IMPINJ INC 10-K

Item 1. Business Overview Our vision is a boundless Internet of Things, or IoT. We are driving a future in which everyday physical items are wirelessly connected to digital counterparts, or digital twins, in the cloud, and in which businesses and people access information about an item from its digital twin. Our mission is to connect every thing. We deliver a platform that powers item-to-cloud connectivity, and on which enterprise solution providers innovate IoT whole products. Today, we deliver the identity, location and authenticity of billions of physical items. We believe our future is extending that delivery to trillions of physical items and enabling ubiquitous access to cloud-based digital twins of those items, each storing an item’s ownership, history and links. We believe the item-to-cloud connectivity that our platform will deliver will enhance businesses efficiencies and commerce and, ultimately, improve peoples’ lives. Impinj Platform Our platform, which comprises multiple product families, wirelessly connects individual items and delivers data about the connected items to business and consumer applications enabled by our partner network. We link the products within our platform to deliver capabilities and performance that surpasses mix-and-match solutions built from competitor products. We and our partners connect the items via a miniature radio chip embedded in the item or in its packaging, reading and delivering each item’s identity, location and authenticity. To date, we have enabled connectivity to more than 60 billion items, enabling businesses and consumers to derive timely information from those connected items. Our platform uses RAIN, a type of radio-frequency identification, or RFID, technology we pioneered. We spearheaded development of the RAIN radio standard, lobbied governments to allocate frequency spectrum and cofounded the RAIN Alliance that today has more than 150 member companies. Our industry uses free spectrum in 81 countries encompassing roughly 95% of the world’s GDP and has connected many tens of billions of items to date. We believe RAIN’s capabilities – in particular, endpoint ICs with serialized identifiers, 30-foot range reading up to 1,000 items per second without line-of-sight, radio-frequency energy harvesting for battery-free operation, essentially unlimited life and, in the future, cryptographic item authentication – position RAIN to be the leading item-to-cloud connectivity technology for the IoT. 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 report captioned “Risk Factors.” Endpoint ICs Our endpoint integrated circuit, or ICs, product family comprises miniature radios-on-a-chip that can wirelessly connect almost any item yet sell for pennies. Each IC attaches to a host item and includes a number to identify the item. The IC may also include or enable features such as user data storage, security, authentication, loss prevention, privacy protection and value-added Impinj custom capabilities, all accessible by our platform. Our original equipment manufacturing, or OEM, partners typically attach each endpoint IC to a thin printed or etched antenna on a paper or Mylar backing, then cover the composite inlay with a paper face to form a tag. End users attach the tags to items in markets including retail, supply chain and logistics, healthcare, automotive, sports, industrial and manufacturing, consumer experience, food, datacenter, travel and banking. In some more-recent applications, rather than attaching a tag to an item, end users may instead embed the inlay directly into the item, for example by sewing an inlay into a garment’s care label. Regardless of the method by which our partners embed an endpoint IC into a host item, we refer to an IC and its host item as an endpoint. 5 Table of Contents When a consumer purchases a retail item, a store or supplier will typically procure another inventory item to sell, including another endpoint IC. We believe endpoint ICs are the first market for consumable silicon and selling endpoint ICs represents a recurring revenue source for us . Systems Our systems product family comprises reader ICs, readers and gateways that wirelessly provide power to, and communicate bidirectionally with, endpoint ICs on host items. They also read, write, authenticate and engage the endpoint ICs on those items. Our systems products include software and algorithms that enable our partners to deliver use cases such as retail self-checkout and loss prevention, and warehouse pallet and carton tracking, to end users worldwide. Our reader IC product family comprises multiple products, tiered by performance and functionality, that our reader IC partners use in their readers. We offer easy-to-use APIs, development environments, sample code, drivers and libraries to facilitate partner reader development. We also leverage developments in our reader and gateway software to enhance our reader IC firmware. We sell our reader ICs to OEM and original design manufacturing, or ODM, partners that use them in mobile or handheld readers, fixed readers, gateways, RAIN-enabled appliances and other intelligent edge devices. We sell our reader ICs for tens of dollars. Our reader product family comprises multiple finished products, tiered by performance and functionality. Our gateway product family