IMPINJ INC - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2021

Commission File Number: 001-37824

IMPINJ, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (206) 517-5300

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☑

As of July 16, 2021, 24,290,417 shares of common stock were outstanding.

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IMPINJ, INC.

QUARTERLY REPORT ON FORM 10-Q

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Risk Factor Summary

Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report captioned “Risk

Factors.” These risks include the following:

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PART I — FINANCIAL INFORMATION

IMPINJ, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include Impinj, Inc. and its wholly owned subsidiaries. We have eliminated intercompany balances and transactions in consolidation. We have prepared these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2020 included in Impinj, Inc.’s Annual Report on Form 10-K, which was filed with the SEC on February 17, 2021. The condensed consolidated balance sheet as of December 31, 2020, included herein, was derived from the audited consolidated financial statements of Impinj, Inc.

The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary to state fairly our financial position, results of operations, and our cash flows for the periods presented. Interim results are not necessarily indicative of the results for a full year or for any other future period.

Use of Estimates

Preparing financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, sales incentives, estimates to complete development contracts, deferred revenue, inventory excess and obsolescence, income taxes, determination of the fair value of stock awards and compensation and employee-related benefits. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. Covid-19 has introduced significant additional uncertainty with respect to estimates, judgments and assumptions about current and forecasted demand, which may materially impact the estimates previously listed, among others.

Recently Adopted Accounting Standards

In August 2020, the FASB issued guidance on debt with conversion and other options, or ASU 2020-06. This guidance eliminates the beneficial- and cash-conversion accounting models for convertible instruments and amends the derivative scope exception for contracts in an entity’s own equity. Additionally, this guidance requires the application of the “if-converted” method to calculate the impact of convertible instruments on diluted earnings per share. We adopted ASU 2020-06 on January 1, 2021 using the modified retrospective transition method and accounted for our convertible notes due 2026, or the 2019 Notes, on a whole-instrument basis. Upon adoption, we recorded a $29.3 million increase to long-term debt, a $32.7 million decrease to additional paid-in capital and a $3.4 million decrease to accumulated deficit on January 1, 2021. Interest expense decreased for the three and six months ended June 30, 2021, as we no longer separate an equity component of the 2019 Notes and incurred amortization of debt discount. We had no changes to net deferred tax liabilities with a decrease in deferred tax liability offset by a corresponding increase in valuation allowance upon adoption. We use the “if-converted” method to calculate the impact of convertible instruments on diluted earnings per share for the three and six months ended June 30, 2021, upon adoption of this guidance.

The condensed consolidated financial statements as of and for the three and six months ended June 30, 2021, are presented under ASU 2020-06, while comparative prior reporting periods presented are not adjusted and continue to be reported in accordance with our historical accounting policy.

Recently Issued Accounting Standards Not Yet Adopted

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not have, or are not expected to have, a material impact on our present or future consolidated financial statements.

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Note 2. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

We applied the following methods and assumptions in estimating our fair value measurements:

Cash Equivalents — Cash equivalents consist of highly liquid investments, including money market funds with original maturities of less than three months at the acquisition date. We record the fair value measurement of these assets based on quoted market prices in active markets.

Investments — Our investments consist of fixed income securities, which typically include U.S. government agency securities, treasury bills, commercial paper, money market funds, corporate notes and bonds and asset-backed securities. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Long-term Debt — See Note 6 for the carrying amount and estimated fair value of our convertible senior notes due 2026.

The following table presents the balances of assets measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the dates presented (in thousands):

We did not have any Level 3 assets or did not measure any liabilities at fair value as of June 30, 2021 or December 31, 2020. The gross unrealized gains or losses on cash equivalents and short-term investments as of June 30, 2021 or December 31, 2020 were not material.

Note 3. Inventory

The following table presents the detail of inventories as of the dates presented (in thousands):

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For the six months ended June 30, 2021, sales of fully reserved inventory had a favorable net gross margin impact of 1.2%. These sales which occurred primarily in the first quarter and were primarily endpoint IC inventory included in the excess and obsolescence charge noted below, are the result of increased endpoint IC demand in today’s supply-constrained environment.

