S-1 1 d94993ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on June 2, 2016.

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

IMPINJ, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3577   91-2041398

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

400 Fairview Avenue North, Suite 1200

Seattle, Washington 98109

(206) 517-5300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Chris Diorio, Ph.D.

Chief Executive Officer

400 Fairview Avenue North, Suite 1200

Seattle, Washington 98109

(206) 517-5300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Patrick J. Schultheis

Michael Nordtvedt

Jeana S. Kim

Wilson Sonsini Goodrich & Rosati

Professional Corporation

701 Fifth Avenue, Suite 5100

Seattle, Washington 98104

(206) 883-2500

 

Yukio Morikubo

General Counsel

Impinj, Inc.

400 Fairview Avenue North, Suite 1200

Seattle, Washington 98109

(206) 517-5300

 

Jeffrey R. Vetter

James D. Evans

Ran D. Ben-Tzur

Fenwick & West LLP

1191 Second Avenue, 10th Floor

Seattle, Washington 98101

(206) 389-4510

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  $60,000,000   $6,042

 

 

(1) 

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes shares that the underwriters have the option to purchase.

(2)

Includes the aggregate offering price of additional shares that the underwriters have the right to purchase from the Registrant, if any.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.


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The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 2, 2016

PRELIMINARY PROSPECTUS

 

             Shares

 

 

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Common Stock

 

 

 

We are offering              shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We expect the initial public offering price to be between $              and $             per share. We have applied to list our common stock on The NASDAQ Global Market under the symbol “PI.”

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 12 of this prospectus.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     PER
SHARE
     TOTAL  

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions

   $         $     

Proceeds to Impinj, Inc. Before Expenses

   $         $     

Delivery of the shares of common stock is expected to be made on or about                     , 2016. We have granted the underwriters an option for a period of 30 days to purchase an additional             shares of our common stock.

 

 

 

RBC Capital Markets   

Pacific Crest Securities

a division of KeyBanc Capital Markets 

   Piper Jaffray

 

Needham & Company    Canaccord Genuity

Prospectus dated                     , 2016


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     12   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     44   

USE OF PROCEEDS

     46   

DIVIDEND POLICY

     47   

CAPITALIZATION

     48   

DILUTION

     50   

SELECTED CONSOLIDATED FINANCIAL DATA

     52   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     55   

BUSINESS

     77   

MANAGEMENT

     90   

EXECUTIVE COMPENSATION

     98   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     114   

PRINCIPAL STOCKHOLDERS

     117   

DESCRIPTION OF CAPITAL STOCK

     121   

SHARES ELIGIBLE FOR FUTURE SALE

     127   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON STOCK

     130   

UNDERWRITING

     134   

LEGAL MATTERS

     143   

EXPERTS

     143   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     143   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor any of the underwriters have authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until and including                     , 2016, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside of the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

Unless the context indicates otherwise, as used in this prospectus, the terms “Impinj,” “we,” “us” and “our” refer to Impinj, Inc. and its wholly-owned subsidiaries. We use Impinj, the Impinj logo, the Powered by Impinj shield logo, Monza, Indy, Speedway, xArray, ItemSense, the checkered flag logo and other marks as trademarks in the United States and other countries. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. Before you decide to invest in our common stock, you should read the entire prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless otherwise stated or the context otherwise indicates, references to “Impinj,” “we,” “us,” “our” and similar references refer to Impinj, Inc. and its subsidiaries taken as a whole.

IMPINJ, INC.

If you’ve purchased apparel from a major retailer like Macy’s or Zara, run a race like the New York City Marathon, enjoyed a drink from a Coca-Cola Freestyle soda fountain, hit a ball at Topgolf or checked bags at airports worldwide like Las Vegas McCarran then you’ve probably interacted with the Impinj Platform. Our platform enables wireless connectivity to billions of everyday items such as apparel, race bibs, golf balls and luggage tags and delivers each item’s unique identity, location and authenticity to enterprise and consumer applications.

Overview

Our vision is digital life for everyday items. Our mission is to provide wireless connectivity for these everyday items and to deliver, to the digital world, each item’s unique identity, location and authenticity. Our platform connects billions of everyday items such as apparel, medical supplies, automobile parts, drivers licenses, food and luggage to applications such as inventory management, patient safety, asset tracking and item authentication, delivering real-time information to businesses about items they create, manage, transport and sell. We believe connecting everyday items and delivering real-time information about them is the essence of the Internet-of-Things, or IoT.

The Impinj Platform delivers Item Intelligence, an item’s unique identity, location and authenticity, to enterprise and consumer applications through both hardware and software elements:

Endpoints

 

   

Tag integrated-circuit, or IC, radios that attach to and uniquely identify items. We refer to an item and its attached tag IC as an endpoint.

Connectivity

 

   

Reader ICs that enable wireless, bidirectional communications with tag ICs.

 

   

Stationary or mobile readers that read, write, authenticate or otherwise engage tag ICs.

 

   

Gateways that integrate stationary readers with scanning antennas to locate and track tagged items.

Software

 

   

Software that aggregates and transforms data from endpoint reads, delivers Item Intelligence to enterprise and consumer applications and configures, manages and controls readers and gateways.

We believe we are the only company selling a platform spanning endpoints, connectivity and software. In 2015, we had leading market share with 65% and 61% of the tag and reader IC unit volume, respectively, based on our

 



 

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calculations derived from research conducted by IDTechEx, an information-technology research firm. We believe we continue to have leading market share in the tag IC and reader IC markets. We estimate we enable approximately 70% unit volume of the stationary reader market inclusive of our readers and readers powered by our reader ICs. We also believe the majority of handheld readers use our reader ICs.

End users in a variety of industries including retail, healthcare, automotive, industrial and manufacturing, consumer experience, government, food, datacenter, travel and banking have deployed part or all of the Impinj Platform. We have sold more than 13 billion tag ICs to date, including approximately 2.6 billion and 3.8 billion in the 12 months ended March 31, 2015 and 2016, respectively. To date, our intellectual property portfolio includes 196 issued and allowed U.S. patents, 38 pending U.S. patent applications and two pending international patent applications.

Our total revenue was $63.8 million and $78.5 million for 2014 and 2015, respectively, and $16.1 million and $21.6 million for the three months ended March 31, 2015 and 2016, respectively. We incurred losses since our inception in 2000 until we first became profitable in 2013. Our net income was $297,000 and $900,000 for 2014 and 2015, respectively. Our adjusted EBITDA was $4.9 million and $4.8 million for 2014 and 2015, respectively. See “Selected Consolidated Financial Data—Adjusted EBITDA” for additional information and a reconciliation of net income (loss) to adjusted EBITDA. We had an accumulated deficit of $187.6 million as of March 31, 2016.

Industry Background

We live in a connected world. Smartphones, tablets and other electronic devices share ever-more information over ever-more interconnected radio links, transforming our lives and unlocking unprecedented industry efficiencies. Advancements in wireless technology, cloud computing, search, and storage have paved the way for this IoT era.

According to industry research, approximately 16 billion wireless devices were connected to networks and the Internet in 2014. However, these devices form only a tiny subset of the items in the physical world, the vast majority of which are now connectable but remain unconnected. Apparel, shoes, jewelry, pharmaceuticals, medical supplies, documents, automotive parts, sporting items and food are among the more than a trillion such everyday items connectable to the digital world. But despite the fact that today’s digital infrastructure can process, analyze and use data from such items, the physical infrastructure and processes required to capture and deliver item-level data has historically been nonexistent or labor-intensive, expensive, time-consuming and ineffective, so these items remain unconnected. For example, retailers have not historically had an automated way to track in-store inventory so they resort to infrequent and labor-intensive manual counts. Similarly, hospitals have not historically had an automated, timely way to track biospecimens so they resort to labor-intensive barcode scanning. In these and numerous other examples a lack of real-time information about item identity and location increases inventory carrying costs, reduces operating efficiencies, and consumes labor and time.

Our Solution

We connect everyday items using RAIN, a radio-frequency identification technology we pioneered. We spearheaded development of the RAIN radio standard, lobbied governments to allocate frequency spectrum and cofounded the RAIN Industry Alliance along with Google, Intel and Smartrac. Today, our industry uses the RAIN radio standard nearly exclusively. RAIN spectrum is freely available in 78 countries representing roughly 96.5% of the world’s GDP and the RAIN Alliance has more than 100 member companies worldwide.

We sell a platform that includes tag ICs, reader ICs, readers and gateways that enable wireless connectivity to everyday items, and software that delivers Item Intelligence from endpoint reads. Our platform is secure, easy to

 



 

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deploy and manage, flexible to meet end user needs across a range of industries including retail and healthcare, and scalable from a single location, store or hospital to large enterprises.

Our tag ICs are ideally suited for wirelessly connecting billions of everyday items. They power themselves from a reader’s radio waves so do not need batteries, are readable to 30 feet without line-of-sight yet sell for pennies. Each tag IC uniquely identifies its host item and may include additional functionalities such as item authentication, data storage, security, loss prevention and consumer privacy.

Our reader ICs, readers and gateways communicate bidirectionally with tag ICs, identifying and locating more than 1,000 items-per-second while also supporting the additional functionalities that tag ICs provide. Our reader ICs sell for tens of dollars and our readers and gateways sell for hundreds to thousands of dollars.

Our software, introduced in 2015, extracts Item Intelligence from the wireless item data, delivers it to the cloud, and exposes it to existing and new enterprise and consumer applications through query- and event-based application program interfaces, or APIs. A single software instance can connect and manage hundreds of readers or gateways. We view our software as an operating system that links the physical and digital worlds, enabling end users to access and leverage Item Intelligence.

Industry Use Cases

A variety of industries use RAIN and Item Intelligence. The following use cases are representative of what we believe to be a massive worldwide opportunity, which we believe is still significantly underpenetrated today.

Retail

Retailers such as Macy’s and Zara have turned to RAIN and Item Intelligence, consuming billions of tags each year. These and other retailers drive competitive advantages by tagging individual apparel items to:

 

   

Improve Inventory Visibility. U.S. apparel retailers historically inferred store inventory using manual counts, store-receipt data and point-of-sale data, typically resulting in 65% visibility based on industry sources. From measured data, RAIN offers apparel retailers better than 95% real-time inventory visibility.

 

   

Reduce Out-of-Stocks and Markdowns. Item Intelligence helps retailers increase revenue by enabling them to stock shelves accurately, reducing inventory costs, out-of-stocks and overstock markdowns.

 

   

Enable Omnichannel Fulfillment. Item Intelligence allows retailers to optimize logistics and increase selling opportunities using omnichannel fulfillment, offering online shoppers next-day, direct-from-store delivery or in-store pickup.

 

   

Enhance Shopping Experiences. Item Intelligence enables retailers to engage shoppers with interactive fitting rooms and product displays. It can also provide retailers real-time data on shopper preferences.

 

   

Identify and Prevent Loss. Item Intelligence can help retailers deter theft and uniquely identify stolen items for replenishment.

We sell our products and platform to retailers, fulfilling through our partner channel comprising distributors, system integrators, value-added resellers, or VARs, and software solution partners.

Healthcare

Under the Affordable Care Act, Medicare links hospital reimbursement to patient quality-of-care, increasing pressure on hospitals to have real-time data about assets, inventory, staff and patients. The Veterans Affairs Hospitals, Northwestern Memorial Hospital, North York General and the University of Tennessee Medical

 



 

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Center use the Impinj Platform, fulfilled through our partner ecosystem, to obtain these data. Applications include biospecimen tracking, asset management, automated billing and replenishment of medical consumables, and authentication and visibility of pharmaceutical inventory.

Other Industries

Other industries such as automotive, industrial and manufacturing, consumer experience, food, datacenter, travel and banking are deriving business value from Item Intelligence. A few examples of end users in these industries that have deployed part or all of the Impinj Platform include:

 

   

Automotive. Audi tags parts and cars for assembly and delivery. Love’s Travel Stops uses vehicle windshield tags to enable automatic, cashless fueling.

 

   

Industrial and Manufacturing. Boeing, Bell Helicopter and Eurocopter tag items for aircraft assembly. Carrier Corporation uses RAIN to improve their warehouse operations.

 

   

Consumer Experience. Foot races such as the New York Marathon track runners though tags in race bibs. NASCAR tags tires for team compliance, and Topgolf tags golf balls to score participants’ shots.

 

   

Food. Coca-Cola uses our tag and reader ICs in its Freestyle soda fountains. The Hy-Vee supermarket chain tags items for cold-chain monitoring. Cheeky’s restaurant patrons self-dispense beverages using tagged access cards. McDonald’s uses our gateways to enable direct-to-table food service.

 

   

Datacenter. Cisco and Hewlett-Packard pre-tag servers and other equipment for asset tracking. Intel links our tag ICs with their microprocessors to enable processor-secured storage.

 

   

Travel. Las Vegas, Hong Kong, Amsterdam and other airports use RAIN-enabled luggage tags. Washington offers tagged drivers licenses to speed border crossings.

 

   

Banking. Bank of America and Wells Fargo tag information technology equipment. The Agricultural Bank of China tags money bundles.

Our Opportunity

We believe our market opportunity is massive. Not only are the numbers of tagged items large and growing but so is the infrastructure, in both scale and investment, that produces, encodes, applies, reads and extracts business value from these tagged items. According to industry research, RAIN tag IC volumes grew at a 27% compound annual growth rate, or CAGR, from 2010 to 2015, reaching 5.3 billion in 2015 and are expected to grow to over 20 billion in 2020. The chart below shows yearly worldwide RAIN tag IC sales volumes and our yearly tag IC shipments in billions:

 

 

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Our addressable market in the two largest RAIN opportunities, retail and healthcare, is large and growing. Frost & Sullivan, a market research firm, forecasts the retail opportunity will grow at a 39% CAGR between 2014 and 2020, reaching $5.4 billion by 2020. Transparency Market Research, another market research firm, forecasts the healthcare opportunity will grow at a 14% CAGR between 2014 and 2020, reaching $5.3 billion by 2020. We have additional opportunities in automotive, industrial and manufacturing, consumer experience, government, food, datacenter, travel and banking.

RAIN market adoption has historically been slower than anticipated or forecasted by us and industry sources. For additional information related to RAIN market adoption, please see the section of this prospectus captioned “Risk Factors.”

