experience. Also, we have not had material past-due balances on our accounts receivable as of December 31, 20212022 or 2020; except for $1.2 million past-due rent receivables from our sublease as of December 31, 2020, which was subsequently collected in 2021.
The allowance for sales returns and price exceptions is our best estimate based on our historical experience and currently available evidence. We record changes in our estimate toof the allowance for sales returns and price exceptions through revenue, and relieve the allowance when we receive product returns are received for sales returns and whenor process claims are processed for price exceptions. The following table summarizes our allowance for sales returns (in thousands):
| | | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | | Additional Reserve | | | Applied Sales Return | | | Balance at End of Year | |
Allowance for sales returns and price exceptions: | | | | | | | | | | | | |
During year ended December 31, 2022 | | $ | 947 | | | $ | 1,899 | | | $ | (2,241 | ) | | $ | 605 | |
During year ended December 31, 2021 | | | 406 | | | | 2,780 | | | | (2,239 | ) | | | 947 | |
During year ended December 31, 2020 | | | 1,072 | | | | 1,109 | | | | (1,775 | ) | | | 406 | |
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| | Balance at Beginning of Year | | | Additional Reserve | | | Applied Sales Return | | | Balance at End of Year | |
Allowance for sales returns and price exceptions: | | | | | | | | | | | | | | | | |
During year ended December 31, 2021 | | $ | 406 | | | $ | 2,780 | | | $ | (2,239 | ) | | $ | 947 | |
During year ended December 31, 2020 | | | 1,072 | | | | 1,109 | | | | (1,775 | ) | | | 406 | |
During year ended December 31, 2019 | | | 373 | | | | 2,939 | | | | (2,240 | ) | | | 1,072 | |
Inventory
Inventory
Inventories are statedWe state inventories at the lower of cost or estimated net realizable value using the average costing method, which approximates thea first-in, first-out method. Inventories comprise raw materials, work-in-process and finished goods. We continuously assess the value of our inventory and write down its value for estimated excess and obsolete inventory. This evaluation includes an analysis of inventory on hand, current and forecasted demand, product development plans and market conditions. If future demand or market conditions are less favorable than our projections, or our product development plans change from current expectations, then a write-down of excess or obsolete inventory may be required and would be reflected in cost of goods sold in the period the updated information is known.
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We had salesSales of fully reserved inventory which had an immaterial impact on our 2022 gross margin and a favorable net impact of 1.5%1.5% on our 2021 gross margin for 2021 andmargin. We recorded inventory excess and obsolescence charges which had an unfavorable net impact of 2.2% and 1.7%2.2% on our 2020 gross margin for 2020 and 2019, respectively. margin. The 2021 favorable net impact in 2021 occurredwas primarily from sales of fully reserved inventory, in the first and third quarters which were primarily endpoint ICs and readers included in the excess and obsolescence charge noted below and, to a lesser extent, readers.recorded below. During 2020, and 2019, we recorded excess and obsolescence charges due primarily to reduced demand for older-generation endpoint ICs and EU gateways, which reduced the inventory value of the impacted products to zero. At the time, we expected future demand to be met by our newer generation endpoint ICs and EU gateways. Instead, as a resultbecause of industry-wide wafer shortages and reader supply constraints in 2022 and 2021, we sold a significant portion of the reserved endpoint ICs and gateways in the yearyears ended December 31, 2022 and 2021.
Property and Equipment
We record propertyproperty and equipment at cost and depreciate it using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows:
| | | | |
Category |
| Useful Life |
|
|
LaboratoryMachinery and equipment
|
| 32 to 10 years
|
|
|
Computer equipment and software |
| 3 to 5 years |
|
|
Furniture and fixtures |
| 53 to 7 years
|
|
|
Equipment acquired under finance leases |
| 63 to 7 years
|
|
|
Leasehold improvements |
| Shorter of remaining lease term or expected useful life |
MaintenanceWe charge maintenance and repair costs are charged to expense aswhen incurred. MajorWe capitalize major improvements, which extend the useful life of the related asset, are capitalized.asset. Upon disposal of a fixed asset, we record a gain or loss based on the differences between the proceeds received and the net book value of the disposed asset.
Other Assets
Other assets primarily comprise capitalized implementation costs from cloud computing arrangements and security deposits. We capitalize eligible costs associated with cloud computing arrangements over the term of the arrangement, plus reasonably certain renewals, and recognize those costs on a straight-line basis in the same line item in the consolidated statement of operations as the expense for fees associated with the cloud computing arrangement. Cloud computing arrangement costs, included in prepaid expenses and other current assets, were $413,000$413,000 and $228,000$413,000, and other non-current assets were $2.3$1.8 million and $1.8$2.3 million, as of December 31, 20212022 and December 31, 2020,2021, respectively. Amortization expense associated with the cloud computing arrangements was $215,000$413,000 for 2022, $215,000 for 2021 and not material for 2020. CashWe present cash flows related to capitalized implementation costs are presented in cash flows used in operating activities.
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Goodwill
Goodwill
Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. We perform an annual impairment assessment of goodwill at the reporting unit level as of September 30, or more frequently if indicators of potential impairment exist. Our annual impairment assessment requires a comparison of the fair value of our reporting unit to the carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying value of a reporting unit is greater than its fair value, we will recognize an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, we will consider the income tax effect from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss.
Revenue Recognition
We generate revenue primarily from sales of hardware products. We also generate revenue from software, extended warranties, enhanced maintenance, support services, and nonrecurring engineering, or NRE, development services, allnone of which are not material.
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We recognize revenue when we transfer control of the promised goods or services is transferred to our customers, which for hardware sales is generally at the time of product shipment as determined by the agreed-upon shipping terms. We measure revenue based on the amount of consideration we expect to be entitled-to in exchange for those goods or services. TheWe expect the period between when we transfer control of promised goods or services and when we receive payment is expected to be one year or less, and that expectation is consistent with our historical experience. As such, we do not adjust our revenuesrevenue for the effects of a significant financing component. We recognize any variable consideration, which comprises primarily comprises sales incentives, as arevenue reduction of revenue at the time of revenue recognition. We estimate sales incentives based on our historical experience and current expectations at the time of revenue recognition and update them at the end of each reporting period as additional information becomes available.
Our reader and gateway products are highly dependent on embedded software and cannot function without this embedded software. In these cases, weWe account for the hardware and embedded software license as a single performance obligation and recognize revenue at the point in time when control is transferred.
Our customer contracts with customers with multiple performance obligations generally include a combination of hardware products, standalone software, extended warranty, and enhanced maintenance and support services. For these contracts, we account for individual performance obligations separately if they are distinct. TheWe allocate the transaction price is allocated to the separate performance obligations on a relative standalone selling-price basis. In instances where the standalone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the standalone selling price using one, or a combination of, the adjusted market assessment or expected cost-plus margin. AmountsWe defer amounts allocated to extended warranty and enhanced maintenance sold with our reader and gateway products are deferred and recognizedrecognize them on a straight-line basis over the term of the arrangement, which is typically from one to three years. Amountsyears. We defer amounts allocated to support services sold with our reader and gateway products are deferred and recognizedrecognize them when we transfer control of the promised services is transferred to our customers.
For nonrecurring engineeringNRE development agreements that involve significant production, modification or customization of our products, we generally recognize revenue over the performance period using the cost-input method because it best depicts the transfer of services to the customer. We receive payments under these agreements based on a billing schedule. Contract assets relate to our conditional right to consideration for our completed performance under these agreements. AccountsWe record accounts receivable are recorded when the right to consideration becomes unconditional. For the periods presented in this report, our contract assets, deferred revenue and the value of unsatisfied performance obligations for nonrecurring engineeringNRE development agreements are not material.
If oura customer pays consideration before we transfer a good or service to the customer under the contract, then we classify those amounts are classified as contract liabilities or deferred revenue. ContractWe recognize contract liabilities are recognized as revenue aswhen we transfer control of the promised goods or services to our customers.
Payment terms typically range from 30 to 120 days.days. We present revenue net of sales tax in our consolidated statements of operations. ShippingWe include shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.
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Practical Expedients and Exemptions: We expense sales commissions when incurred because we expect the amortization period is expected to be one year or less. We record these costs within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less and (2) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performedperformed..
Product Warranties
Product Warranties
We provide limited warranty coverage for most products, generally ranging from a period of 90 days to one year from the date of shipment. We record a liability for the estimated cost of productthese warranties based on historical claims, product failure rates and other factors when we recognize the related revenue is recognized.revenue. We review these estimates periodically and adjust theour warranty reserves aswhen actual experience differs from historical estimates or when other information becomes available. The warranty liability primarily includes the anticipated cost of materials, labor and shipping necessary to repair or replace the product. Accrued warranty costs in 2022, 2021 and 2020 were not material.
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Leases
In February 2016, the FASB, issued guidance on leases. We adopted this standard on January 1, 2019 using the effective-date modified retrospective transition method.
We determine whether an arrangement is or contains a lease at inception. Right-of-use, or ROU, assets represent our right to use an identified asset for the lease term and leaseterm. Lease liabilities represent our obligation to make lease payments arising from the lease. OperatingWe recognize operating lease ROU assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term. We use an incremental borrowing rate in determining the present value of future lease payments asbecause our operating leases do not provide an implicit rate. Our incremental borrowing rate is based on a credit-adjusted risk-free rate, which best approximates a secured rate over a similar term of lease. LeaseWe recognize lease expense for lease payments is recognized on a straight-line basis over the lease term. Our lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. VariableWe expense variable lease costs are expensed as incurred on the consolidated statements of operations.operations as incurred. Our lease agreements generally do not contain any residual value guarantees or restrictive covenants.
We have various non-cancellablenoncancellable operating lease agreements for office, warehouse and research and development space in the U.S., China, Thailand, Brazil and Malaysia, with expiration dates from 20222023 to 2026.2029. Certain of these arrangements have free or escalating rent payment provisions and optional renewal and termination clauses that are factoredwe factor into the classification and measurement of the lease when appropriate. These lease agreements typically include lease and non-lease components and are generally accounted for as a single lease component. We consider variable CAM expenses for real estate leases as non-lease components.
LeasesWe do not record leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet; we instead recognize lease expense for these leases on a straight-line basis over the lease term.
Research and Development Costs
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; external consulting and service costs; prototype materials; other new-product development costs; and an allocated portion of infrastructure costs which include occupancy, depreciation and software costs.
Foreign Currency
OurWe consider our foreign subsidiaries are considered to be extensions of the U.S. Company. The functional currency of theour foreign subsidiaries is the U.S. dollar. Accordingly,We include 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.
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Income Taxes
We use the asset and liability approach for accounting, which requires recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to be in effect when suchthe assets and liabilities are recovered or settled. The effectWe recognize the effects of a change in tax rates on deferred tax assets and liabilities of a change in tax rates is recognized in the year that includesof the enactment date. We determine deferred tax assets, including historical net operating losses and deferred tax liabilities, based on temporary differences between the book and tax bases of the assets and liabilities. We believe that it is currently more likely than not that our deferred tax assets will not be realized and, as such, we have recorded a full valuation allowance for these assets. We evaluate the likelihood of our ability to realize deferred tax assets in future periods on a quarterly basis, and when appropriateif evidence indicates we wouldwill be able to realize some or all of our deferred tax assets then we will revise our valuation allowance accordingly.
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We utilizeuse a two-step approach for evaluating uncertain tax positions. First, we evaluate recognition, which requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes. If we consider a tax position is not considered more likely than not to be sustained,unsustained, then no benefits of the position are recognized. Second, we measure the uncertain tax position based on the largest amount of benefit which is more likely than not to be realized on effective settlement. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. If actual results differ from our estimates, then our net operating loss and credit carryforwards could be materially impacted.
Our realization ofUs realizing the benefits of the NOLs and credit carryforwards depends on sufficient taxable income in future years. We have established a valuation allowance against the carrying value of our deferred tax assets, as it is currently more likely than not that we will not be ableunable to realize these deferred tax assets. In addition, using NOLs and credits to offset future income subject to taxes may be subject to substantial annual limitations due to the “change in ownership” provisions of the Code and similar state provisions. Events that cause limitations in the amount of NOLs that we may use in any one year include, but are not limited to, a cumulative ownership change of more than 50%50%, as defined by Code Sections 382 and 383, over a three-year period. UtilizingUsing our NOLs and tax credit carryforwards could be significantly reduced if a cumulative ownership change of more than 50% has occurred in our past or occurs in our future.
We do not anticipate that the amount of our existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Due to the presence of NOLs in most jurisdictions, our tax years remain open for examination by taxing authorities back to 2000.
Stock-Based Compensation
We have various equity incentiveaward plans that are more fully described in “(“Plans”) for granting share-based awards to employees, consultants and non-employee directors of the Company. The Plans provide for granting several available forms of stock compensation such as stock option awards, restricted stock units, or RSUs, RSUs with performance conditions, or PSUs, and RSUs with market and service conditions, or MSUs.Note 9 Stock-Based Awards”.
We measure stock-based compensation costs for all share-based awards at fair value on the measurement date, which is typically the grant date and recognize compensation expense on a straight-line basis over the requisite service period, which typically vest over four years. We account for forfeitures as they occur.date. We determine the fair value of restricted stock units, oroptions using the Black-Scholes option-pricing model, which considers, among other things, estimates and assumptions on the expected life of the options, stock price volatility and market value of the Company’s common stock. We determine the fair value of RSUs and PSUs based on the closing price of our common stock at the date of grant. We determine the fair value of stock options at the date of grant by using the Black-Scholes option-pricing model. We also use the Black-Scholes option-pricing model to determine the fair value of each common share issued under the ESPP. We determine the fair value of the ESPP grants on the first day of each offering period.