For the three and six months ended June 30, 2020, inventory excess and obsolescence charges had an unfavorable net gross margin impact of 2.2% and 4.4%, respectively. The charges, a majority of which occurred in first quarter 2020, were due primarily to reduced demand for older-generation endpoint ICs and EU gateways and reduced the inventory value of the impacted products to zero. At the time, we expected future demand to be met by our newer generation endpoint ICs and EU gateways. Instead, as a result of today’s industry-wide wafer shortages, we sold a significant portion of the reserved endpoint ICs in the three months ended March 31, 2021.

Note 4. Stock-Based Awards

Stock Options

The following table summarizes stock option activity for the six months ended June 30, 2021 (in thousands):

Restricted Stock Units

We grant (i) RSUs with a service condition, (ii) RSUs with performance and service conditions (“PSUs”), and (iii) RSUs with market and service conditions (“MSUs”) as further explained below.  

The number of annual PSUs that ultimately vest depends on us attaining financial metrics for the fiscal year as well as on the employee’s continued employment through the vesting date. The compensation committee and board of directors typically certify PSU attainment in the first quarter of each year.

On April 12, 2021, and May 20, 2021, we granted a total of 83,750 shares of MSUs, to certain executives. The MSUs are eligible to vest based on our total stockholder return (“TSR”) relative to the TSR of the constituents comprising the S&P Semiconductor Select Industry Index over two measurement periods. Half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2022, and half of the MSUs are eligible to vest based on our relative TSR during the period from January 1, 2021 through December 31, 2023. We use a Monte Carlo simulation in estimating the fair value at grant date and recognize compensation cost over the implied service period. The aggregate grant-date fair value of these shares was estimated to be $6.4 million using the Monte Carlo simulation valuation method.

The following table summarizes activity for RSUs, PSUs, and MSUs, for the six months ended June 30, 2021 (in thousands):

We recorded $558,000 of stock-based compensation expense related to the MSUs for the three and six months ended June 30, 2021.

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Stock-Based Compensation Expense

The following table presents stock-based compensation expense included in our condensed consolidated statements of operations for the periods presented (in thousands):

Note 5. Commitments and Contingencies

For information on our commitments and contingencies, see Part II, Item 8 (Financial Statements and Supplementary Data, Note 11. Commitments and Contingencies) of our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our commitments and contingencies, outside of the ordinary course of our business, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, except for “Obligations with Third-Parties” and “Litigation” as discussed below.

Obligations with Third Parties

We have certain non-cancelable obligations, which include obligations with third-party manufacturers who manufacture our products. We are committed to purchase $14.9 million of inventory as of June 30, 2021.

Litigation

From time to time, we are subject to various legal proceedings or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of June 30, 2021 and December 31, 2020, we did not have accrued contingency liabilities. The following is a description of our significant legal proceedings. Although we believe that resolving these claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties.

New York State Securities Class Action

As previously disclosed, a consolidated federal securities class action was filed in 2018 and was settled and dismissed in 2020. On January 31, 2019, a related class-action complaint for violation of the federal securities laws was filed in the Supreme Court of the State of New York for the County of New York against us, our chief executive officer, former chief operating officer, former chief financial officer, members of our board of directors and the underwriters of our July 2016 initial public stock offering, or IPO, and December 2016 secondary public offering, or SPO. Captioned Plymouth County Retirement System v. Impinj, Inc., et al., the complaint, purportedly brought on behalf of purchasers of our stock pursuant to or traceable to our IPO and SPO, alleged that we made false or misleading statements in the registration statements and prospectuses in those offerings concerning demand for our products and inventory in violation of Section 11 of the Securities Act of 1933. On April 9, 2019, the New York Supreme Court entered an order staying the action and requiring the parties to update the court every 90 days as to the status of the pending consolidated federal securities class actions.