Our Strengths

We lead the market in connecting and delivering Item Intelligence for everyday items. We believe we can maintain and extend our leadership position as the market grows by leveraging our competitive strengths, including:

Comprehensive Platform. End users who deploy the Impinj Platform gain performance, reliability and ease-of-use we believe is unequaled by “mix-and-match” systems cobbled-together from competitors’ components.

Market Leadership. Our leading market share in tag ICs, reader ICs and stationary readers gives us economies of scale relative to our competitors.

Broad Partner Ecosystem. Our strategy of selling to end users with fulfillment through our worldwide partner ecosystem gives us market reach, penetration and scalability we believe few, if any, of our competitors enjoy.

Technology Leadership. Our intense focus on RAIN and Item Intelligence has enabled us to be first-to-market with innovative, high quality products.

Trusted Brand. We believe our industry leadership, name recognition and reputation for innovative, high-performing and quality products have significantly contributed to our leading market position.

Our Growth Strategy

To further our mission of connecting and delivering Item Intelligence for everyday items, we plan to focus on the following strategic areas:

Continue Investing in Our Platform. Since 2003, we have invested more than $160 million developing our platform. We plan to continue investing in platform functionality, software/hardware linkages, broadening our software capabilities, supporting enhanced tag features and enhancing our gateway functionalities. Since 2003, investment in our platform comprised: $150 million in research and development expense, $9 million in costs for development agreements and $1 million in capitalized internal-use software.

Drive End-User Adoption. We plan to expand our engagements with end users in retail and healthcare, accelerating their adoption of the Impinj Platform, and also intend to target other industries such as automotive, industrial and manufacturing, consumer experience, government, food, datacenter, travel and banking.

Cross-Sell and Up-Sell Our Platform within our Installed Footprint. We believe the majority of RAIN deployments today use one or more of our products, positioning us for future platform cross-sell and up-sell opportunities.

 



 

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Expand within our Existing Customer Base. We will seek to generate additional revenue from existing end users of our platform by expanding their deployment scope and adding new use cases.

Enable Ubiquitous Reading. We plan to invest in next-generation reader ICs to improve functionality, reduce costs, and make Impinj-based readers ubiquitous in industrial and consumer devices and facilities infrastructure.

Risks Associated with Our Business

Our business and ability to execute our strategy are subject to many risks that you should be aware of before you buy our common stock. We describe these risks more fully in the prospectus section captioned “Risk Factors” beginning on page 12. These risks include, among others:

 

   

if adoption of the RAIN market stalls or develops slower than we expect, our business will suffer;

 

   

our market is very competitive;

 

   

our growth prospects depend, in part, on others developing business analytics tools to derive business value from the Item Intelligence the Impinj platform delivers;

 

   

we rely on third-party distributors, system integrators, VARs, and software solution partners to sell our products;

 

   

we have limited marketing and sales resources, and because we fulfill through third parties, our visibility to end-user demand is limited and uncertain;

 

   

we rely on a small number of third parties to manufacture, assemble and test our products and some of our suppliers are sole-source; and

 

   

our executive officers, directors, principal stockholders, and their affiliates, who after this offering will hold more than     % of our outstanding common stock, will have the ability to control the outcome of matters submitted to our stockholders for approval.

Corporate Information

We were incorporated in Delaware in April 2000. Our principal executive office is located at 400 Fairview Avenue North, Suite 1200, Seattle, Washington 98109. Our telephone number is (206) 517-5300. Our website is www.impinj.com. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this prospectus.

 



 

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The Offering

 

Common stock to be offered

             shares

 

Common stock to be outstanding immediately after this offering

             shares

 

Option to purchase additional shares

             shares

 

Use of proceeds

We expect to use $5.0 million of the net proceeds from this offering to repay indebtedness under our mezzanine credit facility and the remainder for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire, license, and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction. See “Use of Proceeds.”

 

Proposed NASDAQ Global Market symbol

“PI”

 

Risk factors

See “Risk Factors” beginning on page 12 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

The number of shares of our common stock outstanding immediately after this offering is based on 155,028,663 shares of our common stock outstanding as of March 31, 2016, and excludes:

 

   

22,978,262 shares of common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $0.32 per share;

 

   

             shares of common stock reserved for future issuance under stock-based compensation plans, including (1)              shares of common stock reserved for issuance under the 2016 Equity Incentive Plan, which will become effective on the date of this prospectus, and any future automatic increase in shares reserved for issuance in accordance with the terms of such plan; (2)              shares of common stock reserved for issuance under the 2016 Employee Stock Purchase Plan, and any future automatic increase in shares reserved for issuance in accordance with the terms of such plan; and (3) 2,150,778 shares of common stock reserved for issuance under the 2010 Stock Option Plan as of March 31, 2016, which shares (plus any shares returned due to award termination) will be added to the 2016 Equity Incentive Plan, upon effectiveness of such plan;

 

   

541,557 shares of Series 2 redeemable convertible preferred stock (which will convert into warrants to purchase an aggregate of 676,926 shares of common stock in connection with the offering) underlying warrants with an exercise price of $0.7765 per share which exclude shares underlying the warrants described below that are being net exercised in connection with this offering; and

 

   

300,000 shares of our common stock underlying a warrant with an exercise price of $0.21 per share.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

a 1-for-              reverse stock split of our common and preferred stock, which became effective             , 2016;

 



 

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the conversion of all our outstanding shares of redeemable convertible preferred stock into an aggregate of 102,274,649 shares of common stock immediately prior to the closing of this offering;

 

   

no exercise of options or warrants outstanding as of the date of this prospectus, except warrants to purchase 2,622,528 shares of Series 2 redeemable convertible preferred stock which will, if the initial per share price to public exceeds the exercise price of the warrants, be net exercised automatically for              shares of common stock at an assumed initial price to public of $              per share, the midpoint of the range reflected on the cover page of this prospectus;

 

   

the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

   

no exercise of the underwriters’ option to purchase additional shares.

 



 

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Summary Consolidated Financial Data

The following table sets forth a summary of our historical financial data as of and for the periods indicated. We derived the summary consolidated statements of operations data for the years ended December 31, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the years ended December 31, 2012 and 2013 from our consolidated financial statements not included in this prospectus. We derived the consolidated statements of operations data for the three months ended March 31, 2015 and 2016 and the consolidated balance sheet data as of March 31, 2016 from unaudited interim consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary to state fairly our results of operations and financial position. Our historical results are not necessarily indicative of the results that may be expected in the future. The summary of our consolidated financial data set forth below should be read together with the consolidated financial statements and the related notes to those statements included in this prospectus, as well as the sections captioned “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     YEAR ENDED
DECEMBER 31,
    THREE MONTHS ENDED
MARCH 31,
 
     2012     2013     2014     2015     2015     2016  
     (in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

            

Revenue

   $ 42,832      $ 55,491      $ 63,763      $ 78,479      $ 16,065      $ 21,631   

Cost of revenue(1)

     24,454        27,040        30,032        37,505        8,015        10,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     18,378        28,451        33,731        40,974        8,050        11,156   

Operating expenses:

            

Research and development expense(1)

     10,517        10,479        13,889        17,005        4,058        5,171   

Sales and marketing expense(1)

     9,700        9,592        10,662        14,343        3,004        4,922   

General and administrative expense(1)

     5,872        5,864        6,765        8,025        1,721        2,931   

Offering costs(1)

     —          —          1,959        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     26,089        25,935        33,275        39,373        8,783        13,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (7,711     2,516        456        1,601        (733     (1,868

Interest income (expense) and other, net

     (3,060     (2,183     (63     (535     (153     (447
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax expense

     (10,771     333        393        1,066        (886     (2,315

Income tax expense

     (96     (98     (96     (166     (19     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (10,867   $ 235      $ 297      $ 900      $ (905   $ (2,330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders:

            

Basic

   $ 114,349 (3)    $ (11,066   $ (11,004   $ (10,401   $ (3,730   $ (5,155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (15,706   $ (11,066   $ (11,004   $ (10,401   $ (3,730   $ (5,155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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    YEAR ENDED
DECEMBER 31,
    THREE MONTHS ENDED
MARCH 31,
 
    2012     2013     2014     2015     2015     2016  
    (in thousands, except per share amounts)  

Net income (loss) per share attributable to common stockholders(2):

           

Basic

  $ 3.17 (3)    $ (0.29   $ (0.27   $ (0.22   $ (0.08   $ (0.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.18   $ (0.29   $ (0.27   $ (0.22   $ (0.08   $ (0.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

           

Basic

    36,108        37,727        40,057        46,712        44,233        51,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    85,905        37,727        40,057        46,712        44,233        51,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share attributable to common stockholders(2) - basic and diluted:

        $ 0.00        $ (0.02
       

 

 

     

 

 

 

Pro forma weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

           

Basic

          148,987          153,477   
       

 

 

     

 

 

 

Diluted

          164,264          153,477   
       

 

 

     

 

 

 

Other Financial Information:

           

Adjusted EBITDA(4)

  $ (5,734   $ 4,316      $ 4,918      $ 4,751      $ (13   $ (821

 

(1) 

Includes stock-based compensation as follows:

 

    YEAR ENDED
DECEMBER 31,
    THREE MONTHS ENDED
MARCH 31,
 
    2012     2013     2014     2015         2015             2016      
    (in thousands)  

Cost of revenue

  $ 46      $ 45      $ 49      $ 31      $ 13      $ 5   

Research and development expense

    377        339        362        305        103        69   

Sales and marketing expense

    378        148        413        692        144        205   

General and administrative expense

    387        275        313        150        46        55   

Offering costs

    —          —          38        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 1,188      $ 807      $ 1,175      $ 1,178      $ 306      $ 334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) 

See note 2 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculation of our net loss per share attributable to common stockholders—basic and diluted, and our pro forma net income per share attributable to common stockholders—basic and diluted.

(3)

2012 net income (loss) attributable to common stockholders and net income (loss) per share attributable to common stockholders—basic and diluted was impacted by the recapitalization of previously outstanding preferred stock.

 



 

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(4) 

See “Selected Consolidated Financial Data—Adjusted EBITDA” for additional information and a reconciliation of net income (loss) to adjusted EBITDA.

 

     AS OF MARCH 31, 2016  
     ACTUAL     PRO
FORMA(1)
    PRO
FORMA  AS
ADJUSTED(2)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 14,822      $ 14,822      $                

Working capital

     15,421        15,421     

Total assets

     60,530        60,530     

Total long-term debt

     23,583        23,583     

Warrant liability

     2,811        —       

Redeemable convertible preferred stock

     100,788        —       

Accumulated deficit

     (187,645     (187,645  

Total stockholders’ equity (deficit)

     (89,770     13,829     

 

(1) 

Reflects the (a) automatic conversion of all outstanding shares of redeemable convertible preferred stock as of March 31, 2016 into an aggregate of 102,274,649 shares of common stock immediately prior to the closing of this offering, (b) conversion of the preferred stock warrants classified as liabilities to common stock warrants, assuming no exercise, and (c) effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.

(2) 

Reflects the pro forma adjustments set forth in the immediately preceding note and (a) the sale and issuance by us of shares of common stock in this offering at an assumed initial price to public of $              per share, the midpoint of the range reflected on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, (b) the automatic net exercise of warrants to purchase 2,622,528 shares of Series 2 redeemable convertible preferred stock which will, if the initial per share price to public exceeds the exercise price of the warrants, be net exercised automatically for              shares of common stock at an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, and (c) the application of such proceeds as described in the section captioned “Use of Proceeds.” The pro forma as adjusted information set forth in the table above is illustrative only and will be adjusted based on the actual initial price to public and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial price to public of $              per share, the midpoint of the range reflected on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $              million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of              in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $              million, assuming that the assumed initial price to public remains the same, and after deducting the underwriting discounts and commissions.

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the risks and uncertainties described below, which we believe are the material risks of our business and this offering. Our business, financial condition, operating results or growth prospects could be harmed by any of these risks. In such an event, the trading price of our common stock could decline, and you may lose all or part of your investment. In assessing these risks, you should also refer to all of the other information contained in this prospectus, including our consolidated financial statements and related notes.

Risks Related to Our Business and Industry

RAIN market adoption is uncertain. If RAIN market adoption does not continue to develop, or develops more slowly 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 the Impinj Platform and Item Intelligence, 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 or replace 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 in late 2010 and early 2011, but then decelerated, in part, we believe, due to a patent infringement lawsuit filed by Round Rock Research in 2011 against several large retailers and other end users. Round Rock settled with RAIN suppliers in late 2013, however the end users that were parties to the lawsuit did not finalize their settlements with Round Rock until early 2015. Near-term RAIN adoption depends on large organizations with market influence, particularly in the retail industry, continuing to deploy RAIN solutions. Long-term RAIN market growth will depend on adoption by other industries and government agencies. 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 Item Intelligence, a negative perception of, or experience with, RAIN or a competitor’s RAIN products may deter them from adopting RAIN or our products. Before they adopt RAIN, businesses, government agencies and other organizations may need education on the benefits of using RAIN in their operations. These educational efforts may not be successful, and organizations may decide that the costs of adopting RAIN outweigh the benefits. Failure of organizations to adopt RAIN generally, and the Impinj 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 may affect our ability to forecast our future operating results, including revenue, 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 demand for particular products. Our failure to accurately forecast demand for RAIN solutions may cause us to experience excess inventory levels or a shortage of products available for sale.

If RAIN adoption by retailers does not continue at the rate we expect, our business will be adversely affected.

The retail apparel industry leads RAIN adoption, and end users in the retail industry were the largest consumers of our products in 2015. We believe the retail industry is a leading indicator of the market adoption of RAIN

 

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solutions and if large apparel retailers in particular continue to adopt the Impinj Platform adoption within the retail industry and in other industries will accelerate. As such, the retail industry is our key strategic focus.

If retailers or other early adopters fail to realize demonstrable benefits from RAIN or delay or abandon their deployments, overall RAIN market acceptance may be materially and adversely affected. For example, in July 2012, J.C. Penney Company, Inc. announced plans to tag every item in their stores by February 2013; however, they subsequently stopped the RAIN deployment after experiencing challenging financial results and a change in senior management. Any widespread delay, slowdown or failure by retailers or other organizations to implement RAIN-based systems generally, and our products and the Impinj Platform specifically, will materially and adversely affect our business, operating results, financial condition and long-term prospects.

We have a history of losses and only recently achieved profitability. We cannot be certain that we will increase or sustain profitability in the future.