In 2019,date. Additionally, for awards with a market condition, we began granting RSUs with performance conditions, or PSUs, replacing what has historically been our annual cash-bonus program for our senior executives and other bonus-eligible employees. The number of PSUs that ultimately vest will depend on the extent to which we achieve specified fiscal year financial performance metrics. We record compensation expense each period on a straight-line basis based on our estimate of the most probable number of PSUs that will vest and recognize that expense over the requisite service period.
In 2021, we began granting RSUs with market and service conditions, or MSUs, to certain executives. The MSUs are eligible to vest based on our total stockholder return (“TSR”) relative to the TSR of the constituents comprising the S&P Semiconductor Select Industry Index over two measurement periods. We use a Monte Carlo simulation in estimating themodel to estimate grant date fair value, at grant date and recognize compensation cost overwhich takes into consideration the implied service period.range of possible stock price of total stockholder return outcomes.
Net Loss per Share
NetWe compute net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. We have outstanding stock options, RSUs, PSUs, MSUs and ESPPsan ESPP, each of which we include in theour calculation of diluted net loss per share if their effect would be dilutive. TheWe compute diluted net loss per share is computed by giving effect toconsidering all potential dilutive common stock equivalents outstanding for the period.
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We used the treasury stock method for calculating any potential dilutive effect of the conversion of the 2019 Notes on diluted net loss per share for the year ended December 31, 2020. 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 and the 2021 Notes on diluted net loss per share for the yearyears ended December 31, 2022 and 2021. For more information about the 2019 Notes and the 2021 Notes, please refer to Note 7 to our consolidated financial statements.statements.
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-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 adopted ASU 2020-06 on January 1, 2021 using the modified retrospective transition method and accounted for our convertible notes due 2026, or the 2019 Notes on a whole-instrument basis. Upon adoption, weWe recorded a $29.3$29.3 million increase to long-term debt, a $32.7$32.7 million decrease to additional paid-in capital and a $3.4$3.4 million decrease to accumulated deficit on January 1, 2021. Interest expense decreased for the year ended December 31, 2021 compared with the years ended December 31, 2020 and December 31, 2019, respectively, as we no longer separate an equity component of the 2019 Notes and incur amortization of debt discount. We had no changes to net deferred tax liabilities, with adue to the decrease in deferred tax liability being offset by a corresponding increase in valuation allowance upon adoption.
The condensedWe present our consolidated financial statements as of and for the year ended December 31, 2021, are presented under ASU 2020-06, while2020-06. We have not adjusted the comparative prior reporting periods presented are not adjusted and continue to be reportedreport them in accordance with our historical accounting policy.
In June 2016, the Financial Accounting Standards Board, or FASB, issued guidance on the measurement of credit losses on financial instruments. This guidance requires measurement and recognition of expected credit losses for financial assets held at amortized cost. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We adopted this standard on January 1, 2020 and the adoption of this guidance did not materially impact our financial positions, results of operations or cash flows.
Note 3. Fair Value Measurements
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):
| | | December 31, 2021 | | | December 31, 2020 | | | December 31, 2022 | | | December 31, 2021 | |
| | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Total | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 113,058 | | | $ | — | | | $ | 113,058 | | | $ | 12,425 | | | $ | — | | | $ | 12,425 | | | $ | 14,620 | | | $ | — | | | $ | 14,620 | | | $ | 113,058 | | | $ | — | | | $ | 113,058 | |
Total cash equivalents | | | 113,058 | | | | — | | | | 113,058 | | | | 12,425 | | | | — | | | | 12,425 | | | | 14,620 | | | | — | | | | 14,620 | | | | 113,058 | | | | — | | | | 113,058 | |
Short-term investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agency securities | | | — | | | | 4,066 | | | | 4,066 | | | | — | | | | 20,293 | | | | 20,293 | | | | — | | | | 78,621 | | | | 78,621 | | | | — | | | | 4,066 | | | | 4,066 | |
Corporate notes and bonds | | | — | | | | 36,966 | | | | 36,966 | | | | — | | | | 13,185 | | | | 13,185 | | | | — | | | | 26,953 | | | | 26,953 | | | | — | | | | 36,966 | | | | 36,966 | |
Commercial paper | | | — | | | | 16,489 | | | | 16,489 | | | | — | | | | 23,983 | | | | 23,983 | | | | — | | | | 24,073 | | | | 24,073 | | | | — | | | | 16,489 | | | | 16,489 | |
Treasury bill | | | — | | | | 4,490 | | | | 4,490 | | | | — | | | | 24,992 | | | | 24,992 | | | | — | | | | 11,359 | | | | 11,359 | | | | — | | | | 4,490 | | | | 4,490 | |
Yankee bonds | | | | — | | | | 1,939 | | | | 1,939 | | | | — | | | | — | | | | — | |
Agency bonds | | | | — | | | | 2,882 | | | | 2,882 | | | | — | | | | — | | | | — | |
Asset-backed securities | | | — | | | | 7,432 | | | | 7,432 | | | | — | | | | — | | | | — | | | | — | | | | 8,321 | | | | 8,321 | | | | — | | | | 7,432 | | | | 7,432 | |
Total short-term investments | | | — | | | | 69,443 | | | | 69,443 | | | | — | | | | 82,453 | | | | 82,453 | | | | — | | | | 154,148 | | | | 154,148 | | | | — | | | | 69,443 | | | | 69,443 | |
Long-term investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agency securities | | | — | | | | 14,225 | | | | 14,225 | | | | — | | | | — | | | | — | | | | — | | | | 13,462 | | | | 13,462 | | | | — | | | | 14,225 | | | | 14,225 | |
Yankee bonds | | | | — | | | | 1,869 | | | | 1,869 | | | | — | | | | — | | | | — | |
Agency bonds | | | | — | | | | 2,983 | | | | 2,983 | | | | — | | | | — | | | | — | |
Asset-backed securities | | | | — | | | | 886 | | | | 886 | | | | — | | | | — | | | | — | |
Total long-term investments | | | — | | | | 14,225 | | | | 14,225 | | | | — | | | | — | | | | — | | | | — | | | | 19,200 | | | | 19,200 | | | | — | | | | 14,225 | | | | 14,225 | |
Total | | $ | 113,058 | | | $ | 83,668 | | | $ | 196,726 | | | $ | 12,425 | | | $ | 82,453 | | | $ | 94,878 | | | $ | 14,620 | | | $ | 173,348 | | | $ | 187,968 | | | $ | 113,058 | | | $ | 83,668 | | | $ | 196,726 | |
We did 0tnot have any Level 3 assets as of December 31, 20212022 or 2020. There were02021. We did not have any liabilities measured at fair value as of December 31, 20212022 or 2020. Short-term2021. We expect short-term investments are expected to mature within 1 year fromof the
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reporting date. Long-termWe expect long-term investments are expected to mature between 1 and 2 years from the reporting date. Amortized Cost of all investments by category does not materially differ from fair value. See Note 7 for the carrying amount and estimated fair value of our convertible senior notes due 20262027.
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The following tables present the cost or amortized cost, gross unrealized gains, gross unrealized losses and 2027.total estimated fair value of our financial assets as of the dates presented (in thousands):
| | | | | | | | | | | | | | | |
| December 31, 2022 | |
| Cost or | | | Gross | | | Gross | | | Total Estimated | |
| Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
Description: | | | | | | | | | | | |
Money market funds | $ | 14,620 | | | $ | — | | | $ | — | | | $ | 14,620 | |
U.S. government agency securities | | 93,065 | | | | — | | | | (982 | ) | | | 92,083 | |
Corporate notes and bonds | | 27,133 | | | | 6 | | | | (186 | ) | | | 26,953 | |
Yankee bonds | | 3,815 | | | | — | | | | (7 | ) | | | 3,808 | |
Commercial paper | | 24,073 | | | | — | | | | — | | | | 24,073 | |
Treasury bill | | 11,361 | | | | 2 | | | | (4 | ) | | | 11,359 | |
Agency bond | | 5,863 | | | | 4 | | | | (2 | ) | | | 5,865 | |
Asset-backed securities | | 9,287 | | | | 2 | | | | (82 | ) | | | 9,207 | |
Total | $ | 189,217 | | | $ | 14 | | | $ | (1,263 | ) | | $ | 187,968 | |
| | | | | | | | | | | | | | | |
| December 31, 2021 | |
| Cost or | | | Gross | | | Gross | | | Total Estimated | |
| Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
Description: | | | | | | | | | | | |
Money market funds | $ | 113,058 | | | $ | — | | | $ | — | | | $ | 113,058 | |
U.S. government agency securities | | 18,314 | | | | — | | | | (23 | ) | | | 18,291 | |
Corporate notes and bonds | | 36,975 | | | | 3 | | | | (12 | ) | | | 36,966 | |
Commercial paper | | 16,489 | | | | — | | | | — | | | | 16,489 | |
Treasury bill | | 4,494 | | | | — | | | | (4 | ) | | | 4,490 | |
Asset-backed securities | | 7,435 | | | | — | | | | (3 | ) | | | 7,432 | |
Total | $ | 196,765 | | | $ | 3 | | | $ | (42 | ) | | $ | 196,726 | |
Marketable securities in a continuous loss position for less than 12 months had an estimated fair value of $125.6 million and unrealized losses of $1.2 million as of December 31, 2022. Marketable securities in a continuous loss position for less than 12 months had an estimated fair value of $61.0 million and unrealized losses of $42,000 as of December 31, 2021. Marketable securities in a continuous loss position for greater than 12 months had an estimated fair value of $13.9 million and unrealized losses of $0.1 million as of December 31, 2022. As of December 31, 2021, there were no marketable securities in a continuous loss position for greater than 12 months.
Unrealized losses from our fixed-income securities are primarily attributable to changes in interest rates and not to lower credit ratings of the issuers. In determining whether an unrealized loss is other-than-temporary, for the periods presented, we determined we do not have plans to sell the securities nor is it more likely than not that we would be required to sell the securities before their anticipated recovery.
Note 4. Inventory
The following table presents the detail of inventories as of the dates presented (in thousands):
| | | | | | | | |
| | | | | | |
| | December 31, 2022 | | | December 31, 2021 | |
Raw materials | | $ | 14,678 | | | $ | 6,305 | |
Work-in-process | | | 14,525 | | | | 7,873 | |
Finished goods | | | 17,194 | | | | 7,780 | |
Total inventory | | $ | 46,397 | | | $ | 21,958 | |
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| | | | | | | | |
| | December 31, 2021 | | | December 31, 2020 | |
Raw materials | | $ | 6,305 | | | $ | 5,275 | |
Work-in-process | | | 7,873 | | | | 9,815 | |
Finished goods | | | 7,780 | | | | 21,239 | |
Total inventory | | $ | 21,958 | | | $ | 36,329 | |
Note 5. Property and Equipment
The following table presents the detail of property and equipment details as of the dates presented (in thousands):
| | | | | | | | | | | | | | | | |
| | December 31, 2021 | | | December 31, 2020 | | | | | | |
Laboratory equipment | | $ | 32,159 | | | $ | 18,240 | | |
| | | December 31, 2022 | | | December 31, 2021 | |
Machinery and equipment | | | $ | 48,420 | | | $ | 32,159 | |
Computer equipment and software | | | 2,991 | | | | 5,292 | | | | 3,308 | | | | 2,991 | |
Furniture and fixtures | | | 1,138 | | | | 1,138 | | | | 1,303 | | | | 1,138 | |
Equipment acquired under finance leases | | | 2,960 | | | | 3,461 | | | | 2,895 | | | | 2,960 | |
Leasehold improvements | | | 10,513 | | | | 10,559 | | | | 10,684 | | | | 10,513 | |
Total property and equipment, gross | | | 49,761 | | | | 38,690 | | | | 66,610 | | | | 49,761 | |
Less: Accumulated depreciation | | | (22,261 | ) | | | (22,159 | ) | | | (27,583 | ) | | | (22,261 | ) |
Total property and equipment, net | | $ | 27,500 | | | $ | 16,531 | | | $ | 39,027 | | | $ | 27,500 | |
Depreciation expense, which includes amortization of finance lease assets, was $4.6$6.0 million, $4.5$4.6 million and $4.8$4.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. We did not acquire any property and 2019, respectively.equipment under finance leases for the year ended December 31, 2022. The net book value of property and equipment acquired under finance leases was $0.2 million and $0.4$0.2 million at December 31, 2021 and 2020, respectively.2021.
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Note 6. Income Taxes
We are subject to federal and state income taxes in the United States and foreign jurisdictions.
