You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be materially impacted. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
Risks Relating to Our Business and Industry
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.
Covid-19 has already created significant worldwide economic volatility, uncertainty and disruption, and these effects are highly likely to persist for some time. Covid-19 has already, and will likely continue to, adversely affect our financial position, results of operations, cash flows and future business prospects. Our Covid-19 risks include but are not limited to:
|
|
•
|
decreased product demand given the general decline in business activity globally, particularly in the retail industry, as well as overall delays in RAIN market adoption;
|
|
|
•
|
decreased visibility into market demand and consequent challenges in effectively managing our inventory;
|
|
|
•
|
partner-requested preordering as a result of supply concerns which could increase channel inventory;
|
|
|
•
|
decreased gross margins due to increased manufacturing and shipping costs and increased excess and obsolescence charges;
|
|
|
•
|
increased bad-debt expense and reduced cash flow as customers and end-users delay or default on payments in response to Covid-19;
|
|
|
•
|
work and shipping-related restrictions affecting key suppliers’ ability to produce, process and deliver our products;
|
|
|
•
|
increased operating costs such as those associated with work-from-home edicts and increased legal and regulatory demands;
|
|
|
•
|
delays in customer pilots which could delay project-based deployments;
|
|
|
•
|
partner and/or end-customer bankruptcies or defaults which could reduce demand for our products worldwide or supplier bankruptcies which could reduce our ability to meet customer demand;
|
|
|
•
|
delays in research and development efforts which could delay new product introductions or product enhancements;
|
|
|
•
|
inability to engage in in-person sales and market activities, which could reduce our ability to effectively sell our products and drive future demand;
|
|
|
•
|
cost-reduction initiatives, such as lay-offs and furloughs; and
|
|
|
•
|
maintaining employee engagement and productivity in a prolonged work-from-home environment.
|
The extent to which any or all of these risks materially and negatively affect us, and the duration or those impacts, are largely beyond our control. They will depend on the resiliency of the global economy and on actions taken or not taken by key players in the
30
Table of Contents
global economy, including governments, financial and health organizations, businesses and consumers as a result of, and in response to, Covid-19.
The extent of RAIN market adoption is uncertain. If RAIN market adoption does not continue to develop, or develops slower than we expect, our business will suffer.
The RAIN market is relatively new and, to a large extent, unproven. RAIN technology and product adoption, including that of Impinj’s products and platform, will depend on numerous factors, including:
|
|
•
|
whether end users embrace the benefits we believe RAIN offers, and if so whether RAIN will achieve and sustain high demand and market adoption;
|
|
|
|
•
|
whether end users perceive that the benefits of RAIN adoption outweigh the cost and time to install, replace or modify their existing systems and processes; and
|
|
|
|
•
|
whether the technological capabilities of RAIN products and applications meet end users’ current or anticipated needs.
|
|
The adoption of RAIN technology and products has historically been slower than anticipated or forecasted by us and industry sources. Our industry has also experienced periods of accelerated adoption that were not sustained. For example, RAIN adoption accelerated rapidly in 2016, which resulted in longer lead times. We invested in endpoint IC inventory both to meet forecasted demand and to enhance our ability to deliver in the event of another unexpected demand surge. However, in the second half of 2017 and early 2018, the growth rate in endpoint IC shipments decreased relative to 2016, which we believe was due to multiple factors including, but not limited to, delays in new deployments and in planned expansions at several large retailers. In addition, in first quarter 2020, we believe a significant portion of our revenue was driven by customer concerns regarding global supply constraints due to Covid-19, coupled with our ability to respond to this demand by maintaining acceptable lead times throughout the first quarter. We do not expect similar levels of revenue growth to continue. Covid-19 may impact future demand for endpoint ICs, particularly in the retail industry, which in turn could result in an unanticipated increase in our or our inlay partners’ inventory levels.
The pace of RAIN adoption will turn on prospective customers’ knowledge of our products and our ability to convey to them the value of using RAIN products or our platform over those incorporating other technologies. End users and our prospective customers may not be familiar with our products or RAIN in general, or may use other products and technologies to identify, locate, authenticate, engage, track and prevent loss of their items. Additionally, even if prospective customers are familiar with RAIN, our products or platform, a negative perception of, or experience with, RAIN or a competitor’s RAIN products may deter them from adopting RAIN or our products or platform. Before they adopt RAIN, businesses, government agencies and other organizations may need education on the benefits of using RAIN in their operations, and how they outweigh the costs, including potentially significant costs of modifying or replacing existing systems and processes. These educational efforts may not be successful, and organizations may decide that the costs of adopting RAIN outweigh the benefits or may decide to defer near-term RAIN adoption in favor of a more advanced or comprehensive future deployment. Failure of organizations to adopt RAIN generally, and our products and platform specifically, for any reason will hurt the development of our market and, consequently, impair our business and prospects.
Fluctuations in the adoption of RAIN products and solutions may affect our ability to forecast our future operating results, including revenue, gross margins, cash flows and profitability. Moreover, to ensure adequate inventory supply, we must forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers and contract manufacturers based on our estimates of future product demand. Our failure to accurately forecast demand, particularly when introducing new products, may cause us to experience excess product inventory or shortages for sale.
If RAIN adoption by retailers does not continue at the rate we expect, our business will be adversely affected.
Our financial performance depends on the pace, scope and depth of end-user adoption of our products in multiple industries, especially in the retail industry, which is our largest market and which we believe has been a leading indicator of overall RAIN market adoption. Retailers that have a primarily physical presence in the marketplace have experienced financial stress in recent periods. Many of these retailers have deployed RAIN to improve their competitiveness; however, if they fail to compete effectively, the number of stores they maintain, and thus the scope of their RAIN deployments, may decrease significantly. Covid-19, which has caused widespread store closures, has had, and is expected to continue to have, a materially adverse impact on the retail industry. In addition, the Covid-19 pandemic may accelerate a long-term shift in consumer behavior away from physical stores which may adversely impact demand for our products over the longer term. Further, many companies have announced plans to reduce or defer capital expenditures in response to Covid-19-related business impacts. The extent and duration to which Covid-19 will materially impact the retail industry is unclear, as is the extent to which it will impact our product sales.
31
Table of Contents
If retailers or others deploying RAIN fail to realize demonstrable benefits from RAIN or delay or abandon their deployments, overall RAIN market acceptance may be materially and adversely affected. Any widespread delay, slowdown or failure by retailers or other organizations to implement RAIN-based systems generally, and our products and platform specifically, will materially and adversely affect our business, operating results, financial condition and long-term prospects.
If we are unsuccessful in fostering meaningful adoption of our products and platform by end users other than retailers, our business prospects may be adversely affected.
We expect end users to deploy our platform in sectors beyond retail, including, for example in supply chain and logistics, aviation and automotive. Many of these industries, and aviation in particular, have been materially and adversely impacted by Covid-19. The aviation industry has experienced a precipitous drop in fliers which has resulted in significant financial stress. If we fail to make our products and platform an easy-to-deploy, economical solution for use cases in these other sectors, or if participants in these sectors delay or forgo RAIN investments in response to Covid-19 or otherwise, our ability to penetrate them may suffer and our business prospects may be adversely affected.
We have a history of losses and have only achieved profitability intermittently. We cannot be certain that we will increase or sustain profitability in the future.
We have incurred losses since our inception in 2000. While we were profitable between 2013 and 2015, we had a net loss of $4.3 million for the three months ended March 31, 2020 and an accumulated deficit of $267.1 million as of March 31, 2020. Our ability to regain or sustain profitability depends on numerous factors, many of which are out of our control, including continued RAIN adoption and maintaining or growing our market share. We expect significant expenditures to support operations, product development and business and headcount expansion in sales, engineering, and marketing and may, for periods of time, choose to invest more in the opportunity in the short term to grow the market and our market share, to reduce costs, to improve our efficiencies or to shorten our supply chain, over a longer term. If we fail to increase our revenue or manage our expenses, or if our short-term investments in growing the market or our market share do not succeed, we may not attain or sustain profitability in the future.
Fluctuations in our quarterly and annual operating results may adversely affect our business, prospects and stock price.
You must consider our business and prospects in light of the risks and difficulties we encounter in the uncertain and rapidly evolving RAIN market. Because this market is new, large and evolving, predicting its growth rate and ultimate size is difficult. The rapidly evolving nature of the markets in which we sell our products, as well as other factors that are beyond our control, reduce our ability to accurately value our future prospects and forecast our quarterly or annual performance. Moreover, even if endpoint IC sales (one indicator of market adoption) exceed expectations or if we discount prices to win a particularly large opportunity or in response to competition, our revenue and profitability may be positively affected, but gross margins may be negatively affected depending on product mix for the applicable period. If research analysts or investors perceive such a product mix shift negatively, the trading price of our common stock could be adversely affected.
Historically, we have had limited success in accurately predicting future sales of our products and platform for several reasons. End users drive demand for our products, and we sell nearly all our products through channel partners so our ability to determine and forecast end-user demand is limited. We rely on our channel partners to integrate our RAIN-based systems products with end-user information systems and this integration has been uneven and unpredictable in scope, timing and implementation. Also, RAIN-based systems in general often involve time-consuming proofs-of-concepts and other time-consuming steps such as designing and implementing new business processes, which make sales of our system products difficult to forecast. Partly as a consequence, in the past, both we and other industry participants have at times overestimated the RAIN market size and growth rates, then failed to meet expectations.
Our history in recent years reflects the volatility of our sales and limitations in our ability to accurately forecast them. Our 2016 endpoint IC sales exceeded both our expectations and those of our industry’s analysts due in large part to several coincident large-scale end-user deployments. However, in part of 2017 and 2018, the pace of growth in endpoint IC unit-volume shipments decreased relative to 2016, which we believe was due to multiple factors including, but not limited to, delays in new deployments and in planned expansions at several large retailers as well as a correction in our endpoint IC channel inventory. Due to shorter lead times for our endpoint ICs in 2018 and 2019 relative to prior years, we were, prior to the Covid-19 pandemic, increasingly receiving orders and shipping the ordered products within the same quarter. Shortened lead times decreased our ability to predict both optimal inventory and order volume for a quarter. Additionally, customer orders for readers and gateways were generally weighted toward the end of a quarter. Covid-19 has recently introduced even greater uncertainty as the business impact of the pandemic is unprecedented and its full scope and duration are inherently unpredictable.
We expect that for the foreseeable future our visibility into future sales, including both volumes and prices, will continue to be limited. This poor visibility may cause fluctuations in our operating results, particularly on a quarterly basis, that we are unable to predict as well as failure to achieve our expected operating results.
32
Table of Contents
Numerous factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. Factors that may contribute to fluctuations in our operating results and revenue include:
|
|
•
|
the impact of the Covid-19 pandemic on macroeconomic conditions, our business and our customers, end-users, suppliers and other business partners;
|
|
|
•
|
variations in RAIN adoption and deployment delays by end users;
|
|
|
•
|
fluctuations in demand for our products or platform, including by tag manufacturers and other significant customers on which we rely for a substantial portion of our revenue;
|
|
|
•
|
fluctuations in the availability or supply of our products;
|
|
|
•
|
variations in the quality of our products and return rates;
|
|
|
•
|
delays in new-product introductions;
|
|
|
•
|
decreases in selling prices for our products;
|
|
|
•
|
delays in our product-shipment timing, customer or end-user sales or deployment cycles, or work performed under development contracts;
|
|
|
•
|
intellectual property disputes involving us, our customers, end users or other participants in our industry;
|
|
|
•
|
adverse outcomes of litigation or governmental proceedings;
|
|
|
•
|
timing variability in product introductions, enhancements, services, and technologies by us and our competitors and market acceptance of these new or enhanced products, services and technologies;
|
|
|
•
|
unanticipated excess or obsolete inventory as a result of supply-chain mismanagement, new-product introduction, quality issues or otherwise;
|
|
|
•
|
changes in the amount and timing of our operating costs, including those related to the expansion of our business, operations and infrastructure;
|
|
|
•
|
changes in business cycles or seasonal fluctuations that may affect the markets in which we sell;
|
|
|
•
|
changes in industry standards or specifications, or changes in government regulations, relating to RAIN, or to Impinj’s products or platform;
|
|
|
•
|
late, delayed or cancelled payments from our customers; and
|
|
|
•
|
unanticipated impairment of long-lived assets and goodwill.
|
A substantial portion of our operating expenses are fixed for the short term, and as a result, fluctuations in revenue or unanticipated expenses can have a material and immediate impact on our profitability. The occurrence of any one of these risks could negatively affect our operating results in any period, which could cause the price of our common stock to decline.
Our market is very competitive. If we fail to compete successfully, our business and operating results will suffer.