We have incurred losses since our inception in 2000 and only first became profitable in 2013. Although we had net income of $297,000 and $900,000 for 2014 and 2015, respectively, we had an accumulated deficit of $187.6 million as of March 31, 2016. Our ability to increase or sustain profitability depends on numerous factors, many of which are out of our control, including continued RAIN adoption, our market share and our margins. We expect significant expenditures to support operations, product development, and business and headcount expansion in sales, engineering, and marketing as a public company. If we fail to increase our revenue or manage our expenses, we may not increase 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 and evolving, predicting its future growth rate and 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 evaluate our future prospects and forecast quarterly or annual performance.

End users drive demand for our products. Because we sell nearly all of our products through channel partners, our ability to determine end-user demand is limited. In addition, we rely on our channel partners to integrate our products with end-user information systems and this integration has been uneven and unpredictable in scope, timing and implementation. In the past, both we and other industry participants have overestimated the RAIN market size and growth rates. To date, we have had limited success in accurately predicting future sales of our products and platform. 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.

Numerous other 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:

 

   

variations in RAIN adoption and deployment delays by end users;

 

   

fluctuations in demand for our products, the Impinj Platform or Item Intelligence, including by tag manufacturers and other significant customers on which we rely for a substantial portion of our revenue;

 

   

fluctuations in the available supply of our products;

 

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variations in the quality of our products and return rates;

 

   

declines 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, introduction of new products, 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, the Impinj Platform, or Item Intelligence;

 

   

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 particular 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 readers and gateways, Zebra Technologies Corporation, Alien Technology Corporation, or Alien; in reader ICs, AMS AG and Phychips Inc.; and in tag ICs, NXP B.V., or NXP, and Alien. Our channel partners, including distributors, system integrators, VARs, and software solution partners, may enter our market and 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. In addition, companies in adjacent markets or newly formed companies may decide to enter our 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.

Some of our competitors have longer operating histories and much greater financial, research and development, marketing and other resources than we have. Consequently, some of these competitors may be able to devote more resources to the development, promotion, sale and support of their products. These competitors may also be

 

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able to discount their product pricing, or bundle their products with other products, to gain market share. For example, certain providers could bundle near-field communication, or NFC, products with RAIN products, or could bundle stationary readers with handheld readers. In addition, 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 Item Intelligence. 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. They do not have an interest in purchasing exclusively from one supplier or promoting a particular 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.

We cannot assure you that our products will continue to compete favorably or that we will be successful in the face of increasing competition from new products, or enhancements introduced by our existing competitors, or new companies entering our market. In addition, we cannot assure you that our competitors do not have, or will not develop, processes or product designs that currently or in the future will enable them to produce competitive products at lower costs 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.

Worldwide economic conditions have exhibited significant fluctuations in recent years, and market volatility and uncertainty remain widespread. As a consequence, we and our customers have had extreme difficulty forecasting and planning future business activities accurately. These economic conditions could cause our customers or end users to reduce their capital-expense budgets, which could decrease spending for our products resulting in delayed and lengthened deployment, a decrease in sales or a loss of sales opportunities. The retail industry is subject to volatility, especially during uncertain economic conditions. A downturn in the retail industry in particular may disproportionately affect us because retailers comprise a significant portion of the RAIN end users. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed.

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. Currently, all our tag ICs are manufactured by Taiwan Semiconductor Manufacturing Company Limited, or TSMC, and primarily post-processed by our subcontractor Stars Microelectronics (Thailand) Public Company Limited, or Stars; all our reader ICs are manufactured by Tower Semiconductors Ltd., or TowerJazz; and all our readers and gateways are manufactured by Plexus Corp., or Plexus, or Western Corporation. We also use subcontractors for post-processing, assembly and testing. We do not control our manufacturers’ or subcontractors’ ability or willingness to meet our supply requirements.

Currently, we do not have long-term supply contracts with TSMC, TowerJazz, Plexus or Western Corporation, 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’ and reduce deliveries to us on short notice. Our suppliers may allocate capacity to other companies, which could impair our ability to secure sufficient product supply for sale.

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. If we inaccurately forecast this customer

 

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demand then we may be unable to obtain adequate and cost-effective foundry or assembly capacity to meet our customers’ delivery requirements, or we may accumulate excess inventory.

Manufacturing capacity may not be available when we need it or at reasonable prices. For example, in 2010 we experienced significant shortages in tag IC delivery from TSMC relative to our submitted purchase orders because of high demand for foundry capacity in the semiconductor industry. Such shortages adversely affected our ability to meet our obligations to our customers and, in some cases, caused customers to cancel orders, qualify alternative suppliers or purchase from our competitors. In response to any future shortages, our customers may act similarly or, alternatively, may overbuy our products, which could artificially inflate sales in near-term periods while leading to sales declines in future periods as our customers 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 the second quarter of 2014, we purchased more ICs from TSMC than required, which affected our available cash for the quarter. If we are unable to sell the additional inventory we purchased, or if we must sell it at lower prices due to obsolescence, our operating results may be adversely affected.

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 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.

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 solutions. We commit significant resources to developing these new products and solutions while improving performance, reliability and reducing costs. For example, we are investing substantial resources to develop and enhance our platform software but do not expect to realize material revenue from this software in the near future. The market for our software is nascent, and we need to create market awareness of its benefits to drive end-user adoption. Creating market awareness includes promoting our software as a useful platform on which end users, software developers, consultants, system integrators and others can develop applications that can deliver tailored functionality and thereby accelerate adoption. We may find that our software does not meet the current or anticipated needs of our channel partners or end users. In addition, we have limited experience developing and selling software products and cannot be certain that our proposed pricing model or sales strategy will be successful. We rely on and must train our channel partners to sell, develop applications for and integrate our software with end users’ systems, but we cannot guarantee that we or they will be successful doing so. We believe that we must continue to dedicate a significant amount of resources to our development efforts to maintain our competitive position. We also cannot be certain that our software will generate revenue from these investments for several years, if it all, or that such revenue will exceed the investment we are committing to develop and deploy our software.

The success of a new or enhanced product is impacted by accurate forecasts of long-term market demand. For example, our xArray gateway is a relatively new product that incorporates enhanced technological features, but we cannot be certain whether demand for xArray will develop as forecasted. We may also fail to anticipate or meet market requirements for new features and functionality. By focusing on certain new products and industries, we may miss opportunities for other products and applications that may be more widely adopted.

In addition, we enter into non-recurring engineering, or NRE, development agreements which typically include initial funding with a requirement for us to meet certain milestones in order to receive additional funding for the NRE engagement. If we are unable to meet such milestones, we may not realize the full benefits of the NRE engagement.

 

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If we fail to introduce new or enhanced products in a timely fashion to meet our channel partners’ or end-users’ needs or do not achieve the milestones in our NRE engagements then we will lose market share and our revenue and financial condition could be materially adversely affected.

If we are unable to develop new products 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 or license or otherwise acquire these technologies from third parties. We may be unable to develop commercially viable products using new or enhanced technologies, such as more advanced silicon process geometries for ICs or new materials or designs for readers and gateways. The success of a new or enhanced product depends on future technological developments, 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 performance;

 

   

product certification;

 

   

the quality, reliability and selling price of the product; and

 

   

effective marketing, sales and service.

If we are unable to develop new products or features to compete effectively, our market share will 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 tag 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 by providing software that delivers Item Intelligence could fail. In addition, our guidance to business-analytics tool providers for integrating our products with their tools could prove ineffective.

Solution providers and systems integrators form an essential part of 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 systems integrators 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 systems integrators 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 tag ICs direct, primarily to inlay and tag original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs. In 2015, sales to Avery Dennison Corporation, or Avery, Shang Yang RFID Technology Yangzhou Co. Ltd., or Shang Yang, and Smartrac NV, or Smartrac, accounted for 23%, 22% and 20% of our tag IC revenue, and 16%, 15% and 14% of our total revenue, respectively. We sell our reader ICs primarily through distribution to reader OEMs and ODMs. In 2015, distributor sell-thru to our top two reader IC partners each accounted for 23% of our reader IC revenue, but neither accounted for more than 10% of our total revenue. We sell our readers and gateways primarily through distribution to VARs and system integrators, or SIs. In 2015, we had one distributor, BlueStar, Inc., that accounted for 39% of our readers and gateway revenue and

 

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10% of our total revenue, but no end customer accounted for more than 10% of our total revenue. 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. Although our strategy is to diversify our channel-partner base by pursuing increased orders from smaller partners, add new partners, and increase end-user pull for our products from their diverse customer base, we cannot assure you we will succeed in doing so. The number of tag manufacturers may decrease by consolidation or otherwise. Even if we are successful in obtaining and retaining new channel partners, our small number of existing large tag manufacturers, reader and gateway OEMs and distributors may continue to account for a substantial portion of our future sales. Changes in markets, channel partners, end-user customers, products, negative economic or financial developments, or poor or limited credit availability may adversely affect the ability of our tag manufacturers, reader and gateway OEMs and distributors to bring our products to market.

Our future performance will depend, in part, on our ability to attract new tag manufacturers, reader and gateway OEMs 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 OEMs 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 manufacturers, reader and gateway OEMs 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.

Our reliance on distributors, system integrators, 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 stand-alone basis. Our revenue will decline if our channel partners fail. Further, faulty or negligent implementation and installation of our products by systems integrators may harm our reputation.

Because we fulfill through channel partners, our ability to determine end-user demand is constrained. End users drive demand for our products and 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 competing products. If reader IC OEMs are unable to obtain components for products in which our products are included, our product sales could be adversely affected. If our distributors, system integrators, VARs or software solution providers are unable to sell an adequate amount 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

 

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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.

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 system integrators, 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 prices, or ASPs, 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 have reduced the selling price of our products due to competitive pressures, to encourage adoption, to address macroeconomic conditions and 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. Short product life cycles cause our channel partners and end users to replace older products with newer ones on a regular basis. When demand for older products declines, ASPs may drop, in some cases precipitously. To profitably sell our products we must continually improve our technology, 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 cannot assure you that we will be able to maintain our historical gross margins. Our gross margins depend strongly on product mix. A shift in sales mix away from our higher margin products to lower margin products will adversely affect our gross margins. A majority of our revenue is generated by sales of our tag ICs, which have lower gross margins than our other products, and we expect tag IC revenue to increase as a percentage of our total revenue over time. If tag IC revenue continues to grow relative to our other products, our company-wide gross margin will decline. NRE developments generally also have a higher margin than tag ICs, and their impact

 

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on our gross margin may vary. For example, in the second half of 2013 and first half of 2014 we generated a substantially larger percentage of our revenue from NRE engagements, which resulted in a higher gross margin for such periods. Additionally, competitive alternatives to our products, overall increased competition, weaker than expected demand 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 tag ICs, and a decline in sales of these products 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 tag ICs. In addition, the continued adoption of our tag ICs derives in part from our ability to sell our reader ICs, readers and gateways. We are particularly vulnerable to fluctuations in demand for our tag ICs, and if demand for them declines, our business and operating results will be adversely affected.

Our products must meet exacting technical and quality specifications. Defects, errors or interoperability issues with our products, or the failure of our products to operate as expected, 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-user customers 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, harsh environments or radio-frequency interference may negatively affect gateway performance. 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 with our products combined with or incorporated into products from other vendors, such as tags produced by our tag manufacturers using our tag ICs, readers or gateways assembled by OEMs using our reader ICs. We may have difficulty identifying and correcting the source of 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;

 

   

loss of market share;

 

   

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;

 

   

replacement costs;

 

   

legal actions by our customers; and

 

   

increased insurance costs.

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

 

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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 UHF 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.

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 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 gateway products, a “design-in” means that the gateway product has been selected to be designed into the end user’s system and, in the case of a tag, may mean the tag has met certain unique performance criteria established by the end user or customer. If we fail to develop new products that adequately or competitively address the needs of potential end users, 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 are 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 customer’s 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.

Furthermore, 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

 

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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 then our business could be adversely affected.

Our success depends in part upon our ability to obtain, maintain and enforce patents, trade secrets, trademarks and other intellectual property rights and to operate without infringing on the proprietary rights of others or having third parties infringe, misappropriate or circumvent the rights we own or license. 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 most RAIN products are used in or imported into the United States, we have historically focused on filing U.S. patent applications. We have filed a small number of foreign patent applications, but do not yet have any issued or allowed patents in any foreign country. 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. Regardless, some of our products and technologies may not be covered adequately by any patent, patent application, trademark, copyright, trade secret or domain name.

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;

 

   

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 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.

In addition, our competitors or others may design around our patents or protected technologies. 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. If we pursue litigation to assert our intellectual property rights, 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.

Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may have already occurred or may occur in the future. Our failure to identify unauthorized use or otherwise adequately protect our intellectual property could adversely affect our business. Moreover, any litigation could be time consuming, and we could be forced to incur significant costs and divert our attention and the efforts of our employees, which could, in turn, result in lower revenue and higher expenses.

 

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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. We also cannot assure you that those agreements will 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 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 particular risks. 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 losses in profits due to the sales of competing products that exploit our intellectual property rights.

We may face claims of intellectual property infringement which could be time consuming, costly to defend or settle, result in the loss of significant rights, and adversely affect RAIN adoption generally.

Many companies in our industry hold large numbers of patents and other intellectual property rights and may vigorously pursue, protect and enforce their intellectual property rights. We have in the past, and may in the future, receive invitations to license patent and other intellectual property rights to technologies that are 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 in the RAIN products these retailers use. We believe these 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. 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.

On May 31, 2016, Adasa Inc. filed a lawsuit in U.S. District Court for Oregon against us and we understand that it filed similar lawsuits against Alien and NXP. The complaint against us alleges that our Monza 6 tag ICs infringe U.S. Patent No. 9,272,805, which was issued on March 1, 2016, because such tag ICs allegedly use multi-vendor chip-based serialization. The complaint seeks both damages and a permanent injunction against us. Based upon our preliminary investigation of the patent identified in the complaint, we do not believe that our products infringe valid or enforceable claims, if any, of this patent. Nevertheless, litigation is inherently uncertain and any judgment entered against us or any adverse settlement could adversely impact operating results. In addition, the costs associated with any actual, pending or threatened litigation could negatively impact our operating results regardless of the actual outcome.

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. 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

 

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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 such 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.

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, we have limited 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 types of products, such as our xArray gateway or ItemSense software, our visibility into the sales and deployment cycle lengths 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 and our time educating them on the products’ benefits. 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.

We are subject to order and shipment uncertainties. Inaccuracies in our estimates of end-customer or channel-partner demand and product mix could negatively affect our inventory levels, sales and operating results.