On July 9, 2020, the parties in both this action and the federal securities class actions executed a stipulation of settlement that resolved the claims in both actions. On November 20, 2020, the U.S. District Court for the Western District of Washington entered an order finally approving the settlement, and the action pending in Washington federal court has been dismissed with prejudice. Pursuant to the terms of the settlement, the parties in this action filed stipulation discontinuing this action with prejudice. On April 28, 2021, after a long delay due to the impact of Covid-19 on the New York State court, the court signed and entered the stipulation discontinuing the action with prejudice. The matter is now closed.

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Shareholder Derivative Actions

On October 26, 2018, two shareholder derivative actions were filed in the U.S. District Court for the District of Delaware against our chief executive officer, former chief operating officer, former chief financial officer and certain of our directors. We were a nominal defendant. On November 8, 2018, a third shareholder derivative action was filed in this same court against the same defendants. Captioned Weiss v. Diorio, et al., Fotouhi v. Diorio, et al., and De la Fuente v. Diorio, et al., the derivative complaints, purportedly brought on behalf of us, alleged that the defendants breached their fiduciary duties to us and allegedly made false or misleading statements and omissions of material fact in violation of Section 14(a) of the Securities Exchange Act regarding our business and operations. The derivative actions included claims for, among other things, unspecified damages in favor of us, corporate actions to purportedly improve our corporate governance, and an award of costs and expenses to the derivative plaintiffs, including attorneys’ fees. On January 28, 2019, the Delaware federal court entered a stipulated order that stayed these derivative actions until resolution of the pending federal securities class actions described above.

On July 10, 2020, following a private settlement mediation, the parties in this action executed a stipulation of settlement to settle and resolve the claims asserted in this consolidated derivative action. The settlement required us to implement certain corporate governance changes and the payment of up to $900,000 to plaintiffs’ counsel for attorneys’ fees and expenses. Our insurers have agreed to contribute up to $900,000 to plaintiffs’ counsel for attorneys’ fees and expenses. The proposed settlement is subject to preliminary and, following notice to shareholders, final approval by the U.S. District Court for the District of Delaware. On August 5, 2020, at the court’s request, the parties filed supplemental briefing in respect of their joint motion for preliminary approval of the settlement. On February 26, 2021, the court entered an order preliminarily approving the settlement. On May 11, 2021, the court held a final approval hearing. The court has not yet entered a final order with respect to the proposed settlement.

Patent Infringement Claims and Counterclaims

Impinj Patent Infringement Claims Against NXP in California

On June 6, 2019, we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP Semiconductors N.V., or NXP, in the U.S. District Court for the Northern District of California, or the Court. The original complaint alleged that certain NXP integrated circuit products infringe 26 of our U.S. patents. At the order of the Court, we filed an amended complaint limited to eight of the original 26 patents. We subsequently elected to go forward with asserting infringement of six of those eight patents. We are seeking, among other things, past damages, including lost profits, but no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorneys’ fees and costs for infringement of the asserted patents. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing the RAIN RFID endpoint IC product NXP introduced in 2017. Defendants responded to our complaint on September 30, 2019 citing numerous defenses including denying infringement, claiming our asserted patents are invalid, and that the infringed patents were licensed on a royalty-free basis under Impinj’s commitments to GS1 EPCglobal.

In February 2020, NXP filed inter partes review, or IPR, petitions with the Patent Trial and Appeal Board for the U.S. Patent and Trademark Office, or PTAB, against 12 of the originally asserted 26 patents, including the six patents asserted in the amended complaint. In August and September of 2020, the PTAB declined to institute a review of four of the six patents at issue.

On September 24, 2020, the Court lifted the stay on two of the patents in suit, and based on a schedule set by the Court on October 22, 2020, the case is proceeding with a claim construction hearing scheduled for July 23, 2021 (extended by the Court from March 24, 2021). Also, on October 22, 2020, the Court continued the stay on infringement claims for two additional patents pending determinations on IPRs and on two allegedly related patents. On October 27, 2020, we removed without prejudice the two patents against which the PTAB instituted IPRs by filing a second amended complaint, and, on January 5, 2021 we stipulated to dismiss the two of the eight patents that we had elected not to go forward with.