The following table presents U.S. and foreign components of income (loss) before income taxes (in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
U.S. | | $ | (24,508 | ) | | $ | (51,488 | ) | | $ | (52,343 | ) |
Foreign | | | 391 | | | | 381 | | | | 509 | |
Loss before income taxes | | $ | (24,117 | ) | | $ | (51,107 | ) | | $ | (51,834 | ) |
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
U.S. | | $ | (51,488 | ) | | $ | (52,343 | ) | | $ | (23,291 | ) |
Foreign | | | 381 | | | | 509 | | | | 502 | |
Loss before income taxes | | $ | (51,107 | ) | | $ | (51,834 | ) | | $ | (22,789 | ) |
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The following table presents the detail of income tax benefit (expense) for the periods presented (in thousands):
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2022 | | | 2021 | | | 2020 | |
Current: | | | | | | | | | | | | | | | | | | | | | |
U.S. - Federal | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
U.S. - State | | | (8 | ) | | | (56 | ) | | | (36 | ) | | | (68 | ) | | | (8 | ) | | | (56 | ) |
Foreign | | | (137 | ) | | | (76 | ) | | | (150 | ) | | | (110 | ) | | | (137 | ) | | | (76 | ) |
| | | (145 | ) | | | (132 | ) | | | (186 | ) | | | (178 | ) | | | (145 | ) | | | (132 | ) |
Deferred: | | | | | | | | | | | | | | | | | | | | | |
U.S. - Federal | | | (7 | ) | | | 32 | | | | (11 | ) | | | 5 | | | | (7 | ) | | | 32 | |
U.S. - State | | | (1 | ) | | | 11 | | | | (1 | ) | | | (11 | ) | | | (1 | ) | | | 11 | |
Foreign | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | (8 | ) | | | 43 | | | | (12 | ) | | | (6 | ) | | | (8 | ) | | | 43 | |
Total income tax benefit (expense) | | $ | (153 | ) | | $ | (89 | ) | | $ | (198 | ) | |
Total income tax expense | | | $ | (184 | ) | | $ | (153 | ) | | $ | (89 | ) |
We have not recorded a liability for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2021 as2022 because we intend to permanently reinvest future suchthe earnings outside the United States. TheWe expect the amount of the unrecognized deferred tax liability, if incurred, is expected to be immaterial.
The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2022 | | | 2021 | | | 2020 | |
U.S. Statutory Rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
Change in valuation allowance | | | (33.3 | ) | | | (23.6 | ) | | | (22.9 | ) | | | (54.7 | ) | | | (33.3 | ) | | | (23.6 | ) |
State taxes (net of federal benefit) | | | 0.2 | | | | (0.4 | ) | | | (0.4 | ) | | | 0.4 | | | | 0.2 | | | | (0.4 | ) |
Federal research and development credit | | | 8.5 | | | | 3.9 | | | | 5.9 | | | | 16.5 | | | | 8.5 | | | | 3.9 | |
Stock-based compensation | | | 10.2 | | | | 0.2 | | | | (1.9 | ) | | | 16.1 | | | | 10.2 | | | | 0.2 | |
Inducement Premium | | | (4.7 | ) | | | — | | | | — | | |
Inducement premium | | | | 5.0 | | | | (4.7 | ) | | | — | |
Unrecognized tax benefits | | | (2.1 | ) | | | (1.1 | ) | | | (1.2 | ) | | | (4.1 | ) | | | (2.1 | ) | | | (1.1 | ) |
Other, net | | | (0.1 | ) | | | (0.2 | ) | | | (1.4 | ) | | | (1.0 | ) | | | (0.1 | ) | | | (0.2 | ) |
Effective income tax rate | | | (0.3 | %) | | | (0.2 | %) | | | (0.9 | %) | | | (0.8 | %) | | | (0.3 | %) | | | (0.2 | %) |
We continue to maintain a full valuation allowance against our net deferred tax assets in the U.S. but recognize deferred income tax expense (benefit) due to the change in the indefinite deferred tax liability related to goodwill, which is partially offset by indefinite tax attributes.
Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following
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The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2021 | | | December 31, 2020 | | | December 31, 2022 | | | December 31, 2021 | |
Net operating loss carryforwards | | $ | 58,673 | | | $ | 45,714 | | | $ | 53,157 | | | $ | 58,673 | |
Credit carryforwards | | | 13,879 | | | | 10,607 | | | | 16,868 | | | | 13,879 | |
Capitalized research and development | | | 857 | | | | 1,481 | | | | 17,072 | | | | 857 | |
Operating lease liabilities | | | 3,425 | | | | 4,030 | | | | 3,011 | | | | 3,425 | |
Allowances | | | 859 | | | | 1,704 | | | | 1,398 | | | | 859 | |
Deferral of employer taxes | | | 111 | | | | 283 | | | | — | | | | 111 | |
Deferred revenue | | | 50 | | | | 59 | | | | 74 | | | | 50 | |
Stock-based compensation | | | 6,762 | | | | 4,359 | | | | 6,041 | | | | 6,762 | |
Disallowed interest expense | | | 768 | | | | 374 | | | | 676 | | | | 768 | |
Inventory cost capitalization | | | 506 | | | | 496 | | | | 791 | | | | 506 | |
Other | | | 23 | | | | 24 | | | | — | | | | 23 | |
Deferred tax assets | | | 85,913 | | | | 69,131 | | | | 99,088 | | | | 85,913 | |
Less: Valuation allowance | | | (82,461 | ) | | | (58,820 | ) | | | (95,710 | ) | | | (82,461 | ) |
Net deferred tax assets | | | 3,452 | | | | 10,311 | | | | 3,378 | | | | 3,452 | |
Deferred tax liability: | | | | | | | | | | | | | |
Goodwill | | | (744 | ) | | | (689 | ) | | | (796 | ) | | | (744 | ) |
Depreciation and amortization | | | (336 | ) | | | (590 | ) | | | (475 | ) | | | (336 | ) |
Operating lease ROU assets | | | (2,485 | ) | | | (2,933 | ) | | | (2,226 | ) | | | (2,485 | ) |
Convertible notes | | | — | | | | (6,204 | ) | |
Deferred tax liabilities | | | (3,565 | ) | | | (10,416 | ) | | | (3,497 | ) | | | (3,565 | ) |
Net deferred tax liability | | $ | (113 | ) | | $ | (105 | ) | | $ | (119 | ) | | $ | (113 | ) |
Realizing deferred tax assets depends on us generating future taxable income, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 20212022 and 20202021 because, based on the weight of available evidence, it is more likely than not that we will notbe unable to realize the deferred tax assets.
We have accumulated federal tax losses of approximately $274.7$249.3 million and $213.5$274.7 million, respectively, as of December 31, 20212022 and 2020,2021, which are available to reduce future taxable income. The Tax Cuts and Jobs Act, or TCJA, enacted on December 22, 2017 altered the carryforward period for federal net operating losses and as a result, all net operating losses generated in 2018 and forward have an indefinite life. Of the net operating losses reported, we have accumulated $146$141.8 million with an indefinite life as of December 31, 2021. 2022. We have accumulated state tax losses of approximately $23.3$21.7 million and $21.0$23.3 million as of December 31, 2022 and 2021, and 2020, respectively. Additionally, weWe also have net research and development credit carryforwards of $18.3$22.3 million and $14.0$18.3 million as of December 31, 20212022 and 2020,2021, respectively, which are available to reduce future tax liabilities.
The Tax Cuts and Jobs Act contained a provision which requires the capitalization of Section 174 costs incurred in the years beginning on or after Jan. 1, 2022. Section 174 costs are expenditures which represent research and development costs that are incident to the development or improvement of a product, process, formula, invention, computer software or technique. This provision changes the treatment of Section 174 costs such that the expenditures are no longer allowed as an immediate deduction but rather must be capitalized and amortized. We have included the impact of this provision, which results in a deferred tax asset of approximately $16.7 million as of December 31, 2022.
Our pre-2018 federal tax losses and research and development credit carryforwards began expiring in 2020.2020. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, then the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. We have completed a formal IRC Section 382 study through June 30, 2020December 31,2022 and the attributes disclosed in this footnoteattributes reflect the conclusion of that study. However, subsequent ownership changes may affect the limitation in future years.
We are currently not under audit in any tax jurisdiction. Tax years from 20002003 through 20212022 are currently open for audit by federal and state taxing authorities.
We establish reserves for tax positions based on estimates of whether, and the extent to which, additional taxes will be due. TheWe establish the reserves are established when we believe that our tax-return positions might be challenged by taxing authorities, despite our belief that our tax return positions are fully supportable.
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The following table presents the total balance of unrecognized tax benefits as of the dates presented (in thousands):
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2022 | | | 2021 | | | 2020 | |
Balance at beginning of period | | $ | 3,519 | | | $ | 3,428 | | | $ | 3,159 | | | $ | 4,609 | | | $ | 3,519 | | | $ | 3,428 | |
Gross increase to tax positions in prior periods | | | — | | | | (417 | ) | | | — | | | | — | | | | — | | | | (417 | ) |
Gross increase to tax positions in current periods | | | 1,090 | | | | 508 | | | | 269 | | | | 997 | | | | 1,090 | | | | 508 | |
Balance at end of period | | $ | 4,609 | | | $ | 3,519 | | | $ | 3,428 | | | $ | 5,606 | | | $ | 4,609 | | | $ | 3,519 | |
AtAs of December 31, 2021,2022, we recorded thea total amount of unrecognized tax benefit of $4.6$5.6 million as a reduction to the deferred tax asset. If recognized, itthis tax benefit would have 0no impact to our effective tax rate asbecause we have a full valuation allowance. We do not anticipate that the amount of existing unrecognized tax benefitsbenefit will significantly increase or decrease within the next 12 months. We record accrued interest and penalties related to unrecognized tax benefits as income tax expense and their value is 0.zero.
Note 7. Long-term debt
Convertible Senior Notes
The following table presents the outstanding principal amount and carrying value of the Notes as of the dates indicated (in thousands):
| | December 31, 2021 | | | December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Amount | | | Unamortized debt issuance costs (1) | | | Net Carrying Amount | | | Principal Amount | | | Unamortized debt discount and debt issuance costs (1) | | | Net Carrying Amount | | | December 31, 2022 | | | December 31, 2021 | |
2019 Notes (2) | | $ | 9,850 | | | $ | (217 | ) | | $ | 9,633 | | | $ | 86,250 | | | $ | (31,694 | ) | | $ | 54,556 | | |
| | | Principal Amount | | | Unamortized debt issuance costs | | | Net Carrying Amount | | | Principal Amount | | | Unamortized debt issuance costs | | | Net Carrying Amount | |
2019 Notes (1) (2) | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,850 | | | $ | (217 | ) | | $ | 9,633 | |
2021 Notes | | | 287,500 | | | | (8,839 | ) | | | 278,661 | | | | - | | | | - | | | | - | | | | 287,500 | | | | (7,256 | ) | | | 280,244 | | | | 287,500 | | | | (8,839 | ) | | | 278,661 | |
Total Debt | | | 297,350 | | | | (9,056 | ) | | | 288,294 | | | | 86,250 | | | | (31,694 | ) | | | 54,556 | | | | 287,500 | | | | (7,256 | ) | | | 280,244 | | | | 297,350 | | | | (9,056 | ) | | | 288,294 | |
Short-term Debt | | | 9,850 | | | | (217 | ) | | | 9,633 | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | 9,850 | | | | (217 | ) | | | 9,633 | |
Long-term Debt | | $ | 287,500 | | | $ | (8,839 | ) | | $ | 278,661 | | | $ | 86,250 | | | $ | (31,694 | ) | | $ | 54,556 | | | $ | 287,500 | | | $ | (7,256 | ) | | $ | 280,244 | | | $ | 287,500 | | | $ | (8,839 | ) | | $ | 278,661 | |
(1) We adopted ASU 2020-06 on January 1, 2021 using modified retrospective transition method and accounted for the 2019 Notes on a whole-instrument basis. Accordingly, we no longer had unamortized debt discount related to the equity component of the 2019 Notes as of December 31, 2021. For further information on adoption of ASU 2020-06, please refer to Note 2. | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(2) In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Convertible Notes (“2019 Note Repurchase”) which we accounted for 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 this transaction, we recorded unamortized debt issuance costs of $1.8 million in additional paid-in capital. Please refer to section "Partial Repurchase of the Convertible Senior Notes – 2019". | | |
(1) In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Notes which we accounted for 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 this transaction, we recorded unamortized debt issuance costs of $1.8 million in additional paid-in capital for the year ended December 31, 2021. Please refer to section "Repurchase of the Convertible Senior Notes – 2019".
(2) In June 2022, we completed a repurchase of $9.85 million of the remaining principal amount of the 2019 Notes which we accounted for 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 this transaction, we recorded unamortized debt issuance costs of $199,000 in additional paid-in capital for the year ended December 31, 2022. Please refer to section "Repurchase of the Convertible Senior Notes – 2019". | | (1) In November 2021, we completed a privately negotiated repurchase of $76.4 million principal amount of the 2019 Notes which we accounted for 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 this transaction, we recorded unamortized debt issuance costs of $1.8 million in additional paid-in capital for the year ended December 31, 2021. Please refer to section "Repurchase of the Convertible Senior Notes – 2019".
(2) In June 2022, we completed a repurchase of $9.85 million of the remaining principal amount of the 2019 Notes which we accounted for 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 this transaction, we recorded unamortized debt issuance costs of $199,000 in additional paid-in capital for the year ended December 31, 2022. Please refer to section "Repurchase of the Convertible Senior Notes – 2019". | |
In December 2019, we issued $86.3$86.3 million aggregate principal amount of convertible senior notes due December 15, 2026 (thethe 2019 Notes)Notes and in November 2021, we issued $287.5$287.5 million aggregate principal amount of convertible senior notes due May 15, 2027 (thethe 2021 Notes)Notes (collectively, the Notes).
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) | | 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 | | December 15, 2026 | | 2% | | | June 15, 2020 | | 2.47% | | | June 15; December 15 | | 28.9415 | | $ | 34.55 | | | 0.3 | | December 15, 2026 | | 2% | | June 15, 2020 | | 2.47% | | June 15; December 15 | | 28.9415 | | $ | 34.55 | | | N/A |
2021 Notes | | May 15, 2027 | | 1.125% | | | May 15, 2022 | | 1.72% | | | May 15; November 15 | | 9.0061 | | $ | 111.04 | | | 2.6 | | May 15, 2027 | | 1.125% | | May 15, 2022 | | 1.72% | | May 15; November 15 | | 9.0061 | | $ | 111.04 | | | 2.6 |
(1) Amount for 2019 Notes represents amount after repurchase of the Notes. | |
(1) We repurchased the 2019 Notes in November 2021 ($76.4 million) and June 2022 ($9.85 million). | | (1) We repurchased the 2019 Notes in November 2021 ($76.4 million) and June 2022 ($9.85 million). |
The 2019 Notes, and the 2021 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures for the 2019 Notes and 2021 Notes (the Indentures). The total net proceeds from
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the 2019 Notes and the 2021 Notes, after deducting initial debt issuance costs, fees and expenses, were $83.5$83.5 million and $278.4$278.4 million, respectively. We used a portion of the proceeds from the 2019 Notes proceeds to pay the cost of the capped call transactions described in the section “Capped Calls” and to repay our senior credit facility described in the section “Senior Credit Facility”.2019. We used approximately $183.6 million of the 2021 Notes net proceeds, of the 2021 Notes, excluding accrued interest, to repurchase approximately $76.4$76.4 million aggregate principal amount of the 2019 Notes through individual privately negotiated transactions concurrent with us offering the 2021 Notes. We used
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approximately $17.6 million, excluding accrued interest, to repurchase the remaining $9.85 million aggregate principal amount of the 2019 Notes as described in June 2022. Please refer to the section “Partial Repurchase of the Convertible Senior Notes –- 2019”. for further details of both transactions. We will use the remainder of the net proceeds from the 2021 Notes for general corporate purposes.
Terms of the 2021 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:
| •
| during any fiscal quarter commencing after the fiscal quarter ending on March 31, 2020 for the 2019 Notes and the fiscal quarter ending on March 31, 2022 for the 2021 Notes (and only during such fiscal quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
|
•during any fiscal quarter commencing after the fiscal quarter ending on March 31, 2022 for the 2021 Notes (and only during such fiscal quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
| •
| during the 5 business day period after any 5 consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
|
•during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
| •
| prior to the close of business on the second scheduled trading day immediately preceding the redemption date if we call the Notes for redemption; or
|
•prior to the close of business on the second scheduled trading day immediately preceding the redemption date if we call the Notes for redemption; or
| •
| upon the occurrence of specified corporate events, as described in the indenture.
|
•upon the occurrence of specified corporate events, as described in the indenture.
None of the circumstances described in the paragraphs above were met during fiscal year 2022.
Regardless of the foregoing circumstances, holders may convert all or any portion of the Notes, in increments of $1,000 principal amount, on or after September 15, 2026 (2019 Notes) and on or after February 15, 2027, (2021 Notes), until the close of business on the second scheduled trading day immediately preceding the maturity date.
We may redeem all or a portion of the Notes for cash, at our option, on or after December 20, 2023 (2019 Notes) or on or after November 20, 2024, (2021 Notes), if the last reported sale price of our common stock has been at least 130%130% of the conversion price at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
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 100%100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
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 $52.5$52.5 million calculated as the present value of future cash flows discounted at the borrowing rate for a similar nonconvertible debt instrument based on the expected term. We determined the borrowing rate to be 9.90%9.90% based on the market rates for nonconvertible debt instruments issued by other companies with publicly available credit ratings considered to be comparable to us. We recognized the excess of the principal amount of the 2019 Notes over the initial carrying amount of the liability component as a debt discount of $33.8$33.8 million and amortized it to interest expense over the expected term of the 2019 Notes using the effective interest rate method. We recorded the equity component of $33.8$33.8 million as additional paid-in capital, calculated as the difference between the total proceeds of $86.3$86.3 million and the initial carrying amount of the liability component.
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We allocated the 2019 Notes total issuance costs of $2.8$2.8 million between liability and equity in the same proportion as the allocation of our total proceeds to liability and equity components. We amortized the issuance costs attributable to the liability component of $1.7$1.7 million to interest expense over the respective term of the 2019
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Notes using the effective interest rate method. We netted the issuance costs attributable to the equity component of $1.1$1.1 million against the respective equity component in additional paid-in capital.
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 $29.3$29.3 million increase to long-term debt, a $32.7$32.7 million decrease to additional paid-in capital and a $3.4$3.4 million decrease to accumulated deficit. We had no changes to net deferred tax liabilities with a decrease in deferred tax liability offset by a corresponding increase in valuation allowance upon adoption.
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 $9.1 million as a direct deduction from the face amount of the 2021 Notes. We amortized the issuance costs to interest expense over the respective term of the 2021 Notes using the effective interest rate method.
Interest expense related to the Notes was as follows (in thousands):
| | Year Ended December 31, 2021 | | | Year Ended December 31, 2020 | | | Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 Notes | | | 2021 Notes | | | Total | | | 2019 Notes | | | Total | | | 2019 Notes | | | Total | | | Year Ended December 31, 2022 | | | Year Ended December 31, 2021 | | | Year Ended December 31, 2020 | |
Amortization of debt discount (1) | | $ | — | | | $ | — | | | $ | — | | | $ | 3,566 | | | $ | 3,566 | | | $ | 140 | | | $ | 140 | | |
| | | 2019 Notes | | | 2021 Notes | | | Total | | | 2019 Notes | | | 2021 Notes | | | Total | | | 2019 Notes | | | Total | |
Amortization of debt discount | | | $ | - | | | $ | - | | | $ | - | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,566 | | | $ | 3,566 | |
Amortization of debt issuance costs | | | 329 | | | | 239 | | | | 568 | | | | 115 | | | | 115 | | | | 4 | | | | 4 | | | | 19 | | | | 1,583 | | | | 1,602 | | | | 329 | | | | 239 | | | | 568 | | | | 115 | | | | 115 | |
Cash interest expense | | | 1,488 | | | | 494 | | | | 1,982 | | | | 1,732 | | | | 1,732 | | | | 72 | | | | 72 | | | | 87 | | | | 3,234 | | | | 3,321 | | | | 1,488 | | | | 494 | | | | 1,982 | | | | 1,732 | | | | 1,732 | |
Total interest expense | | $ | 1,817 | | | $ | 733 | | | $ | 2,550 | | | $ | 5,413 | | | $ | 5,413 | | | $ | 216 | | | $ | 216 | | | $ | 106 | | | $ | 4,817 | | | $ | 4,923 | | | $ | 1,817 | | | $ | 733 | | | $ | 2,550 | | | $ | 5,413 | | | $ | 5,413 | |
(1) We adopted ASU 2020-06 on January 1, 2021 using modified retrospective transition method and accounted for the 2021 Notes on a whole-instrument basis. For further information on adoption of ASU 2020-06, please refer to Note 2. | | |
Accrued interest related to the 2019 Notes as of December 31, 2021 and 2020 was not material. Accrued interest related to the 2021 Notes as of December 31, 2022 and 2021 was $494,000.$404,000 and $494,000, respectively. We record accrued interest in accrued liabilities in our consolidated balance sheet.
Our estimated fair value of the 2021 Notes was $314.3$347.4 million and $314.3 million as of December 31, 2022 and 2021, respectively, which we determined through consideration of quoted market prices. Our estimated fair value of the 2019 Notes was $26.2 million and $118.7$26.2 million as of December 31, 2021, and 2020, respectively, which we determined through consideration of quoted market prices. The fair value for both Notes is classified as Level 2, as defined in Note 2.
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 are generally designed to reduce the potential dilution to our common stock upon any conversion or settlement of the 2019 Notes, or to offset any cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes, as the case may be, with suchthe 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 then-market price per share of our common stock exceeds the cap price. The initial cap price of the capped call transactions is $54.20$54.20 per share, which represents a 100%100% premium over the last reported sale price of our common stock of $27.10$27.10 per share on December 11, 2019 subject to certain adjustments under the terms of the capped call transactions. The capped call transactions expire over 40 consecutive scheduled trading days ending on December 11, 2026.2026.
The capped-callcapped call transactions meet the criteria for classification in equity, are not accounted for as derivatives and are not remeasured each reporting period. We paid $10.1 million for the capped-call transactions, which we recorded as a reduction to additional paid-in-capital within shareholders’ equity.
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Partial Repurchase of the Convertible Senior Notes – 2019
In November 2021 and June 2022, we completed a privately negotiated induced conversion of $76.4$76.4 million and $9.85 million principal amount, respectively of the 2019 Convertible Notes (“2019 Note Repurchase”).Notes. We accounted for the 2019 Notes Repurchase transactiontransactions as an induced conversionconversions in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20). In connection with the induced conversion,conversions, we paid approximately $183.6$183.6 million in cash in November 2021 and $17.6 million in cash in June 2022, and also paid accrued and unpaid interest thereon. As a result of the induced conversion, we recorded $11.3$11.3 million in November 2021 and $2.2 million in June 2022 in induced conversion expense which is included in the Condensed Consolidated Statements of Operations for the year ended December 31, 2021.Operations. 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. We accounted for the remaining cash consideration under the original terms of the 2019 Notes under the general conversion accounting guidance, where the difference between the carrying amount of the 2019 Notes retired, including unamortized debt issuance costs of $1.8$1.8 million in November 2021 and $199,000 in June 2022, and the cash consideration paid, was recorded in additional paid-in capital.
Senior Credit Facility
On December 16, 2019, we used $24.0 million of the net proceeds from the 2019 Notes to repay in full our senior credit facility, which was terminated pursuant to its terms. In connection with this repayment, we recorded $576,000 of loss on debt extinguishment, comprised of $470,000 prepayment penalty and $106,000 write-off of unamortized debt issuance costs. We also paid accrued interest on our senior credit facility, which was not material.
Note 8. Stockholders’ Equity
Preferred Stock
Our board of directors has the authority to fix the designations, powers, preferences and rights and the qualifications, limitations or restrictions thereof, of any wholly unissued series of preferred stock, and to increase or decrease the number of shares in any series of preferred stock, subject to limitations prescribed by law orand by our certificate of incorporation. There was 0We had no preferred stock issued and outstanding as of December 31, 20212022 or 2021.2020.
Common Stock
As of December 31, 2021,2022, we had authorized 495,000,000 shares of voting $0.001$0.001 par value common stock. Each holder of the common stock is entitled to one vote per common share.share. At its discretion, the board of directors may declare dividends on shares of common stock, subject to the prior rights of our preferred stockholders.stockholders, if any. Upon liquidation or dissolution, holders of common stock will receive distributions only after preferred stock preferences have been satisfied.
The following shares of common stock have been reserved for future issuance as of the date presented (in thousands):
| | | | |
| | December 31, 2021
| |
Option awards outstanding
| | | 2,288
| |
Restricted stock units outstanding
| | | 1,517
| |
Common stock reserved under equity incentive plans
| | | 1,420
| |
Common stock reserved under employee stock purchase plan
| | | 749
| |
Total
| | | 5,974
| |
Note 9. Stock-Based Awards
Stock-Based Compensation Expense
The following table presents the detail of stock-based compensation expense amounts included in our consolidated statements of operations for the periods presented (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | | 2021 | | | 2020 | |
Cost of revenue | $ | 1,522 | | | $ | 1,869 | | | $ | 1,015 | |
Research and development expense | | 17,961 | | | | 17,170 | | | | 10,314 | |
Sales and marketing expense | | 9,447 | | | | 9,496 | | | | 5,981 | |
General and administrative expense | | 13,513 | | | | 11,963 | | | | 8,365 | |
Total stock-based compensation expense | $ | 42,443 | | | $ | 40,498 | | | $ | 25,675 | |
2016 Equity Incentive Plan
In June 2016, our board of directors adopted and our stockholders approved theour 2016 Equity Incentive Plan, or the 2016 Plan, which became effective in July 2016 at which time the 2010 Equity Incentive Plan, or the 2010 Plan, was terminated. Our 2000 Stock Plan was terminated in March 2010. The number of shares of common stock reserved for issuance under the 2016 Plan may increase on January 1 of each year, beginning on January 1, 2017 and ending on and including January 1, 2026, by the lowerlesser of (1) 1,825,000 shares; (2) 5%5% of the total number of
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shares of common stock outstanding on December 31 of the preceding calendar year; and (3) a lesser number of shares determined by our board of directors. The 2016 Plan provides for the grant ofgranting incentive or non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and performance shares or performance units to employees, non-employee directors and consultants.
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All options granted under the 2000 Stock Plan, the 2010 Plan and the 2016 Plan have a maximum 10-year10-year term and generally vest and become exercisable over four years of continued employment or service as defined in each option agreement. We generally grant stock options with exercise prices that equal the fair value of the common stock on the date of grant. As allowed under the 2016 Plan, there are a few exceptions to this vesting schedule, which provide forpermit vesting at different rates or based on achievement ofachieving performance targets. We utilizeuse newly issued shares to satisfy option exercises. At December 31, 2022, we had approximately 2.0 million shares of common stock available for future grants.