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 in advance of received purchase orders. Because the RAIN-solutions market is relatively new, many of our channel partners have difficulty accurately forecasting their product requirements and estimating the timing of their new product introductions, which ultimately affects demand for our products. In some cases we build products according to our demand estimates, which requires us to make forecast assumptions. Demand uncertainties, by our channel partners and us, cause significant forecast inaccuracies. Further, our channel partners can cancel purchase orders or defer product shipments, in some cases with little or no advance notice to us. Additionally, we sometimes receive soft commitments for larger order sizes which do not materialize. Because of these reasons, and because we fulfill through channel partners, our visibility into end-user demand is limited, which may adversely affect our ability to plan purchases or manufacturing.

Our estimates of channel-partner and end-user demand have historically been inaccurate. Some of the inaccuracies have been material, leading to excess inventory with associated costs or product shortages with its

 

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concomitant loss of revenue and gross margin. For example, we believe our 2014 operating results were adversely affected when some retail apparel end users delayed their tag purchases as the result of unexpected extended patent litigation negotiations between certain domestic end users and Round Rock Research. We may experience similar forecasting inaccuracies in the future.

When we release new products we may carry higher inventories or have slower inventory turnover depending on our ability to anticipate market acceptance. High inventory levels and increased obsolescence could result in unexpected expenses or increases in reserves that could adversely affect our business, operating results and financial condition. If we underestimate customer demand or if sufficient manufacturing capacity is unavailable, we could miss revenue opportunities, potentially lose market share and damage our customer relationships. Any significant product-order cancellations or deferrals or the return of previously sold products could materially and adversely impact our profit margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations.

If we do not successfully attract and complete custom engineering projects, our products’ market adoption could be delayed and our market position compromised.

To extend our products’ capabilities and reach, and to encourage market adoption, we may perform NRE product, tool or software developments. If we do not successfully complete our NRE projects then our customer relationship could deteriorate and we could lose business and opportunities to expand our market. Because NRE-based developments can take more than a year to complete, our time to product revenue can be long. Additionally, a customer may choose to cancel or delay the development, reducing potential revenue. In addition, we compete with other companies to win these NRE engagements and, in the future, we may not be able to compete successfully. Some developments grant time-bounded exclusivity to the customer who paid for the NRE engagement, which may limit our ability to capitalize on the knowledge and experience we gain in connection with the NRE engagement. If a competitor develops and markets a similar product that we are unable to compete due to the time-bounded exclusivity then we could lose business, market share and revenue opportunities.

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 2015, 73% of our total revenue was derived 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;

 

   

limited or unfavorable intellectual property protection;

 

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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;

 

   

political uncertainty, strife, unrest, or conflict;

 

   

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 Foreign Corrupt Practices Act or and the United Kingdom Bribery Act of 2010; and

 

   

regulations, and changes thereof, relating to data privacy and the unauthorized use of, or access to, commercial and personal information, particularly in Europe.

Various foreign regulatory or other governmental bodies may issue rulings that invalidate prior laws, regulations, or legal frameworks in manners that may adversely impact our business. The European Court of Justice in October 2015 issued a ruling immediately invalidating the U.S.-EU 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 reached political agreement on February 2, 2016, regarding the U.S.-EU Privacy Shield, which would provide a new mechanism for companies to transfer EU personal data to the United States. It is unclear, however, whether the U.S.-EU Privacy Shield will be formally adopted or whether it will be appropriate for us to rely upon the U.S.-EU Privacy Shield. While we do not rely upon the U.S-EU Safe Harbor Framework to transfer EU personal data to the U.S., and it is unclear that we would make use of the U.S.-EU Privacy Shield, were it to be formally implemented, there is significant regulatory uncertainty surrounding the future of data transfers from the European Economic Area to the United States. In addition, the European Commission recently adopted a new data protection regulation, effective in May 2018, that will impose more stringent data protection requirements than the present regulatory regime in the European Union and provide for greater penalties for noncompliance.

We opened an office in Shanghai, China in 2011. We are exposed to risks associated with changes in the laws and policies governing Chinese operations and, to a lesser extent, changes in U.S. laws and regulations relating to foreign trade and investment. To date, legal, policy or regulatory changes have not had a material adverse effect on our business or financial condition, but we cannot assure you they will not 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.

Failure to comply with anti-corruption and anti-bribery laws in 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 U.S. Foreign Corrupt

 

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Practices Act of 1977, as amended, or 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, system integrators, OEMs, VARs, distributors, tag manufacturers, and other channel partners fail to comply with FCPA requirements 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 United Kingdom Bribery Act of 2010, or the U.K. Bribery Act. We intend to increase our international sales and business there and, as such, our risk of violating laws such as the FCPA or U.K. Bribery Act also increases.

We have limited experience marketing, selling and supporting our products and services abroad and may not be able to increase or maintain international market 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. Furthermore, 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, our business, prospects and operating results will suffer.

We generally conduct our China operations through a wholly owned subsidiary. We generally report our taxable income in worldwide jurisdictions 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.

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 our introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to or from certain countries altogether. While we are not aware of any current or proposed export or import regulations that will materially restrict our ability to sell our products, 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. In such event, our business and results of operations could be adversely affected.

 

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Political unrest, as well as changes in the political, social, business or economic conditions in Thailand, could harm our business, financial condition and operating results.

We post-process many of our IC wafers, including testing, dicing and other wafer operations, using subcontractors in Bangkok, Thailand. Deterioration in the political, social, business and economic conditions in Thailand could have a material effect on our business. Thailand has experienced ongoing political and social upheaval over the past two decades, such as in May 2014 when the Royal Thai Army staged a military coup, banned demonstrations and enforced monitoring of civilian activities. In August 2014, Thailand’s national assembly appointed the coup leader as prime minister. We do not know what direction the political situation may take or if subsequent issues will affect us. Any changes to tax regimes, laws, exchange controls or political action in Thailand may harm our business, financial condition and operating results.

Instability in Thailand could prevent wafer shipments from entering or leaving the country and disrupt our ability to test or post-process wafers in Thailand. In such an event, we could be forced to transfer our testing and dicing activities to more stable, and potentially more costly, regions and find alternative sources for testing and dicing, which could harm our business, financial condition and operating results.

Intellectual property licensing from or to others, including competitors, may subject us to requirements or limitations that could adversely affect our business and prospects.

We have intellectual property license agreements that give us access to certain patents and intellectual property of others. We have not licensed our patents or intellectual property to others except as necessary for our customers to practice their business using our products and as required pursuant to agreements we have entered into in connection with our participation in the development of GS1 EPCglobal protocols and International Standards Organization, or ISO, standards. In the course of our participation in the development of GS1 EPCglobal protocols, including UHF Gen2, UHF Gen2 V2, tag data standards, or TDS, low-level reader protocol, or LLRP, 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. Because it may not be clear whether a member’s intellectual property is necessary or optional to the practice of a protocol, disputes could arise among members, resulting in our inability to receive a license on royalty-free terms. Further, some GS1 EPCglobal members declined to provide licenses to some of their intellectual property under royalty-free terms, instead choosing reasonable and non-discriminatory, or RAND, terms. Disputes or confusion may arise about whether we may invoke our necessary intellectual property if these 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 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 future licenses will not be used to compete 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

 

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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 non-negotiable 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.

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 collecting personally identifiable information, tracking consumers, stealing identities or causing other privacy-related issues. Consumers may be subject to unauthorized 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, 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 even be possible to embed computer viruses or other malicious code into tags so that by reading tag memory, the malicious code can be inserted into end-user systems. If a breach occurs, our customers could be the target of regulatory actions or private lawsuits. In such cases, a customer might allege that our products did not function as promised and may sue us for breach of contract, breach of warranty, negligence or another cause of action. Additionally, if our customers’ security

 

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measures are breached, even if through means beyond our control, our reputation may be damaged, we may be subject to litigation and our business and prospects could suffer. Moreover, concerns about security and privacy risks, even if unfounded, could damage our reputation and operating results and could delay the development of the overall RAIN industry. Security breaches could expose us to litigation and possible liability. Even if our products meet new standards or regulations, if our security measures are breached as a result of third-party action, our error or criminal act or otherwise, and, as a result, someone obtains unauthorized access to customer or end-user data, our reputation could be damaged, our business and prospects may suffer, and we could incur significant liability.

Government regulations and guidelines 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, as well as additional laws and regulations that address privacy and security issues related to radiofrequency identification, or RFID. 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. Because RAIN uses RFID technology, we believe these statutes and regulation apply to RAIN systems.

The European Commission, or EC, has issued guidance to address privacy concerns about RFID. In May 2009, the EC issued a recommendation that retail companies 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 stakeholders 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 European Union, or EU, and other foreign jurisdictions is evolving, and changes in laws and regulations 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.

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 technology, 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

 

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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 the development of industry standards, and we have designed our products to comply with these standards. In 2013, GS1 EPCglobal ratified “UHF Gen2 Version 2” or simply “Gen2 V2,” a new version of the 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 UHF Gen2. If one of our competitors introduces a Gen2 V2 product that gains market adoption before we do, we could lose market share and 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 the sale of our existing products before products based on the new or changed standards become available. 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 cannot assure you that we could 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.

We are a founding member of the RAIN Alliance and our chief executive officer is presently its chairman. Board membership and chairmanship are both elected positions that we could lose in future elections. They provide industry stature and attendant benefits but are 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.

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 each country in the EU. If one of our reader or gateway products is found to be noncompliant despite having such certification then we could be required to modify field-deployed readers or gateways to regain certification 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, requiring us to redesign our products to the new regulations or constraining our ability to implement new and desired features into our products, thereby causing us to incur significant expenses or forego opportunities to improve our products, potentially delaying time-to-market, 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 enables our channel partners to develop their own products that compete with other of our products. For example, sales of our reader ICs allow ODMs and technology companies to build and sell readers and gateways that compete with our products. Similarly, sales of our readers and gateways allows our channel partners to build and sell xPortal- or xArray-like products that compete with our xPortal or xArray. We even see cannibalization within our own product line—for example, our xArray 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

 

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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.

Foreign acquisitions involve additional risks beyond those above, including 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 incurrence, 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; Eric Brodersen, our chief operating officer; and Evan Fein, our chief financial officer. None of our executive management team is bound by employment contracts to remain with us for a specified period. 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

 

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go-to-market initiatives are especially important. There is no guarantee we can attract and retain such 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 personnel. 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; in some instances the terms, whether advertently or inadvertently, may adversely affect our operating results and gross margins. For example, some contracts specify future reader, gateway or IC pricing, or contain most-favored customer pricing for certain products. As another example, some agreements contain exclusivity terms that prevent us from pursuing certain business with other customers during the exclusivity period. Further, reducing prices or offering other favorable terms to one customer could adversely affect our ability to negotiate favorable terms with other customers. We may decide for competitive or strategic reasons to enter into similar types of agreements in the future, and such agreements 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 European Union’s Restriction of Hazardous Substances Directive, or RoHS, 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 be in compliance with these requirements. 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 requirements, properly dispose of wastes associated with our products, or comply with requirements governing the hazardous-substance content of our products, we could be held liable or suffer reputational harm.

We may not sustain or effectively manage our growth.

We have experienced significant revenue growth in a short period of time. We may not experience similar growth rates in future periods. You should not rely on our operating results for any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth then our financial results could suffer and our stock price would decline.

To manage our growth and the responsibilities of 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 offices;

 

   

implement and improve administrative, financial and operational systems, procedures and controls;

 

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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.

We may have insufficient management capabilities or resources to manage our growth and business effectively. As a consequence of our small management team we may be unable to pursue all commercial opportunities. Accordingly, we may require significant additional resources as we increase the complexity and scale of our business operations. We cannot assure you that we will have adequate resources when we need them or that we will have sufficient capital to fund our resource needs. If we are unable to manage our growth effectively, 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 plan or respond to competitive pressures.

Our management has limited public-company experience. As a consequence of becoming a public company, we will be 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 then we may not be able to accurately report our consolidated financial results or prevent fraud. In the course of preparing our consolidated financial statements we previously identified a material weakness in our internal control over financial reporting.

We have never operated as a public company. Most of our management team, including our chief executive officer and chief financial officer, have never managed a publicly traded company and have little to no experience complying with the increasingly complex and changing laws pertaining to public companies. In addition, several members of our management team have only joined us in the last year, including our senior vice president of global sales, as part of our investment in the expansion of our business. Our entire management team as well as other company personnel will need to devote substantial time to compliance, and may not effectively or efficiently manage our transition into a public company. We will incur significant legal, accounting and other expenses that we did not incur as a private company.

We expect rules and regulations such as the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to increase our legal and finance compliance time and costs, and also to increase the time and costs of other activities. For example, Section 404 of the Sarbanes-Oxley Act requires that management report on, and our independent registered public accounting firm attest to, the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Section 404 compliance will divert resources and take significant time and effort to complete. We may be unable to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we are required to do so. In addition, the Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time. Implementing the changes may take significant time and may require additional employee compliance training. We may discover internal controls that need improvement. Our or our independent registered public accounting firm’s discovery of 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 necessary controls and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. Our growth will challenge our ability to maintain the internal control and disclosure standards applicable to public companies. If we fail to successfully complete the procedures and certification and attestation requirements of Section 404, or if in the future our chief executive officer, chief financial officer or independent registered public accounting firm determines 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

 

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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 cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our independent registered public accounting firm will conclude that our internal controls are effective in future periods. Irrespective 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.

In the course of preparing our consolidated financial statements in prior years, we, in conjunction with our independent registered public accounting firm, identified an error in the accounting treatment for the recapitalization of our company in 2012 and the impact of the recapitalization on earnings per share that resulted in the restatement of our previously issued financial statements for the years ended December 31, 2012 and 2013. Also, in 2015, we, in conjunction with our independent registered public accounting firm, identified an error related to the cash flow statement presentation of lease incentives in our consolidated interim financial statements for the nine months ended September 30, 2015. These financial statement errors, combined with other identified control deficiencies, were considered to indicate a material weakness in our internal control over financial reporting related to the accounting and financial statement disclosure over complex accounting matters. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We have taken and continue to take steps to remediate the material weakness, including increasing the depth and experience within our accounting and finance organization, as well as designing and implementing improved processes and internal controls. As of December 31, 2015, this material weakness has not been remediated. Our remediation of this material weakness in future periods may not be effective or prevent future material weaknesses or significant deficiencies in our internal control over financial reporting.