NXP Patent Infringement Claims Against Impinj in Washington

On October 4, 2019, NXP USA, Inc. and NXP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges that certain of our products infringe eight U.S. patents owned by NXP or NXP USA, Inc. The plaintiffs are seeking, among other things, past damages adequate to compensate them for our alleged infringement of each of the patents-in-suit, and reasonable attorneys’ fees and costs. They are also seeking an injunction against us, enjoining continuing acts of infringement of the patents-in-suit. We have denied that we are infringing any of the patents, and we have asserted that we are licensed under four of them and that all eight are invalid. We have also filed IPR petitions with the PTAB against six of the eight patents. On September 23, 2020, the District of Delaware granted Impinj’s motion to transfer the case to the U.S. District Court for the Western District of Washington in Seattle. On December 3, 2020, we moved to amend our answer to include counterclaims that certain NXP integrated circuit products infringe eight of our U.S. patents, all of which were initially included in our California litigation and are therefore beyond the statutory period for any further IPR review at the PTAB.

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On December 11, 2020, we also moved to stay the case with respect to six of the eight patents in suit pending final resolution of petitions that we filed for IPR review by the PTAB. On February 12, 2021, the Court denied our motion to amend our answer to include counterclaims but granted our motion to stay the case as to the six patents with respect to which we filed for IPR review. On February 25, 2021, the Court entered a case schedule setting initial contentions and claim construction deadlines, including a claim construction hearing for October 12, 2021 on the two remaining patents.

On March 9, 2021, we moved for summary judgment of noninfringement on the four patents to which we assert a license, including the two patents that were not subject to a stay. That motion was fully briefed and is pending. The PTAB instituted IPRs on two of the six challenged patents but denied them on the other four. A motion for re-hearing is pending on one of the four. The Court subsequently removed the stay on four. The current schedule contemplates a claim construction hearing on August 12, 2021, and trial on June 13, 2022.

Impinj Patent Infringement Claims Against NXP in Texas

On May 25, 2021, we filed a new patent infringement lawsuit against NXP in the United States District Court for the Western District of Texas (Waco), asserting that NXP has infringed nine of our patents, including seven that were originally asserted in the Northern California case. We are seeking among other things, past damages, including lost profits, but no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorney’s fees and costs for infringement of the asserted patents. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing its UCODE 7, 8, and 9 endpoint ICs. There is no other schedule yet in the case.

On July 26, 2021, NXP filed an answer to our complaint and counterclaimed that we infringe nine patents, one of which NXP owns and eight of which NXP exclusively licensed.

NXP Patent Infringement Claims Against Impinj in China

On December 7, 2020, Impinj Radio Frequency Technology (Shanghai) Co., Ltd., or Impinj Shanghai, was served with patent infringement lawsuits filed in the Intellectual Property Court in Shanghai, China, or Shanghai Intellectual Property Court, in which NXP asserts that certain of our products infringe three Chinese patents owned by NXP, which closely correspond to three of the eight U.S. patents NXP has already asserted in U.S. District Court described above. The plaintiffs are seeking, among other things, past damages, and reasonable attorneys’ fees and costs. They are also seeking an injunction against us, enjoining continuing acts of infringement of the patents-in-suit. Impinj Shanghai objected to the jurisdiction of the Shanghai Intellectual Property Court and filed a motion to stay the proceedings. The jurisdictional challenge was rejected by the Shanghai court in March 2021; a subsequent appeal filed by Impinj Shanghai is pending before the IP Tribunal of the Supreme People’s Court. Impinj Shanghai also filed invalidity requests against all three Chinese patents before the China National Intellectual Property Administration, or CNIPA. In July 2021, the CNIPA issued decisions upholding the validity of the three Chinese patents. Impinj Shanghai retains the option to file for review of some or all of the CNIPA decisions by the Beijing Intellectual Property Court.

Note 6. Debt Facilities

Convertible Senior Notes

In December 2019, we issued convertible senior notes due 2026, or the 2019 Notes, in an aggregate principal amount of $86.3 million. The 2019 Notes are our senior unsecured obligations and are governed by the indenture for the 2019 Notes. The 2019 Notes accrue interest at a fixed rate of 2.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning June 15, 2020. Upon conversion, 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 on December 15, 2026, unless earlier repurchased, redeemed, or converted in accordance with the terms of the indenture.