We face significant competition from both established and emerging competitors. We believe our principal current competitors are: in endpoint ICs, NXP and Alien; in reader ICs, ST, Phychips, Iotelligent and MagicRF; in readers and gateways, Alien and Zebra; and in software, Zebra. Our channel partners, including our OEMs, ODMs, distributors, SIs, VARs and software solution partners may choose to compete with us rather than purchase our products, which would not only reduce our customer base but also increase competition in the market, adversely affecting our operating results, business and prospects. Companies in adjacent markets or newly formed companies may decide to enter our market, particularly as RAIN adoption grows. Further, the Chinese government has made development of the Chinese semiconductor industry a priority, potentially increasing competition for us globally while possibly restricting our ability to participate in the Chinese market.
Competition for customers is intense. Because the RAIN market is evolving rapidly, winning customer and end-user accounts at an early stage in the development of the market is critical to growing our business. End users that instead use competing products and technologies may face high switching costs, which may affect our and our channel partners’ ability to successfully convert them to our products. Failure to obtain orders from customers and end users, for competitive reasons or otherwise, will materially adversely affect our operating results, business and prospects.
33
Table of Contents
Some of our competitors may devote more resources than we can to the development, promotion, sale and support of their products. Our competitors include companies that have much greater financial, operating, research and development, marketing and other resources than us. These competitors may discount their products to gain market share. In doing so, they could simply accept smaller margins, or they could maintain margins by achieving cost savings through better, more efficient designs or production methods. To gain share, competitors could also bundle near-field communication RFID, or NFC, products with RAIN products, or stationary readers with handheld readers. New competitors could enter the gateway market or develop RAIN platforms or solutions. Larger or more established companies may deliver and directly compete with our products or platform. Smaller companies could launch new products and applications we do not offer and could gain market acceptance quickly. Moreover, consolidation in the RAIN industry could intensify the competitive pressures that we face. Many of our existing and potential competitors may be better positioned than we are to acquire other companies, technologies or products.
Some of our customers have policies requiring diverse supplier bases to enhance competition and maintain multiple RAIN product providers. Consequently, they tend to avoid purchasing exclusively from us or promoting our brand. Our ability to increase order sizes from these customers and maintain or increase our market share is constrained by these policies. In addition, any decline in quality or availability of our products or any increase in the number of suppliers that such a customer uses may decrease demand for our products and adversely affect our operating results, business and prospects
In short, as the RAIN market develops, we will face ever increasing competition from new or newly enhanced products from our existing competitors, or from entirely new competitors in our market. These competitors may have, or may develop, processes or product designs that will enable them to offer more competitive products than ours. Any failure to compete successfully will materially adversely affect our business, prospects, operating results and financial condition.
Downturns in the industries we serve, particularly retail, may adversely affect our business.
We, and many of our customers and end users of our products, including many significant retailers, are vulnerable to economic downturns and have had difficulty in the past accurately forecasting and planning future business activities. A downturn in the retail industry could disproportionately affect us because retailers comprise a significant portion of the RAIN end users and product volume. The economic downturn associated with Covid-19 presents an unprecedented challenge to all businesses, particularly retail. That retail impact has already affected demand for certain endpoint IC and gateway products we previously developed and built for the EU retail market. Retail store shutdowns due to Covid-19 have reduced demand for those products and we expect future demand, when it returns, to be met by newer endpoint ICs and gateways, causing us to take a one-time excess and obsolescence charge in the first quarter of 2020.
Volatile economic conditions in the near and medium term could also cause our customers or end users to reduce their capital-expense budgets, which could slow RAIN adoption, delay and lengthen deployment of our products, thereby decreasing sales and sales opportunities. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets, as a result of Covid-19 or otherwise. Based on current conditions of the general economy and markets in which we operate worsen, our business will likely be materially and adversely affected.
If we fail to obtain quality products in adequate quantity and in a timely and cost-effective manner, our operating results and growth prospects will be adversely affected.
We do not own or operate manufacturing facilities, and we do not control our manufacturers’ or subcontractors’ ability or willingness to meet our supply requirements. Currently, all our endpoint IC wafers are manufactured by TSMC, and primarily post-processed by our subcontractor Stars; all our reader IC wafers are manufactured by TowerJazz; all our modules are manufactured by Stars and MTI; and all our readers and gateways are manufactured by Plexus or Computrol. We also use subcontractors for post-processing, assembly and testing.
Currently, we do not have long-term supply contracts with TSMC, TowerJazz, MTI, Plexus or Computrol, and neither they nor our subcontractors are required to supply us with products for any specific period or in any specific quantity. Suppliers can allocate production capacity to other companies for any reason and reduce deliveries to us on short notice, negatively affecting our ability to secure enough product for sale.
Some components of our products have longer lead times and we place orders with some of our suppliers five or more months before our anticipated product delivery dates to our customers. We base these orders on our customer-demand forecasts and on an assumed level of production that may prove to be inaccurate. If we inaccurately forecast this customer demand, or if production levels are constrained for any reason, then we may be unable to obtain adequate and cost-effective components, or foundry or assembly capacity to meet our customers’ delivery requirements, or we may accumulate excess inventory or suffer inventory shortages.
34
Table of Contents
For a variety of reasons, manufacturing capacity may not be available when we need it or at reasonable prices, which may result in us not being able to satisfy demand for our products fully or may distort demand. 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. Semiconductor industry analysts predict high 200mm wafer demand again in 2020. As another example, in mid-2016, as a consequence of rapid growth in endpoint IC demand, we depleted our endpoint IC buffer stock and were temporarily unable to satisfy customer demand, causing some customers to purchase competing products even as we increased production. As yet another example, in 2020, the Malaysian factories that produce our readers and gateways and post-process certain of our endpoint ICs were shut down for approximately three weeks due to Covid-19-related public health measures. These kinds of product shortages may result in decreased sales and possible market share losses as our customers purchase competitive products, or alternatively, artificially inflated sales in near-term periods as customers overbuy products and sales declines in future periods as they consume their accumulated inventory.
At times, our suppliers ask us to purchase excess products to ensure we do not face a subsequent shortage. For example, in certain quarters of 2014, 2015 and 2016, we purchased more wafers from TSMC than we required, which affected our available cash for that quarter. In addition, we may invest significantly in inventory to support anticipated growth in our business, as we did with endpoint IC inventory in 2017. If we are unable to sell the additional inventory we purchased, or if we must sell it at lower prices due to excess inventory or obsolescence, our operating results may be adversely affected.
The recent outbreak of Covid-19 caused travel and work restrictions in Asia and our supply chains for some of our key products were, and remain, disrupted. Moreover, shipping services have been affected in certain Asian markets and that has affected our ability to obtain timely delivery of certain products. We have worked, and are continuing to work, to mitigate these disruptions particularly with respect to our products in highest demand, but the scope and duration of these disruptions are unpredictable and supply disruptions could materially and negatively affect our operating results and business performance.
If our suppliers fail to deliver products at reasonable prices or with satisfactory quality levels, then our ability to bring products to market and our reputation could suffer. For example, if supplier capacity diminishes, including from a closure, bankruptcy, production capacity allocations in response to Covid-19, catastrophic loss of facilities or otherwise, we could have difficulty fulfilling our orders, our revenue could decline, and our growth prospects could be impaired. We anticipate requiring three to 18 months to transition our assembly services or foundries to new providers. Such a transition would likely require a qualification process by our customers or end users, which could also adversely affect our ability to sell our products and our operating results. Moreover, in the event of a suspected quality issue, the process of testing suspect products and diagnosing and fixing defects could be time consuming and costly and could constrain our ability to supply customers with products.
If we are unsuccessful introducing new products and enhancements, our operating results will be harmed.
To keep pace with technology developments, satisfy increasingly stringent end-user requirements and achieve market acceptance, we plan to introduce new products and services. We commit significant resources to developing these new products and services while improving performance, reliability and reducing costs. Because our products are often used in, and incorporated into, complex business processes and use cases, introduction of our new products and services may take time to be successful or may not succeed at all.
For example, we are investing substantial resources to develop and enhance every layer of our platform. The market for many of our products is nascent, and we need to create market awareness to drive end-user adoption. Creating market awareness includes promoting our products to meet end-user needs and solve end-user problems. Our efforts have been, and may continue to be, hampered by Covid-19-related work and travel restrictions. We may be late in delivering or improving our products to meet our partners’ or end users’ needs. We may also not adequately solve the problems that end users encounter. We believe we must continue investing significant resources to maintain our competitive position. Still, the success of a new or enhanced product or service is impacted by accurate forecasts of long-term market demand, which is uncertain. We may also fail to anticipate or meet market requirements for new features and functionality. By focusing on certain new products and services, we may miss opportunities for other products and services that may be more widely adopted.
For example, introducing new endpoint ICs may take longer than we expect or may cost more than we expect. Inlay partners may face complications or delays qualifying inlays incorporating our new endpoint ICs with organizations, such as the ARC Program at Auburn University as discussed below, that certify inlays for end-user deployments. Inlay partners may also encounter issues incorporating our new endpoint ICs into their production processes and may see slower-than-expected adoption by end users. We may incur higher testing and manufacturing costs when introducing a new endpoint IC than we anticipated, which could adversely affect our gross margins. Finally, widespread use of new ICs can expose performance anomalies or incompatibilities with existing devices or systems that can require design modifications that can slow production or introduction of new ICs or make them more expensive to produce or introduce. Depending on the scale of these product introduction issues, the success of the product could be adversely affected, and consequently, our business and financial performance could be harmed.
35
Table of Contents
Recent Covid-19 related work-at-home restrictions have affected our ability to pursue research and development efforts at a normal pace and have delayed new-product developments and enhancements. Covid-19 has contributed to a delayed production ramp of our newest endpoint IC family, the Impinj M700, by over two months. These delays have negatively affected our business and financial performance, and may materially and negatively affect our business and financial performance in the future.
If we are unable to develop new products and services using new or enhanced technologies, our competitive position will be adversely affected.
In the future, we may not succeed in developing the underlying technologies or processes necessary to create new or enhanced products and services, or we may not succeed in licensing or otherwise acquiring these technologies from third parties. In some instances, we may be late to market with our innovations, or may choose to be a “fast follower” but subsequently be unable to overcome the lead we gave to our competition. The success of a new or enhanced product depends on technological developments, market positioning and timing, as well as on various implementation factors, including:
|
|
•
|
our timely and efficient completion of the design process;
|
|
|
•
|
our timely and efficient implementation of manufacturing, assembly and testing procedures;
|
|
|
•
|
product or service performance;
|
|
|
•
|
our ability to attract, retain and manage technical personnel;
|
|
|
•
|
the quality, reliability and selling price of the product or service; and
|
|
|
•
|
effective marketing, sales and service.
|
If we are unable to develop new products, features and services to compete effectively, our market share could be adversely affected, which would harm our business, financial condition and operating results.
An inability or limited ability of enterprise systems to exploit RAIN information may adversely affect the market for our products.
A successful end-user RAIN deployment requires not only tags and readers or gateways, but integration with information systems and applications that derive business value from endpoint data. Unless technology providers continue developing and advancing business analytics tools, and end users install or enhance their information systems and applications to use these tools, deployments of RAIN products and applications could stall. Our efforts to foster development and deployment of these tools could fail. In addition, our guidance to business-analytics tool providers for integrating our products with their tools could prove ineffective.
Solution providers and SIs are essential to the RAIN market by providing deployment know-how to end users who are unable to deploy RAIN solutions on their own. Our efforts to train and support these solution providers and SIs could fail. Further, integrating our products with end-user information systems could prove more difficult or time consuming than we or they anticipate, which could delay deployments. If end users are unable to successfully exploit RAIN data, or if we are unable to support solution providers or SIs adequately, or if deployments of our platform are delayed, we could see a material adverse impact on our business, operating results, financial condition or prospects.
Our reliance on a small number of customers could adversely affect our business and operating results.
We sell our endpoint ICs directly to inlay and tag OEMs and ODMs. In 2019, sales to tag OEMs Avery Dennison and Smartrac accounted for 19% and 12% of our total revenue, respectively. In March 2020, Avery Dennison closed its acquisition of Smartrac’s Transponder, or RFID inlay, segment. Our consequent sales concentration to a smaller number of tag OEMs lowers our bargaining power and increases the risk that our pricing or sales could decline quickly based on aggressive pricing or sales measures taken by our competitors or our own failure to compete effectively.
We sell our reader ICs and reader modules to reader OEMs and ODMs, and our readers, gateways and software to VARs and SIs, primarily through distribution. We have experienced in the past and may again experience in the future purchasing delays or disruptions by some of these channel partners due to conditions within their organizations that are independent of market demand for our products or the RAIN market generally. For example, Covid-19 has caused delays in some of our pending system deployments as SIs and VARs and their related end-customers’ business locations are closed as a result of government travel and business restrictions, impacting our ability to replace project-based revenue from completed projects.
