Impinj, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless stated otherwise, amounts are in U.S. dollars and millions. Impinj develops and sells RAIN RFID products and services, including endpoint ICs and systems, and reports one operating segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $26.5 | $38.2 | $74.3 | $71.3 |
| Gross profit | $13.0 | $18.4 | $34.4 | $34.3 |
| Gross margin | 49.0% | 48.2% | 46.2% | 48.1% |
| Operating loss | $(16.3) | $(4.0) | $(19.7) | $(10.9) |
| Net loss | $(17.5) | $(4.2) | $(21.9) | $(11.2) |
| Basic and diluted loss per share | $(0.77) | $(0.19) | $(0.97) | $(0.52) |
Q2 revenue fell 31% year over year, with declines in both endpoint IC and systems revenue. For the first half, endpoint IC growth more than offset lower systems revenue. First-half operating expenses rose to $54.0 million from $45.2 million, notably reflecting litigation-related charges and higher stock-based compensation. Management reported Q2 adjusted EBITDA of $(5.2) million versus $0.8 million; first-half adjusted EBITDA was $(2.2) million versus $(1.5) million. This non-GAAP measure excludes specified items, including stock compensation, depreciation and litigation settlement costs.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $97.5 million and short-term investments were $23.4 million, totaling $120.9 million. Working capital was $150.8 million.
- For the six months, operating cash flow was $2.8 million, investing cash flow was $24.9 million and financing cash flow was $2.8 million. Cash rose $30.6 million, with investment maturities contributing substantially to investing cash flow.
- Long-term debt carrying value was $52.7 million; the 2019 convertible notes had $86.25 million principal outstanding, 2.00% fixed interest and a December 2026 maturity. Management said existing cash, cash equivalents and investments should cover anticipated needs for at least 12 months.
- Operating lease liabilities totaled $20.6 million, including $3.5 million current. The company had $11.2 million in purchase commitments, primarily inventory.
Material changes and unusual items
- Q2 endpoint IC revenue was $18.5 million, down $5.2 million year over year; systems revenue was $7.9 million, down $6.6 million. Systems comparisons were affected by a prior-year project-based gateway deployment.
- First-half endpoint IC revenue increased $6.7 million to $52.2 million, while systems revenue decreased $3.6 million to $22.1 million. First-quarter customer expedites pulled shipments forward, followed by Q2 rescheduling and weaker demand.
- A $2.7 million first-quarter inventory excess and obsolescence charge related mainly to European endpoint ICs and gateways affected by lower demand, Covid-19 and allocation of additional RAIN spectrum in a new band. The impacted inventory was written down to zero.
- The company recorded $5.4 million in Q2 litigation settlement and related costs. A proposed $20.0 million settlement of securities class actions would be funded approximately $14.6 million by insurers and $5.4 million by Impinj, subject to court approval. A separate proposed derivative-action settlement includes governance changes and up to $0.9 million of attorneys’ fees and expenses, to be paid by insurers, also subject to approval.
- Impinj borrowed approximately $5.8 million under the Paycheck Protection Program in April and repaid it in full on April 30, 2020.
Outlook, management commentary and risks
- No quantitative revenue or earnings guidance is provided. Management said forecasting was unusually difficult because of Covid-19 and limited visibility into end-user demand through channel partners.
- Management expected second-half 2020 endpoint IC sales to decline versus the second half of 2019 as customers adjusted channel inventory, and expected global retail apparel sales to fall in 2020 versus 2019. The magnitude of Covid-19’s financial impact remained uncertain.
- Covid-19 contributed to a 45% sequential decline in endpoint IC revenue from Q1 to Q2, including $6.2 million of customer expedite requests shifted from Q2 into Q1, as well as later-quarter rescheduling. It also delayed planned systems deployments and the M700 endpoint IC ramp by more than two months; M700 was in production by quarter-end.
- Suppliers had mostly recovered to at least 90% of pre-pandemic manufacturing capacity by June, but Impinj cautioned that supply, shipping and customer demand could remain disrupted. It said it had fulfilled all endpoint IC orders and most systems orders in Q2 and believed inventory was sufficient for Q3 endpoint IC demand.
- Key risks include dependence on retail and a small number of large channel partners, volatile project-based systems sales, competition and price erosion, inventory and supplier concentration, and ongoing patent litigation with NXP. Impinj’s patent case against NXP was stayed pending patent-review proceedings; NXP also sued Impinj.
Important facts for investors to verify
- Whether the proposed securities and derivative settlements receive court approval and whether final company costs differ from the recorded amounts.
- Whether second-half endpoint IC demand, channel inventory adjustments and systems deployment delays develop as management anticipated.
- Whether gross margins and operating expenses improve after the Q1 inventory charge and Q2 litigation costs.
- Whether supplier capacity, M700 qualification and product availability remain adequate, and how the NXP patent proceedings affect operations or costs.
- How the $86.25 million convertible-note principal, possible conversion dilution and future cash needs affect liquidity.