Our net proceeds from issuing the 2019 Notes were approximately $83.5 million after deducting fees and expenses. We used a portion of the proceeds to pay the cost of the capped-call transactions described below and repay our prior senior credit facility.

The 2019 Notes are convertible at an initial conversion rate of 28.9415 shares of our common stock per $1,000 principal amount of the 2019 Notes, which is equal to an initial conversion price of approximately $34.55 per share of our common stock, subject to adjustment under certain circumstances in accordance with the indenture. Prior to the close of business on the business day immediately preceding September 15, 2026, holders of the 2019 Notes may convert all or a portion of their 2019 Notes under the following circumstances:

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On or after September 15, 2026, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of the 2019 Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

We may redeem the 2019 Notes for cash, at our option, on or after December 20, 2023, if the last reported sale price of our common stock has been at least 130% of the conversion price at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period at a redemption price equal to 100% of the principal amount of the 2019 Notes being redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.

Holders of the 2019 Notes who convert their 2019 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event constituting a fundamental change (as defined in the indenture), holders of the 2019 Notes may require us to repurchase all or a portion of their 2019 Notes at a repurchase price equal to 100% of the principal amount of the 2019 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.

The last reported sale price of our common stock exceeded 130% of the conversion price of the 2019 Notes for more than 20 trading days during the 30 consecutive trading days ended June 30, 2021. Accordingly, the 2019 Notes are convertible at the option of the holders as of June 30, 2021. The “if-converted value” exceeded the principal amounts by $42.5 million based the closing price of our common stock of $51.59 as of June 30, 2021.

We incurred $2.8 million in issuance costs for the 2019 Notes which is amortized to interest expense over the respective term of the 2019 Notes using the effective interest rate method.

The effective interest rate on the 2019 Notes is 2.50%. As of June 30, 2021, we have $77,000 of accrued interest related to the 2019 Notes included in accrued liabilities on our condensed consolidated balance sheet.

The following table presents the interest expense related to the 2019 Notes for the periods presented (in thousands):

Our estimated fair value of the 2019 Notes was $144.6 million and $118.7 million as of June 30, 2021 and December 31, 2020, respectively, which we determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 2.

The following table presents the outstanding principal amount and carrying value of the 2019 Notes as of the date presented (in thousands):

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In connection with the issuance of the 2019 Notes, we entered into privately negotiated capped-call transactions with certain financial counterparties. The capped-call transactions are generally designed to reduce the potential dilution to our common stock upon any conversion or settlement of the 2019 Notes, or to offset any cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. If, however, the market price per share of our common stock exceeds the cap price of the capped-call transactions then our stock would experience some dilution and/or the capped call would not fully offset the potential cash payments, in each case, to the extent the then-market price per share of our common stock exceeds the cap price. The initial cap price of the capped-call transactions is $54.20 per share, which represents a 100% premium over the last reported sale price of our common stock of $27.10 per share on December 11, 2019 subject to certain adjustments under the terms of the capped-call transactions. The capped-call transactions expire over 40 consecutive scheduled trading days ending on December 11, 2026.

The capped-call transactions meet the criteria for classification in equity, are not accounted for as derivatives, and are not remeasured each reporting period. We paid $10.1 million for the capped-call transactions, which we recorded as a reduction to additional paid-in-capital within shareholders’ equity.

Note 7. Leases

The following table presents the components of lease expense in our condensed consolidated statements of operations for the periods presented (in thousands):

The following table presents supplemental cash-flow information related to operating leases for the periods presented (in thousands):

The following table presents weighted-average remaining lease term and weighted-average discount rate related to operating leases as of the dates presented:

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The following table presents future lease payments under operating leases as of June 30, 2021 (in thousands):

Note 8. Net Loss Per Share

We used the treasury stock method for calculating any potential dilutive effect of the conversion of the 2019 Notes on diluted net loss per share for the three and six months ended June 30, 2020. Upon us adopting ASU 2020-06 using the modified retrospective transition method on January 1, 2021, we applied the “if-converted” method for calculating any potential dilutive effect of the conversion of the 2019 Notes on diluted net loss per share for the three and six months ended June 30, 2021.