integrates our readers with beamforming antennas to electrically steer a radio beam like a radar, locating and tracking items in one dimension or two. Our partners can use our readers and gateways to enable end-user solutions. Our readers and gateways are easy to deploy and use, can be powered via power-over-Ethernet, or PoE, and are certified for operation in more than 40 countries. Our software and algorithms run either entirely on our readers and gateways or partly on them and partly on partner devices. We are currently focused on developing software and algorithms to enable retail use cases (such as self-checkout and loss prevention), and on supply chain and logistics use cases (such as pallet tracking in dock doors and package sortation on conveyors). Our easy-to-use APIs enable our partners to transform item data into actionable information, enabling analytics and insights about the items that businesses manufacture, transport and sell. Our APIs also help our partners deliver enterprise-grade systems management and control. We sell our readers and gateways through distributors, system integrators, or SIs, value-added resellers, or VARs, and solution providers. We sell our readers for hundreds of dollars and our gateways for thousands of dollars. Industry Use Cases The following use cases are representative of actual RAIN deployments we serve today. Retail Retailers, both traditional “brick-and-mortar” and online, consume billions of RAIN tags each year to obtain real-time data about products they manufacture, transport and sell. Today, most retail products with RAIN tags are apparel and footwear, but retailers are extending RAIN usage to cosmetics, home good, sporting items and even food. Retailers can obtain the following benefits by using our platform: • In-store Inventory Visibility . Our platform delivers accurate and timely data about a retailer’s inventory. Accurate inventory data can reduce overstocks, understocks and searching, thereby allowing retailers to both reduce costly inventory and increase same-store sales by ensuring each store is properly stocked and by enabling staff to focus on customers rather than on inventorying or searching for items. • Omnichannel Fulfillment . The cornerstone of a successful omnichannel operation is real-time inventory visibility in stores, warehouses and fulfillment centers. The visibility our platform delivers can help or enable retailers ship directly from those stores, warehouses and fulfillment centers as well as allow consumers to buy online and pickup in store. It can also help retailers sell to any customer from any retail location, confidently sell down to the last item and facilitate seamless returns. 6 Table of Contents • Self-checkout and Loss Prevention . C onsumer self-checkout is a clear opportunity for retailers looking to modernize their in-store experience. However, self-checkout requires effective loss prevention. Our platform can enable both – self-checkout via kiosks that read endpoint ICs on items and loss-prevention systems that scan RAIN tags for unsold items leaving the store. As our inlay partners focus on embedding RAIN tags directly into retail items, we focus on key innovations like our patented Protected Mode that allows a tag to require a PIN for post point-of-sale readability, enabling loss-prevention systems to focus on unsold items while satisfying General Data Protection Regulation, or GDPR, and similar privacy requirements . Supply Chain and Logistics The supply chain and logistics, or SC&L, industry includes shipping companies, third-party logistics providers, postal organizations, captive distribution operations and other organizations transporting national and international trade. These organizations are increasingly demanding real-time shipment data to virtualize, analyze and optimize their operations. SC&L companies can obtain these benefits using our platform: • Shipment Verification. Our platform provides real-time data about items passing through dock doors to the systems that run shipping and receiving, enabling SC&L companies to reduce mistakes, automate processes and drive operational efficiencies. • Conveyor Sortation. Our platform enables high-speed, real-time, not line-of-sight reading of packages moving along conveyors, improving automatic sortation accuracy and reducing costly shipping errors. • Returnable Transit Item, or RTI, Tracking. By tagging RTI containers that travel in and out of warehouses, our platform can reduce RTI loss and ensure SC&L companies have the RTI containers they need. • Asset Management. Our platform enables automated asset check-in/out procedures and location monitoring, reducing loss and improving efficiencies and maintenance-schedule compliance. Other Industries These other industries can also obtain benefits using our platform: • Aviation. Luggage tags that incorporate our endpoint ICs allow airlines to give passengers real-time location information for their checked bags as well as reduce lost bags. • Automotive . Car manufacturers use our platform to track and verify automotive parts for vehicle assembly, reducing mistakes and labor costs and improving operations. • Healthcare. Hospitals use our platform to track assets and manage patient and clinician workflows. Partner products built on our platform include RAIN-enabled medical cabinets and refrigerators. • Industrial and Manufacturing . Industrial companies track components to increase manufacturing productivity and reduce shipping errors. Manufacturers use our platform to track assets and tools, reducing errors and increasing calibration compliance. • Sports . Marathons and other foot races track runners via our endpoint ICs in race bibs. Golf venues score participants’ shots via our endpoint ICs inside golf balls. • Food . Our reader ICs track syrup cartridges for replenishment in soda fountains. Our endpoint ICs track meat and fish for freshness. • Datacenters . Datacenters use our platform for asset tracking. Electronics manufacturers embed our e ndpoint ICs into electronic devices for processor-secured storage. • Travel . Driver licenses in some states in the United States include our endpoint ICs to speed border crossings. Fueling stations use vehicle windshield tags to enable automatic and cashless fueling. • Banking . Banks use our endpoint ICs for money bundles and to track information-technology assets. 7 Table of Contents • Linen and Uniform Tracking . Laundry providers embed washable tags into their linens and uniforms for automated tracking. Competitive Advantages We believe we can extend our leadership of the RAIN RFID market by leveraging our competitive strengths, including: • Platform . Our platform integrates our products and enables enhanced functionalities in ways we believe surpasses mix-and-match solutions built from competitor components, improving overall RAIN system performance, capabilities, reliability and ease-of-use. • Market Leadership . We believe we lead the RAIN market as the only company with an integrated platform spanning endpoint ICs, reader ICs, fixed readers and gateways. • Technology Leadership . Our RAIN focus has enabled us to regularly be first-to-market with innovative, high-performing and high-quality products. Our chief executive officer is a recognized industry thought leader, a director of the RAIN Alliance and previously was an editor for the RAIN radio standard. • Partner Ecosystem . Our worldwide partner ecosystem comprises hundreds of distributors, SIs, VARs, software solution partners and reader, inlay and tag ODMs and OEMs. That ecosystem gives us market reach, penetration and scale we believe few, if any, of our competitors enjoy. • Trusted Brand . We believe our industry leadership, name recognition and reputation for innovative, high-performing and high-quality products have significantly contributed to our leading market position. • Intellectual Property . We believe we have the leading RAIN patent portfolio. As of December 31, 2021, our portfolio included 291 issued and allowed U.S. patents, five issued and allowed international patents, 24 pending U.S. patent applications and 2 pending international patent applications. Growth Strategies To further our mission of connecting every thing, we plan to focus on the following strategic areas: • Drive RAIN Adoption: We will focus on repeatable whole products with top-tier partners, enhancing and expanding our product offerings and deepening our platform integration with those partners. • Invest in Our Platform: We will continue investing in our platform’s products, software and algorithms, use cases, differentiated capabilities and cost reductions. • Ubiquitous Reading: We will develop next-generation reader ICs to improve functionality, reduce costs and make Impinj-based partner readers ubiquitous. • Cloud Services: We will invest in cloud services that leverage differentiated features in our endpoint ICs to enhance our platform’s reach and breadth and enable new use cases and opportunities Sales and Marketing We have a worldwide sales team with expertise in endpoint ICs, reader ICs, readers, gateways and solutions. We also have a global ecosystem of hundreds of partners. Our sales team enables end-user solutions through, with and alongside those partners, fulfilling through the partners primarily as follows: • E ndpoint ICs: Directly to inlay and tag OEMs. We typically negotiate pricing with these OEMs annually, with new pricing effective during the first quarter of the calendar year . • Reader ICs: Through distribution to handheld and fixed reader OEMs and ODMs. • Readers and gateways: To VARs and SIs through distributors . 8 Table of Contents We aim to engender preference for our platform in all our sales engagements, encouraging our partners and end users to use and gain the full benefit of our entire platform. Our business development, product marketing, technical and systems engineers actively engage those partners and end users. Our solutions-marketing and business-development teams work with our ISVs to enable end-user awareness, joint solutions, joint go-to-market selling and sales enablement. The following table presents total revenue concentration to Avery Dennison Corporation, or Avery Dennison, Arizon RFID Technology (Yangzhou) Co., LTD, or Arizon, and a North American logistics provider for the periods presented; Year Ended December 31, 2021 2020 2019 Revenue: Avery Dennison ( 1) 32 % 32 % 31 % North American logistics provider * * 14 Arizon 11 10 * 43 % 42 % 45 % * Less than 10% (1) Includes revenue concentration related to Smartrac NV, or Smartrac. Avery Dennison acquired Smartrac in March 2020. Avery Dennison and Arizon purchase our endpoint ICs for their inlay and tag products. In 2019, we generated 14% of total revenue from a North American logistics provider in connection with a project-based gateway deployment. Manufacturing We outsource all our product manufacturing to third-party manufacturers that build our products to our specifications. This capital-efficient operating model scales efficiently with volume, allowing us to focus our resources on accelerating development of new products and solutions. Taiwan Semiconductor Manufacturing Company Limited, or TSMC, fabricates our endpoint IC wafers in Asia and the United States and has been our sole endpoint IC wafer supplier since 2003. We order endpoint IC wafers on a purchase-order basis and do not have a long-term agreement with TSMC. We test the wafers at our U.S. headquarters and in Asia. We use multiple subcontractors to post-process the wafers. Stars Microelectronics (Thailand) Public Company Limited, or Stars, Chipbond Technology Corporation, or Chipbond, and Unisem Group, or Unisem, are our primary subcontracts. We generally engage all our endpoint IC subcontractors on a purchase-order basis. Tower Semiconductor, or Tower, fabricates our reader IC wafers in the United States and has been our sole reader IC wafer supplier since 2008. We order reader IC wafers on a purchase-order basis and do not have a long-term agreement with Tower. We test and package the ICs in Asia. We generally engage all our reader IC subcontractors on a purchase-order basis. Plexus Corp., or Plexus, manufactures our readers and gateways in Asia since 2005. We order readers and gateways pursuant to non-exclusive purchase agreements that automatically renew each year, subject to each party’s right to terminate on 180 days’ notice. We use subcontractors on a purchase-order basis to assemble and test printed circuit boards, to build our reader and gateway enclosures and to test our readers and gateways. Research and Development We built our company around technology leadership, innovation and best-in-class products. Throughout our history we have committed, and we plan to continue committing, significant resources to technology, innovation and product development. We believe we have achieved our leading market position by continuously improving product performance, features, quality and reliability while reducing costs, and we plan to invest to continue doing so. 9 Table of Contents In most situations, we strive to lead the market with new products and innovations, but we sometimes adopt a more deliberate approach depending on the market situation. As one example, our nearest endpoint IC competitor migrated from 200mm wafers to 300mm wafers before we did. That migration caused the inlay OEMs to gradually retrofit their inlay manufacturing machines to handle 300mm wafers. In the meantime, we focused on an endpoint IC process-node migration, which we completed in 2020. Our first product in that process node, the Impinj M700, is not only on 300mm wafers, but today has roughly twice as many ICs per wafer as that competitor and enter ed the market with the inlay OEMs already able to process 300mm wafers . We have a team of skilled engineers that today conduct all our research and most of our product development internally. As of December 31, 2021, we had 194 employees in research and development. We regularly review our technology, products and market development opportunities and reallocate our spending and resources accordingly. Intellectual Property We protect our technologies by filing patent applications, retaining trade secrets and defending and enforcing our intellectual property rights where appropriate. To date, our intellectual property portfolio includes 291 issued and allowed U.S. patents, five issued and allowed international patents, 24 pending U.S. patent applications and 2 pending international patent applications. The first of our 270 utility patents expire in 2022 and the first of our 21 design patents expire in 2022. To protect confidential information not otherwise subject to patent protection, we rely on trade secret law and enter into confidentiality agreements with our employees, customers, suppliers and partners. Because most RAIN product SKUs are used in the United States, and because most of our partners, end users and competitors have U.S. operations, we believe U.S. patents hold the most value for our business. Consequently, we have primarily filed U.S. patent applications. Because our portfolio currently comprises mostly U.S. patents, we have limited ability to assert our intellectual property rights outside the United States. Although our patents and trade secrets constitute valuable assets, we do not view any one of them as material. Instead, we believe the totality of our patent and trade-secret portfolio creates an advantage for our business. We have entered into licensing, broad-scope cross licensing and other agreements authorizing us to use or to operate within the scope of patents and intellectual property owned by third parties. For example, we have licenses to third-party intellectual property that we use in our products. As another example, by participating in developing GS1 EPCglobal protocols, such as the RAIN radio protocol, we agreed to license those of our patents necessarily infringed by the practice of these