36
Table of Contents
We attempt to diversify our partner base by pursuing orders from smaller partners, adding new partners and increasing end-user demand for our products. We may not succeed in doing so. The number of tag OEMs may also continue to decrease by consolidation or otherwise. Even if we succeed in obtaining and retaining new partners, our small number of existing large tag OEMs may continue to account for a substantial portion of our future sales. Changes in markets, channel partners, end users, products, negative economic or financial developments, or poor or limited credit availability may adversely affect the ability of our tag OEMs, reader and gateway partners and distributors to bring our products to market. If our reader IC or reader module OEMs are unable to obtain components for products in which our products are included, our product sales could be adversely affected.
Our future performance will depend, in part, on our ability to attract new tag OEMs, reader and gateway partners and distributors that use, market and support our products effectively, especially in market segments where we have not sold products previously. If we cannot retain our current tag manufacturers, reader and gateway partners and distributors or establish new relationships, our business, financial condition and operating results could be harmed. In addition, our competitors’ strategic relationships with or acquisitions of these tag OEMs, reader and gateway partners or distributors could disrupt our relationships with them. Any such disruption could impair or delay our product sales to end users and increase our costs of distribution, which could adversely affect our sales or operating results.
We also engage with large enterprises to adopt our RAIN solutions in large projects that make our revenues and operating results more volatile than they would be without these large projects. These large projects, often involving sizable purchases of our readers and gateways, are often discrete deployments that can result in significant sales for periods of time. For example, we generated 14% of 2019 total revenue from a North American Systems customer in connection with a project-based gateway deployment for which we do not have orders beyond first quarter of 2020. If we are unable to replace project-based revenue from these discrete projects with new revenue streams, or if end users with sizable projects change or delay them without giving us with adequate notice, our sales could decline significantly from period to period and harm our stock price as a result.
Our reliance on distributors, SIs, VARs and software solution providers to sell and distribute our products to end users could harm our business and revenue.
We rely on our partner ecosystem to sell and distribute our products to end users. Our revenue depends on their ability to successfully market, sell, install and provide technical support for the solutions in which our products are integrated or to sell our products on a standalone basis. Our revenue will decline if our partners fail. Further, faulty or negligent implementation and installation of our products by SIs may harm our reputation.
Because we fulfill through channel partners, our ability to affect or determine end-user demand is limited.
End users drive demand for our products but because we are often at least one step removed from these end users, we may be unable to rectify damage to our reputation caused by our channel partners who have more direct contact with these end users. For strategic or other reasons, our channel partners may choose to prioritize the sale of our competitors’ products over our products. Furthermore, some of our channel partners may offer some products that compete with our products and may limit sales of our products. If our distributors, SIs, VARs or software solution providers are unable to sell enough of our products in a given quarter or if they choose to decrease their inventories of our products for any reason, our sales to these channel partners and our revenue will decline.
Many of our channel partners provide us with customer referrals and cooperate with us in marketing our products; however, our relationships with them may end at any time. If we fail to successfully manage our relationships with our channel partners, our ability to sell our products into new industries and to increase our penetration into existing industries may be impaired and our business will be harmed.
If our channel partners do not properly forecast end users’ demand for our products then they may carry excess product inventory, which could adversely affect our revenue and operating results.
If some or all of our channel partners purchase more of our products than they need to satisfy end-user demand in any particular period, inventories held by the channel partners will grow during that period. The channel partners are then likely to reduce future orders until they realign inventory levels with end-user demand, which could adversely affect our product revenue in a subsequent period.
Distributors may also return our products in exchange for other products, subject to time and quantity limitations. Our reserve estimates for products stocked by our distributors are based principally on reports provided to us by our distributors, typically on a monthly basis. To the extent this resale and channel-inventory information is inaccurate, or we do not receive it in a timely manner, we may not be able to make accurate reserve estimates for future periods, which could adversely affect our operating results.
37
Table of Contents
Our growth strategy depends in part on the success of strategic relationships with third parties and their continued performance and alignment.
To continue our growth, we are investing in our relationships with SIs, VARs and software solution providers that have product offerings that complement our platform and through which we will fulfill sales. Our business will be harmed if we fail to successfully develop and implement such strategic relationships. For example, operating results may suffer if our efforts towards developing our go-to-market relationships consume resources and incur costs, but do not result in a commensurate increase in revenue. In addition, such relationships may involve exclusivity provisions, additional levels of distribution, discount pricing or investments in other companies. The cost of developing and maintaining such relationships may go unrecovered or unrewarded and our efforts may not generate a correspondingly significant increase in revenue.
Selling prices of our products could decrease substantially, which could have a material adverse effect on our revenue and gross margins.
Historically, our market has experienced price erosion. The average selling price, or ASP, of our products has decreased as the RAIN market has developed. We may experience substantial fluctuations in future operating results due to further ASP reductions.
From time-to-time we reduce the selling prices of our products to meet end-customer demands or to respond to market pressure from our competition. For example, during the second half of 2017, competitive pressures led to larger ASP declines for our endpoint ICs than we saw in previous quarters. As the market has grown, we have generally seen competitive pressures increase. We also sometimes reduce prices to encourage adoption, address macroeconomic conditions or for other reasons. We expect to do so again in the future. If we are unable to offset ASP reductions with increased sales volumes or reduced product costs, then our revenue and gross margins will suffer. Further, our customers may be slow to migrate to new, higher margin products. Some competitors have significantly greater resources than we have and may be better able to absorb the negative impact on operating results as a result of such trends.
Rapid market innovation, which we continue to experience, can drive intense pricing pressure, particularly for older products or products using older technology. New market requirements can render old products uncompetitive for new opportunities. When demand for older products declines, ASPs may drop, in some cases precipitously. To profitably sell our products we must continually improve our technology and processes, and reduce costs in line with the lower selling prices. If we and our third-party suppliers and manufacturers cannot advance process technologies or improve efficiencies to a degree sufficient to maintain required margins, we may not be able to sell our products profitably. Should our cost reductions fail to keep pace with reductions in market prices, our business, financial condition and operating results will be materially adversely affected.
Changes in our product mix could cause our overall gross margin to decline, adversely affecting our operating results and financial condition.
We may not be able to maintain our historical gross margins. We generate a majority of our revenue from endpoint IC sales, which have lower gross margins than our other products. If endpoint IC revenue increases as a percentage of total revenue, then our company-wide gross margin will decline. In addition, endpoint IC gross margins are affected by product mix, which can fluctuate based on competitive pressures and end-user demand. A shift in sales mix away from our higher margin products to lower margin products, in particular for our endpoint ICs, will adversely affect our gross margins. As the market for our endpoint ICs matures, we experience price erosion which will adversely affect gross margins if we are not able to realize cost reductions or introduce or shift towards higher-margin ICs. Additionally, competitive alternatives to our products, overall increased competition, weaker than expected demand, currency exchange rates and other factors may lead to lower prices, revenue and margins in the future, adversely affecting our operating results and financial condition.
We generate most of our revenue from our endpoint ICs, and a decline in sales of these products or increased price competition in the market for endpoint ICs could adversely affect our operating results and financial condition.
We derive, and expect to continue to derive, a majority of our product revenue from our endpoint ICs. Accordingly, we are vulnerable to fluctuations in endpoint IC demand – if demand declines then our business and operating results will be adversely affected. In addition, the continued adoption of and demand for our existing endpoint ICs, as well as for our new endpoint ICs, derives in part from our ability to continually innovate and to demonstrate the benefits of using our endpoint ICs with our reader ICs and reader modules, readers and gateways to achieve superior performance over our competitors. If we are not successful in establishing the benefits of using our products and platform, we may not be successful in countering competitive pressures to lower prices for our endpoint ICs and our business and operating results could be adversely affected.
38
Table of Contents
Our products must meet exacting technical and quality specifications. Defects, errors or interoperability issues with our products, the failure of our products to operate as expected, or undue difficulty in deploying our products in actual operations could affect our reputation, result in significant costs to us and impair our ability to sell our products.
Our products may contain defects or errors or may not operate as we or our channel partners or end users expect, which could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. Our products must meet demanding specifications for quality, performance and reliability. Our products are highly technical and designed to be deployed in large, complex systems under a variety of conditions. Channel partners and end users may discover errors, defects or incompatibilities only after deploying our products. For example, environments with certain physical characteristics or with radio-frequency interference may negatively affect gateway performance and our ability to track or locate items. In addition, our channel partners or end users may experience compatibility or interoperability issues between our products and their enterprise software systems or networks, or between our products and other RAIN products they may use.
We may experience quality problems when our products are combined with or incorporated into products from other vendors, such our tag OEMs using our endpoint ICs with their antennas, or our reader partners using our reader ICs or reader modules in their readers. We may have difficulty identifying and correcting the problems when third parties are combining, incorporating or assembling our products.
If we are unable to fix errors or other problems, we could experience:
|
|
•
|
loss of customers or customer orders;
|
|
|
•
|
lost or delayed market acceptance and sales of our products;
|
|
|
•
|
damage to our brand and reputation;
|
|
|
•
|
impaired ability to attract new customers or achieve market acceptance;
|
|
|
•
|
diversion of development resources;
|
|
|
•
|
increased service and warranty costs;
|
|
|
•
|
legal actions by our customers; and
|
|
|
•
|
increased insurance costs.
|
Given the technical and business requirements against which end users evaluate RAIN and our products and platform, our business results and prospects could suffer if we are unable to make our products and our platform easy to deploy. To demonstrate the benefits of our platform, or layers of it, in fulfilling business needs and to develop deployment methods to meet those needs, we frequently enter into proof-of-concept deployments, or POCs, with prospective end users. These POCs can extend for relatively long periods of time, and their ultimate outcome can be mixed for a variety of reasons, including changes in end-user business requirements, changes in end-user commitment to the POC as well as deployment challenges. If we fail to deliver deployable solutions through POCs or otherwise, adoption of our products and platform could be adversely affected and our reputation and our business prospects could suffer.
Although our agreements typically contain provisions that purport to limit our liability for damages resulting from defects in our products, such limitations and disclaimers may not be enforceable or otherwise effectively protect us from claims. We may be required to indemnify our customers against liabilities arising from defects in our products or in their solutions that incorporate our products. These liabilities may also include costs incurred by our channel partners or end users to correct problems or replace our products.
The costs we incur correcting product defects or errors may be substantial and could adversely affect our operating results. Although we test our products for defects or errors prior to product release and during production, our customers still occasionally catch defects or errors that we miss. Such defects or errors have occurred in the past and may occur in the future. To the extent product failures are material, they could adversely affect our business, operating results, customer relationships, reputation and prospects. Also, we assert that our products conform to the Gen2 protocol. Compatibility issues between our products and the protocol, or among different products that each nominally conform to the protocol, could disrupt our customers’ operations, hurt our customer relations and materially adversely affect our business and prospects.
39
Table of Contents
We will lose market share and may not be successful if end users or customers do not design our products into their products and systems.
End users often undertake extensive pilot programs or qualification processes prior to placing orders for large quantities of our products, in particular for reader and gateway products, because these products must function as part of a larger system or network or meet certain other specifications. We spend significant time and resources to have our products selected by a potential end user or customer, which is known as a “design-in.” In the case of reader and gateway products, a “design-in” means the product has been selected to be designed into the end user’s system and, in the case of an endpoint IC, may mean the endpoint IC has met performance criteria established by the end user or customer. If we fail to develop new products that adequately or competitively address the needs of end users or customers, they may not select our products to be designed into their systems, which could adversely affect our business, prospects and operating results.
Our business is dependent upon our brand recognition and reputation, and if we fail to maintain or enhance our brand recognition or reputation, our business could be harmed.
We believe that maintaining and enhancing our brand and our reputation is critical to our relationships with our customers and end users and to our ability to attract new customers and end users. We also believe that our brand and reputation will be increasingly important as competition in our market continues to develop. Our success in this area will depend on a wide range of factors, some of which are beyond our control, including the following:
|
|
•
|
the efficacy of our marketing efforts;
|
|
|
•
|
our ability to continue to offer high-quality, innovative and defect-free products;
|
|
|
•
|
our ability to maintain the security and privacy of our customers’ sensitive and proprietary information;
|
|
|
•
|
our ability to retain existing customers and obtain new customers;
|
|
|
•
|
our ability to maintain high customer satisfaction;
|
|
|
•
|
the quality and perceived value of our products;
|
|
|
•
|
our ability to successfully differentiate our products from those of our competitors;
|
|
|
•
|
actions of competitors and other third parties; and
|
|
|
•
|
positive or negative publicity.
|
If our brand promotion activities are not successful, our operating results and growth may be harmed.
Negative publicity, whether or not justified, relating to events or activities attributed to us, employees, channel partners or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our products and platform and have an adverse effect on our business, operating results and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brands may be costly and time consuming, and such efforts may not ultimately be successful.
If we are unable to protect our intellectual property, our business could be adversely affected.
Our success depends in part upon our ability to obtain, maintain and enforce patents, copyrights, trade secrets, trademarks and other intellectual property rights and to prevent third parties from infringing, misappropriating or circumventing the rights we own or license. Given our industry-leading innovation in RAIN technology, there is a high likelihood that material elements of our products, including our endpoint ICs have been or will be copied by competitors. We take appropriate and feasible measures to protect our intellectual property rights. However, we cannot be sure that we will be able to prevent such conduct by simply enforcing, or threatening to enforce, those rights, particularly against competitors who may have more financial and other resources to deploy against us.
We rely on a variety of intellectual property rights, including patents in the United States and copyrights, trademarks and trade secrets in the United States and foreign countries. Because many RAIN products are used in or imported into the United States, we have historically focused on filing U.S. patent applications. By seeking patent protection primarily in the United States, our ability to assert our intellectual property rights outside the United States is limited. We have registered trademarks and domain names in selected foreign countries where we believe filing for such protection is appropriate and have a small number of foreign patent applications and foreign issued and allowed patents. Regardless, some of our products and technologies may not be covered adequately by any patent, patent application, trademark, copyright, trade secret or domain name. Also, effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United States.
We cannot guarantee that:
|
|
•
|
any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;
|
40
Table of Contents
|
|
•
|
our intellectual property rights will provide competitive advantages to us;
|
|
|
•
|
our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
|
|
|
•
|
any of our pending or future patent applications will be issued or have the coverage we originally sought;
|
|
|
•
|
our intellectual property rights can or will be enforced, particularly in jurisdictions where competition may be intense or where legal protections may be weak;
|
|
|
•
|
we will not lose the ability to assert our intellectual property rights against, or to license our technology to, others and collect royalties or other payments; or
|
|
|
•
|
we will retain the right to ask for a royalty-bearing license in relation to ratification of a standard for which we participate in the standards process if we fail to file an intellectual property declaration pursuant to such standards process.
|
Monitoring and addressing unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property has already occurred and may occur again in the future. Our failure to identify unauthorized use or otherwise adequately protect our intellectual property could adversely affect our business.
Any actual or threatened litigation to enforce our intellectual property could be time consuming, distracting, expensive and could result in outcomes or trigger consequences that are harmful to us. We could incur significant costs and divert our attention and the efforts of our employees by threatening or initiating litigation, which could, in turn, decrease revenues and increase expenses. To the extent we discuss our concerns regarding possible or actual infringement with others prior to or in lieu of litigation, we could also become subject to claims brought by alleged infringers. Because litigation outcomes are uncertain, we could lose in our enforcement action or weaken our intellectual property in the litigation process. An adverse decision in any legal action could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and operating results. At the same time, any decision not to enforce our intellectual property rights through litigation could embolden others to violate or potentially violate our intellectual property rights and thus weaken those rights over time.
In June 2019 we filed a filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and a subsidiary of NXP, in the U.S. District Court for the Northern District of California. Our complaint alleges that certain NXP endpoint ICs infringed and continue to infringe numerous U.S. patents we own. We are seeking, among other things, past damages, including lost profits, and no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorneys’ fees and costs for infringement of each of the asserted patents. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing an endpoint IC NXP introduced in 2017. In response, NXP asserted various affirmative defenses and various counterclaims including inequitable conduct, fraudulent concealment, breach of contract and promissory estoppel. Their counterclaims allege that we violated purported commitments to GS1 EPCglobal. NXP seeks damages and injunctive relief in connection with its counterclaims. In October 2019, NXP USA, Inc. and NXP filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware, which we have moved to transfer to the U.S. District Court for the Western District of Washington. In addition, as of the date of this report, NXP has filed petitions against all of the patents we accuse NXP of infringing in our case in the Norther District of California for inter partes review, or IPR, with the Patent Trial and Appeal Board for the U.S. Patent and Trademark Office. If we are unsuccessful in prosecuting our claims against NXP or in defending NXP’s claims against us, or to the extent we cannot maintain the validity and enforceability of our patents in IPRs or otherwise, we could see a material adverse effect on our business, results of operations and financial condition. Regardless of the outcome, our lawsuit against NXP may increase our expenses, distract management and other key employees, negatively impact relationships with other participants in our supply chain or with customers and could result in retaliatory claims against us.
Some of our know-how or technology is not patented or patentable and may constitute trade secrets. To protect our trade secrets, we have a policy of requiring our employees, consultants, advisors and other collaborators to enter into confidentiality agreements. We also rely on customary contractual protections with our channel partners, suppliers and end users, and we implement security measures intended to protect our trade secrets, know-how or other proprietary information. However, we cannot guarantee we have entered into appropriate agreements with all parties that have had access to our trade secrets, know-how or other proprietary information. Moreover, the agreements we have entered into may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Our trade secrets, know-how or other proprietary information could also be obtained by third parties as a result of breaches of our physical or electronic security systems or our suppliers, employees or consultants could assert rights to our intellectual property.
Finally, our use of overseas manufacturers may involve extra risk. The intellectual property protection in countries where our third-party contractors operate is weaker than in the United States. If the steps we have taken and the protection provided by law do not adequately safeguard our intellectual property rights then we could suffer lost profits due to sales of competing products that exploit our intellectual property rights.
41
Table of Contents
We may assert or face claims of intellectual property infringement which could be time consuming, costly to prosecute, defend or settle, result in the loss of significant rights, and adversely affect RAIN adoption generally.
Many companies in our industry, as well as so-called non-practicing entities, hold large numbers of patents and other intellectual property rights and may vigorously pursue, protect and enforce their intellectual property rights. We have received in the past, and may receive in the future, invitations to license patent and other intellectual property rights to technologies that could be important to our business. We may also receive assertions against us, our channel partners or end users claiming that we or they infringe patent or other intellectual property rights. Claims that our products, processes, technology or other aspects of our business infringe third-party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. If we decline to accept an offer, the offering party may allege that we infringe such patents, which could result in litigation.
Intellectual property disputes affecting our industry may adversely affect RAIN adoption. For example, in 2011 Round Rock Research filed lawsuits against 11 end users, including Walmart and Macy’s, for patent infringement related to their RAIN usage. We believe those lawsuits materially and adversely affected demand for our products by retailers and others from 2011 to 2014. In 2013, Round Rock Research entered into licensing settlement agreements with a substantial number of RAIN vendors, including us; in early 2015, they reached a settlement agreement with the last of the end-user defendants. The Round Rock patents were all expired by the end of 2019. However, we, our channel partners, suppliers or end users could be involved in similar disputes in the future which would materially and adversely affect our operating results and growth prospects.
We may also be forced, or choose, to take action to protect our own intellectual property against infringement by others. Our actions could materially and adversely affect RAIN adoption as well as our own operating and growth prospects. For example, in June, 2019 we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP, in the U.S. District Court for the Northern District of California and in October 2019, NXP USA, Inc. and NXP filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. For more information, see “—If we are unable to protect our intellectual property, our business could be adversely affected.”
Many of our agreements require us to indemnify and defend our channel partners and end users from third-party infringement claims and pay damages in the case of adverse rulings. These damages could be sizable and disproportionate to the business derived from the accused channel partners or end users. Moreover, we may not know whether we are infringing a third party’s rights due to the large number of RAIN-related patents or to other systemic factors. For example, patent applications in the United States are maintained in confidence for up to 18 months after filing or, in some instances, for the entire time prior to patent issuance. Consequently, we may not be able to account for such rights until after publication. Competitors may also have filed patent applications or received patents and may obtain additional patents and proprietary rights that block or compete with our patents. Claims of this sort could harm our relationships with our channel partners or end users and might deter future customers from doing business with us. We do not know whether we will prevail in any future proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, then we could be required to:
|
|
•
|
cease the manufacture, use or sale of the infringing products, processes or technology;
|
|
|
•
|
pay substantial damages for infringement;
|
|
|
•
|
expend significant resources to develop non-infringing products, processes or technology;
|
|
|
•
|
license technology from the party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
|
|
|
•
|
cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; or
|
|
|
•
|
pay substantial damages to our channel partners or end users to cause them to discontinue their use of, or replace, infringing products with non-infringing products.
|
Any of the foregoing results could have a material adverse effect on our business, financial condition and operating results.
42
Table of Contents
We have limited visibility into the length of the sales and deployment cycles for our products.
Because we have limited sales history for our products, and because our market is growing and changing rapidly, we have limited or uncertain visibility into the lengths of the product sales and deployment cycles, and from time-to-time these cycles have been longer than we anticipated. For new product types our visibility into the sales and deployment cycle lengths is even more limited; inasmuch as these products are elements of a systems sale, our experience in the systems-selling cycle is even more limited. Numerous factors can contribute to uncertainties in the cycle lengths, including the time channel partners and end users spend evaluating our products, our time educating them on the products’ benefits, and our time integrating our systems with their systems. The length and uncertain timing of the sales and deployment cycles can lead to delayed product orders. In anticipation of product orders, we may incur substantial costs before the sales cycle is complete and before we receive any customer orders or payments. If a sale is not completed or is cancelled or delayed, we may incur substantial expenses, which could hinder our ability to achieve or maintain profitability or otherwise negatively affect our financial results.
Significant developments stemming from the current U.S. administration’s priorities or initiatives, or the U.K.’s departure from the EU could have a material adverse effect on us.
The current U.S. administration has pursued trade policy that is starkly different from past administrations. Its actions include withdrawing the United States from negotiations for the TPP; renegotiating NAFTA; announcing and imposing tariffs on a wide variety of trading partners including, as of the date of this report, tariffs on up to $550 billion of goods imported into the United States from China; proposing restrictions on free trade generally as well as on immigration to the United States.
Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and immigration to the United States, and any negative sentiments towards the United States as a result of such changes, including our trading partners potentially imposing tariffs on imports of U.S. products, could materially affect our business or the businesses of our customers or end users, which in turn could result in weakening demand by our customers or end users for our products. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees, or the imposition of restrictions on immigration to the United States, could adversely affect sales or hiring and retention, respectively. To the extent U.S. policies engender an economic downturn, in the United States or abroad, or to the extent they increase efforts by other countries to promote its own industries such as the Chinese government’s efforts to promote China’s domestic semiconductor industry, the effects could materially affect our business or the businesses of our customers or end users in many ways, only some of which we can identify as of the date of this report.
In August 2018, the United States imposed tariffs on products manufactured in China and though a preliminary trade agreement between the United States and China was signed in early 2020, certain tariffs remain as negotiations between the countries continue. Current U.S. tariffs affect certain pre-Monza R6 endpoint IC SKUs that our inlay partners import into, and process in, the United States, a relatively small portion of our current endpoint IC sales. However, in general, the imposition of import tariffs by the current U.S. administration could adversely affect our business.
In June 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union or EU, and in January 2020, the United Kingdom officially left the EU, with a transitional period scheduled to end on December 31, 2020. The United Kingdom’s departure from the EU and ongoing negotiation related to the United Kingdom’s future trade and other relationships with the EU have created political and economic uncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Our business in the United Kingdom, the EU and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s decision to leave the EU. There are many ways in which our business could be affected, only some of which we can identify as of the date of this report.
The withdrawal of the United Kingdom from the EU, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal, including the possible breakup of the United Kingdom, may cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. Furthermore, we currently operate in Europe through an Impinj subsidiary based in the United Kingdom, which currently provides us with certain operational, tax and other benefits. The United Kingdom’s withdrawal from the EU could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operations as a result. These possible negative impacts, and others resulting from the United Kingdom’s withdrawal from the EU, may adversely affect our operating results and growth prospects.
43
Table of Contents
We are subject to order and shipment uncertainties. Inaccuracies in our estimates of end-customer or channel-partner demand and product mix, or unexpected external events, could negatively affect our inventory levels, sales and operating results.
We have limited ability to accurately plan purchases or manufacturing because lead times for our products can be lengthy and because our ability to accurately forecast near-term product demand is limited, potentially causing us to have either excess or inadequate inventory, to lose sales, or to reduce our profit margins. High inventory levels and potential obsolescence could result in unexpected expenses or increases in reserves that could adversely affect our business, operating results and financial condition. Low inventory levels could cause us to lose sales, market share or damage our customer relationships.