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share for the periods presented (in thousands, except per share amounts):

The following table presents the outstanding shares of our common stock equivalents and the potential dilutive effect of the conversion of the 2019 Notes excluded from the computation of diluted net loss per share as of the dates presented because their effect would have been antidilutive (in thousands):

Note 9. Segment Information

We have one reportable operating segment, which is the development and sale of our RAIN RFID products and services. We identify this one reportable segment based on how our chief operating decision-maker manages our business, makes decisions and evaluates our operating performance. Our chief executive officer is the chief operating decision-maker and reviews financial and operational information on an entity-wide basis as one business activity. We do not have segment managers who are separately accountable for operations, operating results or plans. Accordingly, we determined that we have a single reportable operating segment.

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The chief executive officer reviews information about our revenue categories, which are endpoint ICs and systems. We define systems as reader ICs, readers, gateways and software. The following table presents our revenue categories for the periods presented (in thousands):

Note 10. Deferred Revenue

Deferred revenue, comprising individually immaterial amounts for extended warranty, enhanced maintenance and advance payments on non-recurring engineering services contracts, represents contracted revenue that has not yet been recognized. Deferred revenue as of December 31, 2020, included a $6.0 million advance payment for a system order, which we recognized as revenue for the six months ended June 30, 2021.

The following table presents the changes in deferred revenue for the periods presented (in thousands):

We recognized $6.6 million of revenue related to amounts included in deferred revenue as of December 31, 2020 for the six months ended June 30, 2021. We recognized $371,000 of revenue related to amounts included in deferred revenue as of December 31, 2019 for the six months ended June 30, 2020.

Note 11. Related-Party Transactions

We have a consulting agreement with a limited liability company owned by Cathal Phelan, a member of our board of directors, pursuant to which Mr. Phelan provides advisory and consulting services. The term of the consulting agreement began in May 2020 through December 2020, which was extended by an additional 12 months to December 2021 as mutually agreed upon by Mr. Phelan and us. We recognized $115,200 and $249,600 of consulting fee expense to Mr. Phelan, or the limited liability company owned by Mr. Phelan, for the three and six months ended June 30, 2021, respectively. We recognized $112,000 and $180,000 of consulting fee expense to Mr. Phelan, or the limited liability company owned by Mr. Phelan, for the three and six months ended June 30, 2020, respectively.

Note 12. Restructuring

On February 2, 2021, we restructured our go-to-market organization to strategically align our global sales, product, partner development and marketing teams. As part of the restructuring, we eliminated approximately seven full-time positions within our go-to-market organization, representing about 2% of our workforce. We incurred restructuring charges of $1.2 million for employee termination benefits as well as $50,000 in other associated costs for legal expenses for the six months ended June 30, 2021. We substantially completed our restructuring by June 30, 2021.

A summary of accrued restructuring costs as of June 30, 2021, is shown in the table below (in thousands):

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This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about:

Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A (Risk Factors).

In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Our Business

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 more than 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 the RAIN 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 1,000 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.

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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 introduced, and continues introducing, especially at retail end users, has exacerbated that forecasting difficulty. Covid-19’s impact has been further complicated by countries vaccinating and reopening at different rates, with some seemingly able to manage the transition and others not. Covid-19 also caused long-term shifts, many negative, in other industries important to us, such as aviation and sports. Even in supply chain and logistics, or SC&L, which saw shipment volumes surge in the depths of Covid-19, end users had been reticent to deploy new technologies.

We built endpoint IC inventory through much of 2020, anticipating tight 200mm wafer foundry capacity ahead of our transition to our 300mm M700 product family. We introduced our new Impinj M700 in 2020 and, although it was in production by the end of 2020, we initially saw a slower demand ramp than we expected. Today, with a return to some semblance of post Covid-19 normalcy, demand for all our endpoint ICs, including our M700, has increased dramatically. Worldwide IC wafer demand has also increased, leading to wafer shortfalls in many industries, including ours. In first-quarter 2021, we consumed the inventory we built in 2020 at a pace that exceeded our first-quarter 2021 wafer supply and post-processing capacity. In second-quarter 2021, we began to moderate that inventory burndown, and expect to continue doing so through the next two quarters, stretching our IC supply to our partners and market but constraining our ability to fully capitalize on the increased endpoint IC demand.

