Impinj, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Impinj sells a RAIN RFID platform of endpoint and reader integrated circuits, readers, gateways and software, primarily through channel partners. Financial amounts below are in millions unless otherwise indicated.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $31.0 | $20.7 | $78.6 | $55.9 |
| Gross profit / margin | $16.4 / 52.8% | $10.6 / 51.4% | $41.1 / 52.2% | $28.8 / 51.6% |
| Operating income (loss) | $0.8 | $0.6 | ($0.8) | $1.1 |
| Net income (loss) | $0.8 | $0.01 | ($1.8) | $0.08 |
| Adjusted EBITDA | $2.2 | $1.3 | $2.7 | $3.2 |
| Operating cash flow | Not separately presented | Not separately presented | ($9.5) | ($3.8) |
Q3 net income attributable to common stockholders was $0.2 million, or $0.01 per share, after $0.6 million of preferred-stock accretion. For the nine-month period, the comparable common-stockholder loss was $8.0 million, or $1.01 per share, including $6.3 million of accretion.
- Revenue and margins: Q3 revenue rose 50.1% year over year; nine-month revenue grew 40.8%. Product revenue accounted for about 99.6% of revenue in both 2016 periods. Gross margin improved modestly in both comparisons.
- Growth driver: Management attributed most of the revenue increase to higher shipment volumes of the Monza R6 endpoint IC family. Reader and gateway shipment volumes increased 14% in Q3 and 18% year to date; lower selling prices partly offset volume growth.
- Expenses and profitability: Operating expenses increased to $15.6 million in Q3 and $41.9 million year to date, reflecting investment in engineering, sales and marketing, facilities and corporate functions. Nine-month operating results moved to a loss despite revenue growth. Adjusted EBITDA declined year over year for the nine-month period.
- Liquidity: At September 30, cash and cash equivalents were $47.9 million, short-term investments $14.1 million and working capital $85.2 million. Current assets were $101.6 million against current liabilities of $16.4 million.
- Debt: Senior-facility borrowings totaled $11.6 million ($10.5 million term debt and $1.1 million equipment loans), with a 5.7% weighted-average rate; no revolver borrowings were outstanding. Capital lease obligations totaled $2.9 million. The $5.0 million mezzanine loan, which carried 18% interest, was repaid in July. The senior facility is secured by substantially all assets other than intellectual property; the company reported covenant compliance.
- Cash flows: Nine-month investing cash use was $16.4 million, including $14.1 million of investment purchases and $2.3 million of capital expenditures. Financing provided $63.8 million, including IPO proceeds and borrowing activity. Operating cash use increased, with higher receivables and inventory among the uses; inventory rose to $20.5 million.
Material changes and unusual items
- Impinj completed its IPO on July 26, 2016, selling 5.52 million shares at $14 each and receiving $68.5 million net proceeds. Preferred stock and warrants converted into common shares; the company reported 18,783,907 common shares outstanding as of November 4, 2016.
- Inventory purchase commitments were $16.5 million at quarter-end, an increase in commitments management identified as a change from previously disclosed contractual obligations.
- The company early adopted share-based payment guidance in Q3, recording a $215,000 cumulative adjustment to accumulated deficit for forfeitures accounted for as they occur.
- Management said there were no material legal proceedings as of the report date.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management expects operating expenses, including research and development, sales and marketing, and general and administrative costs, to increase in absolute dollars as the business grows.
- Management expects product average selling prices to fluctuate and decline over time, while seeking to offset pricing pressure through manufacturing and quality improvements. It said current cash, investments and available credit should cover anticipated needs for at least 12 months, but noted there is no assurance operating cash flows will consistently fund the business.
- Key risks include uncertain RAIN adoption and customer deployment timing; dependence on channel partners and a concentrated set of customers; reliance on third-party manufacturers and subcontractors; demand-forecast errors and excess or insufficient inventory; pricing pressure, product mix and margin variability; competition and product-development execution.
- Disclosure controls and procedures were deemed ineffective at September 30, 2016 because a previously reported material weakness in accounting and financial reporting controls had not been remediated. The weakness followed identified financial-statement errors, including prior restatements. Management described ongoing remediation efforts.
- Variable-rate debt creates interest-rate exposure; the filing estimates a 100-basis-point increase, assuming the revolver is fully drawn, would increase interest expense and reduce cash flow and pretax income by approximately $275,000 over the stated sensitivity period.
Investor verification points
- Track whether Monza R6-driven growth continues and how endpoint IC pricing and product mix affect gross margin.
- Assess whether inventory growth and $16.5 million of purchase commitments align with actual customer demand and channel inventories.
- Monitor operating cash use, debt repayment requirements, covenant headroom and the company’s stated 12-month liquidity expectation.
- Review progress remediating the material weakness and restoring effective disclosure controls.
- Confirm the effect of IPO-related share issuance, preferred-stock conversion and potential future share sales on dilution and per-share results.