If we fail to hire additional finance personnel or fail to strengthen our financial reporting systems and infrastructure then 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 intend to hire personnel with financial reporting and Sarbanes-Oxley Act compliance expertise. Any impact to our plan such as an inability to hire, a delay in hiring, or a delay in training such personnel could adversely impact our ability to timely and accurately prepare our financial statements. Further, our ability to retain employees with the requisite experience could adversely affect our financial statements because new 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 increased demands of being a public company then the quality and timeliness of our financial reporting may suffer, which could result in material weaknesses in our internal controls. The consequences of inaccuracies 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, diluting our stockholders. If our need is due to unforeseen circumstances or material expenditures or if our operating results are worse than expected then we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, and these additional financings could cause additional dilution to our stockholders. Debt financing, if available, may involve agreements that 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 on us 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.

 

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Our debt obligations contain restrictions that impact our business and expose us to risks that could adversely affect our liquidity and financial condition.

We have a loan and security agreement, or senior credit facility, with Silicon Valley Bank. The senior credit facility provides for a $10.5 million term loan, up to $2.0 million of equipment loans and a revolving line of credit that allows us to borrow revolving loans of up to the lesser of $15.0 million and a borrowing base tied to the amount of our eligible accounts receivable and inventory. At March 31, 2016, we had $10.4 million of outstanding indebtedness under the revolving line of credit and $8.5 million of outstanding indebtedness under the term loan facility. We also have a mezzanine loan and security agreement, or mezzanine credit facility with SG Enterprises II, LLC. At March 31, 2016, we had $5.0 million of outstanding indebtedness under the mezzanine credit facility.

Our credit facilities contain customary covenants, which limit our and our subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness or guarantee indebtedness of others;

 

   

create liens on our assets;

 

   

enter into mergers or consolidations;

 

   

dispose of assets;

 

   

pay dividends and make other distributions on our capital stock, and redeem and repurchase our capital stock;

 

   

make investments, including acquisitions; and

 

   

enter into transactions with affiliates.

Our credit facilities also include customary affirmative covenants, tangible net worth and liquidity ratio covenants under the senior credit facility and a minimum revenue covenant under the mezzanine credit facility.

The credit facilities contain customary events of default, subject to customary cure periods for certain defaults, that include, among others, non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, a material adverse change default and inaccuracy of representations and warranties.

If we experience a decline in cash flow due to any of the factors described in this “Risk Factors” section or otherwise, we could have difficulty paying interest and principal amounts due on our indebtedness and meeting the financial covenants set forth in our credit facilities. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required payments under our credit facilities, or if we fail to comply with the requirements of our indebtedness, we could default under our credit facilities. Any such default that is not cured or waived could result in the acceleration of the obligations under the credit facilities, an increase in the applicable interest rate under the credit facilities, and termination of the revolving line of credit under the senior credit facility, and would permit our lenders to exercise remedies with respect to all of the collateral that is securing the credit facilities, including substantially all of our assets, other than intellectual property. Any such default could have a material adverse effect on our liquidity and financial condition.

Even if we comply with all of the applicable covenants, the restrictions on the conduct of our business could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be beneficial to the business.

 

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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 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 viruses, loggers, or other malfeasant code in our data or software, could compromise this information. The consequences of such loss and possible misuse of our proprietary and confidential information could include, among other things, unfavorable publicity, damage to our reputation, difficulty marketing our products, customer allegations of breach-of-contract, 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 some financial functions, and we are therefore dependent on the security systems of these providers. 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 information loss and misappropriation of confidential 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.

Our operations could be disrupted by natural disasters.

An earthquake, fire, flood or other natural or manmade disaster could disable our facilities, disrupt operations, or cause catastrophic losses. 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 quite 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 tag IC wafers. We do not carry insurance policies that cover potential losses caused by earthquakes, floods or other disasters.

Our ability to use net operating losses to offset future taxable income may be limited.

As of December 31, 2015, we had federal net operating loss carryforwards, or NOLs, of $97.0 million and federal research and experimentation credit carryforwards of $7.5 million which we may use to reduce future taxable income or offset income taxes due. The NOLs start expiring in 2023 and fully expire in 2035. The credit carryforwards start expiring in 2020 and fully expire in 2035. Insufficient future taxable income will adversely affect our ability to deploy these NOLs and credit carryforwards. In addition, under Section 382 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 an ownership change in connection with or after this offering then our ability to use our NOLs and credit carryforwards could be further limited by Section 382 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 Section 382 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. We use significant judgment in evaluating our worldwide income-tax provision. During the ordinary course of business, we conduct

 

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many transactions for which the ultimate tax determination is uncertain. For example, 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 such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related 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.

We will be subject to SEC rules regarding the use and disclosure of conflict minerals, which we expect will increase our operating and compliance costs and could potentially harm our reputation, causing a decline in our stock price.

As a public company, we will be subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to diligence, disclose and report whether our solutions contain conflict minerals. The rule requires us to submit forms and reports to the SEC by May 31, 2018 and annually thereafter to disclose our determinations and due-diligence measures regarding conflict minerals. Although we do not directly purchase conflict minerals, tracing the minerals our suppliers use back to country of origin is a complex task that requires us to, among other things, survey our supply chain to understand what programs our suppliers have for tracing the source of minerals used in products supplied to us and ensure these suppliers have performed reasonable due diligence. We have not determined how many or, if any, of our suppliers use conflict minerals. In addition to the increased administrative expense required to comply with these requirements, some of our customers are also subject to this rule, and we have been and will continue to be asked as part of their supply chain to comply with their requirements as part of their compliance with the rule. Moreover, we may face a limited pool of suppliers who can provide “conflict-free” products, and we may not be able to obtain conflict-free products or supplies in sufficient quantities or at competitive prices for our operations. We may be required to disclose our products as not being “conflict free,” which could adversely affect our reputation and may harm relationships with business partners and customers, and our stock price could suffer as a result.

Risks Relating to this Offering and Ownership of Our Common Stock

The market price of our common stock may be volatile, and the value of your investment could decline significantly.

There has been no public market for our common stock prior to this offering. The initial price to public for our common stock will be determined through negotiations between us and the underwriters. Investors who purchase common stock in this offering may not be able to sell their shares at or above the initial price to public. Securities of companies similar to ours experience significant price and volume fluctuations. The following factors, in addition to other risks described in this prospectus, may have a significant effect on our common stock price:

 

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price and volume fluctuations in the overall stock market from time to time;

 

   

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;

 

   

supply interruptions;

 

   

developments with respect to intellectual property rights;

 

   

our ability to develop and market new and enhanced products on a timely basis;

 

   

commencement of, or our involvement in, litigation;

 

   

major changes in our board of directors or management;

 

   

changes in governmental regulations or in the status of our regulatory approvals;

 

   

the trading volume of our stock;

 

   

limited public float;

 

   

any future sales of our common stock or other securities;

 

   

failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

fluctuations in the values of companies perceived by investors 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 related markets.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect our stock price, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, securities class action litigation has often been instituted against companies whose stock prices have declined, especially following periods of volatility in the overall market. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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Future sales of our common stock in the public market could cause our stock price to fall.

Our stock price could decline as a result of sales of a large number of shares after this offering or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering,             shares of our common stock will be outstanding, based on our shares outstanding as of March 31, 2016. All shares of common stock expected to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act unless held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The resale of the remaining             shares, or         % of our outstanding shares after this offering, are currently prohibited or otherwise restricted as a result of securities law provisions, market standoff agreements entered into by our stockholders with us or lock-up agreements entered into by our stockholders with the underwriters; however, subject to applicable securities law restrictions, these shares will be able to be sold in the public market beginning 180 days after the date of this prospectus. In addition, the shares subject to outstanding options and warrants, of which 22,978,262 and 4,254,981 were exercisable as of March 31, 2016, respectively, and the shares reserved for future issuance under our stock option and equity incentive plans will become available for sale immediately upon the exercise of such options and the expiration of any applicable market stand-off or lock-up agreements. For more information see “Shares Eligible for Future Sale.”

As of March 31, 2016, holders of approximately 123,851,592 shares (including 676,926 shares underlying the warrants described in the section of this prospectus captioned “Shares Eligible for Future Sale—Warrants”) and warrants to purchase 2,622,528 shares of Series 2 redeemable convertible preferred stock, if the initial per share price to public exceeds the exercise price of the warrants, net exercised automatically for             shares of common stock at an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, or         %, of our common stock had rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans. Once we register the offer and sale of shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the section of this prospectus captioned “Underwriting.”

In addition, in the future, we may 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 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 will be able to exercise significant influence over matters subject to stockholder approval.

Our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially owned approximately 71.4% of our capital stock as of May 31, 2016, and we expect that upon completion of this offering, that same group will beneficially own at least         % of our capital stock. Accordingly, after this offering, our executive officers, directors and principal stockholders will be able to determine the composition of our board of directors, retain the voting power to approve all matters requiring stockholder approval, including mergers and other business combinations, and continue to have significant influence over our operations. 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.

 

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We have broad discretion to use the net proceeds from this offering, and our investment of these proceeds may not yield a favorable return. We may invest the proceeds of this offering in ways you disagree with.

Our management has broad discretion as to how to spend and invest the proceeds from this offering, and we may spend or invest these proceeds in a way with which our stockholders may disagree. Accordingly, you will need to rely on our judgment with respect to the use of these proceeds. We intend to use the proceeds from this offering for debt repayment, product development, working capital and other general corporate purposes, including the costs associated with being a public company. We could spend the proceeds from this offering in ways that our stockholders may not agree with or that do not yield a favorable return. You will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. Although we expect that our common stock will be approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial price to public for our common stock was determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. This initial price to public may vary from the market price of our common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial price to public.

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 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 the price of our stock. Among other things, our certificate of incorporation and bylaws will:

 

   

permit our board of directors to issue up to             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 to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be taken by written consent;

 

   

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;

 

   

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);

 

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provide that special meetings of our stockholders may be called only by the chairman 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.” See “Description of Capital Stock.”

Our bylaws will provide that the Court of Chancery of the State of Delaware will be 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 will utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.

We are an emerging growth company, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various 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 of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have in this prospectus utilized, and we plan in future filings with the SEC to continue to utilize, 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.

 

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In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

We could remain an “emerging growth company” for up to five years, or 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 Securities Exchange Act of 1934, as amended, or Exchange Act, which would occur if the market value of our common stock that is 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.

We will incur increased costs by being a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements of the SEC and The NASDAQ Global Market. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, we may have more difficulty attracting and retaining qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the additional costs we may incur or the timing of such costs.

So long as we remain an “emerging growth company,” we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our management’s beliefs and assumptions and on information currently available to our management. Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

the size of our market opportunity;

 

   

the breadth and rate of adoption of RAIN technology and solutions and growth of the RAIN market broadly and within specific industries;

 

   

our ability to compete effectively against other providers of RAIN products and services, as well as competing technologies;

 

   

the implementation of our business model and strategic plans, including estimates regarding future sales, revenues, expenses, capital requirements and stock performance;

 

   

our ability to introduce new products and applications that achieve market acceptance, including our software products;

 

   

future macroeconomic conditions;

 

   

our expected use of proceeds;

 

   

the performance of third parties on which we rely for the manufacture, assembly and testing of our products;

 

   

our relationships with distributors, system integrators, VARs and software solution partners;

 

   

average selling prices, gross margins, market share and technology leadership for our products and services, and the industry profile and financial condition of our customers;

 

   

our ability to adequately protect our intellectual property, and the impact of intellectual property litigation on the RAIN industry;

 

   

the regulatory regime for our products and services, domestically and internationally;

 

   

our future leadership of the industry’s standards-setting process; and

 

   

our ability to sustain and manage growth in our business.

You should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, which although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that

 

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we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise.

This prospectus contains statistical data, estimates, and forecasts that are based on independent industry publications or reports or other publicly available information, as well as other information based on our internal sources. This information involves a number of assumptions and limitations, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The source of certain statistical data, estimates, and forecasts contained in this prospectus are the following independent industry publications or reports:

 

   

Frost & Sullivan, “Analysis of the Global RFID Market in Retail,” 2015.

 

   

IDTechEx, “RFID Forecasts, Players and Opportunities 2015—2025,” 2014.

 

   

IDTechEx, “RFID Forecasts, Players and Opportunities 2016—2026,” 2015.

 

   

Transparency Market Research, “Radiofrequency Identification (RFID) Market in Healthcare,” 2015.

 

   

VDC Research, “Strategic Insights 2013: RFID, Contactless & RTLS Technology.”

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of the shares of common stock in this offering will be approximately $             million, or approximately $             million if the underwriters’ option to purchase additional shares is exercised in full, based upon an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. Each $1.00 increase (decrease) in the assumed initial price to public of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of             shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial price to public remains the same, and after deducting the underwriting discounts and commissions. We do not expect that a change in the initial price to public or the number of shares by these amounts would have a material effect on our uses of the proceeds from this offering, although it may accelerate the time when we need to seek additional capital.

We currently expect to use $5.0 million of the net proceeds from this offering to repay indebtedness under our mezzanine credit facility and the remainder for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction.

The $5.0 million term loan outstanding under the mezzanine credit facility is scheduled to mature in October 2020, and interest on such borrowings accrues at a fixed per annum rate equal to 18.0%. We used the proceeds of such borrowing for working capital.

The expected use of net proceeds of this offering represents our current intentions based upon our present plans and business conditions. We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. Pending their uses, we plan to invest the net proceeds of this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, our credit facilities materially restrict, and future debt instruments may materially restrict, our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of our current or then-existing debt instruments and other factors our board of directors deems relevant.

 

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CAPITALIZATION

The following table summarizes our capitalization as of March 31, 2016:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the (1) automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 102,274,649 shares of common stock immediately prior to the closing of this offering, (2) conversion of the preferred stock warrants classified as liabilities to common stock warrants, assuming no exercise and (3) effectiveness of our amended and restated certificate of incorporation as of immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect the pro forma adjustments set forth in the immediately preceding bullet point and the sale and issuance by us of              shares of common stock in this offering at an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, the automatic net exercise of warrants to purchase 2,622,528 shares of Series 2 redeemable convertible preferred stock which will, if the initial per share price to public exceeds the exercise price of the warrants, be net exercised automatically for             shares of common stock at an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, and the application of such proceeds as described in the section captioned “Use of Proceeds.”

You should read the information in this table together with our financial statements and related notes to those statements, as well as the sections captioned “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.

 

    AS OF MARCH 31, 2016  
    ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED(1)
 
    (in thousands, except per share amounts)  

Long-term debt, including current portion

  $ 23,583      $ 23,583      $                

Warrant liabilities

    2,811        —       

Redeemable convertible preferred stock, $0.001 par value per share; 99,752,645 shares authorized, 94,621,067 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

    100,788        —       

Stockholders’ equity (deficit):

     

Preferred stock, $0.001 par value per share; no shares authorized, issued and outstanding, actual;              shares authorized, no shares issued or outstanding pro forma and pro forma as adjusted

    —          —       

Common stock, $0.001 par value per share; 180,500,000 shares authorized, 52,754,014 shares issued and outstanding, actual; 180,500,000 shares authorized, 155,028,663 shares issued and outstanding, pro forma; and              shares authorized,              shares issued and outstanding, pro forma as adjusted

    51        153     

Additional paid-in capital

    97,824        201,321     

Accumulated deficit

    (187,645     (187,645  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (89,770     13,829     
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 37,412      $ 37,412      $                
 

 

 

   

 

 

   

 

 

 

 

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(1) 

Each $1.00 increase (decrease) in the assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, would increase (decrease) each of cash and equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of              shares in the number of shares offered by us would increase (decrease) each of additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $             million, assuming that the assumed initial price to public remains the same, and after deducting the underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial price to public and other terms of this offering determined at pricing.

The number of shares of our common stock outstanding immediately after this offering is based on 155,028,663 shares of our common stock outstanding as of March 31, 2016 and excludes:

 

   

22,978,262 shares of common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $0.32 per share;

 

   

             shares of common stock reserved for future issuance under stock-based compensation plans, including (1)              shares of common stock reserved for issuance under the 2016 Equity Incentive Plan, which will become effective on the date of this prospectus, and any future automatic increase in shares reserved for issuance in accordance with the terms of such plan; (2)              shares of common stock reserved for issuance under the 2016 Employee Stock Purchase Plan, and any future automatic increase in shares reserved for issuance in accordance with the terms of such plan; and (3) 2,150,778 shares of common stock reserved for issuance under the 2010 Stock Option Plan as of March 31, 2016, which shares (plus any shares returned due to award termination) will be added to the 2016 Equity Incentive Plan, upon effectiveness of such plan;

 

   

541,557 shares of Series 2 redeemable convertible preferred stock (which will convert into warrants to purchase an aggregate of 676,926 shares of common stock in connection with the offering) underlying warrants with an exercise price of $0.7765 per share which exclude shares underlying the warrants discussed below that are being net exercised in connection with this offering; and

 

   

300,000 shares of our common stock underlying a warrant with an exercise price of $0.21 per share.

 

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DILUTION

If you invest in our common stock you will experience immediate and substantial dilution in the pro forma net tangible book value of your shares of common stock. Dilution in pro forma net tangible book value represents the difference between the price to public per share of our common stock and the pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering.

Historical net tangible book value (deficit) represents our total tangible assets (total assets less intangible assets and capitalized offering costs) less total liabilities and accreted value of our redeemable convertible preferred stock divided by the number of outstanding shares of common stock. As of March 31, 2016, our historical net tangible book deficit was $94.7 million and our historical net tangible book deficit per share was $1.79. After giving effect to (1) the automatic conversion of our outstanding redeemable convertible preferred stock into an aggregate of 102,274,649 shares of common stock immediately prior to the closing of this offering, (2) the sale and issuance of              shares of common stock in this offering at an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (3) the automatic net exercise of warrants to purchase 2,622,528 shares of Series 2 redeemable convertible preferred stock which will, if the initial per share price to public exceeds the exercise price of the warrants, be net exercised automatically for              shares of common stock at an assumed initial price to public of $             per share, the midpoint of the range reflected on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of March 31, 2016 would have been approximately $             million, or $             per share. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial price to public per share

     $                

Historical net tangible book deficit per share as of March 31, 2016

   $ (1.79  

Increase per share attributable to conversion of redeemable convertible preferred stock

     1.85     
  

 

 

   

Pro forma net tangible book value per share before this offering

   $ 0.06     

Increase in pro forma net tangible book value per share attributable to investors participating in the offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering

    
    

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to investors participating in this offering

     $                
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial price to public of $             per share would increase (decrease) our pro forma as adjusted net tangible book value by approximately $            , or approximately $             per share, and increase (decrease) the dilution per share to investors participating in this offering by approximately $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. An increase of             in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by approximately $            , or $             per share, and the dilution per share to investors participating in this offering would be $             per share, assuming that the assumed initial price to public remains the same, and after deducting the underwriting discounts and commissions. Similarly, a decrease of              shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $            , or $             per share, and the dilution per share to investors participating in this offering would be $             per share, assuming that the assumed initial price to public remains the same, and after deducting the underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial price to public and other terms of this offering determined at pricing.

 

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If the underwriters exercise their option in full to purchase              additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $             per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $             per share, and the pro forma dilution to new investors purchasing common stock in this offering would be $             per share.

The following table summarizes, on a pro forma basis as of March 31, 2016, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted-average price per share paid by existing stockholders and by investors participating in this offering at an assumed initial price to public of $             per share, before deducting underwriting discounts and commissions and estimated offering expenses:

 

     SHARES PURCHASED     TOTAL
CONSIDERATION
    AVERAGE
PRICE PER
SHARE
 
     NUMBER    PERCENT     AMOUNT      PERCENT    

Existing stockholders before this offering

                       $                                  $                   

Investors participating in this offering

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

                       $                            
  

 

  

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial price to public of $             per share would increase (decrease) total consideration paid by new investors by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. An increase (decrease) of              in the number of shares offered by us would increase (decrease) total consideration paid by new investors, by $             million, assuming that the assumed initial price to public remains the same, and after deducting the underwriting discounts and commissions.

The number of shares of our common stock outstanding immediately after this offering is based on 155,028,663 shares of our common stock outstanding as of March 31, 2016, excludes:

 

   

22,978,262 shares of common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $0.32 per share;

 

   

             shares of common stock reserved for future issuance under stock-based compensation plans, including (1)              shares of common stock reserved for issuance under the 2016 Equity Incentive Plan, which will become effective on the date of this prospectus, and any future automatic increase in shares reserved for issuance in accordance with the terms of such plan; (2)              shares of common stock reserved for issuance under the 2016 Employee Stock Purchase Plan, and any future automatic increase in shares reserved for issuance in accordance with the terms of such plan; and (3) 2,150,778 shares of common stock reserved for issuance under the 2010 Stock Option Plan as of March 31, 2016, which shares (plus any shares returned due to award termination) will be added to the 2016 Equity Incentive Plan, upon effectiveness of such plan;

 

   

541,557 shares of Series 2 redeemable convertible preferred stock (which will convert into warrants to purchase an aggregate of 676,926 shares of common stock in connection with the offering) underlying warrants with an exercise price of $0.7765 per share which excludes shares underlying the warrants that are being net exercised in connection with this offering; and

 

   

300,000 shares of our common stock underlying a warrant with an exercise price of $0.21 per share.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth a summary of our historical financial data as of and for the periods indicated. We derived the selected consolidated statements of operations data for the years ended December 31, 2014 and 2015 and the consolidated balance sheet data as of December 31, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the years ended December 31, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from our consolidated financial statements not included elsewhere in this prospectus. We derived the consolidated statements of operations data for the three months ended March 31, 2015 and 2016 and the consolidated balance sheet data as of March 31, 2016 from unaudited interim consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary to state fairly our results of operations and financial position. Our historical results are not necessarily indicative of the results that may be expected in the future. The selected consolidated financial data set forth below should be read together with the audited consolidated financial statements and the related notes to those statements included in this prospectus, as well as the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    YEAR ENDED
DECEMBER 31,
    THREE MONTHS
ENDED

MARCH 31,
 
    2012     2013     2014     2015     2015     2016  
    (in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

           

Revenue

  $ 42,832      $ 55,491      $ 63,763      $ 78,479      $ 16,065      $ 21,631   

Cost of revenue(1)

    24,454        27,040        30,032        37,505        8,015        10,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,378        28,451        33,731        40,974        8,050        11,156   

Operating expenses:

           

Research and development expense(1)

    10,517        10,479        13,889        17,005        4,058        5,171   

Sales and marketing expense(1)

    9,700        9,592        10,662        14,343        3,004        4,922   

General and administrative expense(1)

    5,872        5,864        6,765        8,025        1,721        2,931   

Offering costs(1)

    —          —          1,959        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,089        25,935        33,275        39,373        8,783        13,024   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (7,711     2,516        456        1,601     

 

(733

 

 

(1,868

Interest income (expense) and other, net

    (3,060     (2,183     (63     (535  

 

(153

 

 

(447

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax expense

    (10,771     333        393        1,066        (886     (2,315

Income tax expense

    (96     (98     (96     (166  

 

(19

 

 

(15

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (10,867   $ 235      $ 297      $ 900      $ (905   $ (2,330
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders:

           

Basic

  $ 114,349 (3)    $ (11,066   $ (11,004   $ (10,401   $ (3,730   $ (5,155
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (15,706   $ (11,066   $ (11,004   $ (10,401   $ (3,730   $ (5,155
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(2):

           

Basic

  $ 3.17 (3)    $ (0.29   $ (0.27   $ (0.22   $ (0.08   $ (0.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.18   $ (0.29   $ (0.27   $ (0.22   $ (0.08   $ (0.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    YEAR ENDED
DECEMBER 31,
    THREE MONTHS
ENDED

MARCH 31,
 
    2012     2013     2014     2015     2015     2016  
    (in thousands, except per share amounts)  

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

           

Basic

    36,108        37,727        40,057        46,712        44,233        51,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    85,905        37,727        40,057        46,712        44,233        51,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share attributable to

common stockholders(2) - basic
and diluted:

        $ 0.00        $ (0.02
       

 

 

     

 

 

 

Pro forma weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

           

Basic

          148,987          153,477   
       

 

 

     

 

 

 

Diluted

          164,264          153,477   
       

 

 

     

 

 

 

Other Financial Information:

           

Adjusted EBITDA(4)

  $ (5,734   $ 4,316      $ 4,918      $ 4,751      $ (13   $ (821

 

(1) 

Includes stock-based compensation as follows:

 

    YEAR ENDED
DECEMBER 31,
    THREE MONTHS
ENDED MARCH 31,
 
    2012     2013     2014     2015     2015     2016  
    (in thousands)  

Cost of revenue

  $ 46      $ 45      $ 49      $ 31      $ 13      $ 5   

Research and development expense

    377        339        362        305        103        69   

Sales and marketing expense

    378        148        413        692        144        205   

General and administrative expense

    387        275        313        150        46        55   

Offering costs

    —          —          38        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $     1,188      $        807      $     1,175      $     1,178      $        306      $        334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) 

See note 2 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculation of our net loss per share attributable to common stockholders, basic and diluted, and our pro forma net income per share attributable to common stockholders, basic and diluted.

(3)

2012 net income (loss) attributable to common stockholders and net income (loss) per share attributable to common stockholders—basic and diluted was impacted by the recapitalization of previously outstanding preferred stock.

(4) 

See “—Adjusted EBITDA” below.

Adjusted EBITDA

We use adjusted EBITDA as a key measure to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In addition, we believe the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

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Adjusted EBITDA is not prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. In addition, adjusted EBITDA is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are that our adjusted EBITDA:

 

   

does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

   

does not reflect the amounts we paid in taxes or other components of our tax expense;

 

   

does not reflect the stock-based component of employee compensation;

 

   

does not reflect the non-cash charges of depreciation and amortization;

 

   

does not reflect offering costs written off due to delays in offering activities; and

 

   

may be calculated differently than such metric is calculated by other companies, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including our financial results presented in accordance with GAAP.

The following table presents a reconciliation of net income (loss) to adjusted EBITDA:

 

    YEAR ENDED
DECEMBER 31,
    THREE MONTHS ENDED
MARCH 31,
 
    2012     2013     2014     2015     2015     2016  
    (in thousands)  

Net income (loss)

  $ (10,867   $ 235      $ 297      $ 900      $ (905   $ (2,330

Interest income (expense) and other, net

    3,060        2,183        63        535        153        447   

Income tax expense

    96        98        96        166        19        15   

Depreciation and amortization

    789        993        1,366        1,972        414        713   

Stock-based compensation

    1,188        807        1,175        1,178        306        334   

Offering costs

    —          —          1,921        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $     (5,734   $      4,316      $      4,918      $      4,751      $        (13   $        (821
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     AS OF DECEMBER 31,     AS OF
MARCH 31,

2016
 
     2012     2013     2014     2015    
     (in thousands)  

Cash and cash equivalents

   $ 7,405      $ 11,178      $ 6,939      $ 10,121      $ 14,822   

Working capital

     16,056        15,282        12,169        18,468        15,421   

Total assets

     32,411        32,968        33,817        52,848        60,530   

Total long-term debt(1)

     11,460        10,592        7,974        15,910        23,583   

Warrant liability

     2,260        3,170        3,568        2,865        2,811   

Redeemable convertible preferred stock

     64,060        75,361        86,662        97,963        100,788   

Accumulated deficit

     (186,747     (186,512     (186,215     (185,315     (187,645

Total stockholders’ deficit

     (56,862     (67,028     (76,471     (85,035     (89,770

 

(1) 

We elected to early adopt ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, and for 2014 and 2015 and the three months ended March 31, 2016 presented herein have reclassified debt issuance costs that are not material from other current and non-current assets to be an offset of the associated current and long-term debt balances. For 2012 and 2013, we have not reclassified debt issuance costs that are not material.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

Our mission is to provide wireless connectivity to billions of everyday items and to deliver, to the digital world, each item’s unique identity, location and authenticity. Our platform connects billions of everyday items such as apparel, medical supplies, automobile parts, drivers licenses, food and luggage to applications such as inventory management, patient safety, asset tracking and item authentication, delivering real-time information to businesses about items they create, manage, transport and sell.