For our systems business, Covid-19 delayed pilots and deployments throughout 2020. These delays were due in some cases to businesses being closed by local regulations and in others by reduced or deferred capital expenditures. Some end users accelerated their investments in business-process modernization technologies like RAIN during the pandemic, but even in those cases, Covid-19 delayed deployments for reasons of health and safety, product and labor availability, and store closures. We also saw our distributors normalize their inventory to match Covid-19 demand levels. Like for our endpoint ICs, we built inventory during the pandemic. Also like for our endpoint ICs, we didn’t build enough. Today, we see increased systems demand but packaging delays and packaging price increases causing short supply of our reader ICs, low inventory levels at our distributors, and price increases and component shortfalls for analog, specialized logic, and memory chips constraining reader and gateway supply. Consequently, like for our endpoint ICs, our ability to capitalize on the increased systems demand is constrained.

Our business operations have also been affected by Covid-19. Government restrictions in the early days of the pandemic caused us to mostly close our offices in early 2020. Today, except for a small number of employees who need to be in our offices to fulfill their roles, almost all our employees continue to work from home. As we evaluate how to safely reopen our offices, our first priority is protecting our employees’ health and safety, and we will prioritize health and safety over a rapid office return.

Recently, a resurgence of Covid-19 in geographies where our manufacturing subcontractors are located has caused governments to reinstitute mandatory factory staff reductions and/or closures, periodically impacting our endpoint IC and systems production.

Covid-19 travel restrictions adversely affected our business by slowing new-product launches and typical sales activities, and those activities remain restricted. Although we anticipate that second-half 2021 will bring a return to some semblance of normality, there is no assurance that Covid-19’s impact on our employees or business activities in 2021 will remain modest. Our compliance with legal and regulatory requirements related to Covid-19 may subject us to future challenges, particularly as requirements evolve.

Despite ongoing uncertainties related to Covid-19, we continue investing in research and development and long-term RAIN opportunities. Although we plan to continue making these investments throughout 2021, we may, depending on the business environment, choose to slow or suspend our investments, potentially impairing our ability to meet our long-term strategic objectives.

Covid-19 negatively impacted our results of operations, cash flows and financial position in 2020, and we anticipate that the negative effects of Covid-19 on us and our business will continue in 2021. However, given the ongoing uncertainty over Covid-19’s epidemiological, economic and operational impacts we cannot reasonably estimate the extent or duration of Covid-19’s continuing impact on our business. The extent to which Covid-19 impacts our future results will depend on developments that are unpredictable, including the actions we and others take in response to Covid-19.

For more information on Covid-19’s impact on our business, please refer to Part II, Item 1A (Risk Factors) of this report.

Investing in 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

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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 instances 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.

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 apparel 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 affect 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 SC&L further adopts RAIN. See the section captioned “Covid-19” for additional information.

The pace and scope of end-user adoption, slowed in 2020 by Covid-19, remains uncertain today, potentially causing large fluctuations in our operating results. For a first 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 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 a second historical example, in late 2018 and in 2019 a large north American logistics provider purchased and deployed significant quantities of our gateways, positively impacting our operating results for several quarters, then transitioned to an operational phase in first-half 2020, reducing our gateway sales. For a third example, in first-quarter 2020 we saw high endpoint IC demand as our inlay partners built inventory ahead of Covid-19, followed by several quarters of depressed demand as those same inlay partners consumed that inventory, followed in first-quarter and second-quarter 2021 by high demand as those same inlay partners deliver into recovering end-user opportunities.

