Impinj, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless stated otherwise. Impinj sells RAIN RFID endpoint ICs and connectivity products, including reader ICs, readers and gateways, as well as software. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $25.1 million | $31.7 million |
| Gross profit / gross margin | $11.8 million / 46.9% | $16.8 million / 52.9% |
| Operating loss | $14.3 million | $2.0 million |
| Net loss / loss per share | $14.4 million / $0.68 | $2.2 million / $0.11 |
| Adjusted EBITDA (non-GAAP) | $(7.1) million | $0.2 million |
| Non-GAAP net loss | $7.3 million | Non-GAAP net income of $0.1 million |
- Cash and cash equivalents were $28.0 million at quarter-end; short-term investments were $29.9 million, for combined cash, cash equivalents and investments of $57.9 million. Working capital was $115.0 million.
- Net cash used in operating activities was $11.5 million; investing activities provided $8.3 million, largely from investment maturities; financing activities provided $12.0 million. Cash increased by $8.7 million during the quarter.
- Inventory rose to $54.7 million from $47.1 million at year-end 2017, including $21.6 million of work-in-process. The company had $11.7 million of inventory purchase commitments.
- Long-term debt was $19.8 million net of issuance costs, representing $20.0 million of term-loan principal. There were no revolver borrowings; the facility includes a $25.0 million revolving line. The term-loan interest rate was 5.25% at quarter-end.
Material changes versus the prior-year quarter
- Revenue declined 21.0%. Endpoint IC revenue fell 18.3% to $19.4 million, primarily as Monza 4 and Monza 5 shipment volumes dropped 56%, alongside lower Monza 6 shipments and lower endpoint IC selling prices. A $3.2 million product exchange completed in Q1 partly offset the decline.
- Systems revenue fell 28.9% to $5.7 million, primarily due to a 27% decline in reader and gateway shipments.
- Gross margin decreased 6.0 percentage points, mainly from competitive pricing pressure on endpoint ICs; product mix and supplier volume discounts partly offset the decline.
- Operating expenses rose to $26.0 million from $18.8 million. The quarter included $3.9 million of restructuring costs; research and development, sales and marketing, and general and administrative expenses also increased.
- Revenue fell in the Americas to $4.4 million from $8.5 million; Asia Pacific revenue was $17.2 million versus $19.4 million, and EMEA revenue was $3.5 million versus $3.9 million.
Outlook, management commentary and risks
- Management said available cash, investments and borrowing capacity were expected to fund anticipated cash needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- The February restructuring affected approximately 9% of employees and includes plans to sublease office space and close some remote offices. The company recorded $3.9 million of charges in Q1 and expected approximately $0.2 million of additional costs, mostly by year-end 2018.
- Management attributed weaker endpoint IC demand to deployment delays at large retailers and competitive pricing. It cited deal timing, an APAC reorganization and seasonality as factors in Q1 reader and gateway weakness. Management expects hardware selling prices to fluctuate and generally decline over time, and expects investment in research and development to moderately increase.
- Market adoption and deployment timing remain uncertain; sales depend significantly on retail customers, channel partners and a small number of tag manufacturers. The company also highlights pricing pressure, inventory forecasting and obsolescence, reliance on third-party manufacturers, and the possibility of supply constraints.
- The amended credit facility requires additional financial covenant compliance if specified cash and available-revolver thresholds are breached: $60 million through December 2018 and $55 million from January 2019 onward. The company reported covenant compliance at March 31, 2018. Debt is secured by substantially all assets other than intellectual property.
- Operating lease obligations totaled $34.4 million. The company expected the lease accounting standard, to be adopted January 1, 2019, to materially increase balance-sheet assets and liabilities, but not significantly affect results or cash flows.
- Disclosure controls were deemed ineffective because a previously reported material weakness in controls over complex accounting matters remained unremediated. Prior errors had resulted in restatements of earlier financial statements. The filing also states the CFO resigned effective March 30, 2018.
- No material legal proceedings were reported, and management reported no material changes to previously disclosed contingencies outside ordinary business other than the manufacturer purchase commitments described above.
- After quarter-end, the company announced a voluntary employee stock-option exchange offer, scheduled to expire May 16, 2018, subject to extension.
Key facts for investors to verify
- Whether endpoint IC demand and reader/gateway deployments recover, and whether further price declines or product-mix changes pressure gross margins.
- Inventory levels, sell-through and obsolescence risk, including the $11.7 million of manufacturer purchase commitments.
- Cash burn, availability under the credit facility, and compliance with liquidity and adjusted-EBITDA covenants.
- Progress and remaining costs of the restructuring, including the assumptions for subleasing office space.
- Remediation of the material weakness, effectiveness of financial reporting controls, and the status of the CFO replacement.
- Management’s reported cash-flow discussion contains amounts that differ slightly from the cash-flow statement; verify the definitive figures in the financial statements.