We sell our products primarily through channel partners and we derive revenue primarily from purchase orders rather than from long-term purchase commitments. To ensure product availability, we typically manufacture from channel-partner forecasts before we receive purchase orders. However, many of our channel partners have difficulty accurately forecasting end-user demand for our products and the timing of that demand. Our channel partners can also cancel purchase orders or defer product shipments, in some cases with little or no advance notice to us. In addition, when we release new products, we may carry higher inventories or have slower inventory turnover depending on our ability to anticipate market acceptance. We also sometimes receive soft commitments for large orders which do not materialize. We have additional uncertainty from our competition’s business practices and from unanticipated external events, such as changes in regulatory standards, all of which can adversely affect demand and consequently our inventory levels, sales and operating results.
We are subject to risks inherent in foreign operations, including social, political and economic flux and compliance with additional U.S. and international laws, including those related to anti-bribery and anti-corruption, and may not be able to successfully maintain or expand our international operations.
In 2019, we derived 67% of our total revenue from sales outside the United States. We anticipate growing our business, in part, by continuing to expand our international operations, which involves a variety of risks, including:
|
|
•
|
changes, some unexpected or unanticipated, in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
|
|
|
•
|
lack of established, clear, or fairly implemented standards or regulations with which our products must comply;
|
|
|
•
|
greater difficulty in enforcing contracts, judgments and arbitration awards in international courts, and in collecting accounts receivable and longer payment and collection periods;
|
|
|
•
|
difficulty in supporting and localizing our international products;
|
|
|
•
|
different or unique competitive pressures as a result of, among other things, the presence of, or preference for, local businesses and market players;
|
|
|
•
|
challenges in managing employees, some foreign nationals, over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;
|
|
|
•
|
challenges in doing business in different languages and in business cultures with varying norms of transparency and compliance with policies than in the United States;
|
|
|
•
|
limited or unfavorable intellectual property protection;
|
|
|
•
|
misappropriation of our intellectual property;
|
|
|
•
|
inflation and fluctuations in foreign currency exchange rates and interest rates;
|
|
|
•
|
withholding taxes or other taxes, or changes thereof, on our foreign income;
|
|
|
•
|
restrictions, or changes thereof, on foreign trade or investment, including currency-exchange controls;
|
|
|
•
|
changes in a country’s or region’s political, regulatory, legal or economic conditions, including, for example, global and regional economic disruptions caused by Covid-19;
|
|
|
•
|
political uncertainty, strife, unrest, or conflict, including, for example, the United Kingdom’s departure from the EU and recent political unrest in Hong Kong;
|
|
|
•
|
differing regulations with regard to maintaining operations, products and public information;
|
|
|
•
|
inequities or difficulties obtaining or maintaining export and import licenses;
|
|
|
•
|
differing labor regulations, including where labor laws may be more advantageous to employees than in the United States
|
|
|
•
|
restrictions on earnings repatriation;
|
|
|
•
|
corrupt or unethical practices in foreign jurisdictions that may subject us to exposure under applicable anti-corruption and anti-bribery laws such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, and the United Kingdom Bribery Act of 2010, or U.K. Bribery Act; and
|
|
|
•
|
regulations, and changes thereof, relating to data privacy, cybersecurity, and the unauthorized use of, or access to, commercial and personal information, particularly in Europe.
|
Various foreign regulatory or governmental bodies may issue rulings that invalidate prior laws, regulations, or legal frameworks in ways that may adversely impact our business. For example, the European Union Court of Justice in October 2015 issued a ruling
44
Table of Contents
immediately invalidating the EU-U.S. Safe Harbor Framework, which facilitated personal data transfers to the United States in compliance with applicable EU data-protection laws. EU and U.S. political authorities then adopted the EU-U.S. Privacy Shield in 2016, providing a mechanism for companies to transfer EU personal data to the United States. In addition, the European Commission adopted the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR imposes more stringent data-protection requirements than the former regulatory regime in the EU and provides for greater penalties for noncompliance of up to the greater of 4% of worldwide annual revenue or €20 million. Based on continuingly evolving standards, there remains significant regulatory uncertainty surrounding data transfers from the European Economic Area to the United States. In China, we are monitoring legal and government advisory developments regarding the Chinese Cybersecurity Law and Draft Cybersecurity Review Measures for impacts to our business related to cross-border transfer limitations and evolving privacy, security, or data protection requirements.
Additionally, the United Kingdom has enacted the Data Protection Act of 2018 that substantially implements GDPR, and has made statutory amendments to the Data Protection Act that further align it with the GDPR, but as of the date of this report it remains uncertain how data protection laws or regulations in the United Kingdom will develop in the medium to long term and how data transfers to and from the United Kingdom will be regulated following the December 31, 2020 expiration of a transition period following the UK’s exit from the EU. This has created uncertainty with regard to data transfers between the UK, the EU, and other jurisdictions, and could require us to further change the way we conduct our business and transmit data between the U.S., the UK, the EU, and the rest of the world. Likewise, the California Consumer Privacy Act of 2018, or the CCPA, became effective on January 1, 2020. The CCPA imposes stringent data privacy and data protection requirements for certain data of California residents, and provides for noncompliance penalties of up to $7,500 per violation. Many aspects of the CCPA and its interpretation and enforcement remain unclear as of the date of this report. The effects of this legislation are potentially far reaching and may require us to modify our data-processing practices and policies and to incur substantial costs and expenses in an effort to comply.
We opened an office in Shanghai, China in 2011. In addition to the risks listed above, our China operations expose us to risks associated with Chinese laws and policies governing Chinese operations and also to U.S. laws and regulations relating to foreign trade and investment, such as those described under the caption “—We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.” To date, legal, policy or regulatory changes have not had a material adverse effect on our business or financial condition, but they may in the future. We may experience increased costs for, or significant impact to, our Chinese operations in the event of changes in Chinese government policies or political unrest or unstable economic conditions in China. The nationalization or other expropriation of private enterprises by the Chinese government could result in total loss of our China investment. Any of these matters could materially and adversely affect our business and results of operations.
Our failure to comply with anti-corruption and anti-bribery laws related to our foreign activities could subject us to penalties and other adverse consequences. Anti-corruption and anti-bribery laws generally prohibit companies and their employees and intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage or directing business to another person, and require companies to maintain accurate books and records and a system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. If we, our intermediaries or our solution providers, SIs, OEMs, ODMs, VARs, distributors, tag manufacturers or other partners fail to comply with FCPA or similar legislation, government authorities in the United States and elsewhere could seek to impose civil or criminal fines and penalties which could have a material adverse effect on our business, operating results and financial conditions. Moreover, China is an area of heightened exposure regarding compliance with anticorruption laws such as the FCPA and the U.K. Bribery Act. We intend to increase our international sales and business in China and, as such, our risk of violating laws such as the FCPA or U.K. Bribery Act also increases.
We have limited resources to market, sell and support our products and services abroad and may not be able to maintain or increase international demand for our products. In addition, regulations or standards adopted by other countries may require us to redesign existing products or develop new products for those countries. For example, foreign governments may impose regulations or standards with which our current products do not comply or may require operation in frequency bands in which our products do not operate. If we are unable to expand international operations in a timely and cost-effective manner in response to increased demand, we could miss sales opportunities and our revenue may decline, adversely affecting our operating results, business and prospects. If we invest substantial time and resources but are unable to expand our international operations successfully and in a timely manner then our business, prospects and operating results will suffer.
We generally conduct our China operations through a wholly owned subsidiary and our European operations through our U.K. subsidiary. For other worldwide jurisdictions, we generally report our taxable income based on our business operations in those jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to the jurisdiction or subsidiary. In the event of a disagreement, if our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in tax charges, higher effective tax rates, reduced cash flows and lower overall profitability.
45
Table of Contents
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain products, technologies and software. We must export our products in compliance with U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions established by the Treasury Department’s Office of Foreign Assets Controls. We may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for our products or limitations on our ability to export or sell our products imposed by these laws may harm our international and domestic sales and adversely affect our revenue. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.
Changes in our products or changes in export, import and economic sanctions laws and regulations may delay us introducing new products in international markets, prevent our customers from using our products internationally or, in some cases, prevent the export or import of our products to or from certain countries altogether. The U.S. government has imposed significant tariffs on a variety of items imported from China. China has responded by imposing significant tariffs on a variety of items imported from the United States. Such tariffs could have a material impact on our product costs and decrease our ability to sell our products to existing or potential customers and harm our ability to compete internationally. Further, it is possible that additional sanctions or restrictions may be imposed by the U.S. government on items imported into the United States from China and any such measures could further adversely affect our ability to sell our products to existing or potential customers and harm our ability to compete internationally. Any change in export or import regulations or legislation; shift or change in enforcement; or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations, adversely affecting our business and results of operations.
Instability or deterioration in the political, social, business or economic conditions in key production jurisdictions could harm our business, financial condition and operating results.
We outsource manufacturing and production of our hardware products to suppliers in a limited number of jurisdictions, some of which experience significant and abrupt political, social, business or economic change. These jurisdictions include Thailand, Malaysia, Taiwan and China, which have experienced significant change in political, social, business or economic conditions in the past and may experience them in the future. Some of these jurisdictions have also experienced, and may continue to experience, intermittent or sustained mandatory shutdowns or other restrictions to combat Covid-19.
For a non-Covid-19 example, we post-process many of our IC wafers, including testing, dicing and other wafer operations, using subcontractors in Bangkok, Thailand, which has experienced ongoing political and social upheaval over the past two decades.
Deterioration in the political, social, business and economic conditions in any jurisdictions in which we have significant suppliers could slow or halt product shipments or disrupt our ability to test or post-process products. In such an eventuality, we could be forced to transfer our manufacturing, testing and post-processing activities to more stable, and potentially more costly regions or find alternative sources. Any such transfer could disrupt our operations for an extended period of time, all of which could harm our business, financial condition and operating results.
Our business operations could be disrupted by natural disasters.
A pandemic, earthquake, fire, flood, or other natural or manmade disaster could decrease demand for our products, disable our facilities, disrupt operations or cause catastrophic losses. Several of our suppliers have been impacted by Covid-19 and have either experienced temporary closures or are operating at reduced capacity. For example, the Malaysian factories that produce our readers and gateways and post-process certain of our endpoint ICs were shut down for approximately three weeks due to Covid-19-related public health measures. As of the date of this report they have returned to production, albeit at reduced levels. We also experienced some challenges shipping products due to reduced transport capacity and increased costs as a result of Covid-19-related disruptions. Moreover, Covid-19-related restrictions on our suppliers and inlay partners will delay availability of inlays incorporating our M700 endpoint ICs by over two months. Most of our facilities and employees are based in Seattle, where the government has imposed restrictions designed to slow the spread of Covid-19 and which have disrupted our normal operations.
46
Table of Contents
We have facilities in areas with a known history of seismic activity, such as our headquarters in Seattle, Washington. We also have facilities in areas with a known history of flooding, such as our office in Shanghai, China. We have a wafer testing and dicing subcontractor in Thailand, a region with a known, and recent, history of flooding. A loss at or of any of these or other of our or our suppliers’ facilities could disrupt operations, delay production and shipments, reduce revenue and engender potentially large expenses to repair or replace the facility. As a specific example, in 2011 and 2012 floods in Thailand disrupted our subcontractor’s facility for approximately six months. During that time, we relied on a secondary subcontractor that had longer lead times for, and decreased yield of, our endpoint IC wafers. We do not carry insurance policies that cover potential losses caused by pandemics, earthquakes, floods or other disasters.
Intellectual property licensing from or to others, including competitors, may subject us to requirements or limitations that could adversely affect our business and prospects.
Various intellectual property license agreements give us access to the patents and intellectual property of others, for example to necessary intellectual property in the Gen2 protocol. We have licensed some of our patents and intellectual property to others, for example for our customers to practice their business using our products, and pursuant to agreements we entered into in connection with us participating in the development of GS1 EPCglobal protocols and ISO standards. For the latter, in the course of us participating in the development of GS1 EPCglobal protocols, including UHF Gen2, UHF Gen2 V2, tag data standards, low-level reader protocol and others, we have agreed to license on a royalty-free basis those of our patents that are necessarily infringed by the practice of these protocols to other GS1 EPCglobal members, subject to reciprocal royalty-free rights from those other members. Similarly, in the course of us participating in the development of ISO standards, we have agreed to license on a RAND basis those of our patents that are necessarily infringed by the practice of certain ISO standards. Because it may not be clear whether a member’s intellectual property is necessary to the practice of a protocol, disputes could arise among members, resulting in our inability to receive a license on royalty-free or RAND terms. Further, some GS1 EPCglobal members declined to license some of their intellectual property under royalty-free terms, instead demanding reasonable and nondiscriminatory, or RAND, terms. Disputes or confusion may arise about whether we may invoke our necessary intellectual property if those members choose to assert their RAND intellectual property, potentially causing or at least complicating any ensuing litigation and harming our business, financial condition and operating results.
In the course of our participation in the development of certain ISO standards we have agreed to grant to all users worldwide a license to those of our patents that are necessarily infringed by the practice of those standards, including at frequencies other than UHF, on RAND terms, again subject to reciprocity. As a result, we are not always able to limit to whom and, to a certain extent, on what terms we license our technologies, and our control over and our ability to generate licensing revenue from some of our technologies may be limited. We may also choose to license our patents or intellectual property to others in the future. We cannot guarantee that any patents and technology that we provide in such current and future licenses will not be used against us.
We rely on third-party license agreements; impairment of those agreements may cause production or shipment delays that could harm our business.
We have licensing agreements with other entities for patents, software and technology used in our manufacturing operations and products. For example, we license tools from design-automation software vendors to design our silicon products. Third-party licenses for patents, software and other technology important to our business may not continue to be available on commercially reasonable terms, if at all. Loss of any such licenses could cause significant manufacturing interruptions, delays or reductions in product shipments until we can develop, license, integrate, and deploy alternative technologies, if even possible, which would materially harm our business and operating results.
Our use of open-source software may expose us to additional risks and harm our intellectual property.
Our products, processes and technology sometimes use or incorporate software that is subject to an open-source license. Open-source software is typically freely accessible, usable and modifiable, and is made available to the general public on an “as-is” basis under the terms of a nonnegotiable license. Use and distribution of open-source software may entail greater risks than use of third-party commercial software. Certain open-source software licenses require a user who intends to distribute the open-source software as a component of the user’s software to disclose publicly part or all of the user’s source code. In addition, certain open-source software licenses require the user of such software to make derivative works of the open-source code available to others at low or no cost. Consequently, open-source licensing can subject our previously proprietary software to open-source licensing terms, which could enable our competitors to create similar offerings with lower development effort and time and ultimately could result in a loss of sales. In addition, open-source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of their code, opening us to business risks that could materially harm our operating results.
47
Table of Contents
We may face claims alleging noncompliance with open-source license terms or infringement or misappropriation of proprietary software. These claims could result in litigation, require us to purchase a costly license, or require us to devote research and development resources to change our software, any of which would have a negative effect on our business and operating results. Few courts have interpreted open-source licenses, and these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our offerings. In addition, if there are changes in the licensing terms for the open-source software we use, we may be forced to re-engineer our solutions, incur additional costs or discontinue sale of our offerings. We cannot guarantee that we have incorporated all open-source software in our software in a manner that is consistent with our current policies and procedures, or in a manner that will not subject us to liability.
Privacy and security concerns relating to RAIN could damage our reputation and deter current or potential customers from using our products.
Privacy advocates and others have raised and may continue raising concerns about RAIN compromising consumer privacy or facilitating theft. These concerns include unauthorized parties potentially collecting personally identifiable information or personal data, tracking consumers, stealing identities or causing other issues relating to privacy or data protection. Consumers may be subject to unauthorized readers or gateways surreptitiously identifying and tracking their RAIN tags to gain information a consumer considers private, even if the consumer employs protective measures. Retailers may inadvertently or perhaps even intentionally read consumers’ tags to gain information, such as shopping behavior, that may be illegal to collect, or if not illegal may be considered intrusive by consumers. Unauthorized readers or gateways could gain access to sensitive information stored in tags despite measures designed to thwart such unauthorized access. For example, criminals seeking to divert or steal high-value pharmaceutical products could seek to identify these products by looking for tags with Electronic Product Codes, or EPCs, corresponding to these products. If such concerns increase, or if actual malicious or inadvertent breaches of privacy or theft occur or are perceived to have occurred, then our reputation could be damaged, our business and prospects may suffer, and we could incur significant liability.
In addition to concerns over privacy or theft, it may be possible for those with malicious intent to misuse RAIN in ways that actually facilitate theft or damage the public trust, such as by changing the EPC on a narcotic to misrepresent it as an over-the-counter product. It may possible to embed computer viruses or other malicious code into endpoint ICs, reader ICs, reader modules, readers, gateways or system software to insert malicious code into end-user systems. More generally, we are vulnerable to software bugs, computer viruses, break-ins, phishing attacks, employee errors or malfeasance, attempts to overload our servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our systems, including our IT systems. The security measures we use to detect unauthorized activity and prevent or minimize security breaches may not function as expected or may be insufficient to protect against attacks. Additionally, we may face delays in identifying or responding to security breaches or other security incidents. If a breach or other security incident occurs or is perceived to occur, customer or end-user data, other personally identifiable information or other confidential information could be accessed, obtained, or used without authorization, our and our customers’ operations could be disrupted and our customers or we could be the target of regulatory investigations or proceedings and private claims, demands, or litigation, and we could face potential liability and significant costs and expenses to remediate and otherwise take action in response to the incident. In cases in which a customer is the target of a regulatory action or private lawsuit, the customer might allege that our products did not function as promised and may sue us for breach of contract, breach of warranty, negligence or take other action. Additionally, if our customers’ security measures are breached or are perceived to have been breached, even if through means beyond our control, our reputation may be damaged, we may be subject to claims, demands, or litigation and our business and prospects could suffer. Moreover, concerns about security and privacy, even if unfounded, could damage our reputation and operating results or could delay overall RAIN industry development. Even if our products meet new or changed standards or regulations, if our security measures are breached or perceived to have been breached as a result of third-party action, our error or criminal act or otherwise, and, as a result, someone obtains or is perceived to have obtained unauthorized access to customer or end-user data, personal data, personally identifiable information, or other confidential information, our reputation could be damaged, our business and prospects may suffer, and we could incur significant liability. We also could be required to expend significant capital and other resources to address any data security incident or breach and to implement measures to prevent further breaches or incidents.
We cannot ensure that any limitation-of-liability provisions in our customer and user agreements, contracts with third-party vendors and service providers or other contracts are enforceable or adequate or would protect us from any liabilities or damages with respect to claims relating to a security breach or other security-related matter. Although our insurance policies include some liability coverage, if we experienced a widespread security breach or other incident then we could be subject to indemnity claims or other damages that either are not covered or exceed our insurance coverage. We also cannot be certain that our insurance coverage is adequate for data-handling or data-security liabilities incurred, or that insurance will continue to be available to us on economically reasonable terms or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more claims against us that exceed our insurance coverage, or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results and reputation.
48
Table of Contents
Government regulations and guidelines and other standards relating to consumer privacy may adversely impact adoption of our products, require us to make design changes or constrain our ability to implement new and desired product features.
Our customers are subject to laws and regulations related to collecting, storing, transmitting and using personal information and personal data, as well as additional laws and regulations that address privacy and security issues related to RFID in general. Because RAIN is a type of RFID, we believe these statutes and regulations apply to RAIN systems. For example, some U.S. states have enacted statutes specifically governing the use of RFID, including prohibitions on mandatory implantation of an RFID IC, unauthorized skimming of information from ID cards and documents, unauthorized personnel tracking using RFID and improper use of RFID tags in drivers’ licenses or on vehicles.
The European Commission, or the EC, has issued guidance to address privacy concerns about RFID. In May 2009, the EC issued a recommendation that retailers in the EU inform their customers when RFID tags are either on or embedded within products. In April 2011, the EC signed a voluntary agreement with private and public entities to develop privacy guidelines for companies using RFID in the EU. The agreement requires companies to conduct privacy impact assessments of new RFID applications and to take measures to address risks identified by the assessment before the RFID application is deployed. While compliance with the guidelines is voluntary, our customers that do business in the EU may have a preference for products that comply with the guidelines. If our RAIN products do not provide the necessary functionality to allow customers to comply with the guidelines, then our business may suffer.
The data-security and privacy legislative and regulatory landscape in the United States and EU, and in other foreign jurisdictions is evolving, and new or changed laws, regulations, guidelines and other standards may adversely impact our business, including our ability to develop future products. If we fail to develop products that implement end-user privacy requirements then end users may choose not to use our products in certain applications, which would harm our business, operating results and financial condition.
Although the Gen2 V2 protocol described below includes features for addressing consumer privacy and authenticating a tag, a third party may still breach these features, including as implemented in our products, in which case our reputation could be damaged, and our business and prospects may suffer.
Alternative technologies or standards, or changes in existing technologies or standards, may adversely affect RAIN market growth and our business.
Technology developments may affect our business in ways we cannot anticipate. Breakthroughs in legacy RFID technologies or markets, including those using low frequency or high frequency technology, could adversely affect RAIN market growth generally and demand for our products in particular. For example, NFC, another type of RFID which today addresses a different market than RAIN could, with breakthrough innovations, compete with RAIN in item tagging. Likewise, new technologies such as organic transistors may allow lower-cost ICs than our current silicon-based technology allows. These competing technologies could use intellectual property that is either not royalty-free or to which we do not have access. If we are unable to innovate using new or enhanced technologies or processes or are slow to react to changes in existing technologies or in the market, or have difficulty competing with advances in new or legacy technologies, then our development of new or enhanced products could be materially impacted and potentially result in product obsolescence, decreased revenue and reduced market share.
To encourage widespread RAIN market adoption, we have participated in developing industry standards and have designed our products to comply with these standards. In 2013, GS1 EPCglobal ratified “UHF Gen2 Version 2” or Gen2 V2, a new version of the Gen2 protocol that underlies RAIN communications. In the future, we could lose our position in GS1 EPCglobal or we could lose our project-editorship role for Gen2. If a competitor introduces a Gen2 V2 product before we do, then we could lose market share of face difficulty selling our products. The introduction of new industry standards, or changes to existing industry standards, could make our products incompatible with the new or changed standards and could cause us to incur substantial development costs to adapt to these new or changed standards, particularly if they were to achieve, or be perceived as likely to achieve, greater penetration in the marketplace. If Gen2 V2 diverges significantly from our or the RAIN market’s needs then our products may likewise fail to keep pace with the market, our competitors’ products and end-user requirements, in which case end users could delay RAIN adoption. Moreover, the adoption or expected adoption of new or changed standards could slow our sale of existing products before we can introduce products based on the new or changed standards. New industry standards or changes to existing standards could also limit our ability to implement new features in our products if those features do not meet the new or changed standards. The lost opportunities as well as time and expense required for us to develop new products or change our existing products to comply with new or changed standards could be substantial, and we may not successfully develop products that comply with new or changed standards. If we are not successful in complying with any new or changed industry standards, then we could lose market share, causing our business to suffer.
49
Table of Contents
We are a founding member of the RAIN Alliance, an industry organization that promotes RAIN technology and solutions globally. Our chief executive officer is presently a director and was previously chairman of the RAIN Alliance. Board membership is an elected position that we could lose in future elections; and it provides industry stature and attendant benefits but is not without risk. If the RAIN market falters, or if the RAIN Alliance falters, then we could be blamed, our reputation and industry position could be impacted and our business could suffer.
In addition, certain organizations develop technical specifications for RAIN tags and test those tags against those specifications. For example, the ARC Program at Auburn University, or ARC, is a resource for end users in retail, aviation and manufacturing to develop performance and quality requirements that a RAIN tag needs to meet for deployments specified by those end users. Certain participants in the RAIN market are sponsors of ARC, but we are not among them. A limited number of organizations other than ARC perform this function as well. ARC or a similar organization could develop specifications that few or none of our endpoint ICs meet, which could adversely affect our business.
Compliance with, and changes in, government spectrum regulations could adversely affect our ability to sell products and impair our operating results.
Government radio regulations require that our readers and gateways be certified for spectral compliance in jurisdictions where they are sold or operated. Our readers and gateways are collectively certified for use in more than 40 countries worldwide, including the United States, Canada, Mexico, China, Japan, South Korea and every country in the EU. If one of our reader or gateway products is found to be noncompliant despite being certified then we could be required to modify field-deployed readers or gateways and could spend significant resources as well as miss sales opportunities in the process. Our revenue could decline, adversely affecting our operating results, financial condition, business and prospects.
Additionally, government regulations may change, possibly without advance notice, requiring us to redesign our products to conform with the new regulations or constraining our ability to implement new features into our products, thereby causing us to incur significant expenses. These expenses include costs associated with obsolete inventory. Regulatory changes may also cause us forego opportunities to improve our products, potentially delaying our time-to-market and adversely affecting our operating results, financial condition, business and prospects.
Our products may cannibalize revenue from each other, which could harm our business.
Sales of some of our products enable our channel partners to develop their own products that compete with other of our products. For example, sales of our reader ICs allow technology companies to build and sell readers and gateways that compete with our products. Similarly, sales of our readers allow our channel partners to build and sell products that compete with our xPortal, xArray and xSpan. We even see cannibalization within our own product line—for example, our xSpan sometimes competes with our xPortal. In the future, we may see one product line expand at the expense of another, or we may be asked by channel partners to disadvantage or divest a product line. We cannot predict whether we can manage such conflicts in the future or retain channel partners despite conflicts. Any of the foregoing could have a material adverse effect on our business, financial condition and operating results.
Acquisitions could result in operating difficulties, dilution and other harmful consequences.
We have evaluated, and expect to continue evaluating, potential strategic transactions, and we may pursue one or more transactions, including acquisitions. We have limited experience executing acquisitions. Any transaction could be material to our financial condition and operating results. Integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures. Acquisition-related risks include:
|
|
•
|
diverting management time and focus from operating our business to acquisition integration;
|
|
|
•
|
difficulties integrating acquired products into our strategy and product plans;
|
|
|
•
|
customers switching from us to new suppliers because of the acquisition;
|
|
|
•
|
inability to retain employees from the business we acquire;
|
|
|
•
|
challenges associated with integrating employees from the acquired company into our organization;
|
|
|
•
|
difficulties integrating accounting, management information, human resource and other administrative systems to permit effective management of the business we acquire;
|
|
|
•
|
potential requirements for remediating controls, procedures and policies appropriate for a public company in the acquired business that prior to the acquisition lacked these controls, procedures and policies;
|
|
|
•
|
potential liability for past or present environmental, hazardous substance, or contamination concerns associated with the acquired business or its predecessors;
|
|
|
•
|
possible write-offs or impairment charges resulting from the acquisition; and
|
|
|
•
|
unanticipated or unknown liabilities relating to the acquired business.
|
50
Table of Contents
Foreign acquisitions involve additional risks beyond those above, including risks related to integrating operations across different cultures and languages, currency risks and the economic, political and regulatory risks associated with other countries. Also, the anticipated benefit of any acquisition, domestic or foreign, may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, debt, contingent liabilities or amortization expenses or goodwill write-offs, any of which could harm our financial condition. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.
Our business could be adversely affected if one or more members of our executive management team departed.
Our success depends, in large part, on the continued contributions of our executive management team, including Chris Diorio, Ph.D., our chief executive officer. None of our executive management team is bound by employment contracts to remain with us for a specified period of time. Our former president and chief operating officer, Eric Brodersen, resigned effective March 2020, and although we currently do not intend to appoint a new chief operating officer in the near future, Mr. Brodersen’s departure will require transition of his leadership and management responsibilities to other members of our management team. The loss of any member of our executive management team could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.
If we are unable to attract, train and retain qualified personnel, especially technical, sales and marketing personnel, then we may not be able to effectively execute our business strategy.
Our success depends on our ability to attract, motivate and retain qualified personnel. Our technical personnel, the source of our technical and product innovations, and our sales and marketing personnel that drive our go-to-market initiatives are especially important. There is no guarantee we can attract and retain these personnel as we continue to pursue our business strategy. The availability of, and competition for, qualified personnel in the Seattle area, where we are headquartered, constrains our ability to attract qualified new personnel. In addition, we may be required to engage in cost containment efforts, such as layoffs and furloughs, in response to Covid-19 that materially impacts our ability to execute our long-term strategy. The loss of the services of one or more of our key employees, or our inability to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and operating results.
Pricing and other provisions in our customer agreements could adversely affect our operating results.
In the ordinary course of business, we enter into agreements containing pricing terms that could, in some instances, adversely affect our operating results and gross margins. For example, some contracts specify future IC, reader or gateway pricing or contain most-favored customer pricing for certain products. Other agreements contain exclusivity terms that prevent us from pursuing certain business with other customers during the exclusivity period. Reducing prices or offering other favorable terms to one customer could adversely affect our ability to negotiate favorable terms with other customers. For competitive or strategic reasons, we may decide to enter into agreements containing these types of provisions, which could impair our operating results.
We and our suppliers are subject to environmental laws and regulations that could impose substantial costs on us and may adversely affect our business, operating results and financial condition.
Some of our facilities, including those devoted to research and development, are regulated under federal, state, local, foreign and international environmental laws. Those laws govern pollutant discharge into air and water; managing, disposing, handling, labeling, and exposure to hazardous substances/wastes; and contaminated site cleanup. We could incur costs, fines and civil or criminal sanctions; third-party property damage or personal-injury claims; or could be required to pay substantial investigation or remediation costs if we were to violate or become liable under environmental laws. Liability under certain environmental laws can be joint and several and without regard to comparative fault. In addition, some of our products contain hazardous substances and are subject to requirements that regulate their content, such as the EU’s Restriction of Hazardous Substances Directive and analogous regulations elsewhere. Although we design our products to be compliant with environmental regulations and require our third-party contractors to comply, we cannot guarantee that we or our products will always comply with those regulations. Environmental laws also tend to become more stringent over time, and we cannot predict the ultimate costs under environmental laws or the timing of these costs. Failure to comply with these and other environmental laws could result in fines, penalties and decreased revenue, which could adversely affect our operating results.
If our third-party contractors fail to operate in compliance with environmental laws, improperly dispose of wastes associated with our products, or improperly comply with requirements governing the hazardous-substance content of our products, we could be held liable or suffer reputational harm.
51
Table of Contents
We may not continue to grow or effectively manage our key operating metrics.
Although we have experienced recent revenue growth, we may not experience future revenue growth and you should not rely on any of our operating results from any prior periods as an indication of future performance. For example, in the fourth quarter of 2017 and the first and second quarters of 2018 our revenue declined compared to the same quarter a year earlier. If we are unable to maintain adequate revenue growth and with it our gross margins, as well as control our expenses then our financial results could suffer and our stock price could decline.
To continue to grow and manage being a public company, we believe we must effectively:
|
|
•
|
recruit, hire, train and manage qualified engineers for our research and development activities;
|
|
|
•
|
add sales and marketing personnel and expand our customer-support activities and offices;
|
|
|
•
|
implement and improve administrative, financial and operational systems, procedures and controls;
|
|
|
•
|
integrate and train new employees quickly and effectively; and
|
|
|
•
|
coordinate growth among our executive, engineering, finance, marketing, sales, operations and customer-support organizations.
|
All the above activities add to our organizational complexity and increase our operating expenses.
Our management team is small. We may have insufficient management resources or experience to manage our business effectively or to pursue all commercial opportunities. We may require significant additional management resources as we grow our business. We may not have adequate resources when we need them and we may not have adequate capital to fund our needs. If we are unable to grow effectively then we may not be able to exploit market opportunities or develop new products, and we may fail to satisfy customer requirements, maintain product quality, execute our business plans or respond to competitive pressures.
We are subject to additional regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our consolidated financial results or prevent fraud. We previously identified a material weakness in our internal control over financial reporting and cannot guarantee we will not have a future material weakness.
We have a short history as a public company. Although our management team and other company personnel devote substantial time to regulatory compliance, we may not effectively or efficiently manage our maturation as a public company. Additionally, we have incurred and will continue to incur significant legal, accounting and other expenses related to compliance with laws, regulations and standards applicable to public companies.
We expect rules and regulations such as the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to continue increasing the time and costs we must devote to compliance as well as to other activities. For example, Section 404 of the Sarbanes-Oxley Act, or Section 404, requires management to report on, and after we no longer qualify as an emerging growth company that our independent registered public accounting firm attest to, the effectiveness of our internal controls over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Section 404 compliance will continue to divert resources and take significant time and effort. We may be unable to successfully complete the procedures, certifications and attestation requirements of Section 404 in a timely manner. We or our independent registered public accounting firm may find internal controls that need improvement or may uncover a material weakness. A material weakness, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. Any inability to provide reliable financial reports or prevent fraud could harm our business.
We may be unable to effectively implement, or effectively implement in a timely manner, the controls and employee training necessary to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. In addition, the Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time, in which case implementing the requisite changes may take us significant time and may require additional controls and employee training. Our growth will challenge our ability to maintain these internal control and disclosure standards. If we fail to successfully complete the procedures, certifications and attestation requirements of Section 404, or if our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, we could be subject to sanctions or investigations by the Securities and Exchange Commission, or SEC, or by other regulatory authorities. Investor perceptions of our company may suffer, likely causing a decline in our stock’s market price. We may not be able to fully comply with the requirements of the Sarbanes-Oxley Act or management or our independent registered public accounting firm may conclude that our internal controls will not be effective in future periods. Regardless of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated operating results and harm our reputation.
52
Table of Contents
A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting. A consequence of a material weakness is a reasonable possibility that a material misstatement in our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
In the course of preparing our consolidated financial statements in prior years, we, in conjunction with our independent registered public accounting firm, identified errors which, combined with other identified control deficiencies, were considered to indicate a material weakness in our internal control over financial reporting. These errors related to accounting and financial disclosure of complex accounting matters related to the cash flow statement presentation of lease incentives in our consolidated interim financial statements for the nine months ended September 30, 2015. In 2016, we identified that we did not reflect the correction of the identified error in our consolidated interim financial statements for the nine months ended September 30, 2015 on the statement of cash flows in our Quarterly Report on Form 10-Q filed with the SEC on November 7, 2016.
We remediated this material weakness as of December 31, 2018, including increasing the depth and experience in our accounting and finance organization, as well as designing and implementing improved processes and internal controls. However, our remediation may not be effective in future periods or may not prevent other material weaknesses or significant deficiencies in our internal control over financial reporting from arising in the future.
We are currently subject to securities class-action litigation and may be subject to similar or other litigation in the future, all of which will require significant management time and attention, result in significant legal expenses and may result in unfavorable outcomes, which may have a material adverse effect on our business, operating results and financial condition, and negatively affect the price of our common stock.
We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. For example, we currently have securities class-action complaints pending against us, our chief executive officer, chief operations officer and former chief financial officer, asserting that we made false or misleading statements in our financial statements, press releases and conference calls during the applicable class periods. The complaints each seek monetary damages, costs and expenses. For more information, see Note 5 of our condensed consolidated financial statements included elsewhere in this report.
We cannot predict the outcome of these proceedings or provide an estimate of potential damages, if any. We believe that the claims in the securities class actions are without merit and intend to defend against them vigorously. Regardless, failure by us to obtain a favorable resolution of the claims set forth in the complaints could require us to pay damage awards or otherwise enter into settlement arrangements for which our insurance coverage may be insufficient. Our assets could even be insufficient to cover amounts that exceed our insurance coverage. Any such damage awards or settlement arrangements in current or future litigation could have a material adverse effect on our business, operating results or financial condition. Even if plaintiffs’ claims are not successful, the litigation will have substantial costs and could significantly and adversely impact our reputation and divert management’s attention and resources, all of which could have a material adverse effect on our business, operating results and financial condition and negatively affect the price of our common stock. In addition, such lawsuits may make it more difficult for us to finance our operations in the future.
Our business could be negatively affected as a result of actions of activist stockholders.
We may be subject to actions or proposals from stockholders that may not align with our business strategies or the interests of our other stockholders. Responding to any such actions or proposals could be costly and time-consuming, disrupt our business operations and divert the attention of our board of directors, management and employees from pursuing our business strategies.
Activist stockholders could create uncertainties as to the future direction of our business. Our competitors could exploit the uncertainties, potentially causing us to lose business or create a perception of instability, which could make it more difficult for us to attract and retain qualified personnel. Similarly, any proxy contest for the election of directors at our annual meeting of stockholders would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by our board of directors and management. Any such activist events or perceived uncertainties as to our future direction may affect our relationships with our customers, vendors, channel partners, investors or other third parties and affect the market price and volatility of our stock.
53
Table of Contents
If we fail to retain finance personnel or fail to maintain our financial reporting systems and infrastructure, we may be unable to timely and accurately report our financial results or comply with the requirements of being a public company, including compliance with the Sarbanes-Oxley Act and SEC reporting requirements, which in turn could significantly harm our reputation and our business.
We have hired personnel with financial reporting and Sarbanes-Oxley Act compliance expertise. Our inability to retain these personnel could adversely impact our ability to timely and accurately prepare and file our financial statements, as well as adversely affect our future financial statements because replacement employees require time and training to learn our business and operating procedures. If our finance and accounting organization is unable, for any reason, to meet the demands of being a public company then the quality and timeliness of our financial reporting may suffer, which could result in errors, filing delays and/or material weaknesses in our internal controls. The consequences of errors or delays in our reported financial statements could cause the trading price of our common stock to decline and could harm our business, operating results and financial condition.
We may need to raise additional capital which may not be available on favorable terms, if at all, causing dilution to stockholders, restricting our operations or adversely affecting our ability to operate our business.