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 going forward. 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, insufficient wafer or other product supply, 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 investing in new products. In our endpoint IC business, in 2020 we introduced our new Impinj M700, which offers significant performance advantages over other endpoint ICs on the market and which we believe will foster adoption. In our systems business, in 2020 we introduced our new Impinj R700 reader and in 2021 our new Impinj E710, E510 and E310 reader ICs, which likewise offer significant performance advantages over other readers and reader ICs on the market and which we believe will also foster adoption. Despite us being in full production with the M700 and R700 by the end of 2020, Covid-19 impacted 2020 demand for, as well as the speed with which we were able ramp production of, both. In first-half 2021, demand for one of those products, the M700, outstripped our supply, and we expect it to do so again in second-half 2021. We also continue supporting our partners to produce high-performing, high-quality inlays using the technologically advanced M700.

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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, recovering demand, 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 Customer Deployments

From 2010 to 2020, our endpoint IC sales volumes increased at a compounded annual growth rate of 25%. However, the pace 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), declined again in second- and third-quarter 2020 due to Covid-19, and recovered in fourth-quarter 2020, and first-half 2021. We expect short-term demand to 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.

Our systems business, at least for our readers and gateways, 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 large North American SC&L provider in connection with a project-based gateway deployment. We did not have comparable new project-based revenue in 2020. As another example, in second-quarter 2021, we generated 13% of our quarterly revenue from a project-based gateway deployment for RAIN-based loss-prevention at a large European retailer.

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. Historically, we have been able to compensate these ASP declines by reducing the per-unit cost of most of our products, by reducing supplier costs and implementing manufacturing and quality improvements, as well as by introducing newer and lower-cost products, but the timing of these cost reductions and new-product introductions fluctuates and may not materialize in any given quarter or year. In 2021, due to wafer and component supply shortfalls at many of our suppliers, we anticipate rising costs and delayed supply rather than cost declines. If we are unable to similarly increase our prices, then our operating margins may suffer.

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. Historically, 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 historically lower in the fourth quarter than in the third quarter. We may not see these historical trends hold in 2021 due to the ongoing impacts, both in demand and supply, from Covid-19.

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. Like for our endpoint ICs, we may not see these historical trends to hold in 2021 due to the ongoing impacts, both in demand and supply, from Covid-19.

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, including but not limited to the impacts of Covid-19, can cause our actual results to differ significantly from our expectations, as 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 product availability; fluctuations in our market, including competitor product availability or in 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

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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 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.

In 2021, we are again experiencing wafer shortages due to both significant worldwide demand from multiple industries and semiconductor foundries reallocating wafer capacity to politically significant industries like automotive. We anticipated a 2021 200mm shortfall in 2020 and, in the depths of the pandemic, both built 200mm wafer inventory and accelerated our investment in 300mm M700 post-processing capacity. Regardless, today’s worldwide semiconductor wafer supply imbalance exceeds our prior expectations, and we exited second-quarter 2021 with very limited 200mm inventory, very tight 200mm and 300mm foundry capacity, and 300mm post-processing capacity that remains insufficient in both capacity and maturity to fully capitalize on the market demand. We are currently focused on managing our 200mm wafer supply, accelerating and maturing our 300mm post-processing capacity, and maximizing our total unit volumes to best support our inlay partners and capture the market opportunity. We were previously focused on carefully navigating the crossover between our declining 200mm inventory and our ecosystem ramping the M700, but with today’s wafer-supply constraints, our focus has shifted to simply maximizing total unit volumes. Looking forward, our foundry partner has signaled tight wafer availability, at least in the older-generation semiconductor nodes we use, well into 2022. We are therefore also focused on maximizing our 2022 wafer availability and total unit volumes in light of anticipated strong endpoint IC demand against that constrained wafer supply.

In our systems business, we are experiencing lengthened packaging lead times for our reader ICs, which negatively impacted our ability to meet reader IC demand in first-half 2021. We expect those packaging delays, and our inability to fully meet demand, to continue through second-half 2021. We also anticipate packaging cost increases, likely for several quarters. We have also experienced and expect to continue experiencing shortages and price increases for the electronic and other components our subcontractors use to build our readers and gateways, impacting current and future reader and gateway availability and costs.

Results of Operations

The following table presents our results of operations for the periods indicated: