IMPINJ, INC. 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-cloud connectivity that our platform will deliver will enhance 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. 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 nearly 50 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 theRAIN Alliance that today has more than 160 member companies. Our industry uses free spectrum in 78 countries encompassing roughly 96.5% of the world's GDP and has connected many tens of billions of items to date. We believe RAIN's capabilities - in particular, endpoint ICs with serialized identifiers, 30-foot range reading up to 1000 items per second without line-of-sight, radio-frequency energy harvesting for battery-free operation, essentially unlimited life and, in the future, cryptographic item authentication - position RAIN to be the leading item-to-cloud connectivity technology for the IoT.
Factors Affecting Our Performance
Covid-19
We are actively monitoring and mitigating the impacts of Covid-19 in all aspects of our business, including for 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 has
introduced, especially at retail end users contending with store closures and
reduced customer traffic, have exacerbated that forecasting difficulty.
Covid-19's impact has been further complicated by countries reopening at
different rates, with some seemingly able to manage subsequent outbreaks and
others not. Covid-19 has also caused uncertain long-term shifts, mostly
negative, in other industries important to us besides retail apparel, such as
aviation and sports. Even in supply chain and logistics, or SC&L, which has seen
shipment volumes surge, end users have been reticent to deploy new technologies.
Consequently, Covid-19 negatively impacted our 2020 endpoint IC demand.
Additionally, although we introduced our new Impinj M700 in 2020 and it was in
full production by the end of 2020, we saw a slower demand ramp relative to our
expectations. Due to overall endpoint IC demand decline, we remain uncertain of
its impact in 2021 or beyond.
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For our systems business, Covid-19 delayed pilots and deployments. These delays were due in some cases to businesses being closed by local regulations and in others by reduced or deferred capital expenditures. The delays impacted our 2020 operating results and we expect those impacts will persist into 2021. Some end users have accelerated their investments in business-process modernization technologies like RAIN during the pandemic, but even in those cases, Covid-19 can delay deployments for reasons of health and safety, product and labor availability, and store closures. Consequently, although we see evidence of continued demand for RAIN systems, the extent to which adoption will rebound in 2021 and the degree to which it withstands the negative impacts of Covid-19, remain unclear. From an operations standpoint, Covid-19 caused some of our suppliers to temporarily shut down, operate at reduced capacity, or both. For the most part we navigated these closures and capacity shortfalls successfully. We also navigated shipping challenges due to reduced transport capacity, albeit with higher shipping costs. Most of our facilities and employees are inSeattle , where government restrictions to slow Covid-19's spread have impacted our business, albeit modestly. Almost all our employees, except for those essential few who must be in the office, are working from home. We are striving to minimize Covid-19's impact on our operations. However, our first priority is, and will continue to be, our employees' health and safety. Covid-19's travel restrictions have also adversely affected our business, again modestly, by slowing new-product launches and typical sales activities. There can be no assurance that Covid-19's impact on our employees or business activities in 2021 will remain modest. We may experience issues due to necessary changes in our business practices, to governmental action, or to difficulties responding to unanticipated events like a natural disaster. Increased remote working may result in privacy, data security and fraud risks. Our understanding of the legal and regulatory requirements, as well as the guidance from authorities, related to Covid-19 may be subject to future challenge, particularly as guidance evolves in response to future Covid-19 developments. Despite Covid-19, we have continued investing in research and development and the long-term opportunities RAIN offers. Although we plan to continue making these investments in 2021, depending on the business impact from Covid-19, we may choose to slow or suspend our investments, for example in research and development, potentially impairing our ability to meet our long-term strategic objectives. While the effects of Covid-19 and our responses to it negatively impacted our results of operations, cash flows and financial position for 2020, the uncertainty over its duration and the severity of its epidemiological, economic and operational impacts mean we cannot reasonably estimate the magnitude of its financial impact. The extent to which Covid-19 impacts our results will depend on future developments that are unpredictable, including actions we and others need to take to contain its spread and reduce its impact on public health.