We were founded in 2000 and, since 2003, have been focused on our mission of item connectivity and Item Intelligence. We have invested over $160 million to develop our platform since 2003, including $150 million in research and development expense, $9 million in development agreement costs and $1 million in internal-use capitalized software costs. Our platform comprises:

 

   

Tag ICs. Tag ICs attach to and uniquely identify items, which together comprise endpoints. We launched our first Monza tag IC in 2005 and have brought to market five subsequent Monza product families. Each family has offered new or enhanced features and functionalities or reduced cost. Most recently, we introduced our Monza R6 product family, which has longer read range and enhanced functionality when compared with prior generation tag ICs. We have shipped over 13 billion Monza tag ICs since 2005, including approximately 2.6 billion and 3.8 billion in the 12 months ended March 31, 2015 and 2016, respectively.

 

   

Reader ICs. Reader ICs enable wireless, bidirectional communications with tag ICs. In July 2008, we acquired our Indy reader IC business from Intel Corporation, and have brought to market three subsequent Indy reader IC products. Most recently we introduced the RS500, a reader system-in-package, which greatly reduces OEM and ODM time-to-market and simplifies embedding RAIN functionality in virtually any device. OEM and ODM partners typically place large orders of our reader ICs for use in their products. These orders often secure supply for an extended period of time or complete production runs, resulting in variability in the timing of shipments and associated revenue of our reader ICs in particular periods.

 

   

Readers and Gateways. Stationary and mobile readers read, write, authenticate or otherwise engage tag ICs; gateways integrate stationary readers with scanning antennas to locate and track tagged items. We launched our first Speedway reader in 2006 and have brought to market two subsequent Speedway product families as well as firmware/software enhancements. In 2010, we introduced our first gateway, xPortal, optimized for reading tags in transition zones such as doors and hallways. In 2014, we introduced our xArray gateway, optimized for reading tags over a wide area such as store floors, manufacturing facilities and hospital rooms.

 

   

Software. Our software configures, manages and controls readers and gateways, aggregates and transforms data from endpoints, and delivers Item Intelligence to enterprise and consumer applications. In 2015, we introduced our ItemSense software, an operating system that links the physical and digital world. ItemSense extracts Item Intelligence, which is derived from tag reads and delivers it to enterprise applications via query and event APIs. ItemSense also centralizes reader and gateway configuration, management and control. Currently piloting in retail and healthcare, ItemSense is modular and scalable, and can operate on-premises, in hybrid-cloud or in cloud-based environments. To date software revenue has not been material.

 

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In 2015, we had leading market share with 65% and 61% of the tag and reader IC unit volume, respectively, based on our calculations derived from research conducted by IDTechEx, an information-technology research firm. We believe we continue to have leading market share in the tag IC and reader IC markets. We estimate we enable approximately 70% unit volume of the stationary reader market inclusive of our readers and readers powered by our reader ICs. We also believe that the majority of handheld readers use our reader ICs.

We derive a substantial majority of our revenue from sales of our platform products. We also occasionally derive revenue from non-recurring engineering, or NRE, development agreements under which we develop customized products or services. Although we will continue to pursue strategic NRE opportunities, we expect NRE-based revenue to fluctuate in future periods, and over time to decline as a percentage of total revenue.

We manage our business using a capital-efficient operating model that leverages third-party semiconductor foundries and subcontractors to produce and test our ICs and contract manufacturers to assemble and test our readers and gateways. We designed this production model to scale efficiently with volume. We leverage a partner channel comprising distributors, system integrators, value added resellers, or VARs, and software solution partners to deliver our products and scale revenue.

The efficiency of our operating model allows us to invest strategically in product development and in sales and marketing. In 2014 and 2015, we invested $15.0 million and $17.3 million, respectively, in research and development, including expenses related to NRE development agreements and capitalized internal-use software development costs. We intend to continue to invest significantly in research and development to maintain our technology leadership. In 2014 and 2015, we invested $10.7 million and $14.3 million, respectively, in sales and marketing and intend to continue to invest in sales and marketing. We are investing in our go-to-market strategy to increase our direct engagement with potential end users of our platform by expanding our sales and marketing personnel over the next 12 months, including internationally. These investments will increase operating expenses on an absolute dollar basis for the foreseeable future. Many of these investments will occur in advance of experiencing any direct benefit from them and may affect our profitability, or cause an operating loss, in future periods.

Our total revenue was $63.8 million and $78.5 million for 2014 and 2015, respectively, and $16.1 million and $21.6 million for the three months ended March 31, 2015 and 2016, respectively. Our net income was $297,000 and $900,000 for 2014 and 2015, respectively. Our adjusted EBITDA was $4.9 million and $4.8 million for 2014 and 2015, respectively. For a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income, see “Selected Consolidated Financial Data.”

Factors Affecting Our Performance

Investing in Growth

We have invested, and plan to continue to invest significant amounts in research and development activities to introduce new hardware and software products and enhance existing products comprising our platform. We plan to expand our software deployment models and software functionalities over time as we promote our platform and the value it can deliver in a wide variety of use cases. In addition, we plan to enhance gateway products to help drive gateways as the preferred connectivity devices for retail, healthcare and other industries, and to develop next-generation reader ICs. We may selectively enter into arrangements with others with whom we have relationships, such as customers, vendors and channel partners, to fund all or a portion of certain of these research and development initiatives. If we are unsuccessful with attracting such funding, our operating results and time to market for products may be adversely affected. We also are investing in sales and marketing to directly engage potential end users of our platform and are deepening product integration with software partners to accelerate the development and adoption of solutions based on the Impinj Platform. These investments will increase research and development and sales and marketing expenses on an absolute dollar basis for the foreseeable future. Many of these investments will occur in advance of experiencing any direct benefit from them and may affect our profitability in future periods.

 

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Market Adoption

Our financial performance generally depends upon the rate, scope and depth of end-user adoption of our platform in multiple industries, including the retail industry which is our largest end market. In 2011, Round Rock Research brought a patent infringement lawsuit against several large retailers and other end users of RAIN technology, which adversely affected market adoption. In late 2013, we and numerous RAIN technology companies obtained a license from Round Rock Research; however the end users that were parties to the lawsuit did not finalize their settlements with Round Rock until early 2015. In 2013 and 2014, some major retailers, brand owners and other entities initiated new or expanded current deployments, and in 2015 began more rapid expansion, which increased our product sales. We believe these deployments indicate a trend toward greater RAIN adoption in retail and other markets, and we intend to continue to introduce new platform products to further grow overall market adoption. In addition, we believe greater adoption of our software will increase the value of the other parts of our platform, which we believe will further drive adoption over the longer term. If market adoption of RAIN technology and our platform products specifically, does not meet our expectations, our growth prospects and operating results will be adversely affected.

Timing and Complexity of Customer Deployments

From 2010 to 2015, our tag IC sales volumes increased at a compounded annual growth rate of 30%. However, deployment of RAIN-based solutions has been uneven and unpredictable in scope, timing and implementation. For end users to gain business value from our platform, they typically must integrate our platform with their applications and information systems. We have a large and multi-tiered partner channel which serves many markets and end users; we rely on these channel partners to deploy or integrate our platform and products with end user applications and information systems. If our partners fail to deploy or integrate our platforms and products as planned then sales of our products and our reputation may be adversely affected. As a result of these factors and our reliance on our channel partners, we may experience significant fluctuation in revenue on a quarterly basis, and we anticipate these factors will continue to characterize our business for the foreseeable future. Therefore, we focus on annual results as they are more relevant for planning and for evaluating our performance.

In addition, we enter into NRE development agreements which typically include initial funding with a requirement for us to meet certain milestones in order to receive additional funding for the NRE engagement. If we are unable to meet such milestones, we may not realize the full benefits of the NRE engagement.

Average Selling Price

We occasionally discount prices of our products to win opportunities, particularly large opportunities. In future periods we expect our hardware ASPs to fluctuate based on the level of discounting and competitive price pressure, but decline over time. Historically, we have been able to implement manufacturing and quality improvements to effectively reduce the cost per unit of our products, allowing us to maintain, and in some cases increase, gross margins.

Components of Results of Operations

Revenue

We currently generate revenue from the sale of platform products and development, service and licensing agreements.

Product Revenue

Substantially all of our product revenue is currently derived from sales of tag ICs, reader ICs, readers and gateways, and software. We generate our product revenue as follows:

 

   

We sell our tag ICs primarily to inlay manufacturers. In 2015, sales of tag ICs represented 67% of our product revenue, and we expect tag IC sales to represent a majority of our product revenue for the

 

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foreseeable future. In 2015, sales to Avery, Shang Yang and Smartrac accounted for 23%, 22% and 20% of our tag IC revenue and 16%, 15% and 14% of our total revenue, respectively. We expect this concentration to decrease over time as demand for our tag IC products increases.

 

   

We sell our reader ICs primarily to original equipment manufacturers, or OEMs, and other end user customers through distributors. In 2015, sales to our top two reader IC customers each accounted for 23% of our reader IC revenue, but neither represented more than 10% of total revenue. We expect customer concentration for reader ICs to decrease over time as demand for RAIN solutions grows and the number of OEMs increases.

 

   

We sell most of our readers and gateways indirectly to VARs and system integrators through distributors and are beginning to sell software through these partners and software solution partners. In 2015, we had one distributor, BlueStar, Inc., that accounted for 39% of our readers and gateway revenue and 10% of our total revenue. We have not experienced customer concentration in our reader, gateway and software product lines.

We sell our products through a broad network of distribution channel partners; many of such channel partners sell multiple Impinj products. In addition, to generate and capture Item Intelligence and take advantage of the benefits associated with our integrated platform, end users must deploy multiple products. As a result, we evaluate performance based primarily on total product revenue.

For our tag ICs and reader ICs, we generally recognize product revenue upon shipment because the relevant criteria for revenue recognition are met at that time. For our reader and gateway products, which are occasionally sold with other products and support, revenue is allocated to each separate deliverable on a relative fair value basis and is generally recognized upon shipment or deferred and recognized ratably over the contract service period. We sell our software and expect modest revenue from our newly introduced software for the foreseeable future. We believe software revenue will grow over time, but it has not been material to date.

Development, Service and Licensing Revenue

Our development, service and licensing revenue includes revenue from services performed under custom development agreements and for rights to technology through licenses. Substantially all of our development, service and licensing revenue is derived from NRE development agreements. We often receive payment from customers in advance of completion of deliverables. These payments are recorded as deferred revenue until they are earned, and we generally recognize revenue under these contracts using the percentage of completion method. Our development projects are customized to the customer’s requirements and, therefore, our gross margin varies from project to project. We intend to pursue strategically important development agreements with end users and others to fund product development. In the future we expect revenue from such agreements to fluctuate and over time to decline as a percentage of total revenue.

Cost of Revenue and Gross Margin

Cost of product revenue includes costs associated with the manufacture of our tag ICs, reader ICs, readers and gateways, including direct materials and manufacturing costs as well as associated overhead costs such as logistics, quality control, planning and procurement. We outsource the manufacturing of our readers and gateways to a third-party contract manufacturer, and our costs for these devices are based on negotiated prices for finished goods. Cost of product revenue also includes charges for inventory write-downs, warranty costs and accrued losses on purchase commitments to third-party contract manufacturers. Our gross margins vary by product, with tag IC margins generally lower than total gross margins, and all other hardware and software product margins generally higher than total gross margins. As such, our total product gross margin varies from period to period as a function of product mix.

Cost of development, service, and licensing revenue consists primarily of direct labor and other costs, such as travel and materials, associated with fulfilling deliverables as part of an agreement. These agreements generally

 

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have higher gross margins than our total gross margins. Our development agreements are customized to the customer’s requirements and our gross margin varies from project to project.

Operating Expenses

Research and Development

Research and development expense consists primarily of salaries and related compensation costs, including stock-based compensation expense, for our product development personnel, contract developers, prototype materials and other expenses related to the development of new and innovative products and solutions. We expect research and development expense to increase in absolute dollars in future periods for platform product development.

Research and development costs are expensed as incurred. However, certain of our investments related to research and development are not recorded as research and development expense. Costs incurred that are directly attributable to development agreements are classified as costs of development, service and licensing revenue. Costs incurred to develop software for internal use that meet the criteria for capitalization are capitalized in the period incurred and depreciated over the estimated useful life of the software, typically three years. Our total investment in research and development was $15.0 million and $17.3 million in 2014 and 2015, respectively. These amounts include $13.9 million and $17.0 million in research and development expense, $169,000 and $113,000 of internal-use software development costs capitalized, and $967,000 and $133,000 of development costs for NRE agreements in 2014 and 2015, respectively.

Selling and Marketing

Selling and marketing expense consists primarily of salaries and related variable compensation costs, including stock-based compensation expense, for our sales personnel, as well as travel, advertising and promotional expenses and other related expenses. We anticipate that sales and marketing expense will increase in absolute dollars, as we increase personnel and focus on expanding our market penetration, developing strategic partnerships and driving adoption of our platform. We expect incentive sales compensation to fluctuate as a function of sales.

General and Administrative

General and administrative expense consists primarily of salaries and related compensation costs, including stock-based compensation expense, for our executive, finance, human resources and information technology personnel, legal, accounting and other professional services, travel and related expenses, insurance, occupancy and other overhead costs. We expect our general and administrative expenses to increase in absolute dollars as we add personnel and facilities to support our growth. In addition, we will incur additional compliance and reporting costs as a public company.

Interest Income (Expense) and Other, Net

Interest expense consists primarily of interest on our credit facilities and amortization of deferred financing fees associated with such facilities. Other income and expense, net consists primarily of a payment from a third party in exchange for early termination of the lease for our corporate headquarters and changes in the fair value of outstanding redeemable convertible preferred stock warrants.

 

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Results of Operations

The following table presents our consolidated results of operations for the periods indicated as a percentage of total revenue, with the exception of cost of product revenue and cost of development, service and licensing revenue which are presented as a percentage of related revenue. Percentages from certain line items do not sum to the subtotal or total line items due to rounding. The period-to-period comparisons of results are not necessarily indicative of results for future periods.

 

     YEAR ENDED
DECEMBER 31,
    THREE MONTHS ENDED
MARCH 31,
 
     2014     2015     2015     2016  

Revenue:

        

Product revenue

         92.5         98.6         99.6         99.6

Development, service and licensing revenue

     7.5        1.4        0.4        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0        100.0        100.0        100.0   

Cost of revenue:

        

Cost of product revenue

     49.0        48.1        49.9        48.4   

Cost of development, service and licensing revenue

     23.3        25.0        52.9        47.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     47.1        47.8        49.9        48.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     52.9        52.2        50.1        51.6   

Operating expenses:

        

Research and development expense

     21.8        21.7        25.3        23.9   

Sales and marketing expense

     16.7        18.3        18.7        22.8   

General and administrative expense

     10.6        10.2        10.7        13.5   

Offering costs

     3.1        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     52.2        50.2        54.7        60.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     0.7        2.0        (4.6     (8.6

Interest income (expense) and other, net

     (0.1     (0.7     (1.0     (2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax expense

     0.6        1.4        (5.5     (10.7

Income tax expense

     (0.2     (0.2     (0.1     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     0.5     1.1     (5.6 )%      (10.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Years Ended December 31, 2014 and 2015

Revenue

 

     YEAR ENDED
DECEMBER 31,
     CHANGE 2014 VS. 2015  
     2014      2015      IN DOLLARS     PERCENTAGE  
     (in thousands, except percentages)  

Product revenue

   $ 58,970       $ 77,389       $ 18,419        31.2

Development, service and licensing revenue

     4,793         1,090         (3,703     (77.3
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 63,763       $ 78,479       $ 14,716        23.1   
  

 

 

    

 

 

    

 

 

   

Total revenue increased for 2015 compared to 2014 driven by increased demand for our products from new and existing customers across multiple industry verticals, particularly retail apparel and healthcare. Product revenue increased for 2015 compared to 2014 as (1) tag IC and (2) reader and gateway shipment volumes increased 45.3% and 26.1%, respectively; offset by a decrease in average selling prices for (1) tag ICs and (2) readers and gateways of 2.3% and 4.6%, respectively. Development, service and licensing revenue decreased in 2015 compared to 2014 as we completed work under development agreements in 2014 that were not replaced with new agreements in 2015.

 

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Gross Profit

 

     YEAR ENDED
DECEMBER 31,
    CHANGE 2014 VS. 2015  
     2014     2015     IN DOLLARS     PERCENTAGE  
     (in thousands, except percentages)  

Product gross profit

   $ 30,056      $ 40,157      $ 10,101        33.6

Cost of development, service and licensing revenue gross profit

     3,675        817        (2,858     (77.8
  

 

 

   

 

 

   

 

 

   

Total gross profit

   $ 33,731      $ 40,974      $ 7,243        21.5   
  

 

 

   

 

 

   

 

 

   

Product gross margin

     51.0     51.9    

Cost of development, service and licensing revenue gross margin

     76.7        75.0       

Total gross margin

     52.9        52.2       

Total gross profit increased for 2015 compared to 2014 primarily as a result of increased product revenue. Product gross margin increased in 2015 compared to 2014 due to (1) the sale of $492,000 of inventory previously written down and (2) manufacturing and quality improvements for our tag ICs which reduced our inventory write downs period over period by $347,000.

Operating Expenses

Research and Development

 

     YEAR ENDED DECEMBER 31,      CHANGE 2014 VS. 2015  
     2014      2015      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

Research and development expense

   $ 13,889       $ 17,005       $ 3,116         22.4

Research and development expense increased in 2015 compared to 2014 due to increases of $2.2 million in personnel costs. We also experienced lower revenue from NRE development agreements which resulted in a redeployment of these resources and related costs of $832,000 to research and development.

Sales and Marketing

 

     YEAR ENDED DECEMBER 31,      CHANGE 2014 VS. 2015  
     2014      2015      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

Sales and marketing expense

   $ 10,662       $ 14,343       $ 3,681         34.5

Sales and marketing expense increased in 2015 compared to 2014 due to increases of $3.0 million in personnel costs and $692,000 in additional costs for marketing, advertising and sales related travel and supplies expenses.

General and Administrative

 

     YEAR ENDED DECEMBER 31,      CHANGE 2014 VS. 2015  
     2014      2015      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

General and administrative expense

   $ 6,765       $ 8,025       $ 1,260         18.6

General and administrative expense increased in 2015 compared to 2014 due to increases of $623,000 in rent, utilities and depreciation associated with new facilities, $506,000 in personnel costs and $136,000 in professional service, travel, supplies and office expenses.

 

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Offering Costs

 

     YEAR ENDED DECEMBER 31,      CHANGE 2014 VS. 2015  
      2014      2015      IN DOLLARS     PERCENTAGE  
     (in thousands, except percentages)  

Offering costs

   $ 1,959       $ —         $ (1,959     NR   

Offering costs include the expenses incurred in connection with a proposed offering of our capital stock which were expensed in the fourth quarter of 2014. Offering costs incurred in 2015 were $637,000 and are currently capitalized as they are expected to offset proceeds from our proposed initial public offering.

Interest Income (Expense) and Other, Net

 

     YEAR ENDED
DECEMBER 31,
    CHANGE 2014 VS. 2015  
     2014     2015     IN DOLLARS     PERCENTAGE  
     (in thousands, except percentages)  

Interest expense

   $ (901   $ (1,208   $ (307     34.1

Other income (expense), net

   $ 838      $ 673      $ (165     (19.7 )% 

Interest expense increased for 2015 compared to 2014 due to increased borrowings under our credit facilities in 2015 and additional borrowings under our mezzanine credit facility which carries an interest rate of 18%.

Other income (expense), net decreased for 2015 compared to 2014 due to the non-recurrence of a payment of $1.2 million from a third party in exchange for early termination of the lease for our corporate headquarters in 2014 offset by changes in the fair value of outstanding convertible preferred stock warrants.

Comparison of Three Months Ended March 31, 2015 and 2016

Revenue

 

     THREE MONTHS ENDED
MARCH 31,
     CHANGE 2015 VS. 2016  
     2015      2016      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

Product revenue

   $ 15,995       $ 21,551       $ 5,556         34.7

Development, service and licensing revenue

     70         80         10         14.3   
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 16,065       $ 21,631       $ 5,566         34.6   
  

 

 

    

 

 

    

 

 

    

Total revenue increased for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 driven by increased demand for our products from new and existing customers across multiple industry verticals, particularly retail apparel and healthcare. Product revenue increased for the three months ended March 31, 2016 compared to 2015 as (1) tag IC and (2) reader and gateway shipment volumes increased 43.8% and 31.9%, respectively; offset by a decrease in average selling prices for (1) tag ICs and (2) readers and gateways of 1.0% and 5.2%, respectively, as a result of sales mix. Additionally, our product revenue increased by approximately $250,000 from the sale of software for the three months ended March 31, 2016 compared to 2015.

 

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Gross Profit

 

     THREE MONTHS ENDED
MARCH 31,
    CHANGE 2015 VS. 2016  
     2015     2016     IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

Product gross profit

   $ 8,017      $ 11,114      $ 3,097         38.6

Cost of development, service and licensing revenue gross profit

     33        42        9         27.3   
  

 

 

   

 

 

   

 

 

    

Total gross profit

   $ 8,050      $ 11,156      $ 3,106         38.6   
  

 

 

   

 

 

   

 

 

    

Product gross margin

     50.1     51.6     

Cost of development, service and licensing revenue gross margin

     47.1        52.5        

Total gross margin

     50.1        51.6        

Total gross profit increased for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 primarily as a result of increased product revenue. Product gross margin increased in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 primarily due to volume pricing discounts of 7.5% from our vendors for our tag IC products offset by a decrease in average selling prices for (1) tag ICs and (2) readers and gateways of 1.0% and 5.2%, respectively.

Operating Expenses

Research and Development

 

     THREE MONTHS ENDED
MARCH 31,
     CHANGE 2015 VS. 2016  
     2015      2016      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

Research and development expense

   $ 4,058       $ 5,171       $ 1,113         27.4

Research and development expense increased in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to increases of $721,000 in personnel costs, $218,000 in rent, and $140,000 in lab supplies, equipment and other expenses.

Sales and Marketing

 

     THREE MONTHS ENDED
MARCH 31,
     CHANGE 2015 VS. 2016  
     2015      2016      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

Sales and marketing expense

   $ 3,004       $ 4,922       $ 1,918         63.8

Sales and marketing expense increased in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to increases of $1.4 million in personnel costs, $68,000 in professional services, $99,000 in rent, $182,000 in marketing and advertising costs and $161,000 in sales related travel expenses.

 

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General and Administrative

 

     THREE MONTHS ENDED
MARCH 31,
     CHANGE 2015 VS. 2016  
     2015      2016      IN DOLLARS      PERCENTAGE  
     (in thousands, except percentages)  

General and administrative expense

   $ 1,721       $ 2,931       $ 1,210         70.3

General and administrative expense increased in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to increases of $354,000 in personnel costs, $515,000 in rent, utilities and depreciation associated with new facilities and $329,000 in professional services.

Interest Income (Expense) and Other, Net

 

     THREE MONTHS ENDED
MARCH 31,
    CHANGE 2015 VS. 2016  
     2015     2016     IN DOLLARS     PERCENTAGE  
     (in thousands, except percentages)  

Interest expense

   $ (215   $ (487   $ (272     126.5

Other income (expense), net

   $ 62      $ 40      $ (22     (35.5 )% 

Interest expense increased for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to higher outstanding borrowings in 2016 under our mezzanine credit facility which carries an interest rate of 18%.

 

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Quarterly Results of Operations

The following tables set forth selected unaudited consolidated quarterly statements of operations data for the last eight quarters, as well as the percentage that each line item represents of total revenue, with the exception of cost of product revenue and cost of development, service and licensing revenue which are presented as a percentage of related revenue. Percentages from certain line items do not sum to the subtotal or total line items due to rounding. The consolidated financial statements for each of these quarters have been prepared on the same basis as the audited consolidated financial statements for the years ended December 31, 2014 and 2015 included elsewhere in this prospectus and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary to state fairly our results of operations and financial position for these periods. These data should be read in conjunction with the audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

 

    THREE MONTHS ENDED  
    JUNE 30,
2014
    SEPT  30,
2014
    DEC 31,
2014
    MAR 31,
2015
    JUNE 30,
2015
    SEPT  30,
2015
    DEC 31,
2015
    MAR 31,
2016
 
    (in thousands, except percentages)  

Consolidated Statements of Operations Data:

               

Revenue:

               

Product revenue

  $ 14,957      $ 16,460      $ 15,067      $ 15,995      $ 18,871      $ 20,299      $ 22,224      $ 21,551   

Development, service and licensing revenue

    1,905        738        122        70        252        365        403        80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    16,862        17,198        15,189        16,065        19,123        20,664        22,627        21,631   

Cost of revenue:

               

Cost of product revenue

    7,497        7,914        7,483        7,978        8,877        9,962        10,415        10,437   

Cost of development, service and licensing revenue

    293        151        72        37        59        60        117        38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,790        8,065        7,555        8,015        8,936        10,022        10,532        10,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    9,072        9,133        7,634        8,050        10,187        10,642        12,095     

 

11,156

  

Gross margin

    53.8     53.1     50.3     50.1     53.3     51.5     53.5     51.6

Operating expenses:

               

Research and development expense

    3,733        3,929        3,490        4,058        3,917        4,189        4,841        5,171   

Sales and marketing expense

    2,795        2,782        2,769        3,004        3,289        3,724        4,326        4,922   

General and administrative expense

    1,707        1,694        1,810        1,721        1,771        2,127        2,406        2,931   

Offering costs

    —          —          1,959        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,235        8,405        10,028        8,783        8,977        10,040        11,573        13,024   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    837        728        (2,394     (733     1,210        602        522     

 

(1,868

Interest income (expense) and other, net

    (925     (164     1,289        (153     (206     (560     384        (447
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax expense

    (88     564        (1,105     (886     1,004        42       
906
  
 

 

(2,315

Income tax expense

    (24     (24     (24     (19     (30     (29     (88     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (112   $ 540      $ (1,129   $ (905   $ 974      $ 13      $ 818      $ (2,330
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Information:

               

Adjusted EBITDA(1)

  $ 1,500      $ 1,380      $ 243      $ (13   $ 1,929      $ 1,330      $ 1,503      $ (821

 

(1) 

See “Selected Consolidated Financial Data—Adjusted EBITDA” for additional information.

 

65


Table of Contents
     THREE MONTHS ENDED  
     JUNE 30,
2014
    SEPT 30,
2014
    DEC 31,
2014
    MAR 31,
2015
    JUNE 30,
2015
    SEPT 30,
2015
    DEC 31,
2015
    MAR 31,
2016
 

Consolidated Statements of Operations Data:

                

Revenue:

                

Product revenue

     88.7     95.7     99.2     99.6     98.7     98.2     98.2     99.6

Development, service and licensing revenue

     11.3        4.3        0.8        0.4        1.3        1.8        1.8        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0   

Cost of revenue:

                

Cost of product revenue

     50.1        48.1        49.7        49.9        47.0        49.1        46.9        48.4   

Cost of development, service and licensing revenue

     15.4        20.5        59.0        52.9        23.4        16.4        29.0        47.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     46.2        46.9        49.7        49.9        46.7        48.5        46.5        48.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     53.8        53.1        50.3        50.1        53.3        51.5        53.5        51.6   

Operating expenses:

                

Research and development expense

     22.1        22.8        23.0        25.3        20.5        20.3        21.4        23.9   

Sales and marketing expense

     16.6        16.2        18.2        18.7        17.2        18.0        19.1        22.8   

General and administrative expense

     10.1        9.8        11.9        10.7        9.3        10.3        10.6        13.5   

Offering costs

     —          —          12.9        —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     48.8        48.9        66.0        54.7        46.9        48.6        51.1        60.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     5.0        4.2        (15.8     (4.6     6.3        2.9        2.3        (8.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income (expense) and other, net

     (5.5     (1.0     8.5        (1.0     (1.1     (2.7     1.7        (2.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax expense

     (0.5     3.3        (7.3     (5.5     5.3        0.2        4.0        (10.7

Income tax expense

     (0.1     (0.1     (0.2     (0.1     (0.2     (0.1     (0.4     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (0.7 )%      3.1     (7.4 )%      (5.6 )%      5.1     0.1     3.6     (10.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a reconciliation of net income (loss) to adjusted EBITDA:

 

     THREE MONTHS ENDED  
     JUNE 30,
2014
    SEPT 30,
2014
     DEC 31,
2014
    MAR 31,
2015
    JUNE 30,
2015
     SEPT 30,
2015
     DEC 31,
2015
    MAR 31,
2016
 
     (in thousands)  

Net income (loss)

   $ (112   $ 540       $ (1,129   $ (905   $ 974       $ 13       $ 818      $ (2,330

Interest income (expense) and other, net

     925        164         (1,289     153        206         560         (384     447   

Income tax expense

     24        24         24        19        30         29         88        15   

Depreciation and amortization

     337