protocols on a royalty-free basis to other GS1 EPCglobal members, subject to reciprocal royalty-free rights from those members. By participating in developing International Organization for Standardization, or ISO, standards, we agreed to grant to all users worldwide a license to those of our patents necessarily infringed by the practice of several ISO standards, including non-RAIN standards, on reasonable and nondiscriminatory terms, here again subject to reciprocity. We own a number of trademarks and develop names for our new products and secure trademark protection for them, including domain name registration, in relevant jurisdictions. Alliances and Standardization Our platform connects everyday items using the RAIN RFID technology we pioneered. We spearheaded development of the RAIN radio standard, lobbied governments to allocate frequency spectrum and, along with Google, Intel and Smartrac N.V., cofounded the RAIN Alliance . Our chief executive officer is presently an Alliance Director and was previously the Alliance Chairman . The Alliance is a global organization promoting the universal adoption of RAIN technology and solutions, with more than 150 members as of December 31, 2021. Today, the RAIN industry has access to radio spectrum freely available in 81 countries encompassing roughly 95% of the world’s GDP and has connected many tens of billions of items. We believe RAIN’s core capabilities – serialized identifiers for individual items, battery-free operation, 30-foot range, not line-of-sight readability, up to 1,000 reads per second, low cost, essentially unlimited life and available cryptographic authentication – position RAIN to be the leading item-to-cloud connectivity technology for the IoT. 10 Table of Contents We, our end users, partners and competitors developed the RAIN radio protocol, whose technical name is EPC™ Radio-Frequency Identity Protocols Generation-2 UHF RFID (standardized as ISO/IEC 18000-63 and often known colloquially as Gen2) in 2004, with us as the editor. Our community delivered a backward-compatible update in 2013, again with us as the editor. Our industry uses the RAIN radio protocol nearly exclusively. By participating in GS1 EPCglobal, which produced Gen2, and ISO, which ratified 18000-63, as well as in other standards bodies, we agreed to license certain patents as described in the section captioned “Intellectual Property.” Government Regulations Government regulations require us to certify our readers and gateways in jurisdictions where they operate. For example, we certify our readers and gateways to Federal Communications Commission regulations to operate in the United States and its territories. Our readers and gateways are certified for operation in more than 40 countries worldwide including the United States, Canada, Mexico, China, Japan, South Korea and all of the European Union. Competition Each of our competitors competes with some, but not all, of our products. Our primary competition includes: • Endpoint ICs: NXP B.V., or NXP, EM Microelectronic, Kiloway and Alien Technology Corporation, or Alien. • Reader ICs: STMicroelectronics N.V., or ST, Phychips Inc, Zhikun Semiconductor Co. Ltd, or Iotelligent, and MagicRF. • Readers and Gateways: Alien, which also purchases our reader ICs, and Zebra Technologies Corporation, or Zebra. The market for RAIN, our platform and our products is highly competitive. New entrants can and do come into our market at any time, and we expect our competition to increase as the market and end-user adoption grow. The competitive factors that impact our platform and product sales include: • portfolio, performance, features, lead times, reliability and price; • support, ease of use and availability of reference designs; • development tools and APIs (except in the endpoint IC market); • integration and certification with end-user applications; and • company reputation. Although we believe we compete favorably on the above factors, our future competitiveness will depend on our ability to design, develop and deliver compelling products and enable compelling end-user solutions. We occasionally experience competitive pressures due to prevailing exchange rates as our product pricing is denominated in U.S. dollars. In addition, our competitive position depends on our ability to continue to attract and retain talent while protecting our intellectual property. For additional information on the risks associated with our business, see “Risk Factors.” Employees and Culture As of December 31, 2021, we had 332 employees. Most of our employees are not represented by a labor union, and we believe our employee relations are excellent. Our corporate culture embodies a set of principles centered around respect, collaboration, accountability, empowerment and thinking big. We believe our principles and the culture that derives from them are essential to the health and success of our business. We focus on aligning our employees to those principles, promoting and fostering diversity, inclusion, passion and commitment. 11 Table of Contents Available 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 report. Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available on our website at www.investor.impinj.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this report or any other document we file with the SEC.