For more information on Covid-19's impact on our business, please refer to Part I, Item 1A (Risk Factors) of this report.
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 tightening the platform linkages between our
products. Although we sell our products into nearly all verticals, 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.
Most of our investments precede any sales benefit from the investment, and in
some instances we may never see a benefit. The potential causes of the latter
are many, including the market not being receptive to our product or sales
approach, late or failed product development, personnel departures or other
causes. We sometimes enter into arrangements with end users, suppliers or
channel partners for them to fund a portion of our investment, but even in those
instances the results of our investments remain uncertain, and in some 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 has
introduced new uncertainty to our business. We will continue to monitor the
impacts of Covid-19 on our supply chain, market and opportunities and adjust our
investment strategy as appropriate.
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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 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 in consumer shopping away from physical stores, which could adversely impact demand for endpoint ICs by retailers. The extent to which Covid-19 materially impacts the retail industry is unclear, as is the extent to which it will impact our product sales. Other industries 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. For example, the aviation industry, which had proposed widespread luggage tagging, has been negatively impacted by Covid-19. By contrast, SC&L has experienced increased demand which could positively impact our financial performance if such industry further adopts RAIN technology. See the section captioned "Covid-19" for additional information. The pace and scope of end-user adoption, slowed by Covid-19, remains uncertain, potentially causing large fluctuations in our operating results. For a 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 was 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 another historical example, in late 2018 and in 2019 a large north American logistics provider deployed significant quantities of our gateway products, positively impacting our operating results for several quarters, and then transitioning to an operational phase in first-half 2020. Given the uncertainties in our market, 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 will not materially impact our business. 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, 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 continued to invest in new products. In our endpoint IC business, in 2020 we introduced our new Impinj M700, which offers significant performance advantages and we believe will foster adoption. In our systems business, in 2020 we introduced our new Impinj R700 reader, which likewise offers significant performance advantages, and we believe will also foster adoption. Despite us being in full production with both products by the end of 2020, Covid-19 has impacted demand and the speed with which we were able ramp up production, and the pace of adoption has been slower than we had anticipated. We sell our products through partners and distributors and have limited ability to determine end-user demand. Consequently, we may incorrectly forecast that demand or not identify market shifts in a timely fashion, potentially affecting our business adversely. 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 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 2020, our endpoint IC sales volumes increased at a compounded
annual growth rate of 25%. However, the pace and scope of RAIN adoption 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), and then declined again in second- and
third-quarter 2020 due to Covid-19. Short-term demand will 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. Additionally, Covid-19 may cause
end users to eliminate or significantly reduce or delay spending on RAIN-based
solutions, impacting endpoint IC growth.
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Our systems business relies disproportionally on 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 North American logistics provider in connection with a project-based gateway deployment and we did not have a comparable new project-base revenue in 2020. Notably, Covid-19 has caused delays in some of our pending global system deployments as SIs, VARs and their end users' business locations are temporarily closed, impacting our ability to replace project-based revenue in a timely fashion. 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.
Average Selling Price
Our product ASPs fluctuate based on competitive pressures and the discounting we offer to win opportunities, but generally decline over time. We expect that trend to continue. Historically, we have been able to implement manufacturing and quality improvements that effectively reduce the per-unit cost of most of our products, as well as introduce newer and lower-cost products, but the timing of these cost reductions and product introductions fluctuates and may not materialize in any given quarter or year.