Stock Options
The following table summarizes option award activity for the year ended December 31, 20212022 (in thousands, except per share data and years):
| | | | | | | | | | | | | | | | |
| | Number of
Underlying Shares | | | Weighted-Average
Exercise Price
Per Share | | | Weighted-Average
Remaining
Contractual
Life (Years) | | | Total Intrinsic
Value | |
Outstanding at December 31, 2021 | | | 2,288 | | | $ | 24.53 | | | | 6.65 | | | $ | 146,827 | |
Granted | | | — | | | | — | | | | | | | |
Exercised | | | (550 | ) | | | 22.56 | | | | | | | |
Forfeited or expired | | | (26 | ) | | | 29.07 | | | | | | | |
Outstanding at December 31, 2022 | | | 1,712 | | | | 25.09 | | | | 5.92 | | | | 143,996 | |
Vested and exercisable at December 31, 2022 | | | 1,466 | | | $ | 24.38 | | | | 5.70 | | | $ | 124,287 | |
| | Number of Underlying Shares | | | Weighted-Average Exercise Price Per Share | | | Weighted-Average Remaining Contractual Life (Years) | | | Total Intrinsic Value | |
Outstanding at December 31, 2020 | | | 3,061 | | | $ | 23.56 | | | | 7.55 | | | $ | 56,174 | |
Granted | | | 10 | | | | 58.27 | | | | | | | | | |
Exercised | | | (721 | ) | | | 20.79 | | | | | | | | | |
Forfeited or expired | | | (62 | ) | | | 25.46 | | | | | | | | | |
Outstanding at December 31, 2021 | | | 2,288 | | | | 24.53 | | | | 6.65 | | | | 146,827 | |
Vested and exercisable at December 31, 2021 | | | 1,568 | | | $ | 23.29 | | | | 6.25 | | | $ | 102,578 | |
We estimate thethe fair value of options granted at the date of grant using the Black-Scholes option-pricing model with the following assumptions for the periods presented:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2022 | | 2021 | | | 2020 | |
Risk-free interest rate | | 0.8% - 1.2% | | | 0.3% - 1.7% | | | 1.4% – 2.6% | | | N/A | | 0.8% - 1.2% | | 0.3% - 1.7% | |
Expected dividends yield | | None | | | None | | | None | | | N/A | | None | | None | |
Expected volatility | | 71.2% - 72.4% | | | 64.3% - 70.3% | | | 60.8% - 64.3% | | | N/A | | 71.2% - 72.4% | | 64.3% - 70.3% | |
Weighted-average expected term | | | 6.08 | | | | 6.08 | | | 6.08 | | | N/A | | | 6.08 | | | | 6.08 | |
Weighted-average fair value of options granted | | $ | 36.94 | | | $ | 16.56 | | | $ | 18.31 | | | N/A | | $ | 36.94 | | | $ | 16.56 | |
We determined that it was not practicable to calculate the volatility of our share price because we do not have an extensive public trading history for shares of our common stock.stock. Therefore, we estimated our volatility based on a combination of our historical volatility since becoming a publicly traded company and reported market value data for a group of publicly traded entities that we believe are relatively comparable after consideration ofconsidering their size, stage of lifecycle, profitability, growth, and risk and return on investment.
To determine the expected term, we generally apply and have historically applied the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the options as we do not have sufficient historical exercise data to provide a reasonable basis for an estimate of expected term.
The total intrinsic value of options exercised during 2022, 2021 and 2020 and 2019 was $33.7$31.9 million, $10.2$33.7 million and $10.0$10.2 million, respectively. The total grant date fair value of options vested was $12.8$7.0 million, $11.7$12.8 million and $14.8$11.7 million during 2022, 2021, and 2020, and 2019, respectively.
As of December 31, 2021,2022, our total unrecognized stock-based compensation cost related to unvested stock options was $11.1$4.2 million, which we will recognize over the weighted-average remaining requisite service period of 1.71.2 years.
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Restricted Stock Units
The following table summarizes activity for restricted stock units, or RSUs, including RSUs with performance conditions, or PSUs, and RSUs with market and service conditions, or MSUs, for the year ended December 31, 20212022 (in thousands, except per share data):
| | Number of Underlying Shares | | | Weighted-Average Grant Date Fair Value | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | | MSUs | | | PSUs | | | RSUs | | | MSUs | | | PSUs | | | Number of Underlying Shares | | | Weighted-Average Grant Date Fair Value | |
Outstanding at December 31, 2020 | | | 836 | | | | — | | | | 251 | | | $ | 30.07 | | | $ | — | | | $ | 27.84 | | |
| | | RSUs | | | MSUs | | | PSUs | | | RSUs | | | MSUs | | | PSUs | |
Outstanding at December 31, 2021 | | | | 1,165 | | | | 84 | | | | 268 | | | $ | 45.45 | | | $ | 77.01 | | | $ | 54.67 | |
Granted | | | 695 | | | | 84 | | | | 271 | | | | 56.40 | | | | 77.01 | | | | 54.67 | | | | 737 | | | | 57 | | | | 77 | | | | 65.81 | | | | 81.22 | | | | 64.07 | |
Vested | | | (323 | ) | | | — | | | | (241 | ) | | | 30.29 | | | | — | | | | 27.84 | | | | (478 | ) | | | — | | | | (269 | ) | | | 44.20 | | | | — | | | | 54.70 | |
Forfeited | | | (43 | ) | | | — | | | | (13 | ) | | | 37.07 | | | | — | | | | 33.23 | | | | (114 | ) | | | (31 | ) | | | (2 | ) | | | 50.43 | | | | 72.81 | | | | 64.98 | |
Outstanding at December 31, 2021 | | | 1,165 | | | | 84 | | | | 268 | | | $ | 45.45 | | | $ | 77.01 | | | $ | 54.67 | | |
Outstanding at December 31, 2022 | | | | 1,310 | | | | 110 | | | | 74 | | | $ | 56.92 | | | $ | 80.40 | | | $ | 64.03 | |
MSUs: We granted PSUs in 2019, 2020 and 2021 under our annual bonus program to our senior executives and other bonus-eligible employees. The number of annual PSUs that ultimately vest depends on us attaining financial metrics for the fiscal year as well as on the employee’s continued employment through the vesting date. The compensation committee and board of directors certified achievement of the financial metric for PSUs granted in 2019, vesting 243,000 shares in first-quarter 2020. The compensation committee and board of directors certified achievement of the financial metric for PSUs granted in 2020, vesting 241,000 shares in first-quarter 2021. Based upon attainment of the financial metric for 2021, we expect approximately 240,000 shares to vest in first-quarter 2022.
We record compensation expense for each period based on our estimate of the most probable number of PSUs that will vest, and we recognize the expense over the related service period. The stock-based compensation expense we recognized for PSUs was $13 million and $5.7 million for the year ended December 31, 2021 and 2020.
The total fair market value of RSUs vested was $18.2 million during 2021 and $5.0 million and $1.5 million, respectively, during 2020 and 2019. The total fair value of PSUs vested was $15.4 million during 2021 and $7.5 million during 2020. We will record the grant-date fair value of the outstanding RSUs as stock-based compensation expense over the vesting period. As of December 31, 2021, there was $45.6 million of total unrecognized compensation cost related to unvested RSUs, which we expect to recognize over a weighted average period of 2.8 years. As of December 31, 2021, there was $2.1 million of total unrecognized compensation cost related to PSUs, which we expect to recognize in less than one year.
On April 12, 2021 and May 20, 2021, we granted a total of 57,000 and 83,750 shares of MSUs to certain executives.executives in 2022 and 2021, respectively. The MSUs are eligible to vest based on our total stockholder return (“TSR”) relative to the TSR of the constituents comprising the S&P Semiconductor Select Industry Index over two measurement periods.periods as noted below.
For the 2022 MSUs: Half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2022 through December 31, 2023, and half are eligible to vest based on our relative TSR during the period from January 1, 2022 through December 31, 2024.
For the 2021 MSUs: Half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2022, and half are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2023.
We use a Monte Carlo simulation in estimating the MSU fair value at grant date and recognize compensation cost over the implied service period. We estimated the aggregate grant-date fair value of these sharesthe 2022 and 2021 MSUs to be $6.4$4.2 million and $6.4 million, respectively using the Monte Carlo simulation valuation method. We recorded $2.0$2.8 million and $2.0 million of stock-based compensation expense related to the MSUs for the year ended December 31, 2021.during 2022 and 2021, respectively. As of December 31, 2021,2022, our total unrecognized stock-based compensation cost related to unvested MSUs was $4.5$4.0 million, which we will recognize over the weighted-average period of 2.21.1 years.
PSUs: Since 2019, we have granted PSUs under our annual bonus program to our senior executives and other bonus-eligible employees. The number of annual PSUs that ultimately vest depends on us attaining certain financial metrics for the fiscal year as well as on the employee’s continued employment through the vesting date. The compensation committee and board of directors certified achievement of the financial metric for PSUs granted in 2021, vesting 268,000 shares in first-quarter 2022. Based upon attainment of the financial metric for 2022, we expect approximately 57,028 shares to vest in first-quarter 2023.
We record compensation expense for each period based on our estimate of the most probable number of PSUs that will vest, and we recognize the expense over the related service period. The stock-based compensation expense we recognized for PSUs was $6.7 million and $13 million for the years ended December 31, 2022 and 2021, respectively.
The total fair market value of RSUs vested was $32.9 million during 2022 and $18.2 million and $5.0 million, respectively, during 2021 and 2020. The total fair value of PSUs vested was $18.9 million during 2022 and $15.4 million and $7.5 million, respectively, during 2021 and 2020. We record the grant-date fair value of the outstanding RSUs as stock-based compensation expense over the vesting period. As of December 31, 2022, there was $63.3 million of total unrecognized compensation cost related to unvested RSUs, which we expect to recognize over a weighted average period of 2.6 years. As of December 31, 2022, there was $0.6 million of total unrecognized compensation cost related to PSUs, which we expect to recognize in less than one year.
Employee Stock Purchase Plan
InEffective July 2016, we adopted the 2016 Employee Stock Purchase Plan, or the ESPP, which became effective in July 2016. Under the ESPP,allowing eligible employees canto authorize payroll deductions for amountsof up to 15%15% of their eligible compensation. AAn ESPP participant may purchase a maximum of 4,000 shares, each six-month period or somea lesser number of shares as determined by the IRS rules. rules, each six-month period.
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The offering periods generally start on the first trading day on or after February 20 and August 20 of each year. Participants in an offering period will beare granted the right to purchase common shares at a price per share that is 85%85% of the leastlesser of the fair market value of the shares aton (1) the first day of the offering period andor (2) the end of eachthe purchase period within the offering period. The number of shares reserved for the ESPP may increase each year, beginning on January 1, 2017 and continuing through and
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including January 1, 2036, by the leastlesser of: (1) 1%1% of the total number of shares of common stock outstanding on the first day of sucheach year; (2) 365,411 shares of common stock; and (3) suchan amount as determined by our board of directors.
As of December 31, 2021,2022, the total unrecognized stock-based compensation related tofrom the ESPP was $0.2$0.2 million, which we will recognize on a straight-line basis over the weighted-average remaining service period of less than one year.year.
We estimate thethe fair value of the ESPP grantedgrant at the start of the offering period using the Black-Scholes option-pricing model with the following assumptions for the periods presented:
| | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Risk-free interest rate | | 0.7% - 3.2% | | 0.0% - 0.1% | | 0.1% - 1.6% |
Expected term | | 0.5 Years | | 0.5 Years | | 0.5 Years |
Expected volatility | | 71.9% - 76.3% | | 61.0% - 65.8% | | 46.9% - 91.0% |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Risk-free interest rate | | 0.0% - 0.1% | | 0.1% - 1.6% | | 1.9% – 2.5% |
Expected term | | 0.5 Years | | 0.5 Years | | 0.5 years |
Expected volatility | | 61.0% - 65.8% | | 46.9% - 91.0% | | 66.5% – 72.3% |
Note 10. Leases
Stock-Based Compensation Expense
The following table presents the detailcomponents of stock-based compensationlease expense amounts included in our consolidated statements of operations for the periods presented (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | | 2021 | | | 2020 | |
Operating lease costs(a) | | | | | | | | |
Single lease costs | $ | 4,299 | | | $ | 4,154 | | | $ | 4,121 | |
Variable lease costs | | 2,159 | | | | 1,910 | | | | 1,738 | |
Sublease income(b) | | (1,976 | ) | | | (1,900 | ) | | | (1,902 | ) |
Total operating lease costs | $ | 4,482 | | | $ | 4,164 | | | $ | 3,957 | |
(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 fiscal 2018 restructuring where we continue to have the primary obligations. | |
| Year Ended December 31, | |
| 2021 | | | 2020 | | | 2019 | |
Cost of revenue | $ | 1,869 | | | $ | 1,015 | | | $ | 772 | |
Research and development expense | | 17,170 | | | | 10,314 | | | | 6,427 | |
Sales and marketing expense | | 9,496 | | | | 5,981 | | | | 6,003 | |
General and administrative expense | | 11,963 | | | | 8,365 | | | | 5,284 | |
Total stock-based compensation expense | $ | 40,498 | | | $ | 25,675 | | | $ | 18,486 | |
Note 10. Leases
The following table presents the components of lease expense in our consolidated statements of operations for the periods presented (in thousands):
| Year Ended December 31, | | |
| 2021 | | | 2020 | | |
Operating lease costs(a) | | | | | | | | |
Single lease costs | $ | 4,154 | | | $ | 4,121 | | |
Variable lease costs | | 1,910 | | | | 1,738 | | |
Sublease income(b) | | (1,900 | ) | | | (1,902 | ) | |
Total operating lease costs | $ | 4,164 | | | $ | 3,957 | | |
| | | | | | | | |
(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):
| | Year Ended December 31, | | | Year Ended December 31, | |
| 2021 | | | 2020 | | | 2022 | | | 2021 | | | 2020 | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | | | |
Operating cash flows used | $ | 4,895 | | | $ | 4,755 | | | $ | 5,097 | | | $ | 4,895 | | | | 4755 | |
Lease liabilities arising from remeasurement of right-of-use assets | | | | | | | | | | | | | | |
Operating leases | $ | 698 | | | $ | — | | | $ | — | | | $ | 698 | | | $ | — | |
Lease liabilities arising from obtaining ROU assets | | | | | | | | | |
Operating leases | | $ | 2,237 | | | $ | — | | | $ | — | |
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Thehe following table presents weighted-average remaining lease term and weighted-average discount rate related to operating leases as of:
| | 2021 | | | 2020 | | | 2022 | | | 2021 | |
Weighted-average remaining lease term (years) | | 4.4 | | | | 5.3 | | | | 4.3 | | | | 4.4 | |
Weighted-average discount rate | | 6.7 | % | | | 6.9 | % | | | 6.9 | % | | | 6.7 | % |
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The following table presents future lease payments under operating leases as of December 31, 20212022 (in thousands):
| | | | | | | | | | | | |
| | Operating Leases | |
| | Lease Payments | | | Sublease Income | | | Net | |
2023 | | $ | 4,059 | | | $ | (123 | ) | | $ | 3,936 | |
2024 | | | 3,853 | | | | — | | | | 3,853 | |
2025 | | | 3,919 | | | | — | | | | 3,919 | |
2026 | | | 4,019 | | | | — | | | | 4,019 | |
2027 | | | 623 | | | | — | | | | 623 | |
Thereafter | | | 1,191 | | | | — | | | | 1,191 | |
Total lease payments | | $ | 17,664 | | | $ | (123 | ) | | $ | 17,541 | |
Less: Imputed interest | | | (3,476 | ) | | | | | | |
Present value of lease liabilities | | | 14,188 | | | | | | | |
Less: Current portion of lease liabilities | | | 3,122 | | | | | | | |
Lease liabilities, net of current portion | | $ | 11,066 | | | | | | | |
| | Operating Leases | |
| | Lease Payments | | | Sublease Income | | | Net | |
2022 | | $ | 5,014 | | | $ | (1,457 | ) | | $ | 3,557 | |
2023 | | | 3,528 | | | | (123 | ) | | | 3,405 | |
2024 | | | 3,219 | | | | — | | | | 3,219 | |
2025 | | | 3,315 | | | | — | | | | 3,315 | |
2026 | | | 3,414 | | | | — | | | | 3,414 | |
Thereafter | | | — | | | | — | | | | — | |
Total lease payments | | $ | 18,490 | | | $ | (1,580 | ) | | $ | 16,910 | |
Less: Imputed interest | | | (2,413 | ) | | | | | | | | |
Present value of lease liabilities | | | 16,077 | | | | | | | | | |
Less: Current portion of lease liabilities | | | 4,143 | | | | | | | | | |
Lease liabilities, net of current portion | | $ | 11,934 | | | | | | | | | |
Note 11. Commitments and Contingencies
IndemnificationsIndemnification
In the normal course of business, we may enter into agreements that require us to indemnify either customers or suppliers for specificcertain risks. WhileAlthough we cannot estimate our maximum exposure under these indemnification provisions,agreements, to date theyindemnification claims have not had a material impact on our consolidated results of operations or financial condition.
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 it is both probable that we have incurred a liability has been incurred and we can reasonably estimate the amount of loss. For the year ended December 31, 2021, we recorded $0.5$0.5 million in recovery costs related to settling the shareholder derivative action described below. For the year ended December 31, 2020, we recorded $5.4$5.4 million of our paid settlement of thea federal securities class action to general and administrative expenses. As of December 31, 2021,2022 and 2020,2021, we did 0tnot have accrued contingency liabilities. The following is a description of our significant legal proceedings. Although we believe that resolving these claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties.
Shareholder Derivative Actions
On October 26, 2018, two shareholder derivative actions were filed in the U.S. District Court for the District of Delaware against our chief executive officer, former chief operating officer, former chief financial officer and certain of our directors. We were a nominal defendant. On November 8, 2018, a third shareholder derivative action was filed in this same court against the same defendants. Captioned Weiss v. Diorio, et al., Fotouhi v. Diorio, et al., and De la Fuente v. Diorio, et al., the derivative complaints, purportedly brought on behalf of us, were premised on many of the allegations asserted in the since-settled federal and state securities class actions and alleged that the defendants breached their fiduciary duties to us and allegedly made false or misleading statements and omissions of material fact in violation of Section 14(a) of the Securities Exchange Act regarding our business and operations. The derivative actions included claims for, among other things, unspecified damages in favor of us, corporate actions to purportedly improve our corporate governance and an award of costs and expenses to the derivative plaintiffs, including attorneys’ fees. On January 28, 2019, the Delaware federal court entered a stipulated order that stayed these derivative actions until resolution of the pending federal securities class actions.
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On July 10, 2020, following a private settlement mediation, the parties executed a stipulation of settlement to settle and resolve the claims in the consolidated derivative action. The settlement required us to implement certain corporate governance changes and to pay up to $900,000$900,000 to plaintiffs’ counsel for attorneys’ fees and expenses. Our insurers agreed to contribute up to $900,000$900,000 to plaintiffs’ counsel for the attorneys’ fees and expenses. On August 5, 2020, at the court’s request, the parties filed supplemental briefings in respect of their joint motion for preliminary settlement approval. On February 26, 2021, the court entered an order preliminarily approving the settlement. On May 11, 2021, the court held a final approval hearing. On November 22, 2021, the Court issued an opinion and final order approving the settlement resolving the consolidated derivative actions and awarding plaintiffs’ counsel less than half of the $900,000$900,000 attorneys’ fees and expenses noted above. The approximately $0.5$0.5 million in savings from the contemplated final settlement of the derivative action was remitted by the insurer to us because we contributed $5.4$5.4 million towards the federal securities class action due to exhaustion of our applicable insurance covering both the federal securities class action and the consolidated shareholder derivative actions.
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., or NXP, in the U.S. District Court for the Northern District of California, or the Court. Our original complaint alleged that certain NXP endpoint ICs infringe 26 of our U.S. patents. At the order of the Court, we filed an amended complaint limited to 8eight of the original 26 patents. We subsequently elected to go forward with asserting infringement of 6six of those eight patents. We are seeking, among other things, past damages, including lost profits; no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorneys’ fees and costs. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing the endpoint ICUCODE 8 and UCODE 9 ICs. NXP introduced in 2017. Defendants responded to our complaint on September 30, 2019 citing numerous defenses including denying infringement and claiming our asserted patents are invalid and that the infringed patents were licensed royalty free under Impinj’s commitments to GS1 EPCglobal.invalid.
In February 2020, NXP filed petitions for inter partes review, or IPRs, with the Patent Trial and Appeal Board for the U.S. Patent and Trademark Office, or PTAB, against 12 of the originally asserted 26 patents, including the 6six patents asserted in the amended complaint. In August and September of 2020, the PTAB declined to institute review of 4four of the six asserted patents. On October 27, 2020, we filed a second amended complaint removing without prejudice the 2two of the six patents against which the PTAB instituted IPRs, leaving 4four patents in suit.
On September 24, 2020, the Court lifted thea stay on 2two of the four patents in suit, and on July 23, 2021, the Court held a claim construction hearing for eight disputed claim terms in those two patents. On September 16, 2021, the Court issued an ordera claim construction rejecting all of NXP’s positions and adopting most of Impinj’s positions relating to those disputed claim terms.
On August 26, 2021, Impinj moved to add NXP’s latest endpoint IC, UCODE9, to the suit. After initially objecting to the motion, NXP later dropped its opposition and the Court entered an order adding UCODE9 to Impinj’s patent infringement lawsuit on the two patents for which the claims had been construed.
On September 3, 2021, the Court lifted the stay on the other 2two of the four patents in suit and scheduled a claim construction hearing for those two patents on March 4, 2022, issuing a claim construction order on those patents on March 21, 2022. As ofDiscovery has now no trial date has been setclosed and the parties have both filed various motions for this case.summary judgment. Trial is scheduled for June 5, 2023.
NXP Patent Infringement Claims Against Impinj in Washington
On October 4, 2019, NXP USA, Inc. and NXP filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. The complaint allegesalleged that certain of our products infringe 8eight U.S. patents owned by NXP or NXP USA, Inc. The plaintiffs are seeking, among other things, past damages adequate to compensate them for our alleged infringement of each of the patents-in-suit and reasonable attorneys’ fees and costs. They are also seeking an injunction against us, enjoining continuing acts of infringement of the patents-in-suit. We have denied that we are infringing any of the patents and we have asserted both that our wafer supplier is licensed under 4four of them and that all 8eight are invalid. On September 23, 2020, the District of Delaware granted Impinj’s motion to transfer the case to the U.S. District Court for the Western District of Washington in Seattle.
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On December 11, 2020, we moved to stay the case with respect to 6six of the 8eight patents in suit pending final resolution of IPR petitions we filed with the PTAB. On February 12, 2021, the Court granted our motion to stay the case as to these six patents. The PTAB instituted IPRs on 2two of the six challenged patents but denied them on the other 4.four. The Court subsequently removed the stay on the 4four against which IPRs were not instituted.
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On March 9, 2021, we moved for summary judgment of noninfringement on the 4four patents to which we assert a license exists, including the two patents that were not subject to a stay. That motion was fully briefed and is pending. On July 28, 2021, the Court deferred ruling on our motion for summary judgment pending further discovery. On September 17, 2021, the Court struck all scheduled dates for the case pending reassignment to a new judge. The Court has not yet re-assignedAfter the case or setwas reassigned, the Court addressed both claim construction and our motion for summary judgment, issuing a new schedule.claim construction order and granting our motion for summary judgment on the license defense on November 4, 2022. The case is now limited to three patents. Discovery has closed and both parties are currently briefing summary judgment and related motions. Trial is scheduled for April 10, 2023.
Impinj Patent Infringement Claims Against NXP in Texas
On May 25, 2021, we filed a new patent infringement lawsuit against NXP USA in the United States District Court for the Western District of Texas (Waco), asserting that NXP has infringed 9nine of our patents, including 7seven that we originally asserted in the Northern California case. The Court later granted our motion to amend to add two new NXP entities as defendants—NXP Semiconductor Netherlands B.V. and NXP B.V. Those defendants have moved to dismiss for lack of personal jurisdiction.
We are seeking among other things, past damages, including lost profits; no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorney’s fees and costs. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing its UCODE 7, 8 and 9 endpoint ICs.
On July 26, 2021, NXP filed an answer to our complaint and counterclaimed that we infringe 9nine patents, 1one of which NXP owns and 8eight of which NXP recently licensed from a third party. NXP has denied infringement, asserted our patents are invalid and asserted that some are unenforceable and/or subject to a license under our commitments to license “necessary” patents to certain standards.
A claim construction hearing has been scheduled forwas held on February 10, 2022 with generaland fact discovery is scheduled to openclose on February 11, 2022. A dispositive motion deadline3, 2023. The Patent Office has been tentativelyinstituted reexamination proceedings on five of the nine patents asserted by NXP and has issued a final office action rejecting all asserted claims on one of those patents. Trial is scheduled for November 15, 2022, with a trial date of February 21,September 25, 2023.
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 assertsB.V. asserted that certain of our products infringe 3three Chinese patents owned by NXP B.V., that closely correspond to 3three of the eight U.S. patents NXP asserted in the U.S. District Court described above. The plaintiffs are seeking, among other things, past damages and reasonable attorneys’ fees and costs. They are also seeking an injunction against us, enjoining continuing acts of infringement of the patents-in-suit. Impinj Shanghai objected to the jurisdiction of the Shanghai Intellectual Property Court and filed a motion to stay the proceedings. The jurisdictional challenge was rejected by the Shanghai court in March 2021; a subsequent appeal filed by Impinj Shanghai was denied before the IP Tribunal of the Supreme People’s Court in third-quarter 2021. Impinj, Inc. was formally served in July 2021, officially adding Impinj, Inc. to the suit.
On December 22, 2022, Impinj Shanghai also filed invalidity requests against all 3three Chinese patents before the China National Intellectual Property Administration, or CNIPA. In July 2021, the CNIPA issued decisions upholding the validity of all three Chinese patents. In October 2021, Impinj Shanghai filed for judicial review of all the CNIPA decisions by the Beijing Intellectual Property Court, which has docketed its review for all three patents but has not yet set hearing dates. The Court has set a trial date of May 22, 2022 for all three patents. In December 2022, the Beijing Intellectual Property Court issued the first-instance administrative judgment, upholding the invalidity decision for one of the three Chinese patents. On January 11, 2023, Impinj Shanghai filed a subsequent appeal to the IP Tribunal of the Supreme People’s Court, which is pending. For the remaining two Chinese patent cases, the Beijing Intellectual Property Court has not yet set the trial date.
In May 2022, the Shanghai court held a hearing for all three patents, but the panel did not address the merits of any case in the hearing. In November 2022, we filed with the Shanghai court motions to dismiss two patent cases to which we assert a license defense (parallel to our arguments in Washington). Decisions on the motions are pending.
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Obligations with Third-Party Manufacturers
We manufacture products with third-party manufacturers. We are committed to purchase $54.4$87.9 million of inventory as of December 31, 2021.2022.
Note 12. Deferred Revenue
Deferred revenue, comprising individually immaterial amounts for extended warranties, enhanced product maintenance and advance payments on nonrecurring engineeringNRE services contracts, represents contracted revenue that we have not yet recognized.
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The following table presents the changes in deferred revenue for the indicated periods (in thousands):
| | Year Ended December 31, | | Year Ended December 31, | |
| 2021 | | | 2020 | | 2022 | | | 2021 | |
Balance at beginning of period | $ | 7,088 | | | $ | 764 | | $ | 794 | | | $ | 7,088 | |
Deferral of revenue | | 981 | | | | 7,139 | | | 3,143 | | | | 981 | |
Recognition of deferred revenue | | (7,275 | ) | | | (815 | ) | | (1,338 | ) | | | (7,275 | ) |
Balance at end of period | $ | 794 | | | $ | 7,088 | | $ | 2,599 | | | $ | 794 | |
During 2021, we recognized $6.7 million revenue which we included in deferred revenue as of December 31, 2020. During 2020,2022, we recognized $0.50.4 million revenue which we included in deferred revenue as of December 31, 2019.2021. During 2021, we recognized $6.7 million revenue which we included in deferred revenue as of December 31, 2020.
Note 13. Segment Reporting
We have 1one reportable and operating segment: the development and sale of our products and services. OurWe identified our reportable segment has been identified based on how our chief operating decision-maker manages our business, makes operating decisions and evaluates our operating performance. Our chief executive officer acts as the chief operating decision-maker and reviews financial and operational information on an entity-wide basis. We have one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components. Accordingly, we have determined that we have a single reporting segment and operating unit structure.
Information by Revenue Categories
Our chief executive officer reviews information about our revenue categories, including endpoint ICs and systems. We define systems, the latter defined as reader ICs, readers, gateways and software. The following table presents our revenue categories for the indicated periods (in thousands):
| | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2022 | | | 2021 | | | 2020 | | |
Endpoint ICs | | $ | 191,532 | | | $ | 139,250 | | | $ | 102,326 | | |
Systems | | | 66,268 | | | | 51,033 | | | | 36,597 | | |
Total revenue | | $ | 257,800 | | | $ | 190,283 | | | $ | 138,923 | | |
| | Year Ended December 31, | | |
| | 2021 | | | 2020 | | | 2019 | | |
Endpoint ICs | | $ | 139,250 | | | $ | 102,326 | | | $ | 97,657 | | |
Systems | | | 51,033 | | | | 36,597 | | | | 55,179 | | |
Total revenue | | $ | 190,283 | | | $ | 138,923 | | | $ | 152,836 | | |
Information by Geography
The following table summarizes our long-lived assets, which comprisecomprising property and equipment, less accumulated depreciation (in thousands):
| | | December 31, 2021 | | | December 31, 2020 | | | December 31, 2022 | | | December 31, 2021 | |
United States | | $ | 9,493 | | | $ | 10,114 | | | $ | 10,551 | | | $ | 9,493 | |
Malaysia | | | 10,227 | | | | 5,751 | | | | 12,817 | | | | 10,227 | |
Taiwan | | | 7,330 | | | | 35 | | | | 12,620 | | | | 7,330 | |
Others | | | 450 | | | | 631 | | | | 3,039 | | | | 450 | |
Total | | $ | 27,500 | | | $ | 16,531 | | | $ | 39,027 | | | $ | 27,500 | |
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Revenue presentedOur geographic revenue in the following table isare based on the location of the value-added resellers,VARs, inlay manufacturers, reader OEMs, distributors or end users who purchased products and services directly from us. For sales to our resellers and distributors, their location may be different from the locations of the ultimate end users. The following table presents our sales by geography for the indicated periods (in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Americas | | $ | 57,129 | | | $ | 38,021 | | | $ | 30,962 | |
Asia Pacific | | | 168,249 | | | | 133,152 | | | | 98,483 | |
Europe, Middle East and Africa | | | 32,422 | | | | 19,110 | | | | 9,478 | |
Total revenue | | $ | 257,800 | | | $ | 190,283 | | | $ | 138,923 | |
| | Year Ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Americas | | $ | 38,021 | | | $ | 30,962 | | | $ | 53,260 | |
Asia Pacific | | | 133,152 | | | | 98,483 | | | | 89,012 | |
Europe, Middle East and Africa | | | 19,110 | | | | 9,478 | | | | 10,564 | |
Total revenue | | $ | 190,283 | | | $ | 138,923 | | | $ | 152,836 | |
Total revenue in the United States, which is included in the Americas, was $32.6$43.0 million, $27.6$32.6 million and $50.2$27.6 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. Total revenue in China (and Hong Kong), which is included in Asia Pacific, was $98.8$109.6 million, $79.3$98.8 million and $70.8$79.3 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. Total revenue in Malaysia, which is included in Asia Pacific, was $23.6$41.0 and $23.6 million for the yearyears ended December 31, 2021.2022 and 2021, respectively. The Malaysia revenue from Malaysia was less than 10% of revenue for the yearsyear ended December 31, 2020 and 2019.2020. No sales to countries other than the United States, China and Malaysia accounted for more than 10% of revenue for the years ended December 31, 2022, 2021 2020 and 2019.2020.
Note 14. Net Loss per Share
For the periods presented, the following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share (in thousands, expect per shareexcept for per-share amounts):
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Numerator: | | | | | | | | | |
Net loss | | $ | (24,301 | ) | | $ | (51,260 | ) | | $ | (51,923 | ) |
Denominator: | | | | | | | | | |
Weighted-average shares outstanding — basic and diluted | | | 25,539 | | | | 24,176 | | | | 22,819 | |
Net loss per share — basic and diluted | | $ | (0.95 | ) | | $ | (2.12 | ) | | $ | (2.28 | ) |
| | Year Ended December 31, | | |
| | 2021 | | | 2020 | | | 2019 | | |
Numerator: | | | | | | | | | | | | | |
Net loss | | $ | (51,260 | ) | | $ | (51,923 | ) | | $ | (22,987 | ) | |
Denominator: | | | | | | | | | | | | | |
Weighted-average shares outstanding — basic and diluted | | | 24,176 | | | | 22,819 | | | | 21,847 | | |
Net loss per share — basic and diluted | | $ | (2.12 | ) | | $ | (2.28 | ) | | $ | (1.05 | ) | |
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(in thousands)::
| | Year Ended December 31, | | Year Ended December 31, | |
| 2021 | | | 2020 | | | 2019 | | 2022 | | | 2021 | | | 2020 | |
Stock options | | 2,288 | | | | 3,061 | | | | 3,262 | | | 1,712 | | | | 2,288 | | | | 3,061 | |
RSUs, MSUs, and PSUs | | 1,517 | | | | 1,087 | | | | 761 | | |
RSUs, MSUs and PSUs | | | 1,494 | | | | 1,517 | | | | 1,087 | |
Employee stock purchase plan shares | | 42 | | | | 73 | | | | 69 | | | 26 | | | | 42 | | | | 73 | |
2019 Notes | | 285 | | | | — | | | | — | | | — | | | | 285 | | | | — | |
2021 Notes | | 2,589 | | | | — | | | | — | | | 2,589 | | | | 2,589 | | | | — | |
We used the treasury stock method for calculating any potential dilutive effect of the conversion of the 2019 Notes on diluted net loss per share for the yearsyear ended December 31, 2020 and 2019.2020. 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 and the 2021 Notes on diluted net loss per share for the year ended December 31, 2021.
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Note 15. Related-Party Transactions
We have been party to a consulting agreement with a limited liability company owned by Cathal Phelan, a member of our board of directors, pursuant to which Mr. Phelan providesprovided advisory and consulting services to us. The original term of the consulting agreement was May 2020 through December 2020. As mutually agreed by Mr. Phelan and us, we subsequently extended the term by 12 months to December 2021. In 2021 and 2022, again as mutually agreed by Mr. Phelan and us, we further extended the term by in 12 months-month increments to December 2022.2022 and 2023, respectively. We recognized and paid $499,000$509,000 and $430,000$499,000 in consulting fees to the limited liability company owned by Mr. Phelan for the years ended December 31, 20212022 and December 31, 2020,2021, respectively. Additionally, we granted 60,000 shares of stock options to Mr. Phelan on September 21, 2020 in connection with these consulting services, with 1/24th24th of the shares subject to the option vesting on October 21, 2020 and 1/24th24th of the shares subject to the option vesting on each month thereafter, subject to Mr. Phelan remaining a service provider. As part of the consulting agreement extension in 2022, we granted 8,000 RSUs to Mr. Phelan on October 1, 2022 with ¼th of the RSUs vesting on January 1, April 1, July 1 and October 1, 2023, subject to Mr. Phelan remaining a service provider. On January 1, 2023, Mr. Phelan joined our company as Chief Innovation Officer and ceased to provide us with consulting services. Mr. Phelan remains on our board of directors.
Note 16. Retirement Plans
In 2001, we adopted a salary deferral 401(k) plan for our employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows us to makeService, as well as a matching contribution, subject to certain limitations. We implemented acontributed $1,435,000 and $585,000 as matching contribution during fiscal year 2021 and contributed $123,000 tocontributions the 401(k) plan for the yearyears ended December 31, 2022 and 2021, and have accrued $462,000 as a catch-up contribution as of December 31, 2021 for the mid-year implementation.respectively.
Note 17. Restructuring
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 7seven full-time positions within our go-to-market organization, representing about 2%roughly 2% of our workforce. Restructuring charges were immaterial for the year ended December 31, 2022. We incurred restructuring charges of $1.7$1.7 million for employee termination benefits as well as $50,000$50,000 in other associated costs for legal expenses for the year ended December 31,, 2021. We substantially completed our restructuring by June 30, 2021.
A summary of accrued restructuring costs as of December 31,, 2021, 2022, is shown in the table below (in thousands):
| | Employee Termination Benefits | | | Other Associated Costs | | | Total | |
Restructuring costs | | $ | 1,671 | | | $ | 50 | | | $ | 1,721 | |
Cash payments | | | (1,080 | ) | | | (50 | ) | | | (1,130 | ) |
Accrued restructuring costs as of December 31, 2021 | | $ | 591 | | | $ | — | | | $ | 591 | |
| | | | | | | | | | | | |
| | Employee Termination Benefits | | | Other Associated Costs | | | Total | |
Restructuring costs incurred in 2021 | | $ | 1,671 | | | $ | 50 | | | $ | 1,721 | |
Cash payments in 2021 | | | (1,080 | ) | | | (50 | ) | | | (1,130 | ) |
Cash payments in 2022 | | | (489 | ) | | | — | | | | (489 | ) |
Restructuring costs adjustments in 2022 | | | (102 | ) | | | — | | | | (102 | ) |
Accrued restructuring costs as of December 31, 2022 | | $ | — | | | $ | — | | | $ | — | |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation ofincluding our chief executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021.2022. 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 chief executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021.2022.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined under Rule 13a-15(f) and 15d-15(f) under the Exchange Act. We evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.2022.
The effectiveness of our internal control over financial reporting as of December 31, 20212022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included herein.
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 December 31, 2021.2022.
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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Report of Independent Registered Public Accounting Firm
To the Shareholders and theThe Board of Directors of and Stockholders
Impinj, Inc
Opinion on Internal Control Over Financial Reporting
We have audited Impinj, Inc.and subsidiaries ’s internal control over financial reporting as of December 31, 2021,2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Impinj, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20212022 and 2020,2021, the related consolidated statements of operations,comprehensive loss, changes in stockholders’ equity and cash flows for each of the twothree years in the period ended December 31, 2021,2022, and the related notes and our report dated February 14, 2022 13, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
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with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Seattle, Washington
February 14, 202213, 2023
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Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to our definitive proxy statement relating to the 20222023 annual meeting of stockholders. The definitive proxy statement will be filed with the SEC within 120 days after the end of the 20212022 fiscal year.
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, principal accounting officer and controller and persons performing similar functions. The Code of Ethics is posted on our website at http://corporate-governance.impinj.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics by posting suchthe information on our website at the address specified above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to our definitive proxy statement relating to the 20222023 annual meeting of stockholders. The definitive proxy statement will be filed with the SEC within 120 days after the end of the 20212022 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to our definitive proxy statement relating to the 20222023 annual meeting of stockholders. The definitive proxy statement will be filed with the SEC within 120 days after the end of the 20212022 fiscal year.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to our definitive proxy statement relating to the 20222023 annual meeting of stockholders. The definitive proxy statement will be filed with the SEC within 120 days after the end of the 20212022 fiscal year.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to our definitive proxy statement relating to the 20222023 annual meeting of stockholders. The definitive proxy statement will be filed with the SEC within 120 days after the end of the 20212022 fiscal year.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
We have filed the financial statements listed in the Index to Consolidated Financial Statements as a part of this report.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable, not material or the required information is presented in the financial statements or the notes thereto.