In the course of running our business we may need to raise capital, potentially diluting our stockholders. In December 2019, we issued and sold $86.3 million aggregate principal amount of 2.00% convertible senior notes due 2026, or the 2019 Notes, and we may in the future engage in additional equity, equity-linked or debt financings to secure additional funds. If our financing needs are driven by unforeseen circumstances, such as unforeseen expenditures or if our operating results are worse than we expect, then we may not be able to raise capital on favorable terms, if at all. Debt financing, if available, may include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, expending capital or declaring dividends, or which impose financial covenants that limit our ability to achieve our business objectives. If we need but cannot raise additional capital on acceptable terms then we may not be able to meet our business objectives, our stock price may fall, and you may lose some or all of your investment.
A breach of our security systems could have a material adverse effect on our business.
We use security systems to maintain our facility’s physical and information-technology security and to protect our proprietary and confidential information, including that of our customers, suppliers and employees. Accidental or willful security breaches or other unauthorized access to our facilities or information systems, or breaches due to viruses, loggers, or other malfeasant code in our data or software, or other causes, including phishing, social engineering, and employee or contractor negligence or malfeasance, could compromise access to and the integrity of this information. The consequences of loss and possible misuse of our proprietary and confidential information could include, among other things, unfavorable publicity, damage to our reputation, difficulty marketing or selling our products, customer allegations of breach-of-contract, loss or theft of intellectual property, litigation by affected parties and possible financial liabilities for damages, any of which could have a material adverse effect on our business, financial condition, reputation and relationships with customers and partners. We also rely on third-party providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and financial functions, and we are therefore dependent on the security systems of these third-party providers. These third-party providers also face several risks of security breaches, and our ability to monitor their security is limited. Any security breaches or other unauthorized access to our service-providers’ systems or viruses, loggers, or other malfeasant code in their data or software could expose us to loss or misappropriation of, or unauthorized use or disclosure of, confidential and proprietary information. Because the techniques used to obtain unauthorized access to or sabotage security systems change frequently and are often not recognized until after an attack, we may be unable to anticipate the techniques or implement adequate preventative measures, thereby exposing us to material adverse effect on our business, operations and financial condition.
We may incur significant costs in an effort to detect and prevent security breaches and other security-related incidents. In the event of an actual or perceived security breach, we could be required to expend additional significant capital and other resources in an effort to prevent further breaches. Moreover, we could be required or otherwise find it appropriate to expend significant capital and other resources to respond to, notify third parties of, and otherwise address the breach and its root cause.
Claims relating to an actual or perceived security breach may not be adequately covered by insurance, and may result in increased costs for insurance or insurance not being feasible at all.
54
Table of Contents
Our ability to use net operating losses to offset future taxable income may be limited.
As of December 31, 2019, we had federal net operating loss carryforwards, or NOLs, of $179.1 million and federal research and development credit carryforwards of $12.0 million which we may use to reduce future taxable income or offset income taxes due. We have established a valuation allowance against the carrying value of these deferred tax assets. The tax loss and research and development credit carryforwards begin expiring in 2020. Insufficient future taxable income will adversely affect our ability to utilize these NOLs and credit carryforwards. Reductions in corporate tax rates may also reduce our ability to utilize the NOLs. In addition, under Sections 382 and 383 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more-than 50% ownership change over a three-year testing period is limited in its ability to use its pre-change NOLs and other tax assets to offset future taxable income or income taxes due. Our existing NOLs and credit carryforwards may be subject to limitations arising from previous ownership changes; if we undergo a future ownership change then our ability to use our NOLs and credit carryforwards could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, the causes of which may be outside our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs may also be impaired under state law. As a result of these limitations, we may not be able to utilize a material portion of, or possibly any of, the NOLs and credit carryforwards.
We could be subject to additional income tax liabilities.
We are subject to income taxes in the United States and certain foreign jurisdictions. During the ordinary course of business we use significant judgment in evaluating our worldwide income-tax obligations and we conduct many transactions for which the ultimate tax determination is uncertain. Additionally, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions and these jurisdictions may assess additional income tax against us. Although we believe our tax determinations are proper, the final determination of any tax audits and possible litigation could be materially different from our historical income-tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.
We do not collect sales and use, value-added or similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are either not applicable or an exemption from such taxes applies. Sales and use, value-added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future, including as a result of a change in law. Such tax assessments, penalties and interest or future requirements may adversely affect our operating results.
Risks Relating to Owning Our Common Stock
The market price of our common stock has been and will likely continue to be volatile, and the value of your investment could decline significantly.
There was no public market for our common stock prior to our initial public offering. Since July 2016, when we sold shares of our common stock in our initial public offering through December 31, 2019, our stock price has ranged from $9.95 to $60.85. Securities of companies similar to ours also experience significant price and volume fluctuations. The following factors, in addition to other risks described in this report, may have a significant effect on the trading price of our common stock:
|
|
•
|
price and volume fluctuations in the overall stock market;
|
|
|
•
|
changes in operating performance, stock market valuations, and volatility in the market prices of other technology companies generally, or those in our industry in particular;
|
|
|
•
|
actual or anticipated quarterly variations in our results of operations or those of our competitors;
|
|
|
•
|
actual or anticipated changes in our growth rate relative to our competitors;
|
|
|
•
|
delays in end-user deployments of RAIN systems;
|
|
|
•
|
announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
|
|
|
•
|
developments relating to intellectual property rights or in disputes relating to those rights;
|
|
|
•
|
our ability to develop and market new and enhanced products on a timely basis;
|
55
Table of Contents
|
|
•
|
commencement of, or our involvement in, litigation;
|
|
|
•
|
changes in our board of directors or management;
|
|
|
•
|
changes in governmental regulations or in the status of our regulatory approvals;
|
|
|
•
|
unstable regional political and economic conditions;
|
|
|
•
|
the trading volume of our stock;
|
|
|
•
|
actual or perceived security breaches;
|
|
|
•
|
any future sales of our common stock or other securities;
|
|
|
•
|
financial analysts dropping or reducing their coverage of us; changes in financial estimates by analysts who do cover us; or our failure to meet analyst estimates or investor expectations;
|
|
|
•
|
fluctuations in the values of companies investors perceive to be comparable to us;
|
|
|
•
|
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; and
|
|
|
•
|
general economic conditions and slow or negative growth of markets in which we operate.
|
The market for technology companies like us has experienced extreme price and volume fluctuations often unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors also affect the trading price of our common stock, often regardless of our actual operating performance. Securities class-action litigation is often instituted against companies whose stock prices have declined, as it has been against us. That litigation has already resulted in substantial costs and a diversion of management’s attention and resources, and those costs and diversion could escalate significantly. For further information regarding this litigation risk, please refer to Note 5 of our condensed consolidated financial statements included elsewhere in this report.
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, the trading price of our common stock and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our market. If one or more of the analysts who cover us issues an adverse opinion about us, the trading price of the notes and our common stock, in each case, could decline. If one or more of these analysts stops covering us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our stock price to decline.
Transactions relating to the 2019 Notes may affect the value of our common stock.
If the 2019 Notes are converted by holders, we have the ability under the indenture for the 2019 Notes to deliver cash, common stock or any combination of cash or common stock, at our election upon conversion of the 2019 Notes. If we elect to deliver common stock upon conversion of the 2019 Notes, then doing so will dilute the ownership interests of our existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. Anticipated future conversions of such 2019 Notes into shares of our common stock could depress the price of our common stock. Certain holders of the 2019 Notes may also engage in short selling to hedge their position in the 2019 Notes, which could decrease the price of our common stock.
Additionally, 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 potential dilution to our common stock upon any conversion or settlement of the 2019 Notes or offset any cash payments we are required to make in excess of the principal amount of converted 2019 Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. From time to time, the financial counterparties to the capped calls may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the capped calls. This activity could cause a decrease in the market price of our common stock.
For more information on the 2019 Notes and the capped call transactions, see Note 6 of our condensed consolidated financial statements included elsewhere in this report.
Future sales of our common stock in the public market could cause our stock price to fall.
Significant sales of our stock, especially by our directors, executive officers and principal stockholders, or the perception that these sales might occur, could cause the trading price of the notes and our common stock to decline. These sales, or the possibility that they may occur, also may make it more difficult for us to sell equity securities at a time and price acceptable to us.
56
Table of Contents
We may in the future issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangement or otherwise. Any such issuance, including any issuance of shares upon the conversion of the notes, could result in substantial dilution to our existing stockholders and could cause our stock price to decline.
Our principal stockholders and management own a significant percentage of our stock and are able to exercise significant influence over matters subject to stockholder approval.
As of March 31, 2020, our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially owned approximately 36.2% of our capital stock. As a result, our executive officers, directors and principal stockholders may be able to significantly influence, in their capacity as stockholders, matters requiring approval by our stockholders, including electing directors and approving mergers, acquisitions or other extraordinary transactions. They may have interests that differ from yours and may vote in a way with which you disagree, and which may be adverse to your interests. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove our board of directors or management.
Servicing the 2019 Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 2019 Notes, and our current and future indebtedness may limit our operating flexibility or otherwise affect our business.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance any current or future indebtedness, including the 2019 Notes, or to make cash payments in connection with any conversion of 2019 Notes or upon any fundamental change if holders require us to repurchase their 2019 Notes for cash, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any of our indebtedness, including the 2019 Notes, will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, our existing and future indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
|
|
•
|
make it more difficult for us to satisfy our debt obligations, including the 2019 Notes;
|
|
|
•
|
increase our vulnerability to general adverse economic and industry conditions;
|
|
|
•
|
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other general corporate purposes;
|
|
|
•
|
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
|
|
|
•
|
restrict us from exploiting business opportunities;
|
|
|
•
|
place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
|
|
|
•
|
limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general purposes.
|
Anti-takeover provisions in our charter documents and under Delaware or Washington law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and limit our stock price.
Provisions of our certificate of incorporation and our bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect our stock price. Among other things, our certificate of incorporation and bylaws:
|
|
•
|
permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
|
|
|
•
|
provide that the authorized number of directors may be changed only by resolution of the board of directors;
|
|
|
•
|
provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
|
|
|
•
|
divide our board of directors into three classes;
|
|
|
•
|
restrict the forum for certain litigation against us to Delaware;
|
|
|
•
|
require that any action taken by our stockholders be effected at a duly called annual or special meeting of stockholders and not by written consent;
|
57
Table of Contents
|
|
•
|
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice;
|
|
|
•
|
do not provide for cumulative voting rights (therefore allowing the holders of a plurality of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);
|
|
|
•
|
provide that special meetings of our stockholders may be called only by the chair of the board, our chief executive officer or by the board of directors; and
|
|
|
•
|
provide that stockholders will be permitted to amend our bylaws only upon receiving at least two-thirds of the total votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.
|
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”
Our bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our bylaws provide that, unless we otherwise consent in writing, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit stockholders’ ability to bring a claim in a judicial forum favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
As an emerging growth company within the meaning of the Securities Act, we utilize certain modified disclosure requirements, and those requirements may make our common stock less attractive to investors.
We are an emerging growth company, and for as long as we remain an emerging growth company we may choose to take advantage of exemptions from some reporting requirements applicable to other public companies but not to emerging growth companies, including:
|
|
•
|
not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;
|
|
|
•
|
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
|
|
|
•
|
exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and receive stockholder approval of any golden parachute payments not previously approved.
|
We plan in our filings with the SEC to continue to use the modified disclosure requirements available to emerging growth companies. As a result, our stockholders may not have access to certain information they may deem important.
We can remain an emerging growth company until the earliest of:
|
|
•
|
the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion;
|
|
|
•
|
the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter; or
|
|
|
•
|
the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
|
58
Table of Contents
We have incurred and, in the future, will incur higher costs by being a public company.
We have incurred significant legal, accounting and other costs associated with public-company reporting requirements. Those costs will increase as we transition to no-longer being an emerging growth company. For as long as we remain an emerging growth company, we will use the exemption from the requirement under Section 404 that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting. At the time when our independent registered public accounting firm is required to assess our internal control over financial reporting, the cost of our compliance with Section 404 will increase. If we are unable to comply with those requirements of Section 404 applicable to us, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting, we could incur sanctions or investigations by the SEC or other regulatory authorities which would require additional financial and management resources and further increase costs, all of which could cause the market price of our stock to decline.
We have and will continue to incur costs associated with recently adopted corporate governance requirements, including those of the SEC and The Nasdaq Global Select Market. We expect those governance requirements to lead to ongoing legal and financial costs and make some activities more time consuming and costly. We also expect those requirements to increase the difficulty and expense for us to obtain director and officer liability insurance, and we may need to accept reduced policy limits and coverage or pay substantially higher costs to obtain similar or higher coverage to what we have today. As a result, we may find it difficult to attract and retain qualified persons to serve on our board of directors or as executive officers or may need to pay higher compensation to attract and retain them. Although we monitor developments with respect to those requirements, we cannot predict or estimate the additional costs we may incur or the timing of such costs.