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. The impact tends to decline in subsequent quarters as we reduce costs and, to the extent we can migrate our customers to newer, lower-cost products, adjust product mix. Endpoint IC volumes also tend to be lower in the fourth quarter than in the third quarter. 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' fiscal years. While, over the longer term, we expect these seasonal trends to continue, quarter-to-quarter variability in our revenue can be caused by a number of factors including uncertainty in demand and supply as a result of Covid-19, the timing of large deployments, competitor product availability as well as supply constraints, any or all of which can mask seasonality in any given year. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are described in greater detail in the sections of this report captioned "Covid-19" and in Part II, 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 our product availability, fluctuations in our market,
including competitor product availability, or the global economy, changes in
regulations or tariffs or for a host of other reasons. These inventory dynamics
can impact some or all of our products. High inventory levels can result in
product obsolescence, increases in reserves or unexpected expenses that
adversely affect our business. Low inventory levels can affect our ability to
meet customer demand, lengthen lead times and potentially causing us to miss
opportunities, lose market share and/or damage customer relationships, also
adversely affecting our business. For example, in 2010 we experienced wafer
shortages from TSMC relative to our submitted endpoint IC wafer purchase orders
because of high worldwide demand for semiconductor foundry capacity. These
shortages adversely affected our ability to meet our customers' demand and, in
some cases, caused customers to cancel orders, qualify alternative suppliers or
purchase from our competitors. Our existing ICs use 200mm and 300mm wafers, with
most of our volume still at 200mm, and some semiconductor industry analysts
predict 200mm wafer demand to remain high throughout at least 2021.
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Results of Operations
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands, except
percentages) 2020 2019 2018 Change Change
Revenue $ 138,923 $ 152,836 $ 122,633 $ (13,913 ) $ 30,203
Gross profit $ 65,140 $ 74,002 $ 58,281 $ (8,862 ) $ 15,721
Gross margin 46.9 % 48.4 % 47.5 % (1.5 )% 0.9 %
Loss from operations $ (47,071 ) $ (21,661 ) $ (34,869 ) $ (25,410 ) $ 13,208 Year ended
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
Revenue and gross profit increased from increased endpoint IC and systems revenue. Gross margin increased primarily due to revenue mix with systems revenue representing a larger portion of our total revenue, and from leverage derived from comparable overhead costs on increased revenue, partially offset by higher excess and obsolescence charges. Loss from operations decreased due to increased gross profit, partially offset by increased operating expenses. The increase in operating expenses was due to increased stock-based compensation expense and higher product development costs, partially offset by decreased restructuring costs and decreased personnel expenses.
Revenue
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
Endpoint ICs $ 102,326 $ 97,657 $ 84,974 $ 4,669 $ 12,683
Systems 36,597 55,179 37,659 (18,582 ) 17,520
Total revenue $ 138,923 $ 152,836 $ 122,633 $ (13,913 ) $ 30,203
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, or VARs, and system
integrators, or SIs, primarily through distributors. We expect endpoint IC sales
to represent the majority of our revenue for the foreseeable future.
Year ended
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' 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. 45
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For more information, see the sections captioned "-Factors Affecting Our Performance-Covid-19" and "Risk Factors-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."
Year ended
Endpoint IC revenue increased$12.7 million , due primarily to a$19.5 million increase in shipment volumes, partially offset by a$3.6 million decrease due to lower ASPs and$3.2 million from the one-time product exchange we completed in the first quarter 2018. The ASP decrease was due primarily to our annual price negotiation as discussed above and, to a lesser extent, product mix. Systems revenue increased$17.5 million , due primarily to increases of$16.5 million in gateway revenue and$3.2 million in reader revenue. These gateway and reader revenue increases were due primarily to increased shipment volumes, with gateway revenue favorably impacted by the North American logistics provider in connection with a project-based gateway deployment described above. The systems revenue increases were partially offset by a$2.1 million decrease in reader IC revenue due to both lower shipment volumes and ASPs. Gross Profit and Gross Margin Year Ended December 31, 2020 vs 2019 2019 vs 2018 (in thousands, except percentages) 2020 2019 2018 Change Change Cost of revenue$ 73,783 $ 78,834 $ 64,352 $ (5,051 ) $ 14,482 Gross profit$ 65,140 $ 74,002 $ 58,281 $ (8,862 ) $ 15,721 Gross margin 46.9 % 48.4 % 47.5 % (1.5 )% 0.9 % 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 revenue, underlying product margins driven by changes in ASPs or costs, as well as from inventory excess and obsolescence charges.
Year ended
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.