(a)(3) Exhibits
The list of exhibits included in the Exhibit Index to this report is incorporated herein by reference.
| | | | | INCORPORATION BY REFERENCE | | INCORPORATION BY REFERENCE |
NUMBER | | DESCRIPTION | | Form | | Date | | Number | | DESCRIPTION | | Form | | Date | | Number |
| | | | | | | | | | |
3.1 | | Amended and Restated Certificate of Incorporation of Impinj, Inc., as filed with the Secretary of State of the State of Delaware on June 10, 2020 | | 8-K | | 6/12/2020 | | 3.1 | | Amended and Restated Certificate of Incorporation of Impinj, Inc., as filed with the Secretary of State of the State of Delaware on June 10, 2020 | | 8-K | | 6/12/2020 | | 3.1 |
| | | | | | | | | | |
3.2 | | Amended and Restated Bylaws of Impinj, Inc., adopted as of April 13, 2020 | | 8-K | | 4/16/2020 | | 3.1 | | Amended and Restated Bylaws of Impinj, Inc., adopted as of August 10, 2022 | | 8-K | | 8/15/2022 | | 3.1 |
| | | | | | | | | | |
4.1 | | Description of Impinj, Inc.’s Common Stock | | | | | | | | Description of Impinj, Inc.’s Common Stock | |
| | | | | | | | | | |
4.2 | | Specimen Common Stock Certificate of the registrant | | S-1/A | | 7/11/2016 | | 4.1 | | Specimen Common Stock Certificate of the registrant | | S-1/A | | 7/11/2016 | | 4.1 |
| | | | | | | | | | |
4.3 | | Amended and Restated Investors’ Rights Agreement, dated July 13, 2012, by and among the registrant and the investors and founders named therein | | S-1 | | 6/2/2016 | | 4.2 | | Amended and Restated Investors’ Rights Agreement, dated July 13, 2012, by and among the registrant and the investors and founders named therein | | S-1 | | 6/2/2016 | | 4.2 |
| | | | | | | | | | |
4.4 | | Indenture, dated as of December 16, 2019, between Impinj, Inc., and U.S. Bank National Association, as trustee. | | 8-K | | 12/16/2019 | | 4.1 | | Indenture, dated as of November 5, 2021, between Impinj, Inc., and U.S. Bank National Association, as trustee | | 8-K | | 11/5/2021 | | 4.6 |
| | | | | | | | | | |
4.5 | | Form of 2.00% Convertible Senior Notes due 2026 (included- in Exhibit 4.4) | | 8-K | | 12/16/2019 | | 4.1 | | Form of 1.125% Convertible Senior Notes due 2027 (included in Exhibit 4.4) | | 8-K | | 11/5/2021 | | 4.6 |
| | | | | | | | | | |
4.6 | | Indenture, dated as of November 5, 2021, between Impinj, Inc., and U.S. Bank National Association, as trustee | | 8-K | | 11/5/2021 | | 4.6 | |
| | | | | | | | | |
4.7 | | Form of 1.125% Convertible Senior Notes due 2027 (included in Exhibit 4.6) | | 8-K | | 11/5/2021 | | 4.6 | |
| | | | | | | | | |
10.1+ | | Form of Director and Executive Officer Indemnification Agreement | | S-1/A | | 7/11/2016 | | 10.1 | | Form of Director and Executive Officer Indemnification Agreement | | S-1/A | | 7/11/2016 | | 10.1 |
| | | | | | | | | | |
10.2+ | | 2000 Stock Plan, as amended | | S-1 | | 6/2/2016 | | 10.2 | | 2000 Stock Plan, as amended | | S-1 | | 6/2/2016 | | 10.2 |
| | | | | | | | | | |
10.3+ | | Form of Notice of Stock Option Grant and Stock Option Agreement permitting early exercise under the 2000 Stock Plan | | S-1 | | 6/2/2016 | | 10.3 | | Form of Notice of Stock Option Grant and Stock Option Agreement permitting early exercise under the 2000 Stock Plan | | S-1 | | 6/2/2016 | | 10.3 |
| | | |
10.4+ | | | 2010 Equity Incentive Plan, as amended | | S-1 | | 6/2/2016 | | 10.4 |
| | | |
10.5+ | | | Form of Notice of Stock Option Grant and Stock Option Agreement under the 2010 Equity Incentive Plan | | S-1 | | 6/2/2016 | | 10.5 |
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| | | | | | | | | | | | | | | | |
10.4+ | | 2010 Equity Incentive Plan, as amended | | S-1 | | 6/2/2016 | | 10.4 | |
| | | | | | | | | |
10.5+ | | Form of Notice of Stock Option Grant and Stock Option Agreement under the 2010 Equity Incentive Plan | | S-1 | | 6/2/2016 | | 10.5 | |
| | | | | | | | | | |
10.6+ | | Form of Notice of Stock Option Grant and Stock Option Agreement permitting early exercise under the 2010 Equity Incentive Plan | | S-1 | | 6/2/2016 | | 10.6 | | Form of Notice of Stock Option Grant and Stock Option Agreement permitting early exercise under the 2010 Equity Incentive Plan | | S-1 | | 6/2/2016 | | 10.6 |
| | | | | | | | | | |
10.7+ | | 2016 Equity Incentive Plan | | S-1/A | | 7/11/2016 | | 10.7 | | 2016 Equity Incentive Plan | | S-1/A | | 7/11/2016 | | 10.7 |
| | | | | | | | | | |
10.8+ | | Form of Notice of Stock Option Grant and Stock Option Agreement under the 2016 Equity Incentive Plan | | S-1/A | | 7/11/2016 | | 10.8 | | Form of Notice of Stock Option Grant and Stock Option Agreement under the 2016 Equity Incentive Plan | | S-1/A | | 7/11/2016 | | 10.8 |
| | | | | | | | | | |
10.9+ | | 2016 Employee Stock Purchase Plan | | S-1/A | | 7/11/2016 | | 10.9 | | 2016 Employee Stock Purchase Plan | | S-1/A | | 7/11/2016 | | 10.9 |
| | | | | | | | | | |
10.10+ | | Amended and Restated Diorio Employment Agreement, dated December 19, 2008, between the registrant and Chris Diorio, Ph.D. | | S-1 | | 6/2/2016 | | 10.12 | | Amended and Restated Diorio Employment Agreement, dated December 19, 2008, between the registrant and Chris Diorio, Ph.D. | | S-1 | | 6/2/2016 | | 10.12 |
| | | | | | | | | | |
10.11+ | | First Amendment to Diorio Employment Agreement, dated February 20, 2009, between the registrant and Chris Diorio, Ph.D. | | S-1 | | 6/2/2016 | | 10.13 | | First Amendment to Diorio Employment Agreement, dated February 20, 2009, between the registrant and Chris Diorio, Ph.D. | | S-1 | | 6/2/2016 | | 10.13 |
| | | | | | | | | | |
10.12+ | | Offer Letter, dated January 6, 2020, between the registrant and Cary Baker | | 10-K | | 3/2/2020 | | 10.14 | | Offer Letter, dated January 6, 2020, between the registrant and Cary Baker | | 10-K | | 3/2/2020 | | 10.14 |
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10.13 | | Office Lease, dated December 10, 2014, by and between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21 | | Office Lease, dated December 10, 2014, by and between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21 |
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10.14A | | First Amendment to Lease, dated July 31, 2015, between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21A | | First Amendment to Lease, dated July 31, 2015, between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21A |
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10.14B | | Second Amendment to Lease, dated March 4, 2016, between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21B | | Second Amendment to Lease, dated March 4, 2016, between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21B |
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10.14C | | Third Amendment to Lease, dated March 28, 2016, between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21C | | Third Amendment to Lease, dated March 28, 2016, between the registrant and 400 Fairview LLC | | S-1 | | 6/2/2016 | | 10.21C |
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10.15 | | Office Lease, dated November 17, 2004, between the registrant and Bedford Property Investors, Inc., as amended by the First Amendment to Lease, dated July 21, 2006, by and between the registrant and Fremont Lake Union Center LLC and the Second Amendment to Lease, dated December 11, 2009, by and between the registrant and Fremont Lake Union Center LLC | | S-1 | | 6/2/2016 | | 10.22 | | Office Lease, dated November 17, 2004, between the registrant and Bedford Property Investors, Inc., as amended by the First Amendment to Lease, dated July 21, 2006, by and between the registrant and Fremont Lake Union Center LLC and the Second Amendment to Lease, dated December 11, 2009, by and between the registrant and Fremont Lake Union Center LLC | | S-1 | | 6/2/2016 | | 10.22 |
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10.16† | | License Agreement, dated July 3, 2008, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.1 | | License Agreement, dated July 3, 2008, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.1 |
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10.17† | | Purchase Agreement—Services Phase 2, dated December 23, 2009, by and between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.2 | | Purchase Agreement—Services Phase 2, dated December 23, 2009, by and between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.2 |
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10.18† | | | Amendment No. 1 to Purchase Agreement—Services Phase 2, dated March 26, 2010, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.3 |
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10.18† | | Amendment No. 1 to Purchase Agreement—Services Phase 2, dated March 26, 2010, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.3 | |
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10.19† | | Amendment No. 2 to Purchase Agreement—Services Phase 2, dated April 20, 2011, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.4 | | Amendment No. 2 to Purchase Agreement—Services Phase 2, dated April 20, 2011, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.4 |
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10.20† | | Amendment No. 3 to Purchase Agreement—Services Phase 2, dated November 15, 2011, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.5 | | Amendment No. 3 to Purchase Agreement—Services Phase 2, dated November 15, 2011, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.5 |
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10.21† | | Amendment No. 4 to Purchase Agreement—Services Phase 2, dated April 25, 2013, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.6 | | Amendment No. 4 to Purchase Agreement—Services Phase 2, dated April 25, 2013, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.6 |
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10.22† | | Amendment No. 5 to Purchase Agreement—Services Phase 2, dated June 12, 2013, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.7 | | Amendment No. 5 to Purchase Agreement—Services Phase 2, dated June 12, 2013, between the registrant and Intel Corporation | | 10-Q | | 10/28/2020 | | 10.7 |
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10.23+ | | Form of Notice of Restricted Stock Unit Grant and Restricted Stock Unit Agreement under the 2016 Equity Incentive Plan | | 10-Q | | 8/14/2017 | | 10.1 | | Form of Notice of Restricted Stock Unit Grant and Restricted Stock Unit Agreement under the 2016 Equity Incentive Plan | | 10-Q | | 8/14/2017 | | 10.1 |
10.24 | | Letter Agreement, dated as of June 20, 2018, among Impinj, Inc., Sylebra HK Company Limited, Sylebra Capital Management and Daniel P. Gibson | | 8-K | | 6/26/2018 | | 10.1 | | Letter Agreement, dated as of June 20, 2018, among Impinj, Inc., Sylebra HK Company Limited, Sylebra Capital Management and Daniel P. Gibson | | 8-K | | 6/26/2018 | | 10.1 |
10.25+ | | Executive Employment Agreement, dated April 28, 2017, between the registrant and Jeff Dossett | | 10-K | | 2/28/2020 | | 10.32 | | Executive Employment Agreement, dated April 28, 2017, between the registrant and Jeff Dossett | | 10-K | | 2/28/2020 | | 10.32 |
10.26 | | Form of Capped Call Transaction Confirmation | | 8-K | | 12/16/2019 | | 10.1 | | Form of Capped Call Transaction Confirmation | | 8-K | | 12/16/2019 | | 10.1 |
16.1 | | Letter from PricewaterhouseCoopers LLP to Securities and Exchange Commission, dated April 29, 2020 | | 8-K | | 4/29/2020 | | 16.1 | |
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10.27+ | | | Impinj, Inc. Amended and Restated Outside Director Compensation Policy, as amended May 26, 2022 | | 10-Q | | 7/27/2022 | | 10.1 |
10.28+ | | | Executive Employment Agreement, dated November 13, 2018 between the registrant and Hussein Mecklai | |
10.29+ †† | | | Executive Employment and Abritration Agreement dated December 29, 2022 between the registrant and Cathal Phelan | |
21.1 | | Subsidiaries of the registrant | | S-1 | | 6/2/2016 | | 21.1 | | Subsidiaries of the registrant | | S-1 | | 6/2/2016 | | 21.1 |
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23.1 | | Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm | | | | | | | | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
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23.2 | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | | | | | | | |
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24.1 | | Powers of Attorney (contained on signature page) | | | | | | | | Powers of Attorney (contained on signature page) | |
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31.1 | | Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | | | | | | | | Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
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31.2 | | Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | | | | | | | | Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
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32.1* | | Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350. | | | | | | | |
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32.1* |
| Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350. |
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32.2*
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32.2* |
| Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350§1350. | .
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101.INS |
| Inline XBRL Instance Document |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Linkbase Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| Inline XBRL for the cover page of this Annual Report on Form 10-K, included in the Exhibit 101 Inline XBRL Document Set. |
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+ |
| Indicates management contract or compensatory plan, contract or arrangement. |
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* |
| The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K 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-K, irrespective of any general incorporation language contained in such filing. |
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† |
| Certain portions of this exhibit have been omitted because they are not material and would likely cause competitive harm to the registrant if disclosed. |
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†† |
| Certain portions of this exhibit have been omitted because they are not material and are of the type that the registrant treats as private or confidential. |
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 14, 202213,2023 |
| By: |
| /s/ Cary Baker |
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| Cary Baker |
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| Chief Financial Officer (Principal Financial and Accounting Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Chris Diorio, Ph.D. and Cary Baker, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their and his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and in the capacities and on the dates indicated.
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/s/Chris Diorio |
| Chief Executive Officer and Vice Chair (Principal Executive Officer) |
| February 14, 202213,2023 |
Chris Diorio, Ph.D. |
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/s/ Cary Baker |
| Chief Financial Officer |
| February 14, 202213,2023 |
Cary Baker |
| (Principal Financial and Accounting Officer) |
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/s/ Peter van OppenSteve Sanghi |
| Chair |
| February 14, 202213,2023 |
Peter van OppenSteve Sanghi
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/s/ Steve SanghiGregory Sessler |
| Director |
| February 14, 202213,2023 |
Steve SanghiGregory Sessler
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/s/ Gregory SesslerDaniel Gibson |
| Director |
| February 14, 202213,2023 |
Gregory SesslerDaniel Gibson
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/s/ Theresa WiseUmesh Padval |
| Director |
| February 14, 202213,2023 |
Theresa Wise
Umesh Padval |
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/s/ Daniel Gibson
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| Director
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| February 14, 2022
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Daniel Gibson/s/ Cathal Phelan
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| Director |
| February 13,2023 |
Cathal Phelan |
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/s/ Umesh PadvalMeera Rao |
| Director |
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February 14, 202213,2023 |
Umesh PadvalMeera Rao
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/s/ Cathal Phelan
| | Director
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Cathal Phelan
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/s/ Meera Rao
| | Director
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Meera Rao
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10092