Impinj, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Impinj sells endpoint ICs, reader ICs and modules, readers, gateways and software for RAIN RFID item connectivity. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $34.4 | $32.6 | $88.0 | $98.4 |
| Gross profit / margin | $16.5 / 48.1% | $17.0 / 52.1% | $42.0 / 47.7% | $51.9 / 52.8% |
| Operating loss | $(6.8) | $(4.7) | $(28.7) | $(7.5) |
| Net loss | $(7.1) | $(4.9) | $(29.2) | $(8.0) |
| GAAP loss per share | $(0.33) | $(0.23) | $(1.37) | $(0.39) |
- Q3 revenue rose 5.5% year over year, while nine-month revenue fell 10.6%. Endpoint IC revenue declined 1.2% in Q3 and 14.9% year to date; systems revenue grew 24.5% in Q3 and 2.6% year to date.
- Gross margin contracted in both comparisons, primarily due to endpoint IC price competition and product mix, plus higher manufacturing overhead. The filing attributes some overhead to an excess-and-obsolescence charge following European Commission spectrum expansion.
- Operating expenses were $23.4 million in Q3 and $70.6 million for nine months. Nine-month costs included $3.7 million of restructuring charges. Q3 general and administrative expense rose to $6.7 million, including $1.4 million of investigation-related professional fees.
- Cash from operating activities was $(16.7) million for nine months, versus $(33.1) million in 2017. Investing cash flow was $(1.0) million and financing cash flow was $16.1 million, including net term-loan proceeds.
- At September 30, cash and cash equivalents were $17.6 million and short-term investments were $37.1 million, totaling $54.7 million. Working capital was $102.6 million. Inventory was $49.2 million, up from $47.1 million at year-end 2017.
- Debt borrowings were $23.9 million, excluding $0.1 million of unamortized issuance costs; there were no revolver borrowings. Term-loan and equipment-advance rates were 6.0% and 6.5%. The company reported compliance with its credit-facility covenants at quarter-end.
Material changes versus comparable periods
- Q3 growth reflected higher systems revenue, helped by improved inventory availability; reader and gateway shipments nevertheless declined 11% and average selling prices were pressured by mix. Endpoint IC sales were nearly flat in dollars, with 21% growth in Monza 6 shipment volume offset by a 26% decline in older Monza families.
- Nine-month endpoint IC revenue fell $11.1 million, reflecting lower average selling prices and lower shipment volumes of older products. The comparison included $3.2 million of revenue recognized in Q1 2018 from completion of a one-time product exchange related to a sales-return reserve recorded in Q4 2017.
- Debt increased substantially from year-end 2017: long-term debt, including current portion, was approximately $23.8 million at September 30, 2018, versus approximately $9.6 million at December 31, 2017. The company amended its credit facility and added a $4.0 million equipment advance.
- Stock-based compensation rose to $8.0 million for nine months from $4.8 million in 2017.
Outlook, risks and unusual items
- Outlook: No specific quarterly revenue or earnings guidance is provided in the supplied filing text. Management expects existing cash, investments and available credit to meet anticipated needs for at least 12 months. It expects moderate absolute-dollar growth in R&D expense, relatively consistent sales and marketing and G&A expense following restructuring, and modest software revenue for the foreseeable future. Management expects hardware average selling prices generally to decline over time.
- Business risks: RAIN adoption and customer deployments remain uneven and difficult to forecast; the company relies on channel partners and a concentrated group of customers, outsources manufacturing, and faces price competition, supply and inventory risks. Retail is its largest end market. The filing also discusses tariff exposure affecting certain pre-Monza R6 products and potential obsolescence related to spectrum changes.
- Restructuring: A February 2018 plan affecting approximately 9% of employees included workforce reductions, office closures and subleasing. The plan was substantially complete by June; cease-use lease liabilities extend through January 2023.
- Investigation and litigation: Q3 included $1.4 million in investigation costs. The company said an audit committee investigation found no credible evidence supporting a former employee’s claims. Two securities class actions and two shareholder derivative actions were pending; a separate securities class action was voluntarily dismissed in October 2018. The company said it intended to defend the pending claims and could not estimate outcomes or damages.
- Financial reporting controls: Management concluded disclosure controls were not effective at September 30 because a previously identified material weakness in accounting and disclosure for complex matters remained unremediated. Prior financial statements had required restatements.
- Accounting change: The company adopted the new revenue-recognition standard on January 1, 2018 using the full retrospective method; it reported no material impact on financial position, operations or cash flows. It expected the new lease standard, to be adopted January 1, 2019, to materially affect the balance sheet through recognition of lease assets and liabilities.
Important facts for investors to verify
- Whether endpoint IC demand, pricing and shipment mix stabilize, and whether systems growth continues as supply availability improves.
- How lower gross margins, inventory levels and the spectrum-related obsolescence charge affect future profitability and cash needs.
- Debt amortization, variable interest costs, covenant thresholds and remaining availability under the credit facility.
- Progress on remediating the material weakness and the status, potential costs and outcomes of the pending legal actions.
- Management’s cash runway assumptions, customer deployment timing, tariff mitigation and the anticipated balance-sheet effect of lease-standard adoption.