Year ended
Cost of revenue increased$14.5 million , due primarily to increased revenue of both endpoint ICs and systems and to a lesser extent higher excess and obsolescence charges. Gross margin increased 0.9% due primarily to revenue mix with systems revenue comprising a larger portion of our total revenue, as well as from leverage derived from comparable overhead costs on increased revenue, partially offset by higher excess and obsolescence charges. Inventory excess and obsolescence charges had an unfavorable net gross-margin impact of 1.7% in 2019. Operating Expenses Research and Development Year Ended December 31, 2020 vs 2019 2019 vs 2018 (in thousands) 2020 2019 2018 Change Change Research and development$ 48,590 $ 38,880 $ 34,168 $ 9,710 $ 4,712 46
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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; prototype materials; other new-product development costs, including external consulting and service 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; however, we will continue to monitor the impacts of Covid-19 on our business and may adjust our research and development investment strategy as appropriate.
Year ended
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 stock options and RSUs 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.
Year ended
Research and development expense increased$4.7 million , due primarily to increases of$2.8 million in stock-based compensation expense from PSUs and an increased number of stock options and RSUs,$778,000 in product development costs as a result of fluctuations in the timing of development activities,$554,000 in personnel expenses from a change in headcount mix and$463,000 in infrastructure costs. Sales and Marketing Year Ended December 31, 2020 vs 2019 2019 vs 2018 (in thousands) 2020 2019 2018 Change Change
Sales and marketing
Sales and marketing expense comprises primarily personnel expenses (salaries, incentive sales compensation, or commission, benefits and other employee 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 and marketing expense to remain approximately constant on an absolute dollar basis, except for incentive sales compensation which fluctuates as a function of revenue and travel-related expense which depends on Covid-19's travel restrictions. In addition, we will continue to monitor the impacts of Covid-19 on our business and may adjust our sales and marketing expense as appropriate.
Year ended
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.
Year ended
Sales and marketing expense in 2019 remained comparable to 2018; we had a decrease of$1.3 million in personnel expense due to lower headcount and bonus expense partially offset by higher commission expense, and decreases of$354,000 in infrastructure costs and$312,000 in travel related expense. These decreases were offset by a$1.8 million increase in stock-based compensation expense from PSUs and an increased number of stock options and RSUs.
General and Administrative
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
General and administrative
10,817 $ 1,842
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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. We will continue to monitor the impacts of Covid-19 on our business and may adjust our general and administrative expense as appropriate.
Year ended
General and administrative expense increased$10.8 million due primarily to increases of$5.4 million in the litigation settlement and related costs described above,$3.1 million in stock-based compensation expense from PSUs and an increased number of stock options and RSUs,$1.3 million in non-settlement related legal fees and$723,000 in personnel expenses from higher headcount.
Year ended
General and administrative expense increased$1.8 million , due primarily to an increase of$2.3 million in stock-based compensation from PSUs and an increased number of stock options and RSUs, partially offset by a$455,000 decrease in personnel expenses from lower bonus expense. Our professional service fees in 2019 remained comparable to 2018 with higher non-settlement related legal fees offset by no third-party investigation costs in 2019 in connection with the complaint filed by a former employee.
Restructuring costs
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
Restructuring costs $ - $ - $ 3,749 $ - $ (3,749 )
On February 13, 2018 , we initiated a restructuring plan to align our strategic
and financial objectives and optimize our resources for long-term growth,
including a reduction-in-force affecting approximately 9% of our employees,
subleasing unused office space and closing some remote offices. The
restructuring was substantially complete as of June 30, 2018 . As a result of the
restructuring, we recorded a $3.7 million restructuring charge in 2018.
Other Income, Net
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
Other income, net $ 650 $ 1,242 $ 808 $ (592 ) $ 434
Other income, net comprises primarily interest income on our short-term investments.
Year ended
Other income, net decreased
Year ended
Other income, net increased
Interest Expense
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
Interest expense $ 5,413 $ 1,794 $ 1,403 $ 3,619 $ 391
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Interest expense comprises primarily cash interest, amortization of debt issuance costs and debt discount on our long-term debt.
Year ended
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.
Year ended
Interest expense increased
Loss on Debt Extinguishment
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
Loss on debt extinguishment $ -
InDecember 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) Year Ended December 31, 2020 vs 2019 2019 vs 2018 (in thousands) 2020 2019 2018 Change Change
Income tax benefit (expense)
$ 109 $ (431 )
We are subject to federal and state income taxes in
Year ended
Income tax expense remained comparable to the prior period.
Year ended
Income tax benefit for 2018 was primarily due to the enactment-date effects of
the Tax Cuts and Jobs Act of 2017 that included adjusting deferred tax assets
and liabilities.
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
companies.
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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; 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 theDecember 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. 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: Year Ended December 31, 2020 vs 2019 2019 vs 2018 (in thousands) 2020 2019 2018 Change Change Net loss$ (51,923 ) $ (22,987 ) $ (35,231 ) $ (28,936 ) $ 12,244 Adjustments: Other income, net (650 ) (1,242 ) (808 ) 592 (434 ) Interest expense 5,413 1,794 1,403 3,619 391 Loss on debt extinguishment - 576 - (576 ) 576 Income tax expense (benefits) 89 198 (233 ) (109 ) 431 Depreciation 4,504 4,809 4,534 (305 ) 275 Stock-based compensation 25,675 18,486 11,317 7,189 7,169 Restructuring costs - - 3,749 - (3,749 ) Investigation costs - - 1,449 - (1,449 ) Settlement and related costs 5,359 - - 5,359 - Adjusted EBITDA$ (11,533 ) $ 1,634 $ (13,820 ) $ (18,526 ) $ 15,454
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; investigation costs; restructuring costs; settlement and related costs; 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 theDecember 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. 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. 50
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The following table presents a reconciliation of net loss to non-GAAP net income
(loss):
Year Ended December 31, 2020 vs 2019 2019 vs 2018
(in thousands) 2020 2019 2018 Change Change
Net loss $ (51,923 ) $ (22,987 ) $ (35,231 ) $ (28,936 ) $ 12,244
Adjustments:
Depreciation 4,504 4,809 4,534 (305 ) 275Stock-based compensation 25,675 18,486 11,317
7,189 7,169
Restructuring costs - - 3,749 - (3,749 )
Investigation costs - - 1,449 - (1,449 )
Amortization of debt
discount 3,566 140 - 3,426 140
Prepayment penalty on debt
extinguishment - 470 - (470 ) 470
Settlement and related
costs 5,359 - - 5,359 -
Non-GAAP net income (loss)
(13,737 )
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,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands, except percentages)
Statements of Operations
Data:
Revenue $ 36,448 $ 28,196 $ 26,457 $ 47,822 $ 40,821 $ 40,762 $ 38,190 $ 33,063
Cost of revenue 19,034 14,824 13,497 26,428 20,889 20,981 19,774 17,190
Gross profit 17,414 13,372 12,960 21,394 19,932 19,781 18,416 15,873
Gross margin 47.8 % 47.4 % 49.0 % 44.7 % 48.8 % 48.5 % 48.2 % 48.0 %
Operating expenses:
Research and development
expense 14,971 11,901 10,661 11,057 11,202 10,344 8,773 8,561
Sales and marketing
expense 8,086 6,964 6,123 7,490 8,063 7,842 8,188 8,549
General and
administrative expense 8,743 7,527 12,446 6,242 7,488 5,503 5,455 5,695
Restructuring costs
(benefits) - - - - - - - -
Total operating expenses 31,800 26,392 29,230 24,789 26,753 23,689 22,416 22,805
Loss from operations (14,386 ) (13,020 ) (16,270 ) (3,395 ) (6,821 ) (3,908 ) (4,000 ) (6,932 )
Other income (expense),
net 66 49 126 409 295 317 309 321
Interest expense (1,392 ) (1,360 ) (1,349 ) (1,312 ) (531 ) (413 ) (421 ) (429 )
Loss on debt
extinguishment - - - - (576 ) - - -
Loss before income taxes (15,712 ) (14,331 ) (17,493 ) (4,298 ) (7,633 ) (4,004 ) (4,112 ) (7,040 )
Income tax benefit
(expense) (5 ) (15 ) (41 ) (28 ) (47 ) (77 ) (46 ) (28 )
Net loss (15,717 ) $ (14,346 ) $ (17,534 ) $ (4,326 ) $ (7,680 ) $ (4,081 ) $ (4,158 ) $ (7,068 )
Net loss per share -
basic and diluted $ (0.68 ) $ (0.63 ) $ (0.77 ) $ (0.19 ) $ (0.35 ) $ (0.19 ) $ (0.19 ) $ (0.33 )
Weighted-average shares:
Basic 23,218 22,931 22,716 22,412 22,173 21,961 21,709 21,544
Diluted 23,218 22,931 22,716 22,412 22,173 21,961 21,709 21,544
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Liquidity and Capital Resources
As ofDecember 31, 2020 , we had cash, cash equivalents and short-term investments of$106.1 million , comprising cash deposits held at major financial institutions and short-term investments in a variety of securities, includingU.S. government agencies, treasury bills, corporate notes and bonds, commercial paper and money market funds. As ofDecember 31, 2020 , we had working capital of$143.8 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, our principal use of cash is funding operations to capture our market opportunity and capital 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.
Sources of Funds
From time to time, we may explore additional financing sources and means to lower our cost of capital, which could include equity, equity-linked and debt financing. In addition, in connection with any future acquisitions, we may pursue additional funding 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
InDecember 2019 , we issued the 2019 Notes in an aggregate principal amount of$86.3 million . The 2019 Notes are our senior unsecured obligations. The 2019 Notes bear interest at a fixed rate of 2.00% per year, payable semi-annually in arrears onJune 15 andDecember 15 of each year, beginning onJune 15, 2020 . The 2019 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election. The 2019 Notes will mature onDecember 15, 2026 , unless earlier repurchased, redeemed, or converted in accordance with the terms of the indenture for the 2019 Notes. The net proceeds from issuing the 2019 Notes were approximately$83.5 million after deducting fees and expenses. We used the net proceeds from issuing the 2019 Notes to pay the cost of the capped call transactions and repay our senior credit facility. We intend to use the remainder of the net proceeds 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,
(in thousands) 2020 2019 2018
Net cash provided by (used in) operating
activities $ (16,877 ) $ 4,708 $ (11,777 )
Net cash used in investing activities (36,287 ) (13,099 ) (5,666 )
Net cash provided by financing activities 9,902 57,759 15,688
Operating Cash Flows
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.
For the year ended December 31, 2019 , we generated $4.7 million of net cash from
operating activities. The net cash proceeds were driven primarily by $4.1
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, partially offset by lower cash collections in
accounts receivable due to timing of when amounts became due.
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For the year endedDecember 31, 2018 , we used$11.8 million of net cash from operating activities. The net cash usage was driven primarily by$20.6 million of net loss adjusted for non-cash items, offset by$8.8 million of working capital contribution. The working capital contribution was primarily due to higher cash collection in accounts receivable due to timing of when amounts became due and lower cash usage in inventory purchases.
Investing Cash Flows
For the year endedDecember 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 . For the year endedDecember 31, 2019 , we used$13.1 million of net cash from investing activities. The net cash usage was driven primarily by investments and equipment purchases of$72.4 million and$2.4 million , respectively, partially offset by investment maturities of$61.7 million .
For the year ended
Financing Cash Flows
For the year ended
For the year endedDecember 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. For the year endedDecember 31, 2018 , we generated$15.7 million of net cash from financing activities. The net cash proceeds were driven primarily by$16.4 million in term loan borrowings, net of debt issuance costs and$2.7 million from exercised stock options and our employee stock purchase plan. These proceeds were partially offset by repayments of indebtedness of$2.5 million of principal under our senior credit facility and payments of$0.9 million for finance-lease obligations.
Contractual Obligations
The following table reflects a summary of our contractual obligations as ofDecember 31, 2020 : Payments Due By Period Less More Than 1-3 3-5 Than Total 1 Year Years Years 5 Years (in thousands) Convertible senior notes (1)$ 96,600 $ 1,725 $ 3,450 $ 3,450 $ 87,975 Operating lease obligations Operating lease obligations 22,650 4,790 7,913 6,534 3,413 Sublease income (2,994 ) (1,414 ) (1,580 ) - - Net operating lease commitments 19,656 3,376 6,333 6,534 3,413 Purchase commitments (2) 12,234 12,234 - - - Total$ 128,490 $ 17,335 $ 9,783 $ 9,984 $ 91,388
(1) 2019 Notes include
(2) Purchase commitments comprise primarily non-cancelable commitments to
purchase
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Off-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 purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.
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. The 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. 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; • inventory; • income taxes; and • 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 engineering development services, all of which are
not material.
We recognize revenue when 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. 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 revenues for the effects of a
significant financing component. We recognize any variable consideration, which
primarily comprises sales incentives, as a 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, we account for
the hardware and software license as a single performance obligation and
recognize revenue at the point in time when control is transferred.
Our 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. 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. Amounts allocated to extended warranty and enhanced
maintenance sold with our reader and gateway products are deferred and
recognized on a straight-line basis over the term of the arrangement, which is
typically from one to three years. Amounts allocated to support services sold
with our reader and gateway products are deferred and recognized when control of
the promised services is transferred to our customers.
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For nonrecurring engineering 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. 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 engineering development agreements are not material. If our customer pays consideration before we transfer a good or service to the customer under the contract, those amounts are classified as contract liabilities, or deferred revenue. Contract liabilities are recognized as revenue as 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. 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 the amortization period would have been 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 stated at the lower of cost or estimated net realizable value
using the average costing method, which approximates the 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, 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.
We recorded inventory excess and obsolescence charges, which had an unfavorable
net impact of 2.2%, 1.7% and 1.2% on our gross margin for 2020, 2019 and 2018,
respectively.
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 such assets and liabilities are recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the year that includes 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
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 appropriate evidence indicates we would revise our valuation allowance
accordingly.
We utilize 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
a tax position is not considered more likely than not to be sustained, 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, our net operating loss and credit carryforwards could
be materially impacted.
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Our realization of 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 able 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. Utilizing 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 measure stock-based compensation costs for all share-based awards at fair value on 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. We determine the fair value of RSUs 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, 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.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, please refer to Note 2 in our consolidated financial statements included elsewhere in this report.
JOBS Act
We are an emerging growth company under the JOBS Act. The JOBS Act provides that
an emerging growth company can delay adoption of new or revised accounting
pronouncements applicable to public companies until such pronouncements are made
applicable to private companies, unless we otherwise irrevocably elect not to
avail itself of this exemption. While we have not made such an irrevocable
election, we have not delayed the adoption of any applicable accounting
standards.
Subject to certain conditions set forth in the JOBS Act, if, as an "emerging
growth company," we choose to rely on certain exemptions provided for in the
JOBS Act we may not be required to, among other things, (1) provide an auditor's
attestation report on our system of internal controls over financial reporting
pursuant to Section 404, (2) provide all of the compensation disclosure that may
be required of non-emerging growth public companies under the Dodd-Frank Wall
Street Reform and Consumer Protection Act, (3) comply with any requirement that
may be adopted by the PCAOB regarding mandatory audit firm rotation or a
supplement to the auditor's report providing additional information about the
audit and the financial statements (auditor discussion and analysis) and (4)
disclose certain executive compensation related items such as the correlation
between executive compensation and performance, and comparisons of the CEO's
compensation to median employee compensation. These exemptions apply for a
period of five years following the completion of our 2016 initial public
offering or until we are no longer an "emerging growth company," whichever